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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 October 3, 2020

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 October 21, 2020, the total number of shares outstanding of the registrant’s Common Stock was 98,829,336 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 October 3, 2020 and June 27, 2020

2

Consolidated Statements of Operations for the first quarters ended October 3, 2020 and September 28, 2019

3

Consolidated Statements of Comprehensive Income for the first quarters ended October 3, 2020 and September 28, 2019

4

Consolidated Statements of Shareholders’ Equity for the first quarters ended October 3, 2020 and September 28, 2019

5

Consolidated Statements of Cash Flows for the first quarters ended October 3, 2020 and September 28, 2019

6

Notes to Consolidated Financial Statements

7

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

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

Item 4. Controls and Procedures

28

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

29

Item 1A. Risk Factors

29

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

30

Item 6. Exhibits

31

Signature Page

32

1

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

    

October 3,

    

June 27,

 

2020

2020

 

(Thousands, except share

 

amounts)

 

ASSETS

Current assets:

Cash and cash equivalents

$

483,056

$

477,038

Receivables

 

2,964,531

 

2,928,386

Inventories

 

2,944,673

 

2,731,988

Prepaid and other current assets

 

209,928

 

191,394

Total current assets

 

6,602,188

 

6,328,806

Property, plant and equipment, net

 

404,136

 

404,607

Goodwill

 

798,865

 

773,734

Intangible assets, net

 

47,448

 

65,437

Operating lease assets

288,669

275,917

Other assets

 

240,089

 

256,696

Total assets

$

8,381,395

$

8,105,197

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Short-term debt

$

166,992

$

51

Accounts payable

 

2,005,126

 

1,754,078

Accrued expenses and other

535,376

472,924

Short-term operating lease liabilities

 

58,912

 

53,313

Total current liabilities

 

2,766,406

 

2,280,366

Long-term debt

 

1,195,203

 

1,424,791

Long-term operating lease liabilities

262,850

253,719

Other liabilities

 

379,425

 

419,923

Total liabilities

 

4,603,884

 

4,378,799

Commitments and contingencies (Note 9)

Shareholders’ equity:

Common stock $1.00 par; authorized 300,000,000 shares; issued 98,843,595 shares and 98,792,542 shares, respectively

 

98,844

 

98,793

Additional paid-in capital

 

1,599,331

 

1,594,140

Retained earnings

 

2,367,720

 

2,421,845

Accumulated other comprehensive loss

 

(288,384)

 

(388,380)

Total shareholders’ equity

 

3,777,511

 

3,726,398

Total liabilities and shareholders’ equity

$

8,381,395

$

8,105,197

See notes to consolidated financial statements.

2

Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

First Quarters Ended

    

October 3,

    

September 28,

2020

2019

(Thousands, except per share amounts)

Sales

$

4,723,059

$

4,630,009

Cost of sales

 

4,206,979

 

4,086,170

Gross profit

 

516,080

 

543,839

Selling, general and administrative expenses

 

471,158

 

456,503

Restructuring, integration and other expenses

 

26,420

 

24,598

Operating income

 

18,502

 

62,738

Other (expense) income, net

 

(19,498)

 

4,931

Interest and other financing expenses, net

 

(22,301)

 

(33,631)

Income (loss) before taxes

 

(23,297)

 

34,038

Income tax benefit

 

(4,408)

 

(7,714)

Net (loss) income

$

(18,889)

$

41,752

Earnings (loss) per share:

Basic

$

(0.19)

$

0.40

Diluted

$

(0.19)

$

0.40

Shares used to compute earnings per share:

Basic

 

98,897

 

103,130

Diluted

 

98,897

 

104,377

Cash dividends paid per common share

$

0.21

$

0.21

See notes to consolidated financial statements.

3

Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

First Quarters Ended

    

October 3,

    

September 28,

 

2020

2019

(Thousands)

Net (loss) income

$

(18,889)

$

41,752

Other comprehensive income (loss), net of tax:

Foreign currency translation and other

 

90,373

 

(102,146)

Pension adjustments, net

 

9,623

 

3,813

Total comprehensive income (loss)

$

81,107

$

(56,581)

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 27, 2020

 

98,793

$

98,793

$

1,594,140

$

2,421,845

$

(388,380)

$

3,726,398

Net loss

 

 

 

 

(18,889)

 

 

(18,889)

Translation adjustments and other

 

 

 

 

 

90,373

 

90,373

Pension liability adjustments, net

9,623

9,623

Cash dividends

 

 

 

 

(20,756)

 

 

(20,756)

Effects of new accounting principles, net

(14,480)

(14,480)

Stock-based compensation

 

51

51

5,191

5,242

Balance, October 3, 2020

 

98,844

$

98,844

$

1,599,331

$

2,367,720

$

(288,384)

$

3,777,511

    

    

    

    

    

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

See notes to consolidated financial statements.

