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, 1998
------------------
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: 95,616,125 shares outstanding at October 30, 1998.
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,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Sales $6,184,495 $5,653,471 $2,134,769 $1,949,396
---------- ---------- ----------- ----------
Costs and expenses:
Cost of products sold 5,313,003 4,782,974 1,849,487 1,657,850
Selling, general and
administrative expenses 567,669 519,542 185,756 173,784
Depreciation and amortization 37,644 32,129 13,238 11,295
Integration charge - 21,600 - 21,600
Realignment charge - 37,900 - 37,900
---------- ---------- ---------- ----------
5,918,316 5,394,145 2,048,481 1,902,429
---------- ---------- ---------- ----------
Operating income 266,179 259,326 86,288 46,967
Equity in earnings of
affiliated companies 431 1,006 319 474
Interest expense 59,739 48,193 20,728 18,145
---------- ---------- ---------- ----------
Earnings before income
taxes and minority interest 206,871 212,139 65,879 29,296
Provision for income taxes 87,204 92,156 27,998 17,165
---------- ---------- ---------- ----------
Earnings before minority interest 119,667 119,983 37,881 12,131
Minority interest 6,169 8,628 2,318 2,849
---------- ---------- ---------- ----------
Net income $ 113,498 $ 111,355 $ 35,563 $ 9,282
========== ========== ========== ==========
Net income per share:
Basic $1.18 $1.13 $.37 $.10
===== ===== ==== ====
Diluted $1.16 $1.11 $.37 $.09
===== ===== ==== ====
Average number of shares
outstanding:
Basic 96,061 98,794 95,060 97,522
====== ======= ====== ======
Diluted 97,885 100,437 96,135 99,263
====== ======= ====== ======
See accompanying notes.
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and short-term investments $ 87,583 $ 112,665
Accounts receivable, less allowance
for doubtful accounts ($52,341 in 1998
and $46,055 in 1997) 1,421,498 1,245,354
Inventories 1,325,417 1,230,053
Prepaid expenses and other assets 32,622 42,268
---------- ----------
Total current assets 2,867,120 2,630,340
Property, plant and equipment at cost:
Land 13,534 9,699
Buildings and improvements 86,260 75,431
Machinery and equipment 172,121 143,030
---------- ----------
271,915 228,160
Less accumulated depreciation and
amortization 134,128 113,923 )
---------- ----------
137,787 114,237
Investment in affiliated companies 23,850 54,914
Cost in excess of net assets of
companies acquired, net of amortization
($83,974 in 1998 and $69,899 in 1997) 712,902 645,152
Other assets 93,699 93,230
---------- ----------
$3,835,358 $3,537,873
========== ==========
See accompanying notes.
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 845,363 $ 767,088
Accrued expenses 275,104 285,673
Short-term borrowings, including current
maturities of long-term debt 163,120 143,723
---------- ----------
Total current liabilities 1,283,587 1,196,484
Long-term debt 930,478 823,099
Other liabilities 88,665 87,254
Minority interest 71,515 70,278
Shareholders' equity:
Common stock, par value $1:
Authorized - 120,000,000 shares
Issued - 102,949,640 shares in 1998 and 1997 102,950 102,950
Capital in excess of par value 504,892 506,656
Retained earnings 1,082,496 968,998
Foreign currency translation adjustment (11,093) (35,881)
---------- ----------
1,679,245 1,542,723
Less: Treasury stock (7,380,015 shares in 1998
and 6,011,903 shares in 1997), at cost 199,875 164,207
Unamortized employee stock awards 18,257 17,758
---------- ----------
1,461,113 1,360,758
---------- ----------
$3,835,358 $3,537,873
========== ==========
See accompanying notes.
