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 November 30, 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
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-2048764
- --------------------------------------------------------------------------------
(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 November 30, 1997
Common Stock 16,616,364 shares
- --------------------------------------------------------------------------------
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
--- ---
1
MARSHALL INDUSTRIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's Omitted)
ASSETS
November 30, May 31,
1997 1997
(Unaudited) (Audited)
--------- ---------
Current Assets:
Cash $ 5,372 $ 1,687
Receivables - net 163,579 167,769
Inventories 279,236 284,419
Deferred income tax benefits 14,272 14,272
Prepaid expenses 892 904
--------- ---------
Total Current Assets 463,351 469,051
--------- ---------
Property, Plant and Equipment, net
of accumulated depreciation and
amortization of $47,867 at
November 30, 1997 and $44,988
at May 31, 1997 38,020 36,232
Note Receivable - 33,110
Equity investment 40,168 -
Other Assets - net 365 1,280
--------- ---------
Total Assets $541,904 $539,673
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable and accrued
expenses $ 130,737 $136,649
Income taxes payable 1,271 1,440
--------- ---------
Total Current Liabilities 132,008 138,089
--------- ---------
Long-Term Debt 18,000 50,000
Deferred Income Tax Liabilities 2,642 2,642
Shareholders' Investment 389,254 348,942
--------- ---------
Total Liabilities and
Shareholders' Investment $541,904 $539,673
--------- ---------
--------- ---------
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
MARSHALL INDUSTRIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(000'S OMITTED EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
November 30, November 30,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales $351,212 $286,346 $675,635 $555,636
Cost of sales 299,367 238,526 573,069 460,954
-------- -------- -------- --------
Gross profit 51,845 47,820 102,566 94,682
Selling, general and
administrative expenses 35,214 32,263 69,167 64,054
-------- -------- -------- --------
Income from operations 16,631 15,557 33,399 30,628
Interest expense (income)
and other--net 417 (568) 1,165 (705)
-------- -------- -------- --------
Income before income taxes
and extraordinary gain 16,214 16,125 32,234 31,333
Provision for income taxes 6,795 6,775 13,555 13,200
-------- -------- -------- --------
Income before extraordinary gain 9,419 9,350 18,679 18,133
Extraordinary gain from
termination of joint venture
(Net of income taxes of $10,535) 14,615 --- 14,615 ---
-------- -------- -------- --------
Net income $ 24,034 $ 9,350 $ 33,294 $ 18,133
-------- -------- -------- --------
-------- -------- -------- --------
Income per share before
extraordinary gain $ .56 $ .55 $ 1.11 $ 1.05
Extraordinary gain per share .86 --- .86 ---
-------- -------- -------- --------
Net income per share $ 1.42 $ .55 $ 1.97 $ 1.05
-------- -------- -------- --------
-------- -------- -------- --------
Average number of shares
outstanding 16,907 17,136 16,918 17,240
-------- -------- -------- --------
-------- -------- -------- --------
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)
SIX MONTHS ENDED
NOVEMBER 30,
------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 33,294 $18,133
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary gain from termination
of joint venture, net of income taxes (14,615) ---
Depreciation and amortization 4,208 4,477
Net decrease in current assets
and liabilities 3,304 24,257
Interest accrued on note receivable (172) (1,312)
Other operating activities (43) 23
-------- --------
Net cash provided by operating activities 25,976 45,578
Cash flows from investing activities:
Net proceeds from termination of joint
Venture 14,615 ---
Capital expenditures (4,906) (1,232)
Deferred software costs --- (83)
-------- --------
Net cash provided by (used for) investing
activities 9,709 (1,315)
Cash flows from financing activities:
Net repayments under bank
lines of credit (32,000) ---
Net repayments of other long-term debt --- (25,000)
Purchase of common stock --- (13,327)
-------- --------
Net cash used for
financing activities (32,000) (38,327)
-------- --------
Net increase in cash 3,685 5,936
Cash at the beginning of the period 1,687 2,208
-------- --------
Cash at the end of the period $5,372 $8,144
-------- --------
-------- --------
Cash payments during the six months
for the following:
Interest $1,409 $938
-------- --------
-------- --------
Income taxes $ 24,259 $13,254
-------- --------
-------- --------
4
The accompanying notes are an integral part of these condensed consolidated
cash flow statements.
5
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
November 30, 1997 and the results of its operations for the three and six month
periods and its cash flows for the six month periods ended November 30, 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 ("SEI"), 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 was
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, of which $7.4 million
was attributable to the granting of the stock options described herein, was
recorded as a result of this transaction. The goodwill is being amortized
over a period of thirty years. Accumulated amortization at November 30,
6
1997 was $139,000. During fiscal 1998, the Company recorded a non-cash currency
translation loss of $389,000 on the equity investment with an offsetting charge
against shareholders' investment. The Company's pro-rata share of the earnings
from this equity investment was not material to the Company's results of
operations to date for fiscal 1998.
