UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ----------- Commission file number 1-4482 ------ ARROW ELECTRONICS, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) New York 11-1806155 - -------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 25 Hub Drive, Melville, New York 11747 - -------------------------------- ----------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (516) 391-1300 ----------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ---------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $1 par value: 98,192,497 shares outstanding at October 31, 1997. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS EXCEPT PER SHARE DATA) (Unaudited) Nine Months Ended Three Months Ended September 30, September 30, --------------------- --------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Sales $5,653,471 $4,902,348 $1,949,396 $1,597,379 ---------- ---------- ---------- ---------- Costs and expenses: Cost of products sold 4,782,974 4,111,210 1,657,850 1,353,394 Selling, general and administrative expenses 519,542 454,592 173,784 147,377 Depreciation and amortization 32,129 27,608 11,295 9,254 Integration charge 21,600 - 21,600 - Realignment charge 37,900 - 37,900 - ---------- ---------- ---------- ---------- 5,394,145 4,593,410 1,902,429 1,510,025 ---------- ---------- ---------- ---------- Operating income 259,326 308,938 46,967 87,354 Equity in earnings (loss) of affiliated company 1,006 (419) 474 (391) Interest expense 48,193 29,963 18,145 8,813 ---------- ---------- ---------- ---------- Earnings before income taxes and minority interest 212,139 278,556 29,296 78,150 Provision for income taxes 92,156 110,591 17,165 31,419 ---------- ---------- --------- ---------- Earnings before minority interest 119,983 167,965 12,131 46,731 Minority interest 8,628 13,304 2,849 2,975 ---------- ---------- ---------- ---------- Net income $ 111,355 $ 154,661 $ 9,282 $ 43,756 ========== ========== ========== ========== Net income per common share $1.11 $1.50 $.09 $.43 ===== ===== ==== ==== Average number of common shares and common share equivalents outstanding 100,573 102,930 99,828 102,892 ======= ======= ====== ======= See accompanying notes. ARROW ELECTRONICS, INC. CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) September 30, December 31, 1997 1996 ------------- ------------ (Unaudited) ASSETS - ------ Current assets: Cash and short-term investments $ 137,014 $ 136,400 Accounts receivable, less allowance for doubtful accounts ($44,160 in 1997 and $39,753 in 1996) 1,199,584 902,878 Inventories 1,184,623 1,044,841 Prepaid expenses and other assets 26,796 36,004 ---------- ---------- Total current assets 2,548,017 2,120,123 Property, plant and equipment at cost: Land 9,607 8,712 Buildings and improvements 74,648 77,257 Machinery and equipment 146,639 127,633 ---------- ---------- 230,894 213,602 Less accumulated depreciation and amortization 110,398 98,377 ---------- ---------- 120,496 115,225 Investment in affiliated company 35,206 34,200 Cost in excess of net assets of companies acquired, net of amortization ($66,377 in 1997 and $57,802 in 1996) 638,988 388,787 Other assets 80,838 52,016 ---------- ---------- $3,423,545 $2,710,351 ========== ========== See accompanying notes. ARROW ELECTRONICS, INC. CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) September 30, December 31, 1997 1996 ------------- ------------ (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 751,901 $ 594,474 Accrued expenses 315,449 180,129 Short-term borrowings, including current maturities of long-term debt 67,609 71,504 ---------- ---------- Total current liabilities 1,134,959 846,107 Long-term debt 787,865 344,562 Deferred income taxes and other liabilities 87,734 68,488 Minority interest 62,915 92,712 Shareholders' equity: Common stock, par value $1: Authorized - 120,000,000 shares Issued - 102,949,640 shares in 1997 and 102,392,770 shares in 1996 102,950 102,393 Capital in excess of par value 507,383 498,716 Retained earnings 916,697 805,342 Foreign currency translation adjustment (34,397) 8,753 ---------- ---------- 1,492,633 1,415,204 Less: Treasury stock (4,712,783 shares in 1997 and 2,139,398 shares in 1996), at cost 122,780 49,065 Unamortized employee stock awards 19,781 7,657 ---------- ---------- 1,350,072 1,358,482 ---------- ---------- $3,423,545 $2,710,351 ========== ========== See accompanying notes. ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) Nine Months Ended September 30, ----------------------- 1997 1996 ---- ---- (Unaudited) Cash flows from operating activities: Net income $111,355 $154,661 Adjustments to reconcile net income to net cash provided by (used for) operations: Minority interest in earnings 8,628 13,304 Depreciation and amortization 35,266 29,372 Equity in undistributed (earnings) loss of affiliated company (1,006) 419 Realignment and integration charges 59,500 - Deferred income taxes (11,615) 7,673 Change in assets and liabilities, net of effects of acquired businesses: Accounts receivable (227,719) (35,760) Inventories (62,668) 59,561 Prepaid expenses and other assets 7,375 10,703 Accounts payable 107,944 8,245 Accrued expenses 4,103 (15,631) Other 2,151 4,613 --------- --------- Net cash provided by operating activities 33,314 237,160 --------- --------- Cash flows from investing activities: Acquisition of property, plant and equipment, net (22,198) (22,553) Proceeds from sale of building - 10,442 Cash consideration paid for acquired businesses (350,870) (37,759) Other - 1,752 --------- --------- Net cash used for investing activities (373,068) (48,118) --------- --------- Cash flows from financing activities: Change in short-term borrowings 31,012 (52,096) Change in credit facilities 33,089 (109,372) Repayment of long-term debt (1,450) (6,896) Proceeds from long-term debt 394,335 - Proceeds from exercise of stock options 15,549 8,843 Purchases of common stock (101,009) (9,787) Distribution to minority partners (17,389) (9,378) --------- --------- Net cash provided by (used for) financing activities 354,137 (178,686) --------- --------- Effect of exchange rate changes on cash (13,769) (4,312) --------- --------- Net increase in cash and short-term investments 614 6,044 Cash and short-term investments at beginning of period 136,400 93,947 --------- --------- Cash and short-term investments at end of period $ 137,014 $ 99,991 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes $ 83,410 $ 103,809 Interest 43,788 33,271 See accompanying notes. ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (Unaudited) Note A -- Basis of presentation - ------------------------------- The accompanying consolidated financial statements reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations at and for the periods presented. Such financial statements do not include all the information or footnotes necessary for a complete presentation and, accordingly, should be read in conjunction with the company's audited consolidated financial statements for the year ended December 31, 1996 and the notes thereto. The results of operations for the interim periods are not necessarily indicative of results for the full year. Note B -- Stock split - --------------------- All share and per share amounts have been adjusted to reflect a 2-for-1 stock split in the form of a 100% stock dividend paid on October 15, 1997 to shareholders of record on October 3, 1997. Note C -- Authorized shares and net income per common share - ----------------------------------------------------------- Net income per common share is based upon the weighted average number of shares of common stock and common stock equivalents outstanding. For the nine months ended September 30, 1997 and 1996, the average number of common stock equivalents was 1,686,660 and 1,157,384, respectively. For the quarter ended September 30, 1997 and 1996, the average number of common stock equivalents was 1,714,656 and 887,312, respectively. Note D - Special charges - ------------------------ The consolidated statement of income includes special pre-tax charges totaling $59,500,000 ($.40 and $.41 per share for the nine months and quarter ended September 30, 1997, respectively) related to the realignment of the company's North American components operations and the integration of the volume electronic distribution businesses (FES Group) of Premier Farnell plc acquired earlier in 1997. Of this amount $37,900,000 represents costs associated with the realignment of the North American components operations into seven operating groups based on customer needs. The costs associated with this realignment principally include real estate termination costs, severance and other expenses related to personnel, and costs related to communicating the announcement of the realignment to customers, suppliers, and employees. The remaining $21,600,000 represents costs associated with the integration of the FES group including real estate termination costs, severance and other expenses related to personnel performing duplicative functions, professional fees, and the disposal of duplicative fixed assets. Item 2. Management's Discussion and Analysis of Financial ------------------------------------------------- Condition and Results of Operations. ----------------------------------- Sales - ----- Consolidated sales for the nine months and third quarter of 1997 increased 15 percent and 22 percent, respectively, compared with the year-earlier periods. This sales growth was principally due to increased activity levels throughout the world and the acquisition of the FES Group offset, in part, by the impact of a stronger U.S. dollar. Excluding the FES Group, sales for the nine months and third quarter of 1997 increased more than 9 percent and 15 percent, respectively, compared with the year-earlier periods. Operating income - ---------------- The company recorded operating income of $259.3 million and $47.0 million in the first nine months and third quarter of 1997, respectively, compared with $308.9 million and $87.4 million, respectively, in the year-earlier