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
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 29, 2018 | |
☐ | 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.
Incorporated(Exact name of registrant as specified in New Yorkits charter)
New York | 11-1890605 | |||
(State or other jurisdiction | (IRS Employer | |||
Of incorporation) | Identification No.) |
IRS Employer Identification No. 11-1890605
2211 South 47th Street, Phoenix, Arizona 85034
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 and former address, if changed since last report.)
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, 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 ☐ |
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|
|
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,November 1, 2018, the total number of shares outstanding of the registrant’s Common Stock was 120,927,437111,226,195 shares, net of treasury shares.
AVNET, INC. AND SUBSIDIARIES
1
FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| September 30, |
| July 1, |
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| September 29, |
| June 30, |
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| 2017 |
| 2017 |
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| 2018 |
| 2018 |
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| (Thousands, except share |
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| (Thousands, except share |
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| amounts) |
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| amounts) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 539,679 |
| $ | 836,384 |
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| $ | 365,852 |
| $ | 621,125 |
|
Marketable securities |
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| 197,949 |
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| 281,326 |
| |||||||
Receivables, less allowances of $49,505 and $47,272, respectively |
|
| 3,417,427 |
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| 3,337,624 |
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Receivables, less allowances of $49,645 and $48,959, respectively |
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| 3,682,512 |
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| 3,641,139 |
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Inventories |
|
| 3,129,032 |
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| 2,824,709 |
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| 3,395,194 |
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| 3,141,822 |
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Prepaid and other current assets |
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| 261,600 |
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| 253,765 |
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| 114,432 |
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| 206,513 |
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Total current assets |
|
| 7,545,687 |
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| 7,533,808 |
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| 7,557,990 |
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| 7,610,599 |
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Property, plant and equipment, net |
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| 510,303 |
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| 519,575 |
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| 525,873 |
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| 522,909 |
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Goodwill |
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| 1,178,005 |
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| 1,148,347 |
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| 982,306 |
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| 980,872 |
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Intangible assets, net |
|
| 290,962 |
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| 277,291 |
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| 199,379 |
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| 219,913 |
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Other assets |
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| 248,201 |
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| 220,568 |
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|
| 188,226 |
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| 262,552 |
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Total assets |
| $ | 9,773,158 |
| $ | 9,699,589 |
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| $ | 9,453,774 |
| $ | 9,596,845 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Short-term debt |
| $ | 195,498 |
| $ | 50,113 |
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| $ | 10,626 |
| $ | 165,380 |
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Accounts payable |
|
| 1,917,749 |
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| 1,861,635 |
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| 2,352,771 |
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| 2,269,478 |
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Accrued expenses and other |
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| 598,456 |
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| 542,023 |
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| 501,435 |
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| 534,603 |
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Total current liabilities |
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| 2,711,703 |
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| 2,453,771 |
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| 2,864,832 |
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| 2,969,461 |
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Long-term debt |
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| 1,495,139 |
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| 1,729,212 |
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| 1,554,722 |
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| 1,489,219 |
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Other liabilities |
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| 322,213 |
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| 334,538 |
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|
| 413,147 |
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| 453,084 |
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Total liabilities |
|
| 4,529,055 |
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| 4,517,521 |
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| 4,832,701 |
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| 4,911,764 |
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Commitments and contingencies (Note 7) |
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Shareholders’ equity: |
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Common stock $1.00 par; authorized 300,000,000 shares; issued 121,235,396 shares and 123,080,952 shares, respectively |
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| 121,235 |
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| 123,081 |
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Common stock $1.00 par; authorized 300,000,000 shares; issued 113,030,625 shares and 115,825,062 shares, respectively |
|
| 113,031 |
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| 115,825 |
| |||||||
Additional paid-in capital |
|
| 1,511,461 |
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| 1,503,490 |
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| 1,554,564 |
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| 1,528,713 |
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Retained earnings |
|
| 3,765,491 |
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| 3,799,363 |
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| 3,139,272 |
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| 3,235,894 |
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Accumulated other comprehensive loss |
|
| (154,084) |
|
| (243,866) |
|
|
| (185,794) |
|
| (195,351) |
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Total shareholders’ equity |
|
| 5,244,103 |
|
| 5,182,068 |
|
|
| 4,621,073 |
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| 4,685,081 |
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Total liabilities and shareholders’ equity |
| $ | 9,773,158 |
| $ | 9,699,589 |
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| $ | 9,453,774 |
| $ | 9,596,845 |
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See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| First Quarters Ended |
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| First Quarters Ended |
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| September 30, |
| October 1, |
|
| September 29, |
| September 30, |
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|
| 2017 |
| 2016 |
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| 2018 |
| 2017 |
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| (Thousands, except per share amounts) |
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| (Thousands, except per share amounts) |
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Sales |
| $ | 4,660,943 |
| $ | 4,118,104 |
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| $ | 5,089,879 |
| $ | 4,660,943 |
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Cost of sales |
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| 4,048,388 |
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| 3,595,449 |
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| 4,453,129 |
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| 4,048,388 |
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Gross profit |
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| 612,555 |
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| 522,655 |
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| 636,750 |
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| 612,555 |
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Selling, general and administrative expenses |
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| 496,206 |
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| 363,672 |
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|
| 475,146 |
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| 501,593 |
|
Restructuring, integration and other expenses |
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| 46,394 |
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| 29,469 |
|
|
| 14,788 |
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| 46,394 |
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Operating income |
|
| 69,955 |
|
| 129,514 |
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| 146,816 |
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| 64,568 |
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Other income (expense), net |
|
| 15,579 |
|
| (13,734) |
|
|
| (1,892) |
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| 18,921 |
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Interest expense |
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| (24,060) |
|
| (27,236) |
| |||||||
Interest and other financing expenses, net |
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| (30,093) |
|
| (22,015) |
| |||||||
Income from continuing operations before taxes |
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| 61,474 |
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| 88,544 |
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| 114,831 |
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| 61,474 |
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Income tax expense |
|
| 3,292 |
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| 20,856 |
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| 31,302 |
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| 3,292 |
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Income from continuing operations, net of tax |
|
| 58,182 |
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| 67,688 |
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| 83,529 |
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| 58,182 |
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Income from discontinued operations, net of tax |
|
| 121 |
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| 1,155 |
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| 195 |
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| 121 |
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Net income |
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| 58,303 |
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| 68,843 |
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| 83,724 |
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| 58,303 |
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Earnings per share - basic: |
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Continuing operations |
| $ | 0.48 |
| $ | 0.53 |
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| $ | 0.73 |
| $ | 0.48 |
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Discontinued operations |
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| 0.00 |
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| 0.01 |
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|
| 0.00 |
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| 0.00 |
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Net income per share basic |
|
| 0.48 |
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| 0.54 |
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| 0.73 |
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| 0.48 |
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Earnings per share - diluted: |
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Continuing operations |
| $ | 0.47 |
| $ | 0.52 |
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| $ | 0.72 |
| $ | 0.47 |
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Discontinued operations |
|
| 0.00 |
|
| 0.01 |
|
|
| 0.00 |
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| 0.00 |
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Net income per share diluted |
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| 0.47 |
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| 0.53 |
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| 0.72 |
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| 0.47 |
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Shares used to compute earnings per share: |
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|
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|
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Basic |
|
| 122,685 |
|
| 127,531 |
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|
| 115,260 |
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| 122,685 |
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Diluted |
|
| 123,984 |
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| 129,763 |
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| 116,471 |
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| 123,984 |
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Cash dividends paid per common share |
| $ | 0.18 |
| $ | 0.17 |
|
| $ | 0.20 |
| $ | 0.18 |
|
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| First Quarters Ended |
|
| First Quarters Ended |
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|
| September 30, |
| October 1, |
|
| September 29, |
| September 30, |
| ||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||||
|
| (Thousands) |
|
| (Thousands) |
| ||||||||
Net income |
| $ | 58,303 |
| $ | 68,843 |
|
| $ | 83,724 |
| $ | 58,303 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
| |||||||
