Document

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

FORM 10-Q

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

For the quarterly period ended June 30, 2018

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 87,388,912 shares of Common Stock outstanding as of July 31, 2018.


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
 
Six Months Ended
  
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
 
 
 
 
(Adjusted)
 
 
 
(Adjusted)
Sales
 
$
7,392,528

 
$
6,422,226

 
$
14,268,141

 
$
12,159,006

Cost of sales
 
6,459,708


5,598,202

 
12,466,377


10,573,785

Gross profit
 
932,820


824,024

 
1,801,764


1,585,221

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
 
580,388

 
531,781

 
1,143,357

 
1,047,307

Depreciation and amortization
 
46,422

 
37,381

 
93,669

 
74,522

Loss on disposition of businesses, net
 
—

 
—

 
1,562

 
—

Restructuring, integration, and other charges
 
19,183

 
24,416

 
40,354

 
39,921

 
 
645,993

 
593,578

 
1,278,942

 
1,161,750

Operating income
 
286,827


230,446

 
522,822


423,471

Equity in earnings (losses) of affiliated companies
 
517

 
724

 
(156
)
 
1,649

Gain (loss) on investments, net
 
(2,563
)
 
2,263

 
(5,015
)
 
4,245

Loss on extinguishment of debt
 
—

 
58,759

 
—

 
58,759

Post-retirement expense
 
1,257

 
1,897

 
2,488

 
3,697

Interest and other financing expense, net
 
60,803

 
42,538

 
105,982

 
80,787

Income before income taxes
 
222,721

 
130,239

 
409,181

 
286,122

Provision for income taxes
 
51,681

 
29,592

 
98,271

 
69,156

Consolidated net income
 
171,040

 
100,647

 
310,910

 
216,966

Noncontrolling interests
 
1,125

 
925

 
1,901

 
2,507

Net income attributable to shareholders
 
$
169,915

 
$
99,722

 
$
309,009

 
$
214,459

Net income per share:
 
 

 
 

 
 
 
 
Basic
 
$
1.94

 
$
1.12

 
$
3.52

 
$
2.41

Diluted
 
$
1.92

 
$
1.11

 
$
3.48

 
$
2.38

Weighted-average shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
87,802

 
88,876

 
87,878

 
89,079

Diluted
 
88,652

 
89,837

 
88,841

 
90,146


See accompanying notes.
 
 

3

ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
 
Quarter Ended
 
Six Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
 
 
 
 
(Adjusted)
 
 
 
(Adjusted)
Consolidated net income
 
$
171,040

 
$
100,647

 
$
310,910

 
$
216,966

Other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment and other
 
(146,807
)
 
133,544

 
(101,838
)
 
170,377

Unrealized gain on investment securities, net
 
—

 
1,554

 
—

 
3,282

Unrealized gain (loss) on interest rate swaps designated as cash flow hedges, net
 
231

 
(547
)
 
459

 
(450
)
Employee benefit plan items, net
 
613

 
505

 
895

 
911

Other comprehensive income (loss)
 
(145,963
)
 
135,056

 
(100,484
)
 
174,120

Comprehensive income
 
25,077

 
235,703

 
210,426

 
391,086

Less: Comprehensive income (loss) attributable to noncontrolling interests
 
(534
)
 
3,525

 
(11
)
 
5,694

Comprehensive income attributable to shareholders
 
$
25,611

 
$
232,178

 
$
210,437

 
$
385,392


See accompanying notes.
    

4

ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
(Unaudited)

 
 
June 30,
2018
 
December 31,
2017
 
 
 
 
(Adjusted)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
330,519


$
730,083

Accounts receivable, net
 
8,076,896


8,125,588

Inventories
 
3,775,884


3,302,518

Other current assets
 
278,995


256,028

Total current assets
 
12,462,294


12,414,217

Property, plant, and equipment, at cost:
 
 


 

Land
 
13,199


12,866

Buildings and improvements
 
158,686


160,664

Machinery and equipment
 
1,371,844


1,330,730

 
 
1,543,729


1,504,260

Less: Accumulated depreciation and amortization
 
(707,928
)

(665,785
)
Property, plant, and equipment, net
 
835,801


838,475

Investments in affiliated companies
 
86,186


88,347

Intangible assets, net
 
328,964


286,215

Goodwill
 
2,673,117


2,470,047

Other assets
 
362,446


361,966

Total assets
 
$
16,748,808


$
16,459,267

LIABILITIES AND EQUITY
 
 


 

Current liabilities:
 
 


 

Accounts payable
 
$
6,487,686


$
6,756,830

Accrued expenses
 
790,809


841,675

Short-term borrowings, including current portion of long-term debt
 
114,908


356,806

Total current liabilities
 
7,393,403


7,955,311

Long-term debt
 
3,690,327


2,933,045

Other liabilities
 
497,771


572,971

Commitments and contingencies (Note M)
 





