Avnet, Inc.
AVNET INC (Form: 10-Q, Received: 10/30/2017 06:01:44)

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 September 30, 2017 


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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑

  

Accelerated filer ☐

  

Non-accelerated filer ☐ (Do not check if a smaller reporting   company)

 

Smaller reporting company ☐

 

Emerging growth company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 October 19, 2017, the total number of shares outstanding of the registrant’s Common Stock was 120,927,437 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 September 30, 2017 and July 1, 201 7

2

 

 

Consolidated Statements of Operations for the first quarters ended September 30, 2017 and October 1, 2016  

3

 

 

Consolidated Statements of Comprehensive Income for the first quarters ended September 30, 2017 and October 1, 2016  

4

 

 

Consolidated Statements of Cash Flows for the first quarters ended September 30, 2017 and October 1, 2016  

5

 

 

Notes to Consolidated Financial Statements  

6

 

 

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

19

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk  

26

 

 

Item 4. Controls and Procedures  

26

 

 

PART II. OTHER INFORMATION  

26

 

 

Item 1. Legal Proceedings  

26

 

 

Item 1A. Risk Factors  

27

 

 

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

28

 

 

Item 6. Exhibits  

29

 

 

Signature Page  

30

 

 

 

1


 

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

July 1,

 

 

 

2017

 

2017

 

 

 

(Thousands, except share

 

 

 

amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

539,679

 

$

836,384

 

Marketable securities

 

 

197,949

 

 

281,326

 

Receivables, less allowances of $49,505 and $47,272, respectively

 

 

3,417,427

 

 

3,337,624

 

Inventories

 

 

3,129,032

 

 

2,824,709

 

Prepaid and other current assets

 

 

261,600

 

 

253,765

 

Total current assets

 

 

7,545,687

 

 

7,533,808

 

Property, plant and equipment, net

 

 

510,303

 

 

519,575

 

Goodwill

 

 

1,178,005

 

 

1,148,347

 

Intangible assets, net

 

 

290,962

 

 

277,291

 

Other assets

 

 

248,201

 

 

220,568

 

Total assets

 

$

9,773,158

 

$

9,699,589

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term debt

 

$

195,498

 

$

50,113

 

Accounts payable

 

 

1,917,749

 

 

1,861,635

 

Accrued expenses and other

 

 

598,456

 

 

542,023

 

Total current liabilities

 

 

2,711,703

 

 

2,453,771

 

Long-term debt

 

 

1,495,139

 

 

1,729,212

 

Other liabilities

 

 

322,213

 

 

334,538

 

Total liabilities

 

 

4,529,055

 

 

4,517,521

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock $1.00 par; authorized 300,000,000 shares; issued 121,235,396 shares and 123,080,952 shares, respectively

 

 

121,235

 

 

123,081

 

Additional paid-in capital

 

 

1,511,461

 

 

1,503,490

 

Retained earnings

 

 

3,765,491

 

 

3,799,363

 

Accumulated other comprehensive loss

 

 

(154,084)

 

 

(243,866)

 

Total shareholders’ equity

 

 

5,244,103

 

 

5,182,068

 

Total liabilities and shareholders’ equity

 

$

9,773,158

 

$

9,699,589

 

 

See notes to consolidated financial statements. 

2


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

First Quarters Ended

 

 

    

September 30,

    

October 1,

    

 

 

2017

 

2016

 

 

 

(Thousands, except per share amounts)

 

Sales

 

$

4,660,943

 

$

4,118,104

 

Cost of sales

 

 

4,048,388

 

 

3,595,449

 

Gross profit

 

 

612,555

 

 

522,655

 

Selling, general and administrative expenses

 

 

496,206

 

 

363,672

 

Restructuring, integration and other expenses

 

 

46,394

 

 

29,469

 

Operating income

 

 

69,955

 

 

129,514

 

Other income (expense), net

 

 

15,579

 

 

(13,734)

 

Interest expense

 

 

(24,060)

 

 

(27,236)

 

Income from continuing operations before taxes

 

 

61,474

 

 

88,544

 