Foreign currency translation adjustments and other |
|
| 88,843 |
|
| 31,661 |
| |||||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
| |||||||
Foreign currency translation and other |
|
| 8,801 |
|
| 88,843 |
| |||||||
Pension adjustments, net |
|
| 939 |
|
| 619 |
|
|
| 756 |
|
| 939 |
|
Total comprehensive income |
| $ | 148,085 |
| $ | 101,123 |
|
| $ | 93,281 |
| $ | 148,085 |
|
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| |||||||
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| Three Months Ended |
| ||||
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| Three Months Ended |
|
| September 29, |
| September 30, |
| ||||||
|
| September 30, |
| October 1, |
|
| 2018 |
| 2017 |
| ||||
|
| 2017 |
| 2016 |
|
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| (Thousands) |
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| (Thousands) |
| ||||||||
Cash flows from operating activities: |
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|
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Net income |
| $ | 58,303 |
| $ | 68,843 |
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| $ | 83,724 |
| $ | 58,303 |
|
Less: Income from discontinued operations, net of tax |
|
| 121 |
|
| 1,155 |
|
|
| 195 |
|
| 121 |
|
Income from continuing operations |
|
| 58,182 |
|
| 67,688 |
|
|
| 83,529 |
|
| 58,182 |
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|
|
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|
|
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Non-cash and other reconciling items: |
|
|
|
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|
|
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|
|
|
|
|
Depreciation |
|
| 38,263 |
|
| 19,694 |
|
|
| 25,389 |
|
| 38,263 |
|
Amortization |
|
| 25,506 |
|
| 1,930 |
|
|
| 20,810 |
|
| 25,506 |
|
Deferred income taxes |
|
| (23,436) |
|
| 6,412 |
|
|
| 36,830 |
|
| (23,436) |
|
Stock-based compensation |
|
| 8,609 |
|
| 17,576 |
|
|
| 9,044 |
|
| 8,609 |
|
Other, net |
|
| 4,902 |
|
| 10,714 |
|
|
| 14,994 |
|
| 4,902 |
|
Changes in (net of effects from businesses acquired and divested): |
|
|
|
|
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Receivables |
|
| (32,409) |
|
| (64,587) |
|
|
| (19,292) |
|
| (32,409) |
|
Inventories |
|
| (266,998) |
|
| 182,240 |
|
|
| (269,649) |
|
| (266,998) |
|
Accounts payable |
|
| 37,252 |
|
| (164,777) |
|
|
| 95,119 |
|
| 37,252 |
|
Accrued expenses and other, net |
|
| 22,140 |
|
| 33,522 |
|
|
| (81,753) |
|
| 22,140 |
|
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) |
| |||||||
Net cash flows used for operating activities - continuing operations |
|
| (84,979) |
|
| (127,989) |
| |||||||
Net cash flows used for operating activities - discontinued operations |
|
| — |
|
| — |
| |||||||
Net cash flows used for operating activities |
|
| (84,979) |
|
| (127,989) |
| |||||||
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Cash flows from financing activities: |
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|
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Repayment of notes |
|
| — |
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| (300,000) |
| |||||||
Borrowings (repayments) under accounts receivable securitization, net |
|
| 28,000 |
|
| (150,265) |
|
|
| (40,000) |
|
| 28,000 |
|
Borrowings (repayments) under senior unsecured credit facility, net |
|
| (92,471) |
|
| — |
| |||||||
Borrowings (repayments) under bank credit facilities and other debt, net |
|
| (24,888) |
|
| 669,803 |
| |||||||
Repayments under senior unsecured credit facility, net |
|
| (50,330) |
|
| (92,471) |
| |||||||
Repayments under bank credit facilities and other debt, net |
|
| (1,217) |
|
| (24,888) |
| |||||||
Repurchases of common stock |
|
| (68,113) |
|
| — |
|
|
| (149,094) |
|
| (68,113) |
|
Dividends paid on common stock |
|
| (22,012) |
|
| (21,676) |
|
|
| (22,932) |
|
| (22,012) |
|
Other, net |
|
| (579) |
|
| 682 |
|
|
| 17,328 |
|
| (579) |
|
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 |
| |||||||
Net cash flows used for financing activities - continuing operations |
|
| (246,245) |
|
| (180,063) |
| |||||||
Net cash flows used for financing activities - discontinued operations |
|
| — |
|
| — |
| |||||||
Net cash flows used for financing activities |
|
| (246,245) |
|
| (180,063) |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
| (26,659) |
|
| (34,729) |
|
|
| (41,007) |
|
| (26,659) |
|
Acquisitions of businesses, net of cash acquired (Note 2) |
|
| (14,661) |
|
| — |
| |||||||
Acquisitions of businesses, net of cash acquired |
|
| — |
|
| (14,661) |
| |||||||
Other, net |
|
| 1,211 |
|
| 432 |
|
|
| 65 |
|
| 1,211 |
|
Net cash flows used for investing activities - continuing operations |
|
| (40,109) |
|
| (34,297) |
|
|
| (40,942) |
|
| (40,109) |
|
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) |
| |||||||
Net cash flows provided by investing activities - discontinued operations |
|
| 120,000 |
|
| 45,391 |
| |||||||
Net cash flows provided by investing activities |
|
| 79,058 |
|
| 5,282 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of currency exchange rate changes on cash and cash equivalents |
|
| 6,065 |
|
| 5,807 |
|
|
| (3,107) |
|
| 6,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— (decrease) increase |
|
| (296,705) |
|
| 165,067 |
| |||||||
— decrease |
|
| (255,273) |
|
| (296,705) |
| |||||||
— at beginning of period |
|
| 836,384 |
|
| 1,031,478 |
|
|
| 621,125 |
|
| 836,384 |
|
— at end of period |
| $ | 539,679 |
| $ | 1,196,545 |
|
| $ | 365,852 |
| $ | 539,679 |
|
See notes to consolidated financial statements.
5
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.June 30, 2018.
Certain reclassifications have been made in prior periods and the fiscal year to date current periods to conform to the current period presentation.presentation including reclassifications as a result of recently adopted accounting pronouncements.
NewRecently adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”, and collectively with its related subsequent amendments, “Topic 606”). Topic 606 supersedes previous revenue recognition guidance and requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for such goods or services. The Company adopted Topic 606 on July 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of July 1, 2018. Under this transition method, the Company’s results in the consolidated statements of operations for the three months ended September 29, 2018 are presented under Topic 606, while the comparative results for the three months ended September 30, 2017 were not retrospectively adjusted, as such results were recognized in accordance with the revenue recognition policy discussed under Summary of Significant Accounting Policies in Note 1 of the Company’s Fiscal 2018 Annual Report on Form 10-K.
The adoption of Topic 606 did not have a material impact on the Company’s consolidated financial statements as of the adoption date and as of and for the three months ended September 29, 2018. Substantially all of the Company’s sales continue to be recognized when products are shipped from the Company’s facilities or delivered to customers, depending on the respective contractual terms. For a nominal portion of the Company’s contracts where the accounting did change, the adoption of Topic 606 resulted in an increase to the opening balance of retained earnings of $2.0 million as of July 1, 2018. This impact was primarily due to the acceleration of recognition of net sales and associated gross profit related to certain uncompleted contracts for the manufacture of goods with no alternative use and for which the Company has an enforceable right to payment, including a reasonable profit margin, from the customer for performance completed to date. For these contracts, the Company now recognizes revenue over time as control of the goods transfers through the manufacturing process, rather than when the goods are delivered, and title, risk and reward of ownership are passed to the customer, as under previous revenue recognition guidance.
Refer to Note 2 herein for further discussion regarding revenue recognition and related policies.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715)- Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost ("ASU No. 2017-07"). ASU No. 2017-07 requires that the service cost component of net periodic pension costs be included in the same line item as other compensation costs arising from services rendered by employees during the period, with the other components of the net periodic pension costs reported separately from the service cost component and below operating
6
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
income. The Company adopted this standard effective the first quarter of fiscal year 2019, which required changes to the classification of net periodic pension costs in the consolidated statements of operations for all periods presented. The service cost component of the net periodic pension cost is now included in “Selling, general and administrative expenses” with all other components of net periodic pension costs within “Other income (expense), net” in the consolidated statements of operations. The adoption of ASU No. 2017-07 did not have any impact on the Company’s reported amount of income from continuing operations before taxes.
During the first quarter of fiscal 2019, the Company adopted ASU 2016-16 - Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This update addresses the recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset other than inventory. This update has been applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. The adoption of this update resulted in a cumulative reduction to the opening balance of retained earnings of $5.8 million and a reduction to other assets of $5.8 million.
Recently issued accounting pronouncements
In August 2018, the FASB issued Accounting Standards Update 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 February 2018, the FASB issued Accounting Standards Update 2018-02, Income Statement–Reporting Comprehensive Income (Topic 220):-Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows entities to reclassify accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the tax legislation enacted by the U.S. federal governments on December 22, 2017 (the “Act”). This update is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the income tax rate change resulting from the Act is recognized. The Company is currently evaluating the impact of the adoption of ASU 2018-02 on its consolidated financial statements.
In August 2017, the Financial Accounting Standards Board (“FASB”)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 qualification and application of the hedge accounting guidance incompared to 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 additionsIn February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”) and issued subsequent amendments to the recently issued accounting pronouncements as previously reportedinitial guidance in Part II, Item 7, of the Company’s Annual Report on Form 10-K for the fiscal year ended July 1,September 2017 that affect or may affect the Company’s financial statements.
Premier Farnell
On October 17, 2016, the Company acquired all of the outstanding shares of Premier Farnell Plc (“PF”), a global distributor of electronic componentswithin ASU 2017-13 (collectively, Topic 842). Topic 842 requires companies to generally recognize operating 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 andfinancing lease liabilities assumed based on their estimated fair values on the transaction date. Duringbalance sheet and corresponding right-of-use assets created by those leases with lease terms of more than 12 months. The Company intends to adopt Topic 842 when it becomes effective in the first quarter of fiscal 2018,2020 using a modified retrospective approach. The Company is currently evaluating 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.
6
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 materialits pending adoption of Topic 842 on its consolidated financial statements and expects that most of its operating lease commitments related 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 adjustmentreal estate portfolio will be recorded as an adjustmentsubject to the gain on sale from discontinued operations in the periodnew standard and recognized as operating lease liabilities and right-of-use assets upon adoption, which will materially increase total assets and total liabilities relative to 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 agreedamounts prior 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.
adoption.
7
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The
Prior to the adoption of Topic 606, the Company’s revenue recognition policy was in accordance with ASC Topic 605, Revenue Recognition. Effective July 1, 2018, the Company received 2.8 million sharesadopted Topic 606 using the modified retrospective transition method, resulting in accounting policy changes surrounding revenue recognition which replace revenue recognition policies discussed in the Summary of Significant Accounting Policies in Note 1 of the Buyer’s common stock at closing (the “Shares”), which has been recorded within “Marketable securities”Company’s Fiscal 2018 Annual Report on Form 10-K. The adoption of Topic 606 did not have a material impact on the Company’s Consolidated Balance Sheets. Unrealizedconsolidated financial statements.
The Company’s revenues are generated from the distribution and realized gainssale of electronic components including semiconductors, interconnect, passive and electromechanical (“IP&E”) devices and other integrated electronic components from the world’s leading electronic component manufacturers. The Company’s expertise in design, supply chain and logistics enable it to sell to customers of all sizes from startups and mid-sized businesses to enterprise-level original equipment manufacturers (“OEMs”), electronic manufacturing services (“EMS”) providers and original design manufacturers (“ODMs”). The Company sells to a variety of markets ranging from automotive to medical to defense and aerospace. The Company also sells integrated solutions including the assembly or losses due to changes in fair value based upon Level 1 quoted active market pricesmanufacture of the Shares are recorded in “Other income (expense), net” on the Consolidated Statementsembedded electronic component products and systems, touch and passive displays, and standard or specialized boards. The Company’s revenue arrangements primarily consist of Operations. The sales agreement includes time based contractual restrictionsperformance obligations related to the transfer of promised products. The Company considers customer purchase orders, which in some cases are governed by master agreements, to be the contracts with a customer. All revenue is generated from contracts with customers.
Revenue is recognized at the point at which control of the underlying products are transferred to the customer, which includes determining whether products are distinct and separate performance obligations. For electronic component and related product sales, this generally occurs upon shipment of the products, however, this may occur at a later date depending on the agreed upon sales terms, such as delivery at the customer's designated location, or when products that are consigned at customer locations are consumed. In limited instances, where products are not in stock and delivery times are critical, product is purchased from the supplier and drop-shipped to the customer. The Company typically takes control of the products when shipped by the manufacturer and then recognizes revenue when control of the product transfers to the customer. The Company does not have material product warranty obligations as the assurance type product warranties provided by the component manufacturers are passed through to the Company’s customers.
