Avnet 2004 Annual Report Download - page 29

The Company's Ñscal 2003 consolidated operating income of $12.7 million was up from a loss of
$3.0 million in Ñscal 2002, both periods including the negative impacts of restructuring and other charges
discussed above ($106.8 million in Ñscal 2003 and $79.6 million in Ñscal 2002). The improvement in operating
income in Ñscal 2003 is the result of the early impacts of the Company's eÅorts to remove ongoing costs from
the business through its restructuring eÅorts since the end of Ñscal 2001.
Interest Expense and Other Income (Expense)
Interest expense was $94.6 million in Ñscal 2004, down 9.8% as compared with $104.9 million in Ñscal
2003. The decrease in interest expense between periods is a function of two factors. First, the Company has
reduced its total debt outstanding. The Company's average balance of debt and drawings under its accounts
receivable securitization program during Ñscal 2004 was $1.41 billion as compared with $1.62 billion in Ñscal
2003. The second factor in this decrease in expense relates to the change in the Company's eÅective interest
rates due to the composition of the Company's debt balances. The Company fully repaid 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 through tender and early redemption of these notes during Ñscal 2003 and the repayment of
the remaining principal and interest upon maturity in the Ñrst half of Ñscal 2004 (see Liquidity and Capital
Resources Ì Financing Transactions for further discussion of this transaction and other debt activity
discussed below). Although the Company added $475.0 million of 9
3
/ 4 % Notes due February 15, 2008 in the
third quarter of Ñscal 2003, the Company also entered into hedge contracts for $300.0 million of these notes
which eÅectively converts these notes from a Ñxed rate of 9
3
/ 4 % to a variable rate (7.8% at July 3, 2004) based
upon US LIBOR plus a spread. The Company also beneÑted signiÑcantly in the fourth quarter of Ñscal 2004
from the oÅering of the $300.0 million 2% Convertible Debentures due March 15, 2034 and the tender for a
portion of the outstanding 7
7
/ 8 % Notes due February 15, 2005, both of which closed before the end of the third
quarter of Ñscal 2004.
Interest expense was $104.9 million in Ñscal 2003 as compared with $124.6 million in Ñscal 2002,
representing a 15.8% decline year-over-year. This decrease is due primarily to the ongoing debt reductions and
reduced drawings under the accounts receivable securitization program (see Liquidity and Capital
Resources Ì OÅ-Balance Sheet Arrangements for further discussion) during Ñscal 2003. Consolidated debt
balances at June 27, 2003 were $1.47 billion as compared with $1.63 billion at June 28, 2002. Additionally, the
Company had $200.0 million of outstanding drawings under the accounts receivable securitization program at
June 28, 2002.
Other income, net, which includes interest income, was $7.1 million in Ñscal 2004 as compared with
$26.2 million in Ñscal 2003 and $6.8 million in Ñscal 2002. The primary variable impacting other income, net,
is the eÅect of foreign currency gains or losses, which resulted in a gain in Ñscal 2003 as compared with the
results for Ñscal 2004 and 2002.
Debt Extinguishment Costs
As discussed further under Liquidity and Capital Resources Ì Financing Transactions, the Company
incurred debt extinguishment costs in both Ñscal 2004 and Ñscal 2003 associated with the tender and early
redemption 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 redemptions, which totaled $16.4 million pre-tax, $14.2 million after-tax, or $0.12 per
share on a diluted basis in Ñscal 2004 and $13.5 million pre-tax, $8.2 million after-tax, or $0.07 per share on a
diluted basis in Ñscal 2003.
Income Tax Provision (BeneÑt)
The Company's eÅective tax rate in Ñscal 2004 was 25.9% as compared with 41.9% in Ñscal 2003. The
mix of Avnet's proÑts amongst its various international subsidiaries with varying statutory tax rates impacts
the Company's eÅective tax rates. The continuing improvement in proÑtability, particularly in the EMEA and
Asia/PaciÑc regions, has led to an eÅective tax rate substantially lower than the 35% U.S. federal tax rate.
Similarly, the mix of proÑts amongst international subsidiaries in Ñscal 2003 yielded an eÅective tax rate on
the Company's pre-tax loss that was more favorable than the 35% U.S. federal tax rate.
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