ARW 6.29.2013 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 29, 2013

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)
 
 
7459 South Lima Street, Englewood, 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, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting 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

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 100,182,567 shares of Common Stock outstanding as of July 19, 2013.




ARROW ELECTRONICS, INC.

INDEX

 
 
Page
Part I.
Financial Information
 
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
Consolidated Statements of Operations
 
 
Consolidated Statements of Comprehensive Income
 
 
Consolidated Balance Sheets
 
 
Consolidated Statements of Cash Flows
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
Signature
 

 


 

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
 
Six Months Ended
  
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Sales
 
$
5,306,085

 
$
5,150,563

 
$
10,155,714

 
$
10,040,092

Costs and expenses:
 
 

 
 

 
 
 
 
Cost of sales
 
4,616,513

 
4,463,419

 
8,824,070

 
8,672,369

Selling, general, and administrative expenses
 
470,874

 
457,073

 
922,279

 
912,910

Depreciation and amortization
 
32,599

 
28,035

 
64,104

 
57,085

Restructuring, integration, and other charges
 
30,224

 
13,347

 
51,834

 
21,590

 
 
5,150,210

 
4,961,874

 
9,862,287

 
9,663,954

Operating income
 
155,875

 
188,689

 
293,427

 
376,138

Equity in earnings of affiliated companies
 
1,360

 
1,428

 
3,343

 
3,612

Loss on prepayment of debt
 

 

 
4,277

 

Interest and other financing expense, net
 
30,199

 
28,555

 
59,729

 
55,687

Income before income taxes
 
127,036

 
161,562

 
232,764

 
324,063

Provision for income taxes
 
37,000

 
47,081

 
64,770

 
95,859

Consolidated net income
 
90,036

 
114,481

 
167,994

 
228,204

Noncontrolling interests
 
101

 
98

 
184

 
193

Net income attributable to shareholders
 
$
89,935

 
$
114,383

 
$
167,810

 
$
228,011

Net income per share:
 
 

 
 

 
 
 
 
Basic
 
$
.87

 
$
1.04

 
$
1.61

 
$
2.05

Diluted
 
$
.86

 
$
1.02

 
$
1.58

 
$
2.02

Average number of shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
103,225

 
110,433

 
104,542

 
111,218

Diluted
 
104,024

 
112,031

 
105,892

 
113,079


See accompanying notes.
 
 

3



ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Quarter Ended
 
Six Months Ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Consolidated net income
$
90,036

 
$
114,481

 
$
167,994

 
$
228,204

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
14,311

 
(95,669
)
 
(51,859
)
 
(47,634
)
Unrealized gain (loss) on investment securities, net
581

 
(5,582
)
 
(1,397
)
 
1,047

Unrealized gain (loss) on interest rate swaps designated as cash flow hedges, net
137

 
(6,528
)
 
1,881

 
(3,764
)
Employee benefit plan items, net
763

 
677

 
1,562

 
1,166

Other comprehensive income (loss)
15,792

 
(107,102
)
 
(49,813
)
 
(49,185
)
Comprehensive income
105,828

 
7,379

 
118,181

 
179,019

Less: Comprehensive income (loss) attributable to noncontrolling interests
101

 
94

 
184

 
(5
)
Comprehensive income attributable to shareholders
$
105,727

 
$
7,285

 
$
117,997

 
$
179,024


See accompanying notes.


4



ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
 
 
June 29,
2013
 
December 31,
2012
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
345,891

 
$
409,684

Accounts receivable, net
 
4,723,601

 
4,923,898

Inventories
 
2,104,717

 
2,052,720

Other current assets
 
286,264

 
328,999

Total current assets
 
7,460,473

 
7,715,301

Property, plant, and equipment, at cost:
 
 

 
 

Land
 
23,906

 
23,944

Buildings and improvements
 
155,067

 
152,008

Machinery and equipment
 
1,072,661

 
1,030,983

 
 
1,251,634

 
1,206,935

Less: Accumulated depreciation and amortization
 
(646,465
)
 
(607,294
)
Property, plant, and equipment, net
 
605,169

 
599,641

Investments in affiliated companies
 
65,505

 
65,603

Intangible assets, net
 
395,170

 
414,033

Cost in excess of net assets of companies acquired
 
1,704,298

 
1,711,703

Other assets
 
277,106

 
279,406

Total assets
 
$
10,507,721

 
$
10,785,687

LIABILITIES AND EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
3,633,720

 
$
3,769,268

Accrued expenses
 
615,304

 
776,586

Short-term borrowings, including current portion of long-term debt
 
24,922

 
364,357

Total current liabilities
 
4,273,946

 
4,910,211

Long-term debt
 
2,072,625

 
1,587,478

Other liabilities
 
336,921

 
300,636

Equity:
 
 

 
 

Shareholders' equity:
 
 

 
 

Common stock, par value $1:
 
 

 
 

Authorized - 160,000 shares in both 2013 and 2012
 
 

 
 

Issued - 125,424 shares in both 2013 and 2012
 
125,424

 
125,424

Capital in excess of par value
 
1,051,243

 
1,086,239

Treasury stock (25,343 and 19,423 shares in 2013 and 2012, respectively), at cost
 
(899,185
)
 
(652,867
)
Retained earnings
 
3,447,099

 
3,279,289

Foreign currency translation adjustment
 
130,773

 
182,632

Other
 
(35,449
)
 
(37,495
)
Total shareholders' equity
 
3,819,905

 
3,983,222

Noncontrolling interests
 
4,324

 
4,140

Total equity
 
3,824,229

 
3,987,362

Total liabilities and equity
 
$
10,507,721

 
$
10,785,687

 
See accompanying notes.