For contracts related to the specialized manufacture of products for customers with no alternative use and for which the Company has an enforceable right to payment, including a reasonable profit margin, the Company recognizes revenue over time as control of the products transfer through the manufacturing process. The contract assets associated with such specialized manufacturing products are not material as these contracts represent less than 2% of the Company’s total sales.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. The Company estimates different forms of variable consideration at the time of sale based on historical experience, current conditions and contractual obligations. Revenue is recorded net of customer discounts and rebates. When the Company offers the right or has a history of accepting returns of product, historical experience is utilized to establish a liability for the estimate of expected returns and an asset for the right to recover the product expected to be returned. These adjustments are made in the same period as the underlying sales transactions.
The Company considers the following indicators amongst others when determining whether it is acting as a principal in the contract and recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling the promise to provide the specified products or services, (ii) the Company has inventory risk before the specified products have been transferred to a customer or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified products or services. If a transaction does not meet the Company's indicators of being a principal in the transaction, then the Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.
8
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Sales and other tax amounts collected from customers for remittance to governmental authorities are excluded from revenue. The Company has elected to treat shipping and handling of product as a fulfillment activity. The practical expedient not to disclose information about remaining performance obligations has also been elected as these contacts have an original duration of one year or less. The Company does not have any payment terms that exceed one year from the point it has satisfied the related performance obligations.
3. 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 Shares andfinancial impacts of the divestiture are classified as such,discontinued operations in all periods presented. In August 2018, the Company entered into economic hedges to reduceexecuted a settlement agreement with the Company’s exposure to price fluctuationsBuyer resulting in a final adjustment of $120.0 million and a final geographic allocation of the Shares during the restricted period, which fixes the net amount that the Company will realize uponTS business sales price for tax reporting purposes. The incremental consideration received from 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 haveTS business has been included in Cash flowsclassified as cash flow from discontinued operations investing activities – discontinued operations.activities.
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,In fiscal 2018, the Buyer formally terminated substantially all TSA services outside of certain minor information technology services and all remaining TSA services are expected to be terminated byduring the endfirst half 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, 2016.2019.
8
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 2009.29, 2018.
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
| Electronic |
| Premier |
|
|
| ||
|
| Components |
| Farnell |
| Total | |||
|
| (Thousands) | |||||||
Carrying value at June 30, 2018 (1) |
| $ | 479,699 |
| $ | 501,173 |
| $ | 980,872 |
Additions from acquisitions |
|
| — |
|
| — |
|
| — |
Foreign currency translation |
|
| 704 |
|
| 730 |
|
| 1,434 |
Carrying value at September 29, 2018 (1) |
| $ | 480,403 |
| $ | 501,903 |
| $ | 982,306 |
(1)Includes accumulated impairment of $1,045,110 from fiscal 2009 and $181,440 from fiscal 2018 |
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 as of any fiscal quarter end, (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 2018,2019, 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 |
|
9
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Intangible Assets
The following table presents the Company’s acquired intangible assets at September 29, 2018, and June 30, 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 29, 2018 |
| June 30, 2018 |
| ||||||||||||||
|
| Acquired |
| Accumulated |
| Net Book |
| Acquired |
| Accumulated |
| Net Book |
| ||||||
|
| Amount |
| Amortization |
| Value |
| Amount |
| Amortization |
| Value |
| ||||||
|
| (Thousands) |
| ||||||||||||||||
Customer related |
| $ | 300,707 |
| $ | (165,105) |
| $ | 135,602 |
| $ | 300,126 |
| $ | (148,416) |
| $ | 151,710 |
|
Trade name |
|
| 54,487 |
|
| (18,952) |
|
| 35,535 |
|
| 54,391 |
|
| (16,711) |
|
| 37,680 |
|
Technology and other |
|
| 52,964 |
|
| (24,722) |
|
| 28,242 |
|
| 52,793 |
|
| (22,270) |
|
| 30,523 |
|
|
| $ | 408,158 |
| $ | (208,779) |
| $ | 199,379 |
| $ | 407,310 |
| $ | (187,397) |
| $ | 219,913 |
|
Intangible asset amortization expense from continuing operations was $25.5$20.8 million and $1.9$25.5 million for the first quarters of fiscal 20182019 and 2017,2018, respectively. Intangible assets have a weighted average remaining useful life of approximately 43 years. The following table presents the estimated future amortization expense for the remainder of fiscal 2018,2019 and the next five fiscal years and thereafter (in thousands):
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
| ||
Remainder of fiscal 2018 |
|
| 65,198 | |||
2019 |
|
| 85,462 | |||
Remainder of fiscal 2019 |
| $ | 62,719 | |||
2020 |
|
| 83,476 |
|
| 81,311 |
2021 |
|
| 40,219 |
|
| 39,148 |
2022 |
|
| 12,677 |
|
| 12,358 |
2023 |
|
| 3,693 |
|
| 3,606 |
Thereafter |
|
| 237 | |||
2024 |
|
| 237 | |||
Total |
| $ | 290,962 |
| $ | 199,379 |
Short-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| July 1, 2017 |
| September 30, 2017 |
| July 1, 2017 |
|
| September 29, 2018 |
| June 30, 2018 |
| September 29, 2018 |
| June 30, 2018 |
| ||||||||
|
| Interest Rate |
| Carrying Balance |
|
| Interest Rate |
| Carrying Balance |
| ||||||||||||||||
Bank credit facilities and other |
| 2.15 | % |
| 2.27 | % |
| $ | 25,498 |
| $ | 50,113 |
|
| 3.11 | % |
| 2.91 | % |
| $ | 10,626 |
| $ | 60,380 |
|
Accounts receivable securitization program |
| 1.70 | % |
| — |
|
|
| 170,000 |
|
| — |
|
| — |
|
| 2.63 | % |
|
| — |
|
| 105,000 |
|
Short-term debt |
|
|
|
|
|
|
| $ | 195,498 |
| $ | 50,113 |
|
|
|
|
|
|
|
| $ | 10,626 |
| $ | 165,380 |
|
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
10
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 29, 2018 |
| June 30, 2018 |
| September 29, 2018 |
| June 30, 2018 |
| ||||
|
| Interest Rate |
| Carrying Balance |
| ||||||||
Revolving credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable securitization program |
| 2.99 | % |
| — |
|
| $ | 65,000 |
| $ | — |
|
Public 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 |
| 1.01 | % |
| 1.26 | % |
|
| 293 |
|
| 383 |
|
Long-term debt before discount and debt issuance costs |
|
|
|
|
|
|
|
| 1,565,293 |
|
| 1,500,383 |
|
Discount and debt issuance costs – unamortized |
|
|
|
|
|
|
|
| (10,571) |
|
| (11,164) |
|
Long-term debt |
|
|
|
|
|
|
| $ | 1,554,722 |
| $ | 1,489,219 |
|
In August 2018, the Company has anamended and extended its accounts receivable securitization program (the “Program”“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 $400.0$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 $734.2$767.7 million and $807.5$790.5 million at September 29, 2018, and June 30, 2017, and July 1, 2017,2018, 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 September 29, 2018, and June 30, 2017, and July 1, 2017.2018. The Securitization Program expires in August 20182020 and as a result the Company has classified outstanding balances as short-termlong-term debt as of September 30, 2017.29, 2018. Interest on borrowings is calculated using a base rate or a commercial paperone-month LIBOR rate plus a spread of 0.40% with a0.75%. The facility fee of 0.40%.
10
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-term debt consistson the unused balance of the following (in thousands):facility is up to 0.35%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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$200.0 million of letters of credit and up to $300.0 million of loans in certain approved currencies, which expires in July 2019.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 September 29, 2018, and June 30, 2017, and July 1, 2017.2018. As of September 29, 2018, and June 30, 2017, and July 1, 2017,2018, there were $2.0$3.0 million and $3.1$2.0 million, respectively, in letters of credit issued under the Credit Facility.
As of September 30, 2017,29, 2018, the carrying value and fair value of the Company’s total debt was $1.69$1.57 billion and $1.76$1.59 billion, respectively. At July 1, 2017,June 30, 2018, the carrying value and fair value of the Company’s total debt was $1.78$1.65 billion and $1.85$1.67 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 agreements.facilities.
11
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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“Prepaid and other current assets” or “accrued“Accrued expenses and other,” as applicable, in the accompanying consolidated balance sheets as of September 29, 2018, and June 30, 2017, and July 1, 2017.2018. 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.
11
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, |
|
| September 29, |
| June 30, |
| ||||
|
| 2017 |
| 2017 |
|
| 2018 |
| 2018 |
| ||||
|
| (Thousands) |
|
| (Thousands) |
| ||||||||
Forward foreign currency exchange contracts not receiving hedge accounting treatment recorded in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
| $ | 3,653 |
| $ | 7,297 |
|
| $ | 6,069 |
| $ | 2,259 |
|
Accrued expenses |
|
| 5,108 |
|
| 4,142 |
|
|
| 7,119 |
|
| 7,083 |
|
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) |
|
|
|
|
|
|
|
|
|
|
| First Quarters Ended |
| ||||
|
| September 29, |
| September 30, |
| ||
|
| 2018 |
| 2017 |
| ||
|
| (Thousands) |
| ||||
Net derivative financial instrument gain |
| $ | 2,792 |
| $ | 1,859 |
|
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.
12
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
12
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 29, 2018 and June 30, 2017,2018, the Company had aggregate estimated liabilities of $14.7 million and $14.2 million, respectively, classified within accrued expenses and other for such compliance-related matters that were reasonably estimable as of such dates.
