Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4482
ARROW ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
(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) | |
| 50 Marcus Drive, Melville, New York | 11747 | |
| (Address of principal executive offices) | (Zip Code) |
(631) 847-2000
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
|
Name of each exchange on which registered | |
Common Stock, $1 par value
|
New York Stock Exchange | |
Preferred Share Purchase Rights
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X] No [ ]
Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Yes [ ] No [X]
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 [ ]
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Yes [ ] No [X]
The aggregate market value of voting stock held by non-affiliates of the registrant as of the last business day of the
registrant’s most recently completed second fiscal quarter was $4,658,631,941.
There
were 122,965,945 shares of Common Stock outstanding as of February 1, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement related to the registrant’s Annual Meeting of Shareholders, to be held May 2, 2008, is
incorporated by reference in Part III to the extent described therein.
TABLE OF CONTENTS
Table of Contents
PART I
Item 1. Business.
Arrow Electronics, Inc. (the “company” or “Arrow”) is a global provider of products, services, and
solutions to industrial and commercial users of electronic components and enterprise computing
solutions. The company believes it is a leader in the electronics distribution industry in
operating systems, employee productivity, value-added programs, and total quality assurance.
Arrow, which was incorporated in New York in 1946, serves approximately 700 suppliers and approximately 140,000 original equipment manufacturers (“OEMs”),
contract manufacturers (“CMs”), and commercial customers.
Serving its industrial and commercial customers as a supply channel partner, the company offers
both a wide spectrum of products and a broad range of services and solutions, including materials
planning, design services, programming and assembly services, inventory management, and a
comprehensive suite of online supply chain tools.
Arrow’s diverse worldwide customer base consists of OEMs, CMs, and commercial customers. Customers
include manufacturers of consumer and industrial equipment (including machine tools, factory
automation, and robotic equipment), telecommunications products, automotive and transportation,
aircraft and aerospace equipment, scientific and medical devices, and computer and office products.
Customers also include value-added resellers (“VARs”) of enterprise computing solutions.
The company maintains over 240 sales facilities and 24 distribution and value-added centers in 50
countries and territories, serving over 70 countries and territories. Through this network, Arrow
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 reduce their time to market, lower their total cost of ownership, and enhance their
overall competitiveness.
The company distributes electronic components to OEMs and CMs through its global components
business segment and provides enterprise computing solutions to VARs through its global enterprise
computing solutions (“ECS”) business segment. For 2007, approximately 70% of the company’s sales
consisted of electronic components, and approximately 30% of the company’s sales consisted of
enterprise computing solutions. The financial information about the company’s business segments
and geographic operations can be found in Note 16 of the Notes to Consolidated Financial
Statements.
Global Components
The company’s global components business segment, one of the largest distributors of electronic
components and related services in the world, spans the world’s three largest electronics markets -
North America, EMEASA (Europe, Middle East, Africa, and South America), and the Asia Pacific
region. North America includes sales and marketing organizations in the United States, Canada, and
Mexico.
In the EMEASA region, Arrow operates in Argentina, Austria, Belgium, Brazil, Czech Republic,
Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Israel, Italy, Latvia,
Lithuania, Netherlands, Norway, Poland, Portugal, Romania, the Russian Federation, Slovakia,
Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, and the United Kingdom.
In the Asia Pacific region, Arrow operates in Australia, China, Hong Kong, India, Japan, Korea,
Malaysia, New Zealand, Philippines, Singapore, Taiwan, and Thailand.
Within the global components business segment, approximately 68% of the company’s sales primarily
consist of semiconductor products and related services, approximately 23% are of passive,
electromechanical, and interconnect products, consisting primarily of capacitors, resistors,
potentiometers, power supplies, relays, switches, and connectors, and approximately 9% are of
computing and memory products.
Most of the company’s customers require delivery of the products they ordered on schedules that are
generally not available on direct purchases from manufacturers, and frequently, their orders are of
insufficient size to be placed directly with manufacturers.
Most manufacturers of electronic components rely on authorized distributors, such as the company,
to augment their sales and marketing operations. As a marketing, stocking, and financial
intermediary, the distributor
3
Table of Contents
relieves manufacturers of a portion of the costs and personnel associated with selling and stocking
their products (including otherwise sizable investments in finished goods inventories, accounts
receivable systems, and distribution networks), while providing geographically dispersed selling,
order processing, and delivery capabilities. At the same time, the distributor offers a broad
range of customers the convenience of accessing, from a single source, multiple products from
multiple suppliers and rapid or scheduled deliveries, as well as other value-added services, such
as materials management, memory programming capabilities, and financing solutions. The growth of
the electronics distribution industry is fostered by the many manufacturers who recognize their
authorized distributors as essential extensions of their marketing organizations.
Global ECS
The company’s global ECS business segment is a leading distributor of enterprise and midrange
computing products, services, and solutions to VARs in North America and Europe. Over the past two
years, the company has transformed its enterprise computing solutions business into a stronger
organization with broader geographic reach, increased market share in the fast-growing product
segments of software and storage, and a more robust customer and supplier base. Execution on the
company’s strategic objectives resulted in the global ECS business segment becoming a leading
value-added distributor of enterprise products for IBM and Hewlett-Packard and a leading
distributor of enterprise storage and security and virtualization software. Since December 2005,
global ECS’ geographic footprint expanded from two countries to 22 countries around the world,
including Austria, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, Germany,
Hungary, Latvia, Lithuania, Norway, Poland, Romania, Serbia, Slovakia, Slovenia, Sweden,
Switzerland, the United Kingdom, and the United States.
The company’s global ECS business segment has made several recent acquisitions with the strategic
goal of becoming the premier enterprise computing solutions distributor. The business began its
global expansion in December 2005 with the acquisition of DNSint.com AG (“DNS”), a leading
value-added enterprise distributor based in Munich, Germany. DNS represented Arrow’s first foray
into the European enterprise computing solutions marketplace and became the strategic platform to
expand the company’s ECS business throughout the European region.
In February 2006, the global ECS business segment acquired SKYDATA Corporation, a Canadian value-added
distributor of data storage solutions.
In November 2006, the global ECS business segment acquired Alternative Technology, Inc.
(“Alternative Technology”), a leading specialty software distributor of access infrastructure,
security, and virtualization solutions in North America. This transaction created significant
opportunities in the fast-growing value-added software market. The global ECS business segment’s
software and storage capabilities were further strengthened through its acquisition of InTechnology
Distribution plc’s specialist distribution division (“InTechnology”) in December 2006. Based in
Harrogate, England, the InTechnology transaction extended the business’ operations into the United
Kingdom, the second largest information technology market in Europe.
Continuing its strategic expansion, the global ECS business segment acquired substantially all of
the assets and operations of its KeyLink Systems Group business (“KeyLink”) from Agilysys, Inc.
(“Agilysys”) in March 2007. The acquisition of KeyLink, a leading value-added distributor of
enterprise servers, storage and software in the United States and Canada, brought considerable
scale, cross-selling opportunities and mid-market reseller focus to the company’s global ECS
business segment. The company’s global ECS business segment also entered into a long-term
procurement agreement with Agilysys.
In September 2007, the global ECS business segment acquired Centia Group Limited and AKS Group AB
(“Centia/AKS”), specialty distributors of access infrastructure, security and virtualization
software solutions in Europe.
Within the global ECS business segment, approximately 63% of the company’s sales consist of
enterprise and embedded computing systems and related services, 20% consist of software, and 17%
consist of storage.
Information technology (“IT”) demands for today’s businesses are evolving. As IT needs become more
complex, corporate information officers are increasingly seeking products bundled into solutions
that support business communication, operations, processes, and transactions.
Mid-market and enterprise end users rely on VARs for their IT needs, and global ECS works with
these VARs to tailor complex, highly-technical solutions for the end user. VARs range in size from
small- and medium-
4
Table of Contents
sized businesses to large enterprises and are typically structured as sales organizations and
service providers. They purchase enterprise computing solutions from distributors and
manufacturers and resell them to end users. The increasing complexity of these solutions and
increasing demand for bundled solutions is changing how VARs go to market and increasing the
importance of the value-added services global ECS provides. Global ECS provides VARs with many
value-added services, including but not limited to, vertical market expertise, systems level
training and certification, solutions testing at Arrow solutions labs, financing support, marketing
augmentation, complex order configuration, and access to a one-stop-shop for mission critical
solutions. Global ECS’ vendor partners benefit from affordable mid-market access, demand creation,
speed to market, and enhanced supply chain efficiency. For vendors, global ECS is the aggregation
point to over 12,000 VARs.
In better serving the needs of both the manufacturers and VARs, the company’s focus is to be an
extension of the manufacturer’s sales and marketing organization and manage the supply chain, as
well as to leverage the company’s strong relationships with the world’s foremost hardware, software
and storage manufacturers to better enable VARs to deliver solutions to their customers.
Customers and Suppliers
The company and its affiliates serve approximately 140,000 industrial and commercial customers.
Industrial customers range from major OEMs and CMs to small engineering firms, while commercial
customers primarily include VARs and OEMs. No single customer accounted for more than 2% of the
company’s 2007 consolidated sales.
The products offered by the company are sold by both field sales representatives, who regularly
call on customers in assigned market areas, and by inside sales personnel, who call on customers by
telephone from the company’s selling locations. The company also has sales teams that focus on
small and emerging customers where sales representatives regularly call on customers by telephone
from centralized selling locations, and inbound sales agents serve customers that call into the
company.
Each of the company’s North American selling locations and primary distribution centers in the
global components business segment are electronically linked to the company’s central computer
system, which provides fully integrated, online, real-time data with respect to nationwide
inventory levels and facilitates control of purchasing, shipping, and billing. The company’s
international operations in the global components business segment have similar online, real-time
computer systems, and they can also access the company’s Worldwide Stock Check System, which
provides access to the company’s online, real-time inventory system.
The company sells the products of approximately 700 suppliers. Sales from products and services
from IBM accounted for approximately 10% of the company’s consolidated sales in 2007. No other
single supplier accounted for more than 10% of the company’s consolidated sales in 2007. The
company believes that many of the products it sells are available from other sources at competitive
prices. However, certain parts of the company’s business, such as the company’s global ECS
business segment, rely on a limited number of suppliers with the strategy of providing focused
support, deep product knowledge, and customized service to manufacturers and VARs. Most of the
company’s purchases are pursuant to authorized distributor agreements, which are typically
cancelable by either party at any time or on short notice.
Distribution Agreements
It is the policy of most manufacturers to protect authorized distributors, such as the company,
against the potential write-down of inventories due to technological change or manufacturers’ price
reductions. Write-downs of inventories to market value are based upon contractual provisions,
which typically provide certain protections to the company for product obsolescence and price
erosion in the form of return privileges and price protection. Under the terms of the related
distributor agreements and assuming the distributor complies with certain conditions, such
suppliers are required to credit the distributor for reductions in manufacturers’ list prices. As
of December 31, 2007, this type of arrangement covered approximately 80% of the company’s
consolidated inventories. In addition, under the terms of many such agreements, the distributor
has the right to return to the manufacturer, for credit, a defined portion of those inventory items
purchased within a designated period of time.
A manufacturer, which elects to terminate a distribution agreement, is generally required to
purchase from the distributor the total amount of its products carried in inventory. As of
December 31, 2007, this type of repurchase arrangement covered approximately 78% of the company’s
consolidated inventories.
5
Table of Contents
While these industry practices do not wholly protect the company from inventory losses, the company
believes that they currently provide substantial protection from such losses.
Competition
The company’s business is extremely competitive, particularly with respect to prices, franchises,
and, in certain instances, product availability. The company competes with several other large
multinational and national distributors, as well as numerous regional and local distributors. As
one of the world’s largest electronics distributors, the company’s financial resources and sales
are greater than most of its competitors.
Employees
The company and its affiliates employed approximately 12,600 employees worldwide as of December 31,
2007.
Available Information
The company makes the annual report on Form 10-K, quarterly reports on Form 10-Q, any current
reports on Form 8-K, and amendments to any of these reports available through its website
(http://www.arrow.com) as soon as reasonably practicable after the company files such
material with the U.S. Securities and Exchange Commission (“SEC”). The information posted on the
company’s website is not incorporated into this annual report on Form 10-K. In addition, the SEC
maintains a website (http://www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC. The
annual report on Form 10-K for the year ended December 31, 2007, includes the certifications of the
company’s Chief Executive Officer and Chief Financial Officer as Exhibits 31 (i) and 31 (ii),
respectively, which were filed with the SEC as required under Section 302 of the Sarbanes-Oxley Act
of 2002 and certify the quality of the company’s public disclosure. The company’s Chief Executive
Officer has also submitted a certification to the New York Stock Exchange (the “NYSE”) certifying
that he is not aware of any violations by the company of NYSE corporate governance listing
standards.
6
Table of Contents
Executive Officers
The following table sets forth the names, ages, and the positions held by each of the executive
officers of the company as of February 8, 2008:
| Name | Age | Position | ||||
| William E. Mitchell | 63 | Chairman, President, and Chief Executive Officer |
||||
| Peter S. Brown | 57 | Senior Vice President, General Counsel, and Secretary |
||||
| Kevin J. Gilroy | 52 | Senior Vice President and President, Arrow Enterprise
Computing Solutions |
||||
| Michael J. Long | 49 | Senior Vice President and President, Arrow Global Components |
||||
| John P. McMahon | 56 | Senior Vice President, Human Resources |
||||
| M. Catherine Morris | 49 | Senior Vice President and President, Arrow Enterprise
Computing Solutions |
||||
| Paul J. Reilly | 51 | Senior Vice President and Chief Financial Officer |
||||
| Vincent P. Melvin | 44 | Vice President and Chief Information Officer |
||||
Set forth below is a brief account of the business experience during the past five years of each
executive officer of the company.
William E. Mitchell was appointed Chairman of the company in May 2006. He has been President and
Chief Executive Officer of the company since February 2003. Prior to joining the company, he
served as Executive Vice President of Solectron Corporation and President of Solectron Global
Services, Inc. since March 1999.
Peter S. Brown has been Senior Vice President, General Counsel, and Secretary of the company for
more than five years.
Kevin J. Gilroy was appointed Senior Vice President of the company and President, Arrow Enterprise
Computing Solutions in January 2007. Prior to joining the company, he served as President and
Chief Executive Officer of OnForce, Inc. from May 2006 to December 2006 and Executive Vice
President and General Manager of OnForce, Inc. from November 2005 to May 2006. He also was an
independent consultant from October 2005 to November 2005. Prior thereto, he spent over
twenty-four years at Hewlett-Packard Company, most recently as Senior Vice President and General
Manager of Worldwide SMB Operations Segment from May 2004 to October 2005, and Vice President and
General Manager of Americas Commercial Channels from January 2002 to May 2004.
Michael J. Long was appointed Senior Vice President of the company in January 2006 and, prior
thereto, he served as Vice President of the company for more than five years. He was appointed
President, Arrow Global Components in September 2006. Prior thereto, he served as President, North
America and Asia/Pacific Components from January 2006 until September 2006; President, North
America from May 2005 to December 2005; and President and Chief Operating Officer of Arrow
Enterprise Computing Solutions from July 1999 to April 2005.
John P. McMahon was appointed Senior Vice President, Human Resources in March 2007. Prior to
joining the company, he served as Senior Vice President and Chief Human Resource Officer of UMass
Memorial Health Care System from August 2005 to March 2007; Senior Vice President of Global Human
Resources at Fisher Scientific from June 2004 to June 2005; and Chief Human Resources Officer at
Terra Lycos from August 1999 to May 2004.
M. Catherine Morris was appointed Senior Vice President of the company and President, Arrow
Enterprise Computing Solutions in January 2007. Prior thereto, she served as Acting President,
Arrow Enterprise Computing Solutions from September 2006 to December 2006; Vice President, Support
Services, North America from October 2005 to August 2006; and Vice President, Finance and Support
Services, Enterprise Computing Solutions from September 2002 to September 2005.
Paul J. Reilly was appointed Senior Vice President of the company in May 2005 and, prior thereto,
he served as Vice President of the company for more than five years. He has been Chief Financial
Officer of the company for more than five years.
7
Table of Contents
Vincent P. Melvin was appointed Vice President and Chief Information Officer of the company in
September 2006. Prior to joining the company, he served as Senior Vice President and Chief
Information Officer of Sanmina-SCI, Inc. from December 2001 to September 2006.
Item 1A. Risk Factors.
Described below and throughout this report are certain risks that the company’s management believes
are applicable to the company’s business and the industry in which it operates. There may be
additional risks that are not presently material or known. There are also risks within the
economy, the industry and the capital markets that affect business generally, and the company as
well, which are not described.
If any of the described events occur, the company’s business, results of operations, financial
condition, liquidity, or access to the capital markets could be materially adversely affected.
When stated below that a risk may have a material adverse effect on the company’s business, it
means that such risk may have one or more of these effects.
A large portion of the company’s revenues comes from the sale of semiconductors, which has
historically been a cyclical industry.
Although the market seems to have stabilized in recent years, the semiconductor industry
historically has experienced fluctuations in product supply and demand, often associated with
changes in technology and manufacturing capacity. Sales of semiconductor products and related
services represented approximately 48%, 56%, and 53% of the company’s consolidated sales in 2007,
2006 and 2005, respectively, and the company’s revenues and profitability, particularly in its
global components business segment, tend to closely follow the strength or weakness of the
semiconductor market. While the semiconductor industry has strengthened in recent years from its
downturn in 2000 and 2001, any potential future cyclical downturns in the technology industry,
particularly in the semiconductor sector, could have a material adverse effect on the company’s
business and negatively impact its ability to maintain current profitability levels.
If the company was unable to maintain its relationships with its suppliers or if the suppliers
materially change the terms of their existing agreements with the company, the company’s business
could be materially adversely affected.
A substantial portion of the company’s inventory is purchased from suppliers with which the company
has entered into non-exclusive distribution agreements. These agreements are typically cancelable
on short notice (generally 30 to 90 days). Certain parts of the company’s business, such as the
company’s global ECS business, rely on a limited number of suppliers. For example, sales from
products and services from one of the company’s suppliers, IBM, accounted for approximately 10% of
its consolidated sales in 2007. To the extent that the company’s significant suppliers are
unwilling to continue to do business with the company, the company’s business could be materially
adversely affected. In addition, to the extent that the company’s suppliers modify the terms of
their contracts with the company (including, without limitation, the terms regarding price
protection, rights of return, rebates, or other terms that are favorable to the company), or extend
lead times, limit supplies due to capacity constraints, or other factors, there could be a material
adverse effect on the company’s business.
The competitive pressures the company faces could have a material adverse affect on the company’s
business.
The market for the company’s products and services is very competitive and subject to rapid
technological change. Not only does the company compete with other distributors, it also competes
for customers with many of its own suppliers. Additional competition has emerged from third-party
logistics providers, catalogue distributors, and brokers. The company’s failure to maintain and
enhance its competitive position could adversely affect its business and prospects. Furthermore,
the company’s efforts to compete in the marketplace could cause deterioration of gross profit
margins and, thus, overall profitability. The sizes of the company’s competitors vary across
market sectors, as do the resources the company has allocated to the sectors in which it does
business. Therefore, some of the competitors may have more extensive customer base than the
company has in all or more of its market sectors.
8
Table of Contents
Products sold by the company may be found to be defective and, as a result, warranty and/or product
liability claims may be asserted against the company, which may have a material adverse effect on
the company.
The company sells its components at prices that are significantly lower than the cost of the
equipment or other goods in which they are incorporated. Since a defect or failure in a product
could give rise to failures in the end products that incorporate them (and claims for consequential
damages against the company from its customers), the company may face claims for damages that are
disproportionate to the revenues and profits it receives from the products involved in the claims.
While the company typically has provisions in its supplier agreements that hold the supplier
accountable for defective products, and the company and its suppliers generally exclude
consequential damages in their standard terms and conditions, the company’s ability to avoid such
liabilities may be limited as a result of differing factors, such as the inability to exclude such
damages due to the laws of some of the countries where it does business. The company’s business
could be materially adversely affected as a result of a significant quality or performance issue in
the products sold by the company, if it is required to pay for the damages that result. Although
the company currently has product liability insurance, such insurance is limited in coverage and
amount.
Declines in value and other factors pertaining to the company’s inventory could materially
adversely affect its business.
The market for the company’s products and services is subject to rapid technological change,
evolving industry standards, changes in end-market demand, and regulatory requirements, which can
contribute to the decline in value or obsolescence of inventory. During an economic downturn,
prices could decline due to an oversupply of product and, therefore, there may be greater risk of
declines in inventory value. Although most of the company’s suppliers provide the company with
certain protections from the loss in value of inventory (such as price protection and certain
rights of return), the company cannot be sure that such protections will fully compensate it for
the loss in value, or that the suppliers will choose to, or be able to, honor such agreements. For
example, many of the company’s suppliers will not allow products to be returned after they have
been held in inventory beyond a certain amount of time, and, in most instances, the return rights
are limited to a certain percentage of the amount of product the company purchased in a particular
time frame. In addition, as discussed below, the company historically has sold and continues to
sell products that contain substances that are regulated, or may be regulated, by various
environmental laws. Some of the company’s inventory may become obsolete as a result of these or
other existing or new regulations. All of these factors pertaining to inventory could have a
material adverse effect on the company’s business.
The company is subject to environmental laws and regulations that could materially adversely affect
its business.
The company is subject to a wide and ever-changing variety of international and U.S. federal,
state, and local laws and regulations, compliance with which may require substantial expense. Of
particular note are two European Union (“EU”) directives known as the Restriction of Certain
Hazardous Substances Directive (“RoHS”) and the Waste Electrical and Electronic Equipment
Directive. These directives restrict the distribution of products within the EU containing certain
substances and require a manufacturer or importer to recycle products containing those substances.
In addition, China has recently passed the Management Methods on Control of Pollution from
Electronic Information Products, which will eventually prohibit the import of products for use in
China that contain similar substances banned by the RoHS directive. Failure to comply with these
directives or any other applicable environmental regulations could result in fines or suspension of
sales. Additionally, these directives and regulations may result in the company having
non-compliant inventory that may be less readily salable or have to be written off.
In addition, some environmental laws impose liability, sometimes without fault, for investigating
or cleaning up contamination on or emanating from the company’s currently or formerly owned,
leased, or operated property, as well as for damages to property or natural resources and for
personal injury arising out of such contamination. As the distribution business, in general, does
not involve the manufacture of products, it is typically not subject to significant liability in
this area. However, there may be occasions, including through acquisitions, where environmental
liability arises. Such liability may be joint and several, meaning that the company could be held
responsible for more than its share of the liability involved, or even the entire share. In
addition, the presence of environmental contamination could also interfere with ongoing operations
or adversely affect the company’s ability to sell or lease its properties. The discovery of
contamination for which the company is responsible, or the enactment of new laws and regulations,
or changes in how existing requirements are enforced, could require the company to incur costs for
compliance or subject it to
9
Table of Contents
unexpected liabilities.
The foregoing matters could materially adversely affect the company’s business.
The company is currently involved in the investigation and remediation of environmental matters at
two sites as a result of its Wyle Electronics acquisition, and the company is in litigation related
to those sites.
As a result of its acquisition of Wyle Electronics (“Wyle”) from the VEBA Group (“VEBA”) in 2000,
the company assumed Wyle’s outstanding liabilities, including the responsibility for certain
environmental contamination at sites formerly owned by Wyle. The agreement pursuant to which the
company bought Wyle from VEBA contains an indemnification from VEBA to the company for all of the
costs associated with the Wyle environmental obligations. Two sites are known to have such
contamination, one at Norco, California and the other at Huntsville, Alabama, and the company has
thus far borne most of the cost of the investigation and remediation of the Norco and Huntsville
sites, under the direction of the cognizant state agencies. The company has expended approximately
$25 million to date in connection with these sites. In addition, the company was named as a
defendant in a private lawsuit filed in connection with alleged contamination at a small industrial
building formerly leased by Wyle Laboratories in El Segundo, California. The lawsuit was settled, but the
possibility remains that government entities or others may attempt to involve the company in
further characterization or remediation of groundwater issues in the area.
VEBA’s successor-in-interest, E.ON AG, acknowledged liability under the VEBA contractual
indemnities with respect to the Norco and Huntsville sites and made a small initial payment, but
has subsequently refused to make further payments. The company is engaged in litigation against
E.ON AG and certain other parties in the federal courts of the United States and in the Frankfurt
am Main Regional Court in Germany. The company believes strongly in the merits of its cases and
the probability of recovery from E.ON AG, but there can be no guaranty of the outcome of
litigation, and, should the company lose on all of its claims in both cases, it would bear all of
the cost of the Wyle environmental obligations. Because characterization and remedial design is
not yet complete at any of these sites, the future costs in excess of accrued costs associated
therewith are as yet undetermined and could have a material adverse effect on the company’s
business.