5



ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
Six Months Ended
  
 
June 29,
2013
 
June 30,
2012
Cash flows from operating activities:
 
 
 
 
Consolidated net income
 
$
167,994

 
$
228,204

Adjustments to reconcile consolidated net income to net cash provided by operations:
 
 
 
 
Depreciation and amortization
 
64,104

 
57,085

Amortization of stock-based compensation
 
12,782

 
14,146

Equity in earnings of affiliated companies
 
(3,343
)
 
(3,612
)
Deferred income taxes
 
19,548

 
16,332

Restructuring, integration, and other charges
 
36,183

 
15,843

Excess tax benefits from stock-based compensation arrangements
 
(6,617
)
 
(4,981
)
Loss on prepayment of debt
 
2,627

 

Other
 
(377
)
 
(2,897
)
Change in assets and liabilities, net of effects of acquired businesses:
 
 
 
 
Accounts receivable
 
161,163

 
119,977

Inventories
 
(59,866
)
 
(105,821
)
Accounts payable
 
(124,091
)
 
109,425

Accrued expenses
 
(173,852
)
 
(74,629
)
Other assets and liabilities
 
58,258

 
(58,118
)
Net cash provided by operating activities
 
154,513

 
310,954

Cash flows from investing activities:
 
 
 
 
Cash consideration paid for acquired businesses
 
(9,382
)
 
(187,197
)
Acquisition of property, plant, and equipment
 
(53,561
)
 
(48,864
)
Purchase of cost method investments
 
(3,000
)
 
(15,000
)
Net cash used for investing activities
 
(65,943
)
 
(251,061
)
Cash flows from financing activities:
 
 
 
 
Change in short-term and other borrowings
 
(27,739
)
 
(12,577
)
Proceeds from (repayment of) long-term bank borrowings, net
 
(85,300
)
 
37,800

Net proceeds from note offering
 
591,156

 

Redemption of senior notes
 
(338,184
)
 

Proceeds from exercise of stock options
 
12,295

 
10,766

Excess tax benefits from stock-based compensation arrangements
 
6,617

 
4,981

Repurchases of common stock
 
(312,310
)
 
(157,798
)
Net cash used for financing activities
 
(153,465
)
 
(116,828
)
Effect of exchange rate changes on cash
 
1,102

 
(14,120
)
Net decrease in cash and cash equivalents
 
(63,793
)
 
(71,055
)
Cash and cash equivalents at beginning of period
 
409,684

 
396,887

Cash and cash equivalents at end of period
 
$
345,891

 
$
325,832


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 Form 10-Q for the quarterly period ended March 30, 2013, as well as the audited consolidated financial statements and accompanying notes for the year ended December 31, 2012, as filed in the company's Annual Report on Form 10-K.

During the third quarter of 2012, the company prospectively revised its presentation of sales related to certain fulfillment contracts to present these revenues on an agency basis as net fees, as compared to presenting gross sales and costs of sales in prior periods. This revised presentation had no impact on the company's consolidated balance sheet or statement of cash flows. Within the company's consolidated statement of operations, gross profit dollars, operating income dollars, net income dollars, and earnings per share were also not impacted for any periods reported. Prior to this prospective revision, these contracts approximated three percent of the company's sales for both the second quarter and first six months of 2012. Management has concluded that the impact of this revised presentation is not material and, therefore, prior periods have not been adjusted.

Quarter End

The company operates on a quarterly reporting 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.

Note B – Impact of Recently Issued Accounting Standards

In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity" ("ASU No. 2013-05"). ASU No. 2013-05 requires an entity that ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. ASU No. 2013-05 is effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted and is to be applied prospectively. The adoption of the provisions of ASU No. 2013-05 is not expected to have a material impact on the company's financial position or results of operations.

In February 2013, the FASB issued Accounting Standards Update No. 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date" ("ASU No. 2013-04"). ASU No. 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, ASU No. 2013-04 requires an entity to disclose the nature and amount of the obligation, as well as other information about the obligations. ASU No. 2013-04 is effective for interim and annual periods beginning after December 15, 2013 and is to be applied retrospectively. The adoption of the provisions of ASU No. 2013-04 is not expected to have a material impact on the company's financial position or results of operations.




7

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Note C – Acquisitions

The company accounts for acquisitions using the acquisition method of accounting. The results of operations of acquisitions are included in the company's consolidated results from their respective dates of acquisition. The company allocates the purchase price of each acquisition to the tangible assets, liabilities, and identifiable intangible assets acquired based on their estimated fair values. In certain circumstances, a portion of purchase price may be contingent upon the achievement of certain operating results. The fair values assigned to identifiable intangible assets acquired and contingent consideration were determined primarily by using an income approach which was based on assumptions and estimates made by management. Significant assumptions utilized in the income approach were based on company specific information and projections, which are not observable in the market and are thus considered Level 3 measurements by authoritative guidance (see Note H). The excess of the purchase price over the fair value of the identified assets and liabilities has been recorded as goodwill. Any change in the estimated fair value of the net assets prior to the finalization of the allocation for acquisitions could change the amount of the purchase price allocable to goodwill. The company is not aware of any information that indicates the final purchase price allocations will differ materially from the preliminary estimates.

2013 Acquisition

During the first six months of 2013, the company completed one acquisition. The aggregate consideration for this acquisition was $9,952 and included $570 of contingent consideration. The impact of this acquisition was not material to the company's consolidated financial position or results of operations. The pro forma impact of the 2013 acquisition on the consolidated results of operations of the company for the second quarter and first six months of 2013 and 2012 as though this acquisition occurred on January 1, 2012 was also not material.

2012 Acquisitions

During 2012, the company completed seven acquisitions. The aggregate consideration for these seven acquisitions was $289,782, net of cash acquired and included $10,390 of contingent consideration. The impact of these acquisitions were not material, individually or in the aggregate, to the company's consolidated financial position or results of operations. The pro forma impact of the 2012 acquisitions on the consolidated results of operations of the company for the second quarter and first six months of 2012 as though these acquisitions occurred on January 1, 2012 was also not material.

