Attached files
| file | filename |
|---|---|
| EX-32.II - EXHIBIT 32.II - ARROW ELECTRONICS INC | arwexhibit32iiq317.htm |
| EX-32.I - EXHIBIT 32.I - ARROW ELECTRONICS INC | arwexhibit32iq317.htm |
| EX-31.II - EXHIBIT 31.II - ARROW ELECTRONICS INC | arwexhibit31iiq317.htm |
| EX-31.I - EXHIBIT 31.I - ARROW ELECTRONICS INC | arwexhibit31iq317.htm |
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, 2017
OR
o | 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) |
9201 East Dry Creek Road, Centennial, Colorado | 80112 |
(Address of principal executive offices) | (Zip Code) |
(303) 824-4000
(Registrant's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year, if changed since last report)
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (do not check if a smaller reporting company) | Smaller reporting company o |
Emerging growth company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
There were 87,973 shares of Common Stock outstanding as of October 30, 2017.
ARROW ELECTRONICS, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Sales | $ | 6,953,740 | $ | 5,936,092 | $ | 19,178,638 | $ | 17,382,370 | ||||||||
Cost of sales | 6,110,382 | 5,162,930 | 16,751,427 | 15,061,519 | ||||||||||||
Gross profit | 843,358 | 773,162 | 2,427,211 | 2,320,851 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general, and administrative expenses | 552,896 | 510,017 | 1,600,762 | 1,534,534 | ||||||||||||
Depreciation and amortization | 38,574 | 40,194 | 113,096 | 121,516 | ||||||||||||
Restructuring, integration, and other charges | 15,896 | 24,267 | 55,817 | 61,161 | ||||||||||||
607,366 | 574,478 | 1,769,675 | 1,717,211 | |||||||||||||
Operating income | 235,992 | 198,684 | 657,536 | 603,640 | ||||||||||||
Equity in earnings of affiliated companies | 1,216 | 1,311 | 2,865 | 5,394 | ||||||||||||
Loss on investment, net | 15,000 | — | 14,250 | — | ||||||||||||
Loss on extinguishment of debt | 786 | — | 59,545 | — | ||||||||||||
Interest and other financing expense, net | 39,748 | 37,229 | 120,179 | 111,828 | ||||||||||||
Income before income taxes | 181,674 | 162,766 | 466,427 | 497,206 | ||||||||||||
Provision for income taxes | 46,199 | 44,931 | 114,998 | 137,441 | ||||||||||||
Consolidated net income | 135,475 | 117,835 | 351,429 | 359,765 | ||||||||||||
Noncontrolling interests | 845 | 108 | 3,352 | 1,533 | ||||||||||||
Net income attributable to shareholders | $ | 134,630 | $ | 117,727 | $ | 348,077 | $ | 358,232 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 1.52 | $ | 1.29 | $ | 3.92 | $ | 3.92 | ||||||||
Diluted | $ | 1.50 | $ | 1.28 | $ | 3.87 | $ | 3.87 | ||||||||
Weighted-average shares outstanding: | ||||||||||||||||
Basic | 88,453 | 90,937 | 88,870 | 91,412 | ||||||||||||
Diluted | 89,540 | 91,938 | 89,936 | 92,487 | ||||||||||||
See accompanying notes.
3
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Quarter Ended | Nine Months Ended | ||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | ||||||||||||
Consolidated net income | $ | 135,475 | $ | 117,835 | $ | 351,429 | $ | 359,765 | |||||||
Other comprehensive income: | |||||||||||||||
Foreign currency translation adjustment and other | 54,951 | 16,336 | 225,431 | 38,005 | |||||||||||
Unrealized gain (loss) on investment securities, net | 1,357 | 1,273 | 4,639 | (2,408 | ) | ||||||||||
Unrealized gain (loss) on interest rate swaps designated as cash flow hedges, net | (2,093 | ) | 94 | (2,543 | ) | 278 | |||||||||
Employee benefit plan items, net | 492 | 814 | 1,403 | 5,578 | |||||||||||
Other comprehensive income | 54,707 | 18,517 | 228,930 | 41,453 | |||||||||||
Comprehensive income | 190,182 | 136,352 | 580,359 | 401,218 | |||||||||||
Less: Comprehensive income attributable to noncontrolling interests | 2,049 | 576 | 7,743 | 2,791 | |||||||||||
Comprehensive income attributable to shareholders | $ | 188,133 | $ | 135,776 | $ | 572,616 | $ | 398,427 | |||||||
See accompanying notes.
4
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
September 30, 2017 | December 31, 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 584,339 | $ | 534,320 | ||||
Accounts receivable, net | 7,070,629 | 6,746,687 | ||||||
Inventories | 3,168,769 | 2,855,645 | ||||||
Other current assets | 215,431 | 180,069 | ||||||
Total current assets | 11,039,168 | 10,316,721 | ||||||
Property, plant, and equipment, at cost: | ||||||||
Land | 12,852 | 23,456 | ||||||
Buildings and improvements | 158,865 | 175,141 | ||||||
Machinery and equipment | 1,306,891 | 1,297,657 | ||||||
1,478,608 | 1,496,254 | |||||||
Less: Accumulated depreciation and amortization | (663,229 | ) | (739,955 | ) | ||||
Property, plant, and equipment, net | 815,379 | 756,299 | ||||||
Investments in affiliated companies | 86,626 | 88,401 | ||||||
Intangible assets, net | 307,385 | 336,882 | ||||||
Goodwill | 2,470,576 | 2,392,220 | ||||||
Other assets | 337,832 | 315,843 | ||||||
Total assets | $ | 15,056,966 | $ | 14,206,366 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,799,723 | $ | 5,774,151 | ||||
Accrued expenses | 799,066 | 821,244 | ||||||
Short-term borrowings, including current portion of long-term debt | 380,208 | 93,827 | ||||||
Total current liabilities | 6,978,997 | 6,689,222 | ||||||
Long-term debt | 2,802,960 | 2,696,334 | ||||||
Other liabilities | 349,717 | 355,190 | ||||||
Commitments and contingencies (Note L) | ||||||||
Equity: | ||||||||
Shareholders' equity: | ||||||||
Common stock, par value $1: | ||||||||
Authorized - 160,000 shares in both 2017 and 2016 | ||||||||
Issued - 125,424 shares in both 2017 and 2016 | 125,424 | 125,424 | ||||||
Capital in excess of par value | 1,107,125 | 1,112,114 | ||||||
Treasury stock (37,463 and 36,511 shares in 2017 and 2016, respectively), at cost | (1,739,473 | ) | (1,637,476 | ) | ||||
Retained earnings | 5,545,307 | 5,197,230 | ||||||
Accumulated other comprehensive loss | (159,315 | ) | (383,854 | ) | ||||
Total shareholders' equity | 4,879,068 | 4,413,438 | ||||||
Noncontrolling interests | 46,224 | 52,182 | ||||||
Total equity | 4,925,292 | 4,465,620 | ||||||
Total liabilities and equity | $ | 15,056,966 | $ | 14,206,366 | ||||
See accompanying notes.
5
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, 2017 | October 1, 2016 | |||||||
Cash flows from operating activities: | ||||||||
Consolidated net income | $ | 351,429 | $ | 359,765 | ||||
Adjustments to reconcile consolidated net income to net cash provided by operations: | ||||||||
Depreciation and amortization | 113,096 | 121,516 | ||||||
Amortization of stock-based compensation | 30,301 | 29,783 | ||||||
Equity in earnings of affiliated companies | (2,865 | ) | (5,394 | ) | ||||
Loss on extinguishment of debt | 59,545 | — | ||||||
Deferred income taxes | 13,262 | 30,191 | ||||||
Loss on investments, net | 14,250 | — | ||||||
Other | 7,415 | 4,464 | ||||||
Change in assets and liabilities, net of effects of acquired businesses: | ||||||||
Accounts receivable | (59,084 | ) | 335,455 | |||||
Inventories | (255,820 | ) | (117,674 | ) | ||||
Accounts payable | (113,804 | ) | (513,365 | ) | ||||
Accrued expenses | (41,810 | ) | (102,915 | ) | ||||
Other assets and liabilities | (114,136 | ) | (1,121 | ) | ||||
Net cash provided by operating activities | 1,779 | 140,705 | ||||||
Cash flows from investing activities: | ||||||||
Cash consideration paid for acquired businesses | (3,628 | ) | (68,946 | ) | ||||
Acquisition of property, plant, and equipment | (149,597 | ) | (126,341 | ) | ||||
Proceeds from sale of property, plant, and equipment | 24,433 | — | ||||||
Other | (2,467 | ) | (12,000 | ) | ||||
Net cash used for investing activities | (131,259 | ) | (207,287 | ) | ||||
Cash flows from financing activities: | ||||||||
Change in short-term and other borrowings | (14,423 | ) | 31,941 | |||||
Proceeds from (repayments of) long-term bank borrowings, net | (82,766 | ) | 320,000 | |||||
Proceeds from note offerings, net | 987,144 | — | ||||||
Redemption of notes | (555,886 | ) | — | |||||
Proceeds from exercise of stock options | 21,423 | 16,686 | ||||||
Repurchases of common stock | (149,125 | ) | (167,178 | ) | ||||
Purchase of shares from noncontrolling interest | (23,350 | ) | — | |||||
Other | (1,620 | ) | (3,000 | ) | ||||
Net cash provided by financing activities | 181,397 | 198,449 | ||||||
Effect of exchange rate changes on cash | (1,898 | ) | (20,542 | ) | ||||
Net increase in cash and cash equivalents | 50,019 | 111,325 | ||||||
Cash and cash equivalents at beginning of period | 534,320 | 273,090 | ||||||
Cash and cash equivalents at end of period | $ | 584,339 | $ | 384,415 | ||||
See accompanying notes.
6
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note A – Basis of Presentation
The accompanying consolidated financial statements of Arrow Electronics, Inc. (the "company") were prepared in accordance with accounting principles generally accepted in the United States and reflect all adjustments of a normal recurring nature, 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 consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.
These consolidated financial statements do not include all of the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with the company's audited consolidated financial statements and accompanying notes for the year ended December 31, 2016, as filed in the company's Annual Report on Form 10-K.
Quarter End
The company operates on a quarterly calendar that closes on the Saturday closest to the end of the calendar quarter.
Reclassification
Certain prior period amounts were reclassified to conform to the current period presentation. These reclassifications did not have a material impact on previously reported amounts.