In addition, the company is, along with other parties, a defendant in three suits, all of which
were consolidated for pre-trial purposes, by plaintiff landowners and residents in Riverside County
Court in California for personal injury and property damages allegedly caused by the contaminated
groundwater and related soil-vapor found in certain residential areas adjacent to the Norco site.
Wyle Laboratories, formerly a division of Wyle Electronics, has demanded defense and
indemnification from the company in connection with the litigation, and the company has, in turn
demanded defense and indemnification from E.ON AG. The claims for indemnification are at issue in
the U.S. and Frankfurt court proceedings.
While the company believes strongly in the merits of its claim for indemnification against E.ON AG
and has no reason to believe that the plaintiff’s allegations of damages in the Norco matter
pending in Riverside County have merit, there can be no guaranty regarding the outcome of any of
the matters, and should the company be found to be liable for damages and E.ON AG found not to be
liable to indemnify the company for those damages and those costs that will be incurred in the
future, it could have a material adverse effect on the company’s business.
The company may not have adequate or cost-effective liquidity or capital resources.
The company needs cash or committed liquidity facilities to make interest payments on and to
refinance indebtedness, and for general corporate purposes, such as funding its ongoing working
capital, acquisition, and capital expenditure needs (including the company’s new Enterprise
Resource Planning system). At December 31, 2007, the company had cash and cash equivalents of
$447.7 million. In addition, the company currently has access to committed credit lines of $1.4
billion. The company’s ability to satisfy its cash needs depends on its ability to generate cash
from operations and to access the financial markets, both of which are subject to general economic,
financial, competitive, legislative, regulatory, and other factors that are beyond its control.
The company may, in the future, need to access the financial markets to satisfy its cash needs.
The company’s ability to obtain external financing is affected by its debt ratings. Any increase
in the company’s level of debt, change in status of its debt from unsecured to secured debt, or
deterioration of its operating
10
Table of Contents
results may cause a reduction in its current debt ratings. Any downgrade in the company’s current
debt rating could impair the company’s ability to obtain additional financing on acceptable terms.
Under the terms of any external financing, the company may incur higher than expected financing
expenses and become subject to additional restrictions and covenants. For example, the company’s
existing debt agreements contain restrictive covenants, including covenants requiring compliance
with specified financial ratios, and a failure to comply with these or any other covenants may
result in an event of default. An increase in the company’s financing costs or a breach of debt
instrument covenants could have a material adverse effect on the company’s business.
The agreements governing some of the company’s financing arrangements contain various covenants and
restrictions that limit the discretion of management in operating the business and could prevent
the company from engaging in some activities that may be beneficial to its business.
The agreements governing the company’s financings contain various covenants and restrictions that,
in certain circumstances, could limit its ability to:
| • | grant liens on assets; |
||
| • | make restricted payments (including paying dividends on capital stock or redeeming or
repurchasing capital stock); |
||
| • | make investments; |
||
| • | merge, consolidate, or transfer all or substantially all of its assets; |
||
| • | incur additional debt; or |
||
| • | engage in certain transactions with affiliates. |
As a result of these covenants and restrictions, the company may be limited in how it conducts its
business and may be unable to raise additional debt, compete effectively, or make investments.
The company’s failure to have long-term sales contracts may have a material adverse effect on its
business.
Most of the company’s sales are made on an order-by-order basis, rather than through long-term
sales contracts. The company generally works with its customers to develop non-binding forecasts
for future volume of orders. Based on such non-binding forecasts, the company makes commitments
regarding the level of business that it will seek and accept, the inventory that it purchases, the
timing of production schedules, and the levels of utilization of personnel and other resources. A
variety of conditions, both specific to each customer and generally affecting each customer’s
industry, may cause customers to cancel, reduce, or delay orders that were either previously made
or anticipated. Generally, customers cancel, reduce, or delay purchase orders and commitments
without penalty. The company seeks to mitigate these risks, in some cases, by entering into
noncancelable/nonreturnable sales agreements, but there is no guaranty that such agreements will
adequately protect the company. Significant or numerous cancellations, reductions, or delays in
orders by customers could materially adversely affect the company’s business.
The company’s non-U.S. locations represent a significant portion of its sales, and consequently,
the company is increasingly exposed to risks associated with operating internationally.
In 2007, 2006, and 2005, approximately 50%, 53%, and 47%, respectively, of the company’s sales came
from its operations outside the United States. As a result of the company’s international sales
and locations, its operations are subject to a variety of risks that are specific to international
operations, including the following:
| • | import and export regulations that could erode profit margins or restrict exports; |
||
| • | the burden and cost of compliance with international laws, treaties, and technical
standards and changes in those regulations; |
||
| • | potential restrictions on transfers of funds; |
||
| • | foreign currency fluctuations; |
||
| • | import and export duties and value-added taxes; |
||
| • | transportation delays and interruptions; |
||
| • | uncertainties arising from local business practices and cultural considerations; and |
||
| • | potential military conflicts and political risks. |
11
Table of Contents
Further, the company’s operating income margins are lower in certain geographic markets. Operating
income in the components business in Asia/Pacific tends to be lower than operating income in North
America and Europe. As sales in Asia/Pacific increased as a percentage of overall sales,
consolidated operating income margins have fallen. The financial impact of the lower operating
income on returns on working capital was offset, in part, by lower working capital requirements.
While the company has and will continue to adopt measures to reduce the potential impact of losses
resulting from the risks of doing business abroad, it cannot ensure that such measures will be
adequate.
When the company makes acquisitions, it may not be able to successfully integrate them or attain
the anticipated benefits.
If the company is unsuccessful in integrating its acquisitions, or if integration is more difficult
than anticipated, the company may experience disruptions that could have a material adverse effect
on its business. In addition, the company may not realize all of the anticipated benefits from its
acquisitions, which could result in an impairment of goodwill or other intangible assets.
If the company fails to maintain an effective system of internal controls or discovers
material weaknesses in its internal controls over financial reporting, it may not be able to report
its financial results accurately or timely or detect fraud, which could have a material adverse
effect on its business.
An effective internal control environment is necessary for the company to produce reliable
financial reports and is an important part of its effort to prevent financial fraud. The company
is required to periodically evaluate the effectiveness of the design and operation of its internal
controls over financial reporting. Based on these evaluations, the company may conclude that
enhancements, modifications or changes to internal controls are necessary or desirable. While
management evaluates the effectiveness of the company’s internal controls on a regular basis, these
controls may not always be effective. There are inherent limitations on the effectiveness of
internal controls, including collusion, management override, and failure in human judgment. In
addition, control procedures are designed to reduce rather than eliminate business risks. If the
company fails to maintain an effective system of internal controls, or if management or the
company’s independent registered public accounting firm discovers material weaknesses in the
company’s internal controls, it may be unable to produce reliable financial reports or prevent
fraud, which could have a material adverse effect on the company’s business. In addition, the
company may be subject to sanctions or investigation by regulatory authorities, such as the SEC or
the NYSE. Any such actions could result in an adverse reaction in the financial markets due to a
loss of confidence in the reliability of the company’s financial statements, which could cause the
market price of its common stock to decline or limit the company’s access to capital.
The regulatory authorities in the jurisdictions for which the company ships product could levy
substantial fines on the company or limit its ability to export and re-export products if the
company ships product in violation of applicable export regulations.
A significant percentage of the company’s sales are made outside of the United States through the
exporting and re-exporting of product. Many of the products the company sells are either
manufactured in the United States or based on U.S. technology (“U.S. Products”). As a result, in
addition to the local jurisdictions’ export regulations applicable to individual shipments, U.S.
Products are subject to the Export Administration Regulations (“EAR”) when exported and re-exported
to and from all international jurisdictions. Licenses or proper license exceptions may be required
by local jurisdictions’ export regulations, including EAR, for the shipment of certain U.S.
Products to certain countries, including China, India, Russia, and other countries in which the
company operates. Non-compliance with the EAR or other applicable export regulations can result in
a wide range of penalties including the denial of export privileges, fines, criminal penalties, and
the seizure of commodities. In the event that any export regulatory body determines that any
shipments made by the company violate the applicable export regulations, the company could be fined
significant sums and/or its export capabilities could be restricted, which could have a material
adverse effect on the company’s business.
The company relies heavily on its internal information systems, which, if not properly functioning,
could materially adversely affect the company’s business.
The company’s current global operations reside on multiple technology platforms. These platforms
are subject to electrical or telecommunications outages, computer hacking, or other general system
failure, which could have a material adverse effect on the company’s business. Because most of the
company’s systems
12
Table of Contents
consist of a number of legacy, internally developed applications, it can be harder to upgrade and
may not be adaptable to commercially available software.
The company is in the process of converting its various business information systems worldwide to
a single Enterprise Resource Planning system. The company has committed significant resources to
this conversion, which started in late 2006 and is expected to be phased in over a four-year
period. This conversion is extremely complex, in part, because of the wide range of processes and
the multiple legacy systems that must be integrated globally. The company will be using a
controlled project plan that it believes will provide for the adequate allocation of resources.
However, such a plan, or a divergence from it, may result in cost overruns, project delays, or
business interruptions. During the conversion process, the company may be limited in its ability
to integrate any business that it may want to acquire. Failure to properly or adequately address
these issues could impact the company’s ability to perform necessary business operations, which
could materially, adversely affect the company’s business.
The company may be subject to intellectual property rights claims, which are costly to defend,
could require payment
of damages or licensing fees and could limit the company’s ability to use certain technologies in the future.
of damages or licensing fees and could limit the company’s ability to use certain technologies in the future.
The company sells products and utilizes processes that are highly innovative and may be subject to
allegations of infringement or other violations of intellectual property rights. Without limiting
the generality of the foregoing, the company notes that in recent years certain companies in the
business of acquiring patents not for the purpose of developing technology but with the intention
of aggressively seeking licensing revenue from purported infringers have made an increasing number
of claims against the company and/or its customers. In some cases, depending on the nature of the
claim, the company may be able to seek indemnification from its suppliers for itself and its
customers against such claims, but there is no assurance that it will be successful in obtaining
such indemnification.
Intellectual property right infringement claims, with or without merit, can be time-consuming and
costly to litigate or settle and can divert management resources and attention. If successful
they may require the company to pay damages or seek royalty or license arrangements, which may not
be available on commercially reasonable terms. The payment of any such damages or royalties may
significantly increase the company’s operating expenses and harm its operating results and
financial condition. Also, royalty or license arrangements may not be available at all. The
company may have to stop selling certain products or using technologies, which could affect the
company’s ability to compete effectively.
Item 1B. Unresolved Staff Comments.
None.
13
Table of Contents
Item 2. Properties.
The company owns and leases sales offices, distribution centers, and administrative facilities
worldwide. Its executive office is located in Melville, New York and occupies a 163,000 square
foot facility under a long-term lease expiring in 2013. The company owns 16 locations throughout
North America, EMEASA, and the Asia Pacific region and occupies over 300 additional locations under
leases due to expire on various dates through 2022. The company believes its facilities are well
maintained and suitable for company operations.
Item 3. Legal Proceedings.
Tekelec Matters
In 2000, the company purchased Tekelec Europe SA (“Tekelec”) from Tekelec Airtronic SA
(“Airtronic”) and certain other selling shareholders. Subsequent to the closing of the
acquisition, Tekelec received a product liability claim in the amount of €11.3 million. 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 has commenced legal proceedings
against Tekelec and its insurers to recover damages in the amount of €3.7 million and expenses
of €.3 million plus interest.
Environmental and Related Matters
Wyle Claims
In connection with the purchase of Wyle from VEBA in 2000, the company assumed certain of
the then outstanding obligations of Wyle, including its 1994 indemnification of 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 VEBA, VEBA agreed to indemnify the company for costs associated with the Wyle
environmental indemnities, among other things. The company is aware of two Wyle Laboratories
facilities (in Huntsville, Alabama and Norco, California) at which contaminated groundwater was
identified. Each site will require remediation, the final form and cost of which is as yet
undetermined. As further discussed in Note 15 of the Notes to Consolidated Financial Statements,
the Alabama site is being investigated by the company under the direction of the Alabama Department
of Environmental Management. The Norco site is subject to a consent decree, entered in October
2003, between the company, Wyle Laboratories, and the California Department of Toxic Substance
Control.
Wyle Laboratories has demanded indemnification from the company with respect to the work at both
sites (and in connection with the litigation discussed below), and the company has, in turn,
demanded indemnification from VEBA. VEBA merged with a publicly-traded, German conglomerate in June
2000 and the combined entity is now known as E.ON AG, which remains responsible for VEBA’s
liabilities. E.ON AG acknowledged liability under the terms of the VEBA contract in connection with
the Norco and Huntsville sites and made an initial, partial payment. Neither the company’s demands
for subsequent payments nor its demand for defense and indemnification in the related litigation
and other costs associated with the Norco site were met.
Related Litigation
In September 2004, the company filed suit against E.ON AG in the United States District Court for
the Northern District of Alabama seeking further payments related to those sites and additional
damages. The case has since been transferred to the United States District Court for the Central
District of California, where it was consolidated with a case commenced by the company and Wyle
Laboratories in May 2005 against E.ON AG seeking indemnification, contribution, and a declaration
of the parties’ respective rights and obligations in connection with the Riverside County
litigation (discussed below) and other costs associated with the Norco site. The court has ruled
that the enforcement and interpretation of E.ON AG’s contractual obligations are matters for a
court in Germany, a ruling with which the company disagrees and which it is appealing.
Nevertheless, in October 2005, the company filed a related action with regard to such matters
against E.ON AG in the Frankfurt am Main Regional Court in Germany.
14
Table of Contents
The company was named as a defendant in three suits related to the Norco facility, all of which
were consolidated for pre-trial purposes. In January 2005, an action was filed in the California
Superior Court in Riverside County, California (Gloria Austin, et al. v. Wyle Laboratories, Inc. et
al.) in which 91 plaintiff landowners and residents sued a number of defendants under a variety of
theories for unquantified damages allegedly caused by environmental contamination at and around the
Norco site. Also filed in the Superior Court in Riverside County were Jimmy Gandara, et al. v. Wyle
Laboratories, Inc. et al. in January 2006, and Lisa Briones et al. v. Wyle Laboratories, Inc. et
al. in May 2006, both of which contain allegations similar to those in the Austin case on behalf of
approximately 20 additional plaintiffs. The outcome of the cases and the amount of any associated
liability are all as yet unknown.
The company was also named as a defendant in a lawsuit filed in September 2006 in the United States
District Court for the Central District of California (Apollo Associates, L.P., et anno, v. Arrow
Electronics, Inc. et al.) in connection with alleged contamination at a third site, an industrial
building formerly leased by Wyle Laboratories, in El Segundo, California. The lawsuit was settled,
though the possibility remains that government entities or others may attempt to involve the
company in further characterization or remediation of groundwater issues in the area.
Impact on Financial Statements
The company believes that any cost which it may incur in connection with environmental conditions
at the Norco, Huntsville, and El Segundo sites and the related litigation is covered by the
contractual indemnifications (except, under the terms of the environmental indemnification, for the
first $.5 million), discussed above. The company has received an opinion of counsel that the
recovery of costs incurred to date associated with the environmental clean-up costs related to the
Norco and Huntsville sites, is probable. Based on the opinion of counsel received in the fourth
quarter of 2007, the company increased the receivable for amounts due from E.ON AG by $7.2 million
during 2007 to $24.9 million. The company’s net costs for such indemnified matters may vary from
period to period as estimates of recoveries are not always recognized in the same period as the
accrual of estimated expenses. In 2006, the company recorded a charge of $1.4 million ($.9 million
net of related taxes or $.01 per share on both a basic and diluted basis) related to the
environmental matters arising out of the company’s purchase of Wyle.
Also included in the proceedings against E.ON AG is a claim for the reimbursement of
pre-acquisition tax liabilities of Wyle in the amount of $8.7 million for which E.ON AG is also
contractually liable to indemnify the company. E.ON AG has specifically acknowledged owing the
company not less than $6.3 million of such amounts, but its promises to make payments of at least
that amount have not been kept. The company also believes that the recovery of these amounts is
probable.
In connection with the acquisition of Wyle, the company acquired a $4.5 million tax receivable due
from E.ON AG (as successor to VEBA) in respect of certain tax payments made by Wyle prior to the
effective date of the acquisition, the recovery of which the company also believes is probable.
The company believes strongly in the merits of its actions against E.ON AG, and is pursuing them
vigorously.
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, and tax matters. While such
matters are subject to inherent uncertainties, it is not currently anticipated that any such other
matters will materially, adversely impact the company’s financial position, liquidity, or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
15
Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
Market Information
The company’s common stock is listed on the NYSE (trading symbol: “ARW”). The high and low sales
prices during each quarter of 2007 and 2006 were as follows:
Year |
High | Low | ||||||
2007: |
||||||||
Fourth Quarter |
$ | 44.95 | $ | 34.68 | ||||
Third Quarter |
43.55 | 33.17 | ||||||
Second Quarter |
43.13 | 37.29 | ||||||
First Quarter |
39.83 | 32.00 | ||||||
2006: |
||||||||
Fourth Quarter |
$ | 32.90 | $ | 26.90 | ||||
Third Quarter |
33.14 | 25.93 | ||||||
Second Quarter |
36.95 | 30.35 | ||||||
First Quarter |
36.48 | 31.18 | ||||||
Holders
On
February 1, 2008, there were approximately 2,300 shareholders of record of the company’s common
stock.
Dividend History
The company did not pay cash dividends on its common stock during 2007 or 2006. While the Board of
Directors considers the payment of dividends on the common stock from time to time, the declaration
of future dividends will be dependent upon the company’s earnings, financial condition, and other
relevant factors, including debt covenants.
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2007, relating to the Omnibus
Incentive Plan, which was approved by the company’s shareholders and under which cash-based awards,
non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock
and restricted stock units, performance shares or units, covered employee annual incentive awards
and other stock-based awards may be granted from time to time.
| Number of | Weighted | |||||||||||
| Securities to be | Average | |||||||||||
| Issued Upon | Exercise | Number of | ||||||||||
| Exercise | Price of | Securities | ||||||||||
| of Outstanding | Outstanding | Remaining | ||||||||||
| Options, | Options, | Available | ||||||||||
| Warrants and | Warrants | for Future | ||||||||||
| Plan Category | Rights | and Rights | Issuance | |||||||||
Equity compensation
plans approved by
security holders |
5,235,784 | $31.58 | 3,549,067 | |||||||||
Equity compensation
plans not approved by security holders |
- | - | - | |||||||||
Total |
5,235,784 | $31.58 | 3,549,067 | |||||||||
16
Table of Contents
Performance Graph
The following graph compares the performance of the company’s common stock for the periods
indicated with the performance of the Standard & Poor’s 500 Stock Index (“S&P 500 Stock Index”) and
the average performance of a group consisting of the company’s peer companies on a line-of-business
basis. The companies included in the Peer Group are Avnet, Inc., Bell Microproducts, Inc., Jaco
Electronics, Inc., and Nu Horizons Electronics Corp. The graph assumes $100 invested on December
31, 2002 in the company, the S&P 500 Stock Index, and the Peer Group. Total return indices reflect
reinvestment of dividends and are weighted on the basis of market capitalization at the time of
each reported data point.
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |||||||||||||||||
Arrow Electronics |
100 | 181 | 190 | 250 | 247 | 307 | ||||||||||||||||
Peer Group |
100 | 196 | 167 | 211 | 222 | 291 | ||||||||||||||||
S&P 500 Stock Index |
100 | 126 | 138 | 142 | 161 | 167 | ||||||||||||||||
Unregistered Sales of Equity Securities and Use of Proceeds
In February 2006, the Board of Directors authorized the company to repurchase up to $100 million of
the company’s outstanding common stock through a share-repurchase program (the “program”). In
March 2007, the company announced a rule 10b5-1 plan to facilitate repurchases under the program
with the intention of minimizing earnings per share dilution caused by the issuance of common stock
upon the exercise of stock options. Repurchases were funded with cash received from the exercise
of stock options in the previous quarter. In August 2007, the company replaced the then existing
rule 10b5-1 plan with a new 10b5-1 plan intended to completely offset the dilution caused by the
issuance of common stock upon the exercise of stock options. In December 2007, the Board of
Directors authorized the company to repurchase an additional $100 million of the company’s
outstanding common stock in such amounts as to offset the dilution from the exercise of stock
options and other stock-based compensation plans.
17
Table of Contents
The following table shows the share-repurchase activity for each of the three months in the quarter
ended December 31, 2007:
| Total Number | ||||||||||||||||
| of Shares | Approximate Dollar | |||||||||||||||
| Total | Purchased as | Value of Shares | ||||||||||||||
| Number of | Average | Part of Publicly | that May Yet be | |||||||||||||
| Shares | Price Paid | Announced | Purchased Under | |||||||||||||
| Month | Purchased | per Share | Program | the Program (1) | ||||||||||||
October 1 through 31, 2007 |
197,928 | $43.21 | 197,928 | $15,764,043 | ||||||||||||
November 1 through 30, 2007 |
- | - | - | $15,764,043 | ||||||||||||
December 1 through 31, 2007 |
- | - | - | $115,764,043 | ||||||||||||
Total |
197,928 | 197,928 | ||||||||||||||
| (1) | The approximate dollar value of shares reflects the $100 million authorized for
repurchase under the program in February 2006 less the approximate dollar value of the shares
that were purchased under the program to date. In December 2007, the Board of Directors
authorized the company to repurchase an additional $100 million of the company’s outstanding
common stock. |
18
Table of Contents
Item 6. Selected Financial Data.
The following table sets forth certain selected consolidated financial data and should be read in
conjunction with the company’s consolidated financial statements and related notes appearing
elsewhere in this annual report on Form 10-K (dollars in thousands except per share data):
| For the years ended | ||||||||||||||||||||
| December 31: | 2007(a) (f) | 2006(b) (f) | 2005(c) | 2004(d) | 2003(e) | |||||||||||||||
Sales |
$ | 15,984,992 | $ | 13,577,112 | $ | 11,164,196 | $ | 10,646,113 | $ | 8,528,331 | ||||||||||
Operating income |
$ | 686,905 | $ | 606,225 | $ | 480,258 | $ | 439,338 | $ | 184,045 | ||||||||||
Net income |
$ | 407,792 | $ | 388,331 | $ | 253,609 | $ | 207,504 | $ | 25,700 | ||||||||||
Net income per share: |
||||||||||||||||||||
Basic |
$ | 3.31 | $ | 3.19 | $ | 2.15 | $ | 1.83 | $ | .26 | ||||||||||
Diluted |
$ | 3.28 | $ | 3.16 | $ | 2.09 | $ | 1.75 | $ | .25 | ||||||||||
At December 31: |
||||||||||||||||||||
Accounts receivable
and inventories |
$ | 4,961,035 | $ | 4,401,857 | $ | 3,811,914 | $ | 3,470,600 | $ | 3,098,213 | ||||||||||
Total assets |
8,059,860 | 6,669,572 | 6,044,917 | 5,509,101 | 5,343,690 | |||||||||||||||
Long-term debt |
1,223,337 | 976,774 | 1,138,981 | 1,465,880 | 2,016,627 | |||||||||||||||
Shareholders’ equity |
3,551,860 | 2,996,559 | 2,372,886 | 2,194,186 | 1,505,331 | |||||||||||||||
| (a) | Operating income and net income include restructuring and integration charges of $11.7
million ($7.0 million net of related taxes or $.06 per share on both a basic and diluted
basis) and an income tax benefit of $6.0 million, net, ($.05 per
share on both a basic and diluted basis) principally due to a reduction in
deferred income taxes as a result of the statutory rate change in Germany in 2007. |
|
| (b) | Operating income and net income include restructuring and integration charges of $11.8
million ($9.0 million net of related taxes or $.07 per share on both a basic and diluted
basis), a charge related to a pre-acquisition warranty claim of $2.8 million ($1.9 million net
of related taxes or $.02 per share on both a basic and diluted basis), and a charge related to
pre-acquisition environmental matters arising out of the company’s purchase of Wyle of $1.4
million ($.9 million net of related taxes or $.01 per share on both a basic and diluted
basis). Net income also includes a loss on prepayment of debt of $2.6 million ($1.6 million
net of related taxes or $.01 per share on both a basic and diluted basis) and the reduction of
the provision for income taxes of $46.2 million ($.38 per share on both a basic and diluted
basis) and the reduction of interest expense of $6.9 million ($4.2 million net of related
taxes or $.03 per share on both a basic and diluted basis) related to the settlement of
certain income tax matters. |
|
| (c) | Operating income and net income include restructuring and integration charges of $12.7
million ($7.3 million net of related taxes or $.06 and $.05 per share on a basic and diluted
basis, respectively) and an acquisition indemnification credit of $1.7 million ($1.3 million
net of related taxes or $.01 per share on a basic basis). Net income also includes a loss on
prepayment of debt of $4.3 million ($2.6 million net of related taxes or $.02 and $.01 per
share on a basic and diluted basis, respectively) and a loss of $3.0 million ($.03 per share
on both a basic and diluted basis) on the write-down of an investment. |
|
| (d) | Operating income and net income include restructuring and integration charges of $9.1 million
($5.6 million net of related taxes or $.06 and $.05 per share on a basic and diluted basis,
respectively), an acquisition indemnification credit, due to a change in estimate, of $9.7
million ($.09 and $.08 per share on a basic and diluted basis, respectively), and an
impairment charge of $10.0 million ($.09 and $.08 per share on a basic and diluted basis,
respectively). Net income also includes a loss on prepayment of debt of $33.9 million ($20.3
million net of related taxes or $.18 and $.16 per share on a basic and diluted basis,
respectively) and a loss of $1.3 million ($.01 per share on both a basic and diluted basis) on
the write-down of an investment. |
|
| (e) | Operating income and net income include restructuring and integration charges of $44.9
million ($32.0 million net of related taxes or $.32 per share on both a basic and diluted
basis) and an acquisition indemnification charge, due to a change in estimate, of $13.0
million ($.13 per share on both a basic and diluted basis). Net income also includes a loss on
prepayment of debt of $6.6 million ($3.9 million |
19
Table of Contents
net of related taxes or $.04 per share on both a basic and diluted basis). |
||
| (f) | Operating income and net income include stock option expense of $11.2 million ($7.0 million
net of related taxes or $.06 per share on both a basic and diluted basis) and $13.0 million
($8.5 million net of related taxes or $.07 per share on both a basic and diluted basis) for
2007 and 2006, respectively, resulting from the company’s adoption of Financial Accounting
Standards Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment,” and the
Securities and Exchange Commission Staff Accounting Bulletin No. 107 (collectively, “Statement
No. 123(R)”). |
20
Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
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 OEMs and CMs through its global components business segment and provides enterprise
computing solutions to VARs through its global ECS business segment. For 2007, approximately 70%
of the company’s sales consisted of electronic components, and approximately 30% of the company’s
sales consisted of enterprise computing solutions.
