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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 28, 2019

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

For the transition period from _____ to _____

Commission File #1-4224

AVNET, INC.

(Exact name of registrant as specified in its charter)

New York

 

 

11-1890605

(State or other jurisdiction

 

 

(IRS Employer

of incorporation or organization)

 

 

Identification No.)

2211 South 47th Street, Phoenix, Arizona

 

85034

(Address of principal executive offices)

 

(Zip Code)

(480) 643-2000

(Registrant’s telephone number, including area code.)

N/A

(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on Which registered:

Common stock, par value $1.00 per share

 

AVT

 

Nasdaq Global Select Market

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes þ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

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 January 16, 2020, the total number of shares outstanding of the registrant’s Common Stock was 99,835,238 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 28, 2019 and June 29, 2019

2

Consolidated Statements of Operations for the second quarters and six months ended December 28, 2019 and December 29, 2018

3

Consolidated Statements of Comprehensive Income for the second quarters and six months ended December 28, 2019 and December 29, 2018

4

Consolidated Statements of Shareholders’ Equity for the second quarters and six months ended December 28, 2019 and December 29, 2018

5

Consolidated Statements of Cash Flows for the six months ended December 28, 2019 and December 29, 2018

6

Notes to Consolidated Financial Statements

7

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

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

Item 4. Controls and Procedures

30

PART II. OTHER INFORMATION

30

Item 1. Legal Proceedings

30

Item 1A. Risk Factors

30

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

31

Item 6. Exhibits

32

Signature Page

33

1

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

    

December 28,

    

June 29,

 

2019

2019

 

(Thousands, except share

 

amounts)

 

ASSETS

Current assets:

Cash and cash equivalents

$

488,810

$

546,105

Receivables, less allowances of $49,642 and $53,499, respectively

 

2,977,773

 

3,168,369

Inventories

 

2,908,575

 

3,008,424

Prepaid and other current assets

 

161,343

 

153,438

Total current assets

 

6,536,501

 

6,876,336

Property, plant and equipment, net

 

431,410

 

452,171

Goodwill

 

916,058

 

876,728

Intangible assets, net

 

119,186

 

143,520

Operating lease assets (Note 5)

274,376

Other assets

 

247,581

 

215,801

Total assets

$

8,525,112

$

8,564,556

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Short-term debt

$

492,223

$

300,538

Accounts payable

 

1,802,484

 

1,864,342

Accrued expenses and other

398,486

413,696

Short-term operating lease liabilities (Note 5)

 

52,057

 

Total current liabilities

 

2,745,250

 

2,578,576

Long-term debt

 

1,194,115

 

1,419,922

Long-term operating lease liabilities (Note 5)

244,622

Other liabilities

 

383,792

 

425,585

Total liabilities

 

4,567,779

 

4,424,083

Commitments and contingencies (Note 7)

Shareholders’ equity:

Common stock $1.00 par; authorized 300,000,000 shares; issued 99,348,624 shares and 104,037,769 shares, respectively

 

99,349

 

104,038

Additional paid-in capital

 

1,588,466

 

1,573,005

Retained earnings

 

2,575,536

 

2,767,469

Accumulated other comprehensive loss

 

(306,018)

 

(304,039)

Total shareholders’ equity

 

3,957,333

 

4,140,473

Total liabilities and shareholders’ equity

$

8,525,112

$

8,564,556

See notes to consolidated financial statements.