5

Table of Contents

AVNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

First Quarters Ended

    

October 3,

    

September 28,

2020

2019

(Thousands)

Cash flows from operating activities:

Net (loss) income

$

(18,889)

$

41,752

Non-cash and other reconciling items:

Depreciation

 

21,845

 

24,669

Amortization

 

20,117

 

19,911

Amortization of operating lease assets

14,079

15,839

Deferred income taxes

 

6,614

 

(3,970)

Stock-based compensation

 

4,961

 

7,218

Asset impairment expense

15,166

Other, net

 

10,898

 

8,034

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

Receivables

 

(7,116)

 

(6,703)

Inventories

 

(136,426)

 

(64,194)

Accounts payable

 

228,740

 

189,746

Accrued expenses and other, net

 

(37,545)

 

(36,660)

Net cash flows provided by operating activities

 

122,444

 

195,642

Cash flows from financing activities:

Borrowings under accounts receivable securitization, net

 

166,900

 

110,800

Repayments under senior unsecured credit facility, net

(234,190)

 

(1,100)

Repayments under bank credit facilities and other debt, net

 

(545)

 

(745)

Repurchases of common stock

 

 

(110,805)

Dividends paid on common stock

 

(20,756)

 

(21,451)

Other, net

 

281

 

548

Net cash flows used for financing activities

 

(88,310)

 

(22,753)

Cash flows from investing activities:

Purchases of property, plant and equipment

 

(19,998)

 

(29,864)

Acquisitions of assets

 

(18,700)

 

Other, net

 

753

 

(12,515)

Net cash flows used for investing activities

 

(37,945)

 

(42,379)

Effect of currency exchange rate changes on cash and cash equivalents

 

9,829

 

(12,507)

Cash and cash equivalents:

— increase

6,018

118,003

— at beginning of period

477,038

546,105

— at end of period

$

483,056

$

664,108

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 and assumptions.

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 27, 2020.

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

Fiscal year

The Company operates on a “52/53 week” fiscal year, and fiscal 2021 contains 53 weeks compared to fiscal 2020, which contained 52 weeks. As a result, the first quarter of fiscal 2021 ended October 3, 2020 contained 14 weeks compared to the first quarter of fiscal 2020 ended September 28, 2019, which contained 13 weeks.

Recently adopted accounting pronouncements

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. The adoption of ASU No. 2018-15 in the first quarter of fiscal 2021 did not have a material impact on its 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. On June 28, 2020, the Company adopted Topic 326 using a modified retrospective approach with a cumulative effect adjustment to the opening balance of retained earnings, which increased the allowance for credit losses by $17.2 million ($14.5 million, net of tax of $2.7 million). Increases in the allowance for credit losses relate to the required change from an incurred loss model to an expected loss model, and the related change in timing of loss recognition where an allowance for credit losses is now applied at the time the asset, or pool of assets, is recognized.

Recently issued accounting pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”), which provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. The new guidance provides optional

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expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. This guidance is effective upon issuance through December 31, 2022. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2020-04.

In January 2020, the FASB issued ASU No. 2020-01 - Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (“ASU No.2020-01”), which clarifies the interaction of the accounting for certain equity securities, equity method investments, and certain derivatives. ASU No. 2020-01 will be effective for the Company in the first quarter of fiscal 2022, and early adoption is permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2020-01.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), (“ASU No. 2019-12”) which removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU No. 2019-12 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 a retrospective, modified retrospective or prospective basis. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2019-12.

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. ASU No. 2018-14 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 a material impact on the Company’s consolidated financial statements.

2. Summary of significant accounting policies

Except for the changes below, no material changes have been made to the Company’s significant accounting policies as disclosed in Note 1, Summary of Significant Accounting Policies, in its Annual Report on Form 10-K filed on August 14, 2020 for the year ended June 27, 2020.