Equity:
 
 


 

Shareholders' equity:
 
 


 

Common stock, par value $1:
 
 


 

Authorized - 160,000 shares in both 2018 and 2017, respectively
 
 


 

Issued - 125,424 shares in both 2018 and 2017, respectively
 
125,424


125,424

Capital in excess of par value
 
1,117,389


1,114,167

Treasury stock (38,040 and 37,733 shares in 2018 and 2017, respectively), at cost
 
(1,806,362
)

(1,762,239
)
Retained earnings
 
5,928,149


5,596,786

Accumulated other comprehensive loss
 
(245,809
)

(124,883
)
Total shareholders' equity
 
5,118,791


4,949,255

Noncontrolling interests
 
48,516


48,685

Total equity
 
5,167,307


4,997,940

Total liabilities and equity
 
$
16,748,808


$
16,459,267

 
See accompanying notes.

5

ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
Six Months Ended
  
 
June 30,
2018
 
July 1,
2017
 
 
 
 
(Adjusted)
Cash flows from operating activities:
 
 
 
 
Consolidated net income
 
310,910


216,966

Adjustments to reconcile consolidated net income to net cash used for operations:
 
 

 
Depreciation and amortization
 
93,669


74,522

Amortization of stock-based compensation
 
25,662


21,391

Equity in (earnings) losses of affiliated companies
 
156


(1,649
)
Loss on extinguishment of debt
 
—


58,759

Deferred income taxes
 
12,706


11,825

Other
 
10,622


5,208

Change in assets and liabilities, net of effects of acquired and disposed businesses:
 
 
 
 
Accounts receivable
 
(73,647
)

419,229

Inventories
 
(499,917
)

(149,945
)
Accounts payable
 
(240,725
)

(601,708
)
Accrued expenses
 
(516
)

(90,332
)
Other assets and liabilities
 
(123,769
)

(97,376
)
Net cash used for operating activities
 
(484,849
)

(133,110
)
Cash flows from investing activities:
 
 
 
 
Cash consideration paid for acquired businesses, net of cash acquired
 
(331,563
)

(2,534
)
Proceeds from disposition of businesses
 
34,291

 
—

Acquisition of property, plant, and equipment
 
(66,551
)

(101,906
)
Proceeds from sale of property, plant, and equipment
 
—


24,433

Other
 
(8,000
)

(3,000
)
Net cash used for investing activities
 
(371,823
)

(83,007
)
Cash flows from financing activities:
 
 
 
 
Change in short-term and other borrowings
 
59,613


40,274

Proceeds from long-term bank borrowings, net
 
759,334


241,818

Proceeds from note offerings, net
 
—


494,625

Redemption of notes
 
(300,000
)

(558,100
)
Proceeds from exercise of stock options
 
5,985


20,697

Repurchases of common stock
 
(72,551
)

(123,663
)
Purchase of shares from noncontrolling interest
 
—


(23,350
)
Other
 
(156
)

(945
)
Net cash provided by financing activities
 
452,225


91,356

Effect of exchange rate changes on cash
 
4,883


10,359

Net decrease in cash and cash equivalents
 
(399,564
)

(114,402
)
Cash and cash equivalents at beginning of period
 
730,083


534,320

Cash and cash equivalents at end of period
 
$
330,519


$
419,918


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, 2017, 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 (See Note B). These reclassifications are included in the footnote tables for the second quarter and six months ended June 30, 2018.

Note B – Impact of Recently Issued Accounting Standards

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) ("ASU No. 2018-02"). ASU No. 2018-02 provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period that is impacted by U.S. federal government tax legislation enacted in 2017 (the "Tax Act"). Effective January 1, 2018, the company adopted the provisions of ASU No. 2018-02 on a prospective basis as an adjustment to retained earnings of $4,116.

In August 2017, the 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 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. Effective January 1, 2018, the company adopted the provisions of ASU No. 2017-07 on a retrospective basis for the presentation requirements.

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 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. In July 2018 the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, and ASU No. 2018-11, Leases (Topic 842) Targeted Improvements, which provide supplemental adoption guidance and clarification to ASU No. 2016-02, and must be adopted concurrently with the adoption of ASU No. 2016-02, cumulatively referred to as “Topic 842”. Topic 842 is effective for

7
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

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 Topic 842, 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. Effective January 1, 2018, the company adopted the provisions of ASU No. 2016-01 on a prospective basis as an adjustment to retained earnings of $18,238.

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. 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, cumulatively referred to as "Topic 606".

On January 1, 2018, the company adopted Topic 606 applying the full retrospective method. The primary impact of adoption relates to the application of gross versus net indicators and the determination of whether goods and services are distinct. In addition, the company is deferring certain revenue due to the determination of when transfer of control occurs. The deferrals are expected to be recognized within a year of the transaction date.






