The Company’s effective tax rate on its income before income taxes from continuing operations was 27.3% in the first quarter of fiscal 2019 as compared with 5.4% in the first quarter of fiscal 2018 as compared with 23.6% in2018. During the first quarter of fiscal 2017.2019, the Company’s effective tax rate was unfavorably impacted primarily by (i) an adjustment to the provisional estimate for the one-time mandatory deemed repatriation tax liability recorded under the requirements of the Act and (ii) increases in unrecognized tax benefits, partially offset by (iii) an adjustment to the provisional deferred tax impacts of the Act and (iv) the mix of income in lower tax jurisdictions. 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
In fiscal 2018, the Company recorded a provisional amount for the one-time mandatory deemed repatriation tax liability (the “transition tax”) of $230.0 million. The Company increased this provisional estimate by $16.7 million during the first quarter of fiscal 2017,2019, as a result of additional analysis performed on foreign based-earnings and profits and further refinement of the state tax impacts of the Act. The Company will finalize the transition tax during the second quarter of fiscal 2019, which corresponds to the end of the measurement period allowed for under Staff Accounting Bulletin 118 (“SAB 118”) primarily as a result of further substantiation of foreign-based earnings and profits and foreign tax credits and for evaluation related to the utilization of those foreign tax credits. Additionally, provisional estimates of the transition tax may change due to new guidance from federal and state regulators, interpretation of the law, and refinement of the Company’s effectiveestimates from ongoing analysis of tax rate was favorably impacted primarily bypositions. Any final changes in the mixprovisional amount will be reflected in income tax expense in the second quarter of income in lower tax jurisdictions.fiscal 2019, and may be material.
9. Pension planIn fiscal year 2018, the Company recorded a provisional expense to account for the deferred tax impacts of the Act, which was reduced by $8.4 million in the first quarter of fiscal 2019 as a result of the Company making certain elections related to the fiscal year 2018 federal net operating loss. The estimates related to deferred taxes are provisional and may change as the Company continues to analyze the impacts of the Act, including state income tax conformity considerations.
The Company has a noncontributory defined benefit pension plan (the “Plan”) that covers substantially all U.S. employees excluding U.S. employeescontinues to evaluate the impact of the acquired PF business and a closed noncontributory defined benefit pension plan inAct including 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 |
|
|
|
Company’s historical assertion related to ASC 740 Income Taxes unremitted earnings. The Company contributed $8.0 million to the Plans during the first quarterhas not changed its historical assertion as of fiscalSeptember 29, 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.its ASC 740 unremitted earnings are permanently reinvested. The Company expectsbelieves any unrecorded liabilities related to combine the Plans into a single plan to provide pension benefits to eligible U.S. employees beginning in January 2018.this assertion are not material.
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.
13
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has a noncontributory defined benefit pension plan that covers substantially all U.S. employees and an acquired closed noncontributory defined benefit pension plan covering certain current or former Premier Farnell U.S. employees (the “Plans”). Components of net periodic pension cost for the Plans were as follows, which reflect the adoption of ASU 2017-07 as discussed further in Note 1:
|
|
|
|
|
|
|
|
|
| First Quarters Ended |
| ||||
|
| September 29, |
| September 30, |
| ||
|
| 2018 |
| 2017 |
| ||
|
| (Thousands) |
| ||||
Service cost |
| $ | 3,734 |
| $ | 3,868 |
|
Total net periodic pension cost within selling, general and administrative expenses |
|
| 3,734 |
|
| 3,868 |
|
|
|
|
|
|
|
|
|
Interest cost |
|
| 6,614 |
|
| 5,783 |
|
Expected return on plan assets |
|
| (13,301) |
|
| (13,757) |
|
Amortization of prior service credits |
|
| (393) |
|
| (393) |
|
Recognized net actuarial loss |
|
| 2,535 |
|
| 3,746 |
|
Total net periodic pension benefit within other income (expense), net |
|
| (4,545) |
|
| (4,621) |
|
|
|
|
|
|
|
|
|
Net periodic pension benefit |
| $ | (811) |
| $ | (753) |
|
In connection with the adoption of ASU No. 2017-07, the Company now classifies service cost as a component of selling, general and administrative expenses and other components of net periodic pension costs within other income (expense), net. The Company contributed $8.0 million to the Plans during the first quarter of fiscal 2019 and expects to make an additional contribution to the Plans of $8.0 million in the remainder of fiscal 2019.
Amounts reclassified out of accumulated other comprehensive income, (loss), net of tax, to operating expensesother income (expense), net during the first quarters of fiscal 20182019 and fiscal 20172018 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. IfDuring fiscal 2018, the aggregate amount of former employee withdrawals from theirthe Plan balances reach a certainexceeded the pension accounting settlement threshold during afor fiscal year,2018, which required a settlement charge is requiredexpense 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 chargesaccounting.
14
Table of up to approximately $15 million.Contents
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Share repurchase program
In February 2017,August 2018, the Company’s Board of Directors amendedauthorized a $500 million increase in the Company’s existing share repurchase program to authorizeprogram. With this increase, the Company’s may repurchase of up to $1.75$2.45 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, 2017,29, 2018, the Company repurchased 1.93.3 million shares under this program for a total cost of $72.1$156.9 million. As of September 29, 2018, the Company had $615.2 million remaining under its share repurchase authorization.
Common stock dividend
In August 2017,2018, the Company’s Board of Directors approved a dividend of $0.18$0.20 per common share and dividend payments of $22.0$22.9 million were made in September 2017.2018.
14
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
| First Quarters Ended |
| ||||
|
| September 29, |
| September 30, |
| ||
|
| 2018 |
| 2017 |
| ||
|
| (Thousands, except per share data) |
| ||||
Numerator: |
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 83,529 |
| $ | 58,182 |
|
Income from discontinued operations |
|
| 195 |
|
| 121 |
|
Net income |
| $ | 83,724 |
| $ | 58,303 |
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share |
|
| 115,260 |
|
| 122,685 |
|
Net effect of dilutive stock based compensation awards |
|
| 1,211 |
|
| 1,299 |
|
Weighted average common shares for diluted earnings per share |
|
| 116,471 |
|
| 123,984 |
|
Basic earnings per share - continuing operations |
| $ | 0.73 |
| $ | 0.48 |
|
Basic earnings per share - discontinued operations |
|
| 0.00 |
|
| 0.00 |
|
Basic earnings per share |
| $ | 0.73 |
| $ | 0.48 |
|
Diluted earnings per share - continuing operations |
| $ | 0.72 |
| $ | 0.47 |
|
Diluted earnings per share - discontinued operations |
|
| 0.00 |
|
| 0.00 |
|
Diluted earnings per share |
| $ | 0.72 |
| $ | 0.47 |
|
Stock options excluded from earnings per share calculation due to anti-dilutive effect |
|
| 1,113 |
|
| 2,033 |
|
|
|
|
|
|
|
|
|
|
| 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.
15
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Additional cash flow information
Non-cash investing and financing activities and supplemental cash flow information were as follows:
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| September 29, |
| September 30, |
| ||
|
| 2018 |
| 2017 |
| ||
|
| (Thousands) |
| ||||
Non-cash Investing Activities: |
|
|
|
|
|
|
|
Capital expenditures incurred but not paid |
| $ | 9,690 |
| $ | 23,176 |
|
Unsettled sale of marketable securities |
|
| — |
|
| 4,121 |
|
Non-cash Financing Activities: |
|
|
|
|
|
|
|
Unsettled share repurchases |
| $ | 11,228 |
| $ | 3,955 |
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
Interest |
| $ | 13,826 |
| $ | 5,107 |
|
Income taxes |
|
| 54,519 |
|
| 18,362 |
|
Included in cash and cash equivalents as of September 29, 2018 and June 30, 2017, and July 1, 2017,2018 was $5.5$5.4 million and $208.3$6.1 million, respectively, of cash equivalents, which was primarily comprised of investment grade money market funds and overnight time deposits.
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 |
|
16
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
| First Quarters Ended | ||||
|
| September 29, |
| September 30, | ||
|
| 2018 |
| 2017 | ||
|
| (Thousands) | ||||
Sales: |
|
|
|
|
|
|
Electronic Components |
| $ | 4,710,825 |
| $ | 4,307,251 |
Premier Farnell |
|
| 379,054 |
|
| 353,692 |
|
|
| 5,089,879 |
|
| 4,660,943 |
Operating income: |
|
|
|
|
|
|
Electronic Components |
| $ | 161,913 |
| $ | 139,601 |
Premier Farnell |
|
| 40,793 |
|
| 32,632 |
|
|
| 202,706 |
|
| 172,233 |
Corporate (1) |
|
| (20,175) |
|
| (35,686) |
Restructuring, integration and other expenses |
|
| (14,788) |
|
| (46,394) |
Amortization of acquired intangible assets and other |
|
| (20,927) |
|
| (25,585) |
Operating income |
| $ | 146,816 |
| $ | 64,568 |
|
|
|
|
|
|
|
Sales, by geographic area: |
|
|
|
|
|
|
Americas (2) |
| $ | 1,271,793 |
| $ | 1,185,485 |
EMEA (3) |
|
| 1,714,917 |
|
| 1,692,985 |
Asia/Pacific (4) |
|
| 2,103,169 |
|
| 1,782,473 |
Sales |
| $ | 5,089,879 |
| $ | 4,660,943 |
(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 of profitability or assets and total Avnet amounts reported in the consolidated financial statements.
(2)Includes sales from the United States of $1.10$1.18 billion and $1.17$1.10 billion for the first quarters ended September 29, 2018 and September 30, 2017, and October 1, 2016, respectively.
(3)Includes sales from Germany and Belgium of $685.7 million and $280.1 million, respectively, for the first quarter ended September 29, 2018. 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), Taiwan and Singapore of $693.1 million, $888.7 million and $280.4 million, respectively, for the first quarter ended September 29, 2018. Includes sales from China (including Hong Kong), Taiwan and Singapore of $655.4 million, $657.5 million and $657.5$228.9 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.
16
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.
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) |
|
|
|
| ||||||||||
Fiscal 2018 restructuring expenses |
| $ | 20,583 |
|
| — |
|
| 583 |
|
| 120 |
| $ | 21,286 |
|
Cash payments |
|
| (3,054) |
|
| — |
|
| — |
|
| (13) |
|
| (3,067) |
|
Non-cash amounts |
|
| — |
|
| — |
|
| (583) |
|
| — |
|
| (583) |
|
Other, principally foreign currency translation |
|
| (39) |
|
| — |
|
| — |
|
| (1) |
|
| (40) |
|
Balance at September 30, 2017 |
| $ | 17,490 |
| $ | — |
| $ | — |
| $ | 106 |
| $ | 17,596 |
|
Severance expense recorded in the first quarter of fiscal 2018 related to the reduction, or planned reduction of 461 employees, primarily in executive management, operations, warehouse, sales and business support functions. Facility exit costs (if any) primarily consist of liabilities for remaining lease obligations for exited facilities. Asset impairments relate to the impairment of property, plant and equipment as a result of the underlying restructuring activities. Other restructuring costs related primarily to other miscellaneous restructuring and exit costs. Of the $21.3 million in restructuring expenses recorded during the first quarter of fiscal 2018, $17.7 million related to EC, $2.4 million related to PF and $1.2 million related to corporate executive and business support functions. The Company expects the majority of the remaining amounts to be paid by the end of fiscal 2018.