Receivables – Receivables, predominately comprised of trade accounts and notes receivable, are reported at amortized cost, net of the allowance for credit losses in the consolidated balance sheets. The allowance for credit losses is a valuation account that is deducted from the receivables’ amortized cost basis to present the net amount expected to be collected. The Company estimates the allowance for credit losses using relevant available information about expected credit losses, including information about historical credit losses, past events, current conditions, and other factors which may affect the collectability of receivables. Adjustments to historical loss information are made for differences in current receivable-specific risk characteristics such as changes in customer behavior, economic and industry changes, or other relevant factors. Expected credit losses are estimated on a pooled basis, when similar risk characteristics exist.

3. Acquisitions

In the first quarter of fiscal 2021, the Company completed an asset acquisition. The impact of this asset acquisition was not material to the Company’s consolidated balance sheets or statements of operations.

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4. Receivables

The Company’s receivables and allowance for credit losses were as follows:

October 3,

June 27,

2020

2020

(In thousands)

Receivables

$

3,046,058

$

2,993,404

Allowance for Credit Losses

(81,527)

(65,018)

The Company had the following activity in the allowance for credit losses during the first quarter of fiscal 2021:

October 3,

2020

(In thousands)

Balance at June 27, 2020

$

65,018

Effect of adoption of ASU No. 2016-12 (Note 1)

17,205

Credit Loss Provision

1,786

Credit Loss Recoveries

(126)

Write offs

(4,023)

Foreign Currency Effect and Other

1,667

Balance at October 3, 2020

$

81,527

5. Goodwill and intangible assets

Goodwill

The following table presents the change in goodwill by reportable segment for the three months ended October 3, 2020.

  

Electronic

  

  

Components

Farnell

Total

(Thousands)

Carrying value at June 27, 2020 (1)

$

297,836

$

475,898

$

773,734

Foreign currency translation

 

6,606

 

18,525

 

25,131

Carrying value at October 3, 2020 (1)

$

304,442

$

494,423

$

798,865

(1)Includes accumulated impairment of $1,045,110 from fiscal 2009, $181,440 from fiscal 2018, $137,396 from fiscal 2019 and $118,731 from fiscal 2020.

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. During the first quarter of fiscal 2021, the Company concluded that an interim goodwill impairment test was not required.

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Intangible Assets

The following table presents the Company’s acquired intangible assets at October 3, 2020 and June 27, 2020, respectively.

October 3, 2020

June 27, 2020

 

Acquired

Accumulated

Net Book

 Acquired 

 Accumulated 

 Net Book 

 

    

Amount

    

Amortization

    

Value

    

Amount(1)

    

Amortization

    

Value

 

(Thousands)

 

Customer related

$

311,121

$

(291,936)

$

19,185

$

300,937

$

(266,759)

$

34,178

Trade name

 

53,729

 

(35,914)

 

17,815

 

51,698

 

(32,493)

 

19,205

Technology and other

 

55,666

 

(45,218)

 

10,448

 

53,641

 

(41,587)

 

12,054

$

420,516

$

(373,068)

$

47,448

$

406,276

$

(340,839)

$

65,437

(1)Acquired amount reduced by impairment of $17,473 from fiscal 2020.

Intangible asset amortization expense was $20.1 million and $19.9 million for the first quarters of fiscal 2021 and 2020, 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 2021 and the next five fiscal years (in thousands):

Fiscal Year

    

Remainder of fiscal 2021

$

20,058

2022

14,668

2023

 

6,415

2024

 

2,995

2025

 

1,472

2026

 

1,472

Thereafter

 

368

Total

$

47,448

6. Debt

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

October 3,

June 27,

October 3,

June 27,

2020

   

2020

   

2020

   

2020

Interest Rate

Carrying Balance

 

Bank credit facilities and other

8.45

%

5.69

%

$

92

$

51

Accounts receivable securitization program

1.20

%

 

166,900

 

Short-term debt

$

166,992

$

51

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.

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In July 2020, the Company amended and extended for one year, its 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 $450 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 $728.4 million and $703.8 million at October 3, 2020 and June 27, 2020, respectively. The Securitization Program contains certain covenants relating to the quality of the receivables sold. Interest on borrowings is calculated using a one-month LIBOR rate plus a spread of 1.05% The facility fee on the unused balance of the facility is up to 0.40%.

