Avnet 2006 Annual Report Download - page 42

In June 2006, the Company repurchased $113.6 million of the $475.0 million 9
3
/ 4 % Notes at a price of
approximately $1,058 per $1,000 principal amount of Notes. In connection with this repurchase, the Company
terminated one of the interest rate swaps with a notional amount of $100.0 million that hedged a portion of the
$475.0 million 9
3
/ 4 % Notes. The termination of this swap and repurchase of the related hedged debt resulted in
debt extinguishment costs of $10.9 million pre-tax, $6.6 million after tax and $0.04 per share on a diluted
basis. As a result of the tender and total repurchases in fiscal 2006, as previously described, and the
termination of interest rate swaps noted below, the Company incurred total debt extinguishment costs of
$22.6 million pre-tax, $13.6 million after tax or $0.09 per share on a diluted basis, relating primarily to
premiums and other transaction costs.
The Company's $300.0 million of 2% Convertible Senior Debentures due March 15, 2034 (the
""Debentures'') are convertible into Avnet common stock at a rate of 29.5516 shares of common stock per
$1,000 principal amount of Debentures. The Debentures are only convertible under certain circumstances,
including if: (i) the closing price of the Company's common stock reaches $45.68 per share (subject to
adjustment in certain circumstances) for a specified period of time; (ii) the average trading price of the
Debentures falls below a certain percentage of the conversion value per Debenture for a specified period of
time; (iii) the Company calls the Debentures for redemption; or (iv) certain corporate transactions, as
defined, occur. Upon conversion, the Company will deliver cash in lieu of common stock as the Company
made an irrevocable election in December 2004 to satisfy the principal portion of the Debentures, if converted,
in cash. The Company may redeem some or all of the Debentures for cash any time on or after March 20,
2009 at the Debentures' full principal amount plus accrued and unpaid interest, if any. Holders of the
Debentures may require the Company to purchase, in cash, all or a portion of the Debentures on March 15,
2009, 2014, 2019, 2024 and 2029, or upon a fundamental change, as defined, at the Debentures' full principal
amount plus accrued and unpaid interest, if any.
At July 2, 2005, the Company had two interest rate swaps with a total notional amount of $400.0 million
in order to hedge the change in fair value of the 8% Notes related to fluctuations in interest rates. These
contracts were classified as fair value hedges with a November 2006 maturity date. The interest rate swaps
modified the Company's interest rate exposure by effectively converting the fixed rate on the 8% Notes to a
floating rate (6.4% at July 2, 2005) based on three-month U.S. LIBOR plus a spread through their maturities.
During the first quarter of fiscal 2006, the Company terminated the interest rate swaps which hedged the
8% Notes due to the repurchase of $254.1 million of the $400.0 million 8% Notes, as previously discussed. The
termination of the swaps resulted in net proceeds to the Company, of which, $1.3 million was netted in debt
extinguishment costs in the first quarter of fiscal 2006 based on the pro rata portion of the 8% Notes that were
repurchased. The remaining proceeds of $0.8 million, which represent the pro rata portion of the 8% Notes
that were not repurchased, have been capitalized in other long-term debt and are being amortized over the
maturity of the remaining 8% Notes.
At July 2, 2005, the Company had three additional interest rate swaps with a total notional amount of
$300.0 million, in order to hedge the change in fair value of the 9
3
/ 4 % Notes related to fluctuations in interest
rates. As discussed previously, in June 2006, the Company terminated one of the three $100.0 million notional
amount interest rate swaps in connection with the $113.6 million repurchase of the $475.0 million 9
3
/ 4 % Notes.
As $100.0 million of the repurchase related to the terminated interest rate swap, the $3.5 million of costs
incurred to terminate the swap were included in the debt extinguishment costs recorded in fiscal 2006. The
remaining hedges are classified as fair value hedges and mature in February 2008. These interest rate swaps
modify the Company's interest rate exposure by effectively converting the fixed rate on the 9
3
/ 4 % Notes to a
floating rate (11.7% at July 1, 2006) based on three-month U.S. LIBOR plus a spread through their
maturities.
The hedged fixed rate debt and the interest rate swaps are adjusted to current market values through
interest expense in the consolidated statements of operations. The Company accounts for the hedges using the
shortcut method as defined under Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards
No. 138, Accounting for Certain Derivative Instruments and Hedging Activities. Due to the effectiveness of the
36