ARROW ELECTRONICS, INC. — Interim / Quarterly Report 1999

May 17, 1999

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 March 31, 1999 -------------- 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: 94,816,507 shares outstanding at May 3, 1999. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. --------------------

ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 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, 1998 and the notes thereto. The results of operations for the interim periods are not necessarily indicative of results for the full year. Note B - Earnings per share - --------------------------- The following table sets forth the calculation of basic and diluted earnings per share ("EPS") for the three months ended March 31, 1999 and 1998 (in thousands except per share data): 1999 1998 ------- ------- Net income for EPS $28,341 $41,945 ======= ======= Weighted average common shares outstanding for basic EPS 95,019 96,341 Net effect of dilutive stock options and restricted stock awards 843 1,974 ------- ------- Weighted average common shares outstanding for diluted EPS 95,862 98,315 ======= ======= Basic EPS $.30 $.44 ======= ======= Diluted EPS $.30 $.43 ======= ======= Note C - Comprehensive income - ----------------------------- 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 for the three months ended March 31, 1999 and 1998 are as follows (in thousands): 1999 1998 ------- ------- Net income $28,341 $41,945 Foreign currency translation adjustments(a) (24,867) (10,785) ------- ------- Comprehensive income $ 3,474 $31,160 ======= ======= (a) The foreign currency translation adjustments have not been tax effected as investments in foreign affiliates are deemed to be permanent. Note D - Segment and geographic information - ------------------------------------------- The company is engaged in the distribution of electronic components to original equipment manufacturers and computer products to value-added resellers (VARs). Revenue, operating income, and assets by segment as of and for the three months ended March 31, 1999 and 1998 are as follows (in thousands): Electronic Computer 1999 Components Products Corporate Total ---------- -------- --------- ---------- Revenue from external customers $1,716,619 $485,013 $ - $2,201,632 Operating income (loss) 84,362 3,697 (13,246) 74,813 Total assets 3,357,934 573,487 195,851 4,127,272 1998 Revenue from external customers $1,620,796 404,964 - $2,025,760 Operating income (loss) 97,111 7,797 (12,950) 91,958 Total assets 2,882,253 492,426 205,399 3,580,078 As a result of the company's philosophy of maximizing operating efficiencies through the centralization of certain functions, selected fixed assets and related depreciation, borrowings, and goodwill amortization are not directly attributable to the individual operating segments. Revenues, by geographic area, are as follows (in thousands): For the three months ended March 31, ----------------------- 1999 1998 ---------- ---------- North America $1,440,981 $1,234,081 Europe 605,384 633,075 Asia/Pacific 155,267 158,604 ---------- ---------- $2,201,632 $2,025,760 ========== ========== Total assets, by geographic area, as of March 31, 1999 and 1998 are as follows (in thousands): 1999 1998 ---------- ---------- North America $2,409,067 $1,987,057 Europe 1,428,850 1,384,771 Asia/Pacific 289,355 208,250 ---------- ---------- $4,127,272 $3,580,078 ========== ========== Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations. ---------------------- The company acquired Richey Electronics, Inc. ("Richey") on January 7, 1999 and the electronics distribution group ("EDG") of Bell Industries, Inc. on January 29, 1999. Both of these transactions have been accounted for as purchases in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations." Accordingly, the consolidated results of the company in 1999 include both Richey and EDG from their respective dates of acquisition. Sales - ----- Consolidated sales for the first quarter of 1999 increased approximately 9 percent over the year-earlier period. Excluding the impact of acquisitions, sales declined almost 4 percent. This sales decline was principally due to reduced sales of low margin microprocessors, lower sales in Europe, and a weakening of European currencies offset, in part, by increased sales of components in North America and commercial computer products by the company's Gates/Arrow operation. Operating income - ---------------- The company recorded operating income of $75 million in the first quarter of 1999, compared with $92 million in the first quarter of 1998. The decrease in operating income is due to continued pressure on profit margins in both the commercial computer products markets served by Gates/Arrow and the North American components operations due to competitive pricing pressures and to lower sales and competitive pricing pressures in Europe. Interest expense - ---------------- Interest expense of $24.6 million in the first quarter of 1999 increased from $18.7 million during the comparable quarter of 1998 principally reflecting increases in borrowings associated with acquisitions. Income taxes - ------------ During the first quarter of 1999, the company recorded a provision for taxes at an effective tax rate of 42.5 percent, compared with 41.2 percent in the year-earlier period. The increase in the effective tax rate is due principally to the impact of nondeductible goodwill amortization. Net income - ---------- The company recorded net income of $28.3 million in the first quarter of 1999, compared with $41.9 million in the first quarter of 1998. The decrease in net income from the year-earlier period is principally due to lower operating income and higher 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 72 percent and 75 percent for the first quarter of 1999 and 1998, respectively. During the first three months of 1999, the net amount of cash generated by operating activities was $12.8 million. The net amount of cash used for investing activities was $346.7 million, principally for the acquisitions of Richey, EDG, and the remaining 10% of Spoerle Electronic not previously owned by the company. The net amount of cash provided by financing activities was $271.2 million, reflecting borrowings under the company's credit facilities, offset, in part, by the repayment of Richey's 7.0% Convertible Subordinated Notes and distributions to a former minority partner. During the first three months of 1998, the net amount of cash used by the company's operating activities was $121.4 million, the principal element of which was the increase in inventory. The net amount of cash used for investing activities was $40.7 million, including $32.2 million for various acquisitions. The net amount of cash provided by company's financing activities was $105.5 million. 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, completion; 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 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits. (b) Reports on Form 8-K. During the quarter ended March 31, 1999 the following Current Reports on Form 8-K were filed: Date of Report Item Reported -------------- --------------------------- January 12, 1999 Arrow Electronics announced fourth quarter 1998 earnings are 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: May 14, 1999 By: /s/ Sam R. Leno -------------- ----------------------- Sam R. Leno Senior Vice President and Chief Financial Officer Date: May 14, 1999 By: /s/ Paul J. Reilly -------------- ------------------------ Paul J. Reilly Vice President and Controller