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, 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: 95,943,600 shares outstanding at July 31, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands except per share data)
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
Sales $4,451,660 $4,049,726 $2,250,028 $2,023,966
---------- ---------- ---------- ----------
Costs and expenses:
Cost of products sold 3,829,239 3,463,516 1,935,889 1,732,635
Selling, general and
administrative expenses 425,224 381,913 209,475 190,449
Depreciation and
amortization 36,044 24,406 18,324 12,949
Integration charge 24,560 - 24,560 -
---------- ---------- ---------- ----------
4,315,067 3,869,835 2,188,248 1,936,033
---------- ---------- ---------- ----------
Operating income 136,593 179,891 61,780 87,933
Equity in earnings (loss) of
affiliated companies 38 112 (34) (789)
Interest expense 51,310 39,011 26,708 20,334
---------- ---------- ---------- ----------
Earnings before income taxes
and minority interest 85,321 140,992 35,038 66,810
Provision for income taxes 38,619 59,206 17,249 28,643
---------- ---------- ---------- ----------
Earnings before minority
interest 46,702 81,786 17,789 38,167
Minority interest 3,339 3,851 2,767 2,177
---------- ---------- ---------- ----------
Net income $ 43,363 $ 77,935 $ 15,022 $ 35,990
========== ========== ========== ==========
Net income per share:
Basic $.46 $.81 $.16 $.37
==== ==== ==== ====
Diluted $.45 $.79 $.16 $.37
==== ==== ==== ====
Average number of shares
outstanding:
Basic 95,053 96,189 95,138 96,173
====== ====== ====== ======
Diluted 95,928 98,184 96,016 98,045
====== ====== ====== ======
See accompanying notes.
<PAGE>
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
June 30, December 31,
1999 1998
------------ -------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and short-term investments $ 39,235 $ 158,924
Accounts receivable, less allowance
for doubtful accounts ($45,190 in 1999
and $48,423 in 1998) 1,478,391 1,354,351
Inventories 1,378,313 1,321,261
Prepaid expenses and other assets 27,743 26,279
---------- ----------
Total current assets 2,923,682 2,860,815
Property, plant and equipment at cost:
Land 17,690 15,087
Buildings and improvements 106,698 90,851
Machinery and equipment 223,813 183,227
---------- ----------
348,201 289,165
Less accumulated depreciation and
amortization 147,633 134,359
---------- ----------
200,568 154,806
Investment in affiliated companies 33,246 23,279
Cost in excess of net assets of
companies acquired, net of amortization
($101,540 in 1999 and $91,837 in 1998) 880,020 721,323
Other assets 90,192 79,648
---------- ----------
$4,127,708 $3,839,871
========== ==========
See accompanying notes.
<PAGE>
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 732,696 $ 785,596
Accrued expenses 239,601 211,438
Short-term borrowings, including current
maturities of long-term debt 144,662 168,066
---------- ----------
Total current liabilities 1,116,959 1,165,100
Long-term debt 1,441,164 1,040,173
Other liabilities 60,854 77,587
Minority interest 22,847 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 502,256 506,002
Retained earnings 1,158,189 1,114,826
Foreign currency translation adjustment (72,175) (23,648)
---------- ----------
1,691,220 1,700,130
Less: Treasury stock (7,008,040 shares in 1999
and 7,321,540 shares in 1998), at cost 189,602 198,281
Unamortized employee stock awards 15,734 14,530
---------- ----------
1,485,884 1,487,319
---------- ----------
$4,127,708 $3,839,871
========== ==========
See accompanying notes.
<PAGE>
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
------------------------
1999 1998
---- ----
(Unaudited)
Cash flows from operating activities:
Net income $ 43,363 $ 77,935
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Minority interest in earnings 3,339 3,851
Depreciation and amortization 39,564 25,259
Equity in undistributed earnings
of affiliated companies (38) (112)
Integration charge 24,560 -
Deferred income taxes (9,146) 5,572
Change in assets and liabilities,
net of effects of acquired businesses:
Accounts receivable (81,926) (59,251)
Inventories 66,094 (87,441)
Prepaid expenses and other assets 2,364 18,230
Accounts payable (79,737) (48,520)
Accrued expenses 11,418 (23,570)
Other (20,636) (9,176)
-------- --------
Net cash used for operating activities (781) (97,223)
-------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (40,202) (21,918)
Cash consideration paid for acquired businesses (348,921) (55,905)
-------- --------
Net cash used for investing activities (389,123) (77,823)
-------- --------
Cash flows from financing activities:
Change in short-term borrowings (1,641) (9,762)
Change in credit facilities 362,231 13,052
Repayment of long-term debt (38,560) (111)
Proceeds from long-term debt - 195,814
Proceeds from exercise of stock options 283 7,195
Purchases of common stock - (45,833)
Distribution to minority partners (37,852) (15,075)
-------- --------
Net cash provided by financing activities 284,461 145,280
-------- --------
Effect of exchange rate changes on cash (14,246) (3,231)
-------- --------
Net decrease in cash and short-term investments (119,689) (32,997)
Cash and short-term investments at beginning
of period 158,924 112,665
-------- --------
Cash and short-term investments at end of period $ 39,235 $ 79,668
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 8,785 $ 48,494
Interest 53,077 42,435
See accompanying notes.