Note B – Impact of Recently Issued Accounting Standards
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815) ("ASU No. 2017-12"). ASU No. 2017-12 simplifies certain aspects of hedge accounting and results in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements. ASU No. 2017-12 is effective for the company in the first quarter of 2019, with early adoption permitted, and is to be applied on a modified retrospective basis. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2017-12.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation - Stock Compensation (Topic 718) ("ASU No. 2017-09"). ASU No. 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Effective April 2, 2017, the company adopted the provisions of ASU No. 2017-09 on a prospective basis. The adoption of the provisions of ASU No. 2017-09 did not materially impact the company's consolidated financial position or results of operations.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715) ("ASU No. 2017-07"). ASU No. 2017-07 requires that the service cost component of pension expense be included in the same line item as other compensation costs arising from services rendered by employees, with the other components of pension expense being classified outside of a subtotal of income from operations. ASU No. 2017-07 is effective for the company in the first quarter of 2018 and is to be applied retrospectively for the presentation requirements and prospectively for the capitalization of the service cost component requirements. The adoption of the provisions of ASU No. 2017-07 is not expected to have a material impact on the company's consolidated financial position or results of operations.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350) ("ASU No. 2017-04"). ASU No. 2017-04 eliminates step 2 from the annual goodwill impairment test. Effective January 1, 2017, the company adopted the provisions of ASU No. 2017-04 on a prospective basis. The adoption of the provisions of ASU No. 2017-04 would not materially impact the company's consolidated financial position or results of operations unless step 1 of the annual goodwill impairment test fails.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory (Topic 740) ("ASU No. 2016-16"). ASU No. 2016-16 clarifies the accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. Effective April 2, 2017, the company adopted the provisions
7
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
of ASU No. 2016-16 on a modified retrospective basis. The adoption of the provisions of ASU No. 2016-16 did not materially impact the company's consolidated financial position or results of operations.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230) ("ASU No. 2016-15"). ASU No. 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Effective January 1, 2017, the company adopted the provisions of ASU No. 2016-15 on a retrospective basis. The adoption of the provisions of ASU No. 2016-15 did not materially impact the company's consolidated financial position or results of operations.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU No. 2016-13"). ASU No. 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU No. 2016-13 is effective for the company in the first quarter of 2020, with early adoption permitted, and is to be applied using a modified retrospective approach. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718) ("ASU No. 2016-09"). ASU No. 2016-09 revises the accounting treatment for excess tax benefits, minimum statutory tax withholding requirements, and forfeitures related to share-based awards. Effective January 1, 2017, the company adopted the recognition of excess tax benefits and tax deficiencies on a prospective basis and reclassified excess tax benefits in the consolidated statements of cash flows on a retrospective basis. The company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The adoption of the provisions of ASU No. 2016-09 did not materially impact the company's consolidated financial position or results of operations.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU No. 2016-02"). ASU No. 2016-02 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets. Leases will be classified as either finance or operating, with classification affecting expense recognition in the income statement. ASU No. 2016-02 is effective for the company in the first quarter of 2019, with early adoption permitted, and is to be applied using a modified retrospective approach. While the company continues to evaluate the effects of adopting the provisions of ASU No. 2016-02, the company expects most existing operating lease commitments will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825) ("ASU No. 2016-01"). ASU No. 2016-01 revises the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires the change in fair value of many equity investments to be recognized in net income. ASU No. 2016-01 is effective for the company in the first quarter of 2018, with early adoption permitted, and is to be applied prospectively. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-01.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU No. 2014-09"). ASU No. 2014-09 supersedes all existing revenue recognition guidance. Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for the company in the first quarter of 2018, with early adoption permitted in the first quarter of 2017. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption. In March, April, May, and December 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU No. 2016-08"); ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing ("ASU No. 2016-10"); ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients ("ASU No. 2016-12"); and ASU No. 2016-19, Technical Corrections and Improvements ("ASU No. 2016-19"), respectively. ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12, and ASU No. 2016-19 provide supplemental adoption guidance and clarification to ASU No. 2014-09, and must be adopted concurrently with the adoption of ASU No. 2014-09. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2014-09, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12, and ASU No. 2016-19.
8
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
In 2014, the company established an implementation team (“team”) and engaged external advisers to develop a multi-phase plan to assess the company’s business and contracts, as well as any changes to processes or systems to adopt the requirements of the new revenue standard. The team has updated the assessment for new ASU updates and for newly acquired businesses. The team is in the process of finalizing its conclusions on several aspects of the standard including principal versus agent considerations, identification of performance obligations, and the determination of when control of goods and services transfers to the company’s customers. Additionally, the team is in the process of evaluating the impact of the expanded disclosure requirements.
Note C – Acquisitions
2017 Acquisitions
During the first nine months of 2017, the company acquired an additional 11.9% of the noncontrolling interest common shares of Data Modul AG for $23,350, increasing the company's ownership interest in Data Modul to 69.2%. The impact of this acquisition was not material to the company's consolidated financial position or results of operations.
2016 Acquisitions
During 2016, the company completed three acquisitions for $63,869, net of cash acquired. The impact of these acquisitions was not material to the company's consolidated financial position or results of operations. The pro forma impact of the 2016 acquisitions on the consolidated results of operations of the company for the first nine months of 2016, as though the acquisitions occurred on January 1, 2016, was also not material.
Note D – Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The company tests goodwill and other indefinite-lived intangible assets for impairment annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist.
Goodwill of companies acquired, allocated to the company's business segments, is as follows:
Global Components | Global ECS | Total | ||||||||||
Balance as of December 31, 2016 (a) | $ | 1,239,741 | $ | 1,152,479 | $ | 2,392,220 | ||||||
Acquisitions and related adjustments | (102 | ) | 6,251 | 6,149 | ||||||||
Foreign currency translation adjustment | 17,451 | 54,756 | 72,207 | |||||||||
Balance as of September 30, 2017 (a) | $ | 1,257,090 | $ | 1,213,486 | $ | 2,470,576 | ||||||
(a) | The total carrying value of goodwill for all periods in the table above is reflected net of $1,018,780 of accumulated impairment charges, of which $716,925 was recorded in the global components business segment and $301,855 was recorded in the global ECS business segment. |
Intangible assets, net, are comprised of the following as of September 30, 2017:
Weighted-Average Life | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||
Non-amortizable trade names | indefinite | $ | 101,000 | $ | — | $ | 101,000 | |||||||
Customer relationships | 10 years | 476,656 | (274,847 | ) | 201,809 | |||||||||
Developed technology | 5 years | 6,340 | (2,973 | ) | 3,367 | |||||||||
Amortizable trade name | 5 years | 2,409 | (1,200 | ) | 1,209 | |||||||||
$ | 586,405 | $ | (279,020 | ) | $ | 307,385 | ||||||||
9
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Intangible assets, net, are comprised of the following as of December 31, 2016:
Weighted-Average Life | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||
Non-amortizable trade names | indefinite | $ | 101,000 | $ | — | $ | 101,000 | |||||||
Customer relationships | 10 years | 476,176 | (247,206 | ) | 228,970 | |||||||||
Developed technology | 5 years | 9,140 | (4,435 | ) | 4,705 | |||||||||
Other intangible assets | (b) | 6,721 | (4,514 | ) | 2,207 | |||||||||
$ | 593,037 | $ | (256,155 | ) | $ | 336,882 | ||||||||
(b) | Consists of non-competition agreements, sales backlog, and an amortizable trade name with useful lives ranging from two to five years. |
During the third quarters of 2017 and 2016, the company recorded amortization expense related to identifiable intangible assets of $12,645 and $13,893, respectively.
During the first nine months of 2017 and 2016, the company recorded amortization expense related to identifiable intangible assets of $37,909 and $41,252, respectively.
Note E – Investments in Affiliated Companies
The company owns a 50% interest in several joint ventures with Marubun Corporation (collectively "Marubun/Arrow") and several interests ranging from 43% to 50% in other joint ventures and equity method investments. These investments are accounted for using the equity method.
The following table presents the company's investment in affiliated companies:
September 30, 2017 | December 31, 2016 | |||||||
Marubun/Arrow | $ | 68,179 | $ | 65,237 | ||||
Other | 18,447 | 23,164 | ||||||
$ | 86,626 | $ | 88,401 | |||||
The equity in earnings of affiliated companies consists of the following:
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Marubun/Arrow | $ | 1,886 | $ | 1,549 | $ | 5,168 | $ | 5,059 | ||||||||
Other | (670 | ) | (238 | ) | (2,303 | ) | 335 | |||||||||
$ | 1,216 | $ | 1,311 | $ | 2,865 | $ | 5,394 | |||||||||
Under the terms of various joint venture agreements, the company is required to pay its pro-rata share of the third party debt of the joint ventures in the event that the joint ventures are unable to meet their obligations. At September 30, 2017, the company's pro-rata share of this debt was approximately $850. There were no outstanding borrowings under the third party debt agreements of the joint ventures as of December 31, 2016. The company believes there is sufficient equity in each of the joint ventures to meet the obligations.
10
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note F – Accounts Receivable
Accounts receivable, net, consists of the following:
September 30, 2017 | December 31, 2016 | |||||||
Accounts receivable | $ | 7,124,677 | $ | 6,798,943 | ||||
Allowances for doubtful accounts | (54,048 | ) | (52,256 | ) | ||||
Accounts receivable, net | $ | 7,070,629 | $ | 6,746,687 | ||||
The company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowances for doubtful accounts are determined using a combination of factors, including the length of time the receivables are outstanding, the current business environment, and historical experience. The company also has notes receivables with certain customers. As of September 30, 2017 and December 31, 2016, the company has one customer with a combined note and accounts receivable balance of approximately $27,850 and $20,000, respectively. The customer became delinquent on its repayment of the note during the fourth quarter of 2016. The company believes that it will recover all amounts due; however, it is possible that it could incur a loss.
Note G – Debt
Short-term borrowings, including current portion of long-term debt, consists of the following:
September 30, 2017 | December 31, 2016 | |||||||
3.00% notes, due 2018 | $ | 299,643 | $ | — | ||||
Other short-term borrowings | 80,565 | 93,827 | ||||||
$ | 380,208 | $ | 93,827 | |||||
Other short-term borrowings are primarily utilized to support working capital requirements. The weighted-average interest rate on these borrowings was 2.7% and 2.4% at September 30, 2017 and December 31, 2016, respectively.