Income tax expense

 

 

3,292

 

 

20,856

 

Income from continuing operations, net of tax

 

 

58,182

 

 

67,688

 

Income from discontinued operations, net of tax

 

 

121

 

 

1,155

 

Net income

 

 

58,303

 

 

68,843

 

 

 

 

 

 

 

 

 

Earnings per share - basic:

 

 

 

 

 

 

 

Continuing operations

 

$

0.48

 

$

0.53

 

Discontinued operations

 

 

0.00

 

 

0.01

 

Net income per share basic

 

 

0.48

 

 

0.54

 

 

 

 

 

 

 

 

 

Earnings per share - diluted:

 

 

 

 

 

 

 

Continuing operations

 

$

0.47

 

$

0.52

 

Discontinued operations

 

 

0.00

 

 

0.01

 

Net income per share diluted

 

 

0.47

 

 

0.53

 

 

 

 

 

 

 

 

 

Shares used to compute earnings per share:

 

 

 

 

 

 

 

Basic

 

 

122,685

 

 

127,531

 

Diluted

 

 

123,984

 

 

129,763

 

Cash dividends paid per common share

 

$

0.18

 

$

0.17

 

 

See notes to consolidated financial statements.

3


 

Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

First Quarters Ended

 

 

    

September 30,

    

October 1,

 

 

 

2017

 

2016

 

 

 

(Thousands)

 

Net income

 

$

58,303

 

$

68,843

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Foreign currency translation adjustments and other

 

 

88,843

 

 

31,661

 

Pension adjustments, net

 

 

939

 

 

619

 

Total comprehensive income

 

$

148,085

 

$

101,123

 

 

See notes to consolidated financial statements.

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Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

September 30,

    

October 1,

 

 

 

2017

 

2016

 

 

 

(Thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

58,303

 

$

68,843

 

Less: Income from discontinued operations, net of tax

 

 

121

 

 

1,155

 

Income from continuing operations

 

 

58,182

 

 

67,688

 

 

 

 

 

 

 

 

 

Non-cash and other reconciling items:

 

 

 

 

 

 

 

Depreciation

 

 

38,263

 

 

19,694

 

Amortization

 

 

25,506

 

 

1,930

 

Deferred income taxes

 

 

(23,436)

 

 

6,412

 

Stock-based compensation

 

 

8,609

 

 

17,576

 

Other, net

 

 

4,902

 

 

10,714

 

Changes in (net of effects from businesses acquired and divested):

 

 

 

 

 

 

 

Receivables

 

 

(32,409)

 

 

(64,587)

 

Inventories

 

 

(266,998)

 

 

182,240

 

Accounts payable

 

 

37,252

 

 

(164,777)

 

Accrued expenses and other, net

 

 

22,140

 

 

33,522

 

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

 

 

(127,989)

 

 

110,412

 

Net cash flows used by operating activities - discontinued operations

 

 

 —

 

 

(110,548)

 

Net cash flows used by operating activities

 

 

(127,989)

 

 

(136)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Repayment of notes

 

 

 —

 

 

(300,000)

 

Borrowings (repayments) under accounts receivable securitization, net

 

 

28,000

 

 

(150,265)

 

Borrowings (repayments) under senior unsecured credit facility, net

 

 

(92,471)

 

 

 —

 

Borrowings (repayments) under bank credit facilities and other debt, net

 

 

(24,888)

 

 

669,803

 

Repurchases of common stock

 

 

(68,113)

 

 

 —

 

Dividends paid on common stock

 

 

(22,012)

 

 

(21,676)

 

Other, net

 

 

(579)

 

 

682

 

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

 

 

(180,063)

 

 

198,544

 

Net cash flows used by financing activities - discontinued operations

 

 

 —

 

 

(4,756)

 

Net cash flows (used) provided by financing activities

 

 

(180,063)

 

 

193,788

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(26,659)

 

 

(34,729)

 

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

 

 

(14,661)

 

 

 —

 

Other, net

 

 

1,211

 

 

432

 

Net cash flows used for investing activities - continuing operations

 

 

(40,109)

 

 

(34,297)

 

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

 

 

45,391

 

 

(95)

 

Net cash flows provided (used) by investing activities

 

 

5,282

 

 

(34,392)

 

 

 

 

 

 

 

 

 

Effect of currency exchange rate changes on cash and cash equivalents

 

 

6,065

 

 

5,807

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

— (decrease) increase

 

 

(296,705)

 

 

165,067

 

— at beginning of period

 

 

836,384

 

 

1,031,478

 

— at end of period

 

$

539,679

 

$

1,196,545

 

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 1, 2017.