<PAGE>
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 related to the company's acquisition and integration of
the electronics distribution group of Bell Industries and Richey Electronics.
Of this amount, $15.2 million represents costs associated with closing
facilities and severance payments. The remaining $9.4 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 $31.5
million and $.33, respectively, for the three months ended June 30, 1999 and
$59.8 million, $.63 and $.62, respectively, for the six months ended
June 30, 1999.
<PAGE>
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 Six For the Three
Months Ended Months Ended
June 30, June 30,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $43,363 $77,935 $15,022 $35,990
======= ======= ======= =======
Weighed average common
shares outstanding
for basic earnings
per share 95,053 96,189 95,138 96,173
Net effect of dilutive
stock options and
restricted stock awards 875 1,995 878 1,872
------- ------- ------- -------
Weighted average common
shares outstanding
for diluted earnings
per share 95,928 98,184 96,016 98,045
======= ======= ======= =======
Basic earnings per share $.46 $.81 $.16 $.37
==== ==== ==== ====
Diluted earnings per share $.45 $.79 $.16 $.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 Six For the Three
Months Ended Months Ended
June 30, June 30,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 43,363 $ 77,935 $ 15,022 $ 35,990
Foreign currency
translation adjustments(a) (48,527) (14,104) (23,660) (3,319)
-------- -------- -------- --------
Comprehensive income (loss)(b) $ (5,164) $ 63,831 $ (8,638) $ 32,671
======== ======== ======== ========
(a) The foreign currency translation adjustments have not been tax effected as
investments in foreign affiliates are deemed to be permanent.
(b) Excluding the integration charge of $24,560, net of the related tax effect,
comprehensive income was $11,316 for the six months ended June 30, 1999 and
$7,842 for the three months ended June 30, 1999.
<PAGE>
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, for the six months and quarter ended
June 30, 1999 and 1998 are as follows (in thousands):
For the Six For the Three
Months Ended Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Electronic Components $3,416,478 $3,135,528 $1,699,859 $1,514,732
Computer Products 1,035,182 914,198 550,169 509,234
---------- ---------- ---------- ----------
Consolidated $4,451,660 $4,049,726 $2,250,028 $2,023,966
========== ========== ========== ==========
Operating income:
Electronic Components $ 168,905 $ 182,410 $ 84,543 $ 85,543
Computer Products 19,327 21,409 15,630 13,612
Corporate (51,639) (23,928) (38,393) (11,222)
---------- ---------- ---------- ----------
Consolidated $ 136,593 $ 179,891 $ 61,780 $ 87,933
========== ========== ========== ==========
Total assets, by segment, as of June 30, 1999 and 1998 are as follows (in
thousands):
1999 1998
---- ----
Total assets:
Electronic Components $3,331,418 $2,935,710
Computer Products 602,586 577,036
Corporate 193,704 195,985
---------- ----------
Consolidated $4,127,708 $3,708,731
========== ==========
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 Six For the Three
Months Ended Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
North America $2,972,368 $2,599,185 $1,531,387 $1,337,101
Europe 1,159,070 1,200,182 553,686 567,108
Asia/Pacific 320,222 250,359 164,955 119,757
---------- ---------- ---------- ----------
$4,451,660 $4,049,726 $2,250,028 $2,023,966
========== ========== ========== ==========
<PAGE>
Total assets, by geographic area, as of June 30, 1999 and 1998 are as follows
(in thousands):
1999 1998
---- ----
North America $2,460,756 $2,057,666
Europe 1,365,938 1,426,843
Asia/Pacific 301,014 224,222
---------- ----------
$4,127,708 $3,708,731
========== ==========
Note F -- Subsequent Events
- ---------------------------
In August 1999, the company purchased the 49 percent of Support Net, Inc.
("SNI") which it had not previously owned for a total of $81 million. In
connection therewith, the civil action brought by the former minority
shareholders and employees of SNI has been dismissed with prejudice by
stipulation of the parties.
<PAGE>
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 six months and second quarter of 1999 increased
9.9 percent and 11.2 percent, respectively, compared with the year-earlier
periods. The sales growth was principally due to the acquisition of EDG and
Richey and increased sales of commercial computer products by the company's
Gates/Arrow operation. Offsetting, in part, these sales increases were lower
sales of microprocessors and weakening European currencies. Excluding the
impact of the EDG and Richey acquisitions, foreign exchange rate differences,
and lower microprocessor sales, revenue increased by 5 and 8 percent over the
first six months and the second quarter of 1998, respectively.
Operating income
- ----------------
The company recorded operating income of $136.6 million and $61.8 million in
the first six months and second quarter of 1999, respectively, compared with
$179.9 million and $87.9 million, respectively, in the year-earlier periods.