17
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
| September 29, |
| June 30, |
| ||
|
| 2018 |
| 2018 |
| ||
|
| (Thousands) |
| ||||
Property, plant, and equipment, net, by geographic area: |
|
|
|
|
|
|
|
Americas (1) |
| $ | 272,398 |
| $ | 276,156 |
|
EMEA (2) |
|
| 212,486 |
|
| 204,797 |
|
Asia/Pacific |
|
| 40,989 |
|
| 41,956 |
|
Property, plant, and equipment, net |
| $ | 525,873 |
| $ | 522,909 |
|
(1)Includes property, plant and equipment, net, of $267.5 million and $271.4 million as of September 29, 2018, and June 30, 2018, respectively, in the United States.
(2)Includes property, plant and equipment, net, of $99.4 million, $50.8 million and $52.7 million in Germany, UK and Belgium, respectively, as of September 29, 2018; and $99.4 million, $52.5 million and $43.4 million in Germany, UK and Belgium, respectively, as of June 30, 2018.
Fiscal 20172019
During fiscal 2017,2019, the Company executed certain restructuring actions in order to improve operating efficiencies and further integrate the acquisition of PF. 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 2019 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Facility |
|
|
| |
|
|
|
|
| and Contract |
|
|
| |
|
| Severance |
| Exit Costs |
| Total | |||
|
| (Thousands) | |||||||
Fiscal 2019 restructuring expenses |
| $ | 7,183 |
| $ | 350 |
| $ | 7,533 |
Cash payments |
|
| (1,983) |
|
| (47) |
|
| (2,030) |
Other, principally foreign currency translation |
|
| — |
|
| — |
|
| — |
Balance at September 29, 2018 |
| $ | 5,200 |
| $ | 303 |
| $ | 5,503 |
Severance expense recorded in the first quarter of fiscal 2019 related to the reduction, or planned reduction, of approximately 50 employees, primarily in executive management, operations, warehouse, sales and business support functions. Facility and contract exit costs primarily consist of liabilities for remaining lease obligations for exited facilities and for contractual termination costs. Of the $7.5 million in restructuring expenses recorded during the first quarter of fiscal 2019, $7.3 million related to EC and $0.2 million related to PF. The Company expects the majority of the remaining amounts to be paid by the end of fiscal 2019.
18
AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal 2018 and prior
During fiscal 2018 and prior, the Company incurred restructuring expenses related to various restructuring actions intended to achieve planned synergies from acquired businesses and to reduce future operating expenses. The following table presents the activity during the first three monthsquarter of fiscal 20182019 related to the remaining restructuring liabilities from continuing operations established during fiscal 2017:
2018 and prior:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Facility |
|
|
|
|
|
|
|
|
|
| Facility |
|
|
|
|
|
|
| ||
|
| Severance |
| Exit Costs |
| Other |
| Total |
|
|
|
| and Contract |
| Asset |
|
|
|
| ||||||
|
| (Thousands) |
| Severance |
| Exit Costs |
| Impairments |
| Total |
| ||||||||||||||
Balance at July 1, 2017 |
| $ | 12,186 |
| $ | 76 |
| $ | — |
| $ | 12,262 | |||||||||||||
|
| (Thousands) |
| ||||||||||||||||||||||
Balance at June 30, 2018 |
| $ | 25,918 |
| $ | 2,890 |
| $ | 416 |
| $ | 29,224 |
| ||||||||||||
Cash payments |
|
| (4,506) |
|
| (73) |
|
| — |
|
| (4,579) |
|
| (17,936) |
|
| (623) |
|
| — |
|
| (18,559) |
|
Changes in estimates, net |
|
| 64 |
|
| — |
|
| — |
|
| 64 |
|
| (235) |
|
|
|
|
|
|
|
| (235) |
|
Non-cash amounts |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (416) |
|
| (416) |
|
Other, principally foreign currency translation |
|
| 132 |
|
| 2 |
|
| — |
|
| 134 |
|
| (245) |
|
| (27) |
|
| — |
|
| (272) |
|
Balance at September 30, 2017 |
| $ | 7,876 |
| $ | 5 |
| $ | — |
| $ | 7,881 | |||||||||||||
Balance at September 29, 2018 |
| $ | 7,502 |
| $ | 2,240 |
| $ | — |
| $ | 9,742 |
|
The Company expects the majority of the remaining amounts to be paid by the end of fiscal 2018.2019.
1819
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
For a description of the Company’s critical accounting policies and an understanding of the significant factors that influenced the Company’s performance during the quarter ended September 30, 2017,29, 2018, this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 1 of this Quarterly Report on Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2017.June 30, 2018.
There are references to the impact of foreign currency translation in the discussion of the Company’s results of operations. When the U.S. Dollar strengthens and the stronger exchange rates of the current year are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the resulting impact is a decrease in U.S. Dollars of reported results. Conversely, when the U.S. Dollar weakens and the weaker exchange rates of the current year are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the resulting impact is an increase in U.S. Dollars of reported results. In the discussion that follows, results excluding this impact, primarily for subsidiaries in Europe, the Middle East and Africa (“EMEA”) and Asia/Pacific, are referred to as “excluding the translation impact of changes in foreign currency exchange rates” or “constant currency.”
In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in the U.S. (“GAAP”), the Company also discloses certain non-GAAP financial information, including:
· | Sales adjusted for certain items that impact the year-over-year analysis, which includes the impact of certain acquisitions by adjusting Avnet’s prior periods to include the sales of acquired businesses, as if the acquisitions had occurred at the beginning of the earliest period presented. Sales taking into account these adjustments are referred to as “organic sales.” |
· | Operating income excluding (i) restructuring, integration and other expenses (see Restructuring, Integration and Other Expenses in this MD&A), (ii) goodwill impairment expense and |
The reconciliation of operating income to adjusted operating income is presented in the following table:
|
|
|
|
|
|
|
|
|
| ||||
|
| First Quarters Ended |
|
| First Quarters Ended | ||||||||
|
| September 30, |
| October 1, |
|
| September 29, |
| September 30, | ||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 | ||||
|
| (Thousands) |
|
| (Thousands) | ||||||||
Operating income |
| $ | 69,955 |
| $ | 129,514 |
|
| $ | 146,816 |
| $ | 64,568 |
Restructuring, integration and other expenses |
|
| 46,394 |
|
| 29,469 |
|
|
| 14,788 |
|
| 46,394 |
Amortization of acquired intangible assets and other |
|
| 25,585 |
|
| 2,378 |
|
|
| 20,927 |
|
| 25,585 |
Adjusted operating income |
| $ | 141,934 |
| $ | 161,361 |
|
| $ | 182,531 |
| $ | 136,547 |
Management believes that providing this additional information is useful to readers to better assess and understand operating performance, especially when comparing results with prior periods or forecasting performance for future periods, primarily because management typically monitors the business both including and excluding these adjustments to GAAP results. Management also uses these non-GAAP measures to establish operational goals and, in many cases, for measuring performance for compensation purposes. However, any analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, results presented in accordance with GAAP.
1920
OVERVIEW
Organization
Avnet, Inc. (the “Company” or “Avnet”), foundedis a global technology solutions company with an extensive ecosystem delivering design, product, marketing and supply chain expertise for customers at every stage of the product lifecycle. Avnet transforms ideas into intelligent solutions, reducing the time, cost and complexities of bringing products to market around the world. Founded in 1921 and incorporated in New York in 1955, togetherthe Company works with its consolidated subsidiaries (the “Company” or “Avnet”), is a global value-added distributor of electronic components. Avnet creates a vital linkover 1,400 technology suppliers to serve 2.1 million customers in the technology supply chain that connects the world’s leading electronic component manufacturers with a global customer base primarily comprised of original equipment manufacturers, electronic manufacturing services providers and original design manufacturers. Avnet distributes electronic components, as received from its suppliers or through a customized integrated solution, and offers assembly and other value-added services.more than 140 countries.
Avnet’sAvnet has two primary operating groups –— Electronic Components (“EC”) and Premier Farnell (“PF”) -. Both operating groups have operations in each of the three major economic regions of the world: the Americas; EMEA;Americas, EMEA and Asia/Pacific, consisting of Asia, Australia and New Zealand (“Asia”).Asia. A summary of each operating group is provided in Note 13, “Segment information” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.
Executive Summary
Avnet’sSales for the first quarter of fiscal 2019 were $5.09 billion, an increase of 9.2% from sales for the first quarter of fiscal 2018 of $4.66 billion. The increase in sales was due to increased sales in both EC and PF. Sales in constant currency increased year over year by 9.9% with both EC and PF contributing to the increase.
Gross profit margin for the first quarter of fiscal 2019 decreased 63 basis points compared to the first quarter of fiscal 2018. EC gross profit margin decreased year over year primarily due to a higher percentage of sales coming from the lower-margin Asia region. PF gross profit margin decreased year over year primarily driven by changes in product mix and the impact of foreign currency exchange rates.
Avnet operating income margin was 2.9% in the first quarter of fiscal 2019 as compared with 1.4% in the first quarter of fiscal 2018. Both periods included amortization and restructuring, integration and other expenses. Excluding these expenses from both periods, adjusted operating income margin was 3.6% in the first quarter of fiscal 2019 as compared to 2.9% in the first quarter of fiscal 2018. The increase in operating income margin is primarily due to the year over year growth in sales and gross profit increased year-over-year primarilya reduction in expenses as a result of the Company’s acquisition of PFrestructuring and improvements in the EMEA and Asia regions, partially offset by declines in the Americas region.
Sales of $4.66 billion in the first quarter of fiscal 2018 increased 13.2% over the first quarter of fiscal 2017 sales of $4.12 billion and increased 11.8% in constant currency. Excluding the impact of the PF acquisition, Avnet’s organic sales increased 4.8% or 3.5% in constant currency.
Gross profit margin of 13.1% increased 45 basis points over the prior year first quarter as increases from the acquisition of PF were partially offset by declines across all three EC regions.