 

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

 

New accounting pronouncements

 

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and makes certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. This update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2017-12 on its consolidated financial statements.

 

There have been no material changes or additions to the recently issued accounting pronouncements as previously reported in Part II, Item 7, of the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2017 that affect or may affect the Company’s financial statements.

 

2. Acquisitions

 

Premier Farnell

 

On October 17, 2016, the Company acquired all of the outstanding shares of Premier Farnell Plc (“PF”), a global distributor of electronic components and related products. The cash consideration paid for the acquisition was approximately $841 million, which consisted of £1.85 per share of PF common stock. Additionally, Avnet assumed $242.8 million of debt at fair value.

 

The PF acquisition was accounted for as a business combination. The purchase price of this acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the transaction date. During the first quarter of fiscal 2018, the Company finalized its estimated acquisition date fair values for assets acquired and liabilities assumed, which resulted in a decrease in goodwill of $15.3 million, a net increase in intangible assets of $24.9 million, and an increase in other long-term liabilities of $9.6 million.

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Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The following table summarizes the final purchase price allocation (in thousands):

 

 

 

 

 

Cash

 

$

46,354

Trade and other receivables, net

 

 

187,303

Inventories

 

 

328,037

Property, plant and equipment

 

 

52,621

Intangible assets

 

 

319,966

Total identifiable assets acquired

 

$

934,281

 

 

 

 

Accounts payable, accrued liabilities and other current liabilities

 

$

160,572

Short-term debt

 

 

242,814

Other long-term liabilities

 

 

150,109

Total identifiable liabilities acquired

 

$

553,495

Net identifiable assets acquired

 

 

380,786

Goodwill

 

 

460,534

Net assets acquired

 

$

841,320

 

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

 

Dragon Innovation

 

In August 2017, the Company acquired Dragon Innovation, Inc. (“Dragon”), a provider of manufacturing logistics services to entrepreneurs. The impact of this acquisition was not material to the Company’s consolidated balance sheets or statements of operations.

 

3. Discontinued operations and gain on sale

 

In February 2017, the Company completed the sale of its Technology Solutions (“TS”) business to Tech Data Corporation (the “Buyer”). Included in the gain on sale recorded in fiscal 2017 were estimates for certain income taxes due on the gain and additional cash consideration expected from the Buyer related to a closing date net working capital sales price adjustment (the “closing date adjustment”). The Company is finalizing the closing date adjustment with the Buyer as provided for in the sales agreement and has included an estimate of this amount as the principal component of the $261.6 million of prepaid and other current assets as of September 30, 2017. The final closing date adjustment, as determined through the established process outlined in the sales agreement, may be materially different from the Company’s estimate. The impact of any probable changes in the closing date adjustment will be recorded as an adjustment to the gain on sale from discontinued operations in the period such change occurs. Additionally, the income taxes associated with the gain will be impacted by the final geographic allocation of the sales price, which must be agreed to with the Buyer as required in the sales agreement and may be materially different from the Company’s estimates. The impact of any changes in estimated income taxes on the gain will be recorded as an adjustment to the gain on sale from discontinued operations in the period such change in estimate occurs. The Company expects the closing date adjustment and the income tax on the gain to be finalized by the end of fiscal 2018.