Other

During the first six months of 2012, the company made a payment of $2,526 to increase its ownership interest in a majority-owned subsidiary. The payment was recorded as a reduction to capital in excess of par value, partially offset by the carrying value of the noncontrolling interest.

Note D – Cost in Excess of Net Assets of Companies Acquired and Intangible Assets, Net

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.

Cost in excess of net assets of companies acquired, allocated to the company's business segments, is as follows:

 
 
Global
Components
 
Global ECS
 
Total
Balance as of December 31, 2012 (a)
 
$
957,916

 
$
753,787

 
$
1,711,703

Acquisitions
 
6,789

 

 
6,789

Foreign currency translation
 
(6,662
)
 
(7,532
)
 
(14,194
)
Balance as of June 29, 2013 (a)
 
$
958,043

 
$
746,255

 
$
1,704,298


(a)
The total carrying value of cost in excess of net assets of companies acquired 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.

8

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 June 29, 2013:

 
 
Weighted-Average Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Trade names
 
indefinite
 
$
179,000

 
$

 
$
179,000

Customer relationships
 
11 years
 
324,270

 
(115,528
)
 
208,742

Developed technology
 
5 years
 
10,037

 
(3,233
)
 
6,804

Other intangible assets
 
(b)
 
2,543

 
(1,919
)
 
624

 
 
 
 
$
515,850

 
$
(120,680
)
 
$
395,170


Intangible assets, net, are comprised of the following as of December 31, 2012:

 
 
Weighted-Average Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Trade names
 
indefinite
 
$
179,000

 
$

 
$
179,000

Customer relationships
 
11 years
 
325,509

 
(100,172
)
 
225,337

Developed technology
 
5 years
 
11,154

 
(2,508
)
 
8,646

Other intangible assets
 
(b)
 
2,761

 
(1,711
)
 
1,050

 
 
 
 
$
518,424

 
$
(104,391
)
 
$
414,033


(b)
Consists of non-competition agreements and sales backlog with useful lives ranging from one to three years.

During the second quarters of 2013 and 2012, the company recorded amortization expense related to identifiable intangible assets of $8,869 ($7,029 net of related taxes or $.07 per share on both a basic and diluted basis) and $8,959 ($7,360 net of related taxes or $.07 per share on both a basic and diluted basis), respectively.

During the first six months of 2013 and 2012, the company recorded amortization expense related to identifiable intangible assets of $17,826 ($14,145 net of related taxes or $.14 and $.13 per share on a basic and diluted basis, respectively) and $18,630 ($14,936 net of related taxes or $.13 per share on both a basic and diluted basis), respectively.

Note E – Investments in Affiliated Companies

The company owns a 50% interest in several joint ventures with Marubun Corporation (collectively "Marubun/Arrow") and a 50% interest in Arrow Altech Holdings (Pty.) Ltd. ("Altech Industries"), a joint venture with Allied Technologies Limited. These investments are accounted for using the equity method.

The following table presents the company's investment in Marubun/Arrow and the company's investment and long-term note receivable in Altech Industries:

  
 
June 29,
2013
 
December 31,
2012
Marubun/Arrow
 
$
52,412

 
$
50,864

Altech Industries
 
13,093

 
14,739

 
 
$
65,505

 
$
65,603







9

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

The equity in earnings of affiliated companies consists of the following:

  
 
Quarter Ended
 
Six Months Ended
  
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Marubun/Arrow
 
$
1,195

 
$
1,228

 
$
2,828

 
$
2,844

Altech Industries
 
165

 
200

 
515

 
768

 
 
$
1,360

 
$
1,428

 
$
3,343

 
$
3,612


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 June 29, 2013, the company's pro-rata share of this debt was approximately $925. The company believes that there is sufficient equity in each of the joint ventures to meet their obligations.

Note F – Accounts Receivable

Accounts receivable, net, consists of the following:

 
 
June 29,
2013
 
December 31,
2012
Accounts receivable
 
$
4,779,122

 
$
4,978,136

Allowances for doubtful accounts
 
(55,521
)
 
(54,238
)
Accounts receivable, net
 
$
4,723,601

 
$
4,923,898


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.

Note G – Debt

Short-term borrowings, including current portion of long-term debt, consists of the following:

 
June 29,
2013
 
December 31,
2012
6.875% senior notes, due 2013
$

 
$
335,384

Short-term borrowings in various countries
24,922

 
28,973

 
$
24,922

 
$
364,357


Short-term borrowings in various countries are primarily utilized to support the working capital requirements of certain international operations. The weighted average interest rate on these borrowings at June 29, 2013 and December 31, 2012 were 3.4% and 4.6%, respectively.











10

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Long-term debt consists of the following:

 
 
June 29,
2013
 
December 31,
2012
Revolving credit facility
 
$
63,300

 
$
123,600

Asset securitization program
 
200,000

 
225,000

3.375% notes, due 2015
 
256,368

 
257,732

6.875% senior debentures, due 2018
 
198,974

 
198,869

3.00% notes, due 2018
 
298,546

 

6.00% notes, due 2020
 
299,940

 
299,936

5.125% notes, due 2021
 
249,396

 
249,356

4.50% notes, due 2023
 
297,672

 

7.50% senior debentures, due 2027
 
198,100

 
198,030

Other obligations with various interest rates and due dates
 
10,329

 
34,955

 
 
$
2,072,625

 
$
1,587,478


The 7.50% senior debentures are not redeemable prior to their maturity.  The 3.375% notes, 6.875% senior debentures, 3.00% notes, 6.00% notes, 5.125% notes, and 4.50% 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:

 
 
June 29,
2013
 
December 31,
2012
6.875% senior notes, due 2013
 
$

 
$
342,000

3.375% notes, due 2015
 
260,000

 
260,000

6.875% senior debentures, due 2018
 
230,000

 
236,000

3.00% notes, due 2018
 
300,000

 

6.00% notes, due 2020
 
333,000

 
342,000

5.125% notes, due 2021
 
262,500

 
272,500

4.50% notes, due 2023
 
294,000

 

7.50% senior debentures, due 2027
 
230,000

 
246,000


The carrying amount of the company's short-term borrowings in various countries, revolving credit facility, asset securitization program, and other obligations approximate their fair value.