The company serves as a supply channel partner for approximately 700 suppliers and approximately
140,000 OEMs, CMs, and commercial customers through a global network of more than 300 locations in
50 countries and territories. Through this network, the company provides one of the broadest
product offerings in the electronics distribution industry and a wide range of value-added services
to help customers reduce time to market, lower their total cost of ownership, and enhance their
overall competitiveness.
Operating efficiency and working capital management remain the key focus of the company’s business
initiatives to grow sales faster than the market, grow profits faster than sales, and increase
return on invested capital. To achieve its financial objectives, the company seeks to capture
significant opportunities to grow across products, markets, and geographies. To supplement its
organic growth strategy, the company looks to make strategic acquisitions to broaden its product
offerings, increase its market share, and/or expand its geographic reach. Investments needed to
fund this growth are developed through continuous corporate-wide initiatives to improve
profitability and increase effective asset utilization.
On March 31, 2007, the company acquired KeyLink from Agilysys for a purchase price of $480.6
million in cash, which included acquisition costs and final adjustments based upon a closing audit.
The company also entered into a long-term procurement agreement with Agilysys. KeyLink, a leading
enterprise computing solutions distributor, provides complex solutions from industry leading
manufacturers to more than 800 reseller partners. KeyLink has long-standing reseller relationships
that provide the company with significant cross-selling opportunities. KeyLink’s highly
experienced sales and marketing professionals strengthen the company’s existing relationships with
VARs and position the company to attract new relationships. Total KeyLink sales for 2006,
including estimated revenues associated with the above-mentioned procurement agreement, were
approximately $1.6 billion.
On December 29, 2006, the company acquired InTechnology, which delivers storage and security
solutions to VARs in the United Kingdom. Total InTechnology sales for 2006 were approximately $320
million. The InTechnology acquisition increased the company’s offering of software and security
products and further expanded the company’s ECS business into the United Kingdom.
On November 30, 2006, the company acquired Alternative Technology, which supports VARs in
delivering software solutions that optimize, accelerate, monitor, and secure an end-user’s network.
Total Alternative Technology sales for 2006 were approximately $250 million, of which $48.7 million
were included in the company’s 2006 consolidated results of operations from the acquisition date.
Consolidated sales for 2007 grew by 17.7%, compared with the year-earlier period, primarily as a
result of the impact of acquisitions, the company’s increased focus on sales-related initiatives,
and the impact of a weaker U.S. dollar on the translation of the company’s international financial
statements. This increase was offset, in part, by continued weakness at large electronic
manufacturing services (“EMS”) customers in the global components business segment and the
company’s initiative to exit lower-margin business in the Asia Pacific region. On a pro forma
basis, which includes Alternative Technology, InTechnology, and KeyLink as though these
acquisitions occurred on January 1, 2006, consolidated sales increased by 5.9%. In the global ECS
business segment, sales for 2007 grew by 91.2%, compared with the year-earlier period, primarily
due to the acquisitions of Alternative Technology, InTechnology, and KeyLink. On a pro forma
basis, which includes Alternative Technology, InTechnology, and KeyLink as though these
acquisitions occurred on January 1, 2006, the global ECS business segment sales grew by 17.8%,
compared with the year-earlier period, primarily due to growth in storage, software, and industry
standard servers and due to the company’s increased focus on sales-related initiatives. In the
global components business segment, sales for 2007 increased by 1.2%, compared with the
year-earlier period, primarily due to the company’s increased focus on sales-related initiatives
and the impact of a weaker U.S. dollar on the translation of the company’s international financial
statements, offset, in part, by the aforementioned continued weakness at large EMS
21
Table of Contents
customers and the company’s initiative to exit lower-margin business in the Asia Pacific region.
Net income increased to $407.8 million in 2007, compared with net income of $388.3 million in 2006.
The increase in net income in 2007, compared with the year-earlier period, was due to increased
gross profit on higher sales, offset, in part, by increased selling, general and administrative
expense to support the increase in sales, higher depreciation and amortization expense primarily
related to acquisitions, and a higher effective tax rate. The following items also impact the
comparability of the company’s results for the years ended December 31, 2007 and 2006:
| • | restructuring and integration charges of $11.7 million ($7.0 million net of related
taxes) in 2007 and $11.8 million ($9.0 million net of related taxes) in 2006; |
||
| • | an income tax benefit of $6.0 million, net, principally due to a reduction in deferred
income taxes as a result of the statutory rate change in Germany in 2007; |
||
| • | a charge related to a pre-acquisition warranty claim of $2.8 million ($1.9 million net
of related taxes) in 2006; |
||
| • | a charge related to pre-acquisition environmental matters arising from the company’s
purchase of Wyle of $1.4 million ($.9 million net of related taxes) in 2006; |
||
| • | a loss on prepayment of debt of $2.6 million ($1.6 million net of related taxes) in
2006; and |
||
| • | a reduction of the provision for income taxes of $46.2 million, of which $40.4 million
related to tax years prior to 2006, and the reduction of interest expense of $6.9 million
($4.2 million net of related taxes), of which $4.0 million ($2.4 million net of related
taxes) related to tax years prior to 2006, related to the settlement of certain income tax
matters in 2006. |
Most 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 of
forecast information.
Sales
Consolidated sales for 2007 increased by $2.41 billion, or 17.7%, compared with the year-earlier
period. The increase was driven by an increase in the global ECS business segment of $2.27
billion, or 91.2%, and an increase in the global components business segment of $137.4 million, or
1.2%, compared with the year-earlier period.
In the global ECS business segment, sales for 2007 increased by 91.2%, compared with the
year-earlier period, primarily due to the acquisitions of Alternative Technology, InTechnology, and
KeyLink. On a pro forma basis, which includes Alternative Technology, InTechnology, and KeyLink as
though these acquisitions occurred on January 1, 2006, the global ECS business segment sales for
2007 grew by 17.8%, compared with the year-earlier period, primarily due to the growth in storage,
software, and industry standard servers and due to the company’s increased focus on sales-related
initiatives.
In the global components business segment, sales for 2007 increased by 1.2% compared with the
year-earlier period, primarily due to the company’s increased focus on sales-related initiatives
and the impact of a weaker U.S. dollar on the translation of the company’s international financial
statements, offset, in part, by continued weakness at large EMS customers and the company’s
initiative to exit lower-margin business in the Asia Pacific region.
The translation of the company’s international financial statements into U.S. dollars resulted in
increased sales of $394.7 million for 2007, compared with the year-earlier period, due to a weaker
U.S. dollar. Excluding the impact of foreign currency, the company’s sales increased by 14.8% in
2007.
Consolidated sales for 2006 increased by $2.41 billion, or 21.6%, compared with the year-earlier
period. The increase was driven by an increase in the global components business segment of $1.96
billion, or 21.4%, and an increase in the global ECS business segment of $457.5 million, or 22.5%,
compared with the year-earlier period.
The growth in the global components business segment for 2006 was primarily driven by the sales
increase in the North American Components (“NAC”) businesses of 12.0%, the sales increase in the
EMEASA components businesses of 15.7%, and the sales increase in the Asia/Pacific components
businesses of 20.0%, on a pro forma basis, as though the Ultra Source Technology Corp. (“Ultra
Source”) acquisition occurred on January 1, 2005. The sales increase in the NAC businesses of
12.0%, compared with the year-
22
Table of Contents
earlier period, was primarily driven by the strength of demand for semiconductors and passive
electromechanical and connector products from the company’s broad customer base, as well as the
company’s focus on sales-related initiatives for passive, electromechanical and connector products.
The sales increase in the EMEASA components businesses of 15.7%, compared with the year-earlier
period, was primarily due to the increased end-market demand in this region as well as the
company’s increased focus on sales-related initiatives. The increase in the Asia/Pacific
components businesses of 20.0%, on a pro forma basis as though the Ultra Source acquisition
occurred on January 1, 2005, compared with the year-earlier period, was due to the region’s strong
market growth coupled with the company’s initiative to expand its product offerings and customer
base.
The growth in the global ECS business segment of 22.5% for 2006, compared with the year-earlier
period, was primarily due to the acquisition of DNS in December 2005 and the growth in storage and
industry standard servers offset, in part, by lower sales in North America due to a decline in
low-margin software and the loss of a large reseller customer at the end of 2005 due to mergers and
acquisitions activity, and lower market demand for proprietary servers.
The translation of the company’s international financial statements into U.S. dollars resulted in
increased sales of $44.6 million for 2006, compared with the year-earlier period, due to a weaker
U.S. dollar. Excluding the impact of foreign currency, the company’s sales increased by 21.2% in
2006.
Gross Profit
The company recorded gross profit of $2.29 billion and $2.03 billion for 2007 and 2006,
respectively. The gross profit margin for 2007 decreased by approximately 70 basis points when
compared with the year-earlier period. The decrease in gross profit margin was principally due to
the acquisitions of Alternative Technology, InTechnology, and KeyLink, which have lower gross profit
margins (as well as lower operating expense structures). On a pro forma basis, which includes the
impact of these acquisitions, the gross profit margin for 2007 decreased by approximately 20 basis
points when compared with the year-earlier period, primarily due to a change in the mix in the
company’s business, with the global ECS business segment and Asia/Pacific being a greater
percentage of total sales. The profit margins of products in the global ECS business segment
are typically lower than the profit margins of the products in the global components business
segment, and the profit margins of the components sold in the
Asia/Pacific market tend to be lower than
the profit margins in North America and Europe. The financial impact of the lower gross profit was
offset, in part, by the lower operating costs of those businesses and lower working capital
requirements.
The company recorded gross profit of $2.03 billion and $1.74 billion for 2006 and 2005,
respectively. The gross profit margin for 2006 decreased by approximately 60 basis points when
compared with the year-earlier period. The decrease in gross profit margin was primarily due to
the acquisitions of DNS and Ultra Source, which have lower gross profit margins (as well as lower
operating expense structures). Excluding the impact of these acquisitions, the gross profit margin
increased by approximately 10 basis points when compared with the year-earlier period.
Restructuring, Integration, and Other Charges
The company recorded restructuring and integration charges of $11.7 million ($7.0 million net of
related taxes or $.06 per share on both a basic and diluted basis), $11.8 million ($9.0 million net
of related taxes or $.07 per share on both a basic and diluted basis), and $12.7 million ($7.3
million net of related taxes or $.06 and $.05 per share on a basic and diluted basis, respectively)
in 2007, 2006, and 2005, respectively.
2007
Restructuring
Included in the total restructuring and integration charges above for 2007 is $9.7 million related
to initiatives by the company to improve operating efficiencies. During 2007, the company took a
series of steps to make its organizational structure more efficient. These actions are expected to
reduce costs by approximately $40 million per annum in North America, with approximately $16
million realized in the second half of 2007. Also included in the total restructuring and
integration charges above for 2007 is a net restructuring credit of $.4 million primarily related
to the reversal of excess reserves, which were previously established through restructuring charges
in prior periods, a gain on the sale of the Lenexa, Kansas facility of $.5 million that was vacated
in 2007 due to the company’s continued efforts to reduce real estate costs, and integration charges
of $2.9 million primarily related to the acquisition of KeyLink.
23
Table of Contents
The restructuring charge of $9.7 million in 2007 includes personnel costs of $11.3 million related
to the elimination of approximately 400 positions, primarily within multiple functions in North
America within the company’s electronic components segment, related to the company’s continued
focus on operational efficiency. Facilities includes a restructuring credit of $1.9 million,
primarily related to a gain on the sale of the Harlow, England facility of $8.5 million that was
vacated in 2007, offset by facilities costs of $6.6 million primarily related to exit activities
for a vacated facility in Europe due to the company’s continued efforts to reduce real estate
costs.
2006
Restructuring
Included in the total restructuring and integration charges above for 2006 is $12.3 million related
to initiatives by the company to improve operating efficiencies, resulting in savings of
approximately $9 million per annum. Also included in the total restructuring and integration
charges above for 2006 is a net restructuring credit of $.5 million primarily related to the
reversal of excess reserves, which were previously established through restructuring charges in
prior periods.
The restructuring charge of $12.3 million in 2006 includes personnel costs of $6.5 million related
to the elimination of approximately 300 positions, primarily within multiple functions in North
America within the company’s global components business segment, related to the outsourcing of certain
administrative functions and the closure of a warehouse facility. Facilities costs of $1.2 million
related to exit activities for three vacated facilities in Europe due to the company’s continued
efforts to reduce real estate costs. Also included in the restructuring charge is a charge
related to the write-down of certain capitalized software in Europe of $4.5 million. This
write-down resulted from the company’s decision in the fourth quarter of 2006 to implement a global
Enterprise Resource Planning (“ERP”) system, which caused these software costs to become redundant
and have no future benefit.
2005
Restructuring
Included in the total restructuring and integration charges above for 2005 is $12.9 million related
to actions announced by the company to better optimize the use of its mainframe, reduce real estate
costs, and be more efficient in its distribution centers. Also included in the total restructuring
and integration charges above for 2005 is a net restructuring credit of $.2 million primarily
related to the reversal of excess reserves, which were previously established through restructuring
charges in prior periods.
The restructuring charge of $12.9 million in 2005 includes personnel costs of $13.3 million related
to the elimination of approximately 425 positions across multiple locations, primarily within the
company’s global components business segment and shared service function, related to the company’s
continued focus on operational efficiency. Facilities includes a restructuring credit of $1.3
million, primarily related to a gain on the sale of a facility in North America of $1.5 million
that was vacated in 2005 due to the company’s continued efforts to reduce real estate costs.
Integration
Included in the restructuring and integration charges referenced above in 2007 is an integration
charge of $2.9 million, primarily related to the acquisition of KeyLink, impacting the global ECS
business segment in North America. Integration costs in 2007 also
include $.8 million recorded as additional costs in excess of net assets of companies acquired associated with the acquisition of KeyLink.
The integration charge is net of a $.7 million reversal of excess facilities-related accruals in
connection with certain acquisitions made prior to 2005. Personnel costs associated with the
elimination of approximately 50 positions in North America related to the acquisition of KeyLink.
Pre-Acquisition Warranty Claim
During 2006, the company recorded a charge of $2.8 million ($1.9 million net of related taxes or
$.02 per share on both a basic and diluted basis) related to a pre-acquisition warranty claim.
Pre-Acquisition Environmental Matters
As discussed in Note 15 of the Notes to Consolidated Financial Statements, in 2000, when the
company purchased Wyle from VEBA, the company assumed Wyle’s then outstanding obligations. Among
the obligations the company assumed was Wyle’s 1994 indemnification of the purchasers of one of its
divisions,
24
Table of Contents
Wyle Laboratories, for costs associated with then existing contamination or violation of
environmental regulations. Under the terms of the company’s purchase of Wyle, VEBA agreed to
indemnify the company for, among other things, costs related to environmental pollution associated
with Wyle, including those associated with its prior sale of Wyle Laboratories. VEBA has since
merged with E.ON AG, a German-based, multinational conglomerate. The company’s net costs for such
indemnified matters may vary from period to period as estimates of recoveries are not always
recognized in the same period as the accrual of estimated expenses. During 2006, the company
recorded a charge of $1.4 million ($.9 million net of related taxes or $.01 per share on both a
basic and diluted basis) related to the environmental matters arising out of the company’s purchase
of Wyle.
Acquisition Indemnification
In 2005, Tekelec, a French subsidiary of the company, entered into a settlement agreement with
Airtronic pursuant to which Airtronic paid €1.5 million (approximately $2.0 million) to Tekelec
in full settlement of all of Tekelec’s claims for indemnification under the purchase agreement. The
company recorded the net amount of the settlement of $1.7 million ($1.3 million net of related
taxes or $.01 per share on a basic basis) as an acquisition indemnification credit.
Operating Income
The company recorded operating income of $686.9 million in 2007 as compared with operating income
of $606.2 million in 2006.
Selling, general and administrative expenses increased by $157.8 million, or 11.6%, in 2007, on a
sales increase of 17.7% compared with 2006. The dollar increase in selling, general and
administrative expenses in 2007, as compared with the year-earlier period, was primarily due to
selling, general and administrative expenses incurred by Alternative Technology, InTechnology, and
KeyLink, higher selling expenses to support increased sales, and the impact of foreign exchange
rates. Selling, general and administrative expenses, as a percentage of sales, was 9.5% and 10.0%
for 2007 and 2006, respectively. The decrease in selling, general and administrative expenses, as
a percentage of sales, compared with the year-earlier period, was primarily the result of the
acquisitions of Alternative Technology, InTechnology, and KeyLink, which have lower selling,
general and administrative expenses as a percentage of sales, and the company’s ability to more
effectively leverage its existing cost structure to support a higher level of sales.
Depreciation and amortization increased by $19.8 million, or 42.2%, in 2007, compared with the
year-earlier period, primarily due to acquisitions.
The company recorded operating income of $606.2 million in 2006 as compared with operating income
of $480.3 million in 2005.
Selling, general and administrative expenses increased by $161.3 million, or 13.4%, in 2006, on a
sales increase of 21.6% compared with 2005. The dollar increase in selling, general and
administrative expenses in 2006, as compared with the year-earlier period, was due to selling,
general and administrative expenses incurred by DNS and Ultra Source of $66.0 million and $13.0
million for the expensing of stock options as a result of the company adopting Statement No.
123(R), with the difference attributable to higher variable selling expenses due to increased
sales. Selling, general and administrative expenses, as a percentage of sales, was 10.0% and 10.8%
for 2006 and 2005, respectively. The decrease in selling, general and administrative expenses as a
percentage of sales, compared with the year-earlier period, was primarily the result of the
acquisitions of DNS and Ultra Source, which have lower operating expense structures, and the
company’s ability to more effectively leverage its existing cost structure to support a higher
level of sales.
Loss on Prepayment of Debt
The company recorded a loss on prepayment of debt of $2.6 million ($1.6 million net of related
taxes or $.01 per share on both a basic and diluted basis) and $4.3 million ($2.6
million net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively)
in 2006 and 2005, respectively. These items are discussed below.
During 2006, the company redeemed the total amount outstanding of $283.2 million principal amount
($156.4 million accreted value) of its zero coupon convertible debentures due in 2021 (“convertible
debentures”) and repurchased $4.1 million principal amount of its 7% senior notes due in January
2007. The related loss on
25
Table of Contents
the redemption and repurchase, including any related premium paid, write-off of deferred financing
costs, and cost of terminating a portion of the related interest rate swaps, aggregated $2.6
million ($1.6 million net of related taxes or $.01 per share on both a basic and diluted basis) and
was recognized as a loss on prepayment of debt. As a result of these transactions, net interest
expense was reduced by approximately $2.6 million from the dates of redemption and repurchase
through the respective maturity dates, based on interest rates in effect at the time of the
redemption and repurchase.
During 2005, the company repurchased, through a series of transactions, $151.8 million accreted
value of its convertible debentures. The related loss on the repurchases, including the premium
paid and the write-off of related deferred financing costs, aggregated $3.2 million ($1.9 million
net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively). Also
during 2005, the company repurchased, through a series of transactions, $26.8 million principal
amount of its 7% senior notes due in January 2007. The premium paid, the related deferred
financing costs written off upon the repurchase of this debt, and the loss for terminating the
related interest rate swaps, aggregated $1.1 million ($.7 million net of related taxes). These
charges totaled $4.3 million ($2.6 million net of related taxes or $.02 and $.01 per share on a
basic and diluted basis, respectively), including $1.7 million in cash, and were recognized as a
loss on prepayment of debt. As a result of these transactions, net interest expense was reduced by
approximately $2.4 million from the dates of repurchase through the redemption date, based on
interest rates in effect at the time of the repurchases.
Write-Down of Investments
During 2005, the company determined that an other-than-temporary decline in the fair value of its
investment in Marubun Corporation had occurred and, accordingly, recognized a loss of $3.0 million
($.03 per share on both a basic and diluted basis) on the write-down of this investment.
Interest Expense
Net interest expense increased by 12.2% in 2007 to $101.6 million, compared with $90.6 million in
2006, primarily due to the settlement of certain tax matters in 2006 (discussed in “Income Taxes”
below), which resulted in a reduction of related interest expense of $6.9 million. In addition,
the company had higher average debt outstanding, primarily due to acquisitions, and higher variable
interest rates in 2007, compared with the year-earlier period. Interest income decreased $2.1
million in 2007, compared with the year-earlier period, primary due to the use of interest-bearing
cash to fund acquisitions.
Net interest expense decreased by 1.4% in 2006 to $90.6 million, compared with $91.8 million in
2005, primarily as a result of the settlement of certain income tax matters in 2006 (discussed in
“Income Taxes” below), which resulted in a reduction of related interest expense of $6.9 million
($4.2 million net of related taxes or $.03 per share on both a basic and diluted basis), of which
$4.0 million ($2.4 million net of related taxes or $.02 per share on both a basic and diluted
basis) related to tax years prior to 2006, and lower debt balances, offset by higher variable-rate
debt and reduced interest income. Interest income decreased $6.0 million in 2006, compared with
the year-earlier period, primarily due to the use of interest-bearing cash to redeem the
convertible debentures and to fund acquisitions.
Income Taxes
The company recorded a provision for income taxes of $180.7 million (an effective tax rate of
30.5%) for 2007. During 2007, the company recorded an income tax
benefit of $6.0 million, net, ($.05 per share on both a basic and diluted basis) principally due to a reduction in deferred
income taxes as a result of the statutory tax rate change in Germany. These deferred income taxes
primarily related to the amortization of intangible assets for income tax purposes, which are not
amortized for accounting purposes. The company’s provision for income taxes and effective tax rate
for 2007 were impacted by the aforementioned income tax benefit and the previously discussed
restructuring and integration charges. Excluding the impact of the aforementioned income tax
benefit and restructuring and integration charges, the company’s effective tax rate was 31.7% for
2007.