2

Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Second Quarters Ended

Six Months Ended

    

December 28,

    

December 29,

    

December 28,

    

December 29,

2019

2018

2019

2018

(Thousands, except per share amounts)

Sales

$

4,534,806

$

5,048,980

$

9,164,814

$

10,138,859

Cost of sales

 

4,009,193

 

4,418,947

 

8,095,362

 

8,872,077

Gross profit

 

525,613

 

630,033

 

1,069,452

 

1,266,782

Selling, general and administrative expenses

 

464,873

 

471,723

 

921,377

 

946,868

Restructuring, integration and other expenses

 

14,265

 

62,260

 

38,863

 

77,048

Operating income

 

46,475

 

96,050

 

109,212

 

242,866

Other (expense) income, net

 

(485)

 

2,584

 

4,447

 

692

Interest and other financing expenses, net

 

(33,904)

 

(33,718)

 

(67,535)

 

(63,811)

Income from continuing operations before taxes

 

12,086

 

64,916

 

46,124

 

179,747

Income tax expense (benefit)

 

6,870

 

28,141

 

(844)

 

59,443

Income from continuing operations, net of tax

5,216

36,775

46,968

 

120,304

Loss from discontinued operations, net of tax

(1,548)

(374)

(1,548)

 

(179)

Net income

3,668

36,401

45,420

120,125

Earnings (loss) per share - basic:

Continuing operations

$

0.05

$

0.33

$

0.46

$

1.07

Discontinued operations

(0.01)

(0.00)

(0.01)

(0.01)

Net income per share basic

0.04

0.33

0.45

1.06

Earnings (loss) per share - diluted:

Continuing operations

$

0.05

$

0.33

$

0.45

$

1.06

Discontinued operations

(0.01)

(0.00)

(0.01)

(0.01)

Net income per share diluted

0.04

0.33

0.44

1.05

Shares used to compute earnings per share:

Basic

 

100,431

 

110,332

 

101,781

 

112,796

Diluted

 

101,302

 

111,462

 

102,839

 

113,967

Cash dividends paid per common share

$

0.21

$

0.20

$

0.42

$

0.40

See notes to consolidated financial statements.

3

Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Second Quarters Ended

Six Months Ended

    

December 28,

    

December 29,

     

December 28,

    

December 29,

 

2019

2018

2019

2018

(Thousands)

Net income

$

3,668

$

36,401

$

45,420

$

120,125

Other comprehensive income (loss), net of tax:

Foreign currency translation and other

 

93,186

 

(65,197)

 

(8,960)

 

(56,396)

Pension adjustments, net

 

3,168

 

4,207

 

6,981

 

4,963

Total comprehensive income (loss)

$

100,022

$

(24,589)

$

43,441

$

68,692

See notes to consolidated financial statements.

4

Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)

    

    

    

    

    

Accumulated

    

Common

Common

Additional

Other

Total

Stock-

Stock-

Paid-In

Retained

Comprehensive

Shareholders’

Shares

Amount

Capital

Earnings

(Loss) Income

Equity

(Thousands)

Balance, June 29, 2019

 

104,038

$

104,038

$

1,573,005

$

2,767,469

$

(304,039)

$

4,140,473

Net income

 

 

 

 

41,752

 

 

41,752

Translation adjustments and other

 

 

 

 

 

(102,146)

 

(102,146)

Pension liability adjustments, net

3,813

3,813

Cash dividends

 

 

 

 

(21,451)

 

 

(21,451)

Repurchases of common stock

 

(2,631)

 

(2,631)

 

(109,504)

 

(112,135)

Stock-based compensation

 

64

64

7,701

7,765

Balance, September 28, 2019

 

101,471

$

101,471

$

1,580,706

$

2,678,266

$

(402,372)

$

3,958,071

Net income

 

 

 

 

3,668

 

 

3,668

Translation adjustments and other

 

 

 

 

 

93,186

 

93,186

Pension liability adjustments, net

3,168

3,168

Cash dividends

 

 

 

 

(20,975)

 

 

(20,975)

Repurchases of common stock

 

(2,135)

 

(2,135)

 

(85,423)

 

(87,558)

Stock-based compensation

 

13

 

13

 

7,760

 

 

 

7,773

Balance, December 28, 2019

99,349

$

99,349

$

1,588,466

$

2,575,536

$

(306,018)

$

3,957,333

    

    

    

    

    