In February 2013, the company completed the sale of $300,000 principal amount of 3.00% notes due in 2018 and $300,000 principal amount of 4.50% notes due in 2023. The net proceeds of the offering of $591,156 were used to refinance the company's 6.875% senior notes due July 2013 and for general corporate purposes.

In March 2013, the company redeemed $332,107 principal amount of its 6.875% senior notes due July 2013. The related loss on the redemption for the first six months of 2013 aggregated $4,277 ($2,627 net of related taxes or $.03 and $.02 per share on a basic and diluted basis, respectively) and was recognized as a loss on prepayment of debt.

The company has a $1,200,000 revolving credit facility, maturing in August 2016. 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 and 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 based on the company's credit ratings (1.275% at June 29, 2013), or an effective interest rate of 1.49% at June 29, 2013. The facility fee is .225%.  The company had outstanding borrowings under the revolving credit facility of $63,300 and $123,600 at June 29, 2013 and December 31, 2012, respectively.

11

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

The company has a $775,000 asset securitization program collateralized by accounts receivable of certain of its United States subsidiaries, maturing in December 2014. 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 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, which is based on the company's credit ratings (.40% at June 29, 2013), or an effective interest rate of .70% at June 29, 2013.  The facility fee is .40%.

At June 29, 2013 and December 31, 2012, the company had $200,000 and $225,000, respectively, in outstanding borrowings under the asset securitization program, which was included in "Long-term debt" in the company's consolidated balance sheets, and total collateralized accounts receivable of approximately $1,558,100 and $1,610,946, 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, limit the company's ability to pay cash dividends or repurchase stock, and require that certain financial ratios be maintained at designated levels. The company was in compliance with all covenants as of June 29, 2013 and is currently not aware of any events that would cause non-compliance with any covenants in the future.  

Interest and other financing expense, net, includes interest and dividend income of $549 and $1,120 for the second quarter and first six months of 2013 and $650 and $1,235 for the second quarter and first six months of 2012, 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 June 29, 2013:

 
 
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-sale securities
 
$
65,712

 
$

 
$

 
$
65,712

Foreign exchange contracts
 

 
(385
)
 

 
(385
)
Contingent consideration
 

 

 
(1,129
)
 
(1,129
)
 
 
$
65,712

 
$
(385
)
 
$
(1,129
)
 
$
64,198











12

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, 2012:

 
 
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-sale securities
 
$
67,903

 
$

 
$

 
$
67,903

Interest rate swaps
 

 
(10,832
)
 

 
(10,832
)
Foreign exchange contracts
 

 
(107
)
 

 
(107
)
Contingent consideration
 

 

 
(806
)
 
(806
)
 
 
$
67,903

 
$
(10,939
)
 
$
(806
)
 
$
56,158


The following table summarizes the Level 3 activity for the first six months of 2013:

Balance as of December 31, 2012
$
(806
)
Fair value of contingent consideration recognized upon acquisition
(570
)
Change in fair value of contingent consideration included in earnings
247

Balance as of June 29, 2013
$
(1,129
)

The change in the fair value of contingent consideration is included in "Restructuring, integration, and other charges," in the company's consolidated statements of operations.

During the first six months of 2013 and 2012, 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"), a 1.9% equity ownership interest in WPG Holdings Co., Ltd. ("WPG"), 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 at June 29, 2013 is as follows:

  
 
Marubun
 
WPG
 
Mutual Funds
Cost basis
 
$
10,016

 
$
10,798

 
$
15,354

Unrealized holding gain
 
512

 
25,969

 
3,063

Fair value
 
$
10,528

 
$
36,767

 
$
18,417


The fair value of the company's available-for-sale securities at December 31, 2012 is as follows:

 
 
Marubun
 
WPG
 
Mutual Funds
Cost basis
 
$
10,016

 
$
10,798

 
$
15,271

Unrealized holding gain
 
85

 
29,784

 
1,949

Fair value
 
$
10,101

 
$
40,582

 
$
17,220


The fair value of these investments are included in "Other assets" in the company's consolidated balance sheets, and the related unrealized holding gains or losses are included in "Other" in the shareholders' equity section in the company's consolidated balance sheets.



13

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

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.

The fair values of derivative instruments in the company's consolidated balance sheets are as follows:

 
 
Asset (Liability) Derivatives
  
 
  
 
Fair Value
  
 
Balance Sheet
Location
 
June 29,
2013
 
December 31,
2012
Derivative instruments designated as hedges:
 
 
 
 
 
 
Interest rate swaps designated as cash flow hedges
 
Accrued expenses
 
$

 
$
(10,832
)
Foreign exchange contracts designated as cash flow hedges
 
Other current assets
 
55

 
433

Foreign exchange contracts designated as cash flow hedges
 
Accrued expenses
 
(106
)
 
(45
)
Total derivative instruments designated as hedging instruments
 
 
 
(51
)
 
(10,444
)
Derivative instruments not designated as hedges:
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets
 
1,470

 
1,561

Foreign exchange contracts
 
Accrued expenses
 
(1,804
)
 
(2,056
)
Total derivative instruments not designated as hedging instruments
 
 
 
(334
)
 
(495
)
Total
 
 
 
$
(385
)
 
$
(10,939
)
 
The effect of derivative instruments on the company's consolidated statements of operations is as follows:

 
 
Gain (Loss) Recognized in Income
  
 
Quarter Ended
 
Six Months Ended
  
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Derivative instruments not designated as hedges:
 
 
 