The company recorded a provision for income taxes of $128.5 million (an effective tax rate of
24.8%) for 2006. During 2006, the company settled certain income tax matters
covering multiple years. As a result of the settlement of the tax matters, the company recorded
a reduction of the provision for income taxes of $46.2 million ($.38 per share on both a basic and
diluted basis), of which $40.4 million ($.33 per share on both a basic and diluted basis) related
to tax years prior to 2006. The company’s provision
26
Table of Contents
for income taxes and effective tax rate were impacted by the previously discussed resolution of
certain income tax matters, restructuring and integration charges, pre-acquisition warranty claim,
and pre-acquisition environmental matters. Excluding the impact related to tax years prior to 2006
of the previously discussed resolution of certain income tax matters, restructuring and integration
charges, pre-acquisition warranty claim, and pre-acquisition environmental matters, the company’s
effective tax rate was 32.4% for 2006.
The company recorded a provision for income taxes of $131.2 million (an effective tax rate of
34.0%) for 2005. The company’s provision for income taxes and effective tax rate for 2005 were
impacted by the previously discussed restructuring and integration charges, acquisition
indemnification credit, and write-down of an investment. There was no tax benefit provided on the
aforementioned write-down of an investment in 2005 as this capital loss was not deductible for tax
purposes. Excluding the impact of the previously discussed restructuring and integration charges,
acquisition indemnification credit, and write-down of an investment, the company’s effective tax
rate was 34.2% for 2005.
The company’s income tax provision and effective tax rate are primarily impacted by, among other
factors, the statutory tax rates in the countries in which it operates and the related level of
income generated by these operations.
Net Income
The company recorded net income of $407.8 million for 2007, compared with $388.3 million in the
year-earlier period. The increase in net income in 2007, compared with the year-earlier period, was
due to increased gross profit on higher sales, offset, in part, by increased selling, general and
administrative expenses to support the increase in sales, higher depreciation and amortization
expense primarily related to acquisitions, and a higher effective tax rate. In addition, included
in the results for 2007 are the previously discussed restructuring and integration charges of $7.0
million and income tax benefit of $6.0 million, net, principally due to a reduction in deferred
income taxes as a result of the statutory tax rate change in Germany. Included in the results for
2006 are the previously discussed restructuring and integration charges of $9.0 million, a charge
related to a pre-acquisition warranty claim of $1.9 million, a charge related to pre-acquisition
environmental matters arising out of the company’s purchase of Wyle of $.9 million, a loss on
prepayment of debt of $1.6 million, and the reduction of the provision for income taxes of $46.2
million and the reduction of interest expense, net of related taxes, of $4.2 million related to the
settlement of certain income tax matters totaling $50.4 million.
The company recorded net income of $388.3 million for 2006, compared with $253.6 million in the
year-earlier period. The increase in net income in 2006, compared with the year-earlier period,
was due to increased sales, the impact of efficiency initiatives reducing operating expenses, and,
to a lesser extent, the acquisitions of DNS, Ultra Source, and Alternative Technology. Included in
the results for 2005 are the previously discussed restructuring and integration charges of $7.3
million, acquisition indemnification credit of $1.3 million, loss on prepayment of debt of $2.6
million, and loss on the write-down of an investment of $3.0 million.
Net income for 2007 and 2006 included stock option expense of $7.0 million and $8.5 million,
respectively, resulting from the company’s adoption of Statement No. 123(R).
Liquidity and Capital Resources
At December 31, 2007 and 2006, the company had cash and cash equivalents of $447.7 million and
$337.7 million, respectively.
During 2007, the net amount of cash provided by the company’s operating activities was $850.7
million, the net amount of cash used for investing activities was $665.5 million, and the net
amount of cash used for financing activities was $82.2 million. The effect of exchange rate changes
on cash was an increase of $7.0 million.
During 2006, the net amount of cash provided by the company’s operating activities was $120.8
million, the net amount of cash used for investing activities was $238.7 million, and the net
amount of cash used for financing activities was $132.7 million. The effect of exchange rate
changes on cash was an increase of $7.6 million.
During 2005, the net amount of cash provided by the company’s operating activities was $402.5
million, the net amount of cash used for investing activities was $32.8 million, and the net amount
of cash used for financing activities was $88.4 million. The effect of exchange rate changes on
cash was a decrease of $5.9
27
Table of Contents
million.
Cash Flows from Operating Activities
The company maintains a significant investment in accounts receivable and inventories. As a
percentage of total assets, accounts receivable and inventories were approximately 61.6% and 66.0%
at December 31, 2007 and 2006, respectively.
The net amount of cash provided by the company’s operating activities during 2007 was $850.7
million. Earnings from operations, adjusted for non-cash items, a reduction in inventory, and an
increase in accounts payable and accrued expenses were the primary sources of cash. This was
offset, in part, by an increase in accounts receivable supporting increased sales.
The net amount of cash provided by the company’s operating activities during 2006 was $120.8
million, primarily due to earnings from operations, adjusted for non-cash items, offset, in part,
by increased inventory purchases, and increased accounts receivable supporting increased sales in
the global components businesses.
The net amount of cash provided by the company’s operating activities during 2005 was $402.5
million. Earnings from operations, adjusted for non-cash items, and an increase in accounts
payable were the primary sources of cash. This was offset, in part, by an increase in accounts
receivable supporting increased sales.
Working capital, as a percentage of sales, was 15.2%, 19.2%, and 19.6% in 2007, 2006, and 2005,
respectively.
Cash Flows from Investing Activities
The net amount of cash used for investing activities during 2007 was $665.5 million, primarily
reflecting $539.6 million of cash consideration paid for acquired businesses and $138.8 million for
capital expenditures, which includes $73.1 million of capital expenditures related to the company’s
global ERP initiative. This was offset, in part, by $13.0 million of cash proceeds, primarily
related to the sale of the company’s Lenexa, Kansas and Harlow, England facilities.
During 2007, the company acquired KeyLink, a leading enterprise computing solutions distributor in
North America, Adilam Pty. Ltd., a leading electronic components distributor in Australia and New
Zealand, Centia/AKS, specialty distributors of access infrastructure, security, and virtualization
software solutions in Europe, and Universe Electron Corporation, a distributor of semiconductor and
multimedia products in Japan, for aggregate cash consideration of $506.9 million. In addition, the
company made a payment of $32.7 million to increase its ownership interest in Ultra Source from
70.7% to 92.8%.
The net amount of cash used for investing activities during 2006 was $238.7 million, primarily
reflecting $176.2 million for consideration paid for acquired businesses and $66.1 million for
capital expenditures.
During 2006, the company acquired InTechnology, a distributor of storage and security solutions to
VARs based in the United Kingdom, Alternative Technology, a leading specialty distributor of access
infrastructure and security solutions in North America, and SKYDATA Corporation, a value-added
distributor of data storage solutions in Canada, for aggregate cash consideration of $165.3
million. In addition, the company made payments of $10.9 million to increase its ownership
interest in majority-owned subsidiaries and for other purchase consideration.
The net amount of cash used for investing activities during 2005 was $32.8 million, primarily
reflecting $179.0 million for consideration paid for acquired businesses, $33.2 million for
various capital expenditures offset, in part, by $158.6 million for net proceeds from the sale of
short-term investments and $18.4 million from the sale of facilities.
During 2005, the company acquired DNS, a distributor of mid-range computer products in Europe, the
component distribution business of Connektron Pty. Ltd., a passive, electromechanical, and
connectors distributor in Australia and New Zealand, and 70.7% of the common shares of Ultra
Source, one of the leading electronic components distributors in Taiwan, for aggregate cash
consideration of $156.4 million. In addition, the company made a final payment of $20.1 million
related to its 2004 acquisition of Disway AG and made payments of $2.5 million to increase its
ownership interest in majority-owned subsidiaries.
28
Table of Contents
During the fourth quarter of 2006, the company initiated a global ERP effort to standardize
processes worldwide and adopt best-in-class capabilities. Implementation is expected to be
phased-in over the next four years. For 2008, the estimated cash flow impact of this initiative
is expected to be in the $90 to $100 million range with the
annual impact decreasing by approximately $25 million in 2009. The company expects to finance these costs
with cash flows from operations.
Cash Flows from Financing Activities
The net amount of cash used for financing activities during 2007 was $82.2 million. Net repayments
of short-term borrowings of $90.3 million, repayments of long-term borrowings of $169.1 million
related to the company’s 7% senior notes that were repaid in January 2007 in accordance with their
terms, and repurchases of common stock of $84.2 million under the company’s share repurchase
program were the primary uses of cash. This was offset, in part, by net proceeds from long-term
borrowings of $198.5 million, which include proceeds from a $200.0 million term loan due in 2012,
proceeds from the exercise of stock options of $55.2 million, and $7.7 million related to excess
tax benefits from stock-based compensation arrangements.
The net amount of cash used for financing activities during 2006 was $132.7 million, primarily
reflecting $160.6 million used to repurchase convertible debentures and senior notes, $15.7 million
in other long-term debt repayments, and $22.3 million of net repayments of short-term borrowings,
offset, in part, by $59.2 million of proceeds from the exercise of stock options and $6.7 million
relating to excess tax benefits from stock-based compensation arrangements.
During 2006, the company redeemed the total amount outstanding of $283.2 million principal amount
($156.4 million accreted value) of its convertible debentures and repurchased $4.1 million
principal amount of its 7% senior notes due in January 2007. The related loss on the redemption
and repurchase, including any related premium paid, write-off of deferred financing costs, and cost
of terminating a portion of the related interest rate swaps, aggregated $2.6 million ($1.6 million
net of related taxes or $.01 per share on both a basic and diluted basis). As a result of these
transactions, net interest expense was reduced by approximately $2.6 million from the dates of
redemption and repurchase through the respective maturity dates, based on interest rates in effect
at the time of the redemption and repurchase.
The net amount of cash used for financing activities during 2005 was $88.4 million, primarily
reflecting $180.2 million used to repurchase convertible debentures and senior notes, and other
repayments of long-term borrowings of $2.4 million, offset, in part, by $82.2 million of proceeds
from the exercise of stock options and an increase in short-term borrowings of $12.0 million.
During 2005, the company repurchased, through a series of transactions, $151.8 million accreted
value of its convertible debentures. The related loss on the repurchases, including the premium
paid and the write-off of related deferred financing costs, aggregated $3.2 million ($1.9 million
net of related taxes or $.02 and $.01 per share on a basic and diluted basis, respectively). Also
during 2005, the company repurchased, through a series of transactions, $26.8 million principal
amount of its 7% senior notes due in January 2007. The premium paid, the related deferred
financing costs written off upon the repurchase of this debt, and the loss for terminating the
related interest rate swaps, aggregated $1.1 million ($.7 million net of related taxes). These
charges totaled $4.3 million ($2.6 million net of related taxes or $.02 and $.01 per share on a
basic and diluted basis, respectively), including $1.7 million in cash. As a result of these
transactions, net interest expense was reduced by approximately $2.4 million from the dates of
repurchase through the redemption date, based on interest rates in effect at the time of the
repurchases.
In January 2007, the company amended and restated its bank credit agreement and, among other
things, increased the revolving credit facility size from $600.0 million to $800.0 million and also
entered into a $200.0 million term loan. Interest on borrowings under the revolving credit
facility is based on a base rate or a euro currency rate plus a spread based on the company’s
credit ratings (.425% at December 31, 2007). The credit facility matures in January 2012. The
facility fee related to the credit facility is .125%. The $200.0 million term loan is repayable in
full in January 2012. Interest on the term loan is based on a base rate or euro currency rate plus
a spread based on the company’s credit ratings (.60% at December 31, 2007).
The company has an asset securitization program collateralized by accounts receivable of certain of
its North American subsidiaries. In March 2007, the company renewed its asset securitization
program and, among other things, increased its size from $550.0 million to $600.0 million and
extended its term to a three-year commitment maturing in March 2010. Interest on borrowings is
based on a base rate or a commercial paper rate plus a spread, which is based on the company’s
credit ratings (.225% at December 31, 2007). The facility
29
Table of Contents
fee is .125%.
The company had no outstanding borrowings under its revolving credit facility or its asset
securitization program at December 31, 2007 and 2006. The revolving credit facility and asset
securitization program include terms and conditions, which 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 of the covenants as of December 31, 2007. The company is currently not aware of any
events which would cause non-compliance in the future.
Contractual Obligations
Payments due under contractual obligations at December 31, 2007 are as follows (in thousands):
| Within | 1-3 | 4-5 | After | |||||||||||||||||
| 1 Year | Years | Years | 5 Years | Total | ||||||||||||||||
Debt |
$ | 11,777 | $ | 250,711 | $ | 200,138 | $ | 769,594 | $ | 1,232,220 | ||||||||||
Interest on long-term debt |
87,454 | 167,804 | 118,506 | 312,446 | 686,210 | |||||||||||||||
Capital leases |
1,116 | 2,090 | 804 | – | 4,010 | |||||||||||||||
Operating leases |
61,479 | 82,565 | 45,590 | 33,218 | 222,852 | |||||||||||||||
Purchase obligations (a) |
2,012,035 | 19,360 | 1,588 | 529 | 2,033,512 | |||||||||||||||
Other (b) |
14,388 | 12,491 | 4,578 | 2,886 | 34,343 | |||||||||||||||
| $ | 2,188,249 | $ | 535,021 | $ | 371,204 | $ | 1,118,673 | $ | 4,213,147 | |||||||||||
| (a) | Amounts represent an estimate of non-cancelable inventory purchase orders and other
contractual obligations related to information technology and facilities as of December 31,
2007. Most of the company’s inventory purchases are pursuant to authorized distributor
agreements, which are typically cancelable by either party at any time or on short notice,
usually within a few months. |
|
| (b) | Includes estimates of contributions required to meet the requirements of several defined
benefit plans. Amounts are subject to change based upon the performance of plan assets, as
well as the discount rate used to determine the obligation. The company is unable to estimate
the projected contributions beyond 2013. Also included are amounts relating to personnel,
facilities, customer termination, and certain other costs resulting from restructuring and
integration activities. |
Under the terms of various joint venture agreements, the company is required to pay its pro-rata
share of the third party debt of certain of its joint ventures in the event that the joint ventures are unable
to meet their obligations. At December 31, 2007, the company’s pro-rata share of this debt was
approximately $7.6 million.
Also, as discussed in Note 8 of the Notes to Consolidated Financial Statements, effective January
1, 2007, the company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” At December 31, 2007,
the company had a liability for unrecognized tax benefits and an accrual for the payment of related
interest totaling $88.1 million, of which approximately $3.4 million is expected to be paid within
one year. For the remaining liability, due to the uncertainties related to these tax matters, the
company is unable to make a reasonably reliable estimate when cash settlement with a taxing
authority will occur.
Share-Repurchase Program
In February 2006, the Board of Directors authorized the company to repurchase up to $100 million of
the company’s outstanding common stock through a share-repurchase program (the “program”). As of December 31, 2007,
the company repurchased 2,075,491 shares under this program with a
market value of $84.2 million. In December 2007, the Board of Directors authorized the company to repurchase an additional $100
million of the company’s outstanding common stock in such
amounts as to offset the dilution from the exercise of stock options
and other stock-based compensation plans.
Off-Balance Sheet Arrangements
The company has no off-balance sheet financing or unconsolidated special-purpose entities.
30
Table of Contents
Critical Accounting Policies and Estimates
The company’s consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires the company to make significant estimates and judgments that affect the reported amounts
of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and
liabilities. The company evaluates its estimates on an ongoing basis. The company bases its
estimates on historical experience and on various other assumptions that are believed reasonable
under the circumstances; the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.
The company believes the following critical accounting policies involve the more significant
judgments and estimates used in the preparation of its consolidated financial statements:
| • | The company recognizes revenue in accordance with the SEC Staff Accounting Bulletin No.
104, “Revenue Recognition” (“SAB 104”). Under SAB 104, revenue is recognized when there is
persuasive evidence of an arrangement, delivery has occurred or services are rendered, the
sales price is determinable, and collectibility is reasonably assured. Revenue typically is
recognized at time of shipment. Sales are recorded net of discounts, rebates, and returns. |
A portion of the company’s business involves shipments directly from its suppliers to its
customers. In these transactions, the company is responsible for negotiating price both with
the supplier and customer, payment to the supplier, establishing payment terms with the
customer, product returns, and has risk of loss if the customer does not make payment. As
the principal with the customer, the company recognizes the sale and cost of sale of the
product upon receiving notification from the supplier that the product was shipped.
In addition, the company has certain business with select customers and suppliers that is
accounted for on an agency basis (that is, the company recognizes the fees associated with
serving as an agent in sales with no associated cost of sales) in accordance with Emerging
Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus
Net as an Agent.”
| • | 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. |
| • | Inventories are stated at the lower of cost or market. Write-downs of inventories to market
value are based upon contractual provisions governing price protection, stock rotation, and
obsolescence, as well as assumptions about future demand and market conditions. If assumptions
about future demand change and/or actual market conditions are less favorable than those
projected by the company, additional write-downs of inventories may be required. Due to the
large number of transactions and the complexity of managing the process around price
protections and stock rotations, estimates are made regarding adjustments to the book cost of
inventories. Actual amounts could be different from those estimated. |
| • | The company assesses its long-term investments accounted for as available-for-sale on a
quarterly basis to determine whether declines in market value below cost are
other-than-temporary. When the decline is determined to be other-than-temporary, the cost
basis for the individual security is reduced and a loss is realized in the company’s
consolidated statement of operations in the period in which it occurs. When the decline is
determined to be temporary, the unrealized losses are included in the shareholders’ equity
section in the company’s consolidated balance sheets in “Other.” The company makes such
determination based upon the quoted market price, financial condition, operating results of
the investee, and the company’s intent and ability to retain the investment over a period of
time, which would be sufficient to allow for any recovery in market value. In addition, the
company assesses the following factors: |
| § | broad economic factors impacting the investee’s industry; |
||
| § | publicly available forecasts for sales and earnings growth for the industry and
investee; and |
||
| § | the cyclical nature of the investee’s industry. |
31
Table of Contents
The company could potentially have an impairment charge in future periods if, among other
factors, the investee’s future earnings differ from currently available forecasts.
| • | The carrying value of the company’s deferred tax assets is dependent upon the company’s
ability to generate sufficient future taxable income in certain tax jurisdictions. Should the
company determine that it is more likely than not that some portion or all of its deferred tax assets
will not be realized, a valuation allowance to the deferred tax assets would be established in
the period such determination was made. |
| • | It is the company’s policy to provide for uncertain tax positions and the related interest
and penalties based upon management’s assessment of whether a tax benefit is more likely than
not to be sustained upon examination by tax authorities. At December 31, 2007, the company
believes it has appropriately accounted for any unrecognized tax benefits. To the extent the
company prevails in matters for which a liability for an unrecognized tax benefit is
established or is required to pay amounts in excess of the liability, the company’s effective
tax rate in a given financial statement period may be affected. |
| • | The company uses various financial instruments, including derivative financial instruments,
for purposes other than trading. Derivatives used as part of the company’s risk management
strategy are designated at inception as hedges and measured for effectiveness both at
inception and on an ongoing basis. The company 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 effective
portion of the change in the fair value of interest rate swaps designated as fair value hedges
are 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 are
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
expense, net” in the company’s consolidated statements of operations. |
| • | The effective portion of the change in the fair value of derivatives designated as net
investment hedges are recorded in “Foreign currency translation adjustment” included in the
company’s consolidated balance sheets and any ineffective portion is recorded in earnings.
The company uses the hypothetical derivative method to assess the effectiveness of its net
investment hedge on a quarterly basis. |
| • | The company is subject to proceedings, lawsuits, and other claims related to environmental,
labor, product, tax, and other matters. The company assesses the likelihood of an adverse
judgment or outcomes for these matters, as well as the range of potential losses. A
determination of the reserves required, if any, is made after careful analysis. The required
reserves may change in the future due to new developments impacting the probability of a loss,
the estimate of such loss, and the probability of recovery of such loss from third parties. |
| • | The company recorded charges in connection with restructuring its businesses, and the
integration of acquired businesses. These items primarily include employee separation costs
and estimates related to the consolidation of facilities (net of sub-lease income),
contractual obligations, and the valuation of certain assets. Actual amounts could be
different from those estimated. |
| • | Effective January 1, 2006, the company adopted the provisions of Statement No. 123(R),
which requires share-based payment (“SBP”) awards exchanged for employee services to be
measured at fair value and expensed in the consolidated statements of operations over the
requisite employee service period. |
Prior to January 1, 2006, the company accounted for SBP awards under Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which utilized the
intrinsic value method and did not require any expense to be recorded in the consolidated
financial statements if the exercise price of the award was not less than the market price
of the underlying stock on the date of grant. The company elected to adopt, for periods
prior to January 1, 2006, the disclosure requirements of FASB Statement No. 123, “Accounting
for Stock-Based Compensation,” as amended by FASB Statement No. 148, “Accounting for
Stock-Based Compensation — Transition and Disclosure,” which used a fair value based method
of accounting for SBP awards.
The company adopted the modified prospective transition method provided for under Statement
No. 123(R) and, accordingly, did not restate prior period amounts. The fair value of stock
options is determined using the Black-Scholes valuation model and the assumptions shown in
Note 1 of the
32
Table of Contents
Notes to Consolidated Financial Statements (“Note 1”). The assumptions used in calculating the fair
value of SBP awards represent management’s best estimates. The company’s estimates may be
impacted by certain variables including, but not limited to, stock price volatility,
employee stock option exercise behaviors, additional stock option grants, estimates of
forfeitures, and related tax impacts. See Note 1 for a further discussion on stock-based
compensation.
| • | The costs and obligations of the company’s defined benefit pension plan are dependent on
actuarial assumptions. The two critical assumptions used, which impact the net periodic
pension cost (income) and the benefit obligation, are the discount rate and expected return on
plan assets. The discount rate represents the market rate for a high quality corporate bond,
and the expected return on plan assets is based on current and expected asset allocations,
historical trends, and expected returns on plan assets. These key assumptions are evaluated
annually. Changes in these assumptions can result in different expense and liability amounts. |
| • | The company performs an annual impairment test as of the first day of the fourth quarter,
or earlier if indicators of potential impairment exist, to evaluate goodwill. Goodwill is
considered impaired if the carrying amount of the reporting unit exceeds its estimated fair
value. In assessing the recoverability of goodwill, the company reviews both quantitative and
qualitative factors to support its assumptions with regard to fair value. The fair value of a
reporting unit is estimated using a weighted average multiple of earnings before interest and
taxes from comparable companies. In determining the fair value, the company makes certain
judgments, including the identification of reporting units and the selection of comparable
companies. If these estimates or their related assumptions change in the future as a result
of changes in strategy and/or market conditions, the company may be required to record an
impairment charge. |
| • | Shipping and handling costs may be reported as either a component of cost of products sold
or selling, general and administrative expenses. The company reports shipping and handling
costs, primarily related to outbound freight, in the consolidated statements of operations as
a component of selling, general and administrative expenses. If the company included such
costs in cost of products sold, gross profit margin as a percentage of sales for 2007 would
decrease from 14.3% to 13.9% with no impact on reported earnings. |
Impact of Recently Issued Accounting Standards
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), “Business Combinations” (“Statement No. 141(R)”). Statement No. 141(R) changes the
requirements for an acquirer’s recognition and measurement of the assets acquired and the
liabilities assumed in a business combination. Statement No. 141(R) is effective for annual
periods beginning after December 15, 2008 and should be applied prospectively for all business
combinations entered into after the date of adoption.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
“Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”
(“Statement No. 160”). Statement No. 160 requires (i) that noncontrolling (minority) interests be
reported as a component of shareholders’ equity, (ii) that net income attributable to the parent
and to the noncontrolling interest be separately identified in the consolidated statement of
operations, (iii) that changes in a parent’s ownership interest while the parent retains its
controlling interest be accounted for as equity transactions, (iv) that any retained noncontrolling
equity investment upon the deconsolidation of a subsidiary be initially measured at fair value, and
(v) that sufficient disclosures are provided that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. Statement No. 160 is
effective for annual periods beginning after December 15, 2008 and should be applied prospectively.
However, the presentation and disclosure requirements of the statement shall be applied
retrospectively for all periods presented. The adoption of the provisions of Statement No. 160 is
not anticipated to materially impact the company’s consolidated financial position and results of
operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (“Statement No. 157”) which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. Statement No. 157 applies to
other accounting pronouncements that require or permit fair value measurements and, accordingly,
does not require any new fair value measurements. Statement No. 157 is effective for fiscal years
beginning after November 15, 2007 for financial assets and liabilities, as well as for any other
assets and liabilities that are carried at fair value on a recurring basis, and should be applied
prospectively. The adoption of the provisions
of Statement No. 157 related to financial assets and liabilities and other assets and liabilities
that are carried at
33
Table of Contents
fair value on a recurring basis is not anticipated to materially impact the
company’s consolidated financial position and results of operations. Subsequently, the FASB
provided for a one-year deferral of the provisions of Statement No. 157 for non-financial assets
and liabilities that are recognized or disclosed at fair value in the consolidated financial
statements on a non-recurring basis. The company is currently evaluating the impact of adopting
the provisions of Statement No. 157 for non-financial assets and liabilities that are recognized or
disclosed on a non-recurring basis.