Accumulated

    

Common

Common

Additional

Other

Total

Stock-

Stock-

Paid-In

Retained

Comprehensive

Shareholders’

Shares

Amount

Capital

Earnings

(Loss) Income

Equity

(Thousands)

Balance, June 30, 2018

 

115,825

$

115,825

$

1,528,713

$

3,235,894

$

(195,351)

$

4,685,081

Net income

 

 

 

 

83,724

 

 

83,724

Translation adjustments and other

 

 

 

 

 

8,801

 

8,801

Pension liability adjustments, net

756

756

Cash dividends

 

 

 

 

(22,932)

 

 

(22,932)

Repurchases of common stock

 

(3,315)

 

(3,315)

 

(153,582)

 

(156,897)

Effects of new accounting principles

(3,832)

(3,832)

Stock-based compensation

 

521

 

521

 

25,851

 

 

 

26,372

Balance, September 29, 2018

 

113,031

$

113,031

$

1,554,564

$

3,139,272

$

(185,794)

$

4,621,073

Net income

 

 

 

 

36,401

 

 

36,401

Translation adjustments and other

 

 

 

 

 

(65,197)

 

(65,197)

Pension liability adjustments, net

4,207

4,207

Cash dividends

 

 

 

 

(21,769)

 

 

(21,769)

Repurchases of common stock

 

(4,116)

 

(4,116)

 

(170,967)

 

(175,083)

Stock-based compensation

 

36

 

36

 

9,069

 

 

 

9,105

Balance, December 29, 2018

108,951

$

108,951

$

1,563,633

$

2,982,937

$

(246,784)

$

4,408,737

See notes to consolidated financial statements.

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AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended

    

December 28,

    

December 29,

2019

2018

(Thousands)

Cash flows from operating activities:

Net income

$

45,420

$

120,125

Less: Loss from discontinued operations, net of tax

(1,548)

(179)

Income from continuing operations

46,968

120,304

Non-cash and other reconciling items:

Depreciation

 

49,822

 

48,124

Amortization

 

41,257

 

41,220

Amortization of operating lease asset

31,354

Deferred income taxes

 

(15,518)

 

44,857

Stock-based compensation

 

14,503

 

17,077

Other, net

 

20,609

 

77,437

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

Receivables

 

185,598

 

193,520

Inventories

 

94,182

 

(209,582)

Accounts payable

 

(52,711)

 

(205,254)

Accrued expenses and other, net

 

(71,858)

 

(140,495)

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

344,206

(12,792)

Net cash flows used for operating activities - discontinued operations

(56,284)

Net cash flows provided (used) for operating activities

 

344,206

 

(69,076)

Cash flows from financing activities:

Borrowings (repayments) under accounts receivable securitization, net

 

(35,400)

 

366,000

Repayments under bank credit facilities and other debt, net

(1,376)

 

(59,420)

Repayments under senior unsecured credit facility, net

 

(1,301)

 

(595)

Repurchases of common stock

 

(198,630)

 

(335,404)

Dividends paid on common stock

 

(42,426)

 

(44,701)

Other, net

 

(4,887)

 

15,200

Net cash flows used for financing activities - continuing operations

(284,020)

(58,920)

Net cash flows used for financing activities

 

(284,020)

 

(58,920)

Cash flows from investing activities:

Purchases of property, plant and equipment

 

(44,252)

 

(70,186)

Acquisitions of businesses, net of cash acquired

 

(51,509)

 

(62,514)

Other, net

 

(13,098)

 

963

Net cash flows used for investing activities - continuing operations

(108,859)

(131,737)

Net cash flows provided by investing activities - discontinued operations

123,473

Net cash flows used for investing activities

 

(108,859)

 

(8,264)

Effect of currency exchange rate changes on cash and cash equivalents

 

(8,622)

 

(2,699)

Cash and cash equivalents:

— decrease

(57,295)

(138,959)

— at beginning of period

546,105

621,125

— at end of period

$

488,810

$

482,166

See notes to consolidated financial statements.

