Avnet, Inc.
AVNET INC (Form: 10-Q, Received: 01/30/2017 06:01:52)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2016


Commission File #1-4224

AVNET, INC.

Incorporated in New York


IRS Employer Identification No. 11-1890605

2211 South 47 th Street, Phoenix, Arizona 85034

(480) 643-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☑

  

Accelerated filer ☐

  

Non-accelerated filer ☐

  

Smaller Reporting Company ☐

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of January 19, 2017, the total number of shares outstanding of the registrant’s Common Stock was 128,894,613 shares, net of treasury shares.

 

 

 

 


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

INDEX

 

 

Page No.

PART I. FINANCIAL INFORMATION  

 

 

 

Item 1. Financial Statements  

 

 

 

Consolidated Balance Sheets at December 31, 2016 and July 2, 2016  

2

 

 

Consolidated Statements of Operations for the second quarters and six months ended December 31, 2016 and January 2, 2016  

3

 

 

Consolidated Statements of Comprehensive Income for the second quarters and six months ended December 31, 2016 and January 2, 2016  

4

 

 

Consolidated Statements of Cash Flows for the six months ended December 31, 2016 and January 2, 2016  

5

 

 

Notes to Consolidated Financial Statements  

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  

23

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk  

31

 

 

Item 4. Controls and Procedures  

31

 

 

PART II. OTHER INFORMATION  

31

 

 

Item 1. Legal Proceedings  

31

 

 

Item 1A. Risk Factors  

32

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  

34

 

 

Item 6. Exhibits  

35

 

 

Signature Page  

36

 

 

 

1


 

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

December 31,

    

July 2,

 

 

 

2016

 

2016

 

 

 

(Thousands, except share

 

 

 

amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,270,142

 

$

1,031,478

 

Receivables, less allowances of $34,010 and $27,448, respectively

 

 

2,996,110

 

 

2,769,906

 

Inventories

 

 

2,697,796

 

 

2,559,921

 

Prepaid and other current assets

 

 

59,564

 

 

81,197

 

Assets held for sale (Note 3)

 

 

4,053,487

 

 

2,561,471

 

Total current assets

 

 

11,077,099

 

 

9,003,973

 

Property, plant and equipment, net

 

 

565,108

 

 

453,209

 

Goodwill

 

 

1,098,471

 

 

621,852

 

Intangible assets, net

 

 

296,058

 

 

22,571

 

Other assets

 

 

219,259

 

 

239,133

 

Non-current assets held for sale (Note 3)

 

 

 —

 

 

899,067

 

Total assets

 

$

13,255,995

 

$

11,239,805

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term debt

 

$

246,729

 

$

1,152,599

 

Accounts payable

 

 

1,774,021

 

 

1,590,777

 

Accrued expenses and other

 

 

456,397

 

 

394,888

 

Liabilities held for sale (Note 3)

 

 

2,332,646

 

 

1,804,229

 

Total current liabilities

 

 

4,809,793

 

 

4,942,493

 

Long-term debt

 

 

3,382,431

 

 

1,339,204

 

Other liabilities

 

 

351,909

 

 

223,053

 

Non-current liabilities held for sale (Note 3)

 

 

 —

 

 

43,769

 

Total liabilities

 

 

8,544,133

 

 

6,548,519

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock $1.00 par; authorized 300,000,000 shares; issued 127,978,771 shares and 127,377,466 shares, respectively

 

 

127,979

 

 

127,377

 

Additional paid-in capital

 

 

1,491,125

 

 

1,452,678

 

Retained earnings

 

 

3,760,906

 

 

3,632,271

 

Accumulated other comprehensive loss

 

 

(667,975)

 

 

(520,775)

 

Treasury stock at cost, 24,592 shares and 27,314 shares, respectively

 

 

(173)

 

 

(265)

 

Total shareholders’ equity

 

 

4,711,862

 

 

4,691,286

 

Total liabilities and shareholders’ equity

 

$

13,255,995

 

$

11,239,805

 

 

See notes to consolidated financial statements. 

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Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

 

    

December 31,

    

January 2,

    

December 31,

    

January 2,

    

 

 

 

2016

 

2016

 

2016

 

2016

 

 

 

 

(Thousands, except per share amounts)

 

 

Sales

 

$

4,273,559

 

$

4,161,082

 

$

8,391,663

 

$

8,689,667

 

 

Cost of sales

 

 

3,687,374

 

 

3,656,024

 

 

7,282,823

 

 

7,628,440

 

 

Gross profit

 

 

586,185

 

 

505,058

 

 

1,108,840

 

 

1,061,227

 

 

Selling, general and administrative expenses

 

 

431,555

 

 

354,858

 

 

795,227

 

 

731,918

 

 

Restructuring, integration and other expenses

 

 

30,400

 

 

14,083

 

 

59,869

 

 

26,601

 

 

Operating income

 

 

124,230

 

 

136,117

 

 