 

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Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company received 2.8 million shares of the Buyer’s common stock at closing (the “Shares”), which has been recorded within “Marketable securities” on the Company’s Consolidated Balance Sheets. Unrealized and realized gains or losses due to changes in fair value based upon Level 1 quoted active market prices of the Shares are recorded in “Other income (expense), net” on the Consolidated Statements of Operations. The sales agreement includes time based contractual restrictions related to the Company’s sale of the Shares and as such, the Company entered into economic hedges to reduce the Company’s exposure to price fluctuations of the Shares during the restricted period, which fixes the net amount that the Company will realize upon the sale of the Shares at approximately $247 million. The Company records changes in fair value related to the economic share price hedges within “Other income (expense), net”, offsetting the changes in fair value of the underlying Shares. During the three months ended September 30, 2017, the Company sold 0.6 million Shares, the net proceeds of which have been included in Cash flows from investing activities – discontinued operations.

 

In connection with the sale of the TS business, the Company entered into a Transition Services Agreement (“TSA”), pursuant to which the Buyer will pay the Company to provide certain information technology, distribution, facilities, finance and human resources related services for various periods of time depending upon the services not to exceed approximately two years from the closing date. Expenses incurred by the Company to provide such services under the TSA are classified within selling, general and administrative expenses and amounts billed to the Buyer to provide such services are classified as a reduction of such expenses. As of September 30, 2017, the Buyer terminated substantially all TSA services outside of certain information technology services and all remaining TSA services are expected to be terminated by the end of fiscal 2018.

 

Financial results of the TS business for the first quarter ended October 1, 2016 are presented as “Income from discontinued operations, net of tax” on the Consolidated Statements of Operations and are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

 

    

October 1, 2016

 

 

 

(Thousands)

 

Sales

 

$

1,922,202

 

Cost of sales

 

 

1,728,929

 

Gross profit

 

 

193,273

 

Selling, general and administrative expenses

 

 

166,025

 

Restructuring, integration and other expenses

 

 

4,224

 

Operating income

 

 

23,024

 

Interest and other expense, net

 

 

 5

 

Income from discontinued operations before income taxes

 

 

23,029

 

Income tax expense

 

 

21,874

 

Income from discontinued operations, net of taxes

 

$

1,155

 

 

Included within selling, general and administrative expenses of discontinued operations was $12.5 million of estimated corporate expenses, excluding general overhead, specific to or benefiting the TS business for the first quarter ended October 1, 2016.

 

 

 

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Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

4. Goodwill and long-lived assets

 

Goodwill

 

The following table presents the change in goodwill by reportable segment for the three months ended September 30, 2017. All of the accumulated impairment was recognized in fiscal 2009.

 

 

 

 

 

 

 

 

 

 

 

 

    

Electronic 

    

Premier

    

 

 

 

 

Components

 

Farnell

 

Total

 

 

(Thousands)

Gross goodwill

 

$

1,680,158

 

$

513,299

 

$

2,193,457

Accumulated impairment

 

 

(1,045,110)

 

 

 —

 

 

(1,045,110)

Carrying value at July 1, 2017

 

 

635,048

 

 

513,299

 

 

1,148,347

Additions from acquisitions

 

 

21,539

 

 

 —

 

 

21,539

Foreign currency translation

 

 

5,772

 

 

17,739

 

 

23,511

Measurement period adjustments

 

 

(64)

 

 

(15,328)

 

 

(15,392)

Carrying value at September 30, 2017

 

$

662,295

 

$

515,710

 

$

1,178,005

Gross goodwill

 

$

1,707,405

 

$

515,710

 

$

2,223,115

Accumulated impairment

 

 

(1,045,110)

 

 

 —

 

 

(1,045,110)

Carrying value at September 30, 2017

 

$

662,295

 

$

515,710

 

$

1,178,005

 

The Company’s reporting units passed goodwill impairment testing using a quantitative impairment model in the fourth quarter of fiscal 2017, however, the Company’s Electronic Components (“EC”) Americas reporting units had an estimated fair value that was not substantially in excess of its carrying value. The Company evaluates each quarter if facts and circumstances indicate that it is more likely than not that the fair value of reporting units is less than its carrying value, which would require the Company to perform an interim goodwill impairment test. Indicators the Company evaluates to determine whether an interim goodwill impairment test is necessary include, but are not limited to (i) a sustained decrease in share price or market capitalization, (ii) changes in the macroeconomic or industry environments, (iii) the results of and the amount of time passed since the last goodwill impairment test and (iv) the long-term expected financial performance of its reporting units. During the first quarter of fiscal 2018, the Company concluded that an interim goodwill impairment test was not required. 