6

Table of Contents

AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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. and its consolidated subsidiaries’ (collectively, the “Company” or “Avnet”) financial position, results of operations, comprehensive income 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 United States (“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 June 29, 2019.

Certain reclassifications have been made in prior periods to conform to the current period presentation.

Recently adopted accounting pronouncements

The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842),” and its related amendments (collectively “ASC 842”) on June 30, 2019 (the first day of fiscal 2020) using the modified transition approach without restating the comparative period consolidated financial statements. The standard requires lessees to recognize a right-of-use asset and a short-term and long-term lease liability for all leases.

The adoption of ASC 842 did not have a material impact on the Company’s consolidated statements of operations or retained earnings. The Company elected the package of practical expedients permitted under the transition guidance that allowed, among other things, the historical lease classification to be carried forward without reassessment and the hindsight practical expedient. The Company elected to not separate lease and non-lease components for its real estate leases. Refer to Note 5 for additional disclosures related to leases.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities” and its related amendments (collectively “ASC 815”), 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 qualification and application of hedge accounting compared to historical GAAP. This update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of ASC 815 in the first quarter of fiscal 2020 did not have an impact on the Company’s consolidated financial statements.

Recently issued accounting pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The ASU will be effective for the Company in the first quarter of fiscal 2022, and early adoption is permitted. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2019-12.

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) ("ASU No. 2018-15"). ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop internal-use software. ASU No. 2018-15 is effective for the Company in the first quarter of fiscal 2021, with early adoption permitted, and is to be applied either retrospectively or prospectively. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2018-15.

In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU No. 2018-14”). The new guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including removing certain previous disclosure requirements, adding certain new disclosure requirements, and clarifying certain other disclosure requirements. The ASU will be effective for the Company in the first quarter of fiscal 2022, and early adoption is permitted. The Company’s planned adoption of ASU No. 2018-14 is not expected to have an impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU No. 2016-13") and also issued subsequent amendments to the initial guidance: ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, and ASU No. 2019-11 (collectively, Topic 326). Topic 326 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Topic 326 is effective for the Company in the first quarter of fiscal 2021, with early adoption permitted, and is to be applied using a modified retrospective approach. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13.

2. Acquisitions and discontinued operations

Acquisitions

During the second quarter of fiscal 2020, the Company completed two acquisitions. The impact of these acquisitions was not material to the Company’s consolidated balance sheets or statements of operations and as a result, the Company has not disclosed the preliminary allocation of purchase price or the pro-forma impact of the acquisition.

Discontinued Operations

In February 2017, the Company completed the sale of its Technology Solutions business (“TS business”) to Tech Data Corporation (the “Buyer”). The TS business and the financial impacts of the divestiture are classified as discontinued operations in all periods presented. In August 2018, the Company executed a settlement agreement with the Buyer resulting in a final sales price increase of $120.0 million and a final geographic allocation of the TS business sales price for tax reporting purposes. This incremental consideration received from the sale of the TS business as well as cash settlements from the resolution of indemnification claims and other cash reimbursements have been classified as cash flows from discontinued operations investing activities. Income tax payments related to the gain on sale of the TS business have been classified as cash flows from discontinued operations operating activities.

Under the contractual terms of the sale of the TS business, the Company has indemnified the Buyer for certain liabilities including tax related matters, which may result in future indemnification expenses and indemnification payments to the Buyer depending upon the outcome of those matters subject to indemnification.

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

3. Goodwill and intangible assets

Goodwill

The following table presents the change in goodwill by reportable segment for the six months ended December 28, 2019.