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30,
---------------------------
1998 1997
--------- --------
(Unaudited)
Cash flows from operating activities:
Net income $113,498 $111,355
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Minority interest in earnings 6,169 8,628
Depreciation and amortization 39,518 35,266
Equity in undistributed earnings
of affiliated companies (431) (1,006)
Realignment and integration charges - 59,500
Deferred income taxes (308) (11,615)
Change in assets and liabilities,
net of effects of acquired businesses:
Accounts receivable (106,624) (227,719)
Inventories (36,870) (62,668)
Prepaid expenses and other assets 11,238 7,375
Accounts payable 39,938 107,944
Accrued expenses (47,433) 4,103
Other 13,306 2,151
-------- --------
Net cash provided by operating activities 32,001 33,314
-------- --------
Cash flows from investing activities:
Acquisition of property, plant and
equipment, net (33,617) (22,198)
Cash consideration paid for acquired businesses (56,693) (350,870)
-------- ---------
Net cash used for investing activities (90,310) (373,068)
-------- ---------
Cash flows from financing activities:
Change in short-term borrowings (8,244) 31,012
Change in credit facilities (91,977) 33,089
Repayment of long-term debt (187) (1,450)
Proceeds from long-term debt 195,814 394,335
Proceeds from exercise of stock options 7,203 15,549
Purchases of common stock (50,128) (101,009)
Distribution to minority partners (26,659) (17,389)
-------- ---------
Net cash provided by financing activities 25,822 354,137
-------- ---------
Effect of exchange rate changes on cash 2,606 (13,769)
-------- ---------
Net increase (decrease)in cash and short-term investments (29,881) 614
Cash and short-term investments at beginning
of period 112,665 136,400
Cash and short-term investments of acquired affiliate 4,799 -
-------- --------
Cash and short-term investments at end of period $ 87,583 $137,014
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 89,670 $ 83,410
Interest 69,294 43,788
See accompanying notes.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(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, 1997 and the notes thereto. The results of operations for
the interim periods are not necessarily indicative of results for the full
year.
Note B - Special charges
---------------
The 1997 consolidated statement of income includes special pre-tax charges
totaling $59,500,000 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 upon 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. Excluding
the integration and realignment charges, net income and net income per
share on a basic and diluted basis were $49.7 million, $.51, and $.50,
respectively, for the three months ended September 30, 1997 and $151.8
million, $1.54, and $1.51, respectively, for the nine months ended
September 30, 1997.
Note C -- Subsequent Events
-----------------
In October, the company announced that it had entered into definitive
agreements to acquire the Electronics Distribution Group of Bell Industries,
Inc. and Richey Electronics, Inc. The company also sold $250,000,000 of 6.45%
Senior Notes due 2003, the net proceeds of which will be used to fund a
portion of the purchase price for these acquisitions. The acquisitions are
expected to close around year-end. Prior to the closings, the net proceeds
will be used to repay existing indebtedness and for short-term investments.
Note D -- Earnings per share
------------------
The following table sets forth the calculation of basic and diluted earnings
per share (in thousands except per share data):
For the Nine For the Three
Months Ended Months Ended
September 30, September 30,
-------------------- ------------------
1998 1997 1998 1997
-------- -------- ------- -------
Net income $113,498 $111,355 $35,563 $ 9,282
======== ======== ======= =======
Weighed average common
shares outstanding
for basic earnings
per share 96,061 98,794 95,060 97,522
Net effect of dilutive
stock options and
restricted stock
awards 1,824 1,643 1,075 1,741
Weighted average common -------- ------- ------- ------
shares outstanding
for diluted earnings
per share 97,885 100,437 96,135 99,263
====== ======= ====== ======
Basic earnings per share $1.18 $1.13 $.37 $.10
===== ===== ==== ====
Diluted earnings per share $1.16 $1.11 $.37 $.09
===== ===== ==== ====
Note E -- Comprehensive Income
--------------------
Effective January 1, 1998, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" which
requires disclosure of comprehensive income and its components.
Comprehensive income is defined as the aggregate change in shareholders'
equity excluding changes in ownership interests. For the company,
the components of comprehensive income are as follows (in thousands):
For the Nine For the Three
Months Ended Months Ended
September 30, September 30,
-------------------- ------------------
1998 1997 1998 1997
-------- -------- ------- -------
Net income $113,498 $111,355 $35,563 $ 9,282
Foreign currency
translation adjustments(a) 24,788 (43,150) 38,892 (8,284)
-------- -------- ------- -------
Comprehensive income $138,286 $ 68,205 $74,455 $ 998
======== ======== ======= =======
(a) The foreign currency translation adjustments have not been tax
effected as investments in foreign affiliates are deemed to be
permanent.
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 1998 increased
more than 9 percent compared with the year-earlier periods. This sales
growth was principally due to increased activity levels in Gates/Arrow
Distributing ("Gates/Arrow"), the company's computer products business in
North America, and the acquisition of two mid-range computer product
distributors, offset, in part, by a stronger U.S. dollar during the nine
month period and lower sales in the company's worldwide component
distribution businesses. The performance of the company's component
distribution businesses reflects the difficult market conditions affecting
the industry generally. Supply remains well ahead of demand and the
resultant pressure on both average selling prices and gross profit margins,
coupled with the impact of the financial crisis in Asia, is negatively
impacting the company's results.