 
 
 
 
 
Foreign exchange contracts (a)
 
$
194

 
$
(552
)
 
$
(940
)
 
$
(1,345
)


14

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

 
Cash Flow Hedges
 
Quarter Ended
 
Six Months Ended
 
June 29, 2013
 
June 29, 2013
 
Interest Rate Swaps (b)
 
Foreign Exchange Contracts (c)
 
Interest Rate Swaps (b)
 
Foreign Exchange Contracts (c)
Effective portion:
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income
$

 
$
(441
)
 
$
3,132

 
$
(500
)
Gain (loss) reclassified into income
$
(222
)
 
$
228

 
$
(222
)
 
$
480

Ineffective portion:
 
 
 
 
 
 
 
Gain (loss) recognized in income
$

 
$

 
$
292

 
$

 
 
 
 
 
 
 
 
 
Cash Flow Hedges
 
Quarter Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2012
 
Interest Rate Swaps (b)
 
Foreign Exchange Contracts (c)
 
Interest Rate Swaps (b)
 
Foreign Exchange Contracts (c)
Effective portion:
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income
$
(10,625
)
 
$
(204
)
 
$
(6,079
)
 
$
236

Gain (loss) reclassified into income
$

 
$
(16
)
 
$

 
$
(57
)
Ineffective portion:
 
 
 
 
 
 
 
Gain (loss) recognized in income
$

 
$

 
$

 
$


(a)
The amount of gain (loss) recognized in income on derivatives is recorded in "Cost of sales" in the company's consolidated statements of operations.
(b)
Both the effective and ineffective portions of any gain (loss) reclassified or recognized in income are recorded in "Interest and other financing expense, net" in the company's consolidated statements of operations.
(c)
Both the effective and ineffective portions of any gain (loss) reclassified or recognized in income are recorded in "Cost of sales" in the company's consolidated statements of operations.
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 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 "Other."  The ineffective portion of the interest rate swap, if any, is recorded in "Interest and other financing expense, net" in the company's consolidated statements of operations.

In September 2011, the company entered into a ten-year forward-starting interest rate swap (the "2011 swap") which locked in a treasury rate of 2.63% on an aggregate notional amount of $175,000. This swap managed the risk associated with changes in treasury rates and the impact of future interest payments. The 2011 swap related to the interest payments for anticipated debt issuances to replace the company's 6.875% senior notes due to mature in July 2013. The 2011 swap was classified as a cash flow hedge and had a negative fair value of $10,832 at December 31, 2012. In February 2013, the company paid $7,700 to terminate the 2011 swap upon issuance of the ten-year notes due in 2023. The fair value of the 2011 swap is recorded in the shareholders' equity section in the company's consolidated balance sheets in "Other" and will be reclassified into income over the ten-year term of the notes due in 2023. During the second quarter and first six months of 2013, the company reclassified $(222) and $70, respectively, into income relating to the 2011 swap.


15

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Foreign Exchange Contracts

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 these 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 June 29, 2013 and December 31, 2012 was $352,430 and $425,053, respectively.

Contingent Consideration

In connection with the 2013 acquisition, payment of a portion of the respective purchase price is contingent upon the achievement of certain operating results, with a maximum possible payout of $5,400 which would be due at the end of a three-year period. Additionally, in connection with one of the 2012 acquisitions, payment of a portion of the respective purchase price is contingent upon the achievement of certain operating results, with a maximum possible payout of $18,000 over a three-year period. The company estimated the fair value of the contingent consideration as the present value of the expected contingent payments, determined using the weighted probabilities of the possible payments. The company reassesses the fair value of the contingent consideration on a quarterly basis. Contingent consideration of $1,129 and $806 was included in "Other liabilities" in the company's consolidated balance sheets as of June 29, 2013 and December 31, 2012, respectively. A twenty percent increase or decrease in projected operating performance over the remaining performance period would not result in a material change in the fair value of the contingent consideration recorded as of June 29, 2013.
 
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.

Note I – Restructuring, Integration, and Other Charges

During the second quarters of 2013 and 2012, the company recorded restructuring, integration, and other charges of $30,224 ($20,688 net of related taxes or $.20 per share on both a basic and diluted basis) and $13,347 ($9,702 net of related taxes or $.09 per share on both a basic and diluted basis), respectively.

During the first six months of 2013 and 2012, the company recorded restructuring, integration, and other charges of $51,834 ($36,183 net of related taxes or $.35 and $.34 per share on a basic and diluted basis, respectively) and $21,590 ($15,843 net of related taxes or $.14 per share on both a basic and diluted basis), respectively.

The following table presents the components of the restructuring, integration, and other charges:

 
 
Quarter Ended
 
Six Months Ended
 
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Restructuring charges - current period actions
 
$
27,305

 
$
9,430

 
$
45,864

 
$
14,847

Restructuring and integration charges (credits) - actions taken in prior periods
 
711

 
(60
)
 
921

 
427

Acquisition-related expenses
 
2,208

 
3,977

 
5,049

 
6,316

 
 
$
30,224

 
$
13,347

 
$
51,834

 
$
21,590






16

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

2013 Restructuring Charge

The following table presents the components of the 2013 restructuring charge of $45,864 and activity in the related restructuring accrual for the first six months of 2013:

 
 
Personnel
Costs
 
Facilities
 
Other
 
Total
Restructuring charge
 
$
40,670

 
$
4,496

 
$
698

 
$
45,864

Payments
 
(17,756
)
 
(1,667
)
 

 
(19,423
)
Non-cash usage
 

 

 
(698
)
 
(698
)
Foreign currency translation
 
67

 
(13
)
 

 
54

Balance as of June 29, 2013
 
$
22,981

 
$
2,816

 
$

 
$
25,797

 
The restructuring charge of $45,864 for the first six months of 2013 includes personnel costs of $40,670, facilities costs of $4,496, and other costs of $698.  The personnel costs are related to the elimination of approximately 590 positions within the global components business segment and approximately 180 positions within the global ECS business segment. The facilities costs are related to exit activities for 26 vacated facilities worldwide due to the company's continued efforts to streamline its operations and reduce real estate costs. These restructuring initiatives are due to the company's continued efforts to lower cost and drive operational efficiency.