periods. Included in 1997's results are special pre-tax charges of $21.6 million associated with the integration of the FES Group and $37.9 million related to the realignment of the company's North American components operations. Excluding these special charges, operating income was $318.8 million and $106.5 million for the nine months and quarter ended September 30, 1997, respectively. The improvement in operating income, excluding the special charges, in the first nine months and third quarter of 1997, compared with the year-earlier periods, reflects the impact of increased sales, the acquisition of the FES Group, and economies of scale offset, in part, by lower gross profit margins caused by competitive pricing pressures and a changing product mix more heavily weighted to commercial computer products. Interest expense - ---------------- Interest expense of $48.2 million and $18.1 million in the first nine months and third quarter of 1997, respectively, increased from $30 million during the first nine months of 1996 and $8.8 million in the comparable quarter of 1996. The increase from the first nine months and third quarter of 1996 is a result of acquisitions, the repurchase of the company's common stock, and investments in working capital. Income taxes - ------------ Excluding the special charges, the company recorded a provision for taxes at an effective rate of 40.9 percent and 40.8 percent for the first nine months and third quarter of 1997, respectively, compared with 39.7 percent and 40.2 percent in the comparable year-earlier periods. The increase in the provision for 1997 compared with the year earlier periods is due to increased earnings in countries with higher marginal tax rates. Net income - ---------- The company recorded net income of $111.4 million and $9.3 million in the first nine months and third quarter of 1997, respectively, compared with $154.7 million in the first nine months of 1996 and $43.8 million in the third quarter of 1996. Excluding the special charges of $16.9 million, net of tax, associated with the integration of the FES Group and the special charge of $23.5 million, net of tax, related to the realignment of the company's North American components operations, net income was $151.8 million ($1.51 per share) and $49.7 million ($.50 per share) for the first nine months and third quarter of 1997, respectively. The decrease in net income for the first nine months is due to a decrease in gross profit margins and an increase in interest expense offset, in part, by higher sales. The increase in net income for the third quarter is attributable to higher operating income offset, in part, by an increase in interest expense. Liquidity and capital resources - ------------------------------- The company maintains a high level of current assets, primarily accounts receivable and inventories. Consolidated current assets as a percentage of total assets were approximately 74 percent and 78 percent at September 30, 1997 and 1996, respectively. The net amount of cash provided by the company's operating activities during the first nine months of 1997 was $33.3 million, principally reflecting earnings plus non-cash charges offset, in part, by increased working capital requirements supporting higher sales. The net amount of cash used for investing activities was $373.1 million, including approximately $350.9 million for investments and acquisitions. The net amount of cash provided by financing activities was $354.1 million reflecting the $393 million of proceeds from the issuance in January 1997 of the company's senior notes and senior debentures and increases in the company's credit facilities offset, in part, by the purchase of the company's common stock. The net amount of cash provided by the company's operating activities during the first nine months of 1996 was $237.2 million, principally reflecting increased earnings and improved working capital usage. The net amount of cash used for investing activities was $48.1 million, including $22.6 million for various capital expenditures and $37.8 million for various investments and acquisitions. The net amount of cash used for financing activities was $178.7 million, principally reflecting the reduction in the company's borrowings, purchases of the company's common stock and distributions to partners. The company believes that its working capital, funds available under its credit agreements, and additional funds generated from operations will be sufficient to satisfy its cash requirements at least through 1998. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- None. Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits (11) Statement Re: Computation of Earnings Per Share (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARROW ELECTRONICS, INC. Date: November 12, 1997 By:/s/ Gerald Luterman ------------------- Gerald Luterman Senior Vice President and Chief Financial Officer Date: November 12, 1997 By:/s/ Paul J. Reilly ------------------ Paul J. Reilly Vice President and Corporate Controller