UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: January 17, 2017
(Date of earliest event reported)
TECH DATA CORPORATION
(Exact name of registrant as specified in its charter)
Florida | 0-14625 | 59-1578329 | ||
(State of Incorporation) | (Commission File Number) |
(IRS employer Identification No.) |
5350 Tech Data Drive
Clearwater, Florida, 33760
(Address of principal executive offices)
727-539-7429
(Registrants telephone number)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 8.01. | Other Events. |
In connection with the proposed acquisition (the Acquisition) by Tech Data Corporation (Tech Data) of AVT Technology Solutions LLC (AVT) and another company formed by Avnet, Inc. (Avnet), which will hold all assets and liabilities primarily relating to Avnets technology solutions business (the Acquired Business), pursuant to an Interest Purchase Agreement, dated September 19, 2016, described in Tech Datas Current Report on Form 8-K filed September 19, 2016, Tech Data is filing herewith (i) the audited combined financial statements of the Acquired Business as of July 2, 2016 and June 27, 2015 and for the years ended July 2, 2016, June 27, 2015 and June 28, 2014 and the notes related thereto, (ii) the unaudited condensed combined financial statements of the Acquired Business as of October 1, 2016 and July 2, 2016 and for the three-month periods ended October 1, 2016 and October 3, 2015 and the notes related thereto and (iii) the unaudited pro forma condensed combined balance sheet as of October 31, 2016, the unaudited pro forma condensed combined statement of income for the year ended January 31, 2016, and the unaudited pro forma condensed combined statement of income for the nine-month period ended October 31, 2016 and the notes related thereto.
In connection with the Acquisition, Avnet provided financial outlook data regarding the Acquired Business expected results for the quarter ended December 31, 2016, which is the second quarter of Avnets fiscal 2017. Sales are currently expected to be in the range of $2.25 billion to $2.55 billion and operating income is expected to be in the range of $95 million to $105 million. Avnet will provide additional details when it reports its results for Avnets fiscal 2017 second quarter.
In addition, Tech Data is providing the non-GAAP financial measures for Tech Data and the Acquired Business and reconciliations of those measures included in Exhibit 99.4 hereto and incorporated by reference herein.
Item 9.01. | Financial Statements and Exhibits |
(a) | Financial Statements of Business to be Acquired |
The audited combined balance sheets of the Acquired Business as of July 2, 2016 and June 27, 2015, and the related audited combined statements of operations, comprehensive income, changes in net parent investment and cash flows for each of the years ended July 2, 2016, June 27, 2015 and June 28, 2014, and the notes related thereto, are filed as Exhibit 99.1 hereto and incorporated herein by reference.
The unaudited condensed combined balance sheets of the Acquired Business as of October 1, 2016 and July 2, 2016, and the related unaudited condensed combined statements of operations, comprehensive income and cash flows for each of the three-month periods ended October 1, 2016 and October 3, 2015, and the notes related thereto, are filed as Exhibit 99.2 hereto and incorporated by reference herein.
(b) | Pro Forma Financial Information |
The unaudited pro forma condensed combined balance sheet as of October 31, 2016, the unaudited pro forma condensed combined statement of income for the year ended January 31,
2
2016, and the unaudited pro forma condensed combined statement of income for the nine-month period ended October 31, 2016 and the notes related thereto are filed as Exhibit 99.3 hereto and incorporated herein by reference.
(d) | Exhibits |
Exhibit |
Description | |
23.1 | Consent of KPMG LLP. | |
99.1 | The audited combined balance sheets of the Acquired Business as of July 2, 2016 and June 27, 2015, and the related audited combined statements of operations, comprehensive income, changes in net parent investment and cash flows for each of the years ended July 2, 2016, June 27, 2015 and June 28, 2014 and the notes related thereto. | |
99.2 | The unaudited condensed combined balance sheets of the Acquired Business as of October 1, 2016 and July 2, 2016, and the related unaudited condensed combined statements of operations, comprehensive income and cash flows for each of the three-month periods ended October 1, 2016 and October 3, 2015 and the notes related thereto. | |
99.3 | The unaudited pro forma condensed combined balance sheet as of October 31, 2016, the unaudited pro forma condensed combined statement of income for the year ended January 31, 2016, and the unaudited pro forma condensed combined statement of income for the nine-month period ended October 31, 2016 and the notes related thereto. | |
99.4 | The GAAP to non-GAAP reconciliation for Tech Data and the GAAP to non-GAAP reconciliation for the Acquired Business. |
Cautionary Note Concerning Forward-Looking Statements
The foregoing descriptions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, including statements regarding Tech Datas plans, objectives, expectations and intentions relating to the closing of the proposed Acquisition, the proposed Acquisitions expected contribution to Tech Datas results, financing and closing of the proposed Acquisition, the expected timing and benefits of the proposed Acquisition, Tech Datas and the Acquired Business financial results and estimates and/or business prospects, involve a number of risks and uncertainties. These forward-looking statements are based on current expectations, estimates, forecasts, and projections about the proposed Acquisition and the operating environment, economies and markets in which Tech Data and the Acquired Business operate and the beliefs and assumptions of our management. Words such as expects, anticipates, targets, goals, projects, intends, plans, believes, seeks, estimates, variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that include characterizations of future events or circumstances, are forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.
3
Actual results or events could differ materially from those contemplated in the forward-looking statements as a result of risks and uncertainties relating to our existing business (information regarding which is available as described in the following paragraph) and the proposed Acquisition and financing thereof, including the possibility that certain assumptions with respect to the Acquired Business or the proposed Acquisition could prove to be inaccurate, and the potential failure to receive, delays in the receipt of, or unacceptable or burdensome conditions imposed in connection with, all required regulatory approvals and the satisfaction of the closing conditions to the proposed Acquisition.
For additional information with respect to risks and other factors which could occur, see Tech Datas Annual Report on Form 10-K for the year ended January 31, 2016, including Part I, Item 1A, Risk Factors therein, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other securities filings with the Securities and Exchange Commission (the SEC) that are available at the SECs website at www.sec.gov and other securities regulators. Readers are cautioned not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Many of these factors are beyond Tech Datas control. Unless otherwise required by applicable securities laws, Tech Data disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Tech Data undertakes no duty to update any forward-looking statements contained herein to reflect actual results or changes in Tech Datas expectations.
4
SIGNATURE
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 hereunto duly authorized.
Tech Data Corporation | ||||||
(Registrant) | ||||||
Date: January 17, 2017 | /s/ Charles V. Dannewitz | |||||
Charles V. Dannewitz | ||||||
Executive Vice President, | ||||||
Chief Financial Officer |
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in registration statements (Nos. 333-161687, 333-144298, 333-59198, 033-62181, 033-60479) on Form S-8 of Tech Data Corporation of our report dated January 12, 2017, with respect to the combined balance sheets of Technology Solutions (the Company) as of July 2, 2016 and June 27, 2015, and the related combined statements of operations, comprehensive income, changes in net parent investment, and cash flows for the years ended July 2, 2016, June 27, 2015, and June 28, 2014, which appears in this Current Report on Form 8-K dated January 17, 2017 of Tech Data Corporation.
/s/ KPMG LLP
Phoenix, Arizona
January 17, 2017
Exhibit 99.1
COMBINED FINANCIAL STATEMENTS
Technology Solutions
As of July 2, 2016 and June 27, 2015 and for the Years Ended July 2, 2016,
June 27, 2015, and June 28, 2014
Table of Contents
Page | ||||
Independent Auditors Report |
2 | |||
Combined Balance Sheets at July 2, 2016 and June 27, 2015 |
3 | |||
Combined Statements of Operations for the years ended July 2, 2016, June 27, 2015 and June 28, 2014 |
4 | |||
Combined Statements of Comprehensive Income for the years ended July 2, 2016, June 27, 2015 and June 28, 2014 |
5 | |||
Combined Statements of Changes in Net Parent Investment for the years ended July 2, 2016, June 27, 2015, and June 28, 2014 |
6 | |||
Combined Statements of Cash Flows for the years ended July 2, 2016, June 27, 2015 and June 28, 2014 |
7 | |||
Notes to Combined Financial Statements |
8 |
1
Independent Auditors Report
The Board of Directors
Avnet, Inc.:
We have audited the accompanying combined financial statements of Technology Solutions (the Company), which comprise the combined balance sheets as of July 2, 2016 and June 27, 2015, and the related combined statements of operations, comprehensive income, changes in net parent investment, and cash flows for the years ended July 2, 2016, June 27, 2015, and June 28, 2014, and the related notes to the combined financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Technology Solutions as of July 2, 2016 and June 27, 2015, and the results of its operations and its cash flows for the years ended July 2, 2016, June 27, 2015, and June 28, 2014 in accordance with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Phoenix, Arizona
January 12, 2017
2
TECHNOLOGY SOLUTIONS
COMBINED BALANCE SHEETS
July 2, | June 27, | |||||||
2016 | 2015 | |||||||
(Thousands) | ||||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 149,107 | $ | 85,762 | ||||
Receivables, less allowances of $34,357 and $41,873, respectively |
2,265,341 | 2,039,938 | ||||||
Inventories |
295,362 | 346,543 | ||||||
Prepaid and other current assets |
65,711 | 52,390 | ||||||
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|
|
|
|||||
Total current assets |
2,775,521 | 2,524,633 | ||||||
Property, plant and equipment, net |
158,200 | 177,403 | ||||||
Goodwill |
659,368 | 639,650 | ||||||
Intangible assets, net |
55,826 | 67,636 | ||||||
Other assets |
43,516 | 51,099 | ||||||
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|
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Total assets |
$ | 3,692,431 | $ | 3,460,421 | ||||
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LIABILITIES AND NET PARENT INVESTMENT |
||||||||
Current liabilities: |
||||||||
Short-term debt |
$ | 102,544 | $ | 79,261 | ||||
Accounts payable |
1,643,576 | 1,407,522 | ||||||
Accrued expenses and other |
231,674 | 172,280 | ||||||
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Total current liabilities |
1,977,794 | 1,659,063 | ||||||
Other liabilities |
60,842 | 62,413 | ||||||
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Total liabilities |
2,038,636 | 1,721,476 | ||||||
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Commitments and contingencies (Notes 11 and 12) |
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Net parent investment: |
||||||||
Net parent company investment |
1,821,592 | 1,885,193 | ||||||
Accumulated other comprehensive loss |
(167,797 | ) | (146,248 | ) | ||||
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Total net parent investment |
1,653,795 | 1,738,945 | ||||||
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Total liabilities and net parent investment |
$ | 3,692,431 | $ | 3,460,421 | ||||
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|
|
See notes to combined financial statements.
3
TECHNOLOGY SOLUTIONS
COMBINED STATEMENTS OF OPERATIONS
Years Ended | ||||||||||||
July 2, | June 27, | June 28, | ||||||||||
2016 | 2015 | 2014 | ||||||||||
(Thousands) | ||||||||||||
Sales |
$ | 9,415,529 | $ | 9,799,526 | $ | 10,170,585 | ||||||
Cost of sales |
8,460,272 | 8,800,126 | 9,123,606 | |||||||||
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|
|
|
|
|||||||
Gross profit |
955,257 | 999,400 | 1,046,979 | |||||||||
Selling, general and administrative expenses |
693,901 | 752,341 | 802,664 | |||||||||
Restructuring, amortization, integration and other expenses (Note 14) |
53,389 | 84,874 | 56,904 | |||||||||
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|
|
|
|
|||||||
Operating income |
207,967 | 162,185 | 187,411 | |||||||||
Foreign exchange losses, net |
13,940 | 18,593 | 3,614 | |||||||||
Other expense (income), net |
817 | 4,870 | 1,954 | |||||||||
Interest expense, net |
5,213 | 6,616 | 11,304 | |||||||||
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|
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Income before income taxes |
187,997 | 132,106 | 170,539 | |||||||||
Income tax expense |
71,207 | 55,540 | 68,225 | |||||||||
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Net income |
$ | 116,790 | $ | 76,566 | $ | 102,314 | ||||||
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|
|
See notes to combined financial statements.
4
TECHNOLOGY SOLUTIONS
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended | ||||||||||||
July 2, | June 27, | June 28, | ||||||||||
2016 | 2015 | 2014 | ||||||||||
(Thousands) | ||||||||||||
Net income |
$ | 116,790 | $ | 76,566 | $ | 102,314 | ||||||
Other comprehensive (loss) income, net of tax: |
||||||||||||
Foreign currency translation adjustments and other |
(21,487 | ) | (133,503 | ) | 26,208 | |||||||
Pension adjustments, net |
(62 | ) | (873 | ) | (1,163 | ) | ||||||
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Total comprehensive income (loss) |
$ | 95,241 | $ | (57,810 | ) | $ | 127,359 | |||||
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|
|
|
See notes to combined financial statements.
5
TECHNOLOGY SOLUTIONS
COMBINED STATEMENTS OF CHANGES IN NET PARENT INVESTMENT
Years Ended July 2, 2016, June 27, 2015 and June 28, 2014
Accumulated | ||||||||||||
Net Parent | Other | Total | ||||||||||
Company | Comprehensive | Net Parent | ||||||||||
Investment | Income (Loss) | Investment | ||||||||||
(Thousands) | ||||||||||||
Balance, June 29, 2013 |
1,754,953 | (36,917 | ) | 1,718,036 | ||||||||
Net income |
102,314 | | 102,314 | |||||||||
Translation adjustments |
| 26,208 | 26,208 | |||||||||
Pension liability adjustments, net of tax of $744 |
| (1,163 | ) | (1,163 | ) | |||||||
Net contributions (distributions) from/to parent |
220,576 | | 220,576 | |||||||||
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Balance, June 28, 2014 |
2,077,843 | (11,872 | ) | 2,065,971 | ||||||||
Net income |
76,566 | | 76,566 | |||||||||
Translation adjustments |
| (133,503 | ) | (133,503 | ) | |||||||
Pension liability adjustments, net of tax of $558 |
| (873 | ) | (873 | ) | |||||||
Net contributions (distributions) from/to parent |
(269,216 | ) | | (269,216 | ) | |||||||
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Balance, June 27, 2015 |
1,885,193 | (146,248 | ) | 1,738,945 | ||||||||
Net income |
116,790 | | 116,790 | |||||||||
Translation adjustments |
| (21,487 | ) | (21,487 | ) | |||||||
Pension liability adjustments, net of tax of $40 |
| (62 | ) | (62 | ) | |||||||
Net contributions (distributions) from/to parent |
(180,391 | ) | | (180,391 | ) | |||||||
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Balance, July 2, 2016 |
$ | 1,821,592 | $ | (167,797 | ) | $ | 1,653,795 | |||||
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See notes to combined financial statements.
6
TECHNOLOGY SOLUTIONS
COMBINED STATEMENTS OF CASH FLOWS
Years Ended | ||||||||||||
July 2, | June 27, | June 28, | ||||||||||
2016 | 2015 | 2014 | ||||||||||
(Thousands) | ||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 116,790 | $ | 76,566 | $ | 102,314 | ||||||
Non-cash and other reconciling items: |
||||||||||||
Depreciation |
27,628 | 28,558 | 28,520 | |||||||||
Amortization |
18,830 | 35,919 | 29,059 | |||||||||
Deferred income taxes |
(8,014 | ) | 13,529 | 8,131 | ||||||||
Stock-based compensation |
24,265 | 26,544 | 19,570 | |||||||||
Pension expenses |
12,576 | 13,772 | 13,961 | |||||||||
Impairment expense |
| 12,700 | | |||||||||
Other, net |
6,376 | 14,130 | 8,194 | |||||||||
Changes in (net of effects from businesses acquired): |
||||||||||||
Receivables |
(262,553 | ) | 34,347 | (57,856 | ) | |||||||
Inventories |
51,692 | 4,659 | (48,324 | ) | ||||||||
Accounts payable |
226,017 | 41,415 | (135,427 | ) | ||||||||
Accrued expenses and other, net |
60,970 | (10,501 | ) | (57,728 | ) | |||||||
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Net cash flows provided (used) by operating activities |
274,577 | 291,638 | (89,586 | ) | ||||||||
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Cash flows from financing activities: |
||||||||||||
Borrowings (repayments) of short-term debt, net |
25,083 | (39,740 | ) | 34,121 | ||||||||
Contributions (to)/from Parent, net |
(204,656 | ) | (294,291 | ) | 153,647 | |||||||
Other, net |
(280 | ) | 1,209 | (4,890 | ) | |||||||
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Net cash flows provided (used) for financing activities |
(179,853 | ) | (332,822 | ) | 182,878 | |||||||
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
(10,192 | ) | (41,047 | ) | (43,822 | ) | ||||||
Acquisitions of businesses, net of cash acquired (Note 3) |
(19,675 | ) | | (15,908 | ) | |||||||
Other, net |
(864 | ) | (264 | ) | 972 | |||||||
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Net cash flows used for investing activities |
(30,731 | ) | (41,311 | ) | (58,758 | ) | ||||||
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Effect of currency exchange rate changes on cash and cash equivalents |
(648 | ) | (8,319 | ) | 883 | |||||||
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Cash and cash equivalents: |
||||||||||||
increase (decrease) |
63,345 | (90,814 | ) | 35,417 | ||||||||
at beginning of period |
85,762 | 176,576 | 141,159 | |||||||||
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at end of period |
$ | 149,107 | $ | 85,762 | $ | 176,576 | ||||||
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Additional cash flow information (Note 13)
See notes to combined financial statements.
