ARROW ELECTRONICS, INC. — Interim / Quarterly Report 1998

Aug 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 June 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: 95,568,825 shares outstanding at July 31, 1998. PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements.

ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 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 -- Long-term debt - ------------------------ In May 1998, the company issued $200 million of 6 7/8% senior debentures due 2018. The net proceeds of the offering of $195,814,000 were used to refinance a portion of the company's outstanding borrowings under its global multi-currency credit facility. The terms of these debentures are consistent with the terms of the company's 7% senior notes and 7 1/2% senior debentures. Note C -- Stock split - --------------------- All share and per share amounts for the second quarter and first six months of 1997 have been restated to reflect a two-for-one stock split in the form of a 100 percent stock dividend paid on October 15, 1997. 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 Six For the Three Months Ended Months Ended June 30, June 30, ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net income $77,935 $102,073 $35,990 $51,779 ======= ======== ======= ======= Weighed average common shares outstanding for basic earnings per share 96,189 98,964 96,173 98,698 Net effect of dilutive stock options and restricted stock awards 1,995 1,660 1,872 1,622 ------- ------- ------- ------- Weighted average common shares outstanding for diluted earnings per share 98,184 100,624 98,045 100,320 ======= ======== ======= ======== Basic earnings per share $.81 $1.03 $.37 $.52 ==== ===== ==== ==== Diluted earnings per share $.79 $1.01 $.37 $.52 ==== ===== ==== ==== 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, it is the foreign currency translation adjustments and net income. The components of comprehensive income are as follows (in thousands): For the Six For the Three Months Ended Months Ended June 30, June 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net income $77,935 $102,073 $35,990 $51,799 Foreign currency translation adjustments (a) (14,104) (34,866) (3,319) (10,245) ------- -------- ------- ------- Comprehensive income $63,831 $ 67,207 $32,671 $41,554 ======= ======== ======= ======= (a) The company considers the unremitted earnings of its foreign subsidiaries to be permanently reinvested and does not provide deferred taxes thereon. Accordingly no deferred taxes have been provided with respect to the related foreign currency translation adjustments. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations. ---------------------- Sales - ----- Consolidated sales for the six months and second quarter of 1998 increased 9.3 percent and 9.5 percent, respectively, 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 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 $179.9 million and $87.9 million in the first six months and second quarter of 1998, respectively, compared with $212.4 million and $108.3 million, respectively, in the year-earlier periods. The decrease in operating income in the first half and second quarter of 1998 principally 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 $39 million and $20.3 million in the first six months and second quarter of 1998, respectively, increased from $30.0 million during the first six months of 1997 and $16.1 million in the comparable quarter of 1997. The increase from the first six months and second quarter of 1997 is the result increased borrowings to fund acquisitions and purchases of the company's common stock, offset, in part, by lower interest rates. Income taxes - ------------ During the first six months and second quarter of 1998, the company recorded a provision for taxes at an effective tax rate of 42 percent and 42.9 percent, respectively, compared with 41 percent during the first six months of 1997 and 40.9 percent in the comparable quarter of 1997. The increase in the provision is due to increased earnings in countries with higher marginal tax rates. Net income - ---------- The company recorded net income of $77.9 million and $36 million in the first six months and second quarter of 1998, respectively, compared with $102.1 million in the first six months of 1997 and $51.8 million in the second quarter of 1997. The decrease in net income is due to decreased operating income as well as an increase in interest expense offset, in part, by a decrease in minority interest. 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 June 30, 1998 and 1997. The net amount of cash used by the company's operating activities during the first six months of 1998 was $97.2 million, principally due to the increase in working capital requirements. The net amount of cash used for investing activities was $77.8 million, including $55.9 million for various acquisitions. The net amount of cash provided by financing activities was $145.3 million, principally reflecting the $196 million of proceeds from the issuance in May 1998 of the company's 6 7/8% senior debentures, offset by purchases of the company's common stock. The net amount of cash used by the company's operating activities during the first six months of 1997 was $118.4 million, principally reflecting increased working capital requirements supporting higher sales. The net amount of cash used for investing activities was $355.2 million including approximately $341.2 million for investments and acquisitions. The net amount of cash provided by financing activities was $463.5 million, principally reflecting the $393 million of proceeds from the issuance in January 1997 of the company's senior notes and senior debentures and increases in the company's credit facilities, offset, in part, by purchases of the company's common stock. 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. --------------------------------------------------- (a) The company's Annual Meeting of Shareholders was held on May 14, 1998 (the "Annual Meeting"). (b) The matters voted upon at the Annual Meeting and the results of the voting were as follows: (i) The following individuals were elected by the shareholders to serve as Directors: Board Member In Favor Withheld - ------------ ---------- -------- Daniel W. Duval 79,417,557 245,537 Carlo Giersch 78,707,247 955,847 John N. Hanson 79,420,497 242,597 Stephen P. Kaufman 78,703,592 959,502 Roger King 78,695,213 967,881 Robert E. Klatell 78,701,507 961,587 Karen Gordon Mills 79,421,657 241,437 Richard S. Rosenbloom 79,411,797 251,297 Robert S. Throop 78,705,937 957,157 John C. Waddell 78,706,265 956,829 (ii) The appointment of Ernst & Young LLP as auditors of the company was voted upon as follows: 79,531,217 shares in favor; 74,601 shares against; and 57,276 shares abstaining. Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits None. (b) Reports on Form 8-K. During the quarter ended June 30, 1998 the following Current Reports on Form 8-K were filed: Date of Report Item Reported -------------- ------------- June 16, 1998 Arrow Electronics announced second quarter earnings likely to be below analysts' expectations. 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: August 13, 1998 By:/s/ Gerald Luterman ------------------------- ---------------------- Gerald Luterman Senior Vice President and Chief Financial Officer Date: August 13, 1998 By:/s/ Paul J. Reilly -------------------------- ---------------------- Paul J. Reilly Vice President and Corporate Controller