8
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)


The following table presents the effect of the adoption of Topic 606, ASU No. 2017-07, and other prior period reclassifications.
 
 
Quarter Ended July 1, 2017
 
Six Months Ended July 1, 2017
 
 
As Previously Reported
 
Adjustments**
 
Adjusted for New Standards
 
As Previously Reported
 
Adjustments**
 
Adjusted for New Standards
Sales
 
$
6,465,346


$
(43,120
)

$
6,422,226

 
$
12,224,898

 
$
(65,892
)
 
$
12,159,006

Cost of sales
 
5,641,380


(43,178
)

5,598,202

 
10,641,045

 
(67,260
)
 
10,573,785

Gross profit
 
823,966


58


824,024

 
1,583,853

 
1,368

 
1,585,221

Operating expenses:
 








 
 
 
 
 
 
Selling, general, and administrative expenses
 
532,347


(566
)

531,781

 
1,047,866

 
(559
)
 
1,047,307

Depreciation and amortization
 
37,381


—


37,381

 
74,522

 
—

 
74,522

Restructuring, integration, and other charges
 
24,416


—


24,416

 
39,921

 
—

 
39,921

 
 
594,144


(566
)

593,578

 
1,162,309

 
(559
)
 
1,161,750

Operating income
 
229,822


624


230,446

 
421,544

 
1,927

 
423,471

Equity in earnings of affiliated companies
 
724


—


724

 
1,649

 
—

 
1,649

Gain on investments, net
 
750


1,513


2,263

 
750

 
3,495

 
4,245

Loss on extinguishment of debt
 
58,759


—


58,759

 
58,759

 
—

 
58,759

Post-retirement expense
 
—


1,897


1,897

 
—

 
3,697

 
3,697

Interest and other financing expense, net
 
42,358


180


42,538

 
80,431

 
356

 
80,787

Income before income taxes
 
130,179


60


130,239

 
284,753

 
1,369

 
286,122

Provision for income taxes
 
29,575


17


29,592

 
68,799

 
357

 
69,156

Consolidated net income
 
100,604


43


100,647

 
215,954

 
1,012

 
216,966

Noncontrolling interests
 
925


—


925

 
2,507

 
—

 
2,507

Net income attributable to shareholders
 
$
99,679


$
43


$
99,722

 
$
213,447

 
$
1,012

 
$
214,459

Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic*
 
$
1.12


$
—


$
1.12

 
$
2.40

 
$
0.01

 
$
2.41

Diluted*
 
$
1.11


$
—


$
1.11

 
$
2.37

 
$
0.01

 
$
2.38

* The sum of the as previously reported and as adjusted may not agree to totals, as presented, due to rounding.
** Topic 606 impacted sales and cost of sales. ASU No. 2017-07 and other reclassifications impacted operating and non-operating expenses.


9
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

The following table presents the effect of the adoption of Topic 606, ASU No. 2017-07, and other prior period reclassifications for 2017.
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
Year to Date
 
As Previously Reported
Adjusted for New Standards
 
As Previously Reported
Adjusted for New Standards
 
As Previously Reported
Adjusted for New Standards
 
As Previously Reported
Adjusted for New Standards
 
As Previously Reported
Adjusted for New Standards
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
$
5,759,552

$
5,736,780

 
$
6,465,346

$
6,422,226

 
$
6,953,740

$
6,856,108

 
$
7,633,870

$
7,539,449

 
$
26,812,508

$
26,554,563

Cost of sales
4,999,665

4,975,583

 
5,641,380

5,598,202

 
6,110,382

6,013,541

 
6,703,742

6,610,269

 
23,455,169

23,197,595

Operating income
191,722

193,025

 
229,822

230,446

 
235,992

235,441

 
270,914

286,824

 
928,450

945,736

Net income attributable to shareholders
$
113,768

$
114,737

 
$
99,679

$
99,722

 
$
134,630

$
134,064

 
$
53,885

$
53,653

 
$
401,962

$
402,176


Operating income for the fourth quarter of 2017 was impacted by a reclassification of pension settlement expense of $16,706 due to the implementation of ASU No. 2017-07. The settlement expense was moved to "post-retirement expense", which is classified as non-operating on the statement of operations.
    
Note C – Significant Accounting Policies

Except for the changes below, no material changes have been made to the company's significant accounting policies disclosed in Note 1, Summary of Significant Accounting Policies, in its Annual Report on Form 10-K, filed on February 6, 2018, for the year ended December 31, 2017.

Revenue Recognition

Revenue is recognized at the point at which control of the underlying goods or services are transferred to the customer, which included determining whether goods and services are distinct and separate performance obligations, which may require significant judgment. Satisfaction of the company’s performance obligations occur upon the transfer of control of goods or services, either from the company’s facilities or directly from suppliers to customers. The company considers customer purchase orders, which in some cases are governed by master agreements, to be the contracts with a customer. All revenue is generated from contracts with customers.