7
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation
Description of Business
These combined financial statements reflect the ongoing operations of the Technology Solutions operating group (the Business or TS) of Avnet, Inc. (Avnet, or Parent). The Business is controlled by Avnet, a publicly traded company listed on the New York Stock Exchange. Avnet is a global value-added distributor of electronic components, enterprise computer and storage products, IT solutions and services and embedded subsystems.
As a leading global IT solutions distributor, TS focuses on the value-added distribution of enterprise computing servers and systems, software, storage, services and complex solutions from the worlds foremost technology manufacturers. TS partners with its customers and suppliers to create and deliver effective data center and IT lifecycle solutions that solve the business challenges of end-user customers around the world. TS serves a number of customer segments, from value-added resellers (VARs), systems integrators (SIs) and independent software vendors (ISVs). In addition, TS provides the latest hard disk drives, microprocessor, motherboard and DRAM module technologies to manufacturers of general-purpose computers and system builders. The Business has dedicated sales and marketing teams serving these customer segments. The Business has operations in each of the three major economic regions of the world: the Americas; Europe, the Middle East and Africa (EMEA); and Asia/Pacific, consisting of Asia, Australia and New Zealand (Asia). References to the carve-out operations and similar expressions refer to the Business.
Basis of Presentation
The combined financial statements presented herein have been prepared on a stand-alone basis and have been derived from the consolidated financial statements and accounting records of Avnet. The combined financial statements reflect the financial position, results of operations and cash flows of TS, in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). All significant intercompany transactions and accounts among the carve-out operations have been eliminated.
The combined financial statements may not be indicative of the Business future performance and may not reflect what the combined results of operations, financial position and cash flows would have been had the Business operated as an independent company during all of the periods presented. To the extent that an asset, liability, revenue or expense is directly associated with the Business, it is reflected in the accompanying combined financial statements.
Historically, Avnet provided certain support and corporate functions to the Business and costs associated with these functions were allocated to the Business. These functions included corporate communications, regulatory compliance, human resource employee compensation and benefit management, treasury, investor relations, corporate controllership, internal audit, Sarbanes Oxley compliance, information technology, corporate and legal compliance, and insurance. The costs of such services were allocated to the Business based on the most relevant allocation method to the service provided, primarily based on specific identification, relative percentage of revenue, direct time, square footage, or headcount. Management believes such allocations were reasonable; however, they may not be indicative of the actual expense that would have been incurred had the Business been operating as an independent company for all of the periods presented. The allocated expenses for these functions are included in selling, general, and administrative expenses in the combined statements of operations.
The Business total net parent investment represents Avnets interest in the recorded net assets of the Business. Certain transactions between the Business and other related parties within the Avnet group, including allocated expenses, are included in net parent company investment. All intercompany transactions and accounts between TS and the Parent are reflected as net parent investment in the accompanying combined balance sheets. The assets and liabilities in the accompanying combined financial statements have been reflected at the Parents historical cost basis.
8
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The Business operations participate in Avnets centralized treasury management function and all available excess cash is transferred to Avnet, however, certain operations maintain cash and derivative assets and liabilities outside of Avnets centralized management system. Where an entity has been included in these combined financial statements the cash, derivative assets, and derivative liabilities held by that entity have also been included in the combined financial statements. For derivative instruments held by Avnet on behalf of an entity included in the Business, the impacts of the derivative instruments have been included within the Business combined statement of operations.
Allocated costs and expenses have generally been considered to have been paid by the Business to Avnet in the year in which the costs were incurred. Current income taxes are considered to have been remitted, in cash, by or to Avnet in the year the related income taxes were recorded. Amounts receivable from or payable to Avnet have been classified in the combined balance sheet within net parent company investment. The Business reflects the cash generated by its operations and expenses paid by Avnet on behalf of its operations as a component of net parent investment in the accompanying combined balance sheets, combined statements of changes in net parent company investment, and net contributions (to)/from parent on the accompanying combined statements of cash flows. A discussion of the relationship with Avnet, including a description of the costs that have been allocated to the Business, is included in Note 5 to the combined financial statements.
Avnets debt and related interest expense have not been allocated to the Business for any of the periods presented, since the Business is not the legal obligor of the debt and Avnets debt and related interest expense are not directly attributed to the Business
Cash and bank overdrafts held locally and specifically related to the operations of the Business have been included in the combined balance sheets.
2. Summary of significant accounting policies
Principles of combination The accompanying combined financial statements include the accounts of Technology Solutions and all of its majority-owned and controlled subsidiaries (the Business or TS), with the limited exception of certain operations retained by Avnet. The assets and liabilities in the accompanying combined financial statements have been reflected on a historical basis. All intercompany and intracompany accounts and transactions have been eliminated.
Fiscal year The Business operates on a 52/53 week fiscal year, which ends on the Saturday closest to June 30th. Fiscal 2016 contains 53 weeks compared to 52 weeks in fiscal 2015 and 2014. Unless otherwise noted, all references to fiscal or any other year shall mean the Business fiscal year.
Management estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (GAAP) requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, reported amounts of sales and expenses and the disclosure of contingent assets and liabilities at the date of the combined financial statements. Actual results could differ materially from those estimates.
Cash and cash equivalents The Business considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
9
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Inventories Inventories, comprised principally of finished goods, are stated at cost (first-in, first-out) or market, whichever is lower. The Business regularly reviews the cost of inventory against its estimated market value, considering historical experience and any contractual rights of return, stock rotations, or price protections provided by the Business suppliers, and records a lower of cost or market write-down if any inventories have a cost in excess of their estimated net realizable value. The Business does not incorporate any non-contractual protections when estimating the net realizable value of its inventories.
Investments Investments in joint ventures and entities (ventures) in which the Business has an ownership interest of greater than 50% and exercises control over the ventures are combined in the accompanying combined financial statements. Non-controlling interests in the years presented are not material and, as a result, are included in the caption accrued expenses and other in the accompanying combined balance sheets. Investments in ventures in which the Business exercises significant influence but not control are accounted for using the equity method of accounting. Investments in ventures in which the Business ownership interest is less than 20% and over which the Business does not exercise significant influence are accounted for using the cost method of accounting. The Business monitors ventures for events or changes in circumstances that indicate that the fair value of a venture is less than its carrying value, in which case the Business would further review the venture to determine if it is other-than-temporarily impaired. During fiscal 2016, 2015 and 2014 the Business did not have any material investments in any ventures.
Depreciation, amortization and useful lives The Business reports property, plant and equipment at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the assets, required installation costs, interest capitalized during the construction period, and any expenditure that substantially adds to the value of or substantially extends the useful life of an existing asset. Additionally, the Business capitalizes qualified costs related to software obtained or developed for internal use. Software obtained for internal use has generally been enterprise-level business operations, logistics and finance software that is customized to meet the Business specific operational requirements. The Business begins depreciation and amortization (depreciation) for property, plant and equipment when an asset is both in the location and condition for its intended use.
Property, plant, and equipment is depreciated using the straight-line method over its estimated useful lives. The estimated useful lives for property, plant, and equipment are typically as follows: buildings 30 years; machinery, fixtures and equipment 2-10 years; information technology hardware and software 2-10 years; and leasehold improvements over the applicable minimum lease term or economic useful life if shorter.
The Business amortizes intangible assets acquired in business combinations using the straight-line method over the estimated economic useful lives of the intangible assets from the date of acquisition, which is generally between 5-10 years.
Long-lived assets impairment Long-lived assets, including property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. For purposes of recognition and measurement of an impairment loss, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (asset group). An impairment is recognized when the estimated undiscounted cash flows expected to result from the use of the asset group and its eventual disposition is less than its carrying amount. An impairment is measured as the amount by which an asset groups carrying value exceeds its estimated fair value. The Business considers a long-lived asset to be abandoned when it has ceased use of such abandoned asset and if the Business has no intent to use or repurpose the asset in the future. The Business continually evaluates the carrying value and the remaining economic useful life of long-lived assets and will adjust the carrying value and remaining useful life if and when appropriate.
10
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Goodwill Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value assigned to the individual assets acquired and liabilities assumed. The Business does not amortize goodwill, but instead tests goodwill for impairment at least annually in the fourth quarter and, if necessary, records any impairment resulting from such goodwill impairment testing as a component of operating expenses. Impairment testing is performed at the reporting unit level, and the Business has identified three reporting units, defined as each of the three regions (Americas, EMEA, and Asia Pacific). The Business will perform an interim impairment test between required annual tests if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value.
In performing goodwill impairment testing, the Business may first make a qualitative assessment of whether it is more-likely-than-not that a reporting units fair value is less than its carrying value. If the qualitative assessment indicates it is more-likely-than-not that a reporting units fair value is not greater than its carrying value, the Business must perform a two-step quantitative impairment test. The Business defines the fair value of a reporting unit as the price that would be received to sell the reporting unit as a whole in an orderly transaction between market participants at the impairment test date. To determine the fair value of a reporting unit, the Business primarily uses the income approach methodology of valuation, which includes the discounted cash flow method, and the market approach methodology of valuation, which considers values of comparable businesses to estimate the fair value of the Business reporting units.
Significant management judgment is required when estimating the fair value of the Business reporting units from a market participant perspective including the forecasting of future operating results, the discount rates and expected future growth rates used in the discounted cash flow method of valuation, and in the selection of comparable businesses and related market multiples that are used in the market approach. If the estimated fair value of a reporting unit exceeds the carrying value assigned to that reporting unit, goodwill is not impaired and no further impairment testing is required.
If the carrying value assigned to a reporting unit exceeds its estimated fair value in the first step, then the Business is required to perform the second step of the goodwill impairment test. In this step, the Business assigns the fair value of the reporting unit calculated in the first step to all of the assets and liabilities of that reporting unit, as if a market participant just acquired the reporting unit in a business combination. The excess of the fair value of the reporting unit determined in the first step of the impairment test over the total amount assigned to the assets and liabilities in the second step of the impairment test represents the implied fair value of goodwill. If the carrying value of a reporting units goodwill exceeds the implied fair value of goodwill, the Business will record an impairment loss equal to the difference. If there is no such excess then all goodwill for a reporting unit is considered impaired.
Foreign currency translation The assets and liabilities of foreign operations are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date, with the related translation adjustments reported as a separate component of shareholders equity and comprehensive income. Results of operations are translated using the average exchange rates prevailing throughout the period. Transactions denominated in currencies other than the functional currency of the Avnet subsidiaries that are party to the transactions are remeasured at exchange rates in effect at the balance sheet date or upon settlement of the transaction. Gains and losses from such remeasurements are recorded in the combined statements of operations as a component of other income (expense), net.
Income taxes The Business operating results have been included in Avnets U.S. federal and state tax returns or non-U.S. jurisdictions tax returns. Amounts presented in these combined financial statements related to income taxes have been determined on a separate tax return basis. These amounts may not reflect tax positions taken or to be taken by Avnet or the Business and have been available for use by Avnet, and may remain with Avnet after the separation from Avnet.
11
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
With the exception of certain dedicated foreign entities, the Business does not maintain taxes payable to/from the Parent and is deemed to settle the annual current tax balances immediately with the legal tax-paying entities in the respective jurisdictions. These settlements are reflected as changes in net parent company investment.
The Business follows the asset and liability method of accounting for income taxes. Deferred income tax assets and liabilities are recognized for the estimated future tax impact of differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized within income tax expense in the period in which the new rate is enacted. Based upon historical and estimated levels of future taxable income and analysis of other key factors, the Business may increase or decrease a valuation allowance against its deferred tax assets, as deemed necessary, to state such assets at their estimated net realizable value.
The Business establishes contingent liabilities for potentially unfavorable outcomes of positions taken on certain tax matters. These liabilities are based on managements assessment of whether a tax benefit is more likely than not to be sustained upon examination by the relevant tax authorities. There may be differences between the estimated and actual outcomes of these matters that may result in future changes in estimates to such contingent liabilities. To the extent such changes in estimates are required; the Business effective tax rate may potentially fluctuate as a result. In accordance with the Business accounting policies, accrued interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense.
Self-insurance In the U.S., the Business is primarily self-insured for workers compensation, medical, and general, product and automobile liability costs; however, the Business also has stop-loss insurance policies in place to limit the Business exposure to individual and aggregate claims made. Liabilities for these programs are estimated based upon outstanding claims and claims estimated to be incurred but not yet reported based upon historical loss experience. These estimates are subject to variability due to changes in trends of losses for outstanding claims and incurred but not reported claims, including external factors such as the number of and cost of claims, benefit level changes and claim settlement patterns. The liabilities associated with the Business self-insurance coverages will be retained by Avnet.
Revenue recognition Revenue from the sale of products or services is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable and collectability is reasonably assured. Generally, these criteria are met upon either shipment or delivery to customers, depending upon the sales terms. A portion of the Business product sales come from products the Business purchases from a supplier and holds in inventory. A majority of the Business sales of products are shipped directly from its suppliers to its customers (drop-ship). In such drop-ship arrangements, TS negotiates the price with the customer, pays the supplier directly for the products shipped and bears credit risk of collecting payment from its customers. Furthermore, in such drop-shipment arrangements, the Business bears responsibility for accepting returns of products from the customer even if the Business, in turn, has a right to return the products to the original supplier if the products are defective. Under these sales terms, the Business serves as the principal with the customer and, therefore, recognizes the billed amount of the gross sale and the full cost of sale of the product upon shipment by the supplier.
In addition, the Business has certain contractual relationships with its customers and suppliers whereby TS assumes an agency relationship in the sales transaction. In such agency arrangements, the Business recognizes the net fee associated with serving as an agent within sales with no associated cost of sales.
12
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Revenues from maintenance contracts where TS is the principal are recognized ratably over the life of the contracts, generally ranging from one to three years.
Revenues are recorded net of discounts, customer rebates and estimated returns. Provisions are made for discounts and customer rebates, which are primarily timing or volume specific, and are estimated based on historical trends and anticipated customer buying patterns. Provisions for returns and other sales adjustments are estimated based on historical sales returns experience, credit memo experience and other known factors.
Vendor allowances and consideration Consideration received from suppliers for price protection, product rebates, marketing/promotional activities, or any other programs are recorded when earned under the terms and conditions of such supplier programs as adjustments to product costs or selling, general and administrative expenses depending upon the nature and contractual requirements related to the consideration received. Some of these supplier programs requires management to make estimates and may extend over one or more reporting periods.
Comprehensive income Comprehensive income represents net income for the year adjusted for certain changes in net parent company investment. Accumulated comprehensive income items impacting comprehensive income includes foreign currency translation and the impact of the Business pension liability adjustments, net of tax (see Note 5).
Restructuring and Exit Activities The determination of when the Business accrues for involuntary termination benefits under restructuring plans depends on whether the termination benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement. The Business accounts for on-going benefit arrangements in accordance with ASC 712 Nonretirement Postemployment Benefits and accounts for one-time benefit arrangements in accordance with ASC 420 Exit or Disposal Cost Obligations. If applicable, the Business records such costs into operating expense over the terminated employees future service period beyond any minimum retention period. Other costs associated with restructuring or exit activities may include contract termination costs including operating leases and impairments of long-lived assets, which are expensed in accordance with ASC 420 and ASC 360 Property, Plant and Equipment, respectively.
Business Combinations The Business accounts for business acquisitions using the acquisition method of accounting and records any identifiable definite-lived intangible assets separate from goodwill. Intangible assets are recorded at their fair value based on estimates as of the date of acquisition. Goodwill is recorded as the residual amount of the purchase price consideration less the fair value assigned to the individual identifiable assets acquired and liabilities assumed as of the date of acquisition. Contingent consideration, which represents an obligation of the acquirer to transfer additional assets or equity interests to the former owner as part of the purchase price if specified future events occur or conditions are met, is accounted for at the acquisition date fair value either as a liability or as equity depending on the terms of the acquisition agreement.
