ARROW ELECTRONICS, INC. — Interim / Quarterly Report 1994

Nov 14, 1994

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, 1994 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 Identifi- incorporation or organization) cation 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: 35,305,176 shares outstanding at November 3, 1994. PART I. FINANCIAL INFORMATION Item 1. Financial Statements.

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-5- ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1994 (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, 1993 and the notes thereto. The results of operations for the interim periods are not necessarily indicative of results for the full year. On August 29, 1994, the company completed the acquisition of Gates/FA Distributing, Inc. ("Gates") in a transaction which was accounted for as a pooling-of-interests. Accordingly, the company's consolidated financial statements have been restated to include the operations of Gates for all periods presented. Note B -- Net income per common share Net income per common share for 1994 is based upon the weighted average number of shares of common stock and common stock equivalents outstanding. For the nine months and quarter ended September 30, 1994, the average number of common stock equivalents was 522,706 and 476,962, respectively. Net income per common share on a fully diluted basis for 1994 assumes that the 5-3/4% convertible subordinated debentures (the "convertible subordinated debentures") were converted to common stock at the beginning of the period and the related interest expense, net of taxes, was eliminated. Net income per common share for 1993 is based upon the weighted average number of common stock and common stock equivalents outstanding after deducting preferred stock dividends related to the series B $19.375 convertible exchangeable preferred stock (the "convertible exchangeable preferred stock"), which was converted into common stock in September 1993. For the nine months and quarter ended September 30, 1993, the average number of common stock equivalents was 715,082 and 725,334, respectively. Net income per common share on a fully diluted basis for 1993 assumes that the convertible exchangeable preferred stock and the convertible subordinated debentures were converted to common stock at the beginning of the period. The dividends related to the convertible exchangeable preferred stock and the interest expense on the convertible subordinated debentures, net of taxes, were eliminated. -6- Note C -- Acquisition of electronics distribution businesses On August 29, 1994, the company completed the acquisition of Gates through the exchange of approximately 3,700,000 shares of newly-issued company stock. Gates' reported financial results have been adjusted to conform to the financial presentation of the company. Sales and net income combined for the nine months and three months ended September 30, 1993 and 1994, respectively, are as follows (in thousands): Nine months ended Three months ended September 30 September 30 1994 1993 1994 1993 Sales: Arrow $2,572,311 $1,833,285 $915,881 $697,825 Gates 313,974 262,064 80,378 93,116 Combined $2,886,285 $2,095,349 $996,259 $790,941 Net income: Arrow $ 68,153 $ 58,830 $ 16,330 $ 21,734 Gates 3,845 5,377 177 1,782 Combined $ 71,998 $ 64,207 $ 16,507 $ 23,516 The combined financial data does not reflect the cost savings expected to be achieved from the combination of Gates with the company's business or any sales attrition which may result. The cost savings will result principally from reductions in personnel performing duplicative functions and the elimination of duplicative administrative facilities, selling and stocking locations, and computer and telecommunications equipment. The combined financial data for 1994 includes a special pretax charge of $21,875,000 ($.36 and $.37 per share for the nine months and quarter ended September 30, 1994, respectively) of estimated costs associated with the integration of Gates and related transaction fees. Such estimated integration costs included real estate termination costs and severance and other expenses related to personnel performing duplicative functions. In January 1994, the company acquired an additional 15% share in Spoerle Handelsgesellschaft mbH and Co. and its general partner, Spoerle GmbH (collectively, "Spoerle"), the largest distributor of electronic components in Germany, increasing its holdings to a 70% interest. During the first quarter of 1994, the company acquired an additional 11% share in Silverstar Ltd. S.p.A. ("Silverstar"), the largest distributor of electronic components in Italy, increasing its holdings to a 61% majority interest. The acquisitions are being accounted for as purchase transactions, and Silverstar is consolidated with the company, effective January 1, 1994. Prior to 1994 the company's investment in Silverstar was accounted for under the equity method. In addition, in January 1994 the company acquired the electronic component distribution business of Field Oy, the largest distributor of electronic components in Finland, and in March 1994 the company acquired TH:s Elektronik AB and its subsidiaries, a group of electronic distribution -7- companies serving Norway, Sweden, and Finland. In April 1994, the company acquired Exatec A/S, one of the largest distributors of semiconductors in Denmark. In May 1994, the company acquired Texny (Holdings) Limited, one of Hong Kong's leading distributors of electronic components. The acquisitions are being accounted for as purchase transactions beginning in their respective month of acquisition. In January 1993, the company acquired an additional 15% share in Spoerle, increasing its holdings to a then 55% majority interest. In May 1993, the company acquired the high-reliability electronic component distribution and value-added service businesses of Zeus Components, Inc. ("Zeus"). In June 1993, the company acquired Microprocessor & Memory Distribution Limited ("MMD"), a U.K.