Avnet 2005 Annual Report Download - page 30

substantial improvement in profitability from fiscal 2003 to fiscal 2004 is primarily a function of growth in
sales, as the Company emerged from the previous economic and industry downturn in fiscal 2004, and as a
result of ongoing management of operating costs through the various restructuring actions taken by the
Company in recent years (see Restructuring and Other Charges for further discussion).
Interest Expense and Other Income (Expense)
Interest expense was $85.1 million in fiscal 2005, down $9.5 million, or 10.1%, as compared with interest
expense of $94.6 million in fiscal 2004. The reduction in interest expense year-over-year is due to a
combination of reduced total debt outstanding and a lower effective interest rate on outstanding borrowings.
As further described below, the Company has used cash and new financings to further repay outstanding debt
obligations. As a result of these actions, the Company's total debt outstanding at July 2, 2005 was $1.24 billion
and the average debt outstanding during fiscal 2005 was approximately $1.30 billion. This is down from total
debt outstanding at the end of fiscal 2004 and an average debt balance during fiscal 2004 of $1.36 billion and
$1.41 billion, respectively. The Company's overall effective interest rate also declined as a result of two
actions. First, the Company repaid in cash, at maturity, its $100.0 million 6
7
/ 8 % Notes due March 15, 2004.
These notes were outstanding for nearly three quarters of fiscal 2004 with no comparable interest expense in
fiscal 2005. Additionally, the Company paid off $273.4 million of its 7
7
/ 8 % Notes due February 15, 2005 with
the proceeds from its 2% Convertible Debentures due March 15, 2034, which were issued in March 2004. This
resulted in a substantial decrease in effective rates between these two obligations year-over-year. The
remaining $86.6 million of the 7
7
/ 8 % Notes were paid off in cash at their maturity date during the third quarter
of fiscal 2005, which eliminated the remaining interest expense on the 7
7
/ 8 % Notes for the remainder of fiscal
2005. These positive impacts on the Company's effective interest rate were offset, in part, by short-term
interest rates that rose throughout fiscal 2005, which results in the Company's fair value hedges paying interest
at a higher rate. Specifically, from the end of fiscal 2004 to the end of fiscal 2005, the interest rates on the
Company's $400.0 million hedge of its 8% Notes and $300.0 million hedge of its 9.75% Notes each rose by
approximately 190 basis points. See Liquidity and Capital Resources Ì Financing Transactions for further
discussion of the Company's financing.
The acquisition of Memec, completed subsequent to fiscal 2005, is not expected to have a significant
impact on the Company's annual interest expense as the Company was able to satisfy the cash obligations of
the purchase with cash on hand. Simultaneous with the July 5, 2005 close of the acquisition, Avnet also
repaid, in cash, substantially all of Memec's ongoing debt obligations. Certain foreign lines of credit in the
Asia region represent the only significant remaining debt of Memec subsequent to the acquisition by Avnet.
Interest expense was $94.6 million in fiscal 2004, down 9.8% as compared with $104.9 million in fiscal
2003. Trends similar to those discussed above drove this downward trend in interest expense. First, Avnet's
average debt outstanding was approximately $210 million less in fiscal 2004 as compared with fiscal 2003.
Second, Avnet's effective interest rate on borrowings was lower in fiscal 2004 as a result of the Company's
tender and early redemption in the third quarter of fiscal 2003 of certain public debt obligations that were
maturing in the following twelve months. These tenders and early redemptions were financed by the issuance
of $475.0 million of 9
3
/ 4 % Notes due February 15, 2008. However, with the fair value hedges that the
Company entered into on this newly issued debt, the resulting effective interest rate was lower than it was on
the debt that was retired. Avnet fully repaid, through tender and early redemption in the third quarter of fiscal
2003, its original principal balances of $200.0 million of 6.45% Notes due August 15, 2003 and $250.0 million
of 8.20% Notes due October 17, 2003. This repayment was financed by the issuance of $475.0 million of
9
3
/ 4 % Notes due February 15, 2008 in the third quarter of fiscal 2003. The Company simultaneously executed
a fair value hedge of the 9
3
/ 4 % Notes to convert this new debt from a fixed rate of 9
3
/ 4 % to a variable rate (7.8%
at July 3, 2004) based upon US LIBOR plus a spread. Additionally, the final four months of fiscal 2004 were
benefited by the previously discussed issuance of the 2% Convertible Debentures due March 15, 2034 and
tender to pay down a portion of the 7
7
/ 8 % Notes due February 15, 2005.
Other income, net, which includes interest income, was $3.5 million in fiscal 2005 as compared with
$7.1 million in fiscal 2004 and $26.2 million in fiscal 2003. The primary driver of the variations between years
is the effect of foreign currency exchange gains and losses. Fiscal 2005 and fiscal 2004 both contained foreign
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