Long-term debt consists of the following:
September 30, 2017 | December 31, 2016 | |||||||
Revolving credit facility | $ | 96,200 | $ | — | ||||
Asset securitization program | 255,000 | 460,000 | ||||||
6.875% senior debentures, due 2018 | — | 199,348 | ||||||
3.00% notes, due 2018 | — | 299,013 | ||||||
6.00% notes, due 2020 | 208,928 | 299,183 | ||||||
5.125% notes, due 2021 | 130,364 | 248,843 | ||||||
3.50% notes, due 2022 | 346,330 | 345,776 | ||||||
4.50% notes, due 2023 | 297,001 | 296,646 | ||||||
3.25% notes, due 2024 | 492,846 | — | ||||||
4.00% notes, due 2025 | 345,040 | 344,625 | ||||||
7.50% senior debentures, due 2027 | 109,673 | 198,514 | ||||||
3.875% notes, due 2028 | 493,449 | — | ||||||
Interest rate swaps designated as fair value hedges | 180 | 152 | ||||||
Other obligations with various interest rates and due dates | 27,949 | 4,234 | ||||||
$ | 2,802,960 | $ | 2,696,334 | |||||
11
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
The 7.50% senior debentures are not redeemable prior to their maturity. The 3.00% notes, 6.00% notes, 5.125% notes, 3.50% notes, 4.50% notes, 3.25% notes, 4.00% notes, and 3.875% notes, notes may be called at the option of the company subject to "make whole" clauses.
The estimated fair market value, using quoted market prices, is as follows:
September 30, 2017 | December 31, 2016 | |||||||
6.875% senior debentures, due 2018 | $ | — | $ | 212,500 | ||||
3.00% notes, due 2018 | 301,500 | 303,500 | ||||||
6.00% notes, due 2020 | 226,500 | 325,500 | ||||||
5.125% notes, due 2021 | 140,500 | 265,500 | ||||||
3.50% notes, due 2022 | 358,000 | 349,500 | ||||||
4.50% notes, due 2023 | 318,500 | 305,500 | ||||||
3.25% notes, due 2024 | 494,000 | — | ||||||
4.00% notes, due 2025 | 357,500 | 345,000 | ||||||
7.50% senior debentures, due 2027 | 136,500 | 238,000 | ||||||
3.875% notes, due 2028 | 499,000 | — | ||||||
The carrying amount of the company's short-term borrowings in various countries, revolving credit facility, asset securitization program, commercial paper, and other obligations approximate their fair value.
The company has a $1,800,000 revolving credit facility maturing in December 2021. This facility may be used by the company for general corporate purposes including working capital in the ordinary course of business, letters of credit, repayment, prepayment or purchase of long-term indebtedness, acquisitions, and as support for the company's commercial paper program, as applicable. Interest on borrowings under the revolving credit facility is calculated using a base rate or a euro currency rate plus a spread (1.18% at September 30, 2017), which is based on the company's credit ratings, or an effective interest rate of 2.36% at September 30, 2017. The facility fee, which is based on the company's credit ratings, was .20% at September 30, 2017. The company had $96,200 in outstanding borrowings under the revolving credit facility at September 30, 2017. The company had no outstanding borrowings under the revolving credit facility at December 31, 2016.
The company has a commercial paper program and the maximum aggregate balance of commercial paper outstanding may not exceed the borrowing capacity of $1,200,000. The company had no outstanding borrowings under this program at September 30, 2017 and December 31, 2016. The program had an effective interest rate of 1.74% for the third quarter of 2017.
The company has an asset securitization program collateralized by accounts receivable of certain of its subsidiaries. The company may borrow up to $910,000 under the asset securitization program, which matures in September 2019. The asset securitization program is conducted through Arrow Electronics Funding Corporation ("AFC"), a wholly-owned, bankruptcy remote subsidiary. The asset securitization program does not qualify for true sale treatment. Accordingly, the accounts receivable and related debt obligation remain on the company's consolidated balance sheets. Interest on borrowings is calculated using a base rate or a commercial paper rate plus a spread (.40% at September 30, 2017), which is based on the company's credit ratings, or an effective interest rate of 1.73% at September 30, 2017. The facility fee is .40%.
At September 30, 2017 and December 31, 2016, the company had $255,000 and $460,000, respectively, in outstanding borrowings under the asset securitization program, which was included in "Long-term debt" in the company's consolidated balance sheets. Total collateralized accounts receivable of approximately $2,187,751 and $2,045,464, respectively, were held by AFC and were included in "Accounts receivable, net" in the company's consolidated balance sheets. Any accounts receivable held by AFC would likely not be available to other creditors of the company in the event of bankruptcy or insolvency proceedings before repayment of any outstanding borrowings under the asset securitization program.
Both the revolving credit facility and asset securitization program include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels. The company was in compliance with all
12
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
covenants as of September 30, 2017 and is currently not aware of any events that would cause non-compliance with any covenants in the future.
The company has a $100,000 uncommitted line of credit. The company had no outstanding borrowings under the uncommitted line of credit at September 30, 2017 and December 31, 2016.
During June 2017, the company completed the sale of $500,000 principal amount of 3.875% notes due in 2028. The net proceeds of the offering of $494,625 were used to redeem the company's 6.875% senior debenture due June 2018 and refinance a portion of the company’s 6.00% notes due April 2020, 5.125% notes due March 2021, and 7.50% notes due January 2027. The company recorded a loss on extinguishment of debt of $59,545 in the first nine months of 2017.
During September 2017, the company completed the sale of $500,000 principal amount of 3.25% notes due in 2024. The net proceeds of the offering of $493,810 are expected to be used to redeem the company's debt obligations and for general corporate purposes.
Interest and other financing expense, net, includes interest and dividend income of $8,121 and $23,487 for the third quarter and first nine months of 2017, respectively. Interest and other financing expense, net, includes interest and dividend income of $5,040 and $13,626 for the third quarter and first nine months of 2016, respectively.
Note H – Financial Instruments Measured at Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
Level 2 | Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. |
Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. |
The following table presents assets (liabilities) measured at fair value on a recurring basis at September 30, 2017:
Balance Sheet Location | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Cash equivalents | Other assets | $ | 854 | $ | — | $ | — | $ | 854 | |||||||||
Available-for-sale securities | Other assets | 45,112 | — | — | 45,112 | |||||||||||||
Interest rate swaps | Other assets | — | 180 | — | 180 | |||||||||||||
Foreign exchange contracts | Other current assets | — | 6,809 | — | 6,809 | |||||||||||||
Foreign exchange contracts | Accrued expenses | — | (6,733 | ) | — | (6,733 | ) | |||||||||||
Contingent consideration | Accrued expenses | — | — | (3,100 | ) | (3,100 | ) | |||||||||||
$ | 45,966 | $ | 256 | $ | (3,100 | ) | $ | 43,122 | ||||||||||
13
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
The following table presents assets (liabilities) measured at fair value on a recurring basis at December 31, 2016:
Balance Sheet Location | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Cash equivalents | Other assets | $ | 2,660 | $ | — | $ | — | $ | 2,660 | |||||||||
Available-for-sale securities | Other assets | 37,915 | — | — | 37,915 | |||||||||||||
Interest rate swaps | Other assets | — | 152 | — | 152 | |||||||||||||
Foreign exchange contracts | Other current assets | — | 4,685 | — | 4,685 | |||||||||||||
Foreign exchange contracts | Accrued expenses | — | (3,444 | ) | — | (3,444 | ) | |||||||||||
Contingent consideration | Accrued expenses / Other liabilities | — | — | (4,027 | ) | (4,027 | ) | |||||||||||
$ | 40,575 | $ | 1,393 | $ | (4,027 | ) | $ | 37,941 | ||||||||||
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to goodwill and identifiable intangible assets (see Note C and D). The company tests these assets for impairment if indicators of potential impairment exist or at least annually if indefinite lived.
During the first nine months of 2017 and 2016, there were no transfers of assets (liabilities) measured at fair value between the three levels of the fair value hierarchy.
Available-For-Sale Securities
The company has an 8.4% equity ownership interest in Marubun Corporation ("Marubun") and a portfolio of mutual funds with quoted market prices, all of which are accounted for as available-for-sale securities.
The fair value of the company's available-for-sale securities is as follows:
September 30, 2017 | December 31, 2016 | |||||||||||||||
Marubun | Mutual Funds | Marubun | Mutual Funds | |||||||||||||
Cost basis | $ | 10,016 | $ | 17,743 | $ | 10,016 | $ | 18,097 | ||||||||
Unrealized holding gain | 7,763 | 9,590 | 3,806 | 5,996 | ||||||||||||
Fair value | $ | 17,779 | $ | 27,333 | $ | 13,822 | $ | 24,093 | ||||||||
The unrealized holding gains on these investments are included in "Accumulated other comprehensive loss" in the shareholders' equity section in the company's consolidated balance sheets.
Derivative Instruments
The company uses various financial instruments, including derivative instruments, for purposes other than trading. Certain derivative instruments are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. Derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings.
Interest Rate Swaps
The company occasionally enters into interest rate swap transactions that convert certain fixed-rate debt to variable-rate debt or variable-rate debt to fixed-rate debt in order to manage its targeted mix of fixed- and floating-rate debt. The company uses the hypothetical derivative method to assess the effectiveness of its interest rate swaps designated as fair value hedges on a quarterly basis. The effective portion of the change in the fair value of interest rate swaps designated as fair value hedges is recorded as a change to the carrying value of the related hedged debt, and the effective portion of the change in fair value of interest rate swaps designated as cash flow hedges is recorded in the shareholders' equity section in the company's consolidated balance sheets in "Accumulated other comprehensive loss." The ineffective portion of the interest rate swaps, if any, is recorded in "Interest and other financing expense, net" in the company's consolidated statements of operations. As of September 30, 2017 and December 31, 2016, all outstanding interest rate swaps were designated as fair value hedges.
14
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
The terms of our outstanding interest rate swap contracts at September 30, 2017 are as follows:
Maturity Date | Notional Amount | Interest rate due from counterparty | Interest rate due to counterparty | |||
April 2020 | 50,000 | 6.000% | 6 mo. USD LIBOR + 3.896% | |||
Foreign Exchange Contracts
The company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. The company’s transactions in its foreign operations are denominated primarily in the following currencies: Euro, Chinese Renminbi, British Pound, Taiwan Dollar, and Australian Dollar. The company enters into foreign exchange forward, option, or swap contracts (collectively, the "foreign exchange contracts") to mitigate the impact of changes in foreign currency exchange rates. These contracts are executed to facilitate the hedging of foreign currency exposures resulting from inventory purchases and sales and generally have terms of no more than six months. Gains or losses on designated contracts are deferred and recognized when the underlying future purchase or sale is recognized or when the corresponding asset or liability is revalued. The company does not enter into foreign exchange contracts for trading purposes. The risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the company minimizes by limiting its counterparties to major financial institutions. The fair value of the foreign exchange contracts are estimated using market quotes. The notional amount of the foreign exchange contracts at September 30, 2017 and December 31, 2016 was $447,484 and $460,233, respectively.