253,744

 

 

302,708

 

 

Other expense, net

 

 

(36,514)

 

 

(2,052)

 

 

(50,248)

 

 

(1,169)

 

 

Interest expense

 

 

(26,748)

 

 

(20,965)

 

 

(53,984)

 

 

(42,997)

 

 

Income from continuing operations before income taxes

 

 

60,968

 

 

113,100

 

 

149,512

 

 

258,542

 

 

Income tax expense

 

 

28,503

 

 

10,959

 

 

49,359

 

 

47,477

 

 

Income from continuing operations

 

 

32,465

 

 

102,141

 

 

100,153

 

 

211,065

 

 

Income from discontinued operations

 

 

70,753

 

 

53,871

 

 

71,908

 

 

75,201

 

 

Net income

 

$

103,218

 

$

156,012

 

$

172,061

 

$

286,266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.25

 

$

0.77

 

$

0.78

 

$

1.59

 

 

Discontinued operations

 

 

0.55

 

 

0.41

 

 

0.56

 

 

0.56

 

 

Net income per share - basic

 

$

0.80

 

$

1.18

 

 

1.34

 

 

2.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.25

 

$

0.76

 

$

0.77

 

$

1.56

 

 

Discontinued operations

 

 

0.54

 

 

0.40

 

 

0.55

 

 

0.55

 

 

Net income per share - diluted

 

$

0.79

 

$

1.16

 

$

1.32

 

$

2.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used to compute earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

127,901

 

 

131,909

 

 

127,716

 

 

132,846

 

 

Diluted

 

 

130,347

 

 

134,918

 

 

130,055

 

 

135,622

 

 

Cash dividends paid per common share

 

$

0.17

 

$

0.17

 

$

0.34

 

$

0.34

 

 

 

See notes to consolidated financial statements.

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AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

    

December 31,

    

January 2,

     

December 31,

    

January 2,

 

 

2016

 

2016

 

2016

 

2016

 

 

(Thousands)

Net income

 

$

103,218

 

$

156,012

 

$

172,061

 

$

286,266

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments and other

 

 

(182,663)

 

 

(68,637)

 

 

(151,002)

 

 

(108,885)

Pension adjustments, net

 

 

3,183

 

 

2,157

 

 

3,802

 

 

4,224

Total comprehensive (loss) income

 

$

(76,262)

 

$

89,532

 

$

24,861

 

$

181,605

 

See notes to consolidated financial statements.

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Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

    

December 31,

    

January 2,

 

 

2016

 

2016

 

 

(Thousands)

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

172,061

 

$

286,266

Less: Income from discontinued operations, net of tax

 

 

71,908

 

 

75,201

Income from continuing operations

 

 

100,153

 

 

211,065

 

 

 

 

 

 

 

Non-cash and other reconciling items:

 

 

 

 

 

 

Depreciation

 

 

45,616

 

 

33,991

Amortization

 

 

11,759

 

 

4,034

Deferred income taxes

 

 

9,312

 

 

(708)

Stock-based compensation

 

 

32,525

 

 

38,424

Other, net

 

 

13,069

 

 

18,240

Changes in (net of effects from businesses acquired):

 

 

 

 

 

 

Receivables

 

 

(127,153)

 

 

261,855

Inventories

 

 

139,672

 

 

(189,595)

Accounts payable

 

 

133,698

 

 

(240,474)

Accrued expenses and other, net

 

 

(55,437)

 

 

(66,251)

Net cash flows provided by operating activities - continuing operations

 

 

303,214

 

 

70,581

Net cash flows (used) provided by operating activities - discontinued operations

 

 

(63,124)

 

 

13,661

Net cash flows provided by operating activities

 

 

240,090

 

 

84,242

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Issuance of notes, net of issuance costs

 

 

296,374

 

 

 —

Borrowings (repayment) of notes

 

 

(378,559)

 

 

(250,000)

Repayments under accounts receivable securitization, net

 

 

(264,963)

 

 

39,972

Borrowings of bank and revolving debt, net

 

 

752,196

 

 

417,982

Borrowings under term loans

 

 

530,756

 

 

 —

Repurchases of common stock (Note 10)

 

 

 —

 

 

(184,704)

Dividends paid on common stock

 

 

(43,426)

 

 

(45,020)

Other, net

 

 

13,825

 

 

(1,080)

Net cash flows provided (used) for financing activities - continuing operations

 

 

906,203

 

 

(22,850)

Net cash flows provided (used) for financing activities - discontinued operations

 

 

(16,505)

 

 

26,389

Net cash flows provided by financing activities

 

 

889,698

 

 

3,539

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(70,424)

 

 

(74,392)

Acquisitions of businesses, net of cash acquired (Note 2)

 

 

(798,366)

 

 

 —

Other, net

 

 

7,766

 

 

9,111

Net cash flows used for investing activities - continuing operations

 

 

(861,024)

 

 

(65,281)

Net cash flows used for investing activities - discontinued operations

 

 

(3,093)

 

 

(20,988)

Net cash flows used for investing activities

 

 

(864,117)

 

 

(86,269)

 

 

 

 

 

 

 

Effect of currency exchange rate changes on cash and cash equivalents

 

 

(27,007)

 

 

(17,977)

Net change in cash and cash equivalents

 

 

238,664

 

 

(16,465)

Cash and cash equivalents at beginning of period

 

 

1,031,478

 

 

932,553

Cash and cash equivalents at end of period

 

$

1,270,142

 

$

916,088

 

See notes to consolidated financial statements.

