10-Q 1 q10110q.txt FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 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, 2001 -------------- 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: 98,702,122 shares outstanding at May 4, 2001. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. -------------------- ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENT OF INCOME (In thousands except per share data) (Unaudited) Three Months Ended March 31, ----------------------- 2001 2000 ---- ---- Sales $3,275,747 $2,769,424 ---------- ---------- Costs and expenses: Cost of products sold 2,727,465 2,346,425 Selling, general and administrative expenses 326,463 261,225 Depreciation and amortization 28,584 19,594 Integration charge 9,375 - ---------- ---------- 3,091,887 2,627,244 ---------- ---------- Operating income 183,860 142,180 Equity in losses of affiliated companies (396) (1,298) Interest expense 65,907 30,579 ---------- ---------- Earnings before income taxes and minority interest 117,557 110,303 Provision for income taxes 45,847 46,327 ---------- ---------- Earnings before minority interest 71,710 63,976 Minority interest 31 917 ---------- ---------- Net income $ 71,679 $ 63,059 ========== ========== Net income per share: Basic $.73 $.66 ==== ==== Diluted $.68 $.65 ==== ==== Average number of shares outstanding: Basic 97,888 95,387 ======= ====== Diluted 107,491 96,922 ======= ====== See accompanying notes. ARROW ELECTRONICS, INC. CONSOLIDATED BALANCE SHEET (Dollars in thousands) March 31, December 31, 2001 2000 ----------- ----------- (Unaudited) ASSETS ------ Current assets: Cash and short-term investments $ 67,176 $ 55,546 Accounts receivable, including retained interest in securitized receivables, net 2,046,477 2,635,595 Inventories 2,737,985 2,972,661 Prepaid expenses and other assets 61,345 100,408 ---------- ---------- Total current assets 4,912,983 5,764,210 Property, plant and equipment at cost: Land 43,052 40,892 Buildings and improvements 156,758 167,194 Machinery and equipment 329,740 319,305 ---------- ---------- 529,550 527,391 Less accumulated depreciation and amortization (216,419) (210,932) ---------- ---------- 313,131 316,459 Investments in affiliated companies 48,562 35,885 Cost in excess of net assets of companies acquired, net of amortization ($153,763 in 2001 and $145,014 in 2000) 1,197,086 1,237,099 Other assets 341,078 250,888 ---------- ---------- $6,812,840 $7,604,541 ========== ========== See accompanying notes. ARROW ELECTRONICS, INC. CONSOLIDATED BALANCE SHEET (Dollars in thousands) March 31, December 31, 2001 2000 ----------- ----------- (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $1,071,830 $1,567,631 Accrued expenses 490,496 473,984 Short-term borrowings, including current maturities of long-term debt 325,146 529,261 ---------- ---------- Total current liabilities 1,887,472 2,570,876 Long-term debt 2,904,341 3,027,671 Other liabilities 88,454 92,246 Shareholders' equity: Common stock, par value $1: Authorized - 160,000,000 shares Issued - 103,816,553 shares in 2001 and 103,816,792 shares in 2000 103,817 103,817 Capital in excess of par value 528,867 529,376 Retained earnings 1,668,589 1,596,910 Foreign currency translation adjustment (216,842) (160,914) ---------- ---------- 2,084,431 2,069,189 Less: Treasury stock (5,127,277 shares in 2001 and 5,405,918 shares in 2000), at cost (137,117) (144,569) Unamortized employee stock awards (14,741) (10,872) ---------- ---------- 1,932,573 1,913,748 ---------- ---------- $6,812,840 $7,604,541 ========== ========== See accompanying notes. ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) Three Months Ended March 31, ------------------------ 2001 2000 ---- ---- (Unaudited) Cash flows from operating activities: Net income $ 71,679 $ 63,059 Adjustments to reconcile net income to net cash provided by (used for) operations: Minority interest in earnings 31 917 Depreciation and amortization 32,222 22,077 Accretion of discount on convertible debentures 2,882 - Equity in losses of affiliated companies 396 1,298 Deferred income taxes (38,386) 280 Change in assets and liabilities: Accounts receivable 281,304 (168,683) Inventories 191,948 (130,053) Prepaid expenses and other assets (720) (612) Accounts payable (472,012) 144,536 Accrued expenses 31,257 51,073 Other (7,311) (7,638) --------- --------- Net cash provided by (used for) operating activities 93,290 (23,746) --------- --------- Cash flows from investing activities: Acquisition of property, plant and equipment, net (18,664) (22,022) Investments (3,013) - --------- --------- Net cash used for investing activities (21,677) (22,022) --------- --------- Cash flows from financing activities: Sale of accounts receivable under securitization program 251,737 - Change in short-term borrowings (525,247) 