Gains and losses related to non-designated foreign currency exchange contracts are recorded in "Cost of sales" in the company's consolidated statements of operations. Gains and losses related to designated foreign currency exchange contracts, are recorded in "Cost of sales", "Selling, general, and administrative expenses", and "Interest and other financing expense, net" based upon the nature of the underlying hedged transaction, in the company's consolidated statements of operations and were not material for the third quarter and first nine months of 2017 and 2016.
The effects of derivative instruments on the company's consolidated statements of operations and other comprehensive income are as follows:
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Loss Recognized in Consolidated Net Income | ||||||||||||||||
Foreign exchange contracts | $ | (4,283 | ) | $ | (2,394 | ) | $ | (15,445 | ) | $ | (1,873 | ) | ||||
Interest rate swaps | (210 | ) | (153 | ) | (532 | ) | (452 | ) | ||||||||
Total | $ | (4,493 | ) | $ | (2,547 | ) | $ | (15,977 | ) | $ | (2,325 | ) | ||||
Loss Recognized in Other Comprehensive Income before reclassifications | ||||||||||||||||
Foreign exchange contracts | $ | (374 | ) | $ | (55 | ) | $ | (1,241 | ) | $ | (588 | ) | ||||
Interest rate swaps | $ | (3,619 | ) | $ | — | $ | (4,672 | ) | $ | — | ||||||
Other
The carrying amount of cash and cash equivalents, accounts receivable, net, and accounts payable approximate their fair value due to the short maturities of these financial instruments.
15
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note I – Restructuring, Integration, and Other Charges
The following table presents the components of the restructuring, integration, and other charges:
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Restructuring and integration charges - current period actions | $ | 12,050 | $ | 12,028 | $ | 34,296 | $ | 22,131 | ||||||||
Restructuring and integration charges (credits) - actions taken in prior periods | 250 | (487 | ) | 6,348 | 3,474 | |||||||||||
Other charges | 3,596 | 12,726 | 15,173 | 35,556 | ||||||||||||
$ | 15,896 | $ | 24,267 | $ | 55,817 | $ | 61,161 | |||||||||
2017 Restructuring and Integration Charges
The following table presents the components of the 2017 restructuring and integration charges and activity in the related restructuring and integration accrual for the first nine months of 2017:
Personnel Costs | Facilities Costs | Other | Total | |||||||||||||
Restructuring and integration charges | $ | 29,030 | $ | 4,222 | $ | 1,044 | $ | 34,296 | ||||||||
Payments | (14,203 | ) | (2,575 | ) | (834 | ) | (17,612 | ) | ||||||||
Foreign currency translation | 868 | 83 | 20 | 971 | ||||||||||||
Balance as of September 30, 2017 | $ | 15,695 | $ | 1,730 | $ | 230 | $ | 17,655 | ||||||||
These restructuring initiatives are due to the company's continued efforts to lower cost and drive operational efficiency. Integration costs are primarily related to the integration of acquired businesses within the company's pre-existing business and the consolidation of certain operations.
2016 Restructuring and Integration Charges
The following table presents the activity in the restructuring and integration accrual for the first nine months of 2017 related to restructuring and integration actions taken in 2016:
Personnel Costs | Facilities Costs | Other | Total | |||||||||||||
Balance as of December 31, 2016 | $ | 11,694 | $ | 3,793 | $ | 316 | $ | 15,803 | ||||||||
Restructuring and integration charges (credits) | 6,422 | (472 | ) | (18 | ) | 5,932 | ||||||||||
Payments | (11,347 | ) | (2,688 | ) | (119 | ) | (14,154 | ) | ||||||||
Foreign currency translation | 436 | 187 | 31 | 654 | ||||||||||||
Balance as of September 30, 2017 | $ | 7,205 | $ | 820 | $ | 210 | $ | 8,235 | ||||||||
Restructuring and Integration Accruals Related to Actions Taken Prior to 2016
Included in restructuring, integration, and other charges for the first nine months of 2017 are restructuring and integration charges of $416 related to restructuring and integration actions taken prior to 2016. The restructuring and integration charge (credits) includes adjustments to personnel costs of $773, facilities costs of $(337), and other costs of $(20). The restructuring and integration accruals at September 30, 2017 related to actions taken prior to 2016 of $3,558 include accruals for personnel costs of $2,560, accruals for facilities costs of $870, and accruals for other costs of $128.
16
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Restructuring and Integration Accrual Summary
The restructuring and integration accruals aggregate to $29,448 at September 30, 2017, all of which are expected to be spent in cash, and are expected to be utilized as follows:
• | The accruals for personnel costs totaling $25,460 relate to the termination of personnel that have scheduled payouts of $20,918 in 2017, $3,917 in 2018, $601 in 2019, and $24 in 2020. |
• | The accruals for facilities totaling $3,420 relate to vacated leased properties that have scheduled payments of $2,297 in 2017, $507 in 2018, $112 in 2019, $108 in 2020, $104 in 2021, and $292 thereafter. |
• | Other accruals of $568 are expected to be spent within one year. |
Other Charges
Included in restructuring, integration, and other charges for the third quarter and first nine months of 2017 are other expenses of $3,596 and $15,173, respectively. The other charge include acquisition related charges for the third quarter and first nine months of 2017 of $559 and $4,562, respectively, related to contingent consideration for acquisitions completed in prior years which were conditional upon the financial performance of the acquired companies and the continued employment of the selling shareholders, as well as professional and other fees directly related to recent acquisition activity. In the third quarter and first nine months of 2017, the company recorded a net loss on real estate transactions of $319 and $3,131, respectively, and incurred an additional expense of $65 and $2,013, respectively, to increase its accrual for the Wyle Laboratories ("Wyle") environmental obligation (see Note L).
Included in restructuring, integration, and other charges for the third quarter and first nine months of 2016 are other expenses of $12,726 and $35,556, respectively. Included in these other charges for the third quarter and first nine months of 2016 are expenses related to a fraud loss that the company recorded, net of insurance recoveries, of $507 and $4,449, respectively. The charges for the third quarter and first nine months of 2016 of $2,679 and $7,645, respectively, related to contingent consideration for acquisitions completed in prior years which were conditional upon the financial performance of the acquired companies and the continued employment of the selling shareholders, as well as professional and other fees directly related to recent acquisition activity. In the third quarter and first nine months of 2016, the company released a $2,376 legal reserve related to the Tekelec Matter and incurred an additional expense of $11,744 to increase its accrual for the Wyle environmental obligation (see Note L). During 2016, the company adopted an amendment to its Wyle defined benefit plan and incurred a settlement expense of $12,211 during the third quarter and first nine months of 2016.
In January 2016, the company determined that it was the target of criminal fraud by persons impersonating a company executive, which resulted in unauthorized transfers of cash from a company account in Europe to outside bank accounts in Asia. Legal actions by the company and law enforcement are ongoing. The information gathered by the company indicates that this was an isolated event not associated with a security breach or loss of data. Additionally, no officers or employees of the company were involved in the fraud.
Note J – Net Income per Share
The following table presents the computation of net income per share on a basic and diluted basis (shares in thousands):
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Net income attributable to shareholders | $ | 134,630 | $ | 117,727 | $ | 348,077 | $ | 358,232 | ||||||||
Weighted-average shares outstanding - basic | 88,453 | 90,937 | 88,870 | 91,412 | ||||||||||||
Net effect of various dilutive stock-based compensation awards | 1,087 | 1,001 | 1,066 | 1,075 | ||||||||||||
Weighted-average shares outstanding - diluted | 89,540 | 91,938 | 89,936 | 92,487 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 1.52 | $ | 1.29 | $ | 3.92 | $ | 3.92 | ||||||||
Diluted (a) | $ | 1.50 | $ | 1.28 | $ | 3.87 | $ | 3.87 | ||||||||
17
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
(a) | Stock-based compensation awards for the issuance of 396 and 363 shares for the third quarter and first nine months of 2017 and 824 and 821 shares for the third quarter and first nine months 2016, respectively, were excluded from the computation of net income per share on a diluted basis as their effect was anti-dilutive. |
Note K – Shareholders' Equity
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in Accumulated other comprehensive income (loss), excluding noncontrolling interests:
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Foreign Currency Translation Adjustment and Other: | ||||||||||||||||
Other comprehensive income (loss) before reclassifications (a) | $ | 57,988 | $ | 15,822 | $ | 227,928 | $ | 35,610 | ||||||||
Amounts reclassified into income | (4,241 | ) | 46 | (6,888 | ) | 1,137 | ||||||||||
Unrealized Gain (Loss) on Investment Securities, Net: | ||||||||||||||||
Other comprehensive income (loss) before reclassifications | 1,357 | 1,273 | 4,639 | (2,408 | ) | |||||||||||
Amounts reclassified into income | — | — | — | — | ||||||||||||
Unrealized Gain (Loss) on Interest Rate Swaps Designated as Cash Flow Hedges, Net: | ||||||||||||||||
Other comprehensive loss before reclassifications | (2,223 | ) | — | (2,870 | ) | — | ||||||||||
Amounts reclassified into income | 130 | 94 | 327 | 278 | ||||||||||||
Employee Benefit Plan Items, Net: | ||||||||||||||||
Other comprehensive income (loss) before reclassifications | (51 | ) | 25 | (94 | ) | 97 | ||||||||||
Amounts reclassified into income (loss) | 543 | 789 | 1,497 | 5,481 | ||||||||||||
Net change in Accumulated other comprehensive income (loss) | $ | 53,503 | $ | 18,049 | $ | 224,539 | $ | 40,195 | ||||||||
(a) | Includes intra-entity foreign currency transactions that are of a long-term investment nature of $(11,193) and $(50,512) for the third quarter and first nine months of 2017 and $(9,273) and $(38,092) for the third quarter and first nine months of 2016, respectively. |
Share-Repurchase Program
The following table shows the company's Board of Directors (the "Board") approved share-repurchase programs as of September 30, 2017:
Month of Board Approval | Dollar Value Approved for Repurchase | Dollar Value of Shares Repurchased | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program | |||||||||
September 2015 | $ | 400,000 | $ | 400,000 | $ | — | ||||||
December 2016 | 400,000 | 16,081 | 383,919 | |||||||||
Total | $ | 800,000 | $ | 416,081 | $ | 383,919 | ||||||
18
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note L – Contingencies
Environmental Matters
In connection with the purchase of Wyle in August 2000, the company acquired certain of the then outstanding obligations of Wyle, including Wyle's indemnification obligations to the purchasers of its Wyle Laboratories division for environmental clean-up costs associated with any then existing contamination or violation of environmental regulations. Under the terms of the company's purchase of Wyle from the sellers, the sellers agreed to indemnify the company for certain costs associated with the Wyle environmental obligations, among other things. In 2012, the company entered into a settlement agreement with the sellers pursuant to which the sellers paid $110,000 and the company released the sellers from their indemnification obligation. As part of the settlement agreement, the company accepted responsibility for any potential subsequent costs incurred related to the Wyle matters. The company is aware of two Wyle Laboratories facilities (in Huntsville, Alabama and Norco, California) at which contaminated groundwater was identified and will require environmental remediation. In addition, the company was named as a defendant in several lawsuits related to the Norco facility and a third site in El Segundo, California which have now been settled to the satisfaction of the parties.