-based electronics distributor which focuses on the distribution of high-technology semiconductor products. In August 1993, the company acquired Components Agent Limited ("CAL"), one of the largest electronics distributors in Hong Kong. During the third quarter of 1993 the company acquired a majority interest in Amitron S.A. and the ATD Group, electronics distributors serving the Spanish and Portuguese markets. In November 1993, the company augmented its French operations by acquiring CCI Electronique. Set forth below for comparative purposes is the pro forma combined summary of operations for the nine months ended September 30, 1993 as though the acquisitions in 1993 had occurred on January 1, 1993. Nine Months Ended September 30, 1993 (In thousands except per share data) Sales $2,218,239 Operating income 147,772 Net income 65,220 Net income per common share: Primary 1.87 Fully diluted 1.75 Average number of common shares and common share equivalents outstanding: Primary 34,418 Fully diluted 39,184 The unaudited pro forma combined summary of operations has been prepared utilizing the historical financial statements of the company and the acquired businesses. The unaudited pro forma combined summary of operations includes the effect of the purchase price allocation adjustments and the additional interest expense on debt incurred in connection with the acquisitions as if the debt had been outstanding from the beginning of the period. The purchase price allocation adjustments include the adjustment of the net assets acquired to fair market value and the estimated costs associated with the integration of the businesses. Such estimated costs include professional fees as well as real estate lease termination costs, costs associated with the elimination of certain redundant franchised lines, and severance and other expenses related to personnel performing duplicative functions, all of which are associated with facilities and personnel of the acquired businesses. The unaudited pro forma combined summary of operations does not purport to be indicative of the results which actually would have been obtained if the acquisitions had been made at the beginning of 1993. -8- The unaudited pro forma combined summary of operations does not reflect sales attrition which may result from the combination of Zeus and MMD with the company's businesses. It also does not reflect the cost savings the company achieved from the combination of the Zeus businesses with its own and it expects to achieve when MMD is combined with the company's UK businesses. In September 1994, the company entered into a definitive agreement to acquire Anthem Electronics, Inc. ("Anthem"), a leading distributor of semiconductors and computer products to customers throughout the United States. Under the agreement, which provides for the merger of Anthem and a newly-formed subsidiary of the company, the shareholders of Anthem will receive .875 of a share of company common stock for each of the approximately 12,400,000 shares of Anthem common stock outstanding. The merger will be accounted for as a pooling-of-interests. The merger is subject to customary closing conditions, including the approval of the shareholders of both the company and Anthem. It is estimated that the closing will occur around the end of November. -9- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. On August 29, 1994, the company completed the acquisition of Gates, a leading commercial distributor of microcomputers, through the exchange of approximately 3.7 million shares of the company's stock for all the stock of Gates. This merger is accounted for as a pooling-of-interests and, accordingly, the accompanying consolidated financial statements have been restated to include the operations of Gates for all periods prior to the merger. Included in 1994's consolidated results is Silverstar, which was accounted for under the equity method prior to January 1994 when the company increased its holdings to a majority interest. Sales Consolidated sales for the nine months and third quarter of 1994 increased 37.7% and 26% compared with the year-earlier periods. Excluding Silverstar, sales for the first nine months and third quarter of 1994 were $2.7 billion and $952 million, respectively, increases of 30.4% and 20.3% over the comparable year-earlier periods. This sales growth was principally due to increased activity levels in each of the company's distribution groups throughout the world and, to a lesser extent, acquisitions in Europe and the Pacific Rim. Operating income The company recorded operating income of $169.7 million and $43.1 million in the first nine months and third quarter of 1994, respectively, compared with $144.4 million and $52.5 million, respectively, in the year-earlier periods. Included