Information Relating to Forward-Looking Statements
This report includes forward-looking statements that are subject to numerous assumptions, risks,
and uncertainties, which could cause actual results or facts to differ materially from such
statements for a variety of reasons, including, but not limited to: industry conditions, the
company’s implementation of its new global financial system and the company’s planned
implementation of its new enterprise resource planning system, changes in product supply, pricing
and customer demand, competition, other vagaries in the global components and global ECS markets,
changes in relationships with key suppliers, increased profit margin pressure, the effects of
additional actions taken to become more efficient or lower costs, and the company’s ability to
generate additional cash flow. Forward-looking statements are those statements, which are not
statements of historical fact. These forward-looking statements can be identified by
forward-looking words such as “expects,” “anticipates,” “intends,” “plans,” “may,” “will,”
“believes,” “seeks,” “estimates,” and similar expressions. Shareholders and other readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date on which they are made. The company undertakes no obligation to update publicly or revise
any of the forward-looking statements.
34
Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The company is exposed to market risk from changes in foreign currency exchange rates and interest
rates.
Foreign Currency Exchange Rate Risk
The company, as a large, global organization, faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business practices evolve and
could materially impact the company’s financial results in the future. The company’s primary
exposure relates to transactions in which the currency collected from customers is different from
the currency utilized to purchase the product sold in Europe, the Asia Pacific region, Canada, and
Latin America. The company’s policy is to hedge substantially all such currency exposures for which
natural hedges do not exist. Natural hedges exist when purchases and sales within a specific
country are both denominated in the same currency and, therefore, no exposure exists to hedge with
a foreign exchange forward, option, or swap contracts (collectively, the “foreign exchange
contracts”). In many regions in Asia, for example, sales and purchases are primarily denominated in
U.S. dollars, resulting in a “natural hedge.” Natural hedges exist in most countries in which the
company operates, although the percentage of natural offsets, as compared with offsets that need to
be hedged by foreign exchange contracts, will vary from country to country. 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 is estimated using market quotes. The notional amount of the foreign exchange contracts
at December 31, 2007 and 2006 was $262.9 million and $298.0 million, respectively. The carrying
amounts, which are nominal, approximated fair value at December 31, 2007 and 2006.
The translation of the financial statements of the non-United States operations is impacted by
fluctuations in foreign currency exchange rates. The increase in consolidated sales and operating
income was impacted by the translation of the company’s international financial statements into
U.S. dollars. This resulted in increased sales of $394.7 million and increased operating income of
$23.4 million for 2007, compared with the year-earlier period, based on 2006 sales at the average
rate for 2007. Sales and operating income would have decreased by approximately $493.8 million and
$27.8 million, respectively, if average foreign exchange rates had declined by 10% against the U.S.
dollar in 2007. This amount was determined by considering the impact of a hypothetical foreign
exchange rate on the sales and operating income of the company’s international operations.
In May 2006, the company entered into a cross-currency swap, with a maturity date of July 2013, for
approximately $100.0 million or €78.3 million (the “2006 cross-currency swap”) to hedge a
portion of its net investment in euro-denominated net assets. The 2006 cross-currency swap is
designated as a net investment hedge and effectively converts the interest expense on $100.0
million of long-term debt from U.S. dollars to euros. As the notional amount of the 2006
cross-currency swap is expected to equal a comparable amount of hedged net assets, no material
ineffectiveness is expected. The 2006 cross-currency swap had a negative fair value of $14.4
million and $3.2 million at December 31, 2007 and 2006, respectively.
In October 2005, the company entered into a cross-currency swap, with a maturity date of October
2010, for approximately $200.0 million or €168.4 million (the “2005 cross-currency swap”) to
hedge a portion of its net investment in euro-denominated net assets. The 2005 cross-currency swap
is designated as a net investment hedge and effectively converts the interest expense on $200.0
million of long-term debt from U.S. dollars to euros. As the notional amount of the 2005
cross-currency swap is expected to equal a comparable amount of hedged net assets, no material
ineffectiveness is expected. The 2005 cross-currency swap had a negative fair value of $46.2
million and $21.7 million at December 31, 2007 and 2006, respectively.
Interest Rate Risk
The company’s interest expense, in part, is sensitive to the general level of interest rates in
North America, Europe, and the Asia Pacific region. The company historically has managed its
exposure to interest rate risk through the proportion of fixed-rate and floating-rate debt in its
total debt portfolio. Additionally, the company utilizes interest rate swaps in order to manage
its targeted mix of fixed- and floating-rate debt.
At December 31, 2007, approximately 56% of the company’s debt was subject to fixed rates, and 44%
of its debt was subject to floating rates. A one percentage point change in average interest rates
would not materially impact interest expense, net of interest income, in 2007. This was determined
by considering the impact of a hypothetical interest rate on the company’s average floating rate on
investments and outstanding
35
Table of Contents
debt. This analysis does not consider the effect of the level of overall economic activity that
could exist. In the event of a change in the level of economic activity, which may adversely impact
interest rates, the company could likely take actions to further mitigate any potential negative
exposure to the change. However, due to the uncertainty of the specific actions that might be taken
and their possible effects, the sensitivity analysis assumes no changes in the company’s financial
structure.
In December 2007, the company entered into an interest rate swap (the “2007 swap”) with a notional
amount of $50.0 million. The 2007 swap modifies the company’s interest rate exposure by
effectively converting the variable rate (5.403% at December 31, 2007) on a portion of its $200.0
million term loan to a fixed rate of 4.595% per annum through December 2009. The 2007 swap is
classified as a cash flow hedge and had a negative fair value of $.2 million at December 31, 2007.
In June 2004, the company entered into a series of interest rate swaps (the “2004 swaps”), with an
aggregate notional amount of $300.0 million. The 2004 swaps modify the company’s interest rate
exposure by effectively converting the fixed 9.15% senior notes to a floating rate, based on the
six-month U.S. dollar LIBOR plus a spread (an effective rate of 9.50% and 9.73% at December 31,
2007 and 2006, respectively), and a portion of the fixed 6.875% senior notes to a floating rate,
also based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 7.24% and 7.50%
at December 31, 2007 and 2006, respectively), through their maturities. The 2004 swaps are
classified as fair value hedges and had a fair value of $7.5 million and a negative fair value of
$3.2 million at December 31, 2007 and 2006, respectively.
36
Table of Contents
Item 8. Financial Statements and Supplementary Data.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Arrow Electronics, Inc.
Arrow Electronics, Inc.
We have audited the accompanying consolidated balance sheets of Arrow Electronics, Inc. (the
“company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the three years in the period ended December 31,
2007. Our audits also included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and the schedule are the responsibility of the company’s management. Our
responsibility is to express an opinion on these financial statements and the schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Arrow Electronics, Inc. at December 31, 2007 and
2006, and the consolidated results of their operations and their cash flows for each of the three
years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in all material
respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the company adopted EITF Issue No.
06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No.
43,” and as discussed in Note 8 to the consolidated financial statements, the company adopted FASB
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB
Statement No. 109,” effective January 1, 2007. As discussed in Note 13 to the consolidated financial
statements, the company adopted Statement of Financial Accounting Standards No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R),” effective December 31, 2006. As discussed in Note 1 to
the consolidated financial statements, the company adopted Statement of Financial Accounting
Standards No. 123(R), “Share-Based Payment,” as revised, effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Arrow Electronics, Inc.’s internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 8, 2008 expressed an unqualified opinion thereon.
/s/
ERNST & YOUNG LLP
New
York, New York
February 8, 2008
February 8, 2008
37
Table of Contents
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
| Years Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Sales |
$ | 15,984,992 | $ | 13,577,112 | $ | 11,164,196 | ||||||
Costs and expenses: |
||||||||||||
Cost of products sold |
13,699,715 | 11,545,719 | 9,424,586 | |||||||||
Selling, general and administrative expenses |
1,519,908 | 1,362,149 | 1,200,826 | |||||||||
Depreciation and amortization |
66,719 | 46,904 | 47,482 | |||||||||
Restructuring and integration charges |
11,745 | 11,829 | 12,716 | |||||||||
Pre-acquisition warranty claim |
- | 2,837 | - | |||||||||
Pre-acquisition environmental matters |
- | 1,449 | - | |||||||||
Acquisition indemnification credit |
- | - | (1,672 | ) | ||||||||
| 15,298,087 | 12,970,887 | 10,683,938 | ||||||||||
Operating income |
686,905 | 606,225 | 480,258 | |||||||||
Equity in earnings of affiliated companies |
6,906 | 5,221 | 4,492 | |||||||||
Loss on prepayment of debt |
- | 2,605 | 4,342 | |||||||||
Write-down of investments |
- | - | 3,019 | |||||||||
Interest expense, net |
101,628 | 90,564 | 91,828 | |||||||||
Income before income taxes and minority interest |
592,183 | 518,277 | 385,561 | |||||||||
Provision for income taxes |
180,697 | 128,457 | 131,248 | |||||||||
Income before minority interest |
411,486 | 389,820 | 254,313 | |||||||||
Minority interest |
3,694 | 1,489 | 704 | |||||||||
Net income |
$ | 407,792 | $ | 388,331 | $ | 253,609 | ||||||
Net income per share: |
||||||||||||
Basic |
$ | 3.31 | $ | 3.19 | $ | 2.15 | ||||||
Diluted |
$ | 3.28 | $ | 3.16 | $ | 2.09 | ||||||
Average number of shares outstanding: |
||||||||||||
Basic |
123,176 | 121,667 | 117,819 | |||||||||
Diluted |
124,429 | 123,181 | 124,080 | |||||||||
See accompanying notes.
38
Table of Contents
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
| December 31, | ||||||||
| 2007 | 2006 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 447,731 | $ | 337,730 | ||||
Accounts receivable, net |
3,281,169 | 2,710,321 | ||||||
Inventories |
1,679,866 | 1,691,536 | ||||||
Prepaid expenses and other assets |
180,629 | 156,034 | ||||||
Total current assets |
5,589,395 | 4,895,621 | ||||||
Property, plant and equipment, at cost: |
||||||||
Land |
41,553 | 41,810 | ||||||
Buildings and improvements |
175,979 | 167,157 | ||||||
Machinery and equipment |
580,278 | 481,689 | ||||||
| 797,810 | 690,656 | |||||||
Less: Accumulated depreciation and amortization |
(442,649 | ) | (428,283 | ) | ||||
Property, plant and equipment, net |
355,161 | 262,373 | ||||||
Investments in affiliated companies |
47,794 | 41,960 | ||||||
Cost in excess of net assets of companies acquired |
1,779,235 | 1,231,281 | ||||||
Other assets |
288,275 | 238,337 | ||||||
Total assets |
$ | 8,059,860 | $ | 6,669,572 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,535,583 | $ | 1,795,089 | ||||
Accrued expenses |
438,898 | 402,536 | ||||||
Short-term borrowings, including current portion of long-term debt |
12,893 | 262,783 | ||||||
Total current liabilities |
2,987,374 | 2,460,408 | ||||||
Long-term debt |
1,223,337 | 976,774 | ||||||
Other liabilities |
297,289 | 235,831 | ||||||
Shareholders’ equity: |
||||||||
Common stock, par value $1: |
||||||||
Authorized - 160,000 shares in 2007 and 2006 |
||||||||
Issued - 125,039 and 122,626 shares in 2007 and 2006, respectively |
125,039 | 122,626 | ||||||
Capital in excess of par value |
1,025,611 | 943,958 | ||||||
Retained earnings |
2,184,744 | 1,787,746 | ||||||
Foreign currency translation adjustment |
312,755 | 155,166 | ||||||
Other |
(8,720 | ) | (7,407 | ) | ||||
| 3,639,429 | 3,002,089 | |||||||
Less: Treasury stock (2,212 and 207 shares in 2007 and 2006,
respectively), at cost |
(87,569 | ) | (5,530 | ) | ||||
Total shareholders’ equity |
3,551,860 | 2,996,559 | ||||||
Total liabilities and shareholders’ equity |
$ | 8,059,860 | $ | 6,669,572 | ||||
See accompanying notes.
39
Table of Contents
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 407,792 | $ | 388,331 | $ | 253,609 | ||||||
Adjustments to reconcile net income to net cash provided by
operations: |
||||||||||||
Depreciation and amortization |
66,719 | 46,904 | 47,482 | |||||||||
Amortization of stock-based compensation |
21,389 | 21,268 | 6,953 | |||||||||
Amortization of deferred financing costs and discount on
notes |
2,144 | 2,808 | 3,589 | |||||||||
Equity in earnings of affiliated companies |
(6,906 | ) | (5,221 | ) | (4,492 | ) | ||||||
Minority interest |
3,694 | 1,489 | 704 | |||||||||
Excess tax benefits from stock-based compensation
arrangements |
(7,687 | ) | (6,661 | ) | - | |||||||
Deferred income taxes |
8,661 | (9,433 | ) | 21,920 | ||||||||
Restructuring and integration charges |
7,036 | 8,977 | 7,310 | |||||||||
Accretion of discount on zero coupon convertible debentures |
- | 876 | 8,698 | |||||||||
Pre-acquisition warranty claim and environmental matters |
- | 2,728 | - | |||||||||
Acquisition indemnification credit |
- | - | (1,267 | ) | ||||||||
Loss on prepayment of debt |
- | 1,558 | 2,596 | |||||||||
Write-down of investments |
- | - | 3,019 | |||||||||
Impact of settlement of tax matters |
- | (50,376 | ) | - | ||||||||
Change in assets and liabilities, net of effects of
acquired businesses: |
||||||||||||
Accounts receivable |
(279,636 | ) | (202,135 | ) | (188,235 | ) | ||||||
Inventories |
116,657 | (119,612 | ) | 11,707 | ||||||||
Prepaid expenses and other assets |
(19,315 | ) | (25,131 | ) | (17,300 | ) | ||||||
Accounts payable |
475,155 | 52,561 | 258,485 | |||||||||
Accrued expenses |
32,458 | 98 | 24,470 | |||||||||
Other |
22,582 | 11,811 | (36,700 | ) | ||||||||
Net cash provided by operating activities |
850,743 | 120,840 | 402,548 | |||||||||
Cash flows from investing activities: |
||||||||||||
Acquisition of property, plant and equipment |
(138,834 | ) | (66,078 | ) | (33,179 | ) | ||||||
Cash consideration paid for acquired businesses |
(539,618 | ) | (176,235 | ) | (178,998 | ) | ||||||
Proceeds from sale of facilities |
12,996 | - | 18,353 | |||||||||
Purchase of short-term investments |
- | - | (230,456 | ) | ||||||||
Proceeds from sale of short-term investments |
- | - | 389,056 | |||||||||
Other |
(23 | ) | 3,652 | 2,429 | ||||||||
Net cash used for investing activities |
(665,479 | ) | (238,661 | ) | (32,795 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Change in short-term borrowings |
(90,318 | ) | (22,298 | ) | 11,994 | |||||||
Repayment of long-term borrowings |
(2,312,251 | ) | (15,687 | ) | (2,400 | ) | ||||||
Proceeds from long-term borrowings |
2,510,800 | - | - | |||||||||
Repurchase/repayment of senior notes |
(169,136 | ) | (4,268 | ) | (27,762 | ) | ||||||
Redemption/repurchase of zero coupon convertible debentures |
- | (156,330 | ) | (152,449 | ) | |||||||
Proceeds from exercise of stock options |
55,228 | 59,194 | 82,176 | |||||||||
Excess tax benefits from stock-based compensation arrangements |
7,687 | 6,661 | - | |||||||||
Repurchases of common stock |
(84,236 | ) | - | - | ||||||||
Net cash used for financing activities |
(82,226 | ) | (132,728 | ) | (88,441 | ) | ||||||
Effect of exchange rate changes on cash |
6,963 | 7,618 | (5,945 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
110,001 | (242,931 | ) | 275,367 | ||||||||
Cash and cash equivalents at beginning of year |
337,730 | 580,661 | 305,294 | |||||||||
Cash and cash equivalents at end of year |
$ | 447,731 | $ | 337,730 | $ | 580,661 | ||||||
See accompanying notes.
40
Table of Contents
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
| Common | Capital | Foreign | Unamortized | |||||||||||||||||||||||||||||
| Stock | in Excess | Currency | Employee | Other | ||||||||||||||||||||||||||||
| at Par | of Par | Retained | Translation | Treasury | Stock | Comprehensive | ||||||||||||||||||||||||||
| Value | Value | Earnings | Adjustment | Stock | Awards | Income (Loss) | Total | |||||||||||||||||||||||||
Balance at December 31, 2004 |
$ | 117,675 | $ | 797,828 | $ | 1,145,806 | $ | 190,595 | $ | (36,735 | ) | $ | (3,738 | ) | $ | (17,245 | ) | $ | 2,194,186 | |||||||||||||
Net income |
- | - | 253,609 | - | - | - | - | 253,609 | ||||||||||||||||||||||||
Translation adjustments |
- | - | - | (177,287 | ) | - | - | - | (177,287 | ) | ||||||||||||||||||||||
Unrealized gain on securities, net |
- | - | - | - | - | - | 7,872 | 7,872 | ||||||||||||||||||||||||
Minimum pension liability adjustments, net |
- | - | - | - | - | - | (2,957 | ) | (2,957 | ) | ||||||||||||||||||||||
Comprehensive income |
81,237 | |||||||||||||||||||||||||||||||
Amortization of stock-based compensation |
- | 4,706 | - | - | - | 2,247 | - | 6,953 | ||||||||||||||||||||||||
Exercise of stock options |
2,612 | 51,190 | - | - | 28,888 | - | - | 82,690 | ||||||||||||||||||||||||
Tax benefits related to exercise of stock
options |
- | 7,315 | - | - | - | - | - | 7,315 | ||||||||||||||||||||||||
Restricted stock awards, net |
- | 333 | - | - | 600 | (933 | ) | - | - | |||||||||||||||||||||||
Other |
(1 | ) | 508 | - | - | (31 | ) | 29 | - | 505 | ||||||||||||||||||||||
Balance at December 31, 2005 |
120,286 | 861,880 | 1,399,415 | 13,308 | (7,278 | ) | (2,395 | ) | (12,330 | ) | 2,372,886 | |||||||||||||||||||||
Net income |
- | - | 388,331 | - | - | - | - | 388,331 | ||||||||||||||||||||||||
Translation adjustments |
- | - | - | 141,858 | - | - | - | 141,858 | ||||||||||||||||||||||||
Unrealized gain on securities, net |
- | - | - | - | - | - | 1,683 | 1,683 | ||||||||||||||||||||||||
Minimum pension liability adjustments, net |
- | - | - | - | - | - | 5,810 | 5,810 | ||||||||||||||||||||||||
Comprehensive income |
537,682 | |||||||||||||||||||||||||||||||
Reclassification of employee stock awards
upon adoption of FASB Statement No.
123(R) |
- | (2,395 | ) | - | - | - | 2,395 | - | - | |||||||||||||||||||||||
Amortization of stock-based compensation |
- | 21,268 | - | - | - | - | - | 21,268 | ||||||||||||||||||||||||
Exercise of stock options |
2,339 | 56,529 | - | - | - | - | - | 58,868 | ||||||||||||||||||||||||
Tax benefits related to exercise of stock
options |
- | 6,661 | - | - | - | - | - | 6,661 | ||||||||||||||||||||||||
Restricted stock awards, net |
- | (1,790 | ) | - | - | 1,790 | - | - | - | |||||||||||||||||||||||
Adjustment to initially apply FASB
Statement No. 158 |
- | - | - | - | - | - | (2,570 | ) | (2,570 | ) | ||||||||||||||||||||||
Other |
1 | 1,805 | - | - | (42 | ) | - | - | 1,764 | |||||||||||||||||||||||
Balance at December 31, 2006 |
$ | 122,626 | $ | 943,958 | $ | 1,787,746 | $ | 155,166 | $ | (5,530 | ) | $ | - | $ | (7,407 | ) | $ | 2,996,559 | ||||||||||||||
41
Table of Contents
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
(In thousands)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
(In thousands)
| Common | Capital | Foreign | Unamortized | |||||||||||||||||||||||||||||
| Stock | in Excess | Currency | Employee | Other | ||||||||||||||||||||||||||||
| at Par | of Par | Retained | Translation | Treasury | Stock | Comprehensive | ||||||||||||||||||||||||||
| Value | Value | Earnings | Adjustment | Stock | Awards | Income (Loss) | Total | |||||||||||||||||||||||||
Balance at December 31, 2006 |
$ | 122,626 | $ | 943,958 | $ | 1,787,746 | $ | 155,166 | $ | (5,530 | ) | $ | - | $ | (7,407 | ) | $ | 2,996,559 | ||||||||||||||
Net income |
- | - | 407,792 | - | - | - | - | 407,792 | ||||||||||||||||||||||||
Translation adjustments |
- | - | - | 157,589 | - | - | - | 157,589 | ||||||||||||||||||||||||
Unrealized gain on securities, net |
- | - | - | - | - | - | 648 | 648 | ||||||||||||||||||||||||
Unrealized loss on interest rate swaps
designated as cash flow hedges, net |
- | - | - | - | - | - | (94 | ) | (94 | ) | ||||||||||||||||||||||
Other employee benefit plan items, net |
- | - | - | - | - | - | (1,867 | ) | (1,867 | ) | ||||||||||||||||||||||
Comprehensive income |
564,068 | |||||||||||||||||||||||||||||||
Amortization of stock-based compensation |
- | 21,389 | - | - | - | - | - | 21,389 | ||||||||||||||||||||||||
Exercise of stock options |
2,216 | 52,867 | - | - | - | - | - | 55,083 | ||||||||||||||||||||||||
Performance share awards |
197 | (197 | ) | - | - | - | - | - | - | |||||||||||||||||||||||
Tax benefits related to exercise of
stock options |
- | 9,791 | - | - | - | - | - | 9,791 | ||||||||||||||||||||||||
Restricted stock awards, net |
- | (2,197 | ) | - | - | 2,197 | - | - | - | |||||||||||||||||||||||
Repurchase of common stock |
- | - | - | - | (84,236 | ) | - | - | (84,236 | ) | ||||||||||||||||||||||
Adjustment to initially apply EITF Issue
No. 06-2 |
- | - | (10,794 | ) | - | - | - | - | (10,794 | ) | ||||||||||||||||||||||
Balance at December 31, 2007 |
$ | 125,039 | $ | 1,025,611 | $ | 2,184,744 | $ | 312,755 | $ | (87,569 | ) | $ | - | $ | (8,720 | ) | $ | 3,551,860 | ||||||||||||||
See accompanying notes.
42
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the company and its majority-owned
subsidiaries. All significant intercompany transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires the company to make significant estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, which are readily convertible into cash,
with original maturities of three months or less.
Financial Instruments
The company uses various financial instruments, including derivative financial instruments, for
purposes other than trading. Derivatives used as part of the company’s risk management strategy
are designated at inception as hedges and measured for effectiveness both at inception and on an
ongoing basis. The company 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 effective portion of the change in the fair
value of interest rate swaps designated as fair value hedges are 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 are recorded in the shareholders’ equity section
in the accompanying consolidated balance sheets in “Other.” The ineffective portion of the
interest rate swap, if any, is recorded in “Interest expense, net” in the accompanying consolidated
statements of operations.
Net Investment Hedge
The effective portion of the change in the fair value of derivatives designated as net investment
hedges are recorded in “Foreign currency translation adjustment” included in the accompanying
consolidated balance sheets and any ineffective portion is recorded in earnings. The company uses
the hypothetical derivative method to assess the effectiveness of its net investment hedges on a
quarterly basis.
Inventories
Inventories are stated at the lower of cost or market. Cost approximates the first-in, first-out
method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed on the straight-line
method over the estimated useful lives of the assets. The estimated useful lives for depreciation
of buildings is generally 20 to 30 years, and the estimated useful lives of machinery and equipment
is generally three to ten years. Leasehold improvements are amortized over the shorter of the term
of the related lease or the life of the improvement. Long-lived assets are reviewed for impairment
whenever changes in circumstances or events may indicate that the carrying amounts may not be
recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized
for the difference.