The company expects these environmental liabilities to be resolved over an extended period of time. Costs are recorded for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accruals for environmental liabilities are adjusted periodically as facts and circumstances change, assessment and remediation efforts progress, or as additional technical or legal information becomes available. Environmental liabilities are difficult to assess and estimate due to various unknown factors such as the timing and extent of remediation, improvements in remediation technologies, and the extent to which environmental laws and regulations may change in the future. Accordingly, the company cannot presently fully estimate the ultimate potential costs related to these sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed and, in some instances, implemented. To the extent that future environmental costs exceed amounts currently accrued by the company, net income would be adversely impacted and such impact could be material.
Accruals for environmental liabilities are included in "Accrued expenses" and "Other liabilities" in the company's consolidated balance sheets. The company has determined that there is no amount within the environmental liability range that is a better estimate than any other amount, and therefore has recorded the accruals at the minimum amount of the ranges.
As successor-in-interest to Wyle, the company is the beneficiary of various Wyle insurance policies that covered liabilities arising out of operations at Norco and Huntsville. To date, the company has recovered approximately $37,000 from certain insurance carriers relating to environmental clean-up matters at the Norco site. The company is considering the best way to pursue its potential claims against insurers regarding liabilities arising out of operations at Huntsville. The resolution of these matters will likely take several years. The company has not recorded a receivable for any potential future insurance recoveries related to the Norco and Huntsville environmental matters, as the realization of the claims for recovery are not deemed probable at this time. The company believes the settlement amount together with potential recoveries from various insurance policies covering environmental remediation and related litigation will be sufficient to cover any potential future costs related to the Wyle acquisition; however, it is possible unexpected costs beyond those anticipated could occur.
Environmental Matters - Huntsville
In February 2015, the company and the Alabama Department of Environmental Management ("ADEM") finalized and executed a consent decree in connection with the Huntsville, Alabama site. Characterization of the extent of contaminated soil and groundwater continues at the site. Under the direction of the ADEM, approximately $5,900 was spent to date. The pace of the ongoing remedial investigations, project management, and regulatory oversight is likely to increase somewhat and, though the complete scope of the activities is not yet known, the company currently estimates additional investigative and related expenditures at the site of approximately $300 to $600. The nature and scope of both feasibility studies and subsequent remediation at the site has not yet been determined, but assuming the outcome includes source control and certain other measures, the cost is estimated to be between $4,400 and $10,000.
Despite the amount of work undertaken and planned to date, the company is unable to estimate any potential costs in addition to those discussed above because the complete scope of the work is not yet known, and, accordingly, the associated costs have yet to be determined.
19
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Environmental Matters - Norco
In October 2003, the company entered into a consent decree with Wyle Laboratories and the California Department of Toxic Substance Control (the "DTSC") in connection with the Norco site. In April 2005, a Remedial Investigation Work Plan was approved by DTSC that provided for site-wide characterization of known and potential environmental issues. Investigations performed in connection with this work plan and a series of subsequent technical memoranda continued until the filing of a final Remedial Investigation Report early in 2008. Work is under way pertaining to the remediation of contaminated groundwater at certain areas on the Norco site and of soil gas in a limited area immediately adjacent to the site. In 2008, a hydraulic containment system was installed to capture and treat groundwater before it moves into the adjacent offsite area. In September 2013, the DTSC approved the final Remedial Action Plan ("RAP") and work is currently progressing under the RAP. The approval of the RAP includes the potential for additional remediation action after the five year review of the hydraulic containment system if the review finds that contaminants have not been sufficiently reduced in the offsite area.
Approximately $55,800 was spent to date on remediation, project management, regulatory oversight, and investigative and feasibility study activities. The company currently estimates that these activities will give rise to an additional $19,000 to $29,800. Project management and regulatory oversight include costs incurred by project consultants for project management and costs billed by DTSC to provide regulatory oversight.
Despite the amount of work undertaken and planned to date, the company is unable to estimate any potential costs in addition to those discussed above because the complete scope of the work under the RAP is not yet known, and, accordingly, the associated costs have yet to be determined.
Other
From time to time, in the normal course of business, the company may become liable with respect to other pending and threatened litigation, environmental, regulatory, labor, product, and tax matters. While such matters are subject to inherent uncertainties, it is not currently anticipated that any such matters will materially impact the company's consolidated financial position, liquidity, or results of operations.
Note M – Segment and Geographic Information
The company is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company distributes electronic components to original equipment manufacturers and contract manufacturers through its global components business segment and provides enterprise computing solutions to value-added resellers through its global ECS business segment. 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, are not directly attributable to the individual operating segments and are included in the corporate business segment.
Sales and operating income (loss), by segment, are as follows:
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Sales: | ||||||||||||||||
Global components | $ | 4,864,361 | $ | 3,904,447 | $ | 13,385,514 | $ | 11,413,348 | ||||||||
Global ECS | 2,089,379 | 2,031,645 | 5,793,124 | 5,969,022 | ||||||||||||
Consolidated | $ | 6,953,740 | $ | 5,936,092 | $ | 19,178,638 | $ | 17,382,370 | ||||||||
Operating income (loss): | ||||||||||||||||
Global components | $ | 212,993 | $ | 175,507 | $ | 583,690 | $ | 524,662 | ||||||||
Global ECS | 94,797 | 96,181 | 282,379 | 283,792 | ||||||||||||
Corporate (a) | (71,798 | ) | (73,004 | ) | (208,533 | ) | (204,814 | ) | ||||||||
Consolidated | $ | 235,992 | $ | 198,684 | $ | 657,536 | $ | 603,640 | ||||||||
20
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
(a) | Includes restructuring, integration, and other charges of $15,896 and $55,817 for the third quarter and first nine months of 2017 and $24,267 and $61,161 for the third quarter and first nine months of 2016, respectively. |
Total assets, by segment, are as follows:
September 30, 2017 | December 31, 2016 | |||||||
Global components | $ | 9,674,716 | $ | 8,360,926 | ||||
Global ECS | 4,590,887 | 5,053,172 | ||||||
Corporate | 791,363 | 792,268 | ||||||
Consolidated | $ | 15,056,966 | $ | 14,206,366 | ||||
Sales, by geographic area, are as follows:
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Americas (b) | $ | 3,217,537 | $ | 2,897,810 | $ | 8,829,813 | $ | 8,327,845 | ||||||||
EMEA (c) | 1,886,440 | 1,548,067 | 5,406,330 | 4,990,973 | ||||||||||||
Asia/Pacific | 1,849,763 | 1,490,215 | 4,942,495 | 4,063,552 | ||||||||||||
Consolidated | $ | 6,953,740 | $ | 5,936,092 | $ | 19,178,638 | $ | 17,382,370 | ||||||||
(b) | Includes sales related to the United States of $2,959,857 and $8,060,819 for the third quarter and first nine months of 2017 and $2,677,954 and $7,665,313 for the third quarter and first nine months of 2016, respectively. |
(c) | Defined as Europe, the Middle East, and Africa. |
Net property, plant, and equipment, by geographic area, is as follows:
September 30, 2017 | December 31, 2016 | |||||||
Americas (d) | $ | 671,668 | $ | 631,386 | ||||
EMEA | 104,028 | 90,834 | ||||||
Asia/Pacific | 39,683 | 34,079 | ||||||
Consolidated | $ | 815,379 | $ | 756,299 | ||||
(d) | Includes net property, plant, and equipment related to the United States of $666,511 and $626,964 at September 30, 2017 and December 31, 2016, respectively. |
Note N – Subsequent Event
In October 2017, the company entered into a settlement for a portion of its Wyle defined benefit plan. Participants will receive benefits through an insurance annuity contract. The company expects to recognize a settlement expense during the fourth quarter of 2017.
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Arrow Electronics, Inc. (the "company") is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company has one of the world’s broadest portfolios of product offerings available from leading electronic components and enterprise computing solutions suppliers, coupled with a range of services, solutions and tools that help industrial and commercial customers introduce innovative products, reduce their time to market, and enhance their overall competitiveness. The company has two business segments, the global components business segment and the global enterprise computing solutions ("ECS") business segment. The company distributes electronic components to original equipment manufacturers and contract manufacturers through its global components business segment and provides enterprise computing solutions to value-added resellers through its global ECS business segment. For the first nine months of 2017, approximately 70% of the company's sales were from the global components business segment and approximately 30% of the company's sales were from the global ECS business segment.
The company's financial objectives are to grow sales faster than the market, increase the markets served, grow profits faster than sales, and increase return on invested capital. To achieve its objectives, the company seeks to capture significant opportunities to grow across products, markets, and geographies. To supplement its organic growth strategy, the company continually evaluates strategic acquisitions to broaden its product and value-added service offerings, increase its market penetration, and/or expand its geographic reach.
Executive Summary
Consolidated sales for the third quarter and first nine months of 2017 increased by 17.1% and 10.3%, respectively, compared with the year-earlier period. The increase for the third quarter of 2017 was driven by an increase in the global components business segment sales of 24.6% and an increase in the global ECS business segment sales of 2.8%. The increase for the first nine months of 2017 was driven by an increase in the global components business segment sales of 17.3% offset by a decrease in the global ECS business segment sales of 2.9%. Adjusted for the change in foreign currencies and acquisitions, consolidated sales increased 15.5% and 10.3% for the third quarter and first nine months, respectively, of 2017 compared with the year-earlier period.
