Avnet 2005 Annual Report Download - page 39

In August 2005, the Company amended its accounts receivable securitization program to, among other
things, increase the maximum available for borrowing from $350.0 million to $450.0 million. The availability
for financing under the amended facility is dependent on the level of the Company's trade receivables from
month-to-month. In addition, the Program, as amended, no longer qualifies as off-balance sheet financing. As
a result, the receivables and related debt will remain on the Company's consolidated balance sheet when
amounts are drawn on the Program. The purpose of the Program is to provide the Company with an additional
source of liquidity at interest rates more favorable than it could receive through other forms of financing. The
Program, as amended, has a one-year term, which expires in August 2006.
Covenants and Conditions
The Program agreement discussed above required the Company to maintain senior unsecured credit
ratings above certain minimum ratings triggers in order to continue utilizing the Program. These minimum
ratings triggers were Ba3 by Moody's Investor Services or BB- by Standard & Poors. The minimum ratings
triggers were eliminated in the amended Program discussed in Off-Balance Sheet Arrangements and replaced
with minimum interest coverage and leverage ratios as defined in the Credit Facility (see discussion below).
The Program agreement in effect at July 2, 2005, as well as the amended Program agreement also contain
certain covenants relating to the quality of the receivables sold. If these conditions are not met, the Company
may not be able to borrow any additional funds and the financial institutions may consider this an amortization
event, as defined in the agreements, which would permit the financial institutions to liquidate the accounts
receivable sold to cover any outstanding borrowings. Circumstances that could affect the Company's ability to
meet the required covenants and conditions of the agreements include the Company's ongoing profitability
and various other economic, market and industry factors. The Company was in compliance with all covenants
of the Program at July 2, 2005.
The Credit Facility discussed in Financing Transactions contains certain covenants with various
limitations on debt incurrence, dividends, investments and capital expenditures and also includes financial
covenants requiring the Company to maintain minimum interest coverage and leverage ratios, as defined.
Management does not believe that the covenants in the Credit Facility limit the Company's ability to pursue
its intended business strategy or future financing needs. The Company was in compliance with all covenants of
the Credit Facility as of July 2, 2005.
See Liquidity for further discussion of the Company's availability under these various facilities.
Liquidity
The Company had total borrowing capacity of $700.0 million at July 2, 2005 under the Credit Facility
and the Program, against which $19.7 million in letters of credit were issued under the Credit Facility as of
July 2, 2005, resulting in $680.3 million of net availability. The Company also had an additional $637.9 million
of cash and cash equivalents at July 2, 2005. Approximately $343 million of this cash balance, excluding
transaction costs, was used to fund the acquisition of Memec and paydown of substantially all of Memec's
outstanding debt obligations, including related expenses, subsequent to fiscal 2005 (see Acquisitions in Item 1
and Note 2 to the consolidated financial statements appearing in Item 15 of this Report). Also subsequent to
fiscal 2005, the Company contributed $55.6 million to its defined benefit pension plan. There are no
significant financial commitments of the Company outside of normal debt and lease maturities as disclosed in
Long-Term Contractual Obligations. Even with the usage of cash for the Memec acquisition, management
believes that Avnet's borrowing capacity, its cash availability and the Company's expected ability to generate
operating cash flows are sufficient to meet its projected financing needs. As discussed more fully in Cash
Flows, the Company is less likely to generate positive cash flows from working capital reductions during an up-
cycle in the electronic components and computer products industry. However, additional cash requirements
for working capital are generally expected to be offset by the operating cash flows generated by the Company's
enhanced profitability model resulting from the Company's significant cost reductions achieved in recent
years. Furthermore, subsequent to fiscal year end, the Company made a tender offer to repurchase up to
$250 million of the $400.0 million 8% Notes, which is the Company's next significant public debt maturity.
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