In determining the transaction price, the company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the company expects to receive. The amount of consideration received and revenue recognized by the company vary due to contractually defined incentives and return rights that are held by customers. These adjustments are made in the same period as the underlying transactions.

Investments

The change in fair value of equity investments, for which the company does not possess the ability to exercise significant influence, are recognized in net income. The fair value of these equity investments are based upon readily determinable fair values (Note I).

Note D – Acquisitions

2018 Acquisitions

On January 8, 2018, the company acquired eInfochips for a purchase price of $327,628, which included $14,769 of cash acquired. eInfochips services customers at every phase of technology deployment, including custom hardware and software, and new Internet of Things based business models. eInfochips is recorded in the company's global components business segment.

Since the date of the acquisition, eInfochips sales of $40,856 were included in the company's consolidated results of operations.


10
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

The purchase price allocation is preliminary and subject to adjustment based on our final assessment of fair value of the acquired assets and liabilities. Items initially estimated and subject to change upon finalization of the valuation include goodwill, intangibles, and deferred taxes. The following table summarizes the preliminary allocation of the net consideration paid to the fair value of the assets acquired and liabilities assumed for the eInfochips acquisition:
Accounts receivable, net
$
13,701

Inventories
1,512

Property, plant, and equipment
4,557

Other assets
28,033

Identifiable intangible assets
71,710

Goodwill
225,937

Accounts payable
(521
)
Accrued expenses
(8,595
)
Deferred tax liability
(21,969
)
Other liabilities
(1,506
)
Cash consideration paid, net of cash acquired
$
312,859


In connection with the eInfochips acquisition, the company allocated $71,710 to customer relationships with a weighted-average life of 9 years.

The goodwill related to the eInfochips acquisition was recorded in the company's global components business segment.

During the first six months of 2018, the company completed one additional acquisition with a purchase price of approximately $18,704, net of cash acquired. The impact of this acquisition was not material to the company's consolidated financial position or results of operations.

The following table summarizes the company's unaudited consolidated results of operations for the second quarter and first six months of 2017, as well as the unaudited pro forma consolidated results of operations of the company, as though the 2018 acquisitions occurred on January 1, 2017:

 
Quarter Ended
 
Six Months Ended
  
July 1, 2017
 
July 1, 2017
 
As Reported
 
Pro Forma
 
As Reported
 
Pro Forma
Sales
$
6,422,226

 
$
6,460,139

 
$
12,159,006

 
$
12,234,218

Net income attributable to shareholders
99,722

 
100,410

 
214,459

 
215,632

Net income per share:
 
 
 
 
 
 
 
Basic
$
1.12

 
$
1.13

 
$
2.41

 
$
2.42

Diluted
$
1.11

 
$
1.12

 
$
2.38

 
$
2.39


2017 Acquisitions

During 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. In addition, the company completed two acquisitions for $3,628, 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 2017 acquisitions on the consolidated results of operations of the company for 2017, as though the acquisitions occurred on January 1, 2017, was also not material.


11
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Note E – 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, 2017 (a)
 
$
1,264,869

 
$
1,205,178

 
$
2,470,047

Acquisitions and related adjustments
 
225,937

 
14,175

 
240,112

Foreign currency translation adjustment
 
(17,896
)
 
(19,146
)
 
(37,042
)
Balance as of June 30, 2018 (a)
 
$
1,472,910

 
$
1,200,207

 
$
2,673,117


(a)
The total carrying value of goodwill for all periods in the table above is reflected net of $1,026,702 of accumulated impairment charges, of which $716,925 was recorded in the global components business segment and $309,777 was recorded in the global enterprise computing solutions business segment.

Intangible assets, net, are comprised of the following as of June 30, 2018:
 
 
Weighted-Average Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Non-amortizable trade names
 
indefinite
 
$
101,000

 
$
—

 
$
101,000

Customer relationships
 
10 years
 
426,441

 
(201,988
)
 
224,453

Developed technology
 
5 years
 
6,340

 
(3,677
)
 
2,663

Amortizable trade name
 
5 years
 
2,408

 
(1,560
)
 
848

 
 
 
 
$
536,189

 
$
(207,225
)
 
$
328,964


Intangible assets, net, are comprised of the following as of December 31, 2017:
 
 
Weighted-Average Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Non-amortizable trade names
 
indefinite
 
$
101,000

 
$
—

 
$
101,000

Customer relationships
 
10 years
 
440,167

 
(259,337
)
 
180,830

Developed technology
 
5 years
 
6,340

 
(3,043
)
 
3,297

Amortizable trade name
 
5 years
 
2,409

 
(1,321
)
 
1,088

 
 
 
 
$
549,916

 
$
(263,701
)
 
$
286,215


During the second quarter of 2018 and 2017, the company recorded amortization expense related to identifiable intangible assets of $11,955 and $12,364, respectively. During the first six months of 2018 and 2017, amortization expense related to identifiable intangible assets was $25,475 and $25,264, respectively.