11,389 Change in credit facilities 293,158 (19,200) Change in long-term debt (748,826) 70,340 Proceeds from convertible debentures 668,779 - Proceeds from exercise of stock options 1,386 9,905 --------- --------- Net cash provided by (used for) financing activities (59,013) 72,434 --------- --------- Effect of exchange rate changes on cash (970) (4,956) --------- --------- Net increase in cash and short-term investments 11,630 21,710 Cash and short-term investments at beginning of period 55,546 44,885 --------- --------- Cash and short-term investments at end of period $ 67,176 $ 66,595 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes $ 17,260 $ 3,046 Interest 46,786 31,298 See accompanying notes. ARROW ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (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, 2000 and the notes thereto. The results of operations for the interim periods are not necessarily indicative of results for the full year. Note B -- Impact of Recently Issued Accounting Standards -------------------------------------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued Statement No. 138, which deferred the effective date of Statement No. 133. The Statement requires the company to recognize all derivatives on the balance sheet at fair value. Gains and losses resulting from changes in the value of the derivatives are accounted for depending on the intended use of the derivative and whether it qualifies for hedge accounting. Due to the company's limited use of derivative financial instruments, adoption of Statement No. 133, effective January 1, 2001, did not have a significant effect on the company's consolidated results of operations or financial position. Note C -- Accounts Receivable ----------------------------- Accounts receivable consists of the following (in thousands): March 31, December 31, 2001 2000 ---------- ----------- Accounts receivable $1,173,798 $2,743,737 Retained interest in securitized accounts receivable 964,668 - Allowance for doubtful accounts (91,989) (108,142) ---------- ---------- $2,046,477 $2,635,595 ========== ========== During the current quarter, the company entered into a $750,000,000 accounts receivable securitization program with a group of financial institutions under which it could sell, with recourse, its interest in certain trade accounts receivable. As of March 31, 2001, the company sold $251,737,000 of outstanding trade accounts receivable and had a subordinated interest in the remaining outstanding receivables of $964,668,000. The sale of these receivables is reflected as a reduction of accounts receivable in the accompanying consolidated balance sheet and the related discount from the sale is included in interest expense in the consolidated statement of income. Note D -- Special Integration Charge ------------------------------------ During the first quarter of 2001, the company recorded a special charge of $9,375,000 ($5,719,000 after taxes) related to the acquisition and integration of Wyle Electronics and Wyle Systems (collectively, "Wyle"). Of the total amount recorded, $1,433,000 represented costs associated with the closing of various office facilities and distribution and value-added centers, $4,052,000 represented costs associated with severance and other personnel costs, $2,703,000 represented costs associated with outside services related to the conversion of systems and certain other costs of the integration of Wyle into the company, and $1,187,000 represented the write-down of property, plant and equipment to estimated fair value. Of the expected $8,188,000 to be spent in cash in connection with the acquisition and integration of Wyle, $4,631,000 has been spent to date. Approximately $1,340,000 of the remaining amount relates to vacated facilities leased with various expiration dates through 2003, $245,000 relates to severance and other personnel costs to be paid in 2001, and the balance relates to costs associated with outside services related to the conversion of systems and other costs associated with the integration of Wyle into the company. Note E -- 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 Three Months Ended March 31, ------------------- 2001(a) 2000 ------- ---- Net income used for basic earnings per share $ 71,679 $63,059 Interest on convertible debentures, net of tax 1,634 - -------- ------- Net income used for diluted earnings per share $ 73,313 $63,059 ======== ======= Weighed average common shares outstanding for basic earnings per share 97,888 95,387 Net effect of dilutive stock options and restricted stock awards 2,041 1,535 Net effect of convertible debentures 7,562 - -------- ------- Weighted average common shares outstanding for diluted earnings per share 107,491 96,922 ======== ======= Basic earnings per share $.73 $.66 ==== ==== Diluted