 

Intangible Assets

 

The following table presents the Company’s acquired intangible assets at September 30, 2017, and July 1, 2017, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

July 1, 2017

 

 

 

Acquired

 

Accumulated

 

Net Book

 

  Acquired 

 

 Accumulated 

 

 Net Book 

 

 

    

Amount

    

Amortization

    

Value

    

Amount

    

Amortization

    

Value

 

 

 

(Thousands)

 

Customer related

 

$

307,712

 

$

(101,512)

 

$

206,200

 

$

277,865

 

$

(79,578)

 

$

198,287

 

Trade name

 

 

55,947

 

 

(10,122)

 

 

45,825

 

 

46,915

 

 

(6,720)

 

 

40,195

 

Technology and other

 

 

53,580

 

 

(14,643)

 

 

38,937

 

 

50,369

 

 

(11,560)

 

 

38,809

 

 

 

$

417,239

 

$

(126,277)

 

$

290,962

 

$

375,149

 

$

(97,858)

 

$

277,291

 

 

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Table of Contents

AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Intangible asset amortization expense from continuing operations was $25.5 million and $1.9 million for the first quarters of fiscal 2018 and 2017, respectively. Intangible assets have a weighted average remaining useful life of approximately 4 years. The following table presents the estimated future amortization expense for the remainder of fiscal 2018, the next five fiscal years and thereafter (in thousands):

 

 

 

 

 

Fiscal Year

    

 

Remainder of fiscal 2018

 

 

65,198

2019

 

 

85,462

2020

 

 

83,476

2021

 

 

40,219

2022

 

 

12,677

2023

 

 

3,693

Thereafter

 

 

237

Total

 

$

290,962

 

 

 

5. Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

July 1, 2017

    

September 30, 2017

    

July 1, 2017

 

 

 

Interest Rate

 

Carrying Balance

 

Bank credit facilities and other

 

2.15

%

 

2.27

%

 

$

25,498

 

$

50,113

 

Accounts receivable securitization program

 

1.70

%

 

 —

 

 

 

170,000

 

 

 —

 

Short-term debt

 

 

 

 

 

 

 

$

195,498

 

$

50,113

 

 

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.

 

The Company has an accounts receivable securitization program (the “Program”) in the United States 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 $400.0 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 $734.2 million and $807.5 million at September 30, 2017, and July 1, 2017, 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 September 30, 2017, and July 1, 2017. The Program expires in August 2018 and as a result the Company has classified outstanding balances as short-term debt as of September 30, 2017. 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%.

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

July 1, 2017

    

September 30, 2017

    

July 1, 2017

 

 

 

Interest Rate

 

Carrying Balance

 

Revolving credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable securitization program

 

 —

 

 

1.53

%

 

$

 —

 

$

142,000

 

Credit Facility

 

4.30

%

 

2.77

%

 

 

7,500

 

 

99,970

 

Notes due:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 2020

 

5.88

%

 

5.88

%

 

 

300,000

 

 

300,000

 

December 2021

 

3.75

%

 

3.75

%

 

 

300,000

 

 

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

 

1.36

%

 

1.36

%

 

 

532

 

 

642

 

Long-term debt before discount and debt issuance costs

 

 

 

 

 

 

 

 

1,508,032

 

 

1,742,612

 

Discount and debt issuance costs - unamortized

 

 

 

 

 

 

 

 

(12,893)

 

 

(13,400)

 

Long-term debt

 

 

 

 

 

 

 

$

1,495,139

 

$

1,729,212

 

 

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 $1.50 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 September 30, 2017, and July 1, 2017. As of September 30, 2017, and July 1, 2017, there were $2.0 million and $3.1 million, respectively, in letters of credit issued under the Credit Facility.