Operating income margin was 1.5% in the first quarter of fiscal 2018 as compared with 3.1% in the first quarter of fiscal 2017 and adjusted operating income margin was 3.0% in the first quarter of fiscal 2018 as compared to 3.9% in the first quarter of fiscal 2017. The decline in adjusted operating income margin was driven by the western EC regions,integration efforts, partially offset by the acquisition of PF.decline in gross profit margin.
Sales
The following tables present the reconciliation oftable presents reported sales toand organic sales growth rates between fiscal 2019 and fiscal 2018 for the first quartersquarter of fiscal 2018 and fiscal 2017.2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| First Quarters Ended | ||||||||||
|
| Sales |
| Sales |
|
|
| Organic | ||||
|
| as Reported |
| as Reported |
|
|
| Year-Year % | ||||
|
| and Organic |
| and Organic |
| Organic |
| Change in | ||||
|
| Fiscal |
| Fiscal |
| Year-Year |
| Constant | ||||
|
| 2019 |
| 2018 |
| % Change |
| Currency | ||||
|
| (Dollars in thousands) | ||||||||||
Avnet |
| $ | 5,089,879 |
| $ | 4,660,943 |
| 9.2 | % |
| 9.9 | % |
Avnet by region |
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | 1,271,793 |
| $ | 1,185,485 |
| 7.3 | % |
| 7.3 | % |
EMEA |
|
| 1,714,917 |
|
| 1,692,985 |
| 1.3 |
|
| 2.7 |
|
Asia |
|
| 2,103,169 |
|
| 1,782,473 |
| 18.0 |
|
| 18.3 |
|
Avnet by segment |
|
|
|
|
|
|
|
|
|
|
|
|
EC |
| $ | 4,710,825 |
| $ | 4,307,251 |
| 9.4 | % |
| 10.0 | % |
PF |
|
| 379,054 |
|
| 353,692 |
| 7.2 |
|
| 8.2 |
|
2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| First Quarters Ended |
|
|
| Sales |
|
|
| Organic |
| |||||||||||
|
| Sales |
|
|
|
|
|
|
| As Reported |
|
|
| Sales |
| |||||||
|
| As Reported |
| Sales |
| Sales |
| Sales |
| Year-Year % |
| Organic |
| Year-Year % |
| |||||||
|
| and Organic |
| As Reported |
| Organic |
| As Reported |
| Change in |
| Sales |
| Change in |
| |||||||
|
| Q1-Fiscal |
| Q1-Fiscal |
| Q1-Fiscal |
| Year-Year |
| Constant |
| Year-Year |
| Constant |
| |||||||
|
| 2018 |
| 2017 |
| 2017 (1) |
| % Change |
| Currency |
| % Change |
| Currency |
| |||||||
|
| (Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Avnet |
| $ | 4,660,943 |
| $ | 4,118,104 |
| $ | 4,446,817 |
| 13.2 | % |
| 11.8 | % |
| 4.8 | % |
| 3.5 | % |
|
Avnet by region |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | 1,185,485 |
| $ | 1,250,508 |
| $ | 1,386,652 |
| (5.2) | % |
| — |
|
| (14.5) | % |
| — |
|
|
EMEA |
|
| 1,692,985 |
|
| 1,265,294 |
|
| 1,417,615 |
| 33.8 |
|
| 28.0 | % |
| 19.4 |
|
| 14.3 | % |
|
Asia |
|
| 1,782,473 |
|
| 1,602,302 |
|
| 1,642,550 |
| 11.2 |
|
| 12.3 |
|
| 8.5 |
|
| 9.6 |
|
|
Avnet by segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EC |
| $ | 4,307,251 |
| $ | 4,118,104 |
| $ | 4,118,104 |
| 4.6 | % |
| 3.3 | % |
| 4.6 | % |
| 3.3 | % |
|
PF |
|
| 353,692 |
|
| — |
|
| 328,713 |
| — |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| First Quarter Ended |
| |||||||
|
| As |
|
|
|
|
|
| ||
|
| Reported |
|
|
| Organic Sales |
| |||
|
| Fiscal 2017 |
| Acquisitions (1) |
| Fiscal 2017 |
| |||
|
| (Dollars in thousands) |
| |||||||
Avnet |
| $ | 4,118,104 |
| $ | 328,713 |
| $ | 4,446,817 |
|
Avnet by region |
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | 1,250,508 |
| $ | 136,144 |
| $ | 1,386,652 |
|
EMEA |
|
| 1,265,294 |
|
| 152,321 |
|
| 1,417,615 |
|
Asia |
|
| 1,602,302 |
|
| 40,248 |
|
| 1,642,550 |
|
Avnet by segment |
|
|
|
|
|
|
|
|
|
|
EC |
| $ | 4,118,104 |
| $ | — |
| $ | 4,118,104 |
|
PF |
|
| — |
|
| 328,713 |
|
| 328,713 |
|
|
|
Sales for the first quarter of fiscal 20182019 were $4.66$5.09 billion, as compared toan increase of 9.2%, or $428.9 million, from the prior year first quarter of fiscal 2017 sales of $4.12$4.66 billion. The increase in sales was primarily due to the acquisition of PF and increased sales in the EMEA and Asia EC regions, offset by declines in the Americas EC region primarily as a result of supplier channel changes and year over year sales impacts from an ERP implementation at the end of fiscal 2016.
Organic salesSales in constant currency increased 14.3% in EMEA and 9.6% in Asia and decreased 14.5% in9.9% over the Americas region. PFprior year first quarter with both operating groups contributing to this increase.
EC sales were $353.7 millionof $4.71 billion in the first quarter of fiscal 2018, which is2019 increased $403.6 million or 9.4% from the prior year first quarter sales of $4.31 billion. This increase was primarily driven by increased sales in the Asia and Americas regions. PF sales for the first quarter of fiscal 2019 were $379.1 million, an increase of 2.3% over$25.4 million or 7.2% from the fourthprior year first quarter sales of $353.7 million driven by growth in all three regions.
As discussed in Note 2 to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q, the adoption of the new revenue recognition accounting standard during the first quarter of fiscal 2017.2019 did not have a material impact on the amounts of sales reported or the comparability of sales and gross profit margins year over year.
Gross Profit and Gross Profit Margins
Gross profit for the first quarter of fiscal 20182019 was $612.6$636.8 million, an increase of $89.9$24.2 million, or 17.2%3.9%, from the first quarter of fiscal 20172018 gross profit of $522.7 million.$612.6 million primarily driven by the increase in sales. Gross profit margin of 13.1% increased 45decreased 63 basis points to 12.5% from the first quarter of fiscal 2017 as2018 gross profit margin of 13.1%, with both operating groups contributing to the decrease.
EC gross profit margin decreased year over year primarily due to a resultsales mix shift to the lower-margin Asia region. Asia sales represented approximately 43% of the Company’s acquisitiontotal EC sales in the first quarter of PF. Grossfiscal 2019 as compared with approximately 40% in the first quarter of fiscal 2018. PF gross profit margin for EC declined in bothdecreased year over year primarily driven by customer mix and the Americas and EMEA regions due primarily to supplier channel and program changes that negatively impacted gross profit margin.impact of foreign currency exchange rates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A expenses”) were $496.2$475.1 million in the first quarter of fiscal 2018, an increase2019, a decrease of $132.5$26.4 million, or 36.4%5.3%, from the first quarter of fiscal 2017.2018. The year-over-year increasedecrease in SG&A expenses was primarily due to the acquisitiona reduction of PF and the related PF operating expenses including $23.2 million of
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additional expense for the amortization of intangible assets. SG&A expenses also increased as a result of changes in foreign currency exchange rates year over year, which was offset by cost savingsresulting from management’s restructuring actions taken since the first quarter of fiscal 2017. programs.
Metrics that management monitors with respect to its operating expenses are SG&A expenses as a percentage of sales and as a percentage of gross profit. In the first quarter of fiscal 2018,2019, SG&A expenses as a percentage of sales were 10.6%9.3% and as a percentage of gross profit were 81.0%74.6%, as compared with 8.8%10.8% and 69.6%81.9%, respectively, in the first quarter of fiscal 2017. The increases in SG&A expenses as a percentage of sales and as a percentage of gross profit is due primarily to the acquisition of PF and from the decline in gross profit margin in the western EC regions discussed further above.2018.
Restructuring, Integration and Other Expenses
As a result of the aforementioned supplier channel changes, themanagement’s focus on lowering overallimproving operating costs,efficiencies and further integrating the integrationacquisition of PF, the Company has incurred certain restructuring costs. In addition, the Company incurred integration, accelerated depreciation acquisition/divestiture and other costs. Integration costs are primarily related to the integration of acquired businesses including PF, the integration of certain regional and global businesses including Avnet after the TS divestiture, and incremental costs incurred as part of the consolidation, relocation, and closure of warehouse and office facilities. Accelerated depreciation relates to the incremental depreciation expense incurred related to the shortening of the estimated useful life of the Company’s enterprise resource planning (“ERP”) system in the Americas compared to depreciation expense based on the original useful life of such ERP system. Acquisition/divestiture costs consist primarily of professional fees and other costs incurred related to the acquisition, divestiture and closure of businesses including the acquisition of PF and the divestiture of TS. Other costs consist primarily of any other miscellaneous costs that relate to restructuring, integration and other expenses.
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The Company recorded restructuring, integration and other expenses of $46.4$14.8 million during the first quarter of fiscal 2018.2019. The Company recorded $21.3$7.5 million of restructuring costs in the first quarter of fiscal 2018 and expects to incur up to an additional $10.0 million of costs in the remainder of fiscal 20182019 in order to realize approximately $41.7$7.2 million in expected annualized operating cost savings once such restructuring actions initiated inbefore the end of the first quarter of fiscal 20182019 are completed. Integration, accelerated depreciation and other costs including acquisition/divesture costs were $8.2 million, $16.4 million and $0.5 million, respectively inDuring the first quarter of fiscal 2018.2019, the Company incurred integration costs of $2.9 million, accelerated depreciation of $3.1 million, other costs of $1.5 million and a reversal of $0.2 million for changes in estimates for costs associated with prior year restructuring actions. The after tax impact of restructuring, integration and other expenses were $29.6$11.5 million and $0.24$0.10 per share on a diluted basis.
Comparatively, in the first quarter of fiscal 2017,2018, restructuring, integration and other expenses from continuing operations were $29.5$46.4 million. The after tax impact of restructuring, integration, and other expenses was $20.2$29.6 million and $0.16$0.24 per share on a diluted basis.
