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, 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: 95,989,536 shares outstanding at October 29,
1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
Sales $6,827,457 $6,184,495 $2,375,797 $2,134,769
---------- ---------- ---------- ----------
Costs and expenses:
Cost of products sold 5,881,809 5,313,003 2,052,570 1,849,487
Selling, general and
administrative expenses 637,421 567,669 212,197 185,756
Depreciation and
amortization 53,448 37,644 17,404 13,238
Integration charge 24,560 - - -
---------- ---------- ---------- ----------
6,597,238 5,918,316 2,282,171 2,048,481
---------- ---------- ---------- ----------
Operating income 230,219 266,179 93,626 86,288
Equity in earnings (loss)
of affiliated companies (173) 431 (211) 319
Interest expense 78,146 59,739 26,836 20,728
---------- ---------- ---------- ----------
Earnings before income taxes
and minority interest 151,900 206,871 66,579 65,879
Provision for income taxes 67,447 87,204 28,828 27,998
---------- ---------- ---------- ----------
Earnings before minority
interest 84,453 119,667 37,751 37,881
Minority interest 4,337 6,169 998 2,318
---------- ---------- ---------- ----------
Net income $ 80,116 $ 113,498 $ 36,753 $ 35,563
========== ========== ========== ==========
Net income per share:
Basic $.84 $1.18 $.39 $.37
==== ===== ==== ====
Diluted $.83 $1.16 $.38 $.37
==== ===== ==== ====
Average number of shares
outstanding:
Basic 95,097 96,061 95,176 95,060
====== ====== ====== ======
Diluted 96,001 97,885 96,317 96,135
====== ====== ====== ======
See accompanying notes.
<PAGE>
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and short-term investments $ 49,257 $ 158,924
Accounts receivable, less allowance
for doubtful accounts ($45,317 in 1999
and $48,423 in 1998) 1,608,082 1,354,351
Inventories 1,437,315 1,321,261
Prepaid expenses and other assets 35,866 26,279
---------- ----------
Total current assets 3,130,520 2,860,815
Property, plant and equipment at cost:
Land 17,995 15,087
Buildings and improvements 121,442 90,851
Machinery and equipment 236,044 183,227
---------- ----------
375,481 289,165
Less accumulated depreciation and
amortization 159,034 134,359
216,447 154,806
Investments in affiliated companies 53,484 23,279
Cost in excess of net assets of
companies acquired, net of amortization
($110,247 in 1999 and $91,837 in 1998) 966,106 721,323
Other assets 93,617 79,648
---------- ----------
$4,460,174 $3,839,871
========== ==========
See accompanying notes.
<PAGE>
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 894,051 $ 785,596
Accrued expenses 284,691 211,438
Short-term borrowings, including current
maturities of long-term debt 161,339 168,066
---------- ----------
Total current liabilities 1,340,081 1,165,100
Long-term debt 1,517,276 1,040,173
Other liabilities 59,937 77,587
Minority interest 9,280 69,692
Shareholders' equity:
Common stock, par value $1:
Authorized - 120,000,000 shares
Issued - 102,949,640 shares in 1999 and 1998 102,950 102,950
Capital in excess of par value 502,069 506,002
Retained earnings 1,194,942 1,114,826
Foreign currency translation adjustment (62,599) (23,648)
---------- ----------
1,737,362 1,700,130
Less: Treasury stock (6,993,151 shares in 1999
and 7,321,540 shares in 1998), at cost 189,156 198,281
Unamortized employee stock awards 14,606 14,530
---------- ----------
1,533,600 1,487,319
---------- ----------
$4,460,174 $3,839,871
========== ==========
See accompanying notes.