Concentration of credit risk Financial instruments that potentially subject the Business to a concentration of credit risk principally consist of cash and cash equivalents and trade accounts receivable. The Business invests its excess cash primarily in overnight time deposits and institutional money market funds with highly rated financial institutions. To reduce credit risk, management performs ongoing credit evaluations of its customers financial condition and, in some instances, has obtained credit insurance coverage to reduce such risk. Reserves for potential credit losses from customers are maintained, but material losses have not historically been experienced related to individual customers or groups of customers in any particular end market or geographic area.
Fair value The Business measures financial assets and liabilities at fair value based upon an exit price,
13
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
representing the amount that would be received from the sale of an asset or paid to transfer a liability, in an orderly transaction between market participants. ASC 820, Fair Value Measurements, requires inputs used in valuation techniques for measuring fair value on a recurring or non-recurring basis be assigned to a hierarchical level as follows: Level 1 are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 are observable market-based inputs or unobservable inputs that are corroborated by market data and Level 3 are unobservable inputs that are not corroborated by market data. During fiscal 2016, 2015, and 2014, there were no transfers of assets measured at fair value between the three levels of the fair value hierarchy. The carrying amounts of the Business financial instruments, including cash and cash equivalents, receivables and accounts payable approximate their fair values at July 2, 2016 due to the short-term nature of these assets and liabilities. At July 2, 2016, and June 27, 2015, the Business had $6.3 million and $7.6 million, respectively, of cash equivalents that were measured at fair value based upon Level 1 criteria.
Derivative financial instruments See Note 4 for discussion of the Business accounting policies related to derivative financial instruments.
Defined Benefit Pension Plans and Other Employee Benefits The Business employees have participated in the Parents noncontributory defined benefit pension plan (the Plan), which covers substantially all U.S. employees. For presentation of these accompanying combined financial statements, the Business portion of payroll costs and employee benefit plan costs have been charged to the Business by Avnet. Avnet sponsors various employee pension and postretirement health and life insurance plans. For purposes of these accompanying combined financial statements, the Business is considered to be participating in multiemployer benefit plans of Avnet. As a participant in multiemployer benefit plans, the Business recognizes as expense in each period an allocation from Avnet, and does not recognize any employee benefit plan assets or liabilities. Additionally, Avnet has pension plans of certain non-U.S. subsidiaries and other defined benefit plans, however, the liabilities associated with these plans are not considered material. See Note 5 for total pension and benefit expenses under these plans.
Recently issued accounting pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under GAAP. The core principles of ASU 2014-09 are to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Application of the guidance in ASU 2014-09 may require more judgment and estimates within the revenue recognition process compared to existing GAAP. In July 2015, the FASB approved a one-year delay in the effective date of ASU 2014-09, which makes the effective date for the Business the first quarter of fiscal 2019. The Business may adopt the requirements of ASU 2014-09 using either of two acceptable adoption methods: (i) retrospective adoption to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) adoption with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined within ASU 2014-09. The Business is currently evaluating the impact of the future adoption of ASU 2014-09 on its combined financial statements, including the method of adoption to be used.
In September 2015, the FASB issued Accounting Standards Update 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The Business early adopted this update in the first quarter of fiscal 2016, with no impact to its combined financial statements.
14
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), to simplify the presentation of deferred income taxes by requiring deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The Business early adopted this update in fiscal 2016.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). The update requires a lessee to recognize assets and liabilities on the combined balance sheets for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The update will be effective for the Business in the first quarter of fiscal 2020, using a modified retrospective approach. The Business is currently evaluating the impact of the adoption of ASU 2016-02 on its combined financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation Stock Compensation, which simplifies the accounting for the tax effects related to stock based compensation, including adjustments to how excess tax benefits and how tax withholdings and payments for the benefit of employees receiving stock based compensation should be classified, amongst other items. ASU 2016-09 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Business early adopted ASU 2016-09 during fiscal 2016. This adoption of ASU 2016-09 did not have a material impact on the Business combined financial statements or financial statement disclosures.
3. Acquisitions and divestitures
Fiscal 2016 Acquisitions
The Business acquired two businesses with aggregated annualized sales of approximately $120.0 million for an aggregate purchase price of $36.4 million. In November 2015, the Business purchased Orchestra Service GmbH, a German IT distributor of innovative storage solutions and services for EMC products. In January 2016, the Business purchased ExitCertified, a leading provider of certified IT training in North America. The Business paid cash of $19.7 million, net of cash acquired, for such acquisitions in fiscal 2016. The Business has not disclosed the pro-forma impact of the fiscal 2016 acquisitions, as such impact was not material to the Businesss combined financial position or results of operations. During fiscal 2016, there were no material measurement period adjustments for these acquisitions.
Historical Acquisitions
The Business had no acquisitions in fiscal 2015. During fiscal 2014, the Business acquired Seamless Technologies, an IT private cloud and data center automation service provider, with historical annualized sales of approximately $13.0 million. Cash paid for the acquisition during fiscal 2014 was $15.9 million, net of cash acquired. The Business has not disclosed the pro-forma impact of the fiscal 2014 acquisition as such impact was not material to the Business combined financial position or results of operations. During fiscal 2014 and fiscal 2015, there were no material measurement period adjustments for the fiscal 2014 acquisition. The Business has recognized restructuring, integration and other expenses associated with fiscal 2014 and 2016 acquisitions which are described further in Note 14.
4. Derivative financial instruments
Many of the Business subsidiaries purchase and sell products in currencies other than their functional currencies. This subjects the Business to the risks associated with fluctuations in foreign currency exchange rates. The Business reduces this risk by utilizing natural hedging (i.e., 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
15
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
exchange contracts typically with maturities of less than 60 days (economic hedges). The Business continues to have exposure to foreign currency risks to the extent they are not hedged. The Business adjusts any economic hedges to fair value through the combined statements of operations primarily within other expense, net. Therefore, the changes in valuation of the underlying items being economically hedged are offset by the changes in fair value of the forward foreign exchange contracts. The fair value of forward foreign currency exchange contracts, which are based upon Level 2 criteria under the ASC 820 fair value hierarchy, are classified in the captions other current assets or accrued expenses and other, as applicable, in the accompanying combined balance sheets as of July 2, 2016, and June 27, 2015. The Business master netting and other similar arrangements with various financial institutions related to derivative financial instruments allow for the right of offset. Derivative financial instruments with the same counterparty are presented as either a net asset or liability when the right of offset exists.
The Business generally does not hedge its investments in its foreign operations. The Business does not enter into derivative financial instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties.
The Business 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 Business foreign operations transactions are denominated primarily in the following currencies: U.S. Dollar, Euro, British Pound, Canadian Dollar, Australian Dollar and Mexican Peso. The Business also, to a lesser extent, has foreign operations transactions in other European, Latin American and Asian foreign currencies.
The fair values of derivative financial instruments in the Business combined balance sheets are as follows:
Fiscal Year Ended | ||||||||
July 2, | June 27, | |||||||
2016 | 2015 | |||||||
(Thousands) | ||||||||
Forward foreign currency exchange contracts not receiving hedge accounting treatment recorded in: |
||||||||
Other current assets |
$ | | $ | 516 | ||||
Accrued expenses |
286 | 743 |
The amount recorded to foreign exchange losses, net related to derivative financial instruments are as follows:
Fiscal Year Ended | ||||||||
July 2, | June 27, | |||||||
2016 | 2015 | |||||||
(Thousands) | ||||||||
Net derivative financial instrument gain (loss) |
$ | (2,613 | ) | $ | (1,339 | ) |
Under the economic hedging policies, gains and losses on the derivative financial instruments are substantially offset by the gains and losses on the underlying assets or liabilities being hedged.
16
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
5. Related Party Transactions and Net Parent Investment
The combined financial statements have been prepared on a stand-alone basis and have been derived from the consolidated financial statements and accounting records of Avnet.
Allocation of General Corporate Expense
During fiscal 2016, 2015, and 2014, TS was allocated $148.4 million, $153.7 million and $149.2 million, respectively, of support and general corporate expenses incurred by Avnet which are included within selling, general and administrative expenses in the combined statements of operations.
The expense allocations have been determined on a basis management considers to be a reasonable reflection of the utilization of services provided or the benefit received by the Business during the periods presented. The allocations may not, however, reflect the expense the Business would have incurred as an independent company for the periods presented. Actual costs that may have been incurred if the Business had been a standalone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.
Stock-based Compensation
Avnets incentive compensation programs primarily consist of share awards, restricted share awards or stock options (any of which may be a performance award). Certain Parent employees supporting the Business operations, including certain employees dedicated to the Business, were historically granted these types of awards. These share-based compensation costs have been allocated to the Business as part of the general corporate expense allocations from the Parent, described above. These costs totaled $24.3 million, $26.5 million, and $19.6 million in fiscal 2016, 2015 and 2014, respectively. The underlying equity for all awards granted under the plans consists of Avnet common shares. Accordingly, the amounts presented are not necessarily indicative of future performance and do not necessarily reflect the results the Business would have experienced as an independent company for the periods presented. Share-based compensation expense is included in general and administrative expenses in the accompanying combined statements of operations.
Pension and Retirement Plans
The Business employees participate in the defined benefit pension plan of the Parent. Avnets noncontributory defined benefit pension plan (the Plan) covers substantially all U.S. employees. The Plan itself, however, is a cash balance plan that is similar in nature to a defined contribution plan in that a participants benefit is defined in terms of a stated account balance. A cash balance plan provides Avnet with the benefit of applying any earnings on the Plans investments beyond the fixed return provided to participants, toward the future cash funding obligations. Employees are eligible to participate in the Plan following the first year of service during which they worked at least 1,000 hours.
The Plan provides defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit based upon a percentage of current salary, which varies with age, and interest credits. Avnet uses its fiscal year end as the measurement date for determining pension expense and benefit obligations for each fiscal year. Additionally, Avnet has pension plans of certain non-U.S. subsidiaries and other defined benefit plans, which are not considered material. The Business share of defined benefit plan costs were $12.6 million, $13.8 million, and $14.0 million for the fiscal years ended 2016, 2015 and 2014, respectively. These expenses are included in selling, general and administrative expenses in the combined statements of operations.
17
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Net Parent Company Investment
The Business operations have historically participated in Avnets centralized cash management and funding system. The Business working capital and capital expenditure requirements have historically been part of the corporate-wide cash management program for Avnet. As part of this program, Avnet maintains all cash generated by the Business operations and cash required to meet the Business operating and investing needs is provided by Avnet as necessary. Net cash generated by or used by the Business operations is reflected as a component of net parent company investment on the accompanying combined balance sheets and as Net contributions (to)/from parent on the accompanying combined statements of cash flows.
The Business has various intercompany amounts due to and from the Parent and other Parent businesses. These intercompany amounts resulted from various capital and other operating transactions of the Business and of the Parent to which the Business was either a party or was an intermediary and are included in net parent company investment in the combined balance sheets.
All significant intercompany transactions between the Business and Avnet have been included in these combined financial statements and are considered to be transacted through net parent company investment in the accompanying combined financial statements at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions represents capital contributions from or distributions to the Parent and therefore is reflected in the accompanying combined statements of cash flows as a financing activity, in the accompanying combined statements of changes in net parent investment as Net contributions/(distributions) from/(to) parent and in the accompanying combined balance sheets as net parent company investment.
Accumulated comprehensive income (loss)
The following table includes the balances within accumulated other comprehensive income (loss):
July 2, | June 27, | June 28, | ||||||||||
2016 | 2015 | 2014 | ||||||||||
(Thousands) | ||||||||||||
Accumulated translation adjustments and other |
$ | (164,857 | ) | $ | (143,370 | ) | $ | (9,867 | ) | |||
Accumulated pension liability adjustments, net of income taxes |
(2,940 | ) | (2,878 | ) | (2,005 | ) | ||||||
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|
|
|
|
|
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Total accumulated other comprehensive income (loss) |
$ | (167,797 | ) | $ | (146,248 | ) | $ | (11,872 | ) | |||
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|
|
|
|
|
Amounts reclassified out of accumulated comprehensive income (loss), net of tax, to operating expenses during fiscal 2016, 2015 and 2014 substantially all related to net periodic pension costs.
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TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
6. Property, plant and equipment, net
Property, plant and equipment are recorded at cost and consist of the following:
July 2, 2016 | June 27, 2015 | |||||||
(Thousands) | ||||||||
Buildings and leasehold improvements |
$ | 64,757 | $ | 71,374 | ||||
Machinery, fixtures and equipment |
30,688 | 30,258 | ||||||
Information technology hardware and software |
216,411 | 214,131 | ||||||
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|
|
|
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Depreciable property, plant and equipment, gross |
311,856 | 315,763 | ||||||
Accumulated depreciation |
(159,267 | ) | (142,555 | ) | ||||
|
|
|
|
|||||
Depreciable property, plant and equipment, net |
152,589 | 173,208 | ||||||
Land |
2,158 | 2,181 | ||||||
Construction in progress |
3,453 | 2,014 | ||||||
|
|
|
|
|||||
Property, plant and equipment, net |
$ | 158,200 | $ | 177,403 | ||||
|
|
|
|
Depreciation expense related to property, plant and equipment was $27.6 million, $28.6 million and $28.5 million in fiscal 2016, 2015 and 2014, respectively. Interest expense capitalized during fiscal 2016, 2015 and 2014 was not material.
7. Goodwill and intangible assets
The following table presents the change in goodwill balances for fiscal year 2016. All of the accumulated impairment was recognized in fiscal 2009.
Total | ||||
(Thousands) | ||||
Gross goodwill |
$ | 974,274 | ||
Accumulated impairment |
(334,624 | ) | ||
|
|
|||
Carrying value at June 27, 2015 |
639,650 | |||
|
|
|||
Additions |
24,413 | |||
Adjustments |
| |||
Foreign currency translation |
(4,695 | ) | ||
|
|
|||
Carrying value at July 2, 2016 |
$ | 659,368 | ||
|
|
|||
Gross goodwill |
$ | 993,992 | ||
Accumulated impairment |
(334,624 | ) | ||
|
|
|||
Carrying value at July 2, 2016 |
$ | 659,368 | ||
|
|
Goodwill adjustments represent the net purchase accounting adjustments for acquisitions during the related measurement periods.
Based upon the Business annual impairment tests performed in the fourth quarters of fiscal 2016, 2015 and 2014, there was no impairment of goodwill in the respective fiscal years. The goodwill impairment testing requirements and related assumptions used are described further in Note 2.
19
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The following table presents the Business acquired identifiable intangible assets:
July 2, 2016 | June 27, 2015 | |||||||||||||||||||||||
Acquired | Accumulated | Net Book | Acquired | Accumulated | Net Book | |||||||||||||||||||
Amount | Amortization | Value | Amount | Amortization | Value | |||||||||||||||||||
(Thousands) | ||||||||||||||||||||||||
Customer related |
$ | 163,189 | $ | (108,479 | ) | $ | 54,710 | $ | 206,405 | $ | (139,253 | ) | $ | 67,152 | ||||||||||
Trade name and other |
1,129 | (13 | ) | 1,116 | 3,954 | (3,470 | ) | 484 | ||||||||||||||||
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$ | 164,318 | $ | (108,492 | ) | $ | 55,826 | $ | 210,359 | $ | (142,723 | ) | $ | 67,636 | |||||||||||
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|
|
Intangible asset amortization expense was $18.8 million, $35.9 million and $29.1 million for fiscal 2016, 2015 and 2014 respectively. Included in fiscal 2015 amortization expense was $8.5 million of accelerated amortization for the reduction in useful lives of certain intangible assets as a result of restructuring actions discussed further in Note 14. Intangible assets have a weighted average remaining life of approximately 4 years as of July 2, 2016. The following table presents the estimated future amortization expense for the next five fiscal years and thereafter (in thousands):
Fiscal Year |
||||
2017 |
18,643 | |||
2018 |
9,284 | |||
2019 |
9,241 | |||
2020 |
9,241 | |||
2021 |
6,294 | |||
Thereafter |
3,123 | |||
|
|
|||
Total |
$ | 55,826 | ||
|
|
8. Debt
Short-term debt consists of the following:
July 2, 2016 | June 27, 2015 | July 2, 2016 | June 27, 2015 | |||||||||||||
Interest Rate | Carrying Balance | |||||||||||||||
Bank credit facilities and other |
5.30 | % | 5.65 | % | $ | 102,544 | $ | 79,261 | ||||||||
|
|
|
|
|||||||||||||
Short-term debt |
$ | 102,544 | $ | 79,261 | ||||||||||||
|
|
|
|
Bank credit facilities and other consist of multiple 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 Business including its foreign operations. These facilities are short-term in nature due to the ability for the counterparties to terminate or demand payment upon notice to the Business. The Parent has guaranteed $34.8 million and $31.7 million of such facilities as of July 2, 2016 and June 27, 2015, respectively.