Net income attributable to shareholders increased to $134.6 million and decreased to $348.1 million in the third quarter and first nine months of 2017, respectively, compared to $117.7 million and $358.2 million, in the year-earlier periods. The following items impacted the comparability of the company's results:
Third quarters of 2017 and 2016:
• | loss on extinguishment of debt of $0.8 million in 2017; |
• | restructuring, integration, and other charges of $15.9 million in 2017 and $24.3 million in 2016; |
• | identifiable intangible asset amortization of $12.6 million in 2017 and $13.9 million in 2016; and |
• | loss on investment, net, of $15.0 million in 2017 |
First nine months of 2017 and 2016:
• | loss on extinguishment of debt of $59.5 million in 2017; |
• | restructuring, integration, and other charges of $55.8 million in 2017 and $61.2 million in 2016; |
• | identifiable intangible asset amortization of $37.9 million in 2017 and $41.3 million in 2016; and |
• | loss on investment,net, of $14.3 million in 2017 |
Excluding the aforementioned items, net income attributable to shareholders for the third quarter and first nine months of 2017 increased to $162.9 million and $455.3 million, respectively, compared with $143.1 million and $428.1 million in the year-earlier periods.
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Certain Non-GAAP Financial Information
In addition to disclosing financial results that are determined in accordance with accounting principles generally accepted in the United States ("GAAP"), the company also discloses certain non-GAAP financial information, including:
• | Sales, income, or expense items as adjusted for the impact of changes in foreign currencies (referred to as "impact of changes in foreign currencies") and the impact of acquisitions by adjusting the company's operating results for businesses acquired, including the amortization expense related to acquired intangible assets, as if the acquisitions had occurred at the beginning of the earliest period presented (referred to as "impact of acquisitions"); |
• | Operating income as adjusted to exclude identifiable intangible asset amortization and restructuring, integration, and other charges; and |
• | Net income attributable to shareholders as adjusted to exclude identifiable intangible asset amortization, restructuring, integration, loss on extinguishment of debt, loss on investment, and other charges. |
Management believes that providing this additional information is useful to the reader to better assess and understand the company's operating performance, especially when comparing results with previous periods, primarily because management typically monitors the business adjusted for these items in addition to GAAP results. However, analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP.
Sales
Substantially all of the company's sales are made on an order-by-order basis, rather than through long-term sales contracts. As such, the nature of the company's business does not provide for the visibility of material forward-looking information from its customers and suppliers beyond a few months.
Following is an analysis of net sales by reportable segment (in millions):
Quarter Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2017 | October 1, 2016 | % Change | September 30, 2017 | October 1, 2016 | % Change | ||||||||||||||||
Consolidated sales, as reported | $ | 6,954 | $ | 5,936 | 17.1 | % | $ | 19,179 | $ | 17,382 | 10.3 | % | |||||||||
Impact of changes in foreign currencies | — | 83 | — | (47 | ) | ||||||||||||||||
Impact of acquisitions | — | 1 | — | 48 | |||||||||||||||||
Consolidated sales, as adjusted | $ | 6,954 | $ | 6,020 | 15.5 | % | $ | 19,179 | $ | 17,383 | 10.3 | % | |||||||||
Global components sales, as reported | $ | 4,864 | $ | 3,904 | 24.6 | % | $ | 13,386 | $ | 11,413 | 17.3 | % | |||||||||
Impact of changes in foreign currencies | — | 56 | — | (13 | ) | ||||||||||||||||
Impact of acquisitions | — | 1 | — | 10 | |||||||||||||||||
Global components sales, as adjusted | $ | 4,864 | $ | 3,961 | 22.8 | % | $ | 13,386 | $ | 11,410 | 17.3 | % | |||||||||
Global ECS sales, as reported | $ | 2,089 | $ | 2,032 | 2.8 | % | $ | 5,793 | $ | 5,969 | (2.9 | )% | |||||||||
Impact of changes in foreign currencies | — | 27 | — | (34 | ) | ||||||||||||||||
Impact of acquisitions | — | — | — | 38 | |||||||||||||||||
Global ECS sales, as adjusted | $ | 2,089 | $ | 2,059 | 1.5 | % | $ | 5,793 | $ | 5,973 | (3.0 | )% | |||||||||
Consolidated sales for the third quarter and first nine months of 2017 increased by $1.02 billion, or 17.1%, and $1.80 billion, or 10.3%, respectively, compared with the year-earlier period. The increase for the third quarter of 2017 was driven by an increase in global components business segment sales of $959.9 million, or 24.6%, and an increase in global ECS business segment sales of $57.7 million, or 2.8%. The increase for the first nine months of 2017 was driven by an increase in global components business segment sales of $1.97 billion, or 17.3%, offset by a decrease in global ECS business segment sales of $175.9 million, or 2.9%. Adjusted for the impact of changes in foreign currencies and acquisitions, consolidated sales increased 15.5% and 10.3% for the third quarter and first nine months of 2017, respectively, compared with the year-earlier periods.
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In the global components business segment, sales for the third quarter and first nine months of 2017 increased $959.9 million, or 24.6%, and $1.97 billion, or 17.3%, respectively, compared with the year-earlier periods, with over 20% sales growth across all regions for the third quarter of 2017. The increase for the third quarter and the first nine months is attributable to suppliers awarding additional business to the company. Adjusted for the impact of changes in foreign currencies and acquisitions, the company's global components business segment sales increased by 22.8% and 17.3% for the third quarter and first nine months of 2017, respectively, compared with the year-earlier periods.
In the global ECS business segment, sales for the third quarter and first nine months of 2017 increased $57.7 million, or 2.8%, and decreased $175.9 million, or 2.9%, respectively, compared with the year-earlier period. The increase for third quarter sales relates primarily to the increased demand in the EMEA region. The decrease for first nine months relates primarily to decreased demand in the Americas regions. Adjusted for the impact of changes in foreign currencies and acquisitions, the company's global ECS business segment sales increased 1.5% and decreased 3.0% for the third quarter and first nine months of 2017, respectively, compared with year-earlier periods.
Gross Profit
Following is an analysis of gross profit (in millions):
Quarter Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2017 | October 1, 2016 | % Change | September 30, 2017 | October 1, 2016 | % Change | ||||||||||||||||
Consolidated gross profit, as reported | $ | 843 | $ | 773 | 9.1 | % | $ | 2,427 | $ | 2,321 | 4.6 | % | |||||||||
Impact of changes in foreign currencies | — | 12 | — | (9 | ) | ||||||||||||||||
Impact of acquisitions | — | 1 | — | 13 | |||||||||||||||||
Consolidated gross profit, as adjusted | $ | 843 | $ | 786 | 7.3 | % | $ | 2,427 | $ | 2,325 | 4.4 | % | |||||||||
Consolidated gross profit as a percentage of sales, as reported | 12.1 | % | 13.0 | % | (90) bps | 12.7 | % | 13.4 | % | (70) bps | |||||||||||
Consolidated gross profit as a percentage of sales, as adjusted | 12.1 | % | 13.1 | % | (100) bps | 12.7 | % | 13.4 | % | (70) bps | |||||||||||
The company recorded gross profit of $843.4 million and $2.43 billion in the third quarter and first nine months of 2017, respectively, compared with $773.2 million and $2.32 billion in the year-earlier periods. The increase in gross profit was primarily due to increased demand and supplier awards in the components business. Gross profit margins in the third quarter and first nine months of 2017 decreased by approximately 90 bps and 70 bps, respectively, compared with the year-earlier periods primarily due to an increase in lower margin distribution services.
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Selling, General, and Administrative Expenses and Depreciation and Amortization
Following is an analysis of operating expenses (in millions):
Quarter Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2017 | October 1, 2016 | % Change | September 30, 2017 | October 1, 2016 | % Change | ||||||||||||||||
Selling, general, and administrative expenses, as reported | $ | 553 | $ | 510 | 8.4 | % | $ | 1,601 | $ | 1,535 | 4.3 | % | |||||||||
Depreciation and amortization, as reported | 39 | 40 | (4.0 | )% | 113 | 122 | (6.9 | )% | |||||||||||||
Operating expenses, as reported* | 591 | 550 | 7.5 | % | 1,714 | 1,656 | 3.5 | % | |||||||||||||
Impact of changes in foreign currencies | — | 8 | — | (7 | ) | ||||||||||||||||
Impact of acquisitions | — | 1 | — | 9 | |||||||||||||||||
Operating expenses, as adjusted* | $ | 591 | $ | 559 | 5.8 | % | $ | 1,714 | $ | 1,658 | 3.4 | % | |||||||||
Operating expenses as a percentage of sales, as reported | 8.5 | % | 9.3 | % | (80) bps | 8.9 | % | 9.5 | % | (60) bps | |||||||||||
Operating expenses as a percentage of sales, as adjusted | 8.5 | % | 9.3 | % | (80) bps | 8.9 | % | 9.5 | % | (60) bps | |||||||||||
* The sum of the components for consolidated operating expenses as reported and as adjusted may not agree to totals, as presented, due to rounding.
Selling, general, and administrative expenses increased by $42.9 million, or 8.4%, and $66.2 million, or 4.3%, in the third quarter and first nine months of 2017, respectively, on a sales increase of 17.1% and 10.3% compared with the year-earlier periods. Selling, general, and administrative expenses as a percentage of sales were 8.0% and 8.3% for the third quarter and first nine months of 2017, respectively, compared with 8.6% and 8.8% in the year-earlier periods.
Depreciation and amortization expense as a percentage of operating expenses was 6.5% and 6.6% for the third quarter and first nine months of 2017, respectively, compared with 7.3% in both of the prior year periods. Included in depreciation and amortization expense is identifiable intangible asset amortization of $12.6 million and $37.9 million for the third quarter and first nine months of 2017, respectively, compared to $13.9 million and $41.3 million in the year-earlier periods.
Adjusted for the impact of changes in foreign currencies and acquisitions, operating expenses increased 5.8% and 3.4% for the third quarter and first nine months of 2017, respectively, compared with the year-earlier periods.
Restructuring, Integration, and Other Charges
Restructuring initiatives relate to the company's continued efforts to lower cost and drive operational efficiency. Integration costs are primarily related to the integration of acquired businesses within the company's pre-existing business and the consolidation of certain operations.
2017 Charges
The company recorded restructuring, integration, and other charges of $15.9 million and $55.8 million for the third quarter and first nine months of 2017, respectively. For the third quarter and first nine months of 2017, restructuring and integration charges of $12.1 million and $34.3 million, respectively, related to initiatives taken by the company during 2017 to improve operating efficiencies and $0.6 million and $4.6 million, respectively, of acquisition-related expenses. In the third quarter and first nine months of 2017, the company recorded a net loss on real estate transactions of $0.3 million and $3.1 million, respectively, and incurred an additional expense of $0.1 million and $2.0 million, respectively, to increase its accrual for the Wyle environmental obligation.