<PAGE>
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30,
----------------------
1999 1998
---- ----
(Unaudited)
Cash flows from operating activities:
Net income $ 80,116 $ 113,498
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Minority interest in earnings 4,337 6,169
Depreciation and amortization 59,115 39,518
Equity in undistributed earnings
of affiliated companies 173 (431)
Integration charge 24,560 -
Deferred income taxes (19,917) (308)
Change in assets and liabilities,
net of effects of acquired businesses:
Accounts receivable (189,200) 106,624)
Inventories 23,222 (36,870)
Prepaid expenses and other assets (5,228) 11,238
Accounts payable 72,363 39,938
Accrued expenses 15,479 (47,433)
Other 1,531 13,306
--------- ---------
Net cash provided by operating activities 66,551 32,001
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment, net (62,655) (33,617)
Cash consideration paid for acquired businesses (460,947) (56,693)
--------- ---------
Net cash used for investing activities (523,602) (90,310)
--------- ---------
Cash flows from financing activities:
Change in short-term borrowings 3,490 (8,244)
Change in credit facilities 429,478 (91,977)
Repayment of long-term debt (38,621) (187)
Proceeds from long-term debt - 195,814
Proceeds from exercise of stock options 382 7,203
Purchases of common stock (100) (50,128)
Distribution to minority partners (37,852) (26,659)
--------- ---------
Net cash provided by financing activities 356,777 25,822
--------- ---------
Effect of exchange rate changes on cash (9,393) 2,606
--------- ---------
Net decrease in cash and short-term investments (109,667) (29,881)
Cash and short-term investments at beginning
of period 158,924 112,665
Cash and short-term investments of acquired affiliate - 4,799
--------- ---------
Cash and short-term investments at end of period $ 49,257 $ 87,583
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 21,820 $ 44,778
Interest 79,439 69,294
See accompanying notes.
<PAGE>
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(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, 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 -- Integration charge
- ----------------------------
The 1999 consolidated statement of income includes a pre-tax integration
charge totaling $24.6 million, recorded in the company's second quarter
results, related to the company's acquisition and integration of the
electronics distribution group of Bell Industries and Richey Electronics.
Of this amount, $15.3 million represents costs associated with closing
facilities and severance payments. The remaining $9.3 million principally
represents costs associated with outside resources associated with the
conversion of systems, professional fees, and other costs related to the
integration of these businesses into Arrow. Excluding the integration
charge, net income and net income per share on a basic and diluted basis
were $96.6 million, $1.02 and $1.01, respectively, for the nine months
ended September 30, 1999.
Note C -- 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,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $80,116 $113,498 $36,753 $35,563
======= ======== ======= =======
Weighed average common
shares outstanding
for basic earnings
per share 95,097 96,061 95,176 95,060
Net effect of dilutive
stock options and
restricted stock
awards 904 1,824 1,141 1,075
------- -------- ------- -------
Weighted average common
shares outstanding
for diluted earnings
per share 96,001 97,885 96,317 96,135
====== ====== ====== ======
Basic earnings per share $.84 $1.18 $.39 $.37
==== ===== ==== ====
Diluted earnings per share $.83 $1.16 $.38 $.37
==== ===== ==== ====
Note D -- Comprehensive income
- ------------------------------
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,
------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $80,116 $113,498 $36,753 $35,563
Foreign currency
translation adjustments(a) (38,951) 24,788 9,576 38,892
------- -------- ------- -------
Comprehensive income $41,165 $138,286 $46,329 $74,455
======= ======== ======= =======
(a) The foreign currency translation adjustments have not been tax
effected as investments in foreign affiliates are deemed to be
permanent.