2012 Restructuring Charge

The following table presents the activity in the restructuring accrual for the first six months of 2013 related to the 2012 restructuring:

 
 
Personnel 
Costs
 
Facilities
 
Total
Balance as of December 31, 2012
 
$
10,501

 
$
4,442

 
$
14,943

Restructuring charge (credit)
 
760

 
(495
)
 
265

Payments
 
(8,757
)
 
(1,151
)
 
(9,908
)
Foreign currency translation
 
(64
)
 
(139
)
 
(203
)
Balance as of June 29, 2013
 
$
2,440

 
$
2,657

 
$
5,097


Restructuring Accruals Related to Actions Taken Prior to 2012

The following table presents the activity in the restructuring accruals for the first six months of 2013 related to restructuring actions taken prior to 2012:

 
 
Personnel
Costs
 
Facilities
 
Total
Balance as of December 31, 2012
 
$
1,408

 
$
3,863

 
$
5,271

Restructuring charges (credits)
 
(139
)
 
795

 
656

Payments
 
(294
)
 
(1,226
)
 
(1,520
)
Foreign currency translation
 
10

 
(77
)
 
(67
)
Balance as of June 29, 2013
 
$
985

 
$
3,355

 
$
4,340








17

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Restructuring Accrual Summary

In summary, the restructuring accruals aggregate $35,234 at June 29, 2013, all of which are expected to be spent in cash, and are expected to be utilized as follows:

The accruals for personnel costs totaling $26,406 to cover the termination of personnel are primarily expected to be spent within one year. 

The accruals for facilities totaling $8,828 relate to vacated leased properties that have scheduled payments of $5,175 in 2013, $1,988 in 2014, $922 in 2015, $487 in 2016, $249 in 2017, and $7 thereafter.

Acquisition-Related Expenses

Included in restructuring, integration, and other charges for the second quarter and first six months of 2013 are acquisition-related expenses of $2,208 and $5,049, respectively, primarily consisting of 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 fees directly related to recent acquisition activity.

Included in restructuring, integration, and other charges for the second quarter and first six months of 2012 are acquisition-related expenses of $3,977 and $6,316, respectively, primarily consisting of 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 fees directly related to recent acquisition activity.

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
 
Six Months Ended
 
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Net income attributable to shareholders
 
$
89,935

 
$
114,383

 
$
167,810

 
$
228,011

Weighted average shares outstanding - basic
 
103,225

 
110,433

 
104,542

 
111,218

Net effect of various dilutive stock-based compensation awards
 
799

 
1,598

 
1,350

 
1,861

Weighted average shares outstanding - diluted
 
104,024

 
112,031

 
105,892

 
113,079

Net income per share:
 
 

 
 

 
 
 
 
Basic
 
$
.87

 
$
1.04

 
$
1.61

 
$
2.05

Diluted (a)
 
$
.86

 
$
1.02

 
$
1.58

 
$
2.02


(a)
Stock-based compensation awards for the issuance of 1,296 and 1,171 shares for the second quarter and first six months of 2013 and 1,552 and 804 shares for the second quarter and first six months of 2012, respectively, were excluded from the computation of net income per share on a diluted basis as their effect was anti-dilutive.












18

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Note K – Shareholders' Equity

Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in the balances of each component of accumulated other comprehensive income:

 
 
Foreign Currency Translation Adjustments
 
Unrealized Gain (Loss) on Investment Securities, Net
 
Unrealized Gain (Loss) on Interest Rate Swaps Designated as Cash Flow Hedges, Net
 
Employee Benefit Plan Items, Net
 
Total
Balance as of December 31, 2012
 
$
182,632

 
$
19,617

 
$
(6,669
)
 
$
(50,443
)
 
$
145,137

Other comprehensive income (loss) before reclassifications (a)
 
(66,422
)
 
(1,978
)
 
1,923

 
4

 
(66,473
)
Amounts reclassified into income (loss)
 
252

 

 
(179
)
 
795

 
868

Net other comprehensive income (loss) for the quarter ended March 30, 2013
 
(66,170
)
 
(1,978
)
 
1,744

 
799

 
(65,605
)
Balance as of March 30, 2013
 
116,462

 
17,639

 
(4,925
)
 
(49,644
)
 
79,532

Other comprehensive income before reclassifications (a)
 
14,083

 
581

 

 
46

 
14,710

Amounts reclassified into income
 
228

 

 
137

 
717

 
1,082

Net other comprehensive income for the quarter ended June 29, 2013
 
14,311

 
581

 
137

 
763

 
15,792

Balance as of June 29, 2013
 
$
130,773

 
$
18,220

 
$
(4,788
)
 
$
(48,881
)
 
$
95,324

 
 
 
 
 
 
 
 
 
 
 
Total net other comprehensive income (loss) for the six months ended
  June 29, 2013
 
$
(51,859
)
 
$
(1,397
)
 
$
1,881

 
$
1,562

 
$
(49,813
)

(a)
Foreign currency translation adjustments include intra-entity foreign currency transactions that are of a long-term investment nature of $4,622 and $(13,224) for the first quarter and second quarter of 2013, respectively.

Share-Repurchase Programs

In June 2012, the company's Board of Directors (the "Board") approved the repurchase of up to $200,000 of the company's common stock through a share-repurchase program. In February 2013, the company's Board approved an additional repurchase of up to $200,000 of the company's common stock. As of June 29, 2013, the company repurchased 10,376,515 shares under these programs with a market value of $398,572 at the dates of repurchase.

