Note F – 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.


12
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

The following table presents the company's investment in affiliated companies:
  
 
June 30,
2018
 
December 31,
2017
Marubun/Arrow
 
$
71,857

 
$
70,167

Other
 
14,329

 
18,180

 
 
$
86,186

 
$
88,347


The equity in earnings (losses) of affiliated companies consists of the following:
  
 
Quarter Ended
 
Six Months Ended
  
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Marubun/Arrow
 
$
1,483

 
$
1,617

 
$
2,574

 
$
3,282

Other
 
(966
)
 
(893
)
 
(2,730
)
 
(1,633
)
 
 
$
517

 
$
724

 
$
(156
)
 
$
1,649


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 30, 2018, the company's pro-rata share of this debt was approximately $3,140. There were no outstanding borrowings under the third party debt agreements of the joint ventures as of December 31, 2017. The company believes there is sufficient equity in each of the joint ventures to meet the obligations. 

Note G – Accounts Receivable

Accounts receivable, net, consists of the following:
 
 
June 30,
2018
 
December 31,
2017
Accounts receivable
 
$
8,138,078

 
$
8,181,879

Allowances for doubtful accounts
 
(61,182
)
 
(56,291
)
 
 
$
8,076,896

 
$
8,125,588


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, which are included in "Accounts receivable, net" in the company's consolidated balance sheets.  One such customer, with a combined note and accounts receivable balance of approximately $24,252 and $24,600 as of June 30, 2018 and December 31, 2017, respectively, became delinquent on its repayment of the note during the fourth quarter of 2016.  The company believes that it has adequately reserved for potential losses; however, it is possible that it could incur a loss in excess of the reserve.

Note H – Debt

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

 
 
June 30,
2018
 
December 31,
2017
3.00% notes, due 2018
 
$
—

 
$
299,857

Borrowings on lines of credit
 
70,000

 
—

Other short-term borrowings
 
44,908

 
56,949

 
 
$
114,908

 
$
356,806



13
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Other short-term borrowings are primarily utilized to support working capital requirements. The weighted-average interest rate on these borrowings was 2.3% and 2.6% at June 30, 2018 and December 31, 2017, respectively.

Long-term debt consists of the following:
 
 
June 30,
2018
 
December 31,
2017
Revolving credit facility
 
$
57,700

 
$
—

Asset securitization program
 
1,200,000

 
490,000

6.00% notes, due 2020
 
209,059

 
208,971

5.125% notes, due 2021
 
130,473

 
130,400

3.50% notes, due 2022
 
346,899

 
346,518

4.50% notes, due 2023
 
297,369

 
297,122

3.25% notes, due 2024
 
493,618

 
493,161

4.00% notes, due 2025
 
345,469

 
345,182

7.50% senior debentures, due 2027
 
109,735

 
109,694

3.875% notes, due 2028
 
493,826

 
493,563

Other obligations with various interest rates and due dates
 
6,179

 
18,434

 
 
$
3,690,327

 
$
2,933,045


The 7.50% senior debentures are not redeemable prior to their maturity.  All other 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 30,
2018
 
December 31,
2017
3.00% notes, due 2018
 
$
—

 
$
300,500

6.00% notes, due 2020
 
218,000

 
224,000

5.125% notes, due 2021
 
135,500

 
139,000

3.50% notes, due 2022
 
345,500

 
355,000

4.50% notes, due 2023
 
304,500

 
315,500

3.25% notes, due 2024
 
468,000

 
491,000

4.00% notes, due 2025
 
342,500

 
356,500

7.50% senior debentures, due 2027
 
131,500

 
138,500

3.875% notes, due 2028
 
473,500

 
501,000


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 June 30, 2018), which is based on the company's credit ratings, or an effective interest rate of 2.41% at June 30, 2018. The facility fee, which is based on the company's credit ratings, was .20% of the total borrowing capacity at June 30, 2018. The company had $57,700 in outstanding borrowings under the revolving credit facility at June 30, 2018. The company had no outstanding borrowings under the revolving credit facility at December 31, 2017.


14
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

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 June 30, 2018 and December 31, 2017. The program had an effective interest rate of 2.56% for the second quarter of 2018.

The company has an asset securitization program collateralized by accounts receivable of certain of its subsidiaries. In June 2018, the company amended its asset securitization program and, among other things, increased its borrowing capacity from $910,000 to $1,200,000 and extended its term to mature to June 2021. 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 plus a spread (.40% at June 30, 2018), or an effective interest rate of 2.57% at June 30, 2018. The facility fee is .40% of the total borrowing capacity.