43
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Identifiable Intangible Assets
The company ascribes value to certain identifiable intangible assets, which primarily consist of
customer relationships and other intangible assets (consisting of non-competition agreements,
customer databases, and sales backlog), as a result of acquisitions. Identifiable intangible
assets are included in “Other assets” in the accompanying consolidated balance sheets.
Amortization is computed on the straight-line method over their estimated useful lives. The
weighted average useful life of customer relationships is approximately 12 years. The useful life
of other intangible assets ranges from one to five years. Identifiable intangible assets are
reviewed for impairment whenever changes in circumstances or events may indicate that the carrying
amounts may not be recoverable. If the fair value is less than the carrying amount of the asset, a
loss is recognized for the difference.
Software Development Costs
The company capitalizes certain internal and external costs incurred to acquire or create internal-use
software in accordance with American Institute of Certified Public Accountants Statement of
Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use.” Capitalized software costs are amortized on a straight-line basis over the estimated useful
life of the software, which is generally three to seven years.
Investments
Investments are accounted for using the equity method of accounting if the investment provides the
company the ability to exercise significant influence, but not control, over an investee.
Significant influence is generally deemed to exist if the company has an ownership interest in the
voting stock of the investee between 20% and 50%, although other factors, such as representation on
the investee’s Board of Directors, are considered in determining whether the equity method of
accounting is appropriate. The company records its investments in equity method investees meeting
these characteristics as “Investments in affiliated companies” in the accompanying consolidated
balance sheets.
All other equity investments, which consist of investments for which the company does not have the
ability to exercise significant influence, are accounted for under the cost method, if private, or
as available-for-sale, if public, and are included in “Other assets” in the accompanying
consolidated balance sheets. Under the cost method of accounting, investments are carried at cost
and are adjusted only for other-than-temporary declines in realizable value and additional
investments. If classified as available-for-sale, the company accounts for the changes in the fair
value with unrealized gains or losses reflected in the shareholders’ equity section in the
accompanying consolidated balance sheets in “Other.” The company assesses its long-term investments
accounted for as available-for-sale on a quarterly basis to determine whether declines in market
value below cost are other-than-temporary. When the decline is determined to be
other-than-temporary, the cost basis for the individual security is reduced and a loss is realized
in the company’s consolidated statement of operations in the period in which it occurs. When the
decline is determined to be temporary, the unrealized losses are included in the shareholders’
equity section in the accompanying consolidated balance sheets in “Other.” The company makes such
determination based upon the quoted market price, financial condition, operating results of the
investee, and the company’s intent and ability to retain the investment over a period of time,
which would be sufficient to allow for any recovery in market value. In addition, the company
assesses the following factors:
| • | broad economic factors impacting the investee’s industry; |
||
| • | publicly available forecasts for sales and earnings growth for the industry and
investee; and |
||
| • | the cyclical nature of the investee’s industry. |
The company could potentially have an impairment charge in future periods if, among other factors,
the investee’s future earnings differ from currently available forecasts.
44
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Cost in Excess of Net Assets of Companies Acquired
The company performs an annual impairment test as of the first day of the fourth quarter, or
earlier if indicators of potential impairment exist, to evaluate goodwill. Goodwill is considered
impaired if the carrying amount of the reporting unit exceeds its estimated fair value. In
assessing the recoverability of goodwill, the company reviews both quantitative and qualitative
factors to support its assumptions with regard to fair value. The fair value of a reporting unit
is estimated using a weighted average multiple of earnings before interest and taxes from
comparable companies. In determining the fair value, the company makes certain judgments,
including the identification of reporting units and the selection of comparable companies. If
these estimates or their related assumptions change in the future as a result of changes in
strategy and/or market conditions, the company may be required to record an impairment charge.
Foreign Currency Translation
The assets and liabilities of international operations are translated at the exchange rates in
effect at the balance sheet date, with the related translation gains or losses reported as a
separate component of shareholders’ equity in the accompanying consolidated balance sheets. The
results of international operations are translated at the monthly average exchange rates.
Income Taxes
Income taxes are accounted for under the liability method. Deferred taxes reflect the tax
consequences on future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts. The carrying value of the company’s deferred tax assets is
dependent upon the company’s ability to generate sufficient future taxable income in certain tax
jurisdictions. Should the company determine that it is more likely than not that some portion or
all of its deferred assets will not be realized, a valuation allowance to the deferred tax assets
would be established in the period such determination was made.
It is the company’s policy to provide for uncertain tax positions and the related interest and
penalties based upon management’s assessment of whether a tax benefit is more likely than not to be
sustained upon examination by tax authorities. At December 31, 2007, the company believes it has
appropriately accounted for any unrecognized tax benefits. To the extent the company prevails in
matters for which a liability for an unrecognized tax benefit is established or is required to pay
amounts in excess of the liability, the company’s effective tax rate in a given financial statement
period may be affected.
Net Income Per Share
Basic net income per share is computed by dividing net income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted net income per
share reflects the potential dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
Comprehensive Income
Comprehensive income consists of net income, foreign currency translation adjustments, unrealized
gains or losses on securities, and interest rate swaps designated as
cash flow hedges, in addition to other employee benefit plan items. Unrealized gains or losses on
securities are net of any reclassification adjustments for realized gains or losses included in
net income. Except for unrealized gains or losses resulting from the company’s cross-currency
swaps, foreign currency translation adjustments included in comprehensive income were not tax
effected as investments in international affiliates are deemed to be permanent.
45
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Stock-Based Compensation
Effective January 1, 2006, the company adopted the provisions of Financial Accounting Standards
Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment” and the Securities and
Exchange Commission Staff Accounting Bulletin No. 107 (collectively, “Statement No. 123(R)”),
which requires share-based payment (“SBP”) awards exchanged for employee services to be measured
at fair value and expensed in the consolidated statements of operations over the requisite
employee service period.
Prior to January 1, 2006, the company accounted for SBP awards under Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees,” which utilized the intrinsic value
method and did not require any expense to be recorded in the consolidated financial statements if
the exercise price of the award was not less than the market price of the underlying stock on the
date of grant. The company elected to adopt, for periods prior to January 1, 2006, the disclosure
requirements of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” as amended by
FASB Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”
(collectively, “Statement No. 123”), which used a fair value based method of accounting for SBP
awards.
Statement No. 123(R) requires companies to record compensation expense for stock options measured
at fair value, on the date of grant, using an option-pricing model. The fair value of the
company’s stock options is determined using the Black-Scholes valuation model, which is consistent
with the company’s valuation techniques previously utilized under Statement No. 123.
The company adopted the modified prospective transition method provided for under Statement No.
123(R) and, accordingly, did not restate prior period amounts. Under this transition method,
compensation expense for the years ended December 31, 2007 and 2006 includes compensation expense
for all SBP awards granted prior to, but not yet vested as of, January 1, 2007 and 2006 based on
the grant date fair value estimated in accordance with the original provisions of Statement No.
123. Stock-based compensation expense for all SBP awards granted after January 1, 2006 is based on
the grant date fair value estimated in accordance with the provisions of Statement No. 123(R).
Stock-based compensation expense includes an estimate for forfeitures and is recognized over the
expected term of the award on a straight-line basis. Upon adoption of Statement No. 123(R), the
company evaluated the need to record a cumulative effect adjustment relating to estimated
forfeitures for unvested, previously issued awards and concluded the impact was not material.
As a result of adopting Statement No. 123(R), for the years ended December 31, 2007 and 2006, the
company recorded, as a component of selling, general and administrative expenses, charges of
$11,190 ($6,986 net of related taxes or $.06 per share on both a basic and diluted basis) and
$12,979 ($8,543 net of related taxes or $.07 per share on both a basic and diluted basis),
respectively, relating to the expensing of stock options.
Statement No. 123(R) requires that the realized tax benefit related to the excess of the deductible
amount over the compensation expense recognized be reported as a financing cash flow rather than as
an operating cash flow, as required under previous accounting guidance. As a result, the related
excess tax benefits for the years ended December 31, 2007 and 2006 of $7,687 and $6,661,
respectively, is classified as a reduction in cash flows from operating activities and as a cash
inflow from financing activities. The actual tax benefit realized from SBP awards for the years
ended December 31, 2007 and 2006 was $11,249 and $7,297, respectively.
46
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The following table presents the company’s pro forma net income and basic and diluted net income
per share for the year ended December 31, 2005 had compensation expense been determined in
accordance with the fair value method of accounting at the grant dates for awards under the
company’s various stock-based compensation plans:
| 2005 | ||||
Net income, as reported |
$ | 253,609 | ||
Impact of stock-based employee compensation expense
determined under the fair value method for all awards,
net of related taxes |
(9,100 | ) | ||
Pro forma net income |
$ | 244,509 | ||
Net income per share: |
||||
Basic-as reported |
$ | 2.15 | ||
Basic-pro forma |
$ | 2.08 | ||
Diluted-as reported |
$ | 2.09 | ||
Diluted-pro forma |
$ | 2.01 | ||
The fair value of SBP awards was estimated using the Black-Scholes valuation model with the
following weighted-average assumptions for the years ended December 31:
| 2007 | 2006 | 2005 | ||||||||||
Volatility (percent) * |
29 | 35 | 39 | |||||||||
Expected term (in years) ** |
3.6 | 4.4 | 4.3 | |||||||||
Risk-free interest rate (percent) *** |
4.6 | 4.7 | 4.4 | |||||||||
| * | Volatility is measured using historical daily price changes of the company’s common stock
over the expected term of the option. |
|
| ** | The expected term represents the weighted average period the option is expected to be
outstanding and is based primarily on the historical exercise behavior of employees. |
|
| *** | The risk-free interest rate is based on the U.S. Treasury zero-coupon yield with a maturity
that approximates the expected term of the option. |
There is no expected dividend yield.
The weighted-average fair value per option granted was $11.03, $11.11, and $11.90 for the years
ended December 31, 2007, 2006, and 2005, respectively.
Segment Reporting
Operating segments are defined as components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The company’s operations are
classified into two reportable business segments: global components and global enterprise computing
solutions (“ECS”).
Revenue Recognition
The company recognizes revenue in accordance with the Securities and Exchange Commission Staff
Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Under SAB 104, revenue is
recognized when there is persuasive evidence of an arrangement, delivery has occurred or services
are rendered, the sales price is determinable, and collectibility is reasonably assured. Revenue
typically is recognized at time of shipment. Sales are recorded net of discounts, rebates, and
returns.
47
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
A portion of the company’s business involves shipments directly from its suppliers to its
customers. In these transactions, the company is responsible for negotiating price both with the
supplier and customer, payment to the supplier, establishing payment terms with the customer,
product returns, and has risk of loss if the customer does not make payment. As the principal with
the customer, the company recognizes the sale and cost of sale of the product upon receiving
notification from the supplier that the product was shipped.
In addition, the company has certain business with select customers and suppliers that is
accounted for on an agency basis (that is, the company recognizes the fees associated with serving
as an agent in sales with no associated cost of sales) in accordance with Emerging Issues Task
Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.”
Shipping and Handling Costs
Shipping and handling costs included in selling, general and administrative expenses totaled
$67,911, $65,599, and $56,629 in 2007, 2006, and 2005, respectively.
Sabbatical Liability
Effective January 1, 2007, the company adopted EITF Issue No. 06-2, “Accounting for Sabbatical
Leave and Other Similar Benefits Pursuant to FASB Statement No. 43,” (“EITF Issue No. 06-2”). EITF
Issue No. 06-2 requires that compensation expense associated with a sabbatical leave, or other
similar benefit arrangements, be accrued over the requisite service period during which an employee
earns the benefit. Upon adoption, the company recognized a liability of $18,048 and a
cumulative-effect adjustment to retained earnings of $10,794, net of related taxes.
Impact of Recently Issued Accounting Standards
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), “Business Combinations” (“Statement No. 141(R)”). Statement No. 141(R) changes the
requirements for an acquirer’s recognition and measurement of the assets acquired and the
liabilities assumed in a business combination. Statement No. 141(R) is effective for annual
periods beginning after December 15, 2008 and should be applied prospectively for all business
combinations entered into after the date of adoption.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
“Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”
(“Statement No. 160”). Statement No. 160 requires (i) that noncontrolling (minority) interests be
reported as a component of shareholders’ equity, (ii) that net income attributable to the parent
and to the noncontrolling interest be separately identified in the consolidated statement of
operations, (iii) that changes in a parent’s ownership interest while the parent retains its
controlling interest be accounted for as equity transactions, (iv) that any retained noncontrolling
equity investment upon the deconsolidation of a subsidiary be initially measured at fair value, and
(v) that sufficient disclosures are provided that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. Statement No. 160 is
effective for annual periods beginning after December 15, 2008 and should be applied prospectively.
However, the presentation and disclosure requirements of the statement shall be applied
retrospectively for all periods presented. The adoption of the provisions of Statement No. 160 is
not anticipated to materially impact the company’s consolidated financial position and results of
operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (“Statement No. 157”) which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. Statement No. 157 applies to
other accounting pronouncements that require or permit fair value measurements and, accordingly,
does not require any new fair value measurements. Statement No. 157 is effective for fiscal years
beginning after November 15, 2007 for financial assets and liabilities, as well as for any other
assets and liabilities that are carried at fair value on a recurring basis, and should be applied
prospectively. The adoption of the
48
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
provisions of Statement No. 157 related to financial assets and
liabilities and other assets and liabilities that are carried at fair value on a recurring basis is
not anticipated to materially impact the company’s consolidated financial position and results of
operations. Subsequently, the FASB provided for a one-year
deferral of the provisions of Statement No. 157 for non-financial assets and liabilities that are
recognized or disclosed at fair value in the consolidated financial statements on a non-recurring
basis. The company is currently evaluating the impact of adopting the provisions of Statement No.
157 for non-financial assets and liabilities that are recognized or disclosed on a non-recurring
basis.
Reclassification
Certain prior year amounts were reclassified to conform to the current year presentation.
2. Acquisitions
The following acquisitions were accounted for as purchase transactions and, accordingly, results of
operations were included in the consolidated results of the company from the dates of acquisition.
2007
On March 31, 2007, the company acquired from Agilysys, Inc. (“Agilysys”) substantially all of the
assets and operations of their KeyLink Systems Group business (“KeyLink”) for a purchase price of
$480,640 in cash, which included acquisition costs and final adjustments based upon a closing
audit. The company also entered into a long-term procurement agreement with Agilysys. KeyLink, a
leading enterprise computing solutions distributor, provides complex solutions from industry
leading manufacturers to more than 800 reseller partners. KeyLink has long-standing reseller
relationships that provide the company with significant cross-selling opportunities. KeyLink’s
highly experienced sales and marketing professionals strengthen the company’s existing
relationships with value-added resellers (“VARs”) and position the company to attract new
relationships. Total KeyLink sales for 2006, including estimated revenues associated with the
above-mentioned procurement agreement, were approximately $1,600,000.
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 KeyLink acquisition:
Accounts receivable, net |
$ | 168,958 | ||
Inventories |
47,100 | |||
Prepaid expenses and other assets |
4,893 | |||
Property, plant and equipment |
10,074 | |||
Cost in excess of net assets of companies acquired |
455,345 | |||
Accounts payable |
(199,828 | ) | ||
Accrued expenses |
(2,862 | ) | ||
Other liabilities |
(3,040 | ) | ||
Net consideration paid |
$ | 480,640 | ||
The preliminary allocation is subject to refinement as the company has not yet completed its final
evaluation of the fair value of the assets acquired and liabilities assumed, including the final
valuation of any potential intangible assets created through this acquisition.
The cost in excess of net assets of companies acquired related to the KeyLink acquisition was
recorded in the company’s global ECS business segment. Substantially all of the intangible assets
related to the KeyLink acquisition are expected to be deductible for income tax purposes.
49
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The following table summarizes the company’s consolidated results of operations for 2007 and 2006,
as well as the unaudited pro forma consolidated results of operations of the company, as though the
KeyLink acquisition occurred on January 1:
| For the Years Ended December 31, | ||||||||||||||||
| 2007 | 2006 | |||||||||||||||
| As Reported | Pro Forma | As Reported | Pro Forma | |||||||||||||
Sales |
$ | 15,984,992 | $ | 16,281,515 | $ | 13,577,112 | $ | 14,861,426 | ||||||||
Net income |
407,792 | 409,178 | 388,331 | 399,906 | ||||||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 3.31 | $ | 3.32 | $ | 3.19 | $ | 3.29 | ||||||||
Diluted |
$ | 3.28 | $ | 3.29 | $ | 3.16 | $ | 3.25 | ||||||||
The unaudited pro forma consolidated results of operations does not purport to be indicative of the
results obtained if the above acquisition had occurred as of the beginning of 2007 and 2006, or of
those results that may be obtained in the future, and does not include any impact from the
procurement agreement with Agilysys.
In June 2007, the company acquired the component distribution business of Adilam Pty. Ltd.
(“Adilam”), a leading electronic component distributor in Australia and New Zealand. Total Adilam
sales for 2006 were approximately $18,000. The impact of the acquisition of the component
distribution business of Adilam was not material to the company’s consolidated financial position
and results of operations.
In September 2007, the company acquired Centia Group Limited and AKS Group AB (“Centia/AKS”),
specialty distributors of access infrastructure, security and virtualization software solutions in
Europe. Total Centia/AKS sales for the full year of 2007 were approximately $130,000. The impact
of the Centia/AKS acquisitions were not material to the company’s consolidated financial position
and results of operations.
In November 2007, the company acquired Universe Electron Corporation (“UEC”), a distributor of
semiconductor and multimedia products in Japan. UEC is based in Tokyo, Japan. Total UEC sales for
the full year 2007 were approximately $15,000. The impact of the UEC acquisition was not material
to the company’s consolidated financial position and results of operations.
2006
On November 30, 2006, the company acquired Alternative Technology, Inc. (“Alternative Technology”)
for a purchase price of $77,346, which included $17,483 of debt paid at closing, cash acquired of
$2,315, and acquisition costs. Additional cash consideration ranging from zero to a maximum of
$4,800 may be due if Alternative Technology achieves certain specified financial performance
targets over a three-year period from January 1, 2007 through December 31, 2009. Alternative
Technology, which is headquartered in Englewood, Colorado, has approximately 150 employees and
supports VARs in delivering solutions that optimize, accelerate, monitor, and secure end-user’s
networks. Total Alternative Technology sales for 2006 were approximately $250,000, of which
$48,699 were included in the company’s consolidated results of operations from the acquisition
date. The cash consideration paid, net of cash acquired, was $75,031.
On December 29, 2006, the company acquired InTechnology plc’s storage and security distribution
business (“InTechnology”) for a purchase price of $80,457, which included acquisition costs.
InTechnology, which is headquartered in Harrogate, England, has approximately 200 employees and
delivers storage and security solutions to VARs in the United Kingdom. Total InTechnology sales
for 2006 were approximately $320,000. The cash consideration paid was $80,457.
50
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The following table summarizes the allocation of the net consideration paid to the fair value of
the assets acquired and liabilities assumed for the Alternative Technology and InTechnology
acquisitions (“2006 acquisitions”):
Accounts receivable, net |
$ | 108,066 | ||
Inventories |
31,761 | |||
Prepaid expenses and other assets |
10,076 | |||
Property, plant and equipment |
2,154 | |||
Cost in excess of net assets of companies acquired |
73,094 | |||
Identifiable intangible assets |
33,110 | |||
Accounts payable |
(68,485 | ) | ||
Accrued expenses |
(29,621 | ) | ||
Other liabilities |
(4,667 | ) | ||
Net consideration paid |
$ | 155,488 | ||
During the fourth quarter of 2007, the company completed its valuation of identifiable intangible
assets. The company allocated $32,553 of the purchase price to intangible assets relating to
customer relationships, with a weighted average useful life of approximately ten years, and other
intangible assets (consisting of non-competition agreements and sales backlog) of $557, with useful
lives ranging from one to three years. These identifiable intangible assets are included in “Other
assets” in the accompanying consolidated balance sheets.
The following table summarizes the company’s consolidated results of operations for 2006 and 2005,
as well as the unaudited pro forma consolidated results of operations of the company, as though the
2006 acquisitions occurred on January 1:
| For the Years Ended December 31, | ||||||||||||||||
| 2006 | 2005 | |||||||||||||||
| As Reported | Pro Forma | As Reported | Pro Forma | |||||||||||||
Sales |
$ | 13,577,112 | $ | 14,094,895 | $ | 11,164,196 | $ | 11,718,265 | ||||||||
Net income |
388,331 | 392,578 | 253,609 | 260,551 | ||||||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 3.19 | $ | 3.23 | $ | 2.15 | $ | 2.21 | ||||||||
Diluted |
$ | 3.16 | $ | 3.19 | $ | 2.09 | $ | 2.14 | ||||||||
The unaudited pro forma consolidated results of operations does not purport to be indicative of the
results obtained if the above acquisition had occurred as of the beginning of 2006 and 2005, or of
those results that may be obtained in the future.
In February 2006, the company acquired SKYDATA Corporation (“SKYDATA”), a value-added distributor
of data storage solutions in Mississauga, Ottawa, and Calgary, as well as Laval, Quebec. Total
SKYDATA sales for 2005 were approximately $43,000. The impact of the SKYDATA acquisition was not
deemed to be material to the company’s consolidated financial position and results of operations.
2005
On December 30, 2005, the company acquired DNSint.com AG (“DNS”) for a purchase price of $116,224,
which included cash acquired as well as acquisition costs. In addition, there was the assumption
of $30,638 in debt. DNS is a distributor of mid-range computer products in Central, Northern, and
Eastern Europe and is one of the largest suppliers of Sun Microsystems, Inc. products in Europe.
In 2005, DNS had sales in excess of $400,000. The cash consideration paid, net of cash acquired of
$7,500, was $108,724.
51
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
In December 2005, through a series of transactions, the company acquired 70.7% of the common shares
of Ultra Source Technology Corp. (“Ultra Source”) for a purchase price of $64,647, which included
cash acquired as well as acquisition costs. In addition, Ultra Source had $78,850 in debt and
$19,497 in cash.
Ultra Source is one of the leading electronic components distributors in Taiwan with sales offices
and distribution centers in Taiwan, Hong Kong, and the People’s Republic of China. In 2005, Ultra
Source had sales in excess of $500,000. The cash consideration paid, net of cash acquired, was
$45,150.
The following table summarizes the company’s consolidated results of operations for 2005, as well
as the unaudited pro forma consolidated results of operations of the company, as though the
acquisitions of DNS and Ultra Source occurred on January 1:
| For the Year Ended | ||||||||
| December 31, 2005 | ||||||||
| As Reported | Pro Forma | |||||||
Sales |
$ | 11,164,196 | $ | 12,138,880 | ||||
Net income |
253,609 | 257,784 | ||||||
Net income per share: |
||||||||
Basic |
$ | 2.15 | $ | 2.19 | ||||
Diluted |
$ | 2.09 | $ | 2.12 | ||||
The unaudited pro forma consolidated results of operations does not purport to be indicative of the
results obtained if the above acquisition had occurred as of the beginning of 2005, or of those
results that may be obtained in the future.
On July 1, 2005, the company acquired the component distribution business of Connektron Pty. Ltd.
(“Connektron”), a passive, electromechanical, and connectors distributor in Australia and New
Zealand. The impact of the Connektron acquisition was not deemed to be material to the company’s
consolidated financial position and results of operations.
Other
Amortization expense related to identifiable intangible assets for the years ended December 31,
2007 and 2006 was $14,546 and $1,609, respectively. Amortization expense for each of the years 2008 through 2012 are estimated to be approximately $14,448, $13,402, $13,335, $13,043, and $11,243, respectively.
In July 2007, the company made a payment of $32,685 that was capitalized as cost in excess of net
assets of companies acquired, partially offset by the carrying value of the related minority
interest, to increase its ownership interest in Ultra Source from 70.7% to 92.8%. In January 2008,
the company made a payment of $8,667 to increase its ownership interest in Ultra Source to 100%.
In January 2008, the company acquired all of the assets related to the franchise components
distribution business of Hynetic Electronics and Shreyanics Electronics (“Hynetic”). Hynetic is
based in India. The impact of the acquisition of Hynetic was not material to the company’s
consolidated financial position and results of operations.
Additionally, during 2006 and 2005, the company made payments of $4,666 and $2,527, respectively,
which were capitalized as cost in excess of net assets of companies acquired, partially offset by
the carrying value of the related minority interest, to increase its ownership interest in other
majority-owned subsidiaries.