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 allowed the Company, at its option, to terminate the joint
venture and receive a termination fee. The Company elected to terminate the
joint venture and received a termination fee of $25.150 million on September
30, 1997, which was recorded in the Company's second quarter results of
operations as an extraordinary item, net of the related income taxes.
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 assumed by the Company.
The acquisition has received all required regulatory approvals and was
approved by Sterling's shareholders on January 9, 1998. The transaction is
expected to close January 16, 1998. To finance the transaction, the Company
intends to enter into a $325 million bank facility agreement with a group of
major banks, as described in NOTE 6 to these condensed consolidated financial
statements.
NOTE 6: BANK CREDIT FACILITY
The Company expects to enter into an agreement with a group of major banks
(the "Agreement") whereby the Company can borrow up to $325 million to
finance the acquisition of Sterling, for its working
7
capital requirements and other general corporate purposes. This credit
facility is expected to be for five years with interest rates under the
Agreement determined at the time of borrowing based on a choice of LIBOR plus
a margin or at a prime rate of interest. There is expected to be a fee for
the unused portion of the credit facility and no compensating balance
requirements. The LIBOR margin on the borrowing, and the fees on the unused
portion of the credit facility, is expected to be based on the Company's
total funded debt to operating cash flow, as defined in the Agreement,
calculated on a rolling four quarter basis. Based on the Company's
performance under this calculation, the LIBOR margin on borrowings is
expected to range from .375% to .950% and the fees for the unused portion of
the credit facility will range from .125% to .375%.
The Agreement is expected to require the Company, among other things, to meet
certain interest coverage ratios and maintain certain minimum tangible net
worth levels and current ratios. In addition, the credit facility Agreement
is expected to prohibit the Company from making investments in other
companies (with certain exceptions) or paying dividends in excess of certain
amounts. Pursuant to the expected terms of the Agreement, there is a first
priority lien on 100% (65% for foreign) of the equity or other ownership
interests of all material subsidiaries of the Company and all of the material
subsidiaries of the Company will jointly and severally guarantee the facility
Agreement.
It is expected that beginning in 1999, there will be quarterly reductions in
the credit facility, increasing in amounts from $15 million in the aggregate
for 1999 to a total reduction of $100 million over the term of the facility
Agreement.
8
MARSHALL INDUSTRIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 85.2 83.3 84.8 83.0
----- ----- ----- -----
Gross profit 14.8 16.7 15.2 17.0
Selling, general and
administrative expenses 10.1 11.3 10.2 11.5
----- ----- ----- -----
Income from operations 4.7 5.4 5.0 5.5
Interest expense (income)-net .1 (.2) .2 (.1)
----- ----- ----- -----
Income before provision for
income taxes and extraordinary gain 4.6 5.6 4.8 5.6
Provision for income taxes 1.9 2.3 2.0 2.3
----- ----- ----- -----
Income before extraordinary gain 2.7 3.3 2.8 3.3
Extraordinary gain 4.1 - 2.1 -
----- ----- ----- -----
Net income 6.8% 3.3% 4.9% 3.3%
----- ----- ----- -----
----- ----- ----- -----
9
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 1997 AND 1996
The Company's net sales increased by $65 million or 23% and $120 million or
22% for the second quarter and first six months of fiscal 1998, respectively,
as compared to the comparable periods of the prior year. These increases
were due to an increase in the sales volume of most of the Company's major
products, particularly mass storage products. The sales of mass storage
products increased by $26.3 million and $48.8 million for the second quarter
and first six months of fiscal 1998, respectively, as compared to a year
ago. In addition, the sales of microprocessor products increased by
$1.9 million and $18.3 million for the second quarter and first six months of
fiscal 1998, as compared to last year.
The addition of new suppliers during the last several years contributed to a
significant portion of the increases in mass storage products and microprocessor
sales.
The increase in the Company's net sales for the second quarter and first six
months of fiscal 1998 was partially offset by a decrease of $3.4 million and
$19.6 million, respectively, in the sales of memory products, "DRAMs" and
"SRAMs". The decrease in sales dollars of such products was due to the
substantial market declines in unit pricing during the periods reported.
The decrease in net margins as a percent of sales for the second quarter and
first six months of fiscal 1998, as compared to fiscal 1997, was primarily due
to the substantial increase in the sales of mass storage and microprocessor
products, which are lower margin products. The sales of these products
accounted for approximately $60.2 million and $126.5 million of the Company's
net sales for the three and six month periods ended November 30, 1997, as
compared to $32.0 million and $59.4 million, respectively, for same periods of a
year ago.
The decline in the Company's net margins year to date and for the most recent
quarter of fiscal 1998, as compared to fiscal 1997, also reflected the
continuing competitive market conditions where there has been an increase in the
availability of many electronic components and a moderation in the growth of
customer consumption from late calendar 1995.
Motorola, Inc., one of the largest American semiconductor manufacturers,
recently announced a change in its policy whereby its authorized distributors
in the United States can carry its line plus one Asian semiconductor line.
This policy change is expected to increase competition in the distribution of
Asian semiconductor products. The overall impact of this change in policy on
the Company is uncertain at this time.