earnings per share $.68 $.65 ==== ==== (a) Excluding the integration charge, net income and net income per share on a basic and diluted basis were $77,398,000, $.79, and $.74, respectively, for the three months ended March 31, 2001. Note F -- 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 Three Months Ended March 31, --------------------- 2001 2000 ---- ---- Net income $ 71,679 $ 63,059 Foreign currency translation adjustments(a) (55,928) (27,834) -------- -------- Comprehensive income (b) $ 15,751 $ 35,225 ======== ======== (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 $9,375,000 net of the related tax effect, comprehensive income was $21,470,000 for the three months ended March 31, 2001. Note G -- 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). 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. Revenue and operating income, by segment, are as follows (in thousands): For the Three Months Ended March 31, -------------------------- 2001 2000 ---- ---- Revenue: Electronic Components $2,487,773 $2,033,214 Computer Products 787,974 736,210 ---------- ---------- Consolidated $3,275,747 $2,769,424 ========== ========== Operating income: Electronic Components $ 215,044 $ 157,341 Computer Products 7,926 9,324 Corporate (39,110) (24,485) ---------- ---------- Consolidated (a) $ 183,860 $ 142,180 ========== ========== Total assets, by segment, are as follows (in thousands): March 31, December 31, 2001 2000 ---------- ----------- Total assets: Electronic Components $5,533,503 $5,954,527 Computer Products 1,263,672 1,394,157 Corporate (b) 15,665 255,857 ---------- ---------- Consolidated $6,812,840 $7,604,541 ========== ========== Revenues, by geographic area, are as follows (in thousands): For the Three Months Ended March 31, -------------------------- 2001 2000 ---- ---- Americas $2,041,207 $1,716,915 Europe 979,824 803,552 Asia/Pacific 254,716 248,957 ---------- ---------- Consolidated $3,275,747 $2,769,424 ========== ========== Total assets, by geographic area, are as follows (in thousands): March 31, December 31, 2001 2000 ---------- ----------- Americas (b) $4,139,011 $4,840,169 Europe 2,035,465 2,104,837 Asia/Pacific 638,364 659,535 ---------- ---------- Consolidated $6,812,840 $7,604,541 ========== ========== (a) Excluding the integration charge of $9,375,000, operating income was $193,235,000 for the quarter ended March 31, 2001. (b) The balance at March 31, 2001 reflects a reduction of $251,737,000 related to accounts receivable sold under the asset securitization program. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations. --------------------- Sales ----- Consolidated sales for the first quarter of 2001 increased 18 percent when compared with the year-earlier period. The sales growth was driven by a 22 percent increase in sales of core components (net of foreign exchange rate differences), principally as a result of acquisitions. During the quarter, the North American components operation experienced a slowdown in business activity with its large telecom and networking customers and the contract manufacturers that serve them. Late in the quarter, weakening general economic conditions produced a more widespread slowdown affecting a broader segment of the company's North American customer base. Sales of computer products increased by 7 percent for the first quarter of 2001 when compared to the year-earlier period, principally as a result of acquisitions, offset, in part, by market conditions for mid-range products and lower sales of low margin microprocessors (a product segment not considered a part of the company's core business). Operating Income ---------------- The company recorded operating income of $183.9 million in the first quarter of 2001 compared with $142.2 million in the year-earlier period. Included in the results for the first quarter of 2001 is a pre-tax integration charge of $9.4 million associated with the integration of Wyle. Excluding this integration charge, operating income for the first quarter of 2001 was $193.2 million. The increase in operating income is due to increased sales and improving gross profit margins in the North American components business and in the worldwide computer products business, as well as a change in mix resulting in greater weighting of the core components business. Interest Expense ---------------- Interest expense of $65.9 million in the first quarter of 2001 increased from $30.6 million in the year-earlier period. The increase is the result of additional debt incurred to fund acquisitions during 2000, as well as internet-related joint ventures, capital expenditures, and working capital requirements. Income Taxes ------------ The company recorded a provision for taxes at an effective rate of 39 percent for the first quarter of 2001 compared with 42 percent