 

As of September 30, 2017, the carrying value and fair value of the Company’s total debt was $1.69 billion and $1.76 billion, respectively. At July 1, 2017, the carrying value and fair value of the Company’s total debt was $1.78 billion and $1.85 billion, respectively. Fair value for the notes 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 60 days (“economic hedges”), but no longer than one year. The Company continues to have exposure to foreign currency risks to the extent they are not economically hedged. The Company adjusts any economic hedges to fair value through the consolidated statements of operations primarily within “other income (expense), net.” 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 September 30, 2017, and July 1, 2017. 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.

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

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 and Mexican Peso. The Company also, to a lesser extent, has foreign operations transactions in other European and Asia/Pacific foreign currencies.

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30,

    

July 1,

 

 

 

2017

 

2017

 

 

 

(Thousands)

 

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

 

 

 

 

 

 

 

Other current assets

 

$

3,653

 

$

7,297

 

Accrued expenses

 

 

5,108

 

 

4,142

 

 

In addition to amounts included in the above table, there was approximately $0.1 million and $34.0 million as of September 30, 2017 and July 1, 2017, respectively, of accrued expenses related to an economic hedge derivative financial instrument used to hedge the fair value changes in marketable securities discussed further in Note 3.

 

The amounts recorded to other income (expense), net related to derivative financial instruments for economic hedges are as follows:

 

 

 

 

 

 

 

 

 

 

 

First Quarters Ended

 

 

 

September 30,

    

October 1,

 

 

 

2017

 

2016

 

 

 

(Thousands)

 

Net derivative financial instrument (loss) gain

 

$

1,859

 

$

(9,508)

 

 

For the three months ended October 1, 2016, $8.0 million of derivative financial instrument losses in other income (expenses), net, have been excluded from the above table associated with foreign currency derivative financial instruments purchased to economically hedge the British Pound purchase price of the PF acquisition in fiscal 2017.

 

Under the Company’s economic hedging policies, gains and losses on the derivative financial instruments are classified within the same line item in the consolidated statements of operations and as the underlying assets or liabilities being economically 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.

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

 

As of September 30, 2017, the Company had aggregate estimated liabilities of $14.2 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 5.4% in the first quarter of fiscal 2018 as compared with 23.6% in the first quarter of fiscal 2017.  During the first quarter of fiscal 2018, the Company’s effective tax rate was favorably impacted primarily by (i) the mix of income in lower tax jurisdictions and (ii) the release of unrecognized tax benefit reserves primarily due to the negotiation of a favorable outcome in a foreign jurisdiction. During the first quarter of fiscal 2017, the Company’s effective tax rate was favorably impacted primarily by the mix of income in lower tax jurisdictions.

 

9. Pension plan

 

The Company has a noncontributory defined benefit pension plan (the “Plan”) that covers substantially all U.S. employees excluding U.S. employees of the acquired PF business and a closed noncontributory defined benefit pension plan in the U.S. covering all U.S. PF employees (collectively, the “Plans”). Components of net period pension cost for the Plans were as follows:

 

 

 

 

 

 

 

 

 

 

First Quarters Ended

 

 

    

September 30,

    

October 1,

 

 

 

2017

 

2016 (1)

 

 

 

(Thousands)

 

Service cost

 

$

3,868

 

$

10,848

 

Interest cost

 

 

5,783

 

 

3,774

 

Expected return on plan assets

 

 

(13,757)

 

 

(10,588)

 

Amortization of prior service credits

 

 

(393)

 

 

(393)

 

Recognized net actuarial loss

 

 

3,746

 

 

3,851

 

Net periodic pension (benefit) cost

 

$

(753)

 

$

7,492

 

 


(1)

Includes discontinued operations

 

The Company contributed $8.0 million to the Plans during the first quarter of fiscal 2018 and expects to make an additional contribution to the Plans of $8.0 million in the remainder of fiscal 2018. No contributions were made to the acquired PF plan as that plan has been closed. The Company expects to combine the Plans into a single plan to provide pension benefits to eligible U.S. employees beginning in January 2018.