  

Electronic

  

  

Components

Farnell

Total

(Thousands)

Carrying value at June 29, 2019 (1)

$

390,896

$

485,832

$

876,728

Additions from acquisitions

 

25,967

 

 

25,967

Foreign currency translation

 

361

 

13,002

 

13,363

Carrying value at December 28, 2019 (1)

$

417,224

$

498,834

$

916,058

(1)Includes accumulated impairment of $1,045,110 from fiscal 2009, $181,440 from fiscal 2018 and $137,396 from fiscal 2019

The Company evaluates each quarter if facts and circumstances indicate that it is more likely than not that the fair value of its reporting units is less than their 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 as of any fiscal quarter end, (ii) changes in 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.

Intangible Assets

The following table presents the Company’s acquired intangible assets at December 28, 2019, and June 29, 2019, respectively.

December 28, 2019

June 29, 2019

 

Acquired

Accumulated

Net Book

 Acquired 

 Accumulated 

 Net Book 

 

    

Amount

    

Amortization

    

Value

    

Amount

    

Amortization

    

Value

 

(Thousands)

 

Customer related

$

312,666

$

(244,418)

$

68,248

$

292,266

$

(208,329)

$

83,937

Trade name

 

54,157

 

(29,713)

 

24,444

 

52,760

 

(24,752)

 

28,008

Technology and other

 

64,462

 

(37,968)

 

26,494

 

63,753

 

(32,178)

 

31,575

$

431,285

$

(312,099)

$

119,186

$

408,779

$

(265,259)

$

143,520

9

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Intangible asset amortization expense from continuing operations was $21.3 million and $20.4 million for the second quarters of fiscal 2020 and 2019, respectively, and $41.3 million and $41.2 million for the first six months of fiscal 2020 and 2019, respectively. Intangible assets have a weighted average remaining useful life of approximately 3 years. The following table presents the estimated future amortization expense for the remainder of fiscal 2020 and the next five fiscal years (in thousands):

Fiscal Year

    

Remainder of fiscal 2020

$

42,412

2021

43,446

2022

 

16,820

2023

 

8,118

2024

 

3,584

2025

 

4,806

Total

$

119,186

4. Debt

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

December 28,

June 29,

December 28,

June 29,

2019

   

2019

   

2019

   

2019

Interest Rate

Carrying Balance

 

Bank credit facilities and other

1.94

%

1.02

%

$

323

$

538

Accounts receivable securitization program

2.55

%

191,900

Public notes due June 2020

5.88

%

5.88

%

 

300,000

 

300,000

Short-term debt

$

492,223

$

300,538

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 a trade accounts receivable securitization program (the “Securitization 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 $500 million. The Securitization Program does not qualify for off balance sheet accounting treatment and any borrowings under the Securitization Program are recorded as debt in the consolidated balance sheets. Under the Securitization 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 $740.8 million and $857.3 million at December 28, 2019 and June 29, 2019, respectively. The Securitization Program contains certain covenants relating to the quality of the receivables sold. The Securitization Program also requires the Company to maintain certain minimum interest coverage and leverage ratios, which the Company was in compliance with as of December 28, 2019, and June 29, 2019. The Securitization Program expires in August 2020 and as a result the Company has classified outstanding balances as short-term debt as of December 28, 2019. Interest on borrowings is calculated using a one-month LIBOR rate plus a spread of 0.75%. The facility fee on the unused balance of the facility is up to 0.35%.

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

December 28,

June 29,

December 28,

June 29,

2019

   

2019

  

2019

  

2019

Interest Rate

Carrying Balance

 

Revolving credit facilities:

Accounts receivable securitization program

3.15

%

$

$

227,300

Credit Facility

5.68

%

1,100

Public notes due:

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

1.16

%

1.00

%

 

1,961

 

403

Long-term debt before discount and debt issuance costs

 

1,201,961

 

1,428,803

Discount and debt issuance costs – unamortized

 

(7,846)

 

(8,881)

Long-term debt

$

1,194,115

$

1,419,922

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 $200.0 million of letters of credit and up to $300.0 million of loans in certain approved currencies, which expires in June 2023. 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 December 28, 2019 and June 29, 2019. As of December 28, 2019, and June 29, 2019, there were $3.9 million and $4.0 million, respectively, in letters of credit issued under the Credit Facility.