in 1994's results is a special pretax charge of $21.9 million associated with the integration of Gates. Excluding the special charge, operating income was $191.5 million and $65 million for the nine months and quarter ended September 30, 1994, respectively. The improvement in operating income, excluding the special charge, in the 1994 periods reflects the impact of increased sales, acquisitions, continued economies of scale and expense containment efforts reducing operating expenses as a percentage of sales, and the consolidation of Silverstar, offset in part by lower gross profit margins. Gross profit margins decreased from prior periods as a result of a change in product mix and competitive pricing pressures. Excluding Silverstar, selling, general and administrative expenses as a percentage of sales decreased from 11.7% and 11.1% in the first nine months and third quarter of 1993, respectively, to 10.6% and 10.3% in the first nine months and third quarter of 1994, respectively. Interest expense Interest expense of $29.2 million and $9.3 million in the first nine months and third quarter of 1994, respectively, increased from $21.7 million during the first nine months of 1993 and $7.4 million in the comparable quarter of 1993. The increase from the first nine months and third quarter of 1993 reflects the consolidation of Silverstar, the acquisition of the incremental 15% of Spoerle in 1994, and the incremental interest associated with businesses acquired subsequent to the third quarter of 1993. -10- Income taxes During the first nine months and third quarter of 1994, the company recorded a provision for taxes at an effective tax rate of 39.7% and 38.4%, respectively, compared with 40.3% and 41.5%, respectively, in the earlier periods. Net income The company recorded net income of $72 and $16.5 million in the first nine months and third quarter of 1994, respectively, compared with $64.2 million in the first nine months of 1993 and $23.5 million in the third quarter of 1993. Excluding the special charge of $13.1 million, net of tax, associated with the integration of Gates, net income was $85.1 million ($2.38 per share) and $29.6 million ($.83 per share) for the first nine months and third quarter of 1994, respectively. The increase in net income over the year-earlier periods is due to increased sales and operating income offset in part by an increase in interest expense as previously discussed. 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 77% and 75% at September 30, 1994 and 1993, respectively, excluding the effect of the investments in net assets of acquired businesses. The net amount of cash provided by the company's operating activities during the first nine months of 1994 was $56.9 million, principally reflecting higher net earnings. The net amount of cash used for investing activities was $84 million, including $80.8 million for various acquisitions. The net amount of cash provided by financing activities was $22.9 million, principally reflecting the company's U.S. credit agreement and German bank borrowings, offset in part by the net repayment of debt. The net amount of cash provided by the company's operating activities during the first nine months of 1993 was $42.5 million, principally reflecting increased earnings offset in part by increased working capital requirements supporting higher sales. The net amount of cash used for investing activities was $102.6 million, including approximately $86.5 million for the acquisition of Zeus, MMD, CAL, Amitron and ATD, and an additional 15% interest in Spoerle. The net amount of cash provided by financing activities was $81 million, principally reflecting the proceeds from the company's U.S. credit agreement, German bank borrowings, and the company's May 1993 common stock offering, offset in part by the payment of financing fees and preferred stock dividends. In September 1994, the company entered into a definitive agreement to acquire Anthem, a leading distributor of semiconductors and computer products to customers throughout the United States. Under the agreement, which provides for the merger of Anthem and a newly-formed subsidiary of the company, the shareholders of Anthem will receive .875 of a share of company common stock for each of the approximately 12.4 million shares of Anthem -11- common stock outstanding. The merger will be accounted for as a pooling-of- interests. The merger is subject to customary closing conditions, including the approval of the shareholders of both the company and Anthem. It is estimated that the closing will occur around the end of November. 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 1996. -12- Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 2 - Agreement and Plan of Merger dated as of September 21, 1994 by and among Arrow Electronics, Inc., MTA Acquisition Company and Anthem Electronics, Inc. (incorporated by reference to Exhibit 2 to the company's Registration Statement on Form S-4, Registration No. 33-55645). 11 - Statement Re: Computation of Earnings Per Share (b) Reports on Form 8-K. During the quarter ended September 30, 1994, the company filed no Current Reports on Form 8-K. -13- 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 14, 1994 By:/s/ Robert E. Klatell Robert E. Klatell Senior Vice President and Chief Financial Officer Date: November 14, 1994 By:/s/ Paul J. Reilly Paul J. Reilly Controller -14-