At June 30, 2018 and December 31, 2017, the company had $1,200,000 and $490,000, 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 $2,525,100 and $2,270,500, 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 covenants as of June 30, 2018 and is currently not aware of any events that would cause non-compliance with any covenants in the future.  

The company has $200,000 in uncommitted lines of credit. There were $70,000 of outstanding borrowings under the uncommitted lines of credit at June 30, 2018 and no outstanding borrowings at December 31, 2017. These borrowings were provided on a short-term basis and the maturity is agreed upon between the company and the lender. The lines had an effective interest rate of 2.79% at June 30, 2018.

During March 2018, the company redeemed $300,000 principal amount of its 3.00% notes due March 2018.

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 $58,759 for the first six 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 were 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 $11,303 and $20,557 for the second quarter and first six months of 2018, respectively. Interest and other financing expense, net, includes interest and dividend income of $7,084 and $15,010 for the second quarter and first six months of 2017, respectively.


15
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Note I – 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 30, 2018:
 
 
Balance Sheet
Location
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents (a)
 
Cash and cash equivalents/
other assets
 
$
16,292

 
$
—

 
$
—

 
$
16,292

Equity investments (b)
 
Other assets
 
45,683

 
—

 
—

 
45,683

Interest rate swaps
 
Other liabilities
 
—

 
(679
)
 
—

 
(679
)
Foreign exchange contracts
 
Other current assets
 
—

 
8,907

 
—

 
8,907

Foreign exchange contracts
 
Accrued expenses
 
—

 
(2,383
)
 
—

 
(2,383
)
Contingent consideration
 
Accrued expenses
 
—

 
—

 
(3,184
)
 
(3,184
)
 
 
 
 
$
61,975

 
$
5,845

 
$
(3,184
)
 
$
64,636


The following table presents assets (liabilities) measured at fair value on a recurring basis at December 31, 2017:
 
 
Balance Sheet
Location
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents (c)
 
Cash and cash equivalents/
other assets
 
$
3,267

 
$
286,671

 
$
—

 
$
289,938

Equity investments (b)
 
Other assets
 
52,683

 
—

 
—

 
52,683

Interest rate swaps
 
Other liabilities
 
—

 
(149
)
 
—

 
(149
)
Foreign exchange contracts
 
Other current assets
 
—

 
5,499

 
—

 
5,499

Foreign exchange contracts
 
Accrued expenses
 
—

 
(8,581
)
 
—

 
(8,581
)
Contingent consideration
 
Accrued expenses
 
—

 
—

 
(3,176
)
 
(3,176
)
 
 
 
 
$
55,950

 
$
283,440

 
$
(3,176
)
 
$
336,214

(a)
Cash equivalents include highly liquid investments with an original maturity of less than three months.
(b)
The company has an 8.4% equity ownership interest in Marubun Corporation and a portfolio of mutual funds with quoted market prices.
(c)
Cash equivalents at December 31, 2017 included $286,671 invested in certificates of deposit, with an original maturity of less than three months, held in anticipation of our acquisition of eInfochips, which closed in January 2018 (see Note D).

Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to goodwill and identifiable intangible assets (see Note D and E). The company tests these assets for impairment if indicators of potential impairment exist or at least annually if indefinite lived. 

During the second quarter and first six months of 2018 and 2017, there were no transfers of assets (liabilities) measured at fair value between the three levels of the fair value hierarchy.

16
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.

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 June 30, 2018 and December 31, 2017, all outstanding interest rate swaps were designated as fair value hedges.

The terms of our outstanding interest rate swap contracts at June 30, 2018 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, Indian Rupee, British Pound, Swedish Krona, 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 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 30, 2018 and December 31, 2017 was $596,899 and $504,084, 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 second quarter and first six months of 2018 and 2017.

17
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)


The effects of derivative instruments on the company's consolidated statements of operations and other comprehensive income are as follows:
  
 
Quarter Ended
 
Six Months Ended
 
 
June 30,
2018

July 1,
2017
 
June 30,
2018
 
July 1,
2017
Gain (Loss) Recognized in Consolidated Net Income
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
6,260

 
$
(2,223
)
 
$
518

 
$
(11,162
)
Interest rate swaps
 
(308
)
 
(163
)
 
(611
)
 
(321
)
Total
 
$
5,952

 
$
(2,386
)
 
$
(93
)
 
$
(11,483
)
Gain (Loss) Recognized in Other Comprehensive Income before reclassifications
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
(58
)
 
$
(1,043
)
 
$
(1,135
)
 
$
(867
)
Interest rate swaps
 
$
—

 
$
(1,053
)
 
$
—

 
$
(1,053
)


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 J – Restructuring, Integration, and Other Charges