in the comparable year- earlier period. The company's effective tax rate is principally impacted by, among other factors, the statutory tax rates in the countries in which it operates, the related level of earnings generated by these operations, and the nondeductibility of goodwill amortization. Net Income ---------- The company recorded net income of $71.7 million in the first quarter of 2001 compared with $63.1 million in the year-earlier period. Excluding the aforementioned integration charge, net income for the first quarter of 2001 was $77.4 million. The increase in net income is due to increased sales and improving gross profit margins, offset, in part, by higher levels of 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 at March 31, 2001 and 2000. The net amount of cash provided by the company's operating activities during the first quarter of 2001 was $93.3 million, principally reflecting earnings for the quarter. The net amount of cash used for investing activities was $21.7 million, including $18.7 million for various capital expenditures and $3 million for internet-related joint ventures. The net amount of cash used for financing activities was $59 million, primarily reflecting proceeds from the sale of convertible debentures and accounts receivable under the company's securitization program, as well as borrowings under the company's credit facilities, offset, in part, by the repayment of short-term and long-term debt. The net amount of cash used for the company's operating activities during the first quarter of 2000 was $23.7 million, principally reflecting increased accounts receivable, resulting from higher sales late in the first quarter, offset, in part, by earnings for the quarter. The net amount of cash used for investing activities was $22 million for various capital expenditures. The net amount of cash provided by financing activities was $72.4 million, principally reflecting borrowings under the company's commercial paper program. 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 electronic components and commercial computer products 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 3. Quantitative and Qualitative Disclosures About Market Risk. ---------------------------------------------------------- The company is exposed to market risk from changes in foreign currency exchange rates and interest rates. The company, as a large international organization, faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material impact on the company's financial results in the future. The company's primary exposure relates to transactions in which the currency collected from customers is different from the currency utilized to purchase the product sold in Europe, the Asia/Pacific region, and Latin and South America. At the present time, the company hedges only those currency exposures for which natural hedges do not exist. Anticipated foreign currency cash flows and earnings and investments in businesses in Europe, the Asia/Pacific region, and Latin and South America are not hedged as in many instances there are natural offsetting positions. The translation of the financial statements of the non-North American operations is impacted by fluctuations in foreign currency exchange rates. Had the various average foreign currency exchange rates remained the same during the first quarter of 2001 as compared with December 31, 2000, 2001 sales and operating income would have been $11 million and $1 million higher, respectively, than the reported results. The company's interest expense, in part, is sensitive to the general level of interest rates in the Americas, Europe, and the Asia/Pacific region. The company manages its exposure to interest rate risk through the proportion of fixed rate and variable rate debt in its total debt portfolio. At March 31, 2001, approximately 75 percent of the company's debt was subject to fixed rates and 25 percent of its debt was subject to variable rates. Interest expense would fluctuate by approximately $3 million if average interest rates had changed by one percentage point during the first quarter of 2001. This amount was determined by considering the impact of a hypothetical interest rate on the company's borrowing cost. This analysis does not consider the effect of the level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management could likely take actions to further mitigate any potential negative exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the company's financial structure. PART II. OTHER INFORMATION 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: May 14, 2001 By:/s/ Sam R. Leno ------------------------- Sam R. Leno Senior Vice President and Chief Financial Officer Date: May 14, 2001 By:/s/ Paul J. Reilly ------------------------- Paul J. Reilly Vice President-Finance