Note E -- 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 and operating income, by segment, are as follows (in
thousands):
For the Nine For the Three
Months Ended Months Ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Electronic components $5,291,307 $4,745,327 $1,874,829 $1,609,799
Computer products 1,536,150 1,439,168 500,968 524,970
---------- ---------- ---------- ----------
Consolidated $6,827,457 $6,184,495 $2,375,797 $2,134,769
========== ========== ========== ==========
Operating income:
Electronic components $ 271,572 $ 265,042 $ 102,667 $ 82,632
Computer products 27,250 36,160 7,924 14,751
Corporate (68,603) (35,023) (16,965) (11,095)
---------- ---------- ---------- ----------
Consolidated $ 230,219 $ 266,179 $ 93,626 $ 86,288
========== ========== ========== ==========
Total assets, by segment, as of September 30, 1999 and 1998 are as follows (in
thousands):
1999 1998
---- ----
Total assets:
Electronic components $3,605,765 $3,089,884
Computer products 667,017 587,175
Corporate 187,392 158,299
---------- ----------
Consolidated $4,460,174 $3,835,358
========== ==========
As a result of the company's philosophy of maximizing operating efficiencies
through the centralization of certain functions, selected fixed assets and
related depreciation, as well as borrowings and goodwill amortization are not
directly attributable to the individual operating segments.
Revenues, by geographic area, are as follows (in thousands):
For the Nine For the Three
Months Ended Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
North America $4,560,417 $3,972,003 $1,588,049 $1,372,818
Europe 1,733,839 1,787,314 574,769 587,132
Asia/Pacific 533,201 425,178 212,979 174,819
---------- ---------- ---------- ----------
$6,827,457 $6,184,495 $2,375,797 $2,134,769
========== ========== ========== ==========
Total assets, by geographic area, as of September 30, 1999 and 1998 are as
follows (in thousands):
1999 1998
---- ----
North America $2,625,989 $2,022,204
Europe 1,489,858 1,510,903
Asia/Pacific 344,327 302,251
---------- ----------
$4,460,174 $3,835,358
========== ==========
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 nine months and third quarter of 1999 increased
10.4 percent and 11.3 percent, respectively, compared with the year-earlier
periods. Sales growth for the nine months ended September 30, 1999 was
principally due to acquisitions and growth in the core components and
Gates/Arrow businesses, offset, in part, by fewer sales of low margin
microprocessors, a product segment not considered a part of the company's
core business, and foreign exchange rate differences. The increase in
sales in the third quarter of 1999 is due to growth in the worldwide
components businesses and the acquistions of Richey and EDG, offset, in
part, by lower sales of microprocessors and commercial computer products
and foreign exchange rate differences. Excluding the impact of the Richey and
EDG acquisitions, foreign exchange rate differences, and lower microprocessor
sales, revenue increased by 6 percent and 9 percent over the
first nine months and the third quarter of 1998, respectively.
Operating income
- ----------------
The company recorded operating income of $230.2 million and $93.6 million
in the first nine months and third quarter of 1999, respectively, compared
with $266.2 million and $86.3 million, respectively, in the year-earlier
periods. Included in 1999's nine month results is a pre-tax charge of
$24.6 million associated with the acquisition and integration of Richey and
EDG. Excluding this integration charge, operating income was $254.8
million for the nine months ended September 30, 1999. The decrease in
operating income for the first nine months is due to continued pressure on
gross profit margins in both the commercial computer products markets
served by Gates/Arrow and the North American components operations as a
result of competitive pricing pressures, as well as competitive pricing
pressures and weakening currencies in Europe. The increase in operating
income for the third quarter is due to increased sales in the North
American, European, and the Asia/Pacific components operations and to
improved gross profit margins in Europe, offset, in part, by weakening
currencies in Europe.
Interest expense
- ----------------
Interest expense of $78.1 million and $26.8 million in the first nine months
and third quarter of 1999, respectively, increased from $59.7 million during
the first nine months of 1998 and $20.7 million in the comparable quarter of
1998. The increase is the result of increased borrowings to fund acquisitions
and investments in working capital and higher interest rates.
Income taxes
- ------------
The company recorded a provision for taxes at an effective rate of 44.4
percent and 43.3 percent for the first nine months and third quarter of 1999,
respectively, compared with 42.2 percent and 42.5 percent, in the comparable
year-earlier periods. Excluding the impact of the aforementioned integration
charge, the effective rate was 42.8 percent for the first nine months of 1999.
