Discontinued operations

9 Months Ended

Apr. 01, 2017

Discontinued Operations and Disposal Groups

Discontinued operations

3. Discontinued operations and gain on sale

In February 2017, the Company completed the sale of its TS business to Tech Data Corporation (the “Buyer”), for approximately $2.86 billion in a combination of $2.61 billion in cash including estimated closing adjustments not yet realized and 2.8 million shares of the Buyer valued at $247.2 million at closing.  The TS business has been classified as a discontinued operation for all periods presented as the sale of the TS business represents a strategic shift to Avnet.

In connection with the closing of the TS sale, the Company recognized an estimated gain on sale of discontinued operations, net of tax of $217.1 million. The final gain on sale could vary materially from the Company’s best estimate as of the third quarter of fiscal 2017 as determination of the final gain amount requires agreement with the Buyer related to final net assets delivered and the geographical allocation of the sales price, which is expected to occur by the first half of fiscal 2018. Included within the gain on sale is $181.5 million of expense reclassified out of accumulated comprehensive income primarily related to TS business cumulative translation adjustments.

The Buyer shares received by the Company are recorded within “Marketable securities” on the Company’s Consolidated Balance Sheets. The Company has classified these shares as trading securities in accordance with ASC 320 due to management having the intent to trade the securities. During the three and nine months ended April 1, 2017, the Company recorded $14.3 million of unrealized gains on the shares due to changes in fair value between the closing date and April 1, 2017, which are recorded in “Other income (expense), net” on the Consolidated Statements of Operations using Level 1 quoted active market prices. The definitive sales agreement includes time based contractual restrictions from the closing date related to the Company’s sale of Buyer shares including a 6-month restriction for 50 percent of the shares and a 12-month restriction for the remaining 50 percent. Subsequent to the third quarter of fiscal 2017, the Company entered into economic hedges for the shares during the contractual restriction periods through the purchase of derivative financial instruments, which economically fixes the amount that will be realized upon the sale of the shares at approximately $247 million. 

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

Financial results of the TS business through the closing date are presented as “Income from discontinued operations, net of tax” on the Consolidated Statements of Operations. The assets and liabilities of the TS business were presented as “Current assets held for sale”, “Non-current assets held for sale”, “Current liabilities held for sale” and “Non-current liabilities held for sale” on the July 2, 2016, Consolidated Balance Sheet. 

Summarized results of the TS business discontinued operations for the third quarters and nine months ended April 1, 2017, and April 2, 2016, are as follows:

	Third Quarters Ended				Nine Months Ended
	April 1,		April 2,		April 1,		April 2,
	2017		2016		2017		2016
	(Thousands)
Sales	$	1,056,676	$	2,092,755	$	5,432,140	$	7,220,839
Cost of sales		955,781		1,876,869		4,883,945		6,496,536
Gross profit		100,895		215,886		548,195		724,303
Selling, general and administrative expenses		105,622		176,974		430,003		534,443
Restructuring, integration and other (income) expenses		(260)		7,318		7,280		27,897
Operating income		(4,467)		31,594		110,912		161,963
Interest and other expense, net		(13,662)		(1,146)		(24,292)		(15,343)
(Loss) income from discontinued operations before income taxes		(18,129)		30,448		86,620		146,620
Income tax expense		17,108		14,781		49,949		55,752
(Loss) income from discontinued operations, net of taxes		(35,237)	$	15,667		36,671		90,868
Gain on sale of discontinued operations, net of tax		217,088		—		217,088		—
Net income from discontinued operations, net of tax	$	181,851	$	15,667	$	253,759	$	90,868

Included within selling, general and administrative expenses of discontinued operations was $8.3 million and $10.7 million of corporate expenses specific to or benefiting the TS business for the third quarters ending April 1, 2017, and April 2, 2016, respectively, and $34.9 million and $38.1 million for the nine months ending April 1, 2017, and April 2, 2016, respectively. Corporate costs related to general overhead were not allocated to the TS business. Subsequent to the first quarter of fiscal 2017, depreciation and amortization of the TS business long-lived assets ceased due to the TS business being classified as held for sale.

Summarized assets and liabilities of the TS business, classified as held for sale as of July 2, 2016, are as follows:

	July 2,
	2016
	(Thousands)
Receivables, less allowances of $39,356	$	2,205,213
Inventories		296,310
Prepaid and other current assets		59,948
Total current assets		2,561,471
Property, plant and equipment, net		159,449
Goodwill		659,368
Intangible assets, net		55,826
Other assets		24,424
Total assets	$	3,460,538
Accounts payable	$	1,643,004
Accrued expenses and other		161,225
Total current liabilities		1,804,229
Other Long-term liabilities		43,769
Total liabilities	$	1,847,998