The Business has historically participated in the Parents accounts receivable securitization program (the Program). Under the Program, the Business, for the benefit of the Parent, 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 combined balance sheets, totaled $696.4 million and $589.7 million at July 2, 2016, and June 27, 2015, respectively and serve as security under the Program.
20
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
9. Accrued expenses and other
Accrued expenses and other consist of the following:
July 2, 2016 | June 27, 2015 | |||||||
(Thousands) | ||||||||
Accrued salaries and benefits |
$ | 49,062 | $ | 55,106 | ||||
Accrued operating costs |
22,607 | 23,336 | ||||||
Accrued restructuring costs (Note 14) |
10,543 | 10,654 | ||||||
Accrued property, plant and equipment |
962 | 6,722 | ||||||
Receivables factoring payable |
67,336 | | ||||||
Accrued other |
81,164 | 76,462 | ||||||
|
|
|
|
|||||
Total accrued expenses and other |
$ | 231,674 | $ | 172,280 | ||||
|
|
|
|
Receivables factoring payable represents a liability associated with cash received related to accounts receivables sold under a factoring arrangement that do not meet all of the sales accounting criteria to derecognize the underlying accounts receivable.
10. Income taxes
The Business operating results have been included in Avnets U.S. federal and state tax returns or non-U.S. jurisdictions tax returns. Amounts presented in these combined financial statements related to income taxes have been determined on a separate tax return basis. Certain of the Business tax attributes may be retained by Avnet after the separation from Avnet. These amounts may not reflect tax returns filed or to be filed by Avnet or the Business and have been available for use by Avnet and may remain with Avnet after the separation from Avnet.
With the exception of certain dedicated foreign entities, the Business does not maintain taxes payable to/from the Parent and is deemed to settle the annual current tax balances immediately with the legal tax-paying entities in the respective jurisdictions. These settlements are reflected as changes in net parent company investment.
21
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The components of income tax expense (tax provision) are included in the table below. Income tax expense for deferred income taxes results from temporary differences arising primarily from net operating losses, inventories valuation, receivables valuation, certain accrued amounts and depreciation and amortization, net of any changes to valuation allowances.
Years Ended | ||||||||||||
July 2, 2016 | June 27, 2015 | June 28, 2014 | ||||||||||
(Thousands) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | 42,501 | $ | 28,345 | $ | 36,296 | ||||||
State and local |
7,920 | 4,515 | 6,215 | |||||||||
Foreign |
28,800 | 9,151 | 17,583 | |||||||||
|
|
|
|
|
|
|||||||
Total current taxes |
79,221 | 42,011 | 60,094 | |||||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
Federal |
(4,494 | ) | 6,071 | 7,323 | ||||||||
State and local |
(207 | ) | 483 | 614 | ||||||||
Foreign |
(3,313 | ) | 6,975 | 194 | ||||||||
|
|
|
|
|
|
|||||||
Total deferred taxes |
(8,014 | ) | 13,529 | 8,131 | ||||||||
|
|
|
|
|
|
|||||||
Income tax expense |
$ | 71,207 | $ | 55,540 | $ | 68,225 | ||||||
|
|
|
|
|
|
Income tax expense is computed based upon income before income taxes from both U.S. and foreign operations. U.S. income before income taxes was $122.1 million, $96.7 million and $118.9 million, and foreign income before income taxes was $65.9 million, $35.4 million and $51.6 million in fiscal 2016, 2015 and 2014, respectively.
Reconciliations of the federal statutory tax rate to the effective tax rates are as follows:
Years Ended | ||||||||||||
July 2, 2016 | June 27, 2015 | June 28, 2014 | ||||||||||
U.S. federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local income taxes, net of federal benefit |
2.7 | 2.1 | 2.9 | |||||||||
Foreign tax rates, net of valuation allowances |
(1.5 | ) | 9.2 | 2.9 | ||||||||
Release of valuation allowance, net of U.S. tax expense |
(0.6 | ) | 0.0 | 0.0 | ||||||||
Change in contingency reserves |
1.5 | 0.6 | (1.6 | ) | ||||||||
Tax audit settlements |
0.8 | (6.0 | ) | (1.1 | ) | |||||||
Other, net |
0.0 | 1.1 | 1.9 | |||||||||
|
|
|
|
|
|
|||||||
Effective tax rate |
37.9 | % | 42.0 | % | 40.0 | % | ||||||
|
|
|
|
|
|
Foreign tax rates represents the impact of the difference between foreign and U.S. federal statutory rates applied to foreign income or loss and also includes the impact of valuation allowances established against the Business otherwise realizable foreign deferred tax assets, which are primarily net operating loss carry-forwards.
The Business effective tax rate on income before income taxes was 37.9% in fiscal 2016 as compared with an effective tax rate of 42.0% in fiscal 2015. Included in the fiscal 2016 effective tax rate is a net tax expense of $4.3 million, which is comprised primarily of (i) a net tax expense of $1.5 million primarily related to audit settlements, and (ii) a net tax expense of $2.2 million related to the establishment of new reserves for uncertain tax positions. The fiscal 2016 effective tax rate is lower than the fiscal 2015 effective tax rate primarily due to the mix of income and the impact of fully valued entities.
The Business applies the guidance in ASC 740 Income Taxes, which requires management to use its judgment to determine the appropriate weighting of all available evidence when assessing the need for the establishment or the release of valuation allowances. As part of this analysis, the Business examines all available evidence on a jurisdiction
22
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
by jurisdiction basis and weighs the positive and negative evidence when determining the need for full or partial valuation allowances. The evidence considered for each jurisdiction includes, among other items: (i) the historic levels of income or losses over a range of time periods, which may extend beyond the most recent three fiscal years depending upon the historical volatility of income in an individual jurisdiction; (ii) expectations and risk associated with underlying estimates of future taxable income, including considering the historical trend of down-cycles in the Business served industries; (iii) jurisdictional specific limitations on the utilization of deferred tax assets including when such assets expire; and (iv) prudent and feasible tax planning strategies.
No provision for U.S. income taxes has been made for approximately $232.9 million of cumulative unremitted earnings of foreign subsidiaries at July 2, 2016, because those earnings are expected to be permanently reinvested outside the U.S. A hypothetical calculation of the deferred tax liability, assuming those earnings were remitted, is not practicable.
The significant components of deferred tax assets and liabilities, included in other assets on the combined balance sheets, are as follows:
July 2, | June 27, | |||||||
2016 | 2015 | |||||||
(Thousands) | ||||||||
Deferred tax assets: |
||||||||
Federal, state and foreign net operating loss carry-forwards |
$ | 51,935 | $ | 57,212 | ||||
Inventories valuation |
3,014 | 2,995 | ||||||
Receivables valuation |
7,393 | 9,764 | ||||||
62,342 | 69,971 | |||||||
Less valuation allowances |
(36,707 | ) | (43,468 | ) | ||||
|
|
|
|
|||||
25,635 | 26,503 | |||||||
Deferred tax liabilities: |
||||||||
Depreciation and amortization of property, plant and equipment |
(20,031 | ) | (19,702 | ) | ||||
Various accrued liabilities and other |
(8,111 | ) | (7,375 | ) | ||||
|
|
|
|
|||||
(28,142 | ) | (27,077 | ) | |||||
|
|
|
|
|||||
Net deferred tax assets |
$ | (2,507 | ) | $ | (574 | ) | ||
|
|
|
|
In addition to deferred tax assets, the Business also has $5.5 million of prepaid income taxes related to a certain jurisdiction in EMEA that are included as a component of other assets in the combined balance sheet as of July 2, 2016.
The change in valuation allowances in fiscal 2016 from fiscal 2015 was primarily due to (i) a $1.6 million decrease due to tax rate changes on valuation allowances previously established in various foreign jurisdictions, (ii) a $1.2 million reduction primarily due to the impact of currency on valuation allowances previously established in various foreign jurisdictions, and (iii) a net decrease of $3.9 million primarily related to previously established valuation allowances in various foreign jurisdictions.
As of July 2, 2016, the Business had foreign net operating loss carry-forwards of approximately $294.8 million, of which $115.1 million will expire during fiscal 2017 and 2018, substantially all of which have full valuation allowances or reserves, $22.9 million have expiration dates ranging from fiscal 2019 to 2036 and the remaining $156.9 million have no expiration date. The carrying value of the Business foreign net operating loss carry-forwards is dependent upon the Business ability to generate sufficient future taxable income in certain foreign tax jurisdictions. In addition, the Business considers historic levels of income or losses, expectations and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances.
Estimated liabilities for unrecognized tax benefits are included in accrued expenses and other and other
23
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
liabilities on the combined balance sheets. These contingent liabilities relate to various tax matters that result from uncertainties in the application of complex income tax regulations in the numerous jurisdictions in which the Business operates. The change in such liabilities during fiscal 2016 was primarily due to increases related to reserves for positions taken in the current year as presented in the following table. As of July 2, 2016, unrecognized tax benefits were $50.3 million, of which approximately $23.4 million, if recognized, would favorably impact the effective tax rate and the remaining balance would be substantially offset by valuation allowances. As of June 27, 2015, unrecognized tax benefits were $47.2 million, of which approximately $20.0 million, if recognized, would favorably impact the effective tax rate, and the remaining balance would be substantially offset by valuation allowances. The estimated liability for unrecognized tax benefits included accrued interest expense and penalties of $5.8 million and $6.9 million, net of applicable state tax benefits, as of the end of fiscal 2016 and 2015, respectively.
Reconciliations of the beginning and ending liability balances for unrecognized tax benefits are as follows:
July 2, 2016 | June 27, 2015 | |||||||
(Thousands) | ||||||||
Balance at beginning of year |
$ | 47,192 | $ | 61,850 | ||||
Additions for tax positions taken in prior periods, including interest |
2,815 | 1,121 | ||||||
Reductions for tax positions taken in prior periods, including interest |
(585 | ) | (354 | ) | ||||
Additions for tax positions taken in current period |
5,352 | 214 | ||||||
Reductions related to settlements with taxing authorities |
(555 | ) | (6,970 | ) | ||||
Reductions related to the lapse of applicable statutes of limitations |
(3,992 | ) | (415 | ) | ||||
Adjustments related to foreign currency translation |
67 | (8,254 | ) | |||||
|
|
|
|
|||||
Balance at end of year |
$ | 50,294 | $ | 47,192 | ||||
|
|
|
|
The evaluation of income tax positions requires management to estimate the ability of the Business to sustain its position and estimate the final benefit to the Business. To the extent that these estimates do not reflect the actual outcome there could be an impact on the combined financial statements in the period in which the position is settled, the applicable statutes of limitations expire or new information becomes available as the impact of these events are recognized in the period in which they occur. It is difficult to estimate the period in which the amount of a tax position will change as settlement may include administrative and legal proceedings whose timing the Business cannot control. The effects of settling tax positions with tax authorities and statute expirations may significantly impact the estimate for unrecognized tax benefits. Within the next twelve months, management estimates that approximately $5.2 million of these liabilities for unrecognized tax benefits will be settled by the expiration of the statutes of limitations or through agreement with the tax authorities for tax positions related to valuation matters and positions related to acquired entities; such matters are common to multinational companies. The expected cash payment related to the settlement of these contingencies is approximately $4.3 million.
The Business conducts business globally and consequently files income tax returns in numerous jurisdictions including those listed in the following table. It is also routinely subject to audit in these and other countries. The Business is no longer subject to audit in its major jurisdictions for periods prior to fiscal 2008. The years remaining subject to audit, by major jurisdiction, are as follows:
Jurisdiction |
Fiscal Year | |||
United States (Federal and state) |
2012 2016 | |||
Hong Kong and Germany |
2010 2016 | |||
Netherlands |
2008 2016 | |||
Belgium |
2014 2016 | |||
United Kingdom |
2009 2016 |
24
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
11. Operating leases
The Business leases many of its operating facilities and is also committed under lease agreements for transportation and operating equipment. Rent expense charged to operating expenses during the last three fiscal years is as follows:
Years Ended | ||||||||||||
July 2, | June 27, | June 28, | ||||||||||
2016 | 2015 | 2014 | ||||||||||
(Thousands) | ||||||||||||
Rent expense under operating leases |
$ | 16,024 | $ | 22,542 | $ | 26,329 |
The aggregate future minimum operating lease commitments, principally for office and warehouse space, in fiscal 2017 through 2021 and thereafter, are as follows (in thousands):
2017 |
$ | 31,997 | ||
2018 |
25,058 | |||
2019 |
20,831 | |||
2020 |
16,681 | |||
2021 |
12,179 | |||
Thereafter |
37,574 | |||
|
|
|||
Total |
$ | 144,320 | ||
|
|
The preceding table includes the remaining operating lease commitments that are included as a component of the Business restructuring liabilities (see Note 14).
12. Commitments and contingencies
From time to time, the Business 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 Business financial condition, liquidity or results of operations.
The Business also is currently subject to various pending and potential legal matters and investigations relating to compliance with governmental laws and regulations, including import/export. For certain of these matters it is not possible to determine the ultimate outcome, and the Business cannot reasonably estimate the maximum potential exposure or the range of possible loss for such matters due primarily to being in the preliminary stages of the related proceedings and investigations. The Business currently believes that the resolution of such matters will not have a material adverse effect on the Business financial position or liquidity, but could possibly be material to its results of operations in any one reporting period.
Subsequent to fiscal 2016, the Parent reached a legal settlement on behalf of the Business, resulting in the payment of $6.5 million to settle a lawsuit for an acquired business related to the operations of such business prior to the acquisition by TS.
25
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
13. Additional cash flow information
The Other, net component of non-cash and other reconciling items within operating activities in the combined statements of cash flows consisted of the following during the last three fiscal years:
July 2, | June 27, | June 28, | ||||||||||
2016 | 2015 | 2014 | ||||||||||
(Thousands) | ||||||||||||
Provision for doubtful accounts receivable |
$ | 4,863 | $ | 8,526 | $ | 4,584 | ||||||
Other, net |
1,513 | 5,604 | 3,610 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 6,376 | $ | 14,130 | $ | 8,194 | ||||||
|
|
|
|
|
|
Interest payments were $7.4 million, $8.6 million and $13.7 million in fiscal years 2016, 2015 and 2014, respectively. The Business made approximately $44.9 million, $35.3 million and $38.9 million of tax payments in fiscal years 2016, 2015, and 2014, respectively.
The Business had $1.5 million of non-cash distributions to the Parent in fiscal year 2015. The Business had $47.4 million of non-cash contributions from the Parent in fiscal year 2014.
The Business includes book overdrafts as part of accounts payable on its combined balance sheets and reflects changes in such balances as part of cash flows from operating activities in its combined statements of cash flows.
14. Restructuring, integration, amortization and other expenses
Fiscal 2016
During fiscal 2016, the Business took certain actions in an effort to reduce future operating expenses, including the continuation of the restructuring activities started in the fourth quarter of fiscal 2015. These actions include activities related to the Parents Avnet Advantage initiative, which is focused on creating long-term operational efficiencies. In addition, the Business incurred integration, amortization and other costs, including acquisition costs as discussed further below. The following table presents the restructuring, integration and other expenses recorded during fiscal 2016:
Year Ended | ||||
July 2, 2016 | ||||
(Thousands) | ||||
Restructuring expenses |
$ | 21,226 | ||
Integration costs |
3,650 | |||
Other costs, including acquisition costs |
11,859 | |||
Changes in estimates for prior year restructuring liabilities |
(2,176 | ) | ||
Amortization expense |
18,830 | |||
|
|
|||
Restructuring, integration, amortization and other expenses |
$ | 53,389 | ||
|
|
26
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The activity related to the restructuring liabilities established and other associated expenses incurred during fiscal 2016 is presented in the following table:
Facility | Asset | |||||||||||||||||||
Severance | Exit Costs | Impairments | Other | Total | ||||||||||||||||
(Thousands) | ||||||||||||||||||||
Fiscal 2016 restructuring expenses |
$ | 16,191 | $ | 3,517 | $ | 1,150 | $ | 368 | $ | 21,226 | ||||||||||
Cash payments |
(11,722 | ) | (533 | ) | | (209 | ) | (12,464 | ) | |||||||||||
Non-cash amounts |
| 37 | (1,150 | ) | (2 | ) | (1,115 | ) | ||||||||||||
Other, principally foreign currency translation |
(102 | ) | (57 | ) | | 63 | (96 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at July 2, 2016 |
$ | 4,367 | $ | 2,964 | $ | | $ | 220 | $ | 7,551 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Severance expense recorded in fiscal 2016 related to the reduction, or planned reduction, of approximately 300 employees, primarily in operations, sales and business support functions, in connection with cost reduction actions taken including the impact of a voluntary retirement program in the United States. Facility exit costs 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 actions taken in fiscal 2016. Other restructuring costs related primarily to other miscellaneous restructuring and exit costs. The Business expects the majority of the remaining severance and facility exit costs to be paid by the end of fiscal 2017.