The company's effective tax rate is principally impacted by, among other
factors, the statutory tax rates in the countries it operates and the related
level of earnings generated by these operations and the nondeductibility of
certain expenses.
Net income
- ----------
The company recorded net income of $80.1 million and $36.8 million in the
first nine months and third quarter of 1999, respectively, compared with
$113.5 million in the first nine months of 1998 and $35.6 million in the third
quarter of 1998. Excluding the aforementioned integration charge, net income
was $96.6 million for the first nine months of 1999. The decrease in net
income for the first nine months is due to lower operating income and an
increase in interest expense. The increase in net income for the third
quarter is due to improving sales and gross profit margins and the synergies
obtained from the acquisition of Richey and EDG, offset, in part, by higher
interest expense and an increased effective tax rate.
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 70 percent at September 30, 1999 compared with
75 percent at September 30, 1998.
The net amount of cash provided by the company's operating activities during
the first nine months of 1999 was $66.6 million, principally reflecting
earnings, offset, in part, by investments in working capital. The net amount
of cash used for investing activities was $523.6 million, including $62.7
million for various capital expenditures and $460.9 million principally for
the acquisitions of Richey, EDG, the remaining 10% of Spoerle Electronic, the
remaining interest in Support Net, Inc., and an additional interest in
Scientific and Business Minicomputers, Inc., as well as certain internet
related investments. The net amount of cash provided by financing activities
was $356.8 million, reflecting borrowings under the company's credit
facilities, offset, in part, by the repayment of Richey's 7.0% convertible
subordinated notes and debentures and distributions to partners.
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
$25.8 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.
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; embedded systems
contained in machinery and equipment including warehousing and
telecommunications equipment; and third party relationships, including trade
and non-trade vendors, carriers, and other principal business partners.
The company divided its remediation plan into the following phases: inventory,
assessment, remediation, testing, and monitoring. In the information
technology arena, the company has completed its comprehensive Year 2000
readiness activities for business critical systems. With respect to
non-information technology, or embedded systems, the company has completed the
inventory and assessment phases, substantially completed remediation, and
testing is progressing according to schedule, with completion anticipated during
the fourth quarter of 1999.
The company is currently engaged in a review of the Year 2000 compliance
efforts of key suppliers and other principal business partners upon whom it
depends for essential products and services. There can be no guarantee that
these parties will resolve their Year 2000 issues with respect to products,
services or critical systems, and processes in a timely manner. Management
believes that failure or delay by any of these parties could possibly cause a
significant disruption to the company's business. The company has spent much
time and effort on developing contingency plans, which are in an advanced
state of readiness, to address these and other issues.
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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
(27) Financial Data Schedule
(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 10, 1999 By:/s/ Sam R. Leno
-------------------------
Sam R. Leno
Senior Vice President and
Chief Financial Officer
Date: November 10, 1999 By:/s/ Paul J. Reilly
-------------------------
Paul J. Reilly
Vice President-Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE 1999 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<CASH> 49,257
<SECURITIES> 0
<RECEIVABLES> 1,608,082
<ALLOWANCES> 45,317
<INVENTORY> 1,437,315
<CURRENT-ASSETS> 3,130,520
<PP&E> 375,481
<DEPRECIATION> 159,034
<TOTAL-ASSETS> 4,460,174
<CURRENT-LIABILITIES> 1,340,081
<BONDS> 1,517,276
0
0
<COMMON> 102,950
<OTHER-SE> 1,430,650
<TOTAL-LIABILITY-AND-EQUITY> 4,460,174
<SALES> 6,827,457
<TOTAL-REVENUES> 6,827,457
<CGS> 5,881,809
<TOTAL-COSTS> 6,597,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 16,631
<INTEREST-EXPENSE> 78,146
<INCOME-PRETAX> 151,900
<INCOME-TAX> 67,447
<INCOME-CONTINUING> 84,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,116
<EPS-BASIC> 0.84
<EPS-DILUTED> 0.83
</TABLE>
