Avnet 2005 Annual Report Download - page 56

AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The fair value of the stock options granted is estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted average assumptions used and the weighted average estimated fair values
of an option granted are as follows:
Years Ended
July 2, July 3, June 27,
2005 2004 2003
Expected life (years)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.0 6.1 6.0
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.5% 3.4% 3.2%
Volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44.8% 46.9% 41.8%
Dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì
Weighted average fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $8.40 $9.07 $5.77
Concentration of credit risk Ì Financial instruments that potentially subject the Company to a concen-
tration of credit risk principally consist of cash and cash equivalents and trade accounts receivable. The
Company invests its excess cash primarily in overnight Eurodollar time deposits and institutional money
market funds with quality financial institutions. The Company sells electronic components and computer
products primarily to original equipment and contract manufacturers, including the military and military
contractors, throughout the world. To reduce credit risk, management performs ongoing credit evaluations of
its customers' financial condition and, in some instances, has obtained insurance coverage to reduce such risk.
The Company maintains reserves for potential credit losses, but has not experienced any material losses
related to individual customers or groups of customers in any particular industry or geographic area.
Fair value of financial instruments Ì The carrying amounts of the Company's financial instruments,
including cash and cash equivalents, receivables and accounts payable approximate their fair values at July 2,
2005 due to the short-term nature of these instruments. See Note 7 for further discussion of the fair value of
the Company's fixed rate long-term debt instruments and see Investments in this Note 1 for further discussion
of the fair value of the Company's investments in unconsolidated entities.
Accounts receivable securitization Ì The Company had an accounts receivable securitization program
whereby the Company may sell receivables in securitization transactions and retain a subordinated interest
and servicing rights to those receivables. The Company accounts for the program under the FASB's Statement
of Financial Accounting Standards No. 140 (""SFAS 140''), Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. The gain or loss on sales of receivables is determined at
the date of transfer based upon the relative fair value of the assets sold and the interests retained. The
Company estimates fair value based on the present value of future expected cash flows using management's
best estimates of the key assumptions, including collection period and discount rates. In August 2005, the
Company amended the accounts receivable securitization program agreement (see Note 3).
Derivative financial instruments Ì The Company accounts for derivative financial instruments in
accordance with the FASB's Statement of Financial Accounting Standards No. 133 (""SFAS 133''),
Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial
Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Hedging Activities and
Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities.
Many of the Company's subsidiaries, on occasion, purchase and sell products in currencies other than
their functional currencies. This subjects the Company to the risks associated with the fluctuations of foreign
currency exchange rates. The Company reduces this risk by utilizing natural hedging (offsetting receivables
and payables) as well as by creating offsetting positions through the use of derivative financial instruments,
primarily forward foreign exchange contracts with maturities of less than sixty days. The Company adjusts all
foreign denominated balances and any outstanding foreign exchange contracts to fair market value through the
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