 

The Plans meet the definition of defined benefit plans and as a result, the Company applies ASC 715 pension accounting to the Plans. The Plans, however, are cash balance plans that are similar in nature to defined contribution plans in that a participant’s benefit is defined in terms of stated account balances. The cash balance plans provides the Company with the benefit of applying any earnings on the Plan’s investments beyond the fixed return provided to participants, toward the Company’s future cash funding obligations.

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Amounts reclassified out of accumulated other comprehensive income (loss), net of tax, to operating expenses during the first quarters of fiscal 2018 and fiscal 2017 were not material and substantially all related to net periodic pension costs including recognition of actuarial losses and amortization of prior service credits.

 

In connection with the sale of the TS business, a significant number of former employees became terminated vested employees under the Plan. If the aggregate amount of former employee withdrawals from their Plan balances reach a certain threshold during a fiscal year, a settlement charge is required under ASC 715 pension accounting in the period that such aggregate withdrawals exceed the threshold. The Company expects that this threshold will be exceeded in fiscal 2018 resulting in settlement charges of up to approximately $15 million.

 

10. Shareholders’ equity

 

Share repurchase program

 

In February 2017, the Company’s Board of Directors amended the Company’s existing share repurchase program to authorize the repurchase of up to $1.75 billion of common stock in the open market or through privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors such as share price, corporate and regulatory requirements, and prevailing market conditions. During the three months ended September 30, 2017, the Company repurchased 1.9 million shares under this program for a total cost of $72.1 million.

 

Common stock dividend

 

In August 2017, the Company’s Board of Directors approved a dividend of $0.18 per common share and dividend payments of $22.0 million were made in September 2017.

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

11. Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarters Ended

 

 

 

September 30,

 

October 1,

 

 

 

2017

  

2016

 

 

 

(Thousands, except per share data)

 

Numerator:

 

 

 

   

 

 

 

Income from continuing operations

 

$

58,182

 

$

67,688

 

Income from discontinued operations

 

 

121

 

 

1,155

 

Net income

 

$

58,303

 

$

68,843

 

Denominator:

 

 

 

 

 

 

 

Weighted average common shares for basic earnings per share

 

 

122,685

 

 

127,531

 

Net effect of dilutive stock based compensation awards

 

 

1,299

 

 

2,232

 

Weighted average common shares for diluted earnings per share

 

 

123,984

 

 

129,763

 

Basic earnings per share - continuing operations

 

$

0.48

 

$

0.53

 

Basic earnings per share - discontinued operations

 

 

0.00

 

 

0.01

 

Basic earnings per share

 

$

0.48

 

$

0.54

 

Diluted earnings per share - continuing operations

 

$

0.47

 

$

0.52

 

Diluted earnings per share - discontinued operations

 

 

0.00

 

 

0.01

 

Diluted earnings per share

 

$

0.47

 

$

0.53

 

Stock options excluded from earnings per share calculation due to anti-dilutive effect

 

 

2,033

 

 

674

 

 

See Note 3 for additional information on income from discontinued operations.

 

 

 

12. Additional cash flow information

 

Non-cash investing activities and supplemental cash flow information were as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

September 30,

    

October 1,

 

 

 

2017

 

2016

 

 

 

(Thousands)

 

Non-cash Investing Activities:

 

 

 

 

 

 

 

Capital expenditures incurred but not paid

 

$

23,176

 

$

7,406

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Interest

 

$

5,107

 

$

18,840

 

Income taxes

 

$

18,362

 

$

15,216

 

 

Non-cash financing activities of $4.0 million related to share repurchases that have been accrued, but not yet paid for as of September 30, 2017. Non-cash investing activities of $4.1 million related to share sales that have been accrued, but not yet received, as of September 30, 2017.

 

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Included in cash and cash equivalents as of September 30, 2017, and July 1, 2017, was $5.5 million and $208.3 million, respectively, of cash equivalents, which was primarily comprised of investment grade money market funds and overnight time deposits.