 

 

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Table of Contents

AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of presentation and new accounting pronouncements

 

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to present fairly Avnet, Inc.’s and its consolidated subsidiaries’ (collectively, the “Company” or “Avnet”) financial position, results of operations, comprehensive income (loss) and cash flows. All such adjustments are of a normal recurring nature.

 

The preparation of financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results may differ from these estimates.

 

Interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2016.

 

Certain reclassifications have been made in prior periods and the fiscal year to date current periods to conform to the current period presentation.

 

Discontinued Operations

 

The results of operations for Avnet’s Technology Solutions (“TS”) business, including all businesses subject to the pending TS sale, have been classified as discontinued operations for all periods presented in the consolidated statements of operations and the consolidated statements of cash flows. The assets and liabilities of TS are classified as held for sale in the consolidated balance sheets. See Note 3 for additional information.

 

Fiscal year

 

The Company operates on a “52/53 week” fiscal year and fiscal 2017 contains 52 weeks compared to 53 weeks in fiscal 2016. As a result, the first six months of fiscal 2017 contained 26 weeks compared to the first six months of fiscal 2016, which contained 27 weeks.

 

New accounting pronouncements

 

In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The update amends accounting guidance for intra-entity transfer of assets other than inventory to require the recognition of income tax consequences when the transfer occurs. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. A modified retrospective approach should be applied. The Company is currently evaluating the impact of the adoption of ASU 2016-16 on its consolidated financial statements.

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The update provides guidance for eight specific cash flow classification issues with respect to how certain cash receipts and cash payments are presented and classified within the statement of cash flows in an effort to reduce existing diversity in practice. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. ASU 2016-15 should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impacts of the adoption of ASU 2016-15 on its consolidated statements of cash flows.

 

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Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The update requires a lessee to recognize assets and liabilities on the consolidated balance sheets for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The update will be effective for the Company in the first quarter of fiscal 2020, using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements. 

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), as amended, to supersede nearly all existing revenue recognition guidance under GAAP. The core principles of ASU 2014-09 are to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Application of the guidance in ASU 2014-09 may require more judgment and estimates within the revenue recognition process compared to existing GAAP. In July 2015, the FASB approved a one-year delay in the effective date of ASU 2014-09, which makes the effective date for the Company the first quarter of fiscal 2019. The Company may adopt the requirements of ASU 2014-09 using either of two acceptable adoption methods: (i) retrospective adoption to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) adoption with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined within ASU 2014-09. The Company is currently evaluating the impact of the future adoption of ASU 2014-09 on its consolidated financial statements, including the method of adoption to be used. 

 

2. Acquisitions

 

Premier Farnell

 

On October 17, 2016, the Company completed its acquisition of Premier Farnell Plc (“PF”), a global distributor of electronic components and related products delivering engineering solutions to the electronic system design community utilizing multi-channel sales and marketing resources. Management believes that the combined business of the Electronics Marketing (“EM”) operating group and PF will create a unique electronic components distribution value proposition, which will expand Avnet’s digital footprint worldwide and allow the Company to reach engineers and makers earlier in the design cycle.

 

The cash consideration paid for the acquisition was $839.7 million, which consisted of £1.85 per share of PF common stock. Additionally, Avnet assumed $229.2 million of debt at carrying value. The Company is integrating PF and the goodwill acquired into its EM operating group. 

 

In connection with the acquisition of PF, the Company incurred certain acquisition related costs during the first six months of fiscal 2017, including approximately $19.0 million of acquisition related professional fees and closing costs included within restructuring, integration and other expenses, and approximately $43.0 million of expenses within other expenses, net for acquisition financing related fees including foreign currency economic hedging costs and bridge financing commitment fees. PF contributed approximately $9.0 million of income from continuing operations in the second quarter of fiscal 2017 since the date of acquisition.

