Avnet 2006 Annual Report Download - page 33

Download and view the complete annual report

Please find page 33 of the 2006 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.

Page out of 98

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98

debt outstanding at the end of fiscal 2004 and an average debt balance during fiscal 2004 of $1.36 billion and
$1.41 billion, respectively. The Company's overall effective interest rate also declined as a result of two
actions. First, the Company repaid in cash, at maturity, its $100.0 million 6
7
/
8
% Notes due March 15, 2004.
These notes were outstanding for nearly three quarters of fiscal 2004 with no comparable interest expense in
fiscal 2005. Additionally, the Company paid off $273.4 million of its 7
7
/
8
% Notes due February 15, 2005 with
the proceeds from its 2% Convertible Debentures due March 15, 2034, which were issued in March 2004. This
resulted in a substantial decrease in effective rates between these two obligations year-over-year. The
remaining $86.6 million of the 7
7
/
8
% Notes were paid off in cash at their maturity date during the third quarter
of fiscal 2005, which eliminated the remaining interest expense on the 7
7
/
8
% Notes for the remainder of fiscal
2005. These positive impacts on the Company's effective interest rate were offset, in part, by short-term
interest rates that rose throughout fiscal 2005, which results in the Company's fair value hedges paying interest
at a higher rate. Specifically, from the end of fiscal 2004 to the end of fiscal 2005, the interest rates on the
Company's $400.0 million hedge of its 8% Notes and $300.0 million hedge of its 9
3
/
4
% Notes due February 15,
2008 (the ""9
3
/
4
% Notes'') each rose by approximately 190 basis points.
Other income, net, in fiscal 2006 was $4.8 million as compared with $3.5 million in fiscal 2005 and
$7.1 million in fiscal 2004. Fiscal 2006 results included higher rate interest income earned on normal cash
balances partially offset by foreign currency losses. The interest income in fiscal 2006 also included
approximately $0.4 million earned on the investment of the net proceeds from the issuance of the 6.00% Notes
during the four week tender period for the 8.00% Notes discussed above. Fiscal 2005 and fiscal 2004 both
contained foreign currency losses which offset a portion of the interest income earned in the respective years
on the Company's cash and cash equivalent balances.
Debt Extinguishment Costs
As discussed further under Liquidity and Capital Resources Ì Financing Transactions, the Company
incurred debt extinguishment costs in fiscal 2006 and 2004 associated with the tender and early repurchase 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 repurchases, which totaled $22.6 million pre-tax, $13.6 million after-tax, or $0.09 per share on a
diluted basis in fiscal 2006, and $16.4 million pre-tax, $14.2 million after-tax, or $0.12 per share on a diluted
basis in fiscal 2004.
Income Tax Provision
Avnet's effective tax rate on its income before taxes for fiscal 2006 was 35.3% as compared with an
effective tax rate of 29.8% in fiscal 2005 and 25.9% in fiscal 2004. The increase in the effective rate is primarily
a function of a loss on the sale of a small, non-core EM business in the EMEA region for which no tax benefit
was available and additional contingency reserves due to the recognition of tax exposures in the EMEA and
Asia regions, partially offset by a favorable settlement of a European audit. Excluding these items, the
effective tax rate would have been lower than the 35% U.S. federal tax rate for fiscal 2006 as a result of
varying statutory tax rates across the jurisdictions in which the Company operates.
In fiscal 2005 and fiscal 2004, continuing improvement in profitability, particularly in the EMEA and
Asia regions, led to effective tax rates substantially lower than the 35% U.S. federal tax rate.
Net Income
As a result of the factors described in the preceding sections of this MD&A, the Company's net income
was $204.5 million, or $1.39 per share on a diluted basis, in fiscal 2006 compared with net income of
$168.2 million, or $1.39 per share on a diluted basis, in fiscal 2005 and net income of $72.9 million, or
27