The restructuring and integration charge of $12.1 million and $34.3 million for the third quarter and first nine months of 2017,
respectively, includes personnel costs of $10.4 million and $29.0 million. Also included therein for both the third quarter and first nine months of 2017, respectively, are facilities costs of $1.3 million and $4.2 million and other costs of $0.4 million and $1.0 million.
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2016 Charges
The company recorded restructuring, integration, and other charges of $24.3 million and $61.2 million for the third quarter and first nine months of 2016, respectively. For the third quarter and first nine months of 2016, restructuring and integration charges of $12.0 million and $22.1 million, respectively, related to initiatives taken by the company to improve operating efficiencies. For the first nine months of 2016, the company recorded a fraud loss, net of insurance recoveries, of $4.4 million. Also included in the third quarter and first nine months of 2016 are acquisition-related expenses of $2.7 million and $7.6 million, respectively, and a pension settlement charge of $12.2 million for both the third quarter and first nine months of 2016. In the third quarter and first nine months of 2016, the company released a $2.4 million legal reserve related to the Tekelec Matter and incurred an additional expense of $11.7 million to increase its accrual for the Wyle environmental obligation.
The restructuring and integration charge of $12.0 million and $22.1 million for the third quarter and first nine months of 2016, respectively, includes personnel costs of $10.5 million and $18.0 million. Also included therein for both the third quarter and first nine months of 2016 are facilities costs of $0.7 million and $3.2 million, and other costs of $0.9 million and $1.0 million, respectively.
As of September 30, 2017, the company does not anticipate there will be any material adjustments relating to the aforementioned restructuring and integration plans. Refer to Note I, "Restructuring, Integration, and Other Charges," of the Notes to the Consolidated Financial Statements for further discussion of the company's restructuring and integration activities.
Operating Income
Following is an analysis of operating income (in millions):
Quarter Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2017 | October 1, 2016 | % Change | September 30, 2017 | October 1, 2016 | % Change | ||||||||||||||||
Consolidated operating income, as reported | $ | 236 | $ | 199 | 18.8 | % | $ | 658 | $ | 604 | 8.9 | % | |||||||||
Identifiable intangible asset amortization | 13 | 14 | 38 | 41 | |||||||||||||||||
Restructuring, integration, and other charges | 16 | 24 | 56 | 61 | |||||||||||||||||
Consolidated operating income, as adjusted* | $ | 265 | $ | 237 | 11.7 | % | $ | 751 | $ | 706 | 6.4 | % | |||||||||
Consolidated operating income as a percentage of sales, as reported | 3.4 | % | 3.3 | % | 10 bps | 3.4 | % | 3.5 | % | (10) bps | |||||||||||
Consolidated operating income, as adjusted, as a percentage of sales, as reported | 3.8 | % | 4.0 | % | (20) bps | 3.9 | % | 4.1 | % | (20) bps | |||||||||||
* The sum of the components for consolidated operating income, as adjusted, may not agree to totals, as presented, due to rounding.
The company recorded operating income of $236.0 million, or 3.4% of sales, and $657.5 million, or 3.4% of sales, in the third quarter and first nine months of 2017, respectively, compared with operating income of $198.7 million, or 3.3% of sales, and $603.6 million, or 3.5% of sales, in the year-earlier periods. Excluding identifiable intangible asset amortization and restructuring, integration, and other charges, operating income, as adjusted, was $264.5 million, or 3.8% of sales, and $751.3 million, or 3.9% of sales, in the third quarter and first nine months of 2017, respectively, compared with operating income, as adjusted, of $236.8 million, or 4.0% of sales, and $706.1 million, or 4.1% of sales, in the year-earlier periods. Operating income, as adjusted, increased 11.7% and 6.4 % for the third quarter and first nine months of 2017, respectively, compared with the year-earlier periods, on a sales increase of 17.1% and 10.3%, respectively, compared with the year-earlier periods. Operating income, as adjusted as a percentage of sales, decreased 20 bps for both the third quarter and first nine months of 2017, respectively, compared with the year-earlier periods, due primarily to increased sales in low margin global components businesses and decreased demand in the global ECS business, largely offset by the company's ability to efficiently manage operating costs.
Interest and Other Financing Expense, Net
The company recorded net interest and other financing expense of $39.7 million and $120.2 million for the third quarter and first nine months of 2017, respectively, compared with $37.2 million and $111.8 million in the year-earlier periods. The increase for the
26
third quarter and first nine months of 2017 was primarily due to higher average debt outstanding and an increase in variable interest rates, offset partially by increased interest income.
Other
During the third quarter and first nine months of 2017, the company recorded a loss on investment of $15.0 million related to a full impairment of a cost method investment.
Income Tax
Income taxes for the interim periods presented have been included in the accompanying consolidated financial statements on the basis of an estimated annual effective tax rate. The determination of the consolidated provision for income taxes requires management to make certain judgments and estimates. Changes in the estimated level of annual pre-tax earnings, tax laws, and changes resulting from tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the company’s projections and assumptions are inherently uncertain; therefore, actual results could differ from projections.
For the third quarter and first nine months of 2017, the company recorded a provision for income taxes of $46.2 million, an effective tax rate of 25.4%, and $115.0 million, an effective tax rate of 24.7%, respectively. The company's provision for income taxes and effective tax rate for the third quarter and first nine months of 2017 were impacted by the previously discussed restructuring, integration, and other charges including, among other things, identifiable intangible asset amortization, loss on extinguishment of debt, and loss on sale of investment. Excluding the impact of the aforementioned items, the company's effective tax rate for the third quarter and first nine months of 2017 was 27.5% and 27.6%, respectively.
For the third quarter and first nine months of 2016, the company recorded a provision for income taxes of $44.9 million, an effective tax rate of 27.6% and $137.4 million, an effective tax rate of 27.6%, respectively. The company's provision for income taxes and effective tax rate for the third quarter and first nine months of 2016 were impacted by the previously discussed restructuring, integration, and other charges and identifiable intangible asset amortization. Excluding the impact of the aforementioned items, the company's effective tax rate for the third quarter and first nine months of 2016 was 28.5% and 28.2%, respectively.
The effective tax rate deviates from the statutory U.S. federal income tax rate mainly due to the foreign taxing jurisdictions in which the company and its foreign subsidiaries generate taxable income. The decrease in the effective tax rate from 27.6% for the third quarter of 2016 to 25.4% for the third quarter of 2017 is primarily driven by an increase in the taxable income in lower tax jurisdictions and discrete items.
Net Income Attributable to Shareholders
Following is an analysis of net income attributable to shareholders (in millions):
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Net income attributable to shareholders, as reported | $ | 135 | $ | 118 | $ | 348 | $ | 358 | ||||||||
Identifiable intangible asset amortization* | 12 | 13 | 37 | 40 | ||||||||||||
Restructuring, integration, and other charges | 16 | 24 | 56 | 61 | ||||||||||||
Loss on extinguishment of debt | 1 | — | 60 | — | ||||||||||||
Loss on investment | 15 | — | 14 | — | ||||||||||||
Tax effect of adjustments above | (16 | ) | (12 | ) | (60 | ) | (31 | ) | ||||||||
Net income attributable to shareholders, as adjusted | $ | 163 | $ | 143 | $ | 455 | $ | 428 | ||||||||
* Identifiable intangible asset amortization does not include amortization related to the noncontrolling interest
The company recorded net income attributable to shareholders of $134.6 million and $348.1 million in the third quarter and first nine months of 2017, respectively, compared with $117.7 million and $358.2 million in the year-earlier periods. Net income attributable to shareholders, as adjusted, was $162.9 million and $455.3 million for the third quarter and first nine months of 2017, respectively, compared with $143.1 million and $428.1 million in the year-earlier periods.
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Liquidity and Capital Resources
At September 30, 2017 and December 31, 2016, the company had cash and cash equivalents of $584.3 million and $534.3 million, respectively, of which $319.5 million and $320.0 million, respectively, were held outside the United States. Liquidity is affected by many factors, some of which are based on normal ongoing operations of the company's business and some of which arise from fluctuations related to global economics and markets. Cash balances are generated and held in many locations throughout the world. It is the company's current intent to permanently reinvest these funds outside the United States and its current plans do not demonstrate a need to repatriate them to fund its United States operations. If these funds were needed for the company's operations in the United States, it would be required to record and pay significant United States income taxes to repatriate these funds. Additionally, local government regulations may restrict the company's ability to move cash balances to meet cash needs under certain circumstances. The company currently does not expect such regulations and restrictions to impact its ability to make acquisitions or to pay vendors and conduct operations throughout the global organization.
During the first nine months of 2017, the net amount of cash provided by the company's operating activities was $1.8 million, the net amount of cash used for investing activities was $131.3 million, and the net amount of cash provided by financing activities was $181.4 million. The effect of exchange rate changes on cash was a decrease of $1.9 million.
During the first nine months of 2016, the net amount of cash provided by the company's operating activities was $140.7 million, the net amount of cash used for investing activities was $207.3 million, and the net amount of cash provided by financing activities was $198.4 million. The effect of exchange rate changes on cash was a decrease of $20.5 million.
Cash Flows from Operating Activities
The company maintains a significant investment in accounts receivable and inventories. As a percentage of total assets, accounts receivable and inventories were approximately 68.0% at September 30, 2017 and 67.6% at December 31, 2016.
The net amount of cash provided by the company's operating activities during the first nine months of 2017 was $1.8 million and was primarily due to an an increase in earnings from operations adjusted for non-cash items, offset, in part, by an increase in working capital.
The net amount of cash provided by the company's operating activities during the first nine months of 2016 was $140.7 million and was primarily due to earnings from operations, adjusted for non-cash items, offset, in part, by an increase in working capital to support the increase in sales.
Working capital as a percentage of sales, which the company defines as accounts receivable, net, plus inventory, net, less accounts payable, divided by annualized sales, was 17.4% in the third quarter of 2017 compared with 16.3% in the third quarter of 2016.
Cash Flows from Investing Activities
The net amount of cash used for investing activities during the first nine months of 2017 was $131.3 million. The use of cash from investing activities included $149.6 million for capital expenditures. The sources of cash from investing activities included $24.4 million of proceeds from the sale of buildings. Included in capital expenditures for the first nine months of 2017 is $44.6 million related to the company's global enterprise resource planning ("ERP") initiative.