Integration costs are primarily related to the integration of acquired businesses, the integration of certain regional businesses, the integration of significant information technology systems and incremental costs incurred as part of the consolidation, relocation and closure of warehouse and office facilities. Integration costs include certain consulting costs for significant new information technology systems and business operation integration assistance, facility moving costs, legal fees, travel, meeting, training, marketing and communication costs that are specifically and incrementally incurred as a result of such integration activities. Also included in integration costs are incremental salary costs specific to integration, consolidation and closure activities. Other costs consists primarily of professional fees incurred for acquisitions, costs incurred for businesses divested or closed in current or prior periods, any ongoing facilities operating costs associated with the consolidation, relocation and closure of facilities once such facilities have been vacated or substantially vacated, and other miscellaneous costs that relate to restructuring, integration and other expenses. Included in other costs during fiscal 2016 was $8.4 million of legal expenses related to lawsuits associated with operations of an acquired business prior to the Business acquisition, as discussed further in Note 12. The remaining integration and other costs in fiscal 2016 were comprised of many different costs, none of which were individually material.
27
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Fiscal 2015
During fiscal 2015, the Business 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 restructuring, integration, amortization and other expenses incurred during fiscal 2015:
Year Ended | ||||
June 27, 2015 | ||||
(Thousands) | ||||
Restructuring expenses |
$ | 32,724 | ||
Integration costs |
7,006 | |||
Other costs including acquisition costs |
10,798 | |||
Changes in estimates for prior year restructuring liabilities |
(1,573 | ) | ||
Amortization expense |
35,919 | |||
|
|
|||
Restructuring, integration, amortization and other expenses |
$ | 84,874 | ||
|
|
The fiscal 2016 activity related to the remaining restructuring liabilities established during fiscal 2015 is presented in the following table:
Facility | ||||||||||||||||
Severance | Exit Costs | Other | Total | |||||||||||||
(Thousands) | ||||||||||||||||
Balance at June 27, 2015 |
$ | 4,657 | $ | 494 | 158 | $ | 5,309 | |||||||||
Cash payments |
(2,842 | ) | (277 | ) | (5 | ) | (3,124 | ) | ||||||||
Changes in estimates, net |
(235 | ) | (189 | ) | (101 | ) | (525 | ) | ||||||||
Non-cash amounts |
| | | | ||||||||||||
Other, principally foreign currency translation |
26 | (28 | ) | | (2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at July 2, 2016 |
$ | 1,606 | $ | | $ | 52 | $ | 1,658 | ||||||||
|
|
|
|
|
|
|
|
As of July 2, 2016, management expects the majority of the remaining severance, facility exit and other liabilities to be utilized by the first half of fiscal 2017.
Fiscal 2014 and prior
During fiscal 2014 and prior fiscal years, the Business incurred expenses to reduce costs, including costs related to the acquisition and integration activities associated with acquired businesses as follows:
Year Ended | ||||
June 28, 2014 | ||||
(Thousands) | ||||
Restructuring expenses |
$ | 23,124 | ||
Integration costs |
6,295 | |||
Other costs including acquisition costs |
3,736 | |||
Changes in estimates for prior year restructuring liabilities |
(5,310 | ) | ||
Amortization expense |
29,059 | |||
|
|
|||
Restructuring, integration, amortization and other expenses |
$ | 56,904 | ||
|
|
As of June 27, 2015, there was $5.3 million of restructuring liabilities remaining related to restructuring actions taken in fiscal years 2014 and prior, the majority of which relates to facility exit costs. The remaining balance for such historical restructuring liabilities as of July 2, 2016 was $1.3 million, which is expected to be paid by the end of fiscal 2017.
28
TECHNOLOGY SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
15. Subsequent Events
In September of 2016, Avnet agreed to sell the then current Business to Tech Data Corporation. The sale and related sales agreements are subject to customary representations, warranties, covenants and closing conditions.
Subsequent events were evaluated through January 12, 2017, the date the Business financial statements were available to be issued for disclosure in the accompanying combined financial statements.
29
Exhibit 99.2
CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Technology Solutions
As of October 1, 2016 and July 2, 2016 and for the first quarters ended
October 1, 2016 and October 3, 2015
Table of Contents
Page | ||||
Condensed Combined Balance Sheets at October 1, 2016 and July 2, 2016 |
2 | |||
Condensed Combined Statements of Operations for the first quarters ended October 1, 2016 and October 3, 2015 |
3 | |||
Condensed Combined Statements of Comprehensive Income (Loss) for the first quarters ended October 1, 2016 and October 3, 2015 | 4 | |||
Condensed Combined Statements of Cash Flows for the first quarters ended October 1, 2016 and October 3, 2015 |
5 | |||
Notes to Condensed Combined Financial Statements |
6 |
1
TECHNOLOGY SOLUTIONS
CONDENSED COMBINED BALANCE SHEETS
(Unaudited)
October 1, | July 2, | |||||||
2016 | 2016 | |||||||
(Thousands) | ||||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 143,739 | $ | 149,107 | ||||
Receivables, less allowances of $36,452 and $34,357, respectively |
1,989,259 | 2,265,341 | ||||||
Inventories |
253,292 | 295,362 | ||||||
Prepaid and other current assets |
63,317 | 65,711 | ||||||
|
|
|
|
|||||
Total current assets |
2,449,607 | 2,775,521 | ||||||
Property, plant and equipment, net |
152,697 | 158,200 | ||||||
Goodwill |
661,812 | 659,368 | ||||||
Intangible assets, net |
51,571 | 55,826 | ||||||
Other assets |
42,943 | 43,516 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,358,630 | $ | 3,692,431 | ||||
|
|
|
|
|||||
LIABILITIES AND NET PARENT INVESTMENT | ||||||||
Current liabilities: |
||||||||
Short-term debt |
$ | 98,002 | $ | 102,544 | ||||
Accounts payable |
1,272,492 | 1,643,576 | ||||||
Accrued expenses and other |
173,090 | 231,674 | ||||||
|
|
|
|
|||||
Total current liabilities |
1,543,584 | 1,977,794 | ||||||
Other liabilities |
59,884 | 60,842 | ||||||
|
|
|
|
|||||
Total liabilities |
1,603,468 | 2,038,636 | ||||||
|
|
|
|
|||||
Commitments and contingencies (Note 7) |
||||||||
Net parent investment: |
||||||||
Net parent company investment |
1,931,527 | 1,821,592 | ||||||
Accumulated other comprehensive loss |
(176,365 | ) | (167,797 | ) | ||||
|
|
|
|
|||||
Total net parent investment |
1,755,162 | 1,653,795 | ||||||
|
|
|
|
|||||
Total liabilities and net parent investment |
$ | 3,358,630 | $ | 3,692,431 | ||||
|
|
|
|
See notes to condensed combined financial statements.
2
TECHNOLOGY SOLUTIONS
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
First Quarters Ended | ||||||||
October 1, | October 3, | |||||||
2016 | 2015 | |||||||
(Thousands) | ||||||||
Sales |
$ | 1,914,623 | $ | 2,426,369 | ||||
Cost of sales |
1,722,074 | 2,191,914 | ||||||
|
|
|
|
|||||
Gross profit |
192,549 | 234,455 | ||||||
Selling, general and administrative expenses |
162,339 | 178,313 | ||||||
Restructuring, amortization, integration and other expenses (Note 9) |
15,153 | 18,084 | ||||||
|
|
|
|
|||||
Operating income |
15,057 | 38,058 | ||||||
Foreign exchange losses (gains), net |
(1,329 | ) | 5,850 | |||||
Other expense (income), net |
(231 | ) | 935 | |||||
Interest expense, net |
1,375 | 1,003 | ||||||
|
|
|
|
|||||
Income before income taxes |
15,242 | 30,270 | ||||||
Income tax expense |
6,649 | 13,281 | ||||||
|
|
|
|
|||||
Net income |
$ | 8,593 | $ | 16,989 | ||||
|
|
|
|
See notes to condensed combined financial statements.
3
TECHNOLOGY SOLUTIONS
CONDENSED COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
First Quarters Ended | ||||||||
October 1, | October 3, | |||||||
2016 | 2015 | |||||||
(Thousands) | ||||||||
Net income |
$ | 8,593 | $ | 16,989 | ||||
Other comprehensive income(loss), net of tax: |
||||||||
Foreign currency translation adjustments and other adjustments |
(8,568 | ) | (22,876 | ) | ||||
|
|
|
|
|||||
Total comprehensive income(loss) |
$ | 25 | $ | (5,887 | ) | |||
|
|
|
|
See notes to condensed combined financial statements.
4
TECHNOLOGY SOLUTIONS
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
First Quarters Ended | ||||||||
October 1, | October 3, | |||||||
2016 | 2015 | |||||||
(Thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 8,593 | $ | 16,989 | ||||
Non-cash and other reconciling items: |
||||||||
Depreciation |
6,823 | 6,714 | ||||||
Amortization |
4,493 | 4,642 | ||||||
Stock-based compensation |
7,519 | 10,486 | ||||||
Pension expenses |
2,932 | 3,626 | ||||||
Other, net |
43 | 3,455 | ||||||
Changes in (net of effects from businesses acquired): |
||||||||
Receivables |
278,504 | (67,641 | ) | |||||
Inventories |
43,167 | (25,989 | ) | |||||
Accounts payable |
(375,734 | ) | 18,585 | |||||
Accrued expenses and other, net |
(70,880 | ) | 27,536 | |||||
|
|
|
|
|||||
Net cash flows used by operating activities |
(94,540 | ) | (1,597 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Borrowings (repayments) of short-term debt, net |
(4,757 | ) | 1,693 | |||||
Contributions (to)/from Parents, net |
93,824 | 7,326 | ||||||
|
|
|
|
|||||
Net cash flows provided by financing activities |
89,067 | 9,019 | ||||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Purchases of property, plant and equipment |
(922 | ) | (1,793 | ) | ||||
Other, net |
177 | (1,607 | ) | |||||
|
|
|
|
|||||
Net cash flows used for investing activities |
(745 | ) | (3,400 | ) | ||||
|
|
|
|
|||||
Effect of currency exchange rate changes on cash and cash equivalents |
850 | (2,271 | ) | |||||
|
|
|
|
|||||
Cash and cash equivalents: |
||||||||
(decrease) increase |
(5,368 | ) | 1,751 | |||||
at beginning of period |
149,107 | 85,762 | ||||||
|
|
|
|
|||||
at end of period |
$ | 143,739 | $ | 87,513 | ||||
|
|
|
|
Additional cash flow information (Note 8)
See notes to condensed combined financial statements.
5
TECHNOLOGY SOLUTIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
1. Description of Business and Basis of Presentation
Basis of Presentation
The accompanying unaudited condensed combined interim financial statements reflect the ongoing operations of the Technology Solutions operating group (the Business or TS) of Avnet, Inc. (Avnet, or Parent) and have been derived from the consolidated financial statements and accounting records of Avnet. The Business is controlled by Avnet, a publicly traded company listed on the New York Stock Exchange. Avnet is a global value-added distributor of electronic components, enterprise computer and storage products, IT solutions and services and embedded subsystems.
Certain information and footnote disclosures, including critical and significant accounting policies normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted for this interim presentation.
Interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year. The information included in this report should be read in conjunction with the condensed combined financial statements as of July 2, 2016 and June 27, 2015 and for the years ended July 2, 2016, June 27, 2015, and June 28, 2014.
Fiscal year
The Business operates on a 52/53 week fiscal year and fiscal 2017 contains 52 weeks compared to 53 weeks in fiscal 2016. As a result, the first quarter of fiscal 2017 contained 13 weeks compared to the first quarter of fiscal 2016, which contained 14 weeks.
New accounting pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). The update requires a lessee to recognize assets and liabilities on the condensed combined balance sheets for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The update will be effective for the Business in the first quarter of fiscal 2020, using a modified retrospective approach. The Business is currently evaluating the impact of the adoption of ASU 2016-02 on its condensed combined financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), as amended, to supersede nearly all existing revenue recognition guidance under GAAP. The core principles of ASU 2014-09 are to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Application of the guidance in ASU 2014-09 may require more judgment and estimates within the revenue recognition process compared to existing GAAP. In July 2015, the FASB approved a one-year delay in the effective date of ASU 2014-09, which makes the effective date for the Business the first quarter of fiscal 2019. The Business may adopt the requirements of ASU 2014-09 using either of two acceptable adoption methods: (i) retrospective adoption to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) adoption with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined within ASU 2014-09. The Business is currently evaluating the impact of the future adoption of ASU 2014-09 on its condensed combined financial statements, including the method of adoption to be used.
6
TECHNOLOGY SOLUTIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
2. Derivative financial instruments
Many of the Business subsidiaries purchase and sell products in currencies other than their functional currencies. This subjects the Business to the risks associated with fluctuations in foreign currency exchange rates. The Business reduces this risk by utilizing natural hedging (i.e., 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 currency exchange contracts typically with maturities of less than 60 days (economic hedges). The Business continues to have exposure to foreign currency risks to the extent they are not hedged. The Business adjusts any economic hedges to fair value through the condensed combined statements of operations primarily within other expense, net. Therefore, the changes in valuation of the underlying items being economically hedged are offset by the changes in fair value of the forward foreign exchange contracts. The fair value of forward foreign currency exchange contracts, which are based upon Level 2 criteria under the ASC 820 fair value hierarchy, are classified in the captions other current assets or accrued expenses and other, as applicable, in the accompanying condensed combined balance sheets as of October 1, 2016, and July 2, 2016. The Business master netting and other similar arrangements with various financial institutions related to derivative financial instruments allow for the right of offset. Derivative financial instruments with the same counterparty are presented as either a net asset or liability when the right of offset exists.
The Business generally does not hedge its investments in its foreign operations. The Business does not enter into derivative financial instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties.
The Business 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 Business foreign operations transactions are denominated primarily in the following currencies: U.S. Dollar, Euro, British Pound, Canadian Dollar, Australian Dollar and Mexican Peso. The Business also, to a lesser extent, has foreign operations transactions in other European, Latin American and Asian foreign currencies.
The fair values of derivative financial instruments in the Business condensed combined balance sheets are as follows:
October 1, | July 2, | |||||||
2016 | 2016 | |||||||
(Thousands) | ||||||||
Forward foreign currency exchange contracts not receiving hedge accounting treatment recorded in: |
||||||||
Other current assets |
$ | 10 | $ | | ||||
Accrued expenses |
338 | 286 |
The amounts recorded to foreign exchange gain, net related to derivative financial instruments are as follows:
Three Months Ended | ||||||||
October 1, | October 3, | |||||||
2016 | 2015 | |||||||
(Thousands) | ||||||||
Net derivative financial instrument gain |
$ | 862 | $ | 15,098 |
Under the economic hedging approach, gains and losses on the derivative financial instruments are partially offset by the gains and losses on the underlying assets or liabilities being hedged.
7
TECHNOLOGY SOLUTIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
3. Related Party Transactions
The condensed combined financial statements have been prepared on a stand-alone basis and have been derived from the consolidated financial statements and accounting records of Avnet.
Allocation of General Corporate Expense
During the three months ended October 1, 2016 and October 3, 2015, TS was allocated $40.5 million and $42.9 million, respectively, of support and general corporate expenses incurred by Avnet which are included within selling, general and administrative expenses in the condensed combined statements of operations.
The expense allocations have been determined on a basis management considers to be a reasonable reflection of the utilization of services provided or the benefit received by the Business during the periods presented. The allocations may not, however, reflect the expense the Business would have incurred as an independent company for the periods presented. Actual costs that may have been incurred if the Business had been a standalone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.
Pension and Retirement Plans
The Business employees participate in the defined benefit pension plan of the Parent. Avnets noncontributory defined benefit pension plan (the Plan) covers substantially all U.S. employees. The Plan itself, however, is a cash balance plan that is similar in nature to a defined contribution plan in that a participants benefit is defined in terms of a stated account balance. Employees are eligible to participate in the Plan following the first year of service during which they worked at least 1,000 hours.
The Plan provides defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit based upon a percentage of current salary, which varies with age, and interest credits. Avnet uses its fiscal year end as the measurement date for determining pension expense and benefit obligations for each fiscal year. Additionally, Avnet has pension plans of certain non-U.S. subsidiaries and other defined benefit plans, which are not considered material. The Business share of defined benefit plan costs were $2.9 million and $3.6 million for the three months ended October 1, 2016 and October 3, 2015, respectively. These expenses are included in selling, general and administrative expenses in the condensed combined statements of operations.