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. The following table presents the components of the restructuring, integration, and other charges:
 
 
Quarter Ended
 
Six Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Restructuring and integration charges - current period actions
 
$
8,798

 
$
14,263

 
$
20,230

 
$
22,246

Restructuring and integration charges - actions taken in prior periods
 
2,931

 
3,996

 
4,280

 
6,098

Other charges
 
7,454

 
6,157

 
15,844

 
11,577

 
 
$
19,183

 
$
24,416

 
$
40,354

 
$
39,921


2018 Restructuring and Integration Charges

The following table presents the components of the 2018 restructuring and integration charges and activity in the related restructuring and integration accrual for the first six months of 2018:
 
 
Personnel
Costs
 
Facilities Costs
 
Other
 
Total
Restructuring and integration charges
 
$
10,496

 
$
9,560

 
$
174

 
$
20,230

Payments
 
(7,592
)
 
(1,820
)
 
(18
)
 
(9,430
)
Foreign currency translation
 
(85
)
 
(151
)
 
(4
)
 
(240
)
Balance as of June 30, 2018
 
$
2,819

 
$
7,589

 
$
152

 
$
10,560


18
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)


2017 Restructuring and Integration Charges

The following table presents the activity in the restructuring and integration accrual for the first six months of 2018 related to restructuring and integration actions taken in 2017:
 
 
Personnel 
Costs
 
Facilities Costs
 
Other
 
Total
Balance as of December 31, 2017
 
$
15,276

 
$
4,874

 
$
100

 
$
20,250

Restructuring and integration charges
 
1,308

 
2,267

 
(7
)
 
3,568

Payments
 
(10,106
)
 
(1,934
)
 
(25
)
 
(12,065
)
Foreign currency translation
 
(67
)
 
(129
)
 
(4
)
 
(200
)
Balance as of June 30, 2018
 
$
6,411

 
$
5,078

 
$
64

 
$
11,553


Restructuring and Integration Accruals Related to Actions Taken Prior to 2017

Included in restructuring, integration, and other charges for the first six months of 2018 are restructuring and integration charges of $712 related to restructuring and integration actions taken prior to 2017. The restructuring and integration charge (credits) includes adjustments to personnel costs of $(91) and facilities costs of $818, and other costs of $(15). The restructuring and integration accruals at June 30, 2018 related to actions taken prior to 2017 of $8,994 include accruals for personnel costs of $7,585, accruals for facilities costs of $1,281, and accruals for other costs of $128.

Restructuring and Integration Accrual Summary

The restructuring and integration accruals aggregate to $31,107 at June 30, 2018, all of which are expected to be spent in cash, and are expected to be utilized as follows:

•
The accruals for personnel costs totaling $16,815 relate to the termination of personnel that have scheduled payouts of $11,087 in 2018, $4,268 in 2019, $1,402 in 2020, and $58 in 2021.
•
The accruals for facilities totaling $13,948 relate to vacated leased properties that have scheduled payments of $3,911 in 2018, $2,780 in 2019, $2,185 in 2020, $1,367 in 2021, $1,068 in 2022, and $2,637 thereafter.
•
Other accruals of $344 are expected to be spent within one year.

Other Charges

Included in restructuring, integration, and other charges for the second quarter and first six months of 2018 are other expenses of $7,454 and $15,844, respectively. Included in these expenses are acquisition-related charges of $1,384 and $7,538, 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.

Included in restructuring, integration, and other charges for the second quarter and first six months of 2017 are other expenses of $6,157 and $11,577, respectively. Included in these expenses are acquisition-related charges of $1,324 and $4,003, 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.


19
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Note K – 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 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net income attributable to shareholders
 
$
169,915

 
$
99,722

 
$
309,009

 
$
214,459

Weighted-average shares outstanding - basic
 
87,802

 
88,876

 
87,878

 
89,079

Net effect of various dilutive stock-based compensation awards
 
850

 
961

 
963

 
1,067

Weighted-average shares outstanding - diluted
 
88,652

 
89,837

 
88,841

 
90,146

Net income per share:
 
 

 
 

 
 
 
 
Basic
 
$
1.94

 
$
1.12

 
$
3.52

 
$
2.41

Diluted (a)
 
$
1.92

 
$
1.11

 
$
3.48

 
$
2.38


(a)
Stock-based compensation awards for the issuance of 915 and 515 shares for the second quarter and first six months of 2018 and 432 and 328 shares for the second quarter and first six months of 2017, respectively, were excluded from the computation of net income per share on a diluted basis as their effect was anti-dilutive.


