SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended August 31, 1997
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 1-5441.
MARSHALL INDUSTRIES
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(Exact name of registrant as specified in its charter)
California 95-2048764
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9320 Telstar Avenue, El Monte, California 91731-2895
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 307-6000
Common Stock outstanding by class as of August 31, 1997
Common Stock 16,616,364 Shares
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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
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1
MARSHALL INDUSTRIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's Omitted)
ASSETS
August 31, May 31,
1997 1997
(Unaudited) (Audited)
----------- ---------
Current Assets:
Cash $ 2,129 $ 1,687
Receivables - net 161,479 167,769
Inventories 286,916 284,419
Deferred income tax benefits 14,272 14,272
Prepaid expenses 941 904
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Total Current Assets 465,737 469,051
-------- --------
Property, Plant and Equipment, net
of accumulated depreciation and
amortization of $46,310 at
August 31, 1997 and $44,988
at May 31, 1997 35,770 36,232
Note Receivable (Note 3) - 33,110
Equity investment (Note 3) 39,324 -
Other Assets - net 760 1,280
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Total Assets $541,591 $539,673
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LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable and accrued
expenses $ 114,774 $136,649
Income taxes payable 4,877 1,440
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Total Current Liabilities 119,651 138,089
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Long-term debt 55,000 50,000
Deferred Income Tax Liabilities 2,642 2,642
Shareholders' Investment 364,298 348,942
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Total Liabilities and
Shareholders' Investment $541,591 $539,673
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The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
MARSHALL INDUSTRIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(000's omitted except per share data)
THREE MONTHS ENDED
AUGUST 31,
1997 1996
---- ----
Net sales $324,423 $269,290
Cost of sales 273,702 222,428
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Gross profit 50,721 46,862
Selling, general and
administrative expenses 33,953 31,791
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Income from operations 16,768 15,071
Interest expense(income) - net 748 (137)
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Income before income taxes 16,020 15,208
Provision for income taxes 6,760 6,425
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Net income $ 9,260 $ 8,783
-------- --------
-------- --------
Net income per share $ .55 $ .51
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-------- --------
Average number of shares outstanding 16,920 17,350
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-------- --------
The accompanying notes are an integral part of these condensed consolidated
income statements.
3
MARSHALL INDUSTRIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's omitted)
THREE MONTHS ENDED
AUGUST 31,
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 9,260 $ 8,783
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,116 2,250
Net (increase)decrease in
current assets and liabilities (14,682) 15,793
Interest on note receivable (172) (830)
Other operating activities --- (9)
-------- --------
Net cash (used in)provided by operating
activities (3,478) 25,987
Cash flows from investing activities:
Capital expenditures (1,080) (814)
Deferred software costs --- (83)
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Net cash used for investing activities (1,080) (897)
Cash flows from financing activities:
Net borrowings under bank
lines of credit 5,000 ---
Repayments of other long-term debt --- (10,000)
Purchase of common stock --- (6,370)
-------- --------
Net cash provided by (used in) financing
activities 5,000 (16,370)
Net increase in cash 442 8,720
Cash at the beginning of the period 1,687 2,208
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Cash at the end of the period $ 2,129 $10,928
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Cash payments during the quarter
for the following:
Interest $ 883 $ 641
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-------- --------
Income taxes $ 3,323 $ 2,808
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed consolidated cash
flow statements.
4
MARSHALL INDUSTRIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto in
the Company's annual report on Form 10-K for the year ended May 31, 1997.
In the opinion of the Company, the unaudited condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
considered necessary to present fairly the Company's financial position as of
August 31, 1997 and the results of its operations and cash flows for the three
month periods ended August 31, 1997 and 1996.
NOTE 2: ACCOUNTING POLICIES
Reference is made to Note 1 of Notes to Consolidated Financial Statements in the
Company's annual report on Form 10-K for the summary of significant accounting
policies.
NOTE 3: INVESTMENT IN SONEPAR ELECTRONIQUE INTERNATIONAL
During the first quarter of fiscal 1998, the Company converted the note
receivable from Sonepar Electronique International plus accrued interest into a
minority equity interest of 16% in SEI's electronics distribution companies. In
connection with this conversion, the Company granted a stock option to SEI for a
period of two years to purchase 874,545 shares of the Company's stock at a price
of $34.5685 per share which is based on the average trading price of the
Company's stock for the 90 days preceding the conversion date. Based on a
preliminary allocation of the investment cost, goodwill of approximately $10
million was recorded as a result of this transaction. The Company has elected
to amortize this goodwill over a period of thirty years. During the first
quarter, the Company recorded a non-cash currency translation
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loss of $1.311 million on the equity investment with an offsetting charge
against shareholders' investment.
NOTE 4: JOINT VENTURE
As described in Note 8 to the Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended May 31, 1997, the Company formed a
joint venture, known as Accord Contract Services LLC ("Accord"), with Wyle
Electronics ("Wyle"), another distributor of semiconductors and computer
products in August 1996. On or about August 6, 1997 Raab Karcher AG, an indirect
wholly-owned subsidiary of VEBA AG, consummated a tender offer for all or
substantially all of the common stock of Wyle. Under the terms of the Accord
Agreement, such a change in the ownership of Wyle allows the Company, at its
option, to terminate the joint venture and receive a termination fee. The
Company has elected to terminate the joint venture and received a termination
fee of $25.150 million on September 30, 1997, which will be recorded in the
Company's second quarter results of operations.
NOTE 5: ACQUISITION OF STERLING ELECTRONICS CORP.