Stock-based Compensation
Avnets incentive compensation programs primarily consist of share awards, restricted share awards or stock options (any of which may be a performance award). Certain Parent employees supporting the Business operations, including certain employees dedicated to the Business, were historically granted these types of awards. These share-based compensation costs have been allocated to the Business as part of the general corporate expense allocations from the Parent, described above. These costs totaled $7.5 million and $10.5 million for the three months ended October 1, 2016 and October 3, 2015, respectively. The underlying equity for all awards granted under the plans consists of Avnet common shares. Accordingly, the amounts presented are not necessarily indicative of future performance and do not necessarily reflect the results the Business would have experienced as an independent company for the periods presented. Share-based compensation expense is included in general and administrative expenses in the accompanying condensed combined statements of operations.
8
TECHNOLOGY SOLUTIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
4. Goodwill and intangible assets
The following table presents the change in goodwill balances for the three months ended October 1, 2016. All of the accumulated impairment was recognized in fiscal 2009.
Total | ||||
(Thousands) | ||||
Gross goodwill |
$ | 993,992 | ||
Accumulated impairment |
(334,624 | ) | ||
|
|
|||
Carrying value at July 2, 2016 |
659,368 | |||
|
|
|||
Additions |
| |||
Adjustments |
| |||
Foreign currency translation |
2,444 | |||
|
|
|||
Carrying value at October 1, 2016 |
$ | 661,812 | ||
|
|
|||
Gross goodwill |
$ | 996,436 | ||
Accumulated impairment |
(334,624 | ) | ||
|
|
|||
Carrying value at October 1, 2016 |
$ | 661,812 | ||
|
|
Goodwill adjustments represent the net purchase accounting adjustments for acquisitions during the related measurement periods.
The following table presents the Business acquired identifiable intangible assets at October 1, 2016 and July 2, 2016, respectively:
October 1, 2016 | July 2, 2016 | |||||||||||||||||||||||
Acquired | Accumulated | Net Book | Acquired | Accumulated | Net Book | |||||||||||||||||||
Amount | Amortization | Value | Amount | Amortization | Value | |||||||||||||||||||
(Thousands) | ||||||||||||||||||||||||
Customer related |
$ | 163,424 | $ | (112,998 | ) | $ | 50,426 | $ | 163,189 | $ | (108,479 | ) | $ | 54,710 | ||||||||||
Trade name and other |
1,159 | (14 | ) | 1,145 | 1,129 | (13 | ) | 1,116 | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 164,583 | $ | (113,012 | ) | $ | 51,571 | $ | 164,318 | $ | (108,492 | ) | $ | 55,826 |
Intangible asset amortization expense was $4.5 million and $4.6 million for the first quarters of fiscal 2017 and 2016, respectively. Intangible assets have a weighted average remaining life of approximately 4 years as of October 1, 2016. The following table presents the estimated future amortization expense for the next five fiscal years and thereafter (in thousands):
Fiscal Year |
||||
Remainder of fiscal 2017 |
$ | 14,120 | ||
2018 |
9,355 | |||
2019 |
9,311 | |||
2020 |
9,311 | |||
2021 |
6,329 | |||
Thereafter |
3,145 | |||
|
|
|||
Total |
$ | 51,571 |
9
TECHNOLOGY SOLUTIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
5. Debt
Short-term debt consists of the following (in thousands):
October 1, 2016 | July 2, 2016 | October 1, 2016 | July 2, 2016 | |||||||||||||
Interest Rate | Carrying Balance | |||||||||||||||
Bank credit facilities and other |
5.44 | % | 5.30 | % | $ | 98,002 | $ | 102,544 | ||||||||
|
|
|
|
|||||||||||||
Short-term debt |
$ | 98,002 | $ | 102,544 | ||||||||||||
|
|
|
|
Bank credit facilities and other consist 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 Business including its foreign operations. These facilities are short-term in nature due to the ability for the counterparties to terminate or demand payment upon notice to the Business. The Parent has guaranteed $35.3 million and $34.8 million of such facilities as of October 1, 2016 and July 2, 2016, respectively
The Business has historically participated in the Parents accounts receivable securitization program (the Program). Under the Program, the Business, for the benefit of the Parent, 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 condensed combined balance sheets, totaled $663.3 million and $696.4 million at October 1, 2016 and July 2, 2016, respectively, and serve as security under the Program.
6. Income taxes
The Business effective tax rate on income before income taxes was 43.6% in the first quarter of 2017 as compared with an effective tax rate of 43.9% in the first quarter of fiscal 2016. During the first quarter of fiscal 2017 and fiscal 2016, the Business effective tax rate was unfavorably impacted primarily by audit settlements, partially offset by a favorable mix of income in lower tax jurisdictions and unfavorably impacted primarily by audit settlements.
The Business applies the guidance in ASC 740 Income Taxes, which requires management to use its judgment to the appropriate weighting of all available evidence when assessing the need for the establishment or the release of valuation allowances. As part of this analysis, the Business examines all available evidence on a jurisdiction by jurisdiction basis and weighs the positive and negative evidence when determining the need for full or partial valuation allowances. The evidence considered for each jurisdiction includes, among other items: (i) the historic levels of income or losses over a range of time periods, which may extend beyond the most recent three fiscal years depending upon the historical volatility of income in an individual jurisdiction; (ii) expectations and risk associated with underlying estimates of future taxable income, including considering the historical trend of down-cycles in the Business served industries; (iii) jurisdictional specific limitations on the utilization of deferred tax assets including when such assets expire; and (iv) prudent and feasible tax planning strategies. Amounts presented in these condensed combined financial statements related to income taxes have been determined on a separate tax return basis.
7. Commitments and contingencies
From time to time, the Business 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 Business financial condition, liquidity or results of operations. The Business also is currently subject to various pending and potential legal matters and investigations relating to compliance with governmental laws and regulations, including import/export. For certain of these matters it is not possible to determine the ultimate outcome, and the Business cannot reasonably estimate the maximum potential exposure or the range of possible loss for such matters due primarily to being in the preliminary stages of the related proceedings and investigations. The Business currently believes that the resolution of such matters will not have a material adverse effect on the Business financial position or liquidity, but could possibly be material to its results of operations in any one interim period.
10
TECHNOLOGY SOLUTIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
In the first quarter of fiscal 2017, the Parent reached a legal settlement on behalf of the Business, resulting in the payment of $6.5 million to settle a lawsuit for an acquired business related to the operations of such business prior to the acquisition by the Business.
8. Additional cash flow information
The Other, net component of non-cash and other reconciling items within operating activities in the condensed combined statements of cash flows consisted of the following during the first three months of fiscal 2017 and 2016:
October 1, | October 3, | |||||||
2016 | 2015 | |||||||
(Thousands) | ||||||||
Provision for doubtful accounts receivable |
$ | 32 | $ | 1,633 | ||||
Other, net |
11 | 1,822 | ||||||
|
|
|
|
|||||
Total |
$ | 43 | $ | 3,455 | ||||
|
|
|
|
Interest payments were $0.4 million and $0.9 million during the first quarters of fiscal 2017 and 2016, respectively.
The Business includes book overdrafts as part of accounts payable on its condensed combined balance sheets and reflects changes in such balances as part of cash flows from operating activities in its condensed combined statements of cash flows.
9. Restructuring, integration, amortization and other expenses
Fiscal 2017
During the first quarter of fiscal 2017, the Business took certain actions in an effort to reduce future operating expenses. These actions include activities related to the Parents Avnet Advantage initiative, which is focused on creating long-term operational efficiencies. In addition, the Business incurred integration, amortization and other costs, including legal settlement costs as discussed further below. The following table presents the restructuring, integration, amortization and other expenses recorded during the first three months of fiscal 2017:
Quarter Ended | ||||
October 1, 2016 | ||||
(Thousands) | ||||
Restructuring expenses |
$ | 3,183 | ||
Integration costs |
161 | |||
Other costs, including acquisition costs |
7,845 | |||
Changes in estimates for prior year restructuring liabilities |
(529 | ) | ||
Amortization expense |
4,493 | |||
|
|
|||
Restructuring, integration, amortization and other expenses |
$ | 15,153 | ||
|
|
11
TECHNOLOGY SOLUTIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
The activity related to the restructuring liabilities established and other associated expenses incurred during 2017 is presented in the following table:
Facility | ||||||||||||||||
Severance | Exit Costs | Other | Total | |||||||||||||
(Thousands) | ||||||||||||||||
Fiscal 2017 restructuring expenses |
$ | 1,816 | $ | 1,300 | $ | 67 | $ | 3,183 | ||||||||
Cash payments |
(872 | ) | (112 | ) | (29 | ) | (1,013 | ) | ||||||||
Non-cash amounts |
| | | | ||||||||||||
Other, principally foreign currency translation |
1 | | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at October 1, 2016 |
$ | 945 | $ | 1,188 | $ | 38 | $ | 2,171 | ||||||||
|
|
|
|
|
|
|
|
Severance expense recorded in the first quarter of fiscal 2017 related to the reduction, or planned reduction, of over 100 employees, primarily in senior management, operations, sales and business support functions. Facility exit costs primarily consist of liabilities for remaining lease obligations for exited facilities. Other restructuring costs related primarily to other miscellaneous restructuring and exit costs. The Business expects the majority of the remaining severance and facility exit costs to be paid by the end of fiscal 2017.
Integration costs are primarily related to the integration of acquired businesses, the integration of certain regional businesses, the integration of significant information technology systems and incremental costs incurred as part of the consolidation, relocation and closure of warehouse and office facilities. Integration costs include certain consulting costs for significant new information technology systems and business operation integration assistance, facility moving costs, legal fees, travel, meeting, training, marketing and communication costs that are specifically and incrementally incurred as a result of such integration activities. Also included in integration costs are incremental salary costs specific to integration, consolidation and closure activities. Other costs consists primarily of professional fees incurred for acquisitions, costs incurred for businesses divested or closed in current or prior periods, any ongoing facilities operating costs associated with the consolidation, relocation and closure of facilities once such facilities have been vacated or substantially vacated, and other miscellaneous costs that relate to restructuring, integration and other expenses. Included in other costs during the first quarter of fiscal 2017 was $6.5 million of expense to settle a lawsuit for an acquired business related to the operations of such business prior to the acquisition by the Business.
Fiscal 2016
During fiscal 2016, the Business incurred restructuring expenses related to various restructuring actions intended to reduce future operating expenses. The following table presents the activity during the first three months of fiscal 2017 related to the remaining restructuring liabilities established during fiscal 2016:
Facility | ||||||||||||||||
Severance | Exit Costs | Other | Total | |||||||||||||
(Thousands) | ||||||||||||||||
Balance at July 2, 2016 |
$ | 4,367 | $ | 2,964 | $ | 220 | $ | 7,551 | ||||||||
Cash payments |
(2,695 | ) | (468 | ) | (46 | ) | (3,209 | ) | ||||||||
Changes in estimates, net |
(389 | ) | 146 | 62 | (181 | ) | ||||||||||
Non-cash amounts |
| | (60 | ) | (60 | ) | ||||||||||
Other, principally foreign currency translation |
(13 | ) | (1 | ) | (56 | ) | (70 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at October 1, 2016 |
$ | 1,270 | $ | 2,641 | $ | 120 | $ | 4,031 | ||||||||
|
|
|
|
|
|
|
|
As of October 1, 2016, management expects the majority of the remaining severance, facility exit and other liabilities to be utilized by the end of fiscal 2017.
12
TECHNOLOGY SOLUTIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
Fiscal 2015 and prior
As of July 2, 2016, there was $3.0 million of restructuring liabilities remaining related to restructuring actions taken in fiscal years 2015 and prior, the majority of which relates to facility exit costs. The remaining balance for such historical restructuring liabilities as of October 1, 2016 was $2.0 million, which is expected to be paid by the end of fiscal 2017.
10. Subsequent Events
Subsequent events were evaluated through January 17, 2017, the date these condensed combined unaudited financial statements were available to be issued.
13
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements have been prepared to illustrate the effect of the Proposed Acquisition and the Debt Financing (as defined herein). The unaudited pro forma condensed combined financial statements have been prepared for informational purposes only and are not necessarily indicative of what the combined companys condensed combined financial position or results of operations actually would have been had the Proposed Acquisition and the Debt Financing been completed as of the dates indicated below. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or operating results of the combined company.
The unaudited pro forma condensed combined balance sheet gives effect to the Proposed Acquisition and the Debt Financing as if those events had occurred on October 31, 2016, while the unaudited pro forma condensed combined statements of income for the year ended January 31, 2016 and the nine months ended October 31, 2016 each give effect to the Proposed Acquisition and the Debt Financing as if those events had occurred on February 1, 2015. The historical financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to events that are (i) directly attributable to the Proposed Acquisition and the Debt Financing, (ii) factually supportable, and (iii) with respect to the statements of income, expected to have a continuing impact on the combined company. The unaudited pro forma condensed combined statements of income do not reflect any non-recurring charges directly related to the Proposed Acquisition and the Debt Financing that the combined company may incur upon completion of the Proposed Acquisition and the Debt Financing. Further, because the tax rate used for these unaudited pro forma condensed combined financial statements is an estimated statutory tax rate, it will likely vary from the actual effective rate in periods subsequent to the completion of the Proposed Acquisition and the Debt Financing.
Until the Proposed Acquisition is completed, both companies are limited in their ability to share information with each other. Therefore, the preliminary purchase price allocation was based on discussions with Avnets management, Tech Datas historical experience, data that were available through publicly available information and Tech Datas due diligence review of the Acquired Business (as defined herein). Each of the adjustments is preliminary and is based on certain estimates and currently available information and is subject to further adjustments as additional information becomes available and as additional analyses are performed. Management believes that all significant adjustments necessary to reflect the effects of the Proposed Transaction and the Debt Financing are included in the accompanying unaudited pro forma condensed combined financial statements and are deemed to be reasonable.
Upon completion of the Proposed Acquisition, additional valuation procedures are expected to be performed and any increases or decreases in the fair value of the assets acquired or liabilities assumed will result in adjustments to the unaudited pro forma condensed combined financial statements until the purchase price allocation is finalized. These adjustments could be material. The preliminary purchase price allocation has been made solely for the purpose of preparing the accompanying unaudited pro forma condensed combined financial statements and is not necessarily indicative of what the actual combined financial position or results of operations of Tech Data and the Acquired Business would have been as of and for the periods presented, nor does it purport to represent the future combined financial position or results of operations of Tech Data and the Acquired Business.
The unaudited pro forma condensed combined financial statements do not reflect the impact of any potential cost savings or efficiencies that Tech Data may achieve from the combination of the two entities.
The following unaudited pro forma condensed combined financial statements have been derived from our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016, our unaudited consolidated financial statements included in our Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2016 and the combined financial statements of the Acquired Business filed as Exhibits 99.1 and 99.2 to our Current Report on Form 8-K filed with the SEC on January 17, 2017. The pro forma condensed combined balance sheet and the pro forma condensed combined statement of income as of and for the nine months ended October 31, 2016 and the condensed combined statement of income for the year ended January 31, 2016 have been prepared utilizing period ends for Tech Data and the Acquired Business that differ by fewer than 93 days, as permitted by Regulation S-X.
The historical financial data for the Acquired Business for the year ended January 2, 2016 are derived by adding the financial data from the Acquired Business audited combined statements of income for the years ended July 2, 2016 and June 27, 2015, and subtracting the Acquired Business unaudited combined statement of income for the six-month periods ended July 2, 2016 and December 27, 2014. The historical financial data for the Acquired Business for the nine-month period ended October 1, 2016 are derived by adding the financial data from the Acquired Business audited combined statement of income for the year ended July 2, 2016 and the unaudited condensed combined statement of income for the three-month period ended October 1, 2016, and subtracting the Acquired Business unaudited combined statement of income for the six-month period ended January 2, 2016.
