Avnet 2005 Annual Report Download - page 31

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currency losses which offset a portion of the interest income earned in the respective years on the Company's
cash and cash equivalent balances. Fiscal 2003 results contained a $15.6 million gain on foreign currency
exchange. The Company has an active hedge program in place, which has been applied on a more global basis
from fiscal 2004 forward. See Item 7A Ì Quantitative and Qualitative Disclosures About Market Risk for
further discussion.
Debt Extinguishment Costs
As discussed further under Liquidity and Capital Resources Ì Financing Transactions, the Company
incurred debt extinguishment costs in both fiscal 2004 and fiscal 2003 associated with the tender and early
purchase of a portion of its outstanding publicly traded debt. In completing these transactions, the Company
incurred debt extinguishment costs, related primarily to premiums and other transaction costs associated with
these tenders and early purchases, which totaled $16.4 million pre-tax, $14.2 million after-tax, or $0.12 per
share on a diluted basis in fiscal 2004 and $13.5 million pre-tax, $8.2 million after-tax, or $0.07 per share on a
diluted basis in fiscal 2003.
Income Tax Provision (Benefit)
The Company's effective tax rate in fiscal 2005 was 29.8% as compared with 25.9% in fiscal 2004. The
mix of Avnet's profits amongst its various international subsidiaries with varying statutory tax rates impacts
the Company's effective tax rates. Continuing improvement in profitability, particularly in the EMEA and
Asia regions, has led to effective tax rates substantially lower than the 35% U.S. federal tax rate in fiscal 2005
and fiscal 2004. Similarly, the mix of profits amongst international subsidiaries in fiscal 2003 yielded an
effective tax rate of 41.9% on the Company's pre-tax loss that year, which was also more favorable than the
35% U.S. federal tax rate.
Net Income (Loss)
As a result of the factors described in the preceding sections of this MD&A, the Company's net income
was $168.2 million, or $1.39 per share on a diluted basis, in fiscal 2005 as compared with net income of $72.9,
or $0.60 per share on a diluted basis, in fiscal 2004 and a net loss of $46.1 million, or $0.39 per share on a
diluted basis, in fiscal 2003. The fiscal 2004 results include the negative after-tax impact of restructuring and
other charges and debt extinguishment costs, discussed previously in this MD&A, totaling $52.8 million, or
$0.44 per share on a diluted basis. The fiscal 2003 results similarly include the negative after-tax impact of
previously discussed charges totaling $73.9 million, or $0.62 per share on a diluted basis.
Critical Accounting Policies
The Company's consolidated financial statements have been prepared in accordance with U.S. GAAP.
The preparation of these consolidated financial statements requires the Company to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting
period. These estimates and assumptions are based upon the Company's continuous evaluation of historical
results and anticipated future events. Actual results may differ from these estimates under different
assumptions or conditions.
The Securities and Exchange Commission defines critical accounting polices as those that are, in
management's view, most important to the portrayal of the Company's financial condition and results of
operations and that require significant judgments and estimates. Management believes the Company's most
critical accounting policies relate to:
Valuation of Receivables
The Company maintains an allowance for doubtful accounts for estimated losses resulting from customer
defaults. Bad debt reserves are recorded based upon historic default averages as well as the Company's regular
assessment of the financial condition of its customers. Therefore, if collection experience or the financial
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