Selling, general, and administrative expenses ("SG&A") increased by $3.0 million
and $5.1 million for the second quarter and first six months of fiscal 1998,
respectively, as compared to fiscal 1997. Salary adjustments and staffing
increases resulted in higher salary costs of $.9 million and $1.4 million for
the second quarter and first six months of fiscal 1998, respectively, as
compared to the prior year. In addition, increased expenses of $.9 million and
$1.9 million were incurred to enhance and expand the Company's information
10
technology capabilities during the second quarter and first six months of
fiscal 1998, respectively, as compared to last year. The balance of the
increase in the Company's SG&A expenses for current periods reported, as
compared to last year, was mainly to service the higher sales volumes.
The increase in interest expense, net for the second quarter and first six
months of fiscal 1998, compared to fiscal 1997, was primarily due to
increased levels of borrowings resulting from increases in inventories and
receivables to support the increased sales levels. In addition, there was a
decrease in interest income as a result of the conversion of the note
receivable from SEI, as described in Note 3 to the accompanying condensed
consolidated financial statements.
During the second quarter of fiscal 1998, the Company received a fee of
$25.150 million, $14.615 million net of income taxes, from the termination of
a joint venture. This payment is reported as extraordinary income during the
quarter.
The Company's sources of liquidity at November 30, 1997 consisted principally
of working capital of $331.3 million and unsecured bank lines of credit of
$70 million of which $18 million in borrowings was outstanding at November
30, 1997. As described in Note 6 to the accompanying condensed consolidated
financial statements, the Company intends to complete a new credit facility.
The Company believes that its working capital, borrowing capabilities and
additional funds generated from operations should be sufficient to finance
its anticipated operating requirements.
This Quarterly Report contains forward-looking statements within the meaning
of the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995. Reference is made in particular to the description of the
Company's plans and objectives for future operations, assumptions underlying
such plans and objectives and other forward-looking statements included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other portions of this Quarterly Report. Such statements may
be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "believe," "estimate," "anticipate," "continue," or similar
terms, variations of such terms or the negative of such terms. Such
statements are based on management's current expectations and are subject to
a number of factors and uncertainties which could cause actual results to
differ materially from those described in the forward-looking statements.
Factors which could cause such results to differ materially from those
described in the forward-looking statements include failure of or delays in
consummating the acquisition of Sterling Electronics, the inability to
consummate (or to consummate on the terms described herein) the anticipated
$325 million credit facility, changes in industry conditions, the addition or
loss of suppliers, fluctuation in quarterly results, foreign currency
translations and other risks and uncertainties that are detailed in the
Company's Annual Report on Form 10-K and other reports filed by the Company with
the Securities and Exchange Commission.
11
PART II
ITEM 2. CHANGES IN SECURITIES
On June 30, 1997, the Company issued to SEI a two year option to purchase
874,545 shares of the Company's common stock for a price of $34.5685 per
share. See Note 3 to these accompanying condensed consolidated financial
statements. The option was issued, and any shares issued upon exercise of the
option will be issued, pursuant to Section 4(2) of the Securities Act of
1933.
Under the terms of the Company's current credit agreements, there are certain
restrictions as to the payment of dividends.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Marshall Industries was held on
October 21, 1997.
The following matters were acted upon at the meeting:
1. ELECTION OF DIRECTORS.
All of the incumbent Directors of the Company were re-elected to serve as
Directors until the next Annual Meeting of Shareholders and until their
successors are elected and have qualified. The vote was as follows:
Votes Votes Abstentions/
Directors For Against Broker Non-Votes
- --------- ----- ------- ----------------
Gordon S. Marshall 13,284,480 0 67,547
Robert Rodin 13,286,780 0 65,247
Richard D. Bentley 13,286,780 0 65,247
Richard C. Colyear 13,287,646 0 64,381
Jean Fribourg 13,286,790 0 65,237
Lathrop Hoffman 13,285,116 0 66,911
Jose Menendez 11,372,446 0 1,979,581
Raymond G. Rinehart 13,285,436 0 66,591
Howard C. White 13,287,646 0 64,381
There were 16,616,364 shares outstanding as of the record date of August
25,1997.
2. RATIFICATION OF APPOINTMENT OF AUDITORS.
The appointment of Arthur Andersen LLP as the Company's independent auditors for
the fiscal year ending May 31, 1998 was ratified by the following vote:
For: 13,303,287 Against: 2,358
Abstentions/Broker Non-Votes: 46,382
3. PROPOSAL TO ADOPT THE 1997 STOCK OPTION PLAN.
The 1997 Stock Option Plan was approved by the Shareholders by the following
vote:
For: 7,876,431 Against: 4,545,663
Abstentions/Broker Non-Votes: 896,217
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Form 8-K dated October 3, 1997 (items 5 and 7) regarding Agreement and Plan
of Merger dated September 18, 1997 between Marshall Industries, MI Holdings
Nevada, Inc. and Sterling Electronics Corporation.
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
January 14, 1998 /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)
13