Avnet 2012 Annual Report Download - page 29

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Table of Contents
The Company establishes reserves for potentially unfavorable outcomes of positions taken on certain tax matters. These reserves are based on
management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. There may be
differences between the anticipated and actual outcomes of these matters that may result in reversals of reserves or additional tax liabilities in
excess of the reserved amounts. To the extent such adjustments are warranted, the Company's effective tax rate may potentially fluctuate as a
result.
In determining the Company's effective tax rate, management considers current tax regulations in the numerous jurisdictions in which it
operates, and requires management's judgment for interpretation and application. Changes to such tax regulations or disagreements with the
Company's interpretation or application by tax authorities in any of the Company's major jurisdictions may have a significant impact on the
Company's provision for income taxes.
Restructuring, Integration and Impairment Charges
The Company has been subject to the financial impact of integrating acquired businesses and charges related to business reorganizations.
In connection with such events, management is required to make estimates about the financial impact of such matters that are inherently
uncertain. Accrued liabilities and reserves are established to cover the cost of severance, facility consolidation and closure, lease termination
fees, inventory adjustments based upon acquisition-related termination of supplier agreements and/or the re-
evaluation of the acquired working
capital assets (inventory and accounts receivable), and write-
down of other acquired assets including goodwill. Actual amounts incurred could be
different from those estimated.
Additionally, in assessing goodwill for impairment, the Company is required to make significant assumptions about the future cash flows
and overall performance of its reporting units. The Company is also required to make judgments regarding the evaluation of changes in events or
circumstances that would more likely than not reduce the fair value of any of its reporting units below its carrying value, the results of which
would determine whether an interim impairment test must be performed. Should these assumptions or judgments change in the future based upon
market conditions or should the structure of the Company’
s reporting units change based upon changes in business strategy, the Company may
be required to perform an interim impairment test which may result in a goodwill impairment charge.
During fiscal 2012, 2011 and 2010, the Company performed its annual goodwill impairment test and determined there was no goodwill
impairment in any of its reporting units. The Company does not believe there were any reporting units that were at risk of failing "step 1" of the
goodwill impairment test. However, there were two reporting units for which the estimated fair value was not substantially in excess of the
carrying value of the reporting unit, specifically TS Asia and TS EMEA. The percentage by which the estimated fair value exceeded carrying
value was approximately 15% and 20% for TS Asia and TS EMEA, respectively. In addition, as of June 30, 2012, TS Asia and TS EMEA had
approximately $58 million and $121 million, respectively, of allocated goodwill.
In order to estimate the fair value of its reporting units, the Company uses a combination of an income approach, specifically a discounted
cash flow methodology, and a market approach. The discounted cash flow methodology includes assumptions for, among others, forecasted
revenues, gross profit margins, operating profit margins, working capital cash flow, perpetual growth rates and long-
term discount rates, all of
which require significant judgments and estimates by management which are inherently uncertain. These assumptions, judgments and estimates
may change in the future based upon market conditions or other events and could result in a goodwill impairment charge, in particular, in the TS
Asia and TS EMEA reporting units.
Contingencies and Litigation
From time to time, the Company may become a party to, or otherwise involved in, various lawsuits, claims, investigations and other legal
proceedings in the ordinary course of conducting its business. While litigation is subject to inherent uncertainties, management does not
anticipate that any current matters will have a material adverse impact on the Company’s financial condition, liquidity or results of operations.
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