Avnet 2005 Annual Report Download - page 41

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company seeks to reduce earnings and cash flow volatility associated with changes in interest rates
and foreign currency exchange rates by entering into financial arrangements intended to provide a hedge
against all or a portion of the risks associated with such volatility. The Company continues to have exposure to
such risks to the extent they are not hedged.
The Company has used interest rate swaps that convert certain fixed rate debt to variable rate debt,
effectively hedging the change in fair value of the fixed rate debt resulting from fluctuations in interest rates.
At July 2, 2005, the Company had five interest rate swaps outstanding under which the Company pays a
variable interest rate and receives a fixed interest rate. The following tables set forth the scheduled maturities
of the Company's debt outstanding at July 2, 2005 and the total fair value (generally based on quoted market
prices) of the debt outstanding at July 2, 2005 and July 3, 2004 (dollars in millions):
Fiscal Year
2006 2007 2008 2009 2010 Thereafter Total
Liabilities:
Fixed rate debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1 $400 $476 $ 1 $ 1 $304 $1,183
Floating rate debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $60 $ Ì $ Ì $Ì $Ì $ Ì $ 60
Interest Rate Swaps:
Fixed to variable (notional amounts)ÏÏÏ $Ì $400 $300 $Ì $Ì $ Ì $ 700
As discussed in Financing Transactions, subsequent to fiscal 2005, the Company initiated a tender offer to
purchase up to $250 million of the 8% Notes, which are included in the fiscal 2007 maturities in the table
above. The Company financed this tender through the issuance of $250 million of 6% Notes, which are not
due to mature until fiscal 2016. Additionally, $400.0 million notional amount of the interest rate swaps
reflected in the table below were terminated in August 2005 as a result of this tender for the underlying debt.
Carrying Carrying
Value at Fair Value at Value at Fair Value at
July 2, 2005 July 2, 2005 July 3, 2004 July 3, 2004
Liabilities:
Fixed rate debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,183 $1,249 $1,273 $1,365
Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏ 7.2% 7.2%
Floating rate debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 60 $ 60 $ 70 $ 70
Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏ 4.0% 2.5%
Interest Rate Swaps:
Fixed to variable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1 $ 1 $ 14 $ 14
Average pay rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ LIBOR ° 4.3% LIBOR ° 4.3%
Average receive rate ÏÏÏÏÏÏÏÏÏÏÏÏ 8.8% 8.8%
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
consolidated statements of operations. Therefore, the market risk related to foreign exchange contracts is
offset by changes in valuation of the underlying items being hedged. The asset or liability representing the fair
value of foreign exchange contracts is classified in the captions ""other current assets'' or ""accrued expenses
and other,'' as applicable, in the accompanying consolidated balance sheets. A hypothetical 10% change in
currency exchange rates under the contracts outstanding at July 2, 2005 would result in an increase or
decrease of approximately $16.6 million to the fair value of the forward foreign exchange contracts, which
would generally be offset by an opposite effect on the related hedged positions.
33