19

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Note L – Employee Benefit Plans

The company maintains supplemental executive retirement plans and a defined benefit plan.  The components of the net periodic benefit costs for these plans are as follows:
 
 
Quarter Ended
 
Six Months Ended
 
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Components of net periodic benefit costs:
 
 
 
 
 
 
 
 
Service cost
 
$
532

 
$
516

 
$
1,064

 
$
1,032

Interest cost
 
2,026

 
2,201

 
4,052

 
4,402

Expected return on plan assets
 
(1,629
)
 
(1,509
)
 
(3,258
)
 
(3,018
)
Amortization of unrecognized net loss
 
1,157

 
951

 
2,314

 
1,902

Amortization of prior service cost
 
11

 
11

 
22

 
22

Net periodic benefit costs
 
$
2,097

 
$
2,170

 
$
4,194

 
$
4,340


Note M – Contingencies

Environmental Matters

In connection with the purchase of Wyle Electronics ("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. During the fourth quarter of 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.

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 $33,000 from certain insurance carriers.  The company continues to seek recovery from an umbrella liability policy carrier for its proportional share of the total Norco liability.  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 could 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.


20

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

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

Characterization of the extent of contaminated soil and groundwater continues at the site in Huntsville, Alabama. Under the direction of the Alabama Department of Environmental Management, approximately $4,000 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 $500 to $750. 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 $3,000 and $4,000.

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.

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. The approval of a final Remedial Action Work Plan is ongoing. Approximately $32,000 was expended to date on project management, regulatory oversight, and investigative and feasibility study activities. The company currently estimates that the additional cost of project management and regulatory oversight to be $200. Project management and regulatory oversight include costs incurred by project consultants for project management and costs billed by DTSC to provide regulatory oversight. Ongoing remedial investigations (including costs related to soil and groundwater investigations), and the preparation of a final remedial investigation report are projected to cost $800.

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. Approximately $12,000 was expended on remediation to date, and it is anticipated that these activities, along with the initial phases of the treatment of contaminated groundwater in the offsite area and remaining Remedial Action Work Plan costs, will give rise to an additional estimated $17,200 to $23,700.

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 consent decree is not yet known, and, accordingly, the associated costs have yet to be determined.

Tekelec Matter

In 2000, the company purchased Tekelec Europe SA ("Tekelec") from Tekelec Airtronic SA and certain other selling shareholders. Subsequent to the closing of the acquisition, Tekelec received a product liability claim in the amount of €11,333. The product liability claim was the subject of a French legal proceeding started by the claimant in 2002, under which separate determinations were made as to whether the products that are subject to the claim were defective and the amount of damages sustained by the purchaser. The manufacturer of the products also participated in this proceeding. The claimant commenced legal proceedings against Tekelec and its insurers to recover damages in the amount of €3,742 and expenses of €312 plus interest. In May 2012, the French court ruled in favor of Tekelec and dismissed the plaintiff's claims. However, that decision has been appealed by the plaintiff. The company believes that any amount in addition to the amount accrued by the company would not materially adversely impact the company's consolidated financial position, liquidity, or results of operations.





21

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

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 N – 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
 
Six Months Ended
 
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Sales:
 
 
 
 
 
 
 
 
Global components
 
$
3,398,690

 
$
3,453,687

 
$
6,591,270

 
$
6,803,241

Global ECS
 
1,907,395

 
1,696,876

 
3,564,444

 
3,236,851

Consolidated
 
$
5,306,085

 
$
5,150,563

 
$
10,155,714

 
$
10,040,092

Operating income (loss):
 
 

 
 

 
 
 
 
Global components
 
$
140,158

 
$
170,524

 
$
268,438

 
$
341,232

Global ECS
 
80,722

 
65,961

 
142,313

 
121,448

Corporate (a)
 
(65,005
)
 
(47,796
)
 
(117,324
)
 
(86,542
)
Consolidated
 
$
155,875

 
$
188,689

 
$
293,427

 
$
376,138


(a)
Includes restructuring, integration, and other charges of $30,224 and $51,834 for the second quarter and first six months of 2013 and $13,347 and $21,590 for the second quarter and first six months of 2012, respectively.

Total assets, by segment, are as follows:

 
 
June 29,
2013
 
December 31,
2012
Global components
 
$
6,685,880

 
$
6,467,123

Global ECS
 
3,184,884

 
3,685,100

Corporate
 
636,957

 
633,464

Consolidated
 
$
10,507,721

 
$
10,785,687











22

ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Sales, by geographic area, are as follows:

 
 
Quarter Ended
 
Six Months Ended
 
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Americas (b)
 
$
2,760,625

 
$
2,703,706

 
$
5,246,772

 
$
5,235,486

EMEA (c)
 
1,490,123

 
1,488,294

 
2,932,294

 
3,018,321

Asia/Pacific
 
1,055,337

 
958,563

 
1,976,648

 
1,786,285

Consolidated
 
$
5,306,085

 
$
5,150,563

 
$
10,155,714

 
$
10,040,092


(b)
Includes sales related to the United States of $2,541,786 and $4,807,163 for the second quarter and first six months of 2013 and $2,493,567 and $4,794,563 for the second quarter and first six months of 2012, respectively.

(c)
Defined as Europe, the Middle East, and Africa.
 
Net property, plant, and equipment, by geographic area, is as follows:

 
 
June 29,
2013
 
December 31,
2012
Americas (d)
 
$
515,175

 
$
512,775

EMEA
 
69,351

 
65,947

Asia/Pacific
 
20,643

 
20,919

Consolidated
 
$
605,169

 
$
599,641


(d)
Includes net property, plant, and equipment related to the United States of $513,598 and $511,555 at June 29, 2013 and December 31, 2012, respectively.



 


23



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 provides one of the broadest product offerings in the electronic components and enterprise computing solutions distribution industries and a wide range of value-added services to help 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 six months of 2013, approximately 65% of the company's sales were from the global components business segment, and approximately 35% 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.