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

October 3,

June 27,

October 3,

June 27,

2020

    

2020

  

2020

  

2020

Interest Rate

Carrying Balance

 

Revolving credit facilities:

Credit Facility (due June 2023)

1.28

%

$

$

230,000

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

1.18

%

1.19

%

 

1,518

 

1,491

Long-term debt before discount and debt issuance costs

 

1,201,518

 

1,431,491

Discount and debt issuance costs – unamortized

 

(6,315)

 

(6,700)

Long-term debt

$

1,195,203

$

1,424,791

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, which were amended during the first quarter of fiscal 2021, requiring the Company to maintain minimum interest coverage and leverage ratios, which the Company was in compliance with as of October 3, 2020 and June 27, 2020.

As of October 3, 2020 and June 27, 2020, there were $1.3 million and $1.6 million, respectively, in letters of credit issued under the Credit Facility.

As of October 3, 2020, the carrying value and fair value of the Company’s total debt was $1.36 billion and $1.46 billion, respectively. At June 27, 2020, the carrying value and fair value of the Company’s total debt was $1.42 billion and $1.52 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.

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

First Quarters Ended

October 3, 2020

  

September 28, 2019

Operating lease cost

$

18,402

$

18,802

Variable lease cost

6,288

5,268

Total lease cost

$

24,690

$

24,070

Future minimum operating lease payments as of October 3, 2020 are as follows (in thousands):

Fiscal Year

Remainder of fiscal 2021

$

51,333

2022

 

59,795

2023

 

50,999

2024

 

38,900

2025

 

32,006

Thereafter

 

156,634

Total future operating lease payments

389,667

Total imputed interest on operating lease liabilities

(67,905)

Total operating lease liabilities

$

321,762

Other information pertaining to operating leases consists of the following:

First Quarters Ended

October 3, 2020

  

September 28, 2019

Operating Lease Term and Discount Rate

Weighted-average remaining lease term in years

9.3

9.6

Weighted-average discount rate

3.8

%

3.8

%

Supplemental cash flow information related to the Company’s operating leases for the first quarters ended October 3, 2020 and September 28, 2019, respectively, was as follows (in thousands):

First Quarters Ended

October 3, 2020

  

September 28, 2019

Supplemental Cash Flow Information:

Cash paid for operating lease liabilities

$

14,710

$

15,322

Operating lease assets obtained from new operating lease liabilities

21,718

6,404

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8. 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 October 3, 2020 and June 27, 2020. 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:

October 3,

    

June 27,

 

2020

2020

(Thousands)

Prepaid and other current assets

$

8,480

$

18,989

Accrued expenses and other

18,471

15,605

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

First Quarters Ended

October 3,

    

September 28,

 

2020

2019

(Thousands)

Net derivative financial instrument (loss) gain

$

(7,816)

$

9,500

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 as the remeasurement of the underlying assets or liabilities being economically hedged.

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9. 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.

As of October 3, 2020 and June 27, 2020, the Company had aggregate estimated liabilities of $18.8 million classified within accrued expenses and other for such compliance-related matters that were reasonably estimable as of such dates.

During the first quarter of fiscal 2021, the Company recorded a gain on legal settlement of $8.2 million, which is classified as a component of Restructuring, integration and other expenses.

10. Income taxes

The Company’s effective tax rate on its loss before taxes was a benefit of 18.9% in the first quarter of fiscal 2021. During the first quarter of fiscal 2021, the Company’s effective tax rate was unfavorably impacted primarily by increases to valuation allowances, partially offset by (i) the release of unrecognized tax benefit reserves and (ii) the mix of income in lower tax jurisdictions.

During the first quarter of fiscal 2020, the Company’s effective tax rate on its income before taxes was a benefit of 22.7%. During the first quarter of fiscal 2020, the Company’s effective tax rate was favorably impacted primarily by (i) the release of unrecognized tax benefit reserves and (ii) the mix of income in lower tax jurisdictions.

The Company’s effective tax rate may change in future periods due to changes in tax laws and issuance of additional guidance and regulations of tax laws.