2
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF OCTOBER 31, 2016
(In thousands)
Historical | ||||||||||||||||||||||||
As of October 31, 2016 |
As of October 1, 2016 |
As of October 31, 2016 |
||||||||||||||||||||||
Tech Data | Acquired Business |
Reclassification Adjustments 3(k) |
Pro Forma Adjustments |
Notes | Pro Forma Combined |
|||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 691,565 | $ | 143,739 | $ | | $ | (380,345 | ) | 3(a) | $ | 454,959 | ||||||||||||
Accounts receivable, less allowances |
2,866,028 | 1,989,259 | | | 4,855,287 | |||||||||||||||||||
Inventories |
2,253,962 | 253,292 | | | 2,507,254 | |||||||||||||||||||
Prepaid expenses and other assets |
129,227 | 63,317 | | 1,220 | 3(e) | 193,764 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current assets |
5,940,782 | 2,449,607 | | (379,125 | ) | 8,011,264 | ||||||||||||||||||
Property and equipment, net |
72,700 | 152,697 | (87,011 | ) | | 138,386 | ||||||||||||||||||
Goodwill |
199,079 | 661,812 | | 18,540 | 3(b) | 879,431 | ||||||||||||||||||
Intangible assets, net |
137,390 | 51,571 | 87,011 | 887,429 | 3(b) | 1,163,401 | ||||||||||||||||||
Other assets, net |
112,713 | 42,943 | | (4,999 | ) | 3(c), (d), (e) | 150,657 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 6,462,664 | $ | 3,358,630 | $ | | $ | 521,845 | $ | 10,343,139 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Short term debt |
$ | | $ | 98,002 | $ | (98,002 | ) | $ | | $ | | |||||||||||||
Accounts payable |
3,495,096 | 1,272,492 | | (7,523 | ) | 3(f) | 4,760,065 | |||||||||||||||||
Accrued expenses and other liabilities |
432,661 | 173,090 | | | 605,751 | |||||||||||||||||||
Revolving credit loans and current maturities of long-term debt, net |
365,417 | | 98,002 | 39,498 | 3(g) | 502,917 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current liabilities |
4,293,174 | 1,543,584 | | 31,975 | 5,868,733 | |||||||||||||||||||
Long term debt, less current maturities |
| | | 1,951,263 | 3(g) | 1,951,263 | ||||||||||||||||||
Other liabilities |
| 59,884 | (59,884 | ) | | | ||||||||||||||||||
Other long term liabilities |
77,051 | | 59,884 | 78,719 | 3(c) | 215,654 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities |
4,370,225 | 1,603,468 | | 2,061,957 | 8,035,650 | |||||||||||||||||||
Commitments and contingencies |
||||||||||||||||||||||||
Shareholders equity: |
||||||||||||||||||||||||
Common stock |
89 | | | | 89 | |||||||||||||||||||
Additional paid-in capital |
683,211 | | | 117,378 | 3(h) | 800,589 | ||||||||||||||||||
Treasury stock, at cost |
(1,071,238 | ) | | | 124,200 | 3(h) | (947,038 | ) | ||||||||||||||||
Retained earnings |
2,550,471 | | | (26,528 | ) | 3(i) | 2,523,943 | |||||||||||||||||
Net parent company investment |
| 1,931,527 | | (1,931,527 | ) | 3(j) | | |||||||||||||||||
Accumulated other comprehensive loss |
(70,094 | ) | (176,365 | ) | | 176,365 | 3(j) | (70,094 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total shareholders equity |
2,092,439 | 1,755,162 | | (1,540,112 | ) | 2,307,489 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities and shareholders equity |
$ | 6,462,664 | $ | 3,358,630 | $ | | $ | 521,845 | $ | 10,343,139 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
3
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED JANUARY 31, 2016
(In thousands, except per share data)
Historical | ||||||||||||||||||||||||
Year Ended January 31, 2016 |
Year Ended January 2, 2016 |
Year Ended January 31, 2016 |
||||||||||||||||||||||
Tech Data | Acquired Business |
Reclassification Adjustments |
Pro Forma Adjustments |
Notes | Pro Forma Combined |
|||||||||||||||||||
Net sales |
$ | 26,379,783 | $ | 9,707,314 | $ | | $ | | $ | 36,087,097 | ||||||||||||||
Cost of products sold |
25,093,122 | 8,734,814 | 17,035 | | 33,844,971 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Gross profit |
1,286,661 | 972,500 | (17,035 | ) | | 2,242,126 | ||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Selling, general and administrative expenses |
990,934 | 704,970 | 88,405 | 34,049 | 4 | (a) | 1,818,358 | |||||||||||||||||
LCD settlements and other, net |
(98,433 | ) | | | | (98,433 | ) | |||||||||||||||||
Value added tax assessments |
(8,796 | ) | | | | (8,796 | ) | |||||||||||||||||
Restructuring, amortization, integration and other expenses |
| 88,405 | (88,405 | ) | | | ||||||||||||||||||
Restatement and remediation related expenses |
829 | | | | 829 | |||||||||||||||||||
Loss on disposal of subsidiaries |
699 | | | | 699 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
885,233 | 793,375 | | 34,049 | 1,712,657 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating income |
401,428 | 179,125 | (17,035 | ) | (34,049 | ) | 529,469 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Interest expense |
14,488 | 5,144 | 1,893 | 65,935 | 4 | (b) | 87,460 | |||||||||||||||||
Foreign exchange losses, net |
| 17,035 | (17,035 | ) | | | ||||||||||||||||||
Other expense (income), net |
4,522 | 7,508 | (1,893 | ) | | 10,137 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income taxes |
382,418 | 149,438 | | (99,984 | ) | 431,872 | ||||||||||||||||||
Provision for income taxes |
116,682 | 54,076 | | (38,370 | ) | 4 | (c) | 132,388 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income |
$ | 265,736 | $ | 95,362 | $ | | $ | (61,614 | ) | $ | 299,484 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Earnings per share: |
||||||||||||||||||||||||
Basic |
$ | 7.40 | $ | 7.74 | ||||||||||||||||||||
Diluted |
7.36 | 7.70 | ||||||||||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||||||||||
Basic |
35,898 | 4 | (e) | 38,683 | ||||||||||||||||||||
Diluted |
36,097 | 4 | (e) | 38,882 |
4
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED OCTOBER 31, 2016
(In thousands, except per share data)
Historical | ||||||||||||||||||||||||
Nine Months Ended October 31, 2016 |
Nine Months Ended October 1, 2016 |
Nine Months Ended October 31, 2016 |
||||||||||||||||||||||
Tech Data | Acquired Business |
Reclassification Adjustments |
Pro Forma Adjustments |
Notes | Pro Forma Combined |
|||||||||||||||||||
Net sales |
$ | 18,807,366 | $ | 6,242,395 | $ | | $ | | $ | 25,049,761 | ||||||||||||||
Cost of products sold |
17,876,466 | 5,600,973 | 3,883 | | 23,481,322 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Gross profit |
930,900 | 641,422 | (3,883 | ) | | 1,568,439 | ||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Selling, general and administrative expenses |
730,211 | 507,335 | 37,668 | 45,296 | 4 | (a) | 1,320,510 | |||||||||||||||||
Acquisition and integration expenses |
14,997 | | | (14,997 | ) | 4 | (d) | | ||||||||||||||||
LCD settlements and other, net |
(4,142 | ) | | | | (4,142 | ) | |||||||||||||||||
Value added tax assessments |
1,049 | | | | 1,049 | |||||||||||||||||||
Restructuring, amortization, integration and other expenses |
| 37,668 | (37,668 | ) | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
742,115 | 545,003 | | 30,299 | 1,317,417 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating income |
188,785 | 96,419 | (3,883 | ) | (30,299 | ) | 251,022 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Interest expense |
21,364 | 4,490 | 1,652 | 44,515 | 4 | (b) | 72,021 | |||||||||||||||||
Foreign exchange losses, net |
| 3,883 | (3,883 | ) | | | ||||||||||||||||||
Other expense (income), net |
(517 | ) | (1,371 | ) | (1,652 | ) | | (3,540 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income taxes |
167,938 | 89,417 | | (74,814 | ) | 182,541 | ||||||||||||||||||
Provision for income taxes |
51,665 | 35,105 | | (28,407 | ) | 4 | (c) | 58,363 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income |
$ | 116,273 | $ | 54,312 | $ | | $ | (46,407 | ) | $ | 124,178 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Earnings per share: |
||||||||||||||||||||||||
Basic |
$ | 3.30 | $ | 3.27 | ||||||||||||||||||||
Diluted |
3.29 | 3.25 | ||||||||||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||||||||||
Basic |
35,184 | 4 | (e) | 37,969 | ||||||||||||||||||||
Diluted |
35,393 | 4 | (e) | 38,178 |
5
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The historical financial information has been adjusted to give pro forma effect to events that are (i) directly attributable to the Proposed Acquisition, (ii) factually supportable, and (iii) expected to have a continuing impact on the combined results. The pro forma adjustments are preliminary and based on estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the Proposed Acquisition and certain other adjustments. The final determination of the purchase price allocation will be based on the fair values of assets acquired and liabilities assumed as of the date the Proposed Acquisition closes, and could result in a significant change to the unaudited pro forma condensed combined financial statements, including goodwill.
Tech Datas historical results are derived from Tech Datas audited consolidated statement of income for the year ended January 31, 2016 and unaudited interim consolidated statement of income for the nine months ended October 31, 2016. The historical financial data for the Acquired Business for the year ended January 2, 2016 are derived by adding the financial data from the Acquired Business audited combined statements of income for the years ended July 2, 2016 and June 27, 2015, and subtracting the Acquired Business unaudited combined statement of income for the six-month periods ended July 2, 2016 and December 27, 2014. The historical financial data for the Acquired Business for the nine-month period ended October 1, 2016 are derived by adding the financial data from the Acquired Business audited combined statement of income for the year ended July 2, 2016 and the unaudited condensed combined statement of income for the three-month period ended October 1, 2016, and subtracting the Acquired Business unaudited combined statement of income for the six-month period ended January 2, 2016.
Significant Accounting Policies
The accounting policies used in the preparation of these unaudited pro forma condensed combined financial statements are those set out in Tech Datas audited financial statements as of January 31, 2016 and the Acquired Business audited financial statements as of July 2, 2016. Management has determined that no significant adjustments are necessary to conform the Acquired Business financial statements to the accounting policies used by Tech Data in the preparation of these unaudited pro forma condensed combined financial statements. Certain reclassifications have been reflected in the pro forma adjustments, as further described in Note 3, to conform the Acquired Business presentation to Tech Datas in the pro forma balance sheet. The pro forma financial statements may not reflect all adjustments necessary to conform the accounting policies of the Acquired Business to those of Tech Data due to limitations on the availability of information.
Description of the Acquisition
On September 19, 2016, we entered into an Interest Purchase Agreement (the Acquisition Agreement) with Avnet to acquire (the Proposed Acquisition) all the shares of AVT Technology Solutions LLC (AVT) and TS Divestco B.V. (together with AVT, the Acquired Companies), which will hold all assets and liabilities primarily relating to the technology solutions business of Avnet (the Acquired Business) following completion of the Reorganization (as defined below).
Concurrently with the execution of the Acquisition Agreement, we entered into (i) a Reorganization Agreement (the Reorganization Agreement) with Avnet and AVT, pursuant to which Avnet will, prior to the consummation of the Proposed Acquisition, transfer the Acquired Business to the Acquired Companies (the Reorganization) and (ii) an Employment Matters Agreement in order to allocate between us and Avnet our respective assets, liabilities and responsibilities with respect to certain employee compensation, pension and benefit plans, programs and arrangements and to provide for certain employment matters in connection with the Proposed Acquisition.
Pursuant to the Acquisition Agreement, and subject to the terms and conditions contained therein, at the closing of the Proposed Acquisition, we will acquire all of the outstanding shares of the Acquired Companies for an aggregate purchase price comprised of $2.4 billion in cash (the Cash Consideration) and 2,785,402 shares of our
6
common stock (representing approximately 7.3% of our outstanding common stock after giving effect to the issuance of the new shares), with the Cash Consideration subject to certain working capital and other adjustments, as described in the Acquisition Agreement.
Acquisition Financing
In addition to an offering of senior notes in the aggregate principal amount of $1 billion, we expect to obtain or otherwise incur additional financing for the Proposed Acquisition as described below.
In connection with the Proposed Acquisition, we expect to borrow up to $1 billion under senior unsecured term loan facilities (the Term Facilities), consisting of a tranche of three-year senior unsecured term loans in an original aggregate principal amount of $250 million and a tranche of five-year senior unsecured term loans in an original aggregate principal amount of $750 million, and expect to borrow an amount up to $100 million under our $1 billion revolving credit facility (the Revolving Facility). We have also obtained commitments for a 30-day senior unsecured bridge loan facility in an original aggregate principal amount of $300 million (the Cash Bridge Facility). If, and to the extent the notes in any offering we may conduct to raise permanent financing in the capital markets are not issued and sold (or are issued in a lesser amount), we may borrow up to $1 billion in loans under a 364-day senior unsecured bridge facility (the Bridge Facility). We refer to any debt financing that we expect to incur to fund the Cash Consideration and to pay related fees and expenses as the Debt Financing.
Tech Data may incur approximately $36 million of transaction costs. This estimate does not include fees related to the debt financing, which are estimated to be approximately $14 million. The fees related to the debt financing were reflected in the unaudited pro forma condensed combined financial statements as debt issuance costs.
2. Calculation of Preliminary Estimated Purchase Price
The fair value of consideration expected to be transferred on the closing date includes the value of the estimated cash consideration, the estimated fair value of the Share Consideration, the estimated working capital adjustment, plus estimated cash, and minus estimated indebtedness. A preliminary estimate of the purchase price is as follows (in thousands, except shares and stock price):
Shares | Per Share | Total | ||||||||||
Estimated cash consideration (1) |
$ | 2,400,000 | ||||||||||
Estimated Share Consideration (2) |
2,785,402 | $ | 86.73 | 241,578 | ||||||||
Estimated net working capital adjustment (3) |
(59,908 | ) | ||||||||||
Estimated Acquired Business cash (4) |
82,805 | |||||||||||
Estimated Acquired Business indebtedness |
(98,002 | ) | ||||||||||
|
|
|||||||||||
Total Estimated Purchase Price |
$ | 2,566,473 | ||||||||||
|
|
(1) | The amount of cash consideration is fixed in the Interest Purchase Agreement |
(2) | The number of shares of Tech Data common stock is fixed in the Interest Purchase Agreement |
(3) | The estimated net working capital adjustment is the amount by which the target net working capital of $992,197,000 exceeds the estimated net working capital |
(4) | The amount of estimated cash is cash, net of $60,934,000 of outstanding checks recognized in accounts payable |
For pro forma purposes only, the fair value of consideration given and thus the estimated purchase price was determined based upon the $86.73 per share closing price of Tech Datas common stock on January 6, 2017. The final purchase consideration could significantly differ from the amounts presented in the unaudited pro forma condensed combined financial statements due to movements in the Tech Data common stock price as of the closing date of the Proposed Acquisition. A sensitivity analysis related to the fluctuation in the Tech Data common stock price was performed to assess the impact a hypothetical change of 10% on the closing price of Tech Data common stock on January 6, 2017 would have on the estimated purchase price and goodwill as of the closing date.
7
The following table shows the change in stock price, estimated purchase price and goodwill (dollars in thousands, except stock price):
Change in stock price |
Stock price | Estimated Purchase Price |
Goodwill | |||||||||
Increase of 10% |
$ | 95.40 | $ | 2,590,631 | $ | 704,510 | ||||||
Decrease of 10% |
$ | 78.06 | $ | 2,542,315 | $ | 656,194 |
Preliminary Purchase Price Allocation
Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed of the Acquired Business are recorded at the acquisition date fair values and added to those of Tech Data. The pro forma adjustments are preliminary and based on estimates of the fair value and useful lives of the assets acquired and liabilities assumed as of October 31, 2016 and have been prepared to illustrate the estimated effect of the Proposed Acquisition. The allocation is dependent upon certain valuations and other studies that have not yet been completed. Accordingly, the preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in significant changes to the estimates of fair value set forth below.
The following table sets forth a preliminary allocation of the estimated purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed of the Acquired Business with the excess recorded as goodwill (dollars in thousands):
Current and other assets |
$ | 2,450,827 | ||
Property and equipment, net |
65,686 | |||
Capitalized software |
87,011 | |||
Goodwill |
680,352 | |||
Intangible assets, net |
939,000 | |||
Other noncurrent assets |
25,784 | |||
|
|
|||
Total assets |
4,248,660 | |||
Current liabilities |
(1,445,582 | ) | ||
Short-term debt |
(98,002 | ) | ||
Other long-term liabilities |
(138,603 | ) | ||
|
|
|||
Total liabilities |
(1,682,187 | ) | ||
|
|
|||
Estimated purchase price |
$ | 2,566,473 | ||
|
|
Preliminary identifiable intangible assets in the pro forma financial statements consist of anticipated intangibles derived from customer and vendor relationships and trade names. The amortization related to these identifiable intangible assets is reflected as a pro forma adjustment to the pro forma condensed combined statements of income, as further described in Note 5. The identifiable intangible assets and related amortization are preliminary and are based on managements estimates after consideration of similar transactions. As discussed above, the amount that will ultimately be allocated to identifiable intangible assets, and the related amount of amortization, may differ materially from this preliminary allocation. In addition, the periods the amortization impacts will ultimately be based upon the periods in which the associated economic benefits are expected to be derived, or where appropriate, based on the use of a straight-line method. Therefore, the amount of amortization following the transaction may differ significantly between periods based upon the final value assigned, and amortization methodology used, for each identifiable intangible asset.