On September 19, 1997, the Company announced that a definitive agreement was
entered into whereby the Company, through the merger of Sterling Electronics
Corporation ("Sterling") with a newly formed subsidiary of the Company, will
acquire all of the common stock of Sterling for $21 per share in cash. With
approximately 7.2 million shares outstanding and options covering approximately
1.1 million shares, the expected purchase price will be approximately $162
million. In addition, Sterling has approximately $55 million in debt, which
will be refinanced by the Company as part of the $325 million bank credit
facility as described elsewhere herein. Completion of the transaction is subject
to obtaining necessary regulatory approvals and Sterling shareholders' approval
and various other closing conditions. Assuming such approvals are obtained and
conditions satisfied, it is expected that the transaction will close before
December 31, 1997.
The Company intends to finance this acquisition with bank financing. It is
currently negotiating with its lending banks to complete this credit
facility, which is expected to be $325 million in the aggregate.
6
MARSHALL INDUSTRIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
THREE MONTHS ENDED
AUGUST 31,
----------------
1997 1996
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Net sales 100.0% 100.0%
Cost of sales 84.4 82.6
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Gross profit 15.6 17.4
Selling, general and administrative expenses 10.5 11.8
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Income from operations 5.1 5.6
Interest expense(income) - net .2 (.1)
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Income before provision for income taxes 4.9 5.7
Provision for income taxes 2.0 2.4
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Net income 2.9% 3.3%
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THREE MONTH PERIODS ENDED AUGUST 31, 1997 AND 1996
The Company's net sales increased by $55 million or 20% for the first quarter of
fiscal 1998 from the comparable period of a year ago. The increase was
primarily due to increases in the sales of mass storage and microprocessor
products. The sales of these products increased by $38.9 million for the first
quarter of fiscal 1998, as compared to last year. The addition of new suppliers
during the last several years contributed to most of the increase in the sales
of such products. There were also increases in the sales of most of the
Company's major products for the first quarter of fiscal 1998, as compared to
the comparable period for last year. These increases were, however, partially
offset by decreases in the net sales of memory products, "DRAMs" and "SRAMs".
The sales of these products decreased by $15.9 million for the first quarter of
fiscal 1998 as compared to fiscal 1997. The substantial market declines in unit
pricing during the periods reported accounted for the decrease in sales dollars
of such products.
The decrease in net margins as a percent of sales for the first quarter of
fiscal 1998, as compared to fiscal 1997, was primarily due to the increase in
the sales volume of mass storage products and microprocessors sold, which are
lower margin products. The decline
7
in the margins on some of the Company's products, particularly DRAMs, also
contributed to the decrease in margins in fiscal 1998, as compared to fiscal
1997.
Selling, general, and administrative expenses ("SG&A") increased by $2.1 million
for the first quarter of fiscal 1998, as compared to fiscal 1997. Higher salary
costs of $.5 million from salary adjustments and increases in staffing, and an
increase of $.6 million to enhance and expand the Company's information
technology capabilities contributed to the increase in SG&A expenses for the
first quarter of fiscal 1998 from last year. In addition, the Company incurred
higher levels of operating costs to service the increase in sales volume. There
were also increased freight costs in the first quarter of fiscal 1998, as
compared to last year, caused by the United Parcel Service strike.
The increase in net interest expense for the first quarter of fiscal 1998, as
compared to fiscal 1997, was due primarily to increased levels of borrowings
resulting from increases in inventories which were needed to support the
Company's higher sales volumes. In addition, there was a decrease in interest
income recorded from the conversion of the note receivable from SEI, as
described in Note 3 to the accompanying condensed consolidated financial
statements.
The Company's sources of liquidity at August 31, 1997 consisted principally
of working capital of $346.1 million and unsecured bank lines of credit of
$70 million of which there were borrowings of $55 million outstanding at
August 31, 1997. As discussed in Note 5 to the accompanying condensed
consolidated financial statements, the Company intends to complete a
financing facility for the acquisition of Sterling. The Company believes
that its working capital, borrowing capabilities and additional funds
generated from operations should be sufficient to finance its anticipated
operating requirements.
8
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On September 15, 1997, the Company granted a stock option to SEI for a
period of two years to purchase 874,545 shares of the Company's common
stock at a price of $34.5685 per share. The option was granted to SEI as
part of the transaction pursuant to which the Company acquired a minority
equity interest of 16% in SEI's electronics distribution companies. (See
Notice 3 to the accompanying condensed consolidated financial statements
and Note 6 to the Consolidated Financial Statements in the Company's annual
report on Form 10-K for the year ended may 31, 1997.) The stock option was
issued pursuant to Section 4(2) of the Securities Act of 1933, as amended,
as the stock option was granted to only one entity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of September 18, 1997, by
and among Marshall Industries, MI Holdings Nevada, Inc. and
Sterling Electronics Corporation. (Incorporated herein by
reference to exhibit 2.1 on Form 8-K event date September 18,
1997.)
10.1 Employment Agreement dated as of September 18, 1997 by and
between Marshall Industries and Ronald S. Spolane. (Incorporated
herein by reference to exhibit 10.1 on Form 8-K event date
September 18, 1997.)
10.2 Employment Agreement dated as of September 18, 1997 by and
between Marshall Industries and David S. Spolane. (Incorporated
herein by reference to exhibit 10.2 on Form 8-K event date
September 18, 1997.)
10.3 Shareholders Agreement with Sonepar Electronique International.
10.4 Marshall Industries Non-qualified Stock Option Grant.
27 Financial Data Schedule
9
SIGNATURE
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.
MARSHALL INDUSTRIES
October 14, 1997 /s/ Henry W. Chin
---------------------------------
Henry W. Chin
Vice President, Finance and
Chief Financial Officer
(Mr. Chin is the principal
financial officer and is
duly authorized to sign for
the Company)
10