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11. Pension plan

The Company has a noncontributory defined benefit pension plan that covers substantially all current or former U.S. employees (the “Plan”). Components of net periodic pension cost for the Plan was as follows:

First Quarters Ended

  

October 3,

    

September 28,

2020

   

2019

(Thousands)

Service cost

$

3,938

$

3,786

Total net periodic pension cost within selling, general and administrative expenses

3,938

3,786

Interest cost

 

3,976

 

5,638

Expected return on plan assets

 

(12,420)

 

(12,668)

Amortization of prior service cost

 

75

 

534

Recognized net actuarial loss

 

5,151

 

3,637

Total net periodic pension benefit within other (expense) income, net

(3,218)

(2,859)

Net periodic pension cost

$

720

$

927

The Company made $8.0 million of contributions during the first quarter of fiscal 2021 and expects to make additional contributions to the Plan of $8.0 million in the remainder of fiscal 2021.

12. Shareholders’ equity

Share repurchase program

In August 2019, the Company’s Board of Directors amended the Company’s existing share repurchase program, increasing the cumulative total of authorized share repurchases to $2.95 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, expected liquidity, expected compliance with financial debt convents, corporate and regulatory requirements, and prevailing market conditions. During the first quarter ended October 3, 2020, the Company did not repurchase any shares under this program. As of October 3, 2020, the Company had $469.0 million remaining under its share repurchase authorization.

Common stock dividend

In August 2020, the Company’s Board of Directors approved a dividend of $0.21 per common share and dividend payments of $20.8 million were made in September 2020.

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13. Earnings per share

First Quarters Ended

 

October 3,

September 28,

2020

  

2019

(Thousands, except per share data)

Numerator:

   

Net (loss) income

$

(18,889)

$

41,752

Denominator:

Weighted average common shares for basic earnings per share

 

98,897

 

103,130

Net effect of dilutive stock based compensation awards

 

 

1,247

Weighted average common shares for diluted earnings per share

 

98,897

 

104,377

Basic (loss) earnings per share

$

(0.19)

$

0.40

Diluted (loss) earnings per share

$

(0.19)

$

0.40

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

875

388

A

For the first quarter of fiscal 2021, the diluted net loss per share is the same as the basic net loss per share as the effect of all potential common shares would be anti-dilutive.

14. Additional cash flow information

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

First Quarters Ended

   

October 3,

   

September 28,

2020

2019

(Thousands)

Non-cash Investing Activities:

Capital expenditures incurred but not paid

$

3,173

$

7,500

Non-cash Financing Activities:

Unsettled share repurchases

$

2,734

Supplemental Cash Flow Information:

Interest

$

12,538

$

19,214

Income tax net payments (refunds)

19,258

(5,192)

Included in cash and cash equivalents as of October 3, 2020 and June 27, 2020 was $5.8 million and $20.9 million, respectively, of cash equivalents, which was primarily comprised of investment grade money market funds and overnight time deposits.

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15. Segment information

Electronic Components (“EC”) and Farnell (“Farnell”) 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. Farnell distributes electronic components and related products to the electronic system design community utilizing multi-channel sales and marketing resources.

First Quarters Ended

October 3,

September 28,

2020

    

2019

 

(Thousands)

Sales:

    

    

    

    

Electronic Components

$

4,382,148

$

4,294,187

Farnell

340,911

335,822

4,723,059

4,630,009

Operating income:

Electronic Components

$

84,440

$

112,286

Farnell

11,959

21,805

96,399

134,091

Corporate

(31,302)

(26,677)

Restructuring, integration and other expenses

 

(26,420)

 

(24,598)

Amortization of acquired intangible assets and other

(20,175)

(20,078)

Operating income

$

18,502

$

62,738

Sales, by geographic area:

Americas (1)

$

1,205,695

$

1,215,757

EMEA (2)

 

1,480,674

 

1,470,924

Asia/Pacific (3)

 

2,036,690

 

1,943,328

Sales

$

4,723,059

$

4,630,009

(1)

Includes sales from the United States of $1.13 billion and $1.14 billion for the first quarters ended October 3, 2020 and September 28, 2019, respectively.

(2)

Includes sales from Germany and Belgium of $574.8 million and $294.4 million, respectively, for the first quarter ended October 3, 2020. Includes sales from Germany and Belgium of $580.3 million and $277.8 million, respectively, for the first quarter ended September 28, 2019.

(3)

Includes sales from China (including Hong Kong), Taiwan and Singapore of $631.8 million, $