 

Preliminary allocation of purchase price

 

The Company has not yet completed its evaluation and determination of certain assets and liabilities acquired, primarily (i) the final valuation of amortizable intangible assets acquired, (ii) the final assessment and valuation of certain assets acquired and liabilities assumed, including working capital, accrued liabilities, other asset and liabilities and property, plant and equipment, and (iii) the final assessment and valuation of certain income tax accounts. The Company expects these final valuations and assessments will be completed by the end of fiscal 2017, which may result in adjustments to the preliminary values included in the following table:

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

 

 

 

 

 

    

Preliminary Acquisition Method Values

 

 

(Thousands)

Cash

 

$

46,354

Trade and other receivables, net

 

 

187,303

Inventories

 

 

334,682

Property, plant and equipment

 

 

95,232

Intangible assets

 

 

288,534

Total identifiable assets acquired

 

$

952,105

 

 

 

 

Accounts payable, accrued liabilities and other current liabilities

 

$

177,639

Short-term debt

 

 

242,918

Other long-term liabilities

 

 

156,950

Total identifiable liabilities acquired

 

$

577,507

Net identifiable assets acquired

 

 

374,598

Goodwill

 

 

466,722

Net assets acquired

 

$

841,320

 

Trade receivables of $160.4 million were recorded at preliminary estimated fair value amounts; however, preliminary adjustments to acquired amounts were not significant as book value approximated fair value due to the short term nature of trade receivables. 

 

Approximately $10.0 million of goodwill associated with the PF acquisition is expected to be deductible for tax purposes.

 

Pro forma and historical results

 

Unaudited pro forma information is presented as if the acquisition of PF occurred at the beginning of fiscal 2016.  The pro forma information presented below does not purport to present what actual results would have been had the acquisition in fact occurred at the beginning of fiscal 2016, nor does the information project results for any future period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

December 31,

 

January 2,

    

December 31,

 

January 2,

 

 

2016

 

2016

 

2016

 

2016

 

 

(Thousands, except per share data)

Pro forma sales

 

$

4,323,198

 

$

4,484,189

 

$

8,770,015

 

$

9,352,305

Pro forma income from continuing operations

 

 

45,652

 

 

103,988

 

 

133,381

 

 

227,526

 

Pro forma results from continuing operations above exclude any benefits that may result from the acquisition due to synergies derived from sales opportunities, the elimination of any duplicative costs and from lower interest costs. Pro forma results exclude restructuring and acquisition/divestiture related expenses incurred by PF in their historical results of operations and include amortization expense associated with identifiable intangible assets related to the Company’s acquisition of PF. Pro forma results also exclude interest expense and other expenses, net related to acquisition/divestiture costs as well as any discrete income tax related expenses. PF generated sales of $269.0 million in the second quarter of fiscal 2017 since the date of acquisition.

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

During November 2016, the Company acquired Hackster, Inc. (“Hackster”), a start-up online community of engineers, makers and hobbyists. The purchase price of Hackster was not material to the Company’s consolidated financial statements.

 

3. Discontinued operations

 

In September 2016, the Company entered into a definitive agreement to sell its TS business to Tech Data Corporation (the “Buyer”), for approximately $2.60 billion in a combination of $2.40 billion in cash and 2.8 million shares of the Buyer. The ultimate selling price and related sale proceeds will be adjusted for changes in certain net assets provided to the Buyer as of the closing date, as compared to certain net assets expected in the definitive agreement. As a result of such agreement, the assets and liabilities of the Company’s TS and associated businesses being sold to the Buyer (the “TS business”) were classified as held for sale. The TS business has been classified as a discontinued operation for all periods presented as the sale of the TS business represents a strategic shift to Avnet. As of December 31, 2016, the TS business continues to be a reportable segment, as discussed further in Note 13. Upon completion of the sale of TS, which is expected to occur by the end of fiscal 2017, the Company expects to record a gain on sale as the selling price is in excess of the carrying value. After completion of the sale of TS, the Company will provide certain customary transition services to the Buyer for a period of time, and the payments received for such transition services will be reflected as a reduction to the expenses incurred by the Company to provide such transition services.

 

Summarized assets and liabilities of the TS business, classified as held for sale as of December 31, 2016, and July 2, 2016, are as follows:

 

 

 

 

 

 

 

 

 

 

    

December 31,

    

July 2,

 

 

 

2016

 

2016

 

 

 

(Thousands)

 

Receivables, less allowances of $35,649 and $39,356, respectively

 

$

2,832,218

 

$

2,205,213

 

Inventories

 

 

271,080

 

 

296,310

 

Prepaid and other current assets

 

 

59,401

 

 

59,948

 

Total current assets

 

 

3,162,699

 

 

2,561,471

 

Property, plant and equipment, net

 

 

152,439

 

 

159,449

 

Goodwill

 

 

648,157

 

 

659,368

 

Intangible assets, net

 

 

49,616

 

 

55,826

 

Other assets

 

 

40,576

 

 

24,424

 

Total assets

 

$

4,053,487

 

$

3,460,538

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,114,323

 

$

1,643,004

 

Accrued expenses and other

 

 

164,796

 

 

161,225

 

Total current liabilities

 

 

2,279,119

 

 

1,804,229

 

Other Long-term liabilities

 

 

53,527

 

 

43,769

 

Total liabilities

 

$

2,332,646

 

$

1,847,998

 

 