See Note 14 “Restructuring Expenses”expenses” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.
Operating Income
Operating income for the first quarter of fiscal 20182019 was $70.0$146.8 million, a decreasean increase of $59.6$82.2 million, or 46.0%127.4%, from the first quarter of fiscal 20172018 of $64.6 million. The year over year increase in operating income of $129.5 million.was primarily driven by the reduction in selling, general and administrative expenses and lower restructuring, integration and other expenses as compared to the prior year first quarter. Adjusted operating income for the first quarter of fiscal 20182019 was $141.9$182.5 million, a decreasean increase of $19.4$46.0 million, or 12.0%33.7%, from the first quarter of fiscal 2017 adjusted operating income of $161.4 million. Operating income margin was 1.5% in the first quarter of fiscal 2018 as compared with 3.1% in the first quarter of fiscal 2017. Adjusted2018.
EC operating income margin for the first quarter of fiscal 2018 was 3.0% comparedincreased 20 basis points year over year to 3.9% in the first quarter of fiscal 2017. The decrease in adjusted3.4% and PF operating income margin increased 153 basis points year over year to 10.8%. The improvement in operating income margin at both operating groups was primarily driven by declines indue to the EC western regions, partially offset by the acquisition of PF.organic sales growth and from operating cost reductions related to restructuring and integration activities.
Interest Expenseand Other Financing Expenses, and Other Income (Expense), Net
Interest expenseand other financing expenses in the first quarter of fiscal 2019 was $30.1 million, an increase of $8.1 million or 36.7%, as compared with interest and other financing expenses of $22.0 million in the first quarter of fiscal 2018. The increase in interest and other financing expenses in the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 was $24.1 million, a decrease of $3.2 million or 11.7%, as compared with interest expense of $27.2 million in the first quarter of fiscal 2017. The decrease in interest expense in the first quarter
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of fiscal 2018 compared to the first quarter of fiscal 2017 was primarily related to increased expenses in Asia to finance working capital needs and from lower interest income from investments in cash equivalents between the impact of the Company’s repayments of certain long-term debt during fiscal 2017. years.
During the first quarter of fiscal 2018,2019, the Company had $15.6$1.9 million of other income,expense, net, as compared with $13.7$18.9 million of other expense,income, net, in the first quarter of fiscal 2017.2018. In the first quarter of fiscal 2019, the Company had foreign currency losses primarily due to the strengthening of the U.S. Dollar compared to certain currencies, partially offset by income related to the Company’s pension plans. In the first quarter of fiscal 2018, the Company had foreign currency gains primarily due to the strengthening of the Euro compared to the U.S. Dollar and British Pound. InPound and other income related to the first quarter of fiscal 2017, the Company incurred additional financing and economic foreign currency hedging costs associated with the PF acquisition.Company’s pension plans.
Income Tax Expense
The Company’s effective tax rate on its income before income taxes from continuing operations was 27.3% in the first quarter of fiscal 2019 as compared with 5.4% in the first quarter of fiscal 2018 as compared with 23.6% in2018. During the first quarter of fiscal 2017.2019, the Company’s effective tax rate was unfavorably impacted primarily by (i) an adjustment to the provisional transition tax expense estimate recorded under the requirements of the Act and (ii) increases in unrecognized tax benefits, partially offset by (iii) an adjustment to the provisional deferred tax impacts of the Act and (iv) the mix of income in lower tax jurisdictions. 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
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Income from Discontinued Operations
Income from discontinued operations was $0.2 million in the first quarter of fiscal 2019 as compared to $0.1 million in the first quarter of fiscal 2018 primarily as a result of certain income tax adjustments related to the TS business.
Income from discontinued operations was $1.2 million in the first quarter of fiscal 2017 due to the operations of the TS business prior to its sale in the third quarter of fiscal 2017.
See Note 3, “Discontinued operations” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information and detail on the financial results of discontinued operations.2018.
Net Income
As a result of the factors described in the preceding sections of this MD&A, the Company’s net income for the first quarter of fiscal 20182019 was $58.3$83.7 million, or $0.47$0.72 per share on a diluted basis, as compared with $68.8$58.3 million of net income, or $0.53$0.47 per share on a diluted basis, in the first quarter of fiscal 2017. 2018.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash Flow from Operating Activities
During the first quarter of fiscal 2018,2019, the Company used $128.0$85.0 million of cash from its operating activities compared to $0.1$128.0 million in the first quarter of fiscal 2017.2018. These operating cash flows were comprised of: (i) cash flow generated from net income from continuing operations, adjusted for the impact of non-cash and other items, which includes depreciation and amortization expenses, deferred income taxes, stock-based compensation expense and other non-cash items (including provisions for doubtful accounts and net periodic pension costs), and (ii) cash flows used for, or generated from, working capital and other, excluding cash and cash equivalents, and (iii) operating cash flowsequivalents. Cash used for or generated from,working capital and other was $275.6 million during the TS business, which is classified asfirst quarter of fiscal 2019, including increases in inventories of $269.6 million and accounts receivable of $19.3 million, a discontinued operation. Cashdecrease in accrued expenses and other of $81.8 million, partially offset by an increase in accounts payable of $95.1 million. The Company utilized cash to invest in inventory primarily to support sales growth and for certain investments in additional inventories at PF. Comparatively, cash used for working capital and other was $240.0 million during the first quarter of fiscal 2018, including increases in inventories and accounts receivable of $267.0 million and $32.4 million, respectively. The Company utilized cash to invest in inventory levels primarily as a result of a strong book to bill and lengthening purchasing lead times. These increases were partially offset by increases in accounts payable and accrued expenses and other of $37.3 million and $22.1 million, respectively. Comparatively, cash used for working capital and other was $13.6 million during the first quarter of fiscal 2017, including an increase in accounts receivable of
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$64.6 million and a decrease in accounts payable of $164.8 million, substantially offset by a decrease in inventories of $182.2 million and an increase in accrued expenses and other of $33.5 million.
Cash used for operating activities of discontinued operations was $110.5 million in the first quarter of fiscal 2017.
Cash Flow from Financing Activities
During the first quarter of fiscal 2019, the Company made net repayments of $40.0 million under the Securitization Program. Additionally, the Company repaid $50.3 million under the Company’s Credit Facility and $1.2 million from borrowings of various bank credit facilities. During the first quarter of fiscal 2019, the Company paid dividends on common stock of $22.9 million and repurchased $149.1 million of common stock. Additionally, included in other, net is approximately $17.6 million of cash received from the exercises of stock options.
During the first quarter of fiscal 2018, the Company received net proceeds of $28.0 million under the Company’s accounts receivable securitization program.Securitization Program. During the first quarter of fiscal 2018, the Company repaid $24.9 million from borrowings of various bank credit facilities and $92.5 million under the Company’s senior unsecured credit facility.Credit Facility. During the first quarter of fiscal 2018, the Company paid dividends on common stock of $22.0 million and repurchased $68.1 million of common stock.
During the first quarter of fiscal 2017, the Company repaid upon maturity the $300 million of 6.63% notes due September 2016. Additionally, the Company received net proceeds of $669.8 million from borrowings of bank and other debt. During the first quarter of fiscal 2017, the Company made net repayments of $150.3 million under the Company’s accounts receivable securitization program. During the first quarter of fiscal 2017, the Company paid dividends on common stock of $21.7 million.
Cash Flow from Investing Activities
During the first quarter of fiscal 2018,2019, the Company used $26.7$41.0 million for capital expenditures primarily related to information system development costs,warehouse and facilities, computer hardware and software purchases and facilitiesinformation system development costs compared to $34.7$26.7 million for capital expenditures in the first quarter of fiscal 2017.2018. During the first quarter of fiscal 2018, the Company used $14.7 million of cash for acquisitions, which is net of the cash acquired.
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During the first quarter of fiscal 2019, the Company received $120.0 million of cash from investing activities – discontinued operations from the sale of the TS business. During the first quarter of fiscal 2018, the Company soldgenerated $45.4 million of cash from investing activities – discontinued operations as a result of the sale of marketable securities obtained through the sale of the TS business, which have been included in Cash flows from investing activities – discontinued operations.business.
Contractual Obligations
For a detailed description of the Company’s long-term debt and lease commitments for the next five years and thereafter, see Long-Term Contractual Obligations appearing in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2017.June 30, 2018. With the exception of the Company’s debt transactions discussed herein, there are no material changes to this information outside of normal borrowings and repayments of long-term debt and operating lease payments. The Company does not currently have any material non-cancellable commitments for capital expenditures or inventory purchases.
Financing Transactions
See Note 5, “Debt” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on financing transactions including the Credit Facility, the Securitization Program, and other outstanding long-term debt as of September 30, 2017.29, 2018. The Company was in compliance with all covenants under the Credit Facility and the Securitization Program as of September 30, 2017.29, 2018.
The Company has various lines of credit, financing arrangements and other forms of bank debt in the U.S. and various foreign locations to fund the short-term working capital, foreign exchange, overdraft and letter of credit needs of its wholly owned subsidiaries. Avnet generally guarantees its subsidiaries’ obligations under such debt facilities. Outstanding borrowings under such forms of debt at the end of first quarter of fiscal 20182019 was $1.0$0.6 million.
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Liquidity
The Company held cash and cash equivalents of $539.7$365.9 million as of September 30, 2017,29, 2018, of which $513.0$330.6 million was held outside the United States. As of July 1, 2017,June 30, 2018, the Company held cash and cash equivalents of $836.4$621.1 million, of which $619.5$545.3 million was held outside of the United States.
As of the end of the first quarter of fiscal 2018,2019, the Company had a combined total borrowing capacity of $1.65$1.75 billion under the Credit Facility and the Securitization Program. There were $7.5 million inno borrowings outstanding and $2.0$3.0 million in letters of credit issued under the Credit Facility and $170.0$65.0 million in borrowings outstanding under the Securitization Program, resulting in approximately $1.42$1.68 billion of total availability as of September 30, 2017.29, 2018. Availability under the Securitization Program is subject to the Company having sufficient eligible trade accounts receivable to support desired borrowings. The Company currently expects to utilize availability under credit facilities to support working capital and other general corporate purposes to the extent such incremental borrowings do not impact the Company’s investment grade credit rating. During the first quarter of fiscal 2019, the Company had an average daily balance outstanding of approximately $65.0 million under the Securitization Program. During the first quarter of fiscal 2018, the Company had an average daily balance outstanding of approximately $10.3 million under the Credit Facility and approximately $166.0 million under the Program. During the first quarter of fiscal 2017, the Company had an average daily balance outstanding of approximately $450.5 million under the Credit Facility and approximately $719.0 million under theSecuritization Program.
