Avnet 2003 Annual Report Download - page 37
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Please find page 37 of the 2003 Avnet annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Change in Accounting Principle Ì Goodwill
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (""SFAS 142''),
""Goodwill and Other Intangible Assets,'' which establishes Ñnancial accounting and reporting for acquired
goodwill and other intangible assets. SFAS 142 requires that ratable amortization of goodwill be replaced with
periodic tests for goodwill impairment and that intangible assets with Ñnite lives be amortized over their useful
lives. The Company elected early adoption of the provisions of SFAS 142 eÅective June 30, 2001, the Ñrst day
of the Company's Ñscal year 2002.
Therefore, the amortization of goodwill was suspended eÅective on that date. Under the required
transitional provisions of SFAS 142, the Company identiÑed and evaluated its reporting units for impairment
as of June 30, 2001 using a two-step process. The Company engaged an outside valuation consultant to assist
in this process. The Ñrst step was to ascertain whether there was an indication that any of the Company's
goodwill was impaired. This was accomplished by identifying the Company's reporting units pursuant to the
guidelines set out in SFAS 142 and then determining the carrying value of each of those reporting units by
assigning the Company's assets and liabilities, including existing goodwill, to each of those reporting units as of
June 30, 2001. For the purpose of this process, the reporting unit structure was deÑned as each of the three
regional businesses (Americas, EMEA and Asia) within each of the Company's three operating groups. The
fair value of each reporting unit was determined by using a combination of present value and multiple of
earnings valuation techniques. Such fair value was then compared to the carrying value of each reporting unit.
As a result of completing the Ñrst step of the process, it was determined that there was an impairment of
goodwill related to the Company's EM and CM operations in both EMEA and Asia. The Company identiÑed
no impairment of goodwill in the Americas region. In the second step of the process, the implied fair value of
the aÅected reporting unit's goodwill was compared to its carrying value. This was done in order to determine
the amount of impairment; that is, the amount by which the carrying amount exceeded the fair value. As a
result of the valuation process, the Company recorded an impairment charge of $580.5 million, which was
recorded as a cumulative eÅect of a change in accounting principle in the Ñrst quarter of 2002. As reÖected in
the accompanying consolidated statement of cash Öows for 2002, the charge resulting from the cumulative
eÅect of change in accounting principle did not impact cash Öow.
The magnitude of the transition impairment charge was signiÑcantly impacted by the timing of the
eÅective date of when the fair value analysis was performed and the designation of the reporting unit structure.
Since the Company adopted SFAS 142 on June 30, 2001, the fair value analysis was required to be completed
as of that date. Due to the diÇcult business and economic conditions at that date, which severely impacted the
market sectors in which the Company operates, and the uncertainty as to when such conditions would
materially improve, the fair value of the Company's businesses was signiÑcantly less than it might have been at
other times. In other words, in a cyclical business, the timing of a valuation such as this may be an important
factor in the outcome of the valuation exercise. The reporting units with the most signiÑcant impairment of
goodwill are in Europe where the Company has not yet generated an acceptable level of proÑts and cash Öows.
In addition, the deÑned reporting unit structure has resulted in an impairment of goodwill which includes
goodwill related to certain recent acquisitions that otherwise might not have been impaired.
The Company conducts its periodic test for goodwill impairment annually, on the Ñrst day of the Ñscal
fourth quarter. The Company's annual impairment tests in 2003 and 2002 have yielded no additional
impairments to the carrying value of the Company's goodwill.
Liquidity and Capital Resources
Cash Flows
In 2003, cash Öow of $169.5 million was generated from continuing operations before depreciation,
amortization, deferred taxes and other non-cash items and $482.4 million was generated by reductions in
working capital (excluding cash and cash equivalents), thus generating net cash Öow from operations of
$651.9 million. The positive cash Öow generated from working capital reductions is a result of the Company's
continued eÅorts to improve its asset utilization and eÇciency, primarily through reductions of receivables
(cash inÖow of $140.7 million) and inventories (cash inÖow of $387.1 million), in what continues to be a
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