Summarized results of the TS business discontinued operations for the second quarters and six months ended December 31, 2016, and January 2, 2016 are as follows:

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

    

December 31,

    

January 2,

 

December 31,

    

January 2,

 

 

 

2016

 

2016

 

2016

 

2016

 

 

 

(Thousands)

 

(Thousands)

 

Sales

 

$

2,453,262

 

$

2,686,975

 

$

4,375,464

 

$

5,128,084

 

Cost of sales

 

 

2,199,235

 

 

2,413,865

 

 

3,928,164

 

 

4,619,667

 

Gross profit

 

 

254,027

 

 

273,110

 

 

447,300

 

 

508,417

 

Selling, general and administrative expenses

 

 

158,356

 

 

175,973

 

 

324,381

 

 

357,469

 

Restructuring, integration and other expenses

 

 

3,316

 

 

7,139

 

 

7,540

 

 

20,579

 

Operating income

 

 

92,355

 

 

89,998

 

 

115,379

 

 

130,369

 

Interest and expense, net

 

 

(10,635)

 

 

(5,891)

 

 

(10,630)

 

 

(14,197)

 

Income from discontinued operations before income taxes

 

 

81,720

 

 

84,107

 

 

104,749

 

 

116,172

 

Income tax expense

 

 

10,967

 

 

30,236

 

 

32,841

 

 

40,971

 

Income from discontinued operations, net of taxes

 

$

70,753

 

$

53,871

 

$

71,908

 

$

75,201

 

 

Sales in the second quarter and six months of fiscal 2016 included the impact of an extra week of sales as discussed further in Note 1.

 

Included within selling, general and administrative expenses of discontinued operations was $14.1 million and $12.3 million of corporate expenses specific to or benefiting the TS business for the second quarters ending December 31, 2016, and January 2, 2016, respectively, and $26.6 million and $27.4 million for the first six months ending December 31, 2016, and January 2, 2016, respectively. Corporate costs related to general overhead were not allocated to the TS business. Subsequent to the first quarter of fiscal 2017, depreciation and amortization of the TS business long-lived assets has ceased due to the TS business being classified as held for sale. 

 

Upon completion of the sale, a portion of the proceeds will be used to pay taxes related to the gain on sale. 

 

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

4. Goodwill and intangible assets

 

Goodwill

 

The following table presents the change in goodwill from continuing operations since the end of fiscal 2016. All of the accumulated impairment was recognized in fiscal 2009.

 

 

 

 

 

 

 

 

    

Electronics

    

 

 

Marketing

 

 

 

(Thousands)

 

Gross goodwill

 

$

1,666,962

 

Accumulated impairment

 

 

(1,045,110)

 

Carrying value at July 2, 2016

 

 

621,852

 

Acquisitions

 

 

479,499

 

Adjustments

 

 

 —

 

Foreign currency translation

 

 

(2,880)

 

Carrying value at December 31, 2016

 

$

1,098,471

 

Gross goodwill

 

$

2,143,581

 

Accumulated impairment

 

 

(1,045,110)

 

Carrying value at December 31, 2016

 

$

1,098,471

 

 

As discussed in Note 3, the Company classified goodwill related to the TS reporting units as held for sale as of December 31, 2016, and July 2, 2016. During the first quarter of fiscal 2017, in connection with the planned sale of the TS business, the Company evaluated goodwill related to TS for impairment and concluded that goodwill related to the TS business was recoverable as the negotiated TS selling price was in excess of its carrying value.

 

Intangible Assets

 

The following table presents the Company’s acquired intangible assets from continuing operations at December 31, 2016, and July 2, 2016, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

July 2, 2016

 

 

 

Acquired

 

Accumulated

 

Net Book

 

  Acquired 

 

 Accumulated 

 

 Net Book 

 

 

    

Amount

    

Amortization

    

Value

    

Amount

    

Amortization

    

Value

 

 

 

(Thousands)

 

Customer related

 

$

50,505

 

$

(37,587)

 

$

12,918

 

$

47,980

 

$

(34,515)

 

$

13,465

 

PF acquired intangibles (Note 2)

 

 

283,482

 

 

(7,755)

 

 

275,727

 

 

 —

 

 

 —

 

 

 —

 

Trade name

 

 

2,163

 

 

(1,406)

 

 

757

 

 

3,746

 

 

(2,718)

 

 

1,028

 

Other

 

 

11,667

 

 

(5,011)

 

 

6,656

 

 

12,356

 

 

(4,278)

 

 

8,078

 

 

 

$

347,817

 

$

(51,759)

 

$

296,058

 

$

64,082

 

$

(41,511)

 

$

22,571

 

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Intangible asset amortization expense from continuing operations was $9.8 million and $1.7 million for the second quarters of fiscal 2017 and 2016, respectively, and $11.8 million and $4.0 million for the first six months of fiscal 2017 and 2016, respectively. Intangible assets from continuing operations have a weighted average remaining useful life of approximately 7 years. The following table presents the estimated future amortization expense from continuing operations for the remainder of fiscal 2017, the next five fiscal years and thereafter (in thousands):