52
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
3. Cost in Excess of Net Assets of Companies Acquired
Cost in excess of net assets of companies acquired allocated to the company’s business segments
are as follows:
| Global | ||||||||||||
| Components | Global ECS | Total | ||||||||||
December 31, 2005 |
$ | 946,357 | $ | 106,909 | $ | 1,053,266 | ||||||
Acquisitions |
14,746 | 97,884 | 112,630 | |||||||||
Other (primarily foreign currency translation) |
53,204 | 12,181 | 65,385 | |||||||||
December 31, 2006 |
1,014,307 | 216,974 | 1,231,281 | |||||||||
Acquisitions |
21,500 | 460,235 | 481,735 | |||||||||
Other (primarily foreign currency translation) |
55,442 | 10,777 | 66,219 | |||||||||
December 31, 2007 |
$ | 1,091,249 | $ | 687,986 | $ | 1,779,235 | ||||||
All existing and future cost in excess of net assets of companies acquired are subject to an annual
impairment test as of the first day of the fourth quarter of each year, or earlier if indicators of
potential impairment exist.
4. Investments
Affiliated Companies
The company has a 50% interest in several joint ventures with Marubun Corporation (collectively
“Marubun/Arrow”) and a 50% interest in Altech Industries (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, the company’s investment
and long-term note receivable in Altech Industries, and the company’s other equity investments at
December 31:
| 2007 | 2006 | |||||||
Marubun/Arrow |
$ | 31,835 | $ | 27,283 | ||||
Altech Industries |
15,782 | 14,419 | ||||||
Other |
177 | 258 | ||||||
| $ | 47,794 | $ | 41,960 | |||||
The equity in earnings (loss) of affiliated companies for the years ended December 31 consist of
the following:
| 2007 | 2006 | 2005 | ||||||||||
Marubun/Arrow |
$ | 5,440 | $ | 4,024 | $ | 4,027 | ||||||
Altech Industries |
1,550 | 1,244 | 500 | |||||||||
Other |
(84 | ) | (47 | ) | (35 | ) | ||||||
| $ | 6,906 | $ | 5,221 | $ | 4,492 | |||||||
Under the terms of various joint venture agreements, the company is required to pay its pro-rata
share of the third party debt of certain of its joint ventures in the event that the joint ventures are
unable to meet their obligations. At December 31, 2007, the company’s pro-rata share of this debt
was approximately $7,600. The company believes there is sufficient equity in the joint ventures to
meet their obligations.
53
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Investment Securities
The company has a 3.3% equity ownership interest in WPG Holdings Co., Ltd. (“WPG”) and an 8.4%
equity ownership interest in Marubun Corporation (“Marubun”), which are accounted for as
available-for-sale securities.
The fair value of the company’s available-for-sale securities are as follows at December 31:
| 2007 | 2006 | |||||||||||||||
| Marubun | WPG | Marubun | WPG | |||||||||||||
Cost basis |
$ | 20,046 | $ | 10,798 | $ | 20,046 | $ | 10,798 | ||||||||
Unrealized holding gain (loss) |
(1,212 | ) | 17,160 | 12,173 | 1,496 | |||||||||||
Fair value |
$ | 18,834 | $ | 27,958 | $ | 32,219 | $ | 12,294 | ||||||||
The company has concluded that an other-than-temporary decline has not occurred in its investment in Marubun. In making this
determination, the company considered its intent and ability to hold the investment until the cost
is recovered, the financial condition and near-term prospects of Marubun, the magnitude of the
loss compared to the investment’s cost, the length of the time the investment was in an unrealized
loss position, and publicly available information about the industry and geographic region in
which Marubun operates. In addition, the fair value of the Marubun investment has been below the
cost basis for less than twelve months.
During 2005, the company determined that an other-than-temporary decline in the fair value of its
investment in Marubun had occurred and, accordingly, recognized a loss of $3,019 ($.03 per share
on both a basic and diluted basis) on the write-down of this investment. The new cost basis of
the company’s investment in Marubun is $20,046.
The fair value of these investments are included in “Other assets” in the accompanying
consolidated balance sheets and the related net unrealized holding gains and losses are included
in “Other” in the shareholders’ equity section in the accompanying consolidated balance sheets.
5. Accounts Receivable
The company has an asset securitization program collateralized by accounts receivable of certain of
its North American subsidiaries. In March 2007, the company renewed the asset securitization
program and, among other things, increased its size from $550,000 to $600,000 and extended its term
to a three-year commitment maturing in March 2010. 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 under FASB
Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.” Accordingly, the accounts receivable and related debt obligation remain on the
company’s consolidated balance sheet. Interest on borrowings is based on a base rate or a
commercial paper rate plus a spread, which is based on the company’s credit ratings (.225% at
December 31, 2007). The facility fee is .125%.
The company had no outstanding borrowings under the program at December 31, 2007 and 2006.
Accounts receivable, net, consists of the following at December 31:
| 2007 | 2006 | |||||||
Accounts receivable |
$ | 3,352,401 | $ | 2,785,725 | ||||
Allowance for doubtful accounts |
(71,232 | ) | (75,404 | ) | ||||
Accounts receivable, net |
$ | 3,281,169 | $ | 2,710,321 | ||||
54
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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.
6. Debt
Short-term borrowings, including current portion of long-term debt, consist of the following at
December 31:
| 2007 | 2006 | |||||||
Short-term borrowings in various countries |
$ | 12,893 | $ | 93,832 | ||||
7% senior notes, due 2007 |
- | 169,136 | ||||||
Interest rate swaps |
- | (185 | ) | |||||
| $ | 12,893 | $ | 262,783 | |||||
Short-term borrowings in various countries are primarily utilized to support the working capital
requirements of certain international operations. The weighted average interest rates on these
borrowings at December 31, 2007 and 2006 were 4.2% and 5.5%, respectively.
Long-term debt consists of the following at December 31:
| 2007 | 2006 | |||||||
9.15% senior notes, due 2010 |
$ | 199,991 | $ | 199,987 | ||||
Bank term loan, due 2012 |
200,000 | - | ||||||
6.875% senior notes, due 2013 |
349,627 | 349,559 | ||||||
6.875% senior debentures, due 2018 |
197,822 | 197,613 | ||||||
7.5% senior debentures, due 2027 |
197,331 | 197,191 | ||||||
Cross-currency swap, due 2010 |
46,198 | 21,729 | ||||||
Cross-currency swap, due 2013 |
14,438 | 3,218 | ||||||
Interest rate swaps |
7,546 | (3,245 | ) | |||||
Other obligations with various interest rates and due dates |
10,384 | 10,722 | ||||||
| $ | 1,223,337 | $ | 976,774 | |||||
The 7.5% senior debentures are not redeemable prior to their maturity. The 9.15% senior notes,
6.875% senior notes, and 6.875% senior debentures may be called at the option of the company
subject to “make whole” clauses.
The estimated fair market value at December 31, as a percentage of par value, is as follows:
| 2007 | 2006 | |||||||
7% senior notes, due 2007 |
- | 100 | % | |||||
9.15% senior notes, due 2010 |
111 | % | 112 | % | ||||
6.875% senior notes, due 2013 |
109 | % | 105 | % | ||||
6.875% senior debentures, due 2018 |
106 | % | 103 | % | ||||
7.5% senior debentures, due 2027 |
107 | % | 108 | % | ||||
The company’s bank term loan, cross-currency swaps, interest rate swaps, and other obligations
approximate their fair value.
55
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Annual payments of borrowings during each of the years 2008 through 2012 are $12,893, $1,308,
$251,493, $914, and $200,028, respectively, and $769,594 for all years thereafter.
In January 2007, the 7% senior notes were repaid in accordance with their terms.
In January 2007, the company amended and restated its bank credit agreement and, among other
things, increased the revolving credit facility size from $600,000 to $800,000 and also entered
into a $200,000
term loan. Interest on borrowings under the revolving credit facility is based on a base rate or a
euro currency rate plus a spread based on the company’s credit ratings (.425% at December 31,
2007). The company had no outstanding borrowings under the credit facility at December 31, 2007 and
2006. The credit facility matures in January 2012. The facility fee related to the credit
facility is .125%. The $200,000 term loan is repayable in full in January 2012. Interest on the
term loan is based on a base rate or a euro currency rate plus a spread based on the company’s
credit ratings (.60% at December 31, 2007).
The revolving credit facility and the asset securitization program include terms and conditions,
which 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 of the covenants as of December 31,
2007. The company is currently not aware of any events which would cause non-compliance in the
future.
During 2006, the company redeemed the total amount outstanding of $283,184 principal amount
($156,354 accreted value) of its zero coupon convertible debentures due in 2021 (“convertible
debentures”) and repurchased $4,125 principal amount of its 7% senior notes due in January 2007.
The related loss on the redemption and repurchase, including any related premium paid, write-off of
deferred financing costs, and cost of terminating a portion of the related interest rate swaps,
aggregated $2,605 ($1,558 net of related taxes or $.01 per share on both a basic and diluted basis)
and was recognized as a loss on prepayment of debt. As a result of these transactions, net
interest expense was reduced by approximately $2,600 from the dates of redemption and repurchase
through the respective maturity dates, based on interest rates in effect at the time of the
redemption and repurchase.
During 2005, the company repurchased, through a series of transactions, $151,845 accreted value of
its convertible debentures. The related loss on the repurchases, including the premium paid and the
write-off of related deferred financing costs, aggregated $3,209 ($1,919 net of related taxes or
$.02 and $.01 per share on a basic and diluted basis, respectively). Also during 2005, the company
repurchased, through a series of transactions, $26,750 principal amount of its 7% senior notes due
in January 2007. The premium paid, the related deferred
financing costs written off upon the
repurchase of this debt, and the loss for terminating the related interest rate swaps, aggregated
$1,133 ($677 net of related taxes). These charges totaled $4,342 ($2,596 net of related taxes or
$.02 and $.01 per share on a basic and diluted basis, respectively), including $1,697 in cash, and
were recognized as a loss on prepayment of debt. As a result of these transactions, net interest
expense was reduced by approximately $2,381 from the dates of repurchase through the redemption
date, based on interest rates in effect at the time of the repurchases.
Interest expense, net, includes interest income of $5,726, $7,817, and $13,789 in 2007, 2006, and
2005, respectively. Interest paid, net of interest income, amounted to $98,881, $105,078, and
$81,689 in 2007, 2006, and 2005, respectively.
7. Financial Instruments
Cross-Currency Swaps
In May 2006, the company entered into a cross-currency swap, with a maturity date of July 2013, for
approximately $100,000 or €78,281 (the “2006 cross-currency swap”) to hedge a portion of its net
investment in euro-denominated net assets. The 2006 cross-currency swap is designated as a net
investment hedge and effectively converts the interest expense on $100,000 of long-term debt from
U.S. dollars to euros. As the notional amount of the 2006 cross-currency swap is expected to equal
a
56
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
comparable amount of hedged net assets, no material ineffectiveness is expected. The 2006
cross-currency swap had a negative fair value of $14,438 and $3,218 at December 31, 2007 and 2006,
respectively.
In October 2005, the company entered into a cross-currency swap, with a maturity date of October
2010, for approximately $200,000 or €168,384 (the “2005 cross-currency swap”) to hedge a portion
of its net investment in euro-denominated net assets. The 2005 cross-currency swap is designated
as a net investment hedge and effectively converts the interest expense on $200,000 of long-term
debt from U.S. dollars to euros. As the notional amount of the 2005 cross-currency swap is
expected to equal a comparable amount of hedged net assets, no material ineffectiveness is
expected. The 2005 cross-currency swap had a negative fair value of $46,198 and $21,729 at December 31, 2007 and 2006,
respectively.
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,
primarily the euro. 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 is estimated using market quotes. The notional amount of the foreign
exchange contracts at December 31, 2007 and 2006 was $262,940 and $297,950, respectively. The
carrying amounts, which are nominal, approximated fair value at December 31, 2007 and 2006.
Interest Rate Swaps
In December 2007, the company entered into an interest rate swap (the “2007 swap”) with a notional
amount of $50,000. The 2007 swap modifies the company’s interest rate exposure by effectively
converting the variable rate (5.403% at December 31, 2007) on a portion of its $200,000 term loan
to a fixed rate of 4.595% per annum through December 2009. The 2007 swap is classified as a cash
flow hedge and had a negative fair value of $155 at December 31, 2007.
In January 2008, the company entered into an interest rate swap (the “2008 swap”) with a notional
amount of $50,000. The 2008 swap modifies the company’s interest rate exposure by effectively
converting the variable rate (5.194% at January 4, 2008) on a portion of its $200,000 term loan to
a fixed rate of 4.319% per annum through December 2009.
In June 2004, the company entered into a series of interest rate swaps (the “2004 swaps”), with an
aggregate notional amount of $300,000. The 2004 swaps modify the company’s interest rate exposure
by effectively converting the fixed 9.15% senior notes to a floating rate, based on the six-month
U.S. dollar LIBOR plus a spread (an effective rate of 9.50% and 9.73% at December 31, 2007 and
2006, respectively), and a portion of the fixed 6.875% senior notes to a floating rate, also based
on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 7.24% and 7.50% at December
31, 2007 and 2006, respectively), through their maturities. The 2004 swaps are classified as fair
value hedges and had a fair value of $7,546 and a negative fair value of $3,245 at December 31,
2007 and 2006, respectively.
57
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
8. Income Taxes
The provision for income taxes for the years ended December 31 consists of the following:
| 2007 | 2006 | 2005 | ||||||||||
Current |
||||||||||||
Federal |
$ | 101,077 | $ | 92,842 | $ | 68,759 | ||||||
State |
13,410 | 19,159 | 6,894 | |||||||||
International |
57,549 | 25,889 | 33,675 | |||||||||
| 172,036 | 137,890 | 109,328 | ||||||||||
Deferred |
||||||||||||
Federal |
(6 | ) | (11,892 | ) | 73 | |||||||
State |
5,124 | 953 | 10,974 | |||||||||
International |
3,543 | 1,506 | 10,873 | |||||||||
| 8,661 | (9,433 | ) | 21,920 | |||||||||
| $ | 180,697 | $ | 128,457 | $ | 131,248 | |||||||
The principal causes of the difference between the U.S. federal statutory tax rate of 35% and
effective income tax rates for the years ended December 31 are as follows:
| 2007 | 2006 | 2005 | ||||||||||
United States |
$ | 262,068 | $ | 252,334 | $ | 230,624 | ||||||
International |
330,115 | 265,943 | 154,937 | |||||||||
Income before income taxes and minority interest |
$ | 592,183 | $ | 518,277 | $ | 385,561 | ||||||
Provision at statutory rate |
$ | 207,264 | $ | 181,397 | $ | 134,946 | ||||||
State taxes, net of federal benefit |
12,047 | 13,073 | 11,614 | |||||||||
International effective tax rate differential |
(54,448 | ) | (24,492 | ) | (11,839 | ) | ||||||
Other non-deductible expenses |
3,270 | 2,280 | 2,808 | |||||||||
Changes in
tax accruals and reserves |
15,838 | (40,426 | ) | - | ||||||||
Other |
(3,274 | ) | (3,375 | ) | (6,281 | ) | ||||||
Provision for income taxes |
$ | 180,697 | $ | 128,457 | $ | 131,248 | ||||||
During
2007, the company recorded an income tax benefit of $6,024, net, principally due to a reduction in deferred income
taxes as a result of the statutory tax rate change in Germany. These deferred income taxes
primarily related to the amortization of intangible assets for income tax purposes, which are not
amortized for accounting purposes.
During 2006, the company settled certain income tax matters covering multiple years. As a result
of the settlement of the tax matters, the company recorded a reduction of $46,176 in “Provision for
income taxes,” of which $40,426 related to tax years prior to 2006, in the accompanying
consolidated statements of operations. In connection with the settlement of the tax matters, an
accrual of $6,900 ($4,200 net of related taxes) for related interest costs, of which $3,994 related
to tax years prior to 2006, was reversed and, accordingly, the company recorded a reduction in
“Interest expense, net” in the accompanying consolidated statements of operations.
58
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Effective January 1, 2007, the company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN
48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For
those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. There was not a material impact on the company’s consolidated
financial position and results of operations as a result of the adoption of the provisions of FIN
48. At December 31, 2007, the company had a liability for unrecognized tax benefits of $77,702 (of
which $73,720, if recognized, would favorably affect the company’s effective tax rate) and an
accrual of $10,395 for the payment of related interest. The company
does not believe there will be any material changes in its
unrecognized tax positions over the next twelve months.
Interest costs related to unrecognized tax benefits are classified as a component of “Interest
expense, net” in the accompanying consolidated statements of operations. Penalties, if any, are
recognized as a component of “Selling, general and administrative expenses.” The company recognized
$4,149 of interest expense related to unrecognized tax benefits for the year ended December 31,
2007.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1, 2007 |
$ | 43,308 | ||
Additions based on tax positions taken during a prior period |
22,714 | |||
Reductions based on tax positions taken during a prior period |
- | |||
Additions based on tax positions taken during the current period |
14,943 | |||
Reductions based on tax positions taken during the current period |
- | |||
Reductions related to settlement of tax matters |
(2,762 | ) | ||
Reductions related to a lapse of applicable statute of limitations |
(501 | ) | ||
Balance at December 31, 2007 |
$ | 77,702 | ||
In many cases the company’s uncertain tax positions are related to tax years that remain subject to
examination by tax authorities. The following describes the open tax years, by major tax
jurisdiction, as of December 31, 2007:
United States – Federal
|
2004 – present | |
United States – State
|
1998 – present | |
Germany (a)
|
2003 – present | |
Hong Kong
|
2001 – present | |
Italy (a)
|
2002 – present | |
Sweden
|
2001 – present | |
United Kingdom
|
2005 – present |
| (a) | Includes federal as well as local jurisdictions. |
Deferred income taxes are provided for the effects of temporary differences between the tax basis
of an asset or liability and its reported amount in the consolidated balance sheets. These
temporary differences result in taxable or deductible amounts in future years.
59
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The significant components of the company’s deferred tax assets and liabilities, included
primarily in “Prepaid expenses and other assets,” “Other assets,” and “Other liabilities” in the
accompanying consolidated balance sheets, consist of the following at December 31:
| 2007 | 2006 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 39,154 | $ | 52,981 | ||||
Capital loss carryforwards |
12,457 | 15,971 | ||||||
Inventory adjustments |
36,335 | 37,122 | ||||||
Allowance for doubtful accounts |
14,232 | 20,447 | ||||||
Accrued expenses |
52,692 | 42,230 | ||||||
Pension costs |
5,135 | 5,112 | ||||||
Derivative
financial instruments |
23,981 | - | ||||||
Integration and restructuring reserves |
2,060 | 1,154 | ||||||
Other |
4,045 | 12,947 | ||||||
| 190,091 | 187,964 | |||||||
Valuation allowance |
(34,814 | ) | (50,466 | ) | ||||
Total deferred tax assets |
$ | 155,277 | $ | 137,498 | ||||
Deferred tax liabilities: |
||||||||
Goodwill |
$ | (60,887 | ) | $ | (61,754 | ) | ||
Other |
(2,734 | ) | (21 | ) | ||||
Total deferred tax liabilities |
$ | (63,621 | ) | $ | (61,775 | ) | ||
Total net deferred tax assets |
$ | 91,656 | $ | 75,723 | ||||
At December 31, 2007, certain international subsidiaries had tax loss carryforwards of
approximately $162,721 expiring in various years after 2008. Deferred tax assets related to the
tax loss carryforwards of the international subsidiaries in the amount of $33,227 as of December
31, 2007 were recorded with a corresponding valuation allowance of $20,132. In addition, a
valuation allowance of $2,225 was provided against the other deferred tax assets for certain
international subsidiaries. The impact of the change in this valuation allowance on the effective
rate reconciliation is included in the international effective tax rate differential.
At December 31, 2007, the company had a capital loss carryforward of approximately $31,498. This
loss will expire through 2010. A full valuation allowance of $12,457 was provided against the
deferred tax asset relating to the capital loss carryforward.
Valuation allowances reflect the deferred tax benefits that management is uncertain of the ability
to utilize in the future.
Cumulative undistributed earnings of international subsidiaries were $1,438,309 at December 31,
2007. No deferred U.S. federal income taxes were provided for the undistributed earnings as they
are permanently reinvested in the company’s international operations.
Income
taxes paid, net of income taxes refunded, amounted to $189,620, $163,889, and $97,916 in
2007, 2006, and 2005, respectively.
9. Restructuring, Integration, and Other Charges
The company recorded restructuring and integration charges of $11,745 ($7,036 net of related taxes
or $.06 per share on both a basic and diluted basis), $11,829 ($8,977 net of related taxes or $.07
per share on both a basic and diluted basis), and $12,716 ($7,310 net of related taxes or $.06 and
$.05 per share
60
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
on a basic and diluted basis, respectively) in 2007, 2006, and 2005, respectively.
2007
Restructuring
Included in the total restructuring and integration charges above for 2007 is $9,708 related to
initiatives by the company to improve operating efficiencies. During 2007, the company took a
series of steps to make its organizational structure more efficient. These actions are expected to
reduce costs by approximately $40,000 per annum in North America, with approximately $16,000
realized in the second half of 2007. Also included in the total restructuring and integration
charges above for 2007 is a net restructuring credit of $359 primarily related to the reversal of
excess reserves, which were previously established through restructuring charges in prior periods,
a gain on the sale of the Lenexa, Kansas facility of $548 that was vacated in 2007 due to the
company’s continued efforts to reduce real estate costs, and integration charges of $2,944
primarily related to the acquisition of KeyLink.
The following table presents the restructuring charge and activity for 2007:
| Personnel | ||||||||||||||||
| Costs | Facilities | Other | Total | |||||||||||||
Restructuring charge |
$ | 11,312 | $ | (1,947 | ) | $ | 343 | $ | 9,708 | |||||||
Payments/proceeds |
(7,563 | ) | 7,896 | (258 | ) | 75 | ||||||||||
Foreign currency translation |
66 | (133 | ) | (71 | ) | (138 | ) | |||||||||
December 31, 2007 |
$ | 3,815 | $ | 5,816 | $ | 14 | $ | 9,645 | ||||||||
The restructuring charge of $9,708 in 2007 includes personnel costs of $11,312 related to the
elimination of approximately 400 positions, primarily within multiple functions in North America
within the company’s global components business segment, related to the company’s continued focus on
operational efficiency. Facilities includes a restructuring credit of $1,947, primarily related to
a gain on the sale of the Harlow, England facility of $8,506 that was vacated in 2007, offset by
facilities costs of $6,559, primarily related to exit activities for a vacated facility in Europe
due to the company’s continued efforts to reduce real estate costs.
2006
Restructuring
Included in the total restructuring and integration charges above for 2006 is $12,280 related to
initiatives by the company to improve operating efficiencies, resulting in savings of approximately
$9,000 per annum. Also included in the total restructuring and integration charges above for 2006
is a net restructuring credit of $451 primarily related to the reversal of excess reserves, which
were previously established through restructuring charges in prior periods.
The following table presents the restructuring charge and activity for 2006 and 2007:
| Asset | ||||||||||||||||||||
| Personnel | Write- | |||||||||||||||||||
| Costs | Facilities | Downs | Other | Total | ||||||||||||||||
Restructuring charge |
$ | 6,542 | $ | 1,228 | $ | 4,484 | $ | 26 | $ | 12,280 | ||||||||||
Payments |
(4,305 | ) | (624 | ) | - | (26 | ) | (4,955 | ) | |||||||||||
Non-cash usage |
- | - | (4,484 | ) | - | (4,484 | ) | |||||||||||||
Foreign currency translation |
(26 | ) | (92 | ) | - | - | (118 | ) | ||||||||||||
December 31, 2006 |
2,211 | 512 | - | - | 2,723 | |||||||||||||||
Restructuring charge |
(330 | ) | (548 | ) | - | - | (878 | ) | ||||||||||||
Payments |
(1,568 | ) | 13 | - | - | (1,555 | ) | |||||||||||||
Foreign currency translation |
32 | 23 | - | - | 55 | |||||||||||||||
December 31, 2007 |
$ | 345 | $ | - | $ | - | $ | - | $ | 345 | ||||||||||
61
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The restructuring charge of $12,280 in 2006 includes personnel costs of $6,542 related to the
elimination of approximately 300 positions, primarily within multiple functions in North America
within the company’s global components business segment, related to the outsourcing of certain
administrative functions and the closure of a warehouse facility. Facilities costs of $1,228
related to exit activities for three vacated facilities in Europe due to the company’s continued
efforts to reduce real estate costs. Also included in the restructuring charge is a charge
related to the write-down of certain capitalized software in Europe of $4,484. This write-down
resulted from the company’s decision in the fourth quarter of 2006 to implement a global Enterprise
Resource Planning system, which caused these software costs to become redundant and have no future
benefit.