During the first six months of 2013, the company completed one acquisition. During 2012, the company completed seven acquisitions. The impact of these acquisitions were not material, individually or in the aggregate, to the company's consolidated financial position or results of operations.

During the third quarter of 2012, the company prospectively revised its presentation of sales related to certain fulfillment contracts to present these revenues on an agency basis as net fees, as compared to presenting gross sales and costs of sales in prior periods. On a gross basis, these contracts contributed approximately $149.1 million to the company's sales in the second quarter of 2012, which negatively impacted the year-over-year consolidated sales growth comparison by approximately 2.9%. On a gross basis, these contracts contributed approximately $280.6 million to the company's sales for the first six months of 2012, which negatively impacted the year-over-year consolidated sales growth comparison by approximately 2.8%. This revised presentation had no impact on the company's consolidated balance sheet or statement of cash flows. Within the company's consolidated statement of operations, this revised presentation had no impact on gross profit dollars, operating income dollars, net income dollars, or earnings per share for any periods reported, but positively impacted the gross profit margin and operating income margin by approximately 30 and 10 basis points, respectively, in the second quarter of 2013, and 40 and 10 basis points, respectively, in the first six months of 2013. Additionally, returns on capital, which are key metrics used to evaluate the company's performance, were also not impacted by this prospective revision.

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 foreign currency and the impact of acquisitions by adjusting the company's prior periods to include the operating results of businesses acquired, including the amortization expense related to acquired intangible assets, as if the acquisitions had occurred at the beginning of the period presented (referred to as "impact of acquisitions"); and
Sales adjusted for certain items that impact the year-over-year comparison, which includes the aforementioned change in presentation of sales related to certain fulfillment contracts to present these revenues on an agency basis as net fees (referred to as "change in presentation of sales").

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.





24



Executive Summary

Consolidated sales for the second quarter of 2013 increased by 3.0%, compared with the year-earlier period, due to a 12.4% increase in the global ECS business segment sales, offset, in part, by a 1.6% decrease in the global components business segment sales. The translation of the company's international financial statements into U.S. dollars resulted in an increase in consolidated sales of .7% for the second quarter of 2013, compared with the year-earlier period, due to a weaker U.S. dollar.

Net income attributable to shareholders decreased to $89.9 million in the second quarter of 2013, compared with net income attributable to shareholders of $114.4 million in the year-earlier period.  The following items impacted the comparability of the company's results:

Second quarters of 2013 and 2012:

restructuring, integration, and other charges of $30.2 million ($20.7 million net of related taxes) in 2013 and $13.3 million ($9.7 million net of related taxes) in 2012; and
an increase in the provision for income taxes of $5.4 million and an increase in interest expense of $1.5 million ($.9 million net of related taxes) relating to adjustments to tax reserves for ongoing international tax audits in 2013.

First six months of 2013 and 2012:

restructuring, integration, and other charges of $51.8 million ($36.2 million net of related taxes) in 2013 and $21.6 million ($15.8 million net of related taxes) in 2012;
a loss on prepayment of debt of $4.3 million ($2.6 million net of related taxes) in 2013; and
an increase in the provision for income taxes of $5.4 million and an increase in interest expense of $1.5 million ($.9 million net of related taxes) relating to adjustments to tax reserves for ongoing international tax audits in 2013.

Excluding the aforementioned items, the decrease in net income attributable to shareholders for the second quarter of 2013 was primarily the result of a decrease in gross profit margins which were negatively impacted principally due to increased competitive pricing pressure in both the company's business segments and a change in mix of products. The decrease in net income attributable to shareholders was also due to an increase in selling, general, and administrative expenses to support the increase in sales, as well as additional selling, general, and administrative expenses relating to recent acquisitions.

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.

























25



Sales

Following is an analysis of net sales by reportable segment (in millions):
 
 
Quarter Ended
 
 
 
Six Months Ended
 
 
 
 
June 29, 2013
 
June 30, 2012
 
% Change
 
June 29, 2013
 
June 30, 2012
 
% Change
Consolidated sales, as reported
 
$
5,306

 
$
5,151

 
3.0
 %
 
$
10,156

 
$
10,040

 
1.2
 %
Impact of foreign currency
 

 
34

 
 
 

 
43

 
 
Impact of acquisitions
 

 
98

 
 
 
3

 
225

 
 
Change in presentation of sales
 

 
(149
)
 
 
 

 
(281
)
 
 
Consolidated sales, as adjusted
 
$
5,306

 
$
5,134

 
3.4
 %
 
$
10,159

 
$
10,027

 
1.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Global components sales, as reported
 
$
3,399

 
$
3,454

 
(1.6
)%
 
$
6,591

 
$
6,803

 
(3.1
)%
Impact of foreign currency
 

 
22

 
 
 

 
33

 
 
Impact of acquisitions
 

 
26

 
 
 
3

 
60

 
 
Change in presentation of sales
 

 
(149
)
 
 
 

 
(281
)
 
 
Global components sales, as adjusted
 
$
3,399

 
$
3,353

 
1.4
 %
 
$
6,594

 
$
6,615

 
(.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Global ECS sales, as reported
 
$
1,907

 
$
1,697

 
12.4
 %
 
$
3,564

 
$
3,237

 
10.1
 %
Impact of foreign currency
 

 
12

 
 
 

 
10

 
 
Impact of acquisitions
 

 
72

 
 
 

 
166

 
 
Global ECS sales, as adjusted
 
$
1,907

 
$
1,781

 
7.1
 %
 
$
3,564

 
$
3,413

 
4.4
 %

Consolidated sales for the second quarter and first six months of 2013 increased by $155.5 million, or 3.0%, and $115.6 million, or 1.2%, respectively, compared with the year-earlier periods. The increase for the second quarter and first six months of 2013 was driven by an increase