20
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Note L – Shareholders' Equity

Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in Accumulated other comprehensive income (loss), excluding noncontrolling interests:
 
 
Quarter Ended
 
Six Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Foreign Currency Translation Adjustment and Other:
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications (a)
 
$
(146,203
)
 
$
132,256

 
$
(99,803
)
 
$
169,837

Amounts reclassified into income
 
1,055

 
(1,312
)
 
(123
)
 
(2,647
)
Unrealized Gain (Loss) on Investment Securities, Net:
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 
—

 
1,554

 
—

 
3,282

Amounts reclassified into income
 
—

 
—

 
—

 
—

Unrealized Gain (Loss) on Interest Rate Swaps Designated as Cash Flow Hedges, Net:
 
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications
 
—

 
(647
)
 
—

 
(647
)
Amounts reclassified into income
 
231

 
100

 
459

 
197

Employee Benefit Plan Items, Net:
 
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications
 
—

 
(48
)
 
—

 
(43
)
Amounts reclassified into income
 
613

 
553

 
895

 
954

Other:
 
 
 
 
 
 
 
 
Reclassification to retained earnings (b)
 
—

 
—

 
(22,354
)
 
—

Net change in Accumulated other comprehensive income (loss)
 
$
(144,304
)
 
$
132,456

 
$
(120,926
)
 
$
170,933


(a)
Includes intra-entity foreign currency transactions that are of a long-term investment nature of $26,698 and $14,774 for the second quarter and first six months of 2018 and $(36,503) and $(36,180) for the second quarter and first six months of 2017, respectively.
(b)
Amounts relate to unrealized gains and losses on investments and stranded tax effects reclassified from "Accumulated other comprehensive income" to "Retained earnings" in accordance with ASU No. 2018-02 and ASU No. 2016-01 (Note B).

Share-Repurchase Program

The following table shows the company's Board of Directors (the "Board") approved share-repurchase programs as of June 30, 2018:
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
December 2016
 
$
400,000

 
$
101,361

 
$
298,639


21
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)


Note M – 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 is complete and has been approved by ADEM. Approximately $5,900 was spent to date and the company currently anticipates no additional investigative and related expenditures. The nature and scope of 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 $4,300 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.


22
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 $63,200 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 $16,000 to $26,700. 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.


23
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

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 and managed service providers 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, by segment by geographic area, are as follows:
 
 
Quarter Ended
 
Six Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Components:
 
 
 
 
 
 
 
 
Americas
 
$
1,937,882

 
$
1,700,241

 
$
3,734,580

 
$
3,263,786

EMEA (a)
 
1,447,972

 
1,192,393

 
2,926,358

 
2,310,672

Asia/Pacific
 
1,898,510

 
1,569,716

 
3,553,358

 
2,946,695

Global components
 
$
5,284,364

 
$
4,462,350

 
$
10,214,296

 
$
8,521,153

 
 
 
 
 
 
 
 
 
ECS:
 
 
 
 
 
 
 
 
Americas
 
$
1,387,034

 
$
1,307,245

 
$
2,582,445

 
$
2,401,888

EMEA
 
721,130

 
652,631

 
1,471,400

 
1,235,965

Global ECS
 
$
2,108,164

 
$
1,959,876

 
$
4,053,845

 
$
3,637,853

Consolidated (b)
 
$
7,392,528

 
$
6,422,226

 
$
14,268,141

 
$
12,159,006


(a)
Defined as Europe, the Middle East, and Africa.

(b)
Includes sales related to the United States of $2,968,469 and $5,618,137 for the second quarter and first six months of 2018 and $2,667,958 and $5,010,086 for the second quarter and first six months of 2017, respectively.

Operating income (loss), by segment, are as follows:
 
 
Quarter Ended
 
Six Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Operating income (loss):
 
 

 
 

 
 
 
 
Global components
 
$
253,840

 
$
197,164

 
$
483,386

 
$
370,697

Global ECS
 
109,417

 
106,761

 
193,223

 
188,950

Corporate (c)
 
(76,430
)
 
(73,479
)
 
(153,787
)
 
(136,176
)
Consolidated
 
$
286,827

 
$
230,446

 
$
522,822

 
$
423,471


(c)
Includes restructuring, integration, and other charges of $19,183 and $40,354 for the second quarter and first six months of 2018 and $24,416 and $39,921 for the second quarter and first six months of 2017, respectively, as well as a net loss on the disposition of businesses of $1,562 for the first six months of 2018.


24
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)

Total assets, by segment, is as follows:
 
 
June 30,
2018
 
December 31,
2017
Global components
 
$
11,630,360

 
$
10,229,168

Global ECS
 
4,491,916

 
5,426,675

Corporate
 
626,532

 
803,424

Consolidated
 
$
16,748,808

 
$
16,459,267


Net property, plant, and equipment, by geographic area, is as follows:
 
 
June 30,
2018
 
December 31,
2017
Americas (d)
 
$
687,594

 
$
688,637

EMEA
 
106,226

 
108,232

Asia/Pacific
 
41,981

 
41,606

Consolidated
 
$
835,801