Included in 1999's results is a pre-tax integration charge of $24.6 million
associated with the integration of EDG and Richey. Excluding this integration
charge, operating income was $161.2 million and $86.3 million for the six months
and quarter ended June 30, 1999, respectively. The decrease in operating income
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 due to competitive pricing pressures, and to lower sales,
competitive pricing pressures and weakening currencies in Europe.
Interest expense
- ----------------
Interest expense of $51.3 million and $26.7 million in the first six months and
second quarter of 1999, respectively, increased from $39 million during the
first six months of 1998 and $20.3 million in the comparable quarter of 1998.
The increase is the result of increased borrowings to fund acquisitions and
investments in working capital, offset, in part, by lower interest rates.
<PAGE>
Income taxes
- ------------
The company recorded a provision for taxes at an effective rate of 45.3 percent
and 49.2 percent for the first six months and second quarter of 1999,
respectively, compared with 42 percent and 42.9 percent, in the comparable
year-earlier periods. Excluding the impact of the aforementioned integration
charge, the effective rate was 42.5 percent for the six months and second
quarter 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 $43.4 million and $15 million in the first
six months and second quarter of 1999, respectively, compared with $77.9
million in the first six months of 1998 and $36 million in the second quarter
of 1998. Excluding the aforementioned integration charge, net income was $59.8
million and $31.5 million for the first six months and second quarter of 1999,
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 71 percent at June 30, 1999 compared with 75
percent at June 30, 1998.
The net amount of cash used for the company's operating activities during the
first six months of 1999 was $.8 million, principally reflecting earnings plus
non-cash charges, offset, in part, by investments in working capital. The net
amount of cash used for investing activities was $389.1 million, including
$40.2 million for various capital expenditures and $348.9 million principally
for the acquisitions of Richey, EDG and the remaining 10% of Spoerle
Electronic as well as certain internet related investments. The net amount of
cash provided by financing activities was $284.5 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.
The net amount of cash used for 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 approximately $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, in
part, by purchases of the company's common stock.
<PAGE>
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.
In the information technology arena, the company divided its remediation plan
into the following phases: inventory, assessment, remediation, testing, and
monitoring. The inventory, assessment, and remediation phases have been
substantially completed, and the testing and monitoring phases have progressed
on schedule, and as of July 31, 1999 have been substantially completed. With
respect to non-information technology, or embedded systems, the company has
substantially completed the inventory and assessment phases, and remediation
and testing are progressing according to schedule, with completion anticipated
during the third 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 is in the process
of developing contingency plans 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 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
(a) The company's Annual Meeting of Shareholders was held on May 12, 1999
(the "Annual Meeting").
(b) The matters voted upon at the Annual Meeting and the results of the
voting were as follows:
<PAGE>
(i) The following individuals were elected by the shareholders to
serve as Directors:
Board Member In Favor Withheld
------------ -------- --------
Daniel W. Duval 86,379,017 322,396
Carlo Giersch 85,624,533 1,076,880
John N. Hanson 86,346,621 354,792
Stephen P. Kaufman 86,622,091 1,079,322
Roger King 85,636,001 1,065,412
Robert E. Klatell 85,636,367 1,065,046
Karen Gordon Mills 86,378,723 322,690
Barry W. Perry 86,382,221 319,192
Richard S. Rosenbloom 86,339,308 362,105
Robert S. Throop 85,635,427 1,065,986
John C. Waddell 85,632,519 1,068,894
(ii) The ratification and approval of the adoption of the Chief
Executive Officer 1999 Performance Bonus Plan was voted upon as
follows: 81,930,317 shares in favor; 4,629,700 shares against;
and 141,396 shares abstaining.
(iii) The appointment of Ernst & Young LLP as auditors of the company
was voted upon as follows: 86,581,320 shares in favor; 87,206
shares against; and 32,887 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
(27) Financial Data Schedule
(b) Reports on Form 8-K.
None.
<PAGE>
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 12, 1999 By:/s/ Sam R. Leno
-------------------------
Sam R. Leno
Senior Vice President and
Chief Financial Officer
Date: August 12, 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> JUN-30-1999
<PERIOD-TYPE> 6-MOS
<EXCHANGE-RATE> 1
<CASH> 39,235
<SECURITIES> 0
<RECEIVABLES> 1,478,391
<ALLOWANCES> 45,190
<INVENTORY> 1,378,313
<CURRENT-ASSETS> 2,923,682
<PP&E> 348,201
<DEPRECIATION> 147,633
<TOTAL-ASSETS> 4,127,708
<CURRENT-LIABILITIES> 1,116,959
<BONDS> 1,441,164
0
0
<COMMON> 102,950
<OTHER-SE> 1,382,934
<TOTAL-LIABILITY-AND-EQUITY> 4,127,708
<SALES> 4,451,660
<TOTAL-REVENUES> 4,451,660
<CGS> 3,829,239
<TOTAL-COSTS> 4,315,067
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,955
<INTEREST-EXPENSE> 51,310
<INCOME-PRETAX> 85,321
<INCOME-TAX> 38,619
<INCOME-CONTINUING> 43,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,363
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.45
</TABLE>