As of December 28, 2019, the carrying value and fair value of the Company’s total debt was $1.69 billion and $1.76 billion, respectively. At June 29, 2019, the carrying value and fair value of the Company’s total debt was $1.72 billion and $1.78 billion, respectively. Fair value for the public 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 facilities.

5. Leases

Substantially all the Company’s leases are classified as operating leases and are predominately related to real property for distribution centers, office space and integration facilities with a lease term of up to 18 years. The Company’s equipment leases are primarily for automobiles and equipment and are not material to the consolidated financial statements.

The Company determines if an arrangement contains a lease at inception based on whether it conveys the right to control the use of an identified asset in exchange for consideration. Lease right-of-use assets (“operating lease assets”) and associated liabilities (“operating lease liabilities”) are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Certain lease agreements may include one or more options to extend or terminate a lease. Lease terms are inclusive of these options if it is reasonably certain that the Company will exercise such options.

11

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company’s leases generally do not provide a readily determinable implicit borrowing rate, as such, the discount rate used to calculate present value is based upon an estimate of the Company’s secured borrowing rate. The estimated secured borrowing rates used at the date of adoption for each lease varies in accordance with the lease term and the currency of the lease payments. Lease cost is recognized on a straight-line basis over the lease term and is included as a component of “Selling, general, and administrative expenses” in the consolidated statements of operations. Lease payments are primarily fixed; however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the measurement of operating lease assets and liabilities.

The components of lease cost related to the Company’s operating leases were as follows (in thousands):

Second Quarter

Six Months

Ended

Ended

December 28, 2019

Operating lease cost

$

19,574

$

38,376

Variable lease cost

4,829

10,097

Total lease cost

$

24,403

$

48,473

Future minimum operating lease payments as of December 28, 2019 are as follows (in thousands):

Fiscal Year

Remainder of fiscal 2020

$

33,538

2021

 

54,147

2022

 

44,733

2023

 

38,763

2024

 

30,806

Thereafter

 

164,179

Total future operating lease payments

366,166

Total imputed interest on operating lease liabilities

(69,487)

Total operating lease liabilities

$

296,679

Prior to the Company’s adoption of ASC 842, future minimum operating lease payments as of June 29, 2019, were as follows (in thousands) on an undiscounted basis and excluding non-lease components:

Fiscal Year

2020

$

68,710

2021

 

52,225

2022

 

42,069

2023

 

32,245

2024

 

23,305

Thereafter

 

85,196

Total lease payments

$

303,750

Other information pertaining to operating leases consists of the following:

Operating Lease Term and Discount Rate

Weighted-average remaining lease term in years

9.7

Weighted-average discount rate

3.9

%

12

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Supplemental cash flow information related to the Company’s operating leases for the six months ended December 28, 2019 was as follows (in thousands):

Supplemental Cash Flow Information:

Cash paid for operating lease liabilities

$

33,044

Operating lease assets obtained from new operating lease liabilities

18,560

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 (expense) income, 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 “Prepaid and other current assets” or “Accrued expenses and other,” as applicable, in the accompanying consolidated balance sheets as of December 28, 2019 and June 29, 2019. 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, Japanese Yen, Chinese Yuan, Taiwan Dollar, Canadian Dollar and Mexican Peso. The Company also, to a lesser extent, has foreign operations transactions in other EMEA and Asia foreign currencies.

The fair values of forward foreign currency exchange contracts not receiving hedge accounting treatment recorded in the Company’s consolidated balance sheets are as follows:

December 28,

    

June 29,

 

2019

2019

(Thousands)

Prepaid and other current assets

$

6,276

$

5,511

Accrued expenses and other

3,442

6,154

13

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AVNET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The am