Goodwill represents the excess of the preliminary estimated purchase price over the fair value of the underlying net assets. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually, absent any indicators of impairment. Goodwill recognized in the U.S. from the Proposed Acquisition is expected to be deductible for tax purposes. Goodwill recognized in foreign jurisdictions from the Proposed Acquisition is not expected to be deductible for tax purposes.
8
The final determination of the purchase price allocation upon the closing of the Proposed Acquisition will be based on the Acquired Business net assets acquired as of that date and will depend on a number of factors, which cannot be predicted with any certainty at this time. The purchase price allocation may change materially based on the receipt of more detailed information. Therefore, the actual allocations will differ from the pro forma adjustments presented.
3. Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
(a) | Represents the Cash Consideration paid, as well as the proceeds from the issuance of new debt, payment to settle the Acquired Business debt, and Tech Data transaction and financing costs to be paid prior to, or concurrent with, closing the Proposed Acquisition. Tech Data debt financing fees are capitalized as deferred debt issuance costs. |
(dollars in thousands) | ||||
Cash proceeds of new debt |
$ | 2,100,000 | ||
Cash Consideration paid |
(2,324,895 | ) | ||
Cash paid to settle Acquired Business debt |
(98,002 | ) | ||
Transaction costs paid |
(43,827 | ) | ||
Debt financing fees paid |
(13,621 | ) | ||
|
|
|||
Net cash outflow |
$ | (380,345 | ) | |
|
|
(b) | Reflects the acquisition method of accounting based on the estimated fair value of the assets and liabilities of the Acquired Business as discussed in Note 2 above. Additional information regarding the fair value of intangible assets acquired is discussed in Note 5 below. |
(c) | Reflects the recognition of a $9,776,000 deferred tax asset based on the estimated U.S. blended federal and state statutory rate of 40% associated with the transaction costs, as well as the elimination of the Acquired Business U.S. deferred tax assets of $24,527,000. Reflects the recognition of a $78,719,000 deferred tax liability based on the estimated blended foreign statutory rate of 28% associated with the net increase in foreign estimated amortizable identifiable intangible assets. The U.S. blended federal and state and blended foreign statutory tax rates do not reflect Tech Datas expected effective tax rate, which will include other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company. |
(d) | Reflects the recognition of $2,384,000 in debt financing costs related to the Revolving Facility. |
(e) | Reflects the increase in deferred rent of $8,588,000 ($1,220,000 in Prepaid and other current assets and $7,368,000 in Other assets, net) as a purchase accounting adjustment. |
(f) | Reflects the elimination of $7,523,000 of accounts payables related to transaction costs discussed above. |
(g) | Reflects adjustments to current and long-term debt for anticipated borrowings to fund the Proposed Acquisition net of the elimination of the Acquired Business current debt. The adjustments to current and long-term debt are summarized as follows: |
9
(dollars in thousands) | ||||
Anticipated new borrowings (net of deferred financing fees) |
$ | 2,086,379 | ||
Repayment of existing current debt |
(98,002 | ) | ||
|
|
|||
Net increase in borrowings |
1,988,377 | |||
Plus: Deferred financing costs related to the Revolving Facility |
2,384 | |||
Less: Increase to current portion of long-term debt |
(39,498 | ) | ||
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Increase to long-term debt |
$ | 1,951,263 | ||
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(h) | Reflects the recognition of the Share Consideration discussed above in Note 2. |
(i) | Reflects the recognition of $36,304,000 of transaction costs discussed above, net of a $9,776,000 tax benefit discussed in Note 3 (c) above. |
(j) | Reflects the elimination of the Acquired Business Net parent company investment and Accumulated other comprehensive loss. |
(k) | Reflects the reclassification of $87,011,000 of capitalized software from Property and equipment, net to Intangible assets, net in conformity with Tech Datas presentation. |
4. Notes to Unaudited Pro Forma Condensed Combined Statements of Income
(a) | Represents adjustment to record amortization expense related to identifiable intangible assets calculated on a straight-line basis. The amortization of intangible assets is based on the periods over which the economic benefits of the intangible assets are expected to be realized. See Note 5 for further details on the amortization lives of the intangible assets expected to be recognized. |
The adjustments to selling, general and administrative expenses are as follows:
(dollars in thousands) | Nine Months Ended October 31, 2016 |
Year Ended January 31, 2016 |
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Amortization of purchased identifiable intangible assets |
$ | 58,327 | $ | 77,769 | ||||
Reversal of the Acquired Business historical intangible asset amortization |
(13,031 | ) | (43,720 | ) | ||||
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Total additional intangible assets amortization expense |
$ | 45,296 | $ | 34,049 | ||||
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(b) | To reverse interest expense associated with debt facilities repaid from the proceeds of the debt financing, and to record estimated incremental interest expense, and amortization of debt financing fees associated with the anticipated borrowings, as described in Note 1. |
(dollars in thousands) | Nine Months Ended October 31, 2016 |
Year Ended January 31, 2016 |
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Interest expense on debt financing |
$ | 52,289 | $ | 70,595 | ||||
Amortization of debt financing fees |
1,782 | 2,377 | ||||||
Reversal of transaction related bridge financing interest |
(3,414 | ) | | |||||
Reversal of the Acquired Business interest expense |
(6,142 | ) | (7,037 | ) | ||||
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Total additional interest expense |
$ | 44,515 | $ | 65,935 | ||||
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(c) | Represents adjustment to income tax expense as a result of the tax impact on the pro forma adjustments. Tech Data and the Acquired Business utilized their respective statutory tax rates to compute the income tax expense related to each entitys pro forma condensed combined statement of income adjustment as follows: |
Nine Months Ended October 31, 2016 | Year Ended January 31, 2016 | |||||||||||||||||||||||
(dollars in thousands) | Tech Data | Acquired Business |
Total | Tech Data | Acquired Business |
Total | ||||||||||||||||||
Pro forma adjustments |
$ | (93,988 | ) | $ | 19,174 | $ | (74,814 | ) | $ | (150,741 | ) | $ | 50,757 | $ | (99,984 | ) | ||||||||
Statutory rate |
38 | % | 39 | % | 38 | % | 36 | % | ||||||||||||||||
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Tax impact |
$ | (35,935 | ) | $ | 7,528 | $ | (28,407 | ) | $ | (56,737 | ) | $ | 18,367 | $ | (38,370 | ) | ||||||||
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10
The statutory tax rates do not reflect Tech Datas expected effective tax rate, which will include other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company.
(d) | To reverse Tech Datas one-time transaction costs incurred to date of $14,997,000. |
(e) | Represents the earnings per share, taking into consideration the pro forma weighted average shares outstanding calculated including the issuance of common stock issued in the Proposed Acquisition, as described in Note 1, assuming the shares were outstanding for the nine months ended October 31, 2016 and the year ended January 31, 2016. |
Nine Months Ended October 31, 2016 |
Year Ended January 31, 2016 |
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Pro Forma Basic Weighted Average Shares (in thousands) |
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Historical weighted average shares outstanding |
35,184 | 35,898 | ||||||
Issuance of shares to Avnet |
2,785 | 2,785 | ||||||
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Pro forma weighted average shares (basic) |
37,969 | 38,683 | ||||||
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Nine Months Ended October 31, 2016 |
Year Ended January 31, 2016 |
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Pro Forma Diluted Weighted Average Shares (in thousands) |
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Historical weighted average shares outstanding |
35,393 | 36,097 | ||||||
Issuance of shares to Avnet |
2,785 | 2,785 | ||||||
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Pro forma weighted average shares (diluted) |
38,178 | 38,882 | ||||||
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5. Intangible Assets
The significant intangible assets identified in the preliminary purchase price allocation discussed above include customer and vendor relationships, and trademarks. The table below indicates the estimated fair value of each of the intangibles identified and the approximate useful lives of each (in thousands):
Approximate Fair Value |
Estimated Useful Life |
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Intangible Asset |
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Customer and vendor relationships |
$ | 894,000 | 13 years | |||||
Trade names |
45,000 | 5 years | ||||||
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Total |
$ | 939,000 | ||||||
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Fair value was estimated using the income approach. The income approach included the use of the multi-period excess earnings method for the acquired customer and vendor relationships and the relief-from-royalty method for the acquired portfolio of trade names. The significant assumptions used in estimating fair value include (i) the estimated life during which the asset will contribute to cash flows, based on inputs such as attrition rate of customers, remaining contractual terms, and expected use of the assets, (ii) the estimated profitability of the operations associated with each of the acquired assets, and (iii) the estimated discount rate that reflects the level of risk associated with receiving future cash flows.
11
6. Financing Agreements
The Company anticipates new borrowings of approximately $2.1 billion, excluding debt issuance costs, in connection with the Proposed Acquisition, which is comprised of the following:
(dollars in thousands) | Amount | Estimated Average Interest Rate |
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Three-year senior unsecured term loans |
$ | 250,000 | 2.2 | % | ||||
Five-year senior unsecured term loans |
750,000 | 2.3 | % | |||||
Senior notes |
1,000,000 | 4.5 | % | |||||
Revolving credit facility |
100,000 | 2.2 | % | |||||
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Total |
$ | 2,100,000 | ||||||
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The unaudited condensed combined pro forma financial statements reflect an estimate of the amount of financing required to complete the Proposed Acquisition. The actual amount of financing required for the Proposed Acquisition will not be determined until the closing date when the actual purchase price and the actual amount of existing cash balances of Tech Data are known. The actual amount of available cash at closing may vary materially from preliminary estimates. The pro forma financial statements also reflect an estimate of interest rates for the various debt facilities based on current market conditions and rates currently available and based on facilities with similar terms and tenors. However, the actual interest incurred may vary significantly based upon, among other things, market considerations, the amount of each debt facility utilized, and success with the note offerings, of various tenors.
Annual future maturities for the five-year senior unsecured term loans are expected to be 5.0% of the initial principal amount each year for the first three years, then increasing to 10% for year four, with the final payment of all remaining outstanding principal amounts, plus accrued interest, being due five years after the closing date. The interest is due quarterly on the five-year senior unsecured term loan. Principal maturities for the three-year senior unsecured term loans and the senior notes are expected to occur at the end of each applicable note term. The interest is due quarterly on the three-year senior unsecured term loan and semi-annually on the senior notes.
A sensitivity analysis on interest expense for the year ended January 31, 2016 and the nine month period ended October 31, 2016 has been performed to assess the effect of a change of 12.5 basis points of the hypothetical interest rate would have on the debt financing.
The following table shows the interest expense assuming a 12.5 basis point change in the interest rates for the debt financing (in thousands):
Nine Months Ended October 31, 2016 |
Year Ended January 31, 2016 |
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Interest expense assuming |
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Increase of 0.125% |
$ | 56,005 | $ | 75,597 | ||||
Decrease of 0.125% |
52,138 | 70,347 |
12
Exhibit 99.4
Tech Data GAAP to Non-GAAP Reconciliation1, 2
($ in millions) | Twelve Months Ended January 31, | Nine Months Ended October 31, | LTM | |||||||||||||||||||||
2014 | 2015 | 2016 | 2015 | 2016 | 10/31/16 |
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Net Sales |
$ | 26,821.9 | $ | 27,670.6 | $ | 26,379.8 | $ | 18,896.2 | $ | 18,807.4 | $ | 26,291.0 | ||||||||||||
Reconciliation of Non-GAAP Operating Income |
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GAAP Operating Income |
$ | 227.5 | $ | 267.6 | $ | 401.4 | $ | 256.2 | $ | 188.8 | $ | 334.0 | ||||||||||||
Plus: Restatement and Remediation-Related Expenses |
53.8 | 22.0 | 0.8 | 0.8 | | | ||||||||||||||||||
Plus: LCD Settlements, Net |
(35.5 | ) | (5.1 | ) | (98.4 | ) | (63.1 | ) | (4.1 | ) | (39.5 | ) | ||||||||||||
Plus: Loss on Disposal of Subsidiaries |
| 1.3 | 0.7 | 0.7 | | | ||||||||||||||||||
Plus: Value Added Tax Assessment |
| (6.2 | ) | (8.8 | ) | (9.6 | ) | 1.0 | 1.8 | |||||||||||||||
Plus: Acquisition & Integration Costs |
| | | | 15.0 | 15.0 | ||||||||||||||||||
Plus: Acquisition-Related Amortization of Intangibles |
29.1 | 28.3 | 23.3 | 17.2 | 16.1 | 22.3 | ||||||||||||||||||
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Non-GAAP Operating Income |
$ | 274.9 | $ | 308.0 | $ | 319.1 | $ | 202.3 | $ | 216.8 | $ | 333.6 | ||||||||||||
% of Revenue |
1.0 | % | 1.1 | % | 1.2 | % | 1.1 | % | 1.2 | % | 1.3 | % | ||||||||||||
Reconciliation of Adjusted EBITDA |
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Non-GAAP Operating Income |
$ | 274.9 | $ | 308.0 | $ | 319.1 | $ | 202.3 | $ | 216.8 | $ | 333.6 | ||||||||||||
Plus: Depreciation & Amortization (non-acquisition related) |
43.8 | 40.5 | 33.9 | 25.4 | 25.1 | 33.7 | ||||||||||||||||||
Plus: Stock-Based Compensation |
8.9 | 13.7 | 14.9 | 11.4 | 11.0 | 14.5 | ||||||||||||||||||
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Adjusted EBITDA |
$ | 327.6 | $ | 362.1 | $ | 367.9 | $ | 239.0 | $ | 252.9 | $ | 381.8 | ||||||||||||
% of Revenue |
1.2 | % | 1.3 | % | 1.4 | % | 1.3 | % | 1.3 | % | 1.5 | % | ||||||||||||
Reconciliation of Free Cash Flow |
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Cash Flow from Operations |
$ | 379.1 | $ | 119.4 | $ | 189.0 | $ | 226.1 | $ | 211.5 | $ | 174.4 | ||||||||||||
Less: Expenditures for Property & Equipment |
15.6 | 18.6 | 20.9 | 13.9 | 18.8 | 25.8 | ||||||||||||||||||
Less: Software & Software Development Costs |
13.3 | 9.5 | 13.1 | 9.2 | 12.1 | 15.9 | ||||||||||||||||||
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Free Cash Flow |
$ | 350.3 | $ | 91.2 | $ | 155.0 | $ | 202.9 | $ | 180.6 | $ | 132.7 |
1 | The sum of the amounts in the table may not agree to the totals due to rounding. |
2 | Tech Datas management believes that providing this additional information is useful to investors to better assess and understand operating performance, especially when comparing results with prior periods or forecasting performance for future periods by excluding both cash and non-cash items of expense not directly related to ongoing income from operations. Management also uses these non-GAAP measures to establish operational goals and in measuring performance. 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. |
Avnets Technology Solutions GAAP to Non-GAAP Reconciliation3, 4
($in millions) | Twelve Months Ended | |||||||||||
6/28/2014 | 6/27/2015 | 7/2/2016 | ||||||||||
Net Sales |
$ | 10,170.6 | $ | 9,799.5 | $ | 9,415.5 | ||||||
Reconciliation of Non-GAAP Operating Income |
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GAAP Operating Income |
$ | 187.4 | $ | 162.2 | $ | 208.0 | ||||||
Plus: Restructuring, Amortization, Integration & other Expenses |
56.9 | 84.9 | 53.4 | |||||||||
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Non-GAAP Operating Income |
$ | 244.3 | $ | 247.1 | $ | 261.4 | ||||||
% of Revenue |
2.4 | % | 2.5 | % | 2.8 | % | ||||||
Reconciliation of Adjusted EBITDA |
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Non-GAAP Operating Income |
$ | 244.3 | $ | 247.1 | $ | 261.4 | ||||||
Plus: Depreciation |
28.5 | 28.6 | 27.6 | |||||||||
Plus: Stock-Based Compensation |
19.6 | 26.5 | 24.3 | |||||||||
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Adjusted EBITDA |
$ | 292.4 | $ | 302.2 | $ | 313.2 | ||||||
% of Revenue |
2.9 | % | 3.1 | % | 3.3 | % |
3 | The sum of the amounts in the table may not agree to the totals due to rounding. |
4 | Management believes that providing this additional information is useful to investors to better assess and understand operating performance, especially when comparing results with prior periods or forecasting performance for future periods by excluding both cash and non-cash items of expense not directly related to ongoing income from operations. 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. |
2