 

 

 

 

 

 

 

Fiscal Year

    

 

 

Remainder of fiscal 2017

 

 

27,700

 

2018

 

 

41,572

 

2019

 

 

40,246

 

2020

 

 

39,159

 

2021

 

 

38,353

 

Thereafter

 

 

109,028

 

Total

 

$

296,058

 

 

 

 

5. Debt

 

Short-term debt from continuing operations consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2016

    

July 2, 2016

    

December 31, 2016

    

July 2, 2016

 

 

 

Interest Rate

 

Carrying Balance

 

Bank credit facilities and other

 

5.06

%

 

4.62

%

 

$

246,729

 

$

122,599

 

Accounts receivable securitization program

 

 —

 

 

0.93

%

 

 

 —

 

 

730,000

 

Notes due September 2016

 

 —

 

 

6.63

%

 

 

 —

 

 

300,000

 

Short-term debt

 

 

 

 

 

 

 

$

246,729

 

$

1,152,599

 

 

Bank credit facilities and other consists primarily of various committed and uncommitted lines of credit and other forms of bank debt with financial institutions utilized primarily to support the working capital requirements of the Company including its foreign operations.

 

In connection with the PF acquisition, discussed further in Note 2, the Company assumed debt including private placement notes, which the Company planned to repay in connection with the acquisition. In December 2016 and January 2017, the Company paid $78.6 million and $152.2 million, respectively, to redeem the assumed private placement notes. The repayments were made with the proceeds from the issuance of $300 million 3.75% of Notes due December 2021 as discussed further below.

 

12


 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Long-term debt from continuing operations consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2016

    

July 2, 2016

    

December 31, 2016

    

July 2, 2016

 

 

 

Interest Rate

 

Carrying Balance

 

Revolving credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable securitization program

 

1.22

%

 

 —

 

 

$

465,000

 

$

 —

 

Credit Facility

 

2.04

%

 

1.72

%

 

 

927,174

 

 

150,000

 

Term Loan

 

1.38

%

 

 —

 

 

 

503,715

 

 

 —

 

Notes due:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 2020

 

5.88

%

 

5.88

%

 

 

300,000

 

 

300,000

 

December 2021

 

3.75

%

 

 —

 

 

 

300,000

 

 

 —

 

December 2022

 

4.88

%

 

4.88

%

 

 

350,000

 

 

350,000

 

April 2026

 

4.63

%

 

4.63

%

 

 

550,000

 

 

550,000

 

Other long-term debt

 

2.21

%

 

1.92

%

 

 

1,159

 

 

1,551

 

Long-term debt before discount and debt issuance costs

 

 

 

 

 

 

 

 

3,397,048

 

 

1,351,551

 

Discount and debt issuance costs

 

 

 

 

 

 

 

 

(14,617)

 

 

(12,347)

 

Long-term debt

 

 

 

 

 

 

 

$

3,382,431

 

$

1,339,204

 

 

In December 2016, the Company issued $300.0 million of 3.75% Notes due December 2021 (“3.75% Notes”). The Company received proceeds of $296.4 million from the offering, net of discounts and debt issuance costs. The 3.75% Notes rank equally in right of payment with all existing and future senior unsecured debt of Avnet and interest will be payable semi-annually each year on June 1 and December 1.

 

In August 2016, the Company amended and extended its accounts receivable securitization program (the “Program”) with a group of financial institutions to allow the Company to transfer, on an ongoing revolving basis, an undivided interest in a designated pool of trade accounts receivable, to provide security or collateral for borrowings up to a maximum of $800.0 million. The Program does not qualify for off balance sheet accounting treatment and any borrowings under the Program are recorded as debt in the consolidated balance sheets. Under the Program, the Company legally sells and isolates certain U.S. trade accounts receivable into a wholly owned and consolidated bankruptcy remote special purpose entity. Such receivables, which are recorded within “Receivables” in the consolidated balance sheets, totaled $1.81 billion and $1.46 billion at December 31, 2016, and July 2, 2016, respectively. The Program contains certain covenants relating to the quality of the receivables sold. The Program also requires the Company to maintain certain minimum interest coverage and leverage ratios, which the Company was in compliance with as of December 31, 2016, and July 2, 2016. The Program has a two-year term that expires in August 2018 and as a result is considered long-term debt as of December 31, 2016. Interest on borrowings is calculated using a base rate or a commercial paper rate plus a spread of 0.40% with a facility fee of 0.40%.

