ARROW ELECTRONICS, INC. — Interim / Quarterly Report 1998

Nov 13, 1998

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. 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