During periods of weakening demand in the electronic components industry, the Company typically generates cash from operating activities. Conversely, the Company is more likely to use operating cash flows for working capital requirements during periods of higher growth. The Company used $17.4generated $296.5 million in cash flows from operating activities over the trailing four fiscal quarters ended September 30, 2017 for29, 2018 from continuing operations.
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Liquidity is subject to many factors, such as normal business operations as well as general economic, financial, competitive, legislative, and regulatory factors that are beyond the Company’s control. To the extent the cash balances held in foreign locations cannot be remitted back to the U.S. in a tax efficient manner, those cash balances are generally used for ongoing working capital, capital expenditure needs and to support acquisitions, and are currently expected to be permanently reinvested outside the United States. If these funds were needed for general corporate use inU.S. The Company is still evaluating the United States,impact of repatriating any additional foreign cash as a result of the Company would incur significant income taxes.Act. In addition, local government regulations may restrict the Company’s ability to move funds among various locations under certain circumstances. Management does not believe such restrictions would limit the Company’s ability to pursue its intended business strategy. Management believes that Avnet’s available borrowing capacity its current cash on hand including the remaining proceeds and marketable securities from the sale of the TS business and the Company’s expected ability to generate operating cash flows in the future will be sufficient to meet its future liquidity needs. The Company also may issue debt or equity securities in the future and management believes the Company will have adequate access to the capital markets, if needed.
During the first quarter of fiscal 2018,Historically the Company has made, and expects to continue to make, strategic investments through acquisition activity to the extent the investments strengthen Avnet’s competitive position, further its business strategies and meet management’s return on capital thresholds. The Company also expects to make capital expenditures, including expenditures over the next two fiscal years to implement a global ERP system.for warehouse facilities and information technology related tools and systems. Additionally, as the Company integrates PF, and restructures to transform Avnet into an electronic components focused business, the Company expects to use cash for restructuring, integration and other expenses.
In addition to continuing to make investments in acquisitions, as of September 30, 2017,29, 2018, the Company may repurchase up to an aggregate of $327.0$615.2 million of shares of the Company’s common stock through a $1.75$2.45 billion share repurchase program approved by the Board of Directors. The Company may repurchase stock from time to time at the discretion of management, subject to strategic considerations, market conditions and other factors. The Company may terminate or limit the share repurchase program at any time without prior notice. 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. Additionally, the Company currently expects to pay quarterly cash dividends on shares of its common stock, subject to approval of the Board of Directors. During the first quarter of fiscal 2018,2019, the Board of Directors approved a dividend of $0.18$0.20 per share, which resulted in $22.0$22.9 million of dividend payments during the quarter.
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Recently Issued Accounting Pronouncements
See Note 1, “Basis of presentation and new accounting pronouncements” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of recently issued accounting pronouncements.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
The Company seeks to reduce earnings and cash flow volatility associated with changes in foreign currency exchange rates by entering into financial arrangements that are intended to provide an economic hedge against all or a portion of the risks associated with such volatility. The Company continues to have exposure to such risks to the extent they are not economically hedged.
See Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2017,June 30, 2018, for further discussion of market risks associated with foreign currency exchange rates and interest rates. Avnet’s exposure to such risks has not changed materially since July 1, 2017,June 30, 2018, as the Company continues to economically hedge the majority of its foreign currency exchange exposures. Thus, any increase or decrease in fair value of the Company’s forward foreign currency exchange contracts is generally offset by an opposite effect on the related hedged position. For interest rate risk, the Company continues to maintain a combination of fixed and variable rate debtsdebt to mitigate the exposure to fluctuation in market interest rates. The Company’s exposure to market price risk related to marketable securities is mitigated through the purchase of a derivative financial instrument that fixes the value of the marketable securities.
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See Liquidity and Capital Resources — Financing Transactions appearing in Item 2 of this Quarterly Report on Form 10-Q for further discussion of the Company’s financing transactions and capital structure. As of September 30, 2017, 88%29, 2018, 95% of the Company’s debt bears interest at a fixed rate and 12%5% of the Company’s debt bears interest at variable rates. Therefore, a hypothetical 1.0% (100 basis points) increase in interest rates would result in a $0.5$0.2 million decrease in income from continuing operations before income taxes in the Company’s consolidated statement of operations for the first quarter of fiscal 2018.2019.
Item 4.Controls and Procedures
The Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the reporting period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures are effective such that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
During the first quarter of fiscal 2018,2019, there were no changes to the Company’s internal control over financial reporting (as defined in RuleRules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
OTHER INFORMATION
As a result primarily of certain former manufacturing operations, Avnet has incurred and may have future liability under various federal, state and local environmental laws and regulations, including those governing pollution and
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exposure to, and the handling, storage and disposal of, hazardous substances. For example, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and similar state laws, Avnet is and may be liable for the costs of cleaning up environmental contamination on or from certain of its current or former properties, and at off-site locations where the Company disposed of wastes in the past. Such laws may impose joint and several liability. Typically, however, the costs for clean up at such sites are allocated among potentially responsible parties based upon each party’s relative contribution to the contamination, and other factors.
Pursuant to SEC regulations, including but not limited to Item 103 of Regulation S-K, the Company regularly assesses the status of and developments in pending environmental and other compliance related legal proceedings to determine whether any such proceedings should be identified specifically in this discussion of legal proceedings, and has concluded that no particular pending legal proceeding requires public disclosure. Based on the information known to date, management believes that the Company has appropriately accrued in its consolidated financial statements for its share of the estimable costs of environmental and other compliance related matters.
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. 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.
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This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Exchange Act with respect to the financial condition, results of operations and business of the Company. You can find many of these statements by looking for words like “believes,” “plans,” “expects,” “anticipates,” “should,” “will,” “may,” “estimates” or similar expressions in this Quarterly Report or in documents incorporated by reference in this Quarterly Report. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. You should understand that the following important factors, in addition to those discussed elsewhere in this Quarterly Report and in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2017,June 30, 2018, could affect the Company’s future results of operations, and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements:
· |
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| competitive pressures among distributors of electronic |
· | an industry down-cycle in semiconductors; |
· | relationships with key suppliers and allocations of products by suppliers; |
· | risks relating to the Company’s international sales and operations, including risks relating to the ability to repatriate cash, foreign currency fluctuations, duties and taxes, and compliance with international and U.S. laws; |
· | risks relating to acquisitions, divestitures and investments; |
· | adverse effects on the Company’s supply chain, shipping costs, third-party service providers, customers and suppliers, including as a result of issues caused by natural and weather-related disasters; |
· | risks related to |
· | general economic and business conditions (domestic, foreign and |
· | geopolitical events, including the uncertainty caused by the United Kingdom’s planned exit from the European Union commonly referred to as “Brexit.” While the specific terms and impact of Brexit are not yet known, Brexit may adversely impact the United Kingdom and/or the European Union and therefore may adversely impact the Company’s operations and financial condition. The Company is monitoring the Brexit negotiations and developing contingency plans, including changes to its logistics operations and shipment routes and preparing for changes in trade facilitation regulations; and |
· | legislative or regulatory changes affecting Avnet’s businesses. |
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Any forward-looking statement speaks only as of the date on which that statement is made. Except as required by law, the Company assumes no obligation to update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made.
The discussion of Avnet’sthe Company’s business and operations should be read together with the risk factors contained in Item 1A of its Annual Report on Form 10-K for the fiscal year ended July 1, 2017,June 30, 2018, which describe various risks and uncertainties to which the Company is or may become subject. These risks and uncertainties have the potential to affect Avnet’sthe Company’s business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. As of September 30, 2017,29, 2018, there have been no material changes to the risk factors set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2017.June 30, 2018.
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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The Company’s Board of Directors has approved the repurchase of up to $1.75$2.45 billion of the Company’s common stock under the Company’s share repurchase program.program including an increase in August 2018 of $500.0 million. The following table includes the Company’s monthly purchases of the Company’s common stock during the first quarter of fiscal 2018,2019, under the share repurchase program, which is part of a publicly announced plan.
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| Total Number of |
| Approximate Dollar |
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| Total |
| Average |
| Shares Purchased |
| Value of Shares That |
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| Number |
| Price |
| as Part of Publicly |
| May Yet Be |
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| of Shares |
| Paid per |
| Announced Plans |
| Purchased under the |
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Period |
| Purchased |
| Share |
| or Programs |
| Plans or Programs |
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July |
| — |
| $ | — |
| — |
| $ | 399,062,000 |
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August |
| 615,000 |
| $ | 36.90 |
| 615,000 |
| $ | 376,365,000 |
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September |
| 1,290,000 |
| $ | 38.27 |
| 1,290,000 |
| $ | 326,994,000 |
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| Total Number of |
| Approximate Dollar |
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| Total |
| Average |
| Shares Purchased |
| Value of Shares That |
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| Number |
| Price |
| as Part of Publicly |
| May Yet Be |
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| of Shares |
| Paid per |
| Announced Plans |
| Purchased under the |
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Period |
| Purchased |
| Share |
| or Programs |
| Plans or Programs |
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July 1 – July 28 |
| 117,301 |
| $ | 42.90 |
| 117,301 |
| $ | 267,089,000 |
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July 29 – August 25 |
| 797,833 |
| $ | 47.75 |
| 797,833 |
| $ | 228,992,000 |
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August 26 – September 29 |
| 2,400,000 |
| $ | 47.40 |
| 2,400,000 |
| $ | 615,223,000 |
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2829
Exhibit |
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31.1* |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1** |
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2** |
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* |
| XBRL Instance Document. |
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101.SCH* |
| XBRL Taxonomy Extension Schema Document. |
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101.DEF* |
| XBRL Taxonomy Extension Definition Linkbase Document. |
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101.CAL* |
| XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB* |
| XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE* |
| XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Filed herewith. |
** | Furnished herewith. The information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section, and shall not be incorporated by reference into any |
2930
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 8, 2018
| AVNET, INC. | |
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| By: | /s/ |
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Date: October 30, 2017
3031