 

The Company has a five-year $1.25 billion senior unsecured revolving credit facility (the “Credit Facility”) with a syndicate of banks, consisting of revolving credit facilities and the issuance of up to $150.0 million of letters of credit, which expires in July 2019. Subject to certain conditions, the Credit Facility may be increased up to $1.5 billion. Under the Credit Facility, the Company may select from various interest rate options, currencies and maturities. The Credit Facility contains certain covenants including various limitations on debt incurrence, share repurchases, dividends, investments and capital expenditures. The Credit Facility also includes financial covenants requiring the Company to maintain minimum interest coverage and leverage ratios, which the Company was in compliance with as of December 31, 2016, and July 2, 2016. As of December 31, 2016, and July 2, 2016, there were $4.8 million and $5.6 million, respectively, in letters of credit issued under the Credit Facility.

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In October 2016, certain foreign subsidiaries of the Company (the “Borrowers”) borrowed €479 million under a Senior Unsecured Term Loan Credit Agreement (the “Term Loan”) entered into with a group of banks. The Term Loan has a maturity date of October 17, 2019. The proceeds from borrowings under the Term Loan were used to finance a portion of the cash consideration and any fees and expenses related to the Company’s acquisition of PF discussed further in Note 2. The Term Loan is unsecured and contains financial covenants consistent with the Credit Facility. The Company was in compliance with such financial covenants as of December 2016.

 

As of December 31, 2016, the carrying value and fair value of the Company’s total debt was $3.63 billion and $3.66 billion, respectively. At July 2, 2016, the carrying value and fair value of the Company’s total debt was $2.49 billion and $2.59 billion, respectively. Fair value for the notes and Term Loan was estimated based upon quoted market prices and for other forms of debt fair value approximates carrying value due to the market based variable nature of the interest rates on those debt agreements.

 

6. Derivative financial instruments

 

Many of the Company’s subsidiaries purchase and sell products in currencies other than their functional currencies. This subjects the Company to the risks associated with fluctuations in foreign currency exchange rates. The Company reduces this risk by utilizing natural hedging (e.g., offsetting receivables and payables in the same foreign currency) as well as by creating offsetting positions through the use of derivative financial instruments, primarily forward foreign exchange contracts typically with maturities of less than sixty days (“economic hedges”). The Company continues to have exposure to foreign currency risks to the extent they are not hedged. The Company adjusts any economic hedges to fair value through the consolidated statements of operations primarily within “other expense, net.” Therefore, the changes in valuation of the underlying items being economically hedged are typically offset by the changes in fair value of the forward foreign currency exchange contracts. The fair value of forward foreign exchange contracts, which are based upon Level 2 criteria under the ASC 820 fair value hierarchy, are classified in the captions “other current assets” or “accrued expenses and other,” as applicable, in the accompanying consolidated balance sheets as of December 31, 2016, and July 2, 2016. The Company’s master netting and other similar arrangements with various financial institutions related to derivative financial instruments allow for the right of offset. The Company’s policy is to present derivative financial instruments with the same counterparty as either a net asset or liability when the right of offset exists.

 

The Company generally does not hedge its investments in its foreign operations. The Company does not enter into derivative financial instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties.

 

The Company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase from suppliers. The Company’s foreign operations transactions are denominated primarily in the following currencies: U.S. Dollar, Euro, British Pound, Canadian Dollar, Japanese Yen, Chinese Yuan, Taiwan Dollar, Australian Dollar and Mexican Peso. The Company also, to a lesser extent, has foreign operations transactions in other European, Latin American and Asian foreign currencies.

 

The fair values of derivative financial instruments from continuing operations in the Company’s consolidated balance sheets are as follows:

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

 

 

 

 

 

 

 

 

 

December 31,

    

July 2,

 

 

 

2016

 

2016

 

 

 

(Thousands)

 

Forward foreign currency exchange contracts not receiving hedge accounting treatment recorded in:

 

 

 

 

 

 

 

Other current assets

 

$

2,386

 

$

9,681

 

Accrued expenses

 

 

3,409

 

 

6,369

 

 

The amounts recorded to other expense, net from continuing operations related to derivative financial instruments for economic hedges are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

 

December 31,

    

January 2,

 

December 31,

    

January 2,

 

 

2016

 

2016

 

2016

 

2016

 

 

(Thousands)

Net derivative financial instrument gain (loss)

 

$

771

 

$

(5,461)

 

$

(8,737)

 

$

(1,789)

 

Additionally, during the first six months and second quarter of fiscal 2017, there is approximately $35.0 million and $27.0 million, respectively, of derivative financial instrument losses in other expenses, net associated with foreign currency derivative financial instruments purchased to economically hedge the British Pound purchase price of the PF acquisition as discussed in Note 2. As a result of the foreign currency economic hedging strategy in place, the Company economically protected itself from a weakening of the U.S. Dollar compared to the British Pound and the Company’s purchase price was approximately $75.0 million lower than its original bid price.

 

The Company’s outstanding economic hedges from continuing operations had average maturities of 49 days and 53 days as of December 31, 2016, and July 2, 2016, respectively. Under the Company’s economic hedging policies, gains and losses on the derivative financial instruments are substantially offset by the gains and losses on the underlying assets or liabilities being hedged.