The net amount of cash used for investing activities during the first nine months of 2016 was $207.3 million. The uses of cash from investing activities included $68.9 million of cash consideration paid, net of cash acquired, for the acquisition of three businesses and $126.3 million for capital expenditures. Included in capital expenditures for the third quarter of 2016 is $45.6 million related to the company's global ERP initiative.
Cash Flows from Financing Activities
The net amount of cash provided by financing activities during the first nine months of 2017 was $181.4 million. The uses of cash from financing activities included $555.9 million of payments for the redemption of notes, $149.1 million of repurchases of common stock, $14.4 million and $82.8 million of net payments from short-term and long-term bank borrowings, respectively, and $23.4 million of payments to acquire additional shares of Data Modul AG. The sources of cash from financing activities during the third quarter of 2017 were $987.1 million of net proceeds from note offerings and $21.4 million of proceeds from the exercise of stock options.
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The net amount of cash provided by financing activities during the first nine months of 2016 was $198.4 million. The uses of cash from financing activities included $167.2 million of repurchases of common stock and $3.0 million of other acquisition related payments. The sources of cash from financing activities during the third quarter of 2016 were $31.9 million and $320.0 million of net proceeds from short-term and long-term bank borrowings, respectively, and $16.7 million of proceeds from the exercise of stock options.
The company has a $1.8 billion revolving credit facility, maturing in December 2021. This facility may be used by the company for general corporate purposes including working capital in the ordinary course of business, letters of credit, repayment, prepayment or purchase of long-term indebtedness, acquisitions, and as support for the company's commercial paper program, as applicable. Interest on borrowings under the revolving credit facility is calculated using a base rate or a euro currency rate plus a spread (1.18% at September 30, 2017), which is based on the company's credit ratings, or an effective interest rate of 2.36% at September 30, 2017. The facility fee, which is based on the company's credit ratings, was .20% at September 30, 2017. The company had $96.2 million in outstanding borrowings under the revolving credit facility at September 30, 2017. There were no outstanding borrowings under the revolving credit facility at December 31, 2016. During the first nine months of 2017 and 2016, the average daily balance outstanding under the revolving credit facility was $18.9 million and $6.8 million, respectively.
The company has a commercial paper program and the maximum aggregate balance of commercial paper outstanding may not exceed the borrowing capacity of $1.2 billion. The company had no outstanding borrowings under this program at September 30, 2017 and December 31, 2016. During the first nine months of 2017 and 2016, the average daily balance outstanding under the commercial paper program was $613.5 million and $261.4 million, respectively.
The company has an asset securitization program collateralized by accounts receivable of certain of its subsidiaries. The company may borrow up to $910.0 million under the asset securitization program, which matures in September 2019. The asset securitization program is conducted through Arrow Electronics Funding Corporation, a wholly-owned, bankruptcy remote subsidiary. The asset securitization program does not qualify for sale treatment. Accordingly, the accounts receivable and related debt obligation remain on the company's consolidated balance sheets. Interest on borrowings is calculated using a base rate or a commercial paper rate plus a spread (.40% at September 30, 2017), which is based on the company's credit ratings, or an effective interest rate of 1.73% at September 30, 2017. The facility fee is .40%. The company had $255.0 million and $460.0 million in outstanding borrowings under the asset securitization program at September 30, 2017 and December 31, 2016, respectively. During the first nine months of 2017 and 2016, the average daily balance outstanding under the asset securitization program was $714.7 million and $616.8 million, respectively.
Both the revolving credit facility and asset securitization program include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels. The company was in compliance with all covenants as of September 30, 2017 and is currently not aware of any events that would cause non-compliance with any covenants in the future.
The company has a $100.0 million uncommitted line of credit. The company had no outstanding borrowings under the uncommitted line of credit at September 30, 2017 and December 31, 2016. During the first nine months of 2017 and 2016, the average daily balance outstanding under the uncommitted line of credit was $6.8 million and $27.9 million, respectively.
During June 2017, the company completed the sale of $500.0 million principal amount of 3.875% notes due in 2028. The net proceeds of the offering of $494.6 million were used to redeem the company's 6.875% senior debenture due June 2018 and refinance a portion of the company’s 6.00% notes due April 2020, 5.125% notes due March 2021, and 7.50% notes due January 2027. The company recorded a loss on extinguishment of debt of $59.5 million in the first nine months of 2017.
During September 2017, the company completed the sale of $500.0 million principal amount of 3.25% notes due in 2024. The net proceeds of the offering of $493.8 million are expected to be used to redeem the company's debt obligations and for general corporate purposes.
In the normal course of business, certain of the company’s subsidiaries have agreements to sell, without recourse, selected trade receivables to financial institutions. The company does not retain financial or legal interests in these receivables, and, accordingly, they are accounted for as sales of the related receivables and the receivables are removed from the company’s consolidated balance sheets. Financing costs related to these transactions were not material and are included in "Interest and other financing expense, net" in the company’s consolidated statements of operations.
The company filed a shelf registration statement with the Securities and Exchange Commission in September 2015, as amended in June 2017, registering debt securities, preferred stock, common stock, and warrants of Arrow Electronics, Inc. that may be issued by the company from time to time. As set forth in the shelf registration statement, the net proceeds from the sale of the offered
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securities may be used by the company for general corporate purposes, including repayment of borrowings, working capital, capital expenditures, acquisitions, and stock repurchases, or for such other purposes as may be specified in the applicable prospectus supplement.
Management believes that the company's current cash availability, its current borrowing capacity under its revolving credit facility and asset securitization program, its expected ability to generate future operating cash flows, and the company's access to capital markets are sufficient to meet its projected cash flow needs for the foreseeable future. The company continually evaluates its liquidity requirements and would seek to amend its existing borrowing capacity or access the financial markets as deemed necessary.
Contractual Obligations
The company has contractual obligations for short-term and long-term debt, interest on short-term and long-term debt, capital leases, operating leases, purchase obligations, and certain other long-term liabilities that were summarized in a table of Contractual Obligations in the company's Annual Report on Form 10-K for the year ended December 31, 2016. Since December 31, 2016, there were no material changes to the contractual obligations of the company outside the ordinary course of the company’s business, except as follows:
• | During the second quarter of 2017, the company completed the sale of $500.0 million principal amount of 3.875% notes due in 2028; |
• | During the second quarter of 2017, the company redeemed $200.0 million of the company's 6.875% senior debenture due June 2018 and refinanced $90.6 million of the 6.00% notes due April 2020, $119.1 million of the 5.125% notes due March 2021, and $89.6 million of the 7.50% notes due January 2027; and |
• | During the third quarter of 2017, the company completed the sale of $500.0 million principal amount of 3.25% notes due in 2024. |
Share-Repurchase Programs
The following table shows the company's Board approved share-repurchase programs as of September 30, 2017 (in thousands):
Month of Board Approval | Dollar Value Approved for Repurchase | Dollar Value of Shares Repurchased | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program | |||||||||
September 2015 | $ | 400,000 | $ | 400,000 | $ | — | ||||||
December 2016 | 400,000 | 16,081 | 383,919 | |||||||||
Total | $ | 800,000 | $ | 416,081 | $ | 383,919 | ||||||
Off-Balance Sheet Arrangements
The company has no off-balance sheet financing or unconsolidated special purpose entities.
Critical Accounting Policies and Estimates
The company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. The company evaluates its estimates on an ongoing basis. The company bases its estimates on historical experience and on various other assumptions that are believed reasonable under the circumstances; the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There were no significant changes during the first nine months of 2017 to the items disclosed as Critical Accounting Policies and Estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in the company's Annual Report on Form 10-K for the year ended December 31, 2016.
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Impact of Recently Issued Accounting Standards
See Note B of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on the company's consolidated financial position and results of operations.
Information Relating to Forward-Looking Statements
This report includes forward-looking statements that are subject to numerous assumptions, 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, the company's implementation of its new enterprise resource planning system, changes in product supply, pricing and customer demand, competition, other vagaries in the global components and global ECS markets, changes in relationships with key suppliers, increased profit margin pressure, the effects of additional actions taken to become more efficient or lower costs, risks related to the integration of acquired businesses, changes in legal and regulatory matters, and the company’s ability to generate additional cash flow. Forward-looking statements are those statements which are not statements of historical fact. These forward-looking statements can be identified by forward-looking words such as "expects," "anticipates," "intends," "plans," "may," "will," "believes," "seeks," "estimates," and similar expressions. 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.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There were no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the company's Annual Report on Form 10-K for the year ended December 31, 2016.
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Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The company’s management, under the supervision and with the participation of the company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the company’s disclosure controls and procedures as of September 30, 2017 (the "Evaluation"). Based upon the Evaluation, the company’s Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) are effective.
Changes in Internal Control over Financial Reporting
There was no change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1A. | Risk Factors |
There were no material changes to the company's risk factors as discussed in Item 1A - Risk Factors in the company's Annual Report on Form 10-K for the year ended December 31, 2016.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In September 2015 and December 2016, the company's Board approved a repurchase of up to $400 million of the company's common stock.
The following table shows the share-repurchase activity for the quarter ended September 30, 2017:
Month | Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (b) | Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs | ||||||||||
July 2 through July 29, 2017 | — | $ | — | — | $ | 408,913,216 | ||||||||
July 30 through August 26, 2017 | 173,548 | 75.84 | 171,500 | 395,919,107 | ||||||||||
August 27 through September 30, 2017 | 157,864 | 77.92 | 154,090 | 383,919,118 | ||||||||||
Total | 331,412 | 325,590 | ||||||||||||
(a) | Includes share repurchases under the Share-Repurchase Program and those associated with shares withheld from employees for stock-based awards, as permitted by the Omnibus Incentive Plan, in order to satisfy the required tax withholding obligations. |
(b) | The difference between the "total number of shares purchased" and the "total number of shares purchased as part of publicly announced program" for the quarter ended September 30, 2017 is 5,822 shares, which relate to shares withheld from employees for stock-based awards, as permitted by the Omnibus Incentive Plan, in order to satisfy the required tax withholding obligations. The purchase of these shares were not made pursuant to any publicly announced repurchase plan. |
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Item 6. | Exhibits |
Exhibit Number | Exhibit | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Documents. | |
101.DEF | XBRL Taxonomy Definition Linkbase Document. | |
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SIGNATURE
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 2, 2017 | By: | /s/ Chris D. Stansbury | |
Chris D. Stansbury | ||||
Senior Vice President and Chief Financial Officer | ||||
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