 

13. Segment information

 

Electronic Components (“EC”) and Premier Farnell (“PF”) are the Company’s reportable segments (“operating groups”). EC markets and sells semiconductors and interconnect, passive and electromechanical devices and integrated components to a diverse customer base serving many end-markets. PF distributes electronic components and related products to the electronic system design community utilizing multi-channel sales and marketing resources.

 

 

 

 

 

 

 

 

 

 

 

First Quarters Ended

 

 

 

September 30,

 

October 1,

 

 

 

2017

 

2016

 

 

 

(Thousands)

 

Sales:

    

 

    

    

 

    

 

Electronic Components

 

$

4,307,251

 

$

4,118,104

 

Premier Farnell

 

 

353,692

 

 

 —

 

 

 

 

4,660,943

 

 

4,118,104

 

Operating income (loss):

 

 

 

 

 

 

 

Electronic Components

 

$

139,601

 

$

185,051

 

Premier Farnell

 

 

34,795

 

 

 —

 

 

 

 

174,396

 

 

185,051

 

Corporate (1)

 

 

(32,462)

 

 

(23,690)

 

Restructuring, integration and other expenses

 

 

(46,394)

 

 

(29,469)

 

Amortization of acquired intangible assets and other

 

 

(25,585)

 

 

(2,378)

 

Operating Income

 

$

69,955

 

$

129,514

 

 

 

 

 

 

 

 

 

Sales, by geographic area:

 

 

 

 

 

 

 

Americas (2)

 

$

1,185,485

 

$

1,250,508

 

EMEA (3)

 

 

1,692,985

 

 

1,265,294

 

Asia/Pacific (4)

 

 

1,782,473

 

 

1,602,302

 

Sales

 

$

4,660,943

 

$

4,118,104

 

 


(1) Corporate is not a reportable segment and represents certain centrally incurred overhead expenses and assets that are not included in the EC and PF measures of profitability or assets. Corporate amounts represent a reconciling item between segment measures and total Avnet amounts reported in the consolidated financial statements.

 

(2) Includes sales from the United States of $1.10 billion and $1.17 billion for the first quarters ended September 30, 2017, and October 1, 2016, respectively.

 

(3) Includes sales from Germany and Belgium of $681.0 million and $262.5 million, respectively, for the first quarter ended September 30, 2017. Includes sales from Germany and Belgium of $521.4 million and $202.7 million, respectively, for the first quarter ended October 1, 2016.

 

(4) Includes sales from China (including Hong Kong) and Taiwan of $655.4 million and $657.5 million, respectively, for the first quarter ended September 30, 2017. Includes sales from China (including Hong Kong) and Taiwan of $624.8 million and $589.5 million, respectively, for the first quarter ended October 1, 2016.

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

July 1,

 

 

 

2017

 

2017

 

 

 

(Thousands)

 

Property, plant, and equipment, net, by geographic area:

 

 

 

 

 

 

 

Americas (1)

 

$

278,435

 

$

296,038

 

EMEA (2)

 

 

193,756

 

 

186,127

 

Asia/Pacific

 

 

38,112

 

 

37,410

 

Property, plant, and equipment, net

 

$

510,303

 

$

519,575

 

 


(1) Includes property, plant and equipment, net, of $272.5 million and $289.1 million as of September 30, 2017, and July 1, 2017, respectively, in the United States.

 

(2) Includes property, plant and equipment, net, of $91.9 million, $52.2 million and $40.6 million in Germany, UK and Belgium, respectively, as of September 30, 2017, and $85.6 million, $52.1 million and $39.8 million in Germany, UK and Belgium, respectively, as of July 1, 2017.

 

14. Restructuring expenses

 

Fiscal 2018

 

During fiscal 2018, the Company took certain restructuring actions in an effort to integrate acquisitions and reduce future operating expenses. Restructuring expenses are included as a component of restructuring, integration and other expenses in the consolidated statements of operations. The activity related to the restructuring liabilities established during fiscal 2018 is presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Facility

    

 

Asset

     

 

 

    

 

 

 

 

 

Severance

 

Exit Costs

 

Impairments

 

Other

 

Total

 

 

 

(Thousands)