Operating income
- ----------------
The company recorded operating income of $266.2 million and $86.3 million
in the first nine months and third quarter of 1998, respectively, compared
with $259.3 million and $47.0 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 decrease in operating income, excluding the
special charges, in the first nine months and third quarter of 1998,
compared with the year-earlier periods, reflects the impact of lower sales
and gross profit margins in the worldwide component distribution
businesses, offset, in part, by increased sales and improved operating
performance at Gates/Arrow.
Interest expense
- ----------------
Interest expense of $59.7 million and $20.7 million in the first nine months
and third quarter of 1998, respectively, increased from $48.2 million during
the first nine months of 1997 and $18.1 million in the comparable quarter of
1997. The increase from the first nine months and third quarter of 1997 is the
result of increased borrowing to fund acquisitions, purchases of the company's
common stock, and investments in working capital, offset, in part, by lower
interest rates.
Income taxes
- ------------
The company recorded a provision for taxes at an effective rate of 42.2
percent and 42.5 percent for the first nine months and third quarter of 1998,
respectively, compared with 40.9 percent and 40.8 percent, excluding the
impact of the aforementioned special charges, in the comparable year-earlier
periods. The increase in the effective rate for 1998 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 $113.5 million and $35.6 million in the
first nine months and third quarter of 1998, respectively, compared with
$111.4 million in the first nine months of 1997 and $9.3 million in the third
quarter of 1997. Excluding the aforementioned special charges, net income was
$151.8 million and $49.7 million for the first nine months and third quarter
of 1997, respectively. The decrease in net income is due to lower operating
income and 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 75 percent at September 30, 1998 compared with
74 percent at September 30, 1997.
The net amount of cash provided by the company's operating activities during
the first nine months of 1998 was $32 million, principally reflecting earnings
offset, in part, by investments in working capital. The net amount of cash
used for investing activities was $90.3 million, including $33.6 million for
various capital expenditures and $56.7 million for various investments and
acquisitions. The net amount of cash provided by financing activities was
$24.3 million, principally reflecting $196 million of proceeds from the
issuance in May 1998 of the company's 6 7/8% senior debentures, offset by the
repayment of certain amounts borrowed under the company's credit facilities,
purchases of the company's common stock, and distributions to partners.
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 and 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 7% senior notes
and 7 1/2% senior debentures and increases in the company's credit facilities
offset, in part, by purchases of the company's common stock.
Year 2000 Update
- ----------------
The company previously initiated a comprehensive, worldwide review to
identify, evaluate and address Year 2000 issues and implemented a plan to
resolve those issues. Included within the scope of this initiative are
operational and information technology computer systems and embedded systems
contained in machinery and equipment including warehousing and
telecommunications equipment, as well as a review of the Year 2000 compliance
efforts of key suppliers and other principal business partners.
Work is progressing in the following phases: inventory, assessment,
remediation, testing deployment, and monitoring. The inventory and assessment
phases have been substantially completed and the remediation and testing
phases are in progress. The company believes that after modifications to its
systems, the Year 2000 issue will not pose significant operational problems.
If such modifications are not completed, however, the Year 2000 issues may
have a material impact on the operations of the company.
The company is engaged in an effort to assess important Year 2000 issues with
its customers and third parties upon whom it depends for essential products
and services. There can be no guarantee that these parties will convert their
critical systems and processes in a timely manner. Failure or delay by any of
these parties could significantly disrupt business.
Information Relating to Forward-Looking Statements
- --------------------------------------------------
This report includes forward-looking statements that are subject to certain
risks and uncertainties which could cause actual results or facts to differ
materially from such statements for a variety of reasons, including, but not
limited to: industry conditions; changes in product supply, pricing, and
customer demand; competition; other vagaries in the computer and electronic
components markets; and changes in relationships with key suppliers.
Shareholders and other readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date on which
they are made. The company undertakes no obligation to update publicly or
revise any of the forward-looking statements.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
None.
(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 13, 1998 By:/s/ Gerald Luterman
-------------------
Gerald Luterman
Senior Vice President and
Chief Financial Officer
Date: November 13, 1998 By:/s/ Paul J. Reilly
------------------
Paul J. Reilly
Vice President and
Corporate Controller