 

7. Commitments and contingencies

 

From time to time, the Company may become a party to, or be otherwise involved in various lawsuits, claims, investigations and other legal proceedings arising in the ordinary course of conducting its business. While litigation is subject to inherent uncertainties, management does not anticipate that any such matters will have a material adverse effect on the Company’s financial condition, liquidity or results of operations.

 

The Company is also currently subject to various pending and potential legal matters and investigations relating to compliance with governmental laws and regulations, including import/export and environmental matters. For certain of these matters it is not possible to determine the ultimate outcome, and the Company cannot reasonably estimate the maximum potential exposure or the range of possible loss for such matters due primarily to being in the early stages of the related proceedings and investigations. The Company currently believes that the resolution of such matters will not have a material adverse effect on the Company’s financial position or liquidity, but could possibly be material to its results of operations in any one reporting period.

 

During the first quarter of fiscal 2017, the Company reached a final settlement related to the compliance investigation conducted by the Customs and Border Protection for potential unpaid import duties associated with the acquisition of Bell Microproducts Inc. for $8.5 million, which was accrued for in connection with the acquisition in fiscal 2011.

 

15


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

As of December 31, 2016, the Company had aggregate estimated liabilities of $11.7 million, classified within accrued expenses and other for such compliance-related matters that were reasonably estimable as of such dates.

 

8. Income taxes

 

The Company’s effective tax rate on its income before income taxes from continuing operations was 46.7% in the second quarter of fiscal 2017 as compared with 9.7% in the second quarter of fiscal 2016. During the second quarter of fiscal 2017, the Company’s effective tax rate was unfavorably impacted primarily by (i) net increases to valuation allowances against deferred tax assets  created primarily from acquisition related expenses that were deemed unrealizable and (ii) the impact of non-deductible acquisition related expenses, partially offset by (iii) the mix of income in lower tax jurisdictions. During the second quarter of fiscal 2016, the Company’s effective tax rate was favorably impacted primarily by (i) the mix of income in lower tax jurisdictions, (ii) the release of valuation allowances against deferred tax assets that were deemed to be realizable and (iii) the release of reserves related to audit settlements and the expiration of statutes of limitation.

 

For the first six months of fiscal 2017 and 2016, the Company’s effective tax rate was 33.0% and 18.4%, respectively. The effective tax rate for the first six months of fiscal 2017 was unfavorably impacted primarily by (i) net increases to valuation allowances against deferred tax assets that were deemed unrealizable and (ii) the impact of non-deductible acquisition related expenses, partially offset by (iii) the mix of income in lower tax jurisdictions. The effective tax rate for the first six months of fiscal 2016 was favorably impacted primarily by (i) the mix of income in lower tax jurisdictions, (ii) the release of valuation allowances against deferred tax assets that were deemed to be realizable and (iii) the release of reserves related to audit settlements and the expiration of statutes of limitation.

 

The Company applies the guidance in ASC 740, which requires management to use its judgment for the appropriate weighting of all available evidence when assessing the need for the establishment or the release of valuation allowances. As part of this analysis, the Company examines all available evidence on a jurisdiction by jurisdiction basis and weighs the positive and negative evidence when determining the need for full or partial valuation allowances. The evidence considered for each jurisdiction includes, among other items: (i) the historic levels of income or losses over a range of time periods, which may extend beyond the most recent three fiscal years depending upon the historical volatility of income in an individual jurisdiction; (ii) expectations and risks associated with underlying estimates of future taxable income, including considering the historical trend of down-cycles in the semiconductor and related industries; (iii) jurisdictional specific limitations on the utilization of deferred tax assets including when such assets expire; and (iv) prudent and feasible tax planning strategies.

 

The Company continues to evaluate the need for the valuation allowances against its deferred tax assets and will adjust valuation allowances as appropriate, which, if adjusted, could result in a significant decrease or increase to the effective tax rate in the period of the adjustment.

 

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Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

9. Pension plan

 

The Company has a noncontributory defined benefit pension plan (the “Plan”) for which the components of net periodic pension costs were as follows (includes amounts related to discontinued operations):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarters Ended

 

Six Months Ended

 

    

December 31,

    

January 2,

    

December 31,

    

January 2,

 

 

2016

 

2016

 

2016

 

2016

 

 

(Thousands)

Service cost

 

$

10,848

 

$

9,935

 

$

21,696

 

$

20,421

Interest cost

 

 

3,774

 

 

5,328

 

 

7,548

 

 

10,656

Expected return on plan assets

 

 

(10,588)

 

 

(10,071)

 

 

(21,176)

 

 

(20,142)

Recognized net actuarial loss

 

 

3,851

 

 

3,183

 

 

7,702

 

 

6,366

Amortization of prior service credits

 

 

(393)

 

 

(393)

 

 

(786)

 

 

(786)

Net periodic pension cost