3. Discontinued operations and gain on sale of discontinued operations

In February 2017, the Company completed the sale of its Technology Solutions operating group (“TS” or the “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 discussed further below 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 in the consolidated financial statements for all periods presented as the sale of the TS Business represented a strategic shift to Avnet.

In connection with the closing of the TS sale, the Company recognized a gain on sale of discontinued operations, net of tax of $222.4 million. Included in the measurement of the gain were estimates for the income taxes due on the gain and the additional cash consideration expected from the Buyer related to a closing date net working capital sales price adjustment. The Company is finalizing such net working capital sales price adjustment with the Buyer as provided for in the sales agreement. The Company has included its estimated amount due from the Buyer for the closing date net working capital sales price adjustment as the principal component of the $253.8 million of prepaid and other current assets as of July 1, 2017. The final net working capital sales price adjustment, as determined through the established process outlined in the sales agreement, may be materially different from the Company’s estimate. The impact of any probable changes in the net working capital adjustment will be recorded as an adjustment to the gain on sale from discontinued operations in the period such change occurs. Additionally, the income taxes associated with the gain will be impacted by the final geographic allocation of the sales price, which must be agreed to with the Buyer as required in the sales agreement and may be materially different from the Company’s estimates. The impact of any changes in estimated income taxes on the gain will be recorded as an adjustment to the gain on sale from discontinued operations in the period such change in estimate occurs. The Company expects the net working capital sales price adjustment and the income tax on the gain to be finalized by the end of fiscal 2018.

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 fiscal 2017, the Company recorded $34.1 million of unrealized gains on the shares due to changes in fair value between the closing date and July 1, 2017, which are recorded in “Other (expense) income, 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. During the fourth 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. The changes in fair value related to such economic share price hedge are also recorded within other (expense) income, net and offset changes in fair value of the underlying shares.

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. At the end of fiscal 2017, the Buyer had initiated the termination of several TSA services and substantially all TSA services are expected to be terminated by the end of fiscal 2018.

Financial results of the TS Business through the closing date are presented as “Income from discontinued operations, net of tax” and “Gain on sale of discontinued operations, net of tax” on the Consolidated Statements of Operations. 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 assets and liabilities of the TS Business are presented as “Current assets of discontinued operations”, “Non-current assets of discontinued operations”, “Current liabilities of discontinued operations” and “Non-current liabilities of discontinued operations” on the July 2, 2016, Consolidated Balance Sheet. Cash flows associated with the TS Business, including the cash proceeds from its sale are reported as discontinued operations in the consolidated statements of cash flows for all periods presented.

Summarized results of discontinued operations for fiscal 2017, fiscal 2016 and fiscal 2015, are as follows:


	Years Ended
	July 1,		July 2,		June 27,
	2017		2016		2015
	(Thousands)
Sales	$	5,432,140	$	9,478,682	$	10,269,338
Cost of sales		4,883,945		8,519,117		9,286,353
Gross profit		548,195		959,565		982,985
Selling, general and administrative expenses		430,003		710,251		759,501
Restructuring, integration and other expenses		7,280		34,557		48,957
Operating income		110,912		214,757		174,527
Interest and other expense, net		(24,291)		(22,261)		(33,073)
Income from discontinued operations before income taxes		86,621		192,496		141,454
Income tax expense		47,050		76,874		54,916
Income from discontinued operations, net of taxes		39,571		115,622		86,538
Gain on sale of discontinued operations, net of taxes		222,356		—		—
Income from discontinued operations, net of taxes	$	261,927	$	115,622	$	86,538

Included within selling, general and administrative expenses of discontinued operations was $34.9 million, $47.3 million and $48.9 million of corporate expenses specific to or benefiting the TS Business for fiscal 2017, fiscal 2016, and fiscal 2015, 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 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		67,359
Total current assets of discontinued operations		2,568,882
Property, plant and equipment, net		159,449
Goodwill		659,368
Intangible assets, net		55,826
Other assets		24,424
Total assets of discontinued operations	$	3,467,949

Accounts payable	$	1,643,004
Accrued expenses and other		161,225
Total current liabilities of discontinued operations		1,804,229
Other Long-term liabilities		43,769
Total liabilities of discontinued operations	$	1,847,998