2005
Restructuring
Included in the total restructuring and integration charges above for 2005 is $12,898 related to
actions announced by the company to better optimize the use of its mainframe, reduce real estate
costs, and be more efficient in its distribution centers. Also included in the total restructuring
and integration charges above for 2005 is a net restructuring credit of $182 primarily related to
the reversal of excess reserves, which were previously established through restructuring charges in
prior periods.
The following table presents the restructuring charge and activity for 2005, 2006, and 2007:
| Personnel | ||||||||||||||||
| Costs | Facilities | Other | Total | |||||||||||||
Restructuring charge (credit) |
$ | 13,335 | $ | (1,349 | ) | $ | 912 | $ | 12,898 | |||||||
Payments/proceeds |
(8,717 | ) | 1,555 | (472 | ) | (7,634 | ) | |||||||||
Non-cash usage |
(407 | ) | - | (150 | ) | (557 | ) | |||||||||
Foreign currency translation |
(73 | ) | (5 | ) | - | (78 | ) | |||||||||
December 31, 2005 |
4,138 | 201 | 290 | 4,629 | ||||||||||||
Restructuring charge (credit) |
142 | 359 | (235 | ) | 266 | |||||||||||
Payments |
(3,809 | ) | (470 | ) | (55 | ) | (4,334 | ) | ||||||||
Foreign currency translation |
(81 | ) | - | - | (81 | ) | ||||||||||
December 31, 2006 |
390 | 90 | - | 480 | ||||||||||||
Restructuring charge (credit) |
(176 | ) | (8 | ) | - | (184 | ) | |||||||||
Payments |
(214 | ) | (82 | ) | - | (296 | ) | |||||||||
December 31, 2007 |
$ | - | $ | - | $ | - | $ | - | ||||||||
The restructuring charge of $12,898 in 2005 includes personnel costs of $13,335 related to the
elimination of approximately 425 positions across multiple locations, primarily within the
company’s global components business segment and shared service function, related to the company’s
continued focus on operational efficiency. Facilities includes a restructuring credit of $1,349,
primarily related to a gain on the sale of a facility in North America of $1,463 that was vacated
in 2005 due to the company’s continued efforts to reduce real estate costs.
62
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Restructuring Accrual Related to Other Actions Taken Prior to 2005
The following table presents the activity during 2005, 2006, and 2007 in the remaining
restructuring accrual related to other actions taken prior to 2005:
| Personnel | ||||||||||||||||
| Costs | Facilities | Other | Total | |||||||||||||
December 31, 2004 |
$ | 2,828 | $ | 9,371 | $ | 4,424 | $ | 16,623 | ||||||||
Restructuring charge (credit) |
227 | 22 | (431 | ) | (182 | ) | ||||||||||
Payments |
(2,500 | ) | (3,916 | ) | (438 | ) | (6,854 | ) | ||||||||
Reclassification |
(41 | ) | (25 | ) | 66 | - | ||||||||||
Non-cash usage |
- | - | (90 | ) | (90 | ) | ||||||||||
Foreign currency translation |
(12 | ) | (128 | ) | - | (140 | ) | |||||||||
December 31, 2005 |
502 | 5,324 | 3,531 | 9,357 | ||||||||||||
Restructuring charge (credit) |
(378 | ) | 529 | (868 | ) | (717 | ) | |||||||||
Payments |
(124 | ) | (3,358 | ) | 117 | (3,365 | ) | |||||||||
Foreign currency translation |
- | (46 | ) | 26 | (20 | ) | ||||||||||
December 31, 2006 |
- | 2,449 | 2,806 | 5,255 | ||||||||||||
Restructuring charge (credit) |
- | 1,517 | (1,362 | ) | 155 | |||||||||||
Payments |
- | (1,388 | ) | - | (1,388 | ) | ||||||||||
Foreign currency translation |
- | 146 | 183 | 329 | ||||||||||||
December 31, 2007 |
$ | - | $ | 2,724 | $ | 1,627 | $ | 4,351 | ||||||||
Integration
Included in the restructuring and integration charges referenced above in 2007 is an integration
charge of $2,944, primarily related to the acquisition of KeyLink.
The following table presents the integration charge and activity for 2005, 2006, and 2007:
| Personnel | ||||||||||||||||
| Costs | Facilities | Other | Total | |||||||||||||
December 31, 2004 |
$ | - | $ | 4,474 | $ | 1,019 | $ | 5,493 | ||||||||
Integration costs (a) |
1,144 | 984 | 143 | 2,271 | ||||||||||||
Payments |
(1,105 | ) | (143 | ) | (350 | ) | (1,598 | ) | ||||||||
Reclassification |
- | (482 | ) | 482 | - | |||||||||||
Foreign currency translation |
(15 | ) | (459 | ) | 76 | (398 | ) | |||||||||
December 31, 2005 |
24 | 4,374 | 1,370 | 5,768 | ||||||||||||
Payments |
(295 | ) | (1,682 | ) | (838 | ) | (2,815 | ) | ||||||||
Reclassification |
271 | (346 | ) | 75 | - | |||||||||||
Non-cash usage |
- | (59 | ) | - | (59 | ) | ||||||||||
Foreign currency translation |
- | 448 | 51 | 499 | ||||||||||||
December 31, 2006 |
- | 2,735 | 658 | 3,393 | ||||||||||||
Integration costs (b) |
1,666 | (535 | ) | 2,609 | 3,740 | |||||||||||
Payments |
(1,109 | ) | (684 | ) | (251 | ) | (2,044 | ) | ||||||||
Foreign currency translation |
- | 58 | - | 58 | ||||||||||||
December 31, 2007 |
$ | 557 | $ | 1,574 | $ | 3,016 | $ | 5,147 | ||||||||
63
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
| (a) | Integration costs include $2,271 recorded as additional costs in excess of net assets of
companies acquired associated with the acquisition of Disway, primarily impacting the global
components business segment in Europe. |
| (b) | Integration costs include $2,944 recorded as an integration charge and $796 recorded as
additional costs in excess of net assets of companies acquired associated with the acquisition
of KeyLink, primarily impacting the global ECS business segment in North America. The
integration charge is net of a $689 reversal of excess facilities-related accruals in
connection with certain acquisitions made prior to 2005. Personnel costs associated with the
elimination of approximately 50 positions in North America related to the acquisition of
KeyLink. |
Restructuring and Integration Summary
In summary, the restructuring and integration accruals aggregate $19,488 at December 31, 2007, of
which $17,847 is expected to be spent in cash, and are expected to be utilized as follows:
| • | The personnel costs accruals of $4,717 to cover costs associated with the termination of
personnel, which are primarily expected to be spent within one year. |
| • | The facilities accruals totaling $10,114 relate to vacated leases with scheduled payments
of $2,821 in 2008, $2,361 in 2009, $1,669 in 2010, $629 in 2011, $608 in 2012, and $2,026
thereafter. |
| • | Other accruals of $4,657 are expected to be utilized over several years. |
Acquisition Indemnification
In 2005, Tekelec Europe SA (“Tekelec”), a French subsidiary of the company, entered into a
settlement agreement with Tekelec Airtronic SA (“Airtronic”) pursuant to which Airtronic paid
€1,510 (approximately $2,000) to Tekelec in full settlement of all of Tekelec’s claims for
indemnification under the purchase agreement. The company recorded the net amount of the
settlement of $1,672 ($1,267 net of related taxes or $.01 per share on a basic basis) as an
acquisition indemnification credit.
10. Shareholders’ Equity
The activity in the number of shares outstanding is as follows (in thousands):
| Common | Common | |||||||||||
| Stock | Treasury | Stock | ||||||||||
| Issued | Stock | Outstanding | ||||||||||
Common stock outstanding at December 31, 2004 |
117,675 | 1,374 | 116,301 | |||||||||
Restricted stock awards, net of forfeitures |
- | (22 | ) | 22 | ||||||||
Exercise of stock options |
2,612 | (1,080 | ) | 3,692 | ||||||||
Other |
(1 | ) | - | (1 | ) | |||||||
Common stock outstanding at December 31, 2005 |
120,286 | 272 | 120,014 | |||||||||
Restricted stock awards, net of forfeitures |
- | (65 | ) | 65 | ||||||||
Exercise of stock options |
2,339 | - | 2,339 | |||||||||
Other |
1 | - | 1 | |||||||||
Common stock outstanding at December 31, 2006 |
122,626 | 207 | 122,419 | |||||||||
Restricted stock awards, net of forfeitures |
- | (70 | ) | 70 | ||||||||
Exercise of stock options |
2,216 | - | 2,216 | |||||||||
Performance share awards |
197 | - | 197 | |||||||||
Repurchases of common stock |
- | 2,075 | (2,075 | ) | ||||||||
Common stock outstanding at December 31, 2007 |
125,039 | 2,212 | 122,827 | |||||||||
64
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The company has 2,000,000 authorized shares of serial preferred stock with a par value of one
dollar. There were no shares of serial preferred stock outstanding at December 31, 2007 and 2006.
In 1988, the company paid a dividend of one preferred share purchase right on each outstanding
share of common stock. Each right, as amended, entitles a shareholder to purchase one
one-hundredth of a share of a new series of preferred stock at an exercise price of fifty dollars
(the “exercise price”). The rights are exercisable only if a person or group acquires 20% or more
of the company’s common stock or announces a tender or exchange offer that will result in such
person or group acquiring 30% or more of the company’s common stock. Rights owned by the person
acquiring such stock or transferees thereof will automatically be void. Each other right will
become a right to buy, at the exercise price, that number of shares of common stock having a market
value of twice the exercise price. The rights, which do not have voting rights, may be redeemed by
the company at a price of one cent per right at any time until ten days after a 20% ownership
position has been acquired. In the event that the company merges with, or transfers 50% or more of
its consolidated assets or earnings power to, any person or group after the rights become
exercisable, holders of the rights may purchase, at the exercise price, a number of shares of
common stock of the acquiring entity having a market value equal to twice the exercise price. The
rights, as amended, expire on March 1, 2008.
Share-Repurchase Program
In February 2006, the Board of Directors authorized the company to repurchase up to $100,000 of the
company’s outstanding common stock through a share-repurchase program (the “program”). In March
2007, the company announced a rule 10b5-1 plan to facilitate repurchases under the program with the
intention of minimizing earnings per share dilution caused by the issuance of common stock upon the
exercise of stock options. Repurchases were funded with cash received from the exercise of stock
options in the previous quarter. In August 2007, the company replaced the then existing rule
10b5-1 plan with a new 10b5-1 plan intended to completely offset the dilution caused by the
issuance of common stock upon the exercise of stock options. As of December 31, 2007, the company
repurchased 2,075,491 shares under this program, which represents the number of shares issued in
connection with the exercise of stock options for the first nine months of 2007. These shares had
a market value of $84,236 at the dates of repurchase.
In December 2007, the Board of Directors authorized the company to repurchase an additional
$100,000 of the company’s outstanding common stock in such amounts as to offset the dilution from
the exercise of stock options and other stock-based compensation plans.
11. Net Income Per Share
The following table sets forth the calculation of net income per share on a basic and diluted
basis for the years ended December 31 (shares in thousands):
| 2007 | 2006 | 2005 | ||||||||||
Net income, as reported |
$ | 407,792 | $ | 388,331 | $ | 253,609 | ||||||
Adjustment for interest expense on convertible debentures,
net of tax |
- | 524 | 5,201 | |||||||||
Net income, as adjusted |
$ | 407,792 | $ | 388,855 | $ | 258,810 | ||||||
Net income per share: |
||||||||||||
Basic |
$ | 3.31 | $ | 3.19 | $ | 2.15 | ||||||
Diluted (a) |
$ | 3.28 | $ | 3.16 | $ | 2.09 | ||||||
Weighted average shares outstanding-basic |
123,176 | 121,667 | 117,819 | |||||||||
Net effect of various dilutive stock-based compensation awards |
1,253 | 1,047 | 1,355 | |||||||||
Net effect of dilutive convertible debentures |
- | 467 | 4,906 | |||||||||
Weighted average shares outstanding-diluted |
124,429 | 123,181 | 124,080 | |||||||||
65
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
| (a) | The effect of options to purchase 43,250, 1,620, and 1,040 shares for the years ended
December 31, 2007, 2006, and 2005, respectively, was excluded from the calculation of net
income per share on a diluted basis as their effect is anti-dilutive. |
12. Employee Stock Plans
Omnibus Plan
The company maintains the Arrow Electronics, Inc. 2004 Omnibus Incentive Plan (the “Omnibus Plan”),
which replaced the Arrow Electronics, Inc. Stock Option Plan, the Arrow Electronics, Inc.
Restricted Stock Plan, the 2002 Non-Employee Directors Stock Option Plan, the Non-Employee
Directors Deferral Plan, and the 1999 CEO Bonus Plan (collectively, the “Prior Plans”). The
Omnibus Plan broadens the array of equity alternatives available to the company when designing
compensation incentives. The Omnibus Plan permits the grant of cash-based awards, non-qualified
stock options, incentive stock options (“ISOs”), stock appreciation rights, restricted stock,
restricted stock units, performance shares, performance units, covered employee annual incentive
awards, and other stock-based awards. The Compensation Committee of the company’s Board of
Directors (the “Compensation Committee”) determines the vesting requirements, termination
provision, and the terms of the award for any awards under the Omnibus Plan when such awards are
issued.
Under the terms of the Omnibus Plan, a maximum of 8,300,000 shares of common stock may be awarded,
subject to adjustment. There were 3,549,067 and 5,200,702 shares available for grant under the
Omnibus Plan as of December 31, 2007 and 2006, respectively. Shares currently subject to awards
granted under the Prior Plans, which cease to be subject to such awards for any reason other than
exercise for, or settlement in, shares will also be available under the Omnibus Plan. Generally,
shares are counted against the authorization only to the extent that they are issued. Restricted
stock, restricted stock units, and performance shares count against the authorization at a rate of
1.69 to 1.
After adoption of the Omnibus Plan, there were no additional awards made under any of the Prior
Plans, though awards previously granted under the Prior Plans will survive according to their
terms.
Stock Options
Under the Omnibus Plan, the company may grant both ISOs and non-qualified stock options. ISOs may
only be granted to employees, subsidiaries, and affiliates. The exercise price for options cannot
be less than the fair market value of Arrow’s common stock on the date of grant. Options granted
under the Prior Plans become exercisable in equal installments over a four-year period, except for
stock options authorized for grant to directors, which become exercisable in equal installments
over a two-year period. Options currently outstanding have terms of ten years.
The following information relates to the stock option activity for the year ended December 31,
2007:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Shares | Price | Life | Value | |||||||||||||
Outstanding at December 31, 2006 |
5,525,265 | $ | 26.90 | |||||||||||||
Granted |
1,408,200 | 38.36 | ||||||||||||||
Exercised |
(2,215,871 | ) | 24.86 | |||||||||||||
Forfeited |
(235,778 | ) | 30.96 | |||||||||||||
Outstanding at December 31, 2007 |
4,481,816 | 31.30 | 89 months | $ | 35,830 | |||||||||||
Exercisable at December 31, 2007 |
1,424,114 | 24.78 | 65 months | $ | 20,652 | |||||||||||
66
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
difference between the company’s closing stock price on the last trading day of 2007 and the
exercise price, multiplied by the number of in-the-money options) that would have been received by
the option holders had all option holders exercised their options on December 31, 2007. This
amount changes based on the market value of the company’s stock.
The total intrinsic value of options exercised for the years ended December 31, 2007 and 2006 was
$30,739 and $21,158, respectively.
Cash received from option exercises during 2007 and 2006 was $55,228 and $59,194, respectively, and
is included within the financing activities section in the accompanying consolidated statements of
cash flows.
Performance Shares
The Compensation Committee, subject to the terms and conditions of the Omnibus Plan, may grant
performance unit and/or performance share awards. The fair value of a performance unit award is
the fair market value of the company’s common stock on the date of grant. Such awards will be
earned only if performance goals over performance periods established by or under the direction of
the Compensation Committee are met. The performance goals and periods may vary from
participant-to-participant, group-to-group, and time-to-time. The performance shares will be
delivered in common stock at the end of the service period based on the company’s actual
performance compared to the target metric and may be from 0% to 200% of the initial award.
Compensation expense is recognized on a straight-line method over the service period, which is
generally three years and is adjusted each period based on the current estimate of performance
compared to the target metric.
Restricted Stock
Subject to the terms and conditions of the Omnibus Plan, the Compensation Committee may grant
shares of restricted stock and/or restricted stock units. Restricted stock units are similar to
restricted stock except that no shares are actually awarded to the participant on the date of
grant. Shares of restricted stock and/or restricted stock units awarded under the Omnibus Plan may
not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end
of the applicable period of restriction established by the Compensation Committee and specified in
the award agreement (and in the case of restricted stock units until the date of delivery or other
payment). Compensation expense is recognized on a straight-line basis as shares become free of
forfeiture restrictions (i.e., vest) generally over a four-year period.
Non-Employee Director Awards
The company’s Board of Directors (the “Board”) shall set the amounts and types of equity awards
that shall be granted to all non-employee directors on a periodic, nondiscriminatory basis pursuant
to the Omnibus Plan, as well as any additional amounts, if any, to be awarded, also on a periodic,
nondiscriminatory basis, based on each of the following: the number of committees of the Board on
which a non-employee director serves, service of a non-employee director as the chair of a
Committee of the Board, service of a non-employee director as Chairman of the Board or Lead
Director, or the first selection or appointment of an individual to the Board as a non-employee
director. Non-employee directors currently receive annual awards of restricted stock units valued
at $60. The restricted stock units will vest one year from date of grant and are subject to
further restrictions until one year following the director’s separation from the Board. All restricted
stock units are settled in common stock after the restriction period.
Unless a non-employee director gives notice setting forth a different percentage, 50% of each
director’s annual retainer fee is deferred and converted into units based on the fair market value
of the company’s stock as of the date it was payable. Upon a non-employee director’s retirement
from the Board, each unit in their deferral account will be converted into a share of company stock
and distributed to the non-
67
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
employee director as soon as practicable following such date.
Summary of Non-Vested Shares
The following information summarizes the changes in non-vested performance shares, restricted
stock, restricted stock units, and non-employee director awards for 2007:
| Weighted | ||||||||
| Average | ||||||||
| Grant Date | ||||||||
| Shares | Fair Value | |||||||
Non-vested shares at December 31, 2006 |
872,034 | $ | 27.06 | |||||
Granted |
357,258 | 41.86 | ||||||
Vested |
(307,228 | ) | 23.90 | |||||
Forfeited |
(73,700 | ) | 31.37 | |||||
Non-vested shares at December 31, 2007 |
848,364 | 34.07 | ||||||
As of December 31, 2007, there was $13,458 of total unrecognized compensation cost related to
non-vested shares which is expected to be recognized over a weighted-average period of 2.1 years.
The total fair value of shares vested for 2007 and 2006 was $11,803 and $4,841, respectively.
Stock Ownership Plan
The company maintains a noncontributory employee stock ownership plan, which enables most North
American employees to acquire shares of the company’s common stock. Contributions, which are
determined by the Board, are in the form of common stock or cash, which is used to purchase the
company’s common stock for the benefit of participating employees. Contributions to the plan for
2007, 2006, and 2005 amounted to $10,857, $9,668, and $9,462, respectively.
13. Employee Benefit Plans
On December 31, 2006, the company adopted the provisions of FASB Statement No. 158 “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (“Statement No. 158”), which required the company to
recognize the funded status of its defined benefit plans in the accompanying consolidated balance
sheet at December 31, 2006, with the corresponding adjustment to accumulated other comprehensive
income, net of tax. The adjustment to accumulated other comprehensive income upon adoption
represents the net unrecognized actuarial losses, unrecognized prior service costs, and
unrecognized transition obligation remaining from the initial adoption of FASB Statement No. 87,
“Employers’ Accounting for Pensions” (“Statement No. 87”), which were previously netted against the
funded status in the company’s consolidated balance sheets in accordance with the provisions of
Statement No. 87. These amounts will be subsequently recognized as net periodic pension cost.
Actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic
pension cost in the same periods will be recognized as a component of other comprehensive income
and will be subsequently recognized as a component of net periodic pension cost on the same basis
as the amounts recognized in accumulated other comprehensive income upon adoption of Statement No.
158.
68
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The incremental effects of adopting the provisions of Statement No. 158 on the company’s
consolidated balance sheet at December 31, 2006 is as follows:
| Prior to | Effect of | |||||||||||
| Adopting | Adopting | |||||||||||
| Statement | Statement | |||||||||||
| No. 158 | No. 158 | As Reported | ||||||||||
Pension assets |
$ | 6,617 | $ | (6,617 | ) | $ | - | |||||
Intangible assets |
817 | (817 | ) | - | ||||||||
Net deferred tax assets |
74,179 | 1,544 | 75,723 | |||||||||
Pension liabilities |
73,198 | (3,320 | ) | 69,878 | ||||||||
Accumulated other comprehensive loss |
(4,837 | ) | (2,570 | ) | (7,407 | ) | ||||||
Pension assets and intangible assets are included in “Other assets” in the accompanying
consolidated balance sheets. Net deferred tax assets are included primarily in “Prepaid expenses
and other assets,” “Other assets,” and “Other liabilities” in the accompanying consolidated balance
sheets. Pension liabilities are included in “Other liabilities” in the accompanying consolidated
balance sheets. Accumulated other comprehensive income is included in “Other” in the shareholders’
equity section in the accompanying consolidated balance sheets.
Prior to the adoption of Statement No. 158, minimum pension liability adjustments were required to
recognize a liability equal to the unfunded accumulated benefit obligation. At December 31, 2006,
prior to adopting Statement No. 158, the company had accumulated additional minimum pension
liabilities of $26,662 related to the company’s employee benefit plans, which were recorded in
“Other liabilities” in the accompanying consolidated balance sheets.
For the year ended December 31, 2007, an actuarial loss of $5,801 ($3,749 net of related taxes)
was recognized in other comprehensive income. For the year ended December 31, 2007, the following
amounts were recognized as a reclassification adjustment of other comprehensive income as a result
of being recognized in net periodic pension cost: transition obligation of $481 ($293 net of
related taxes), prior service cost of $538 ($315 net of related taxes), and an actuarial loss of
$1,670 ($1,274 net of related taxes).
Included in accumulated other comprehensive loss at December 31, 2007 are the following amounts
that have not yet been recognized in net periodic pension cost: unrecognized transition obligation
of $1,573 ($1,056 net of related taxes), unrecognized prior service costs of $1,013 ($612 net of
related taxes), and unrecognized actuarial losses of $31,520 ($18,844 net of related taxes).
The transition obligation, prior service cost, and actuarial loss included in accumulated other
comprehensive loss and expected to be recognized in net periodic pension cost for the year ended
December 31, 2008 is $907 ($744 net of related taxes), $538 ($325 net of related taxes), and $1,976
($1,226 net of related taxes), respectively.
Supplemental Executive Retirement Plans (“SERP”)
The company maintains an unfunded Arrow SERP under which the company will pay supplemental pension
benefits to certain employees upon retirement. There are 27 current and former corporate officers
participating in this plan. The Board determines those employees who are eligible to participate
in the Arrow SERP.
The Arrow SERP, as amended in 2002, provides for the pension benefits to be based on a percentage
of average final compensation, based on years of participation in the Arrow SERP. The Arrow SERP
permits early retirement, with payments at a reduced rate, based on age and years of service
subject to a minimum retirement age of 55. Participants whose accrued rights under the Arrow SERP,
prior to the 2002 amendment, which were adversely affected by the amendment, will continue to be
entitled to such greater rights.
69
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The company acquired Wyle Electronics (“Wyle”) in 2000. Wyle also sponsored an unfunded SERP for
certain of its executives. Benefit accruals for the Wyle SERP were frozen as of December 31, 2000.
There are 19 participants in this plan.
The company uses a December 31 measurement date for the Arrow SERP and the Wyle SERP. Pension
information for the years ended December 31 is as follows:
| 2007 | 2006 | |||||||
Accumulated benefit obligation |
$ | 44,958 | $ | 44,589 | ||||
Changes in projected benefit obligation: |
||||||||
Projected benefit obligation at beginning of year |
$ | 49,103 | $ | 48,452 | ||||
Service cost (Arrow SERP) |
2,651 | 2,292 | ||||||
Interest cost |
2,800 | 2,697 | ||||||
Actuarial (gain)/loss |
1,223 | (1,602 | ) | |||||
Benefits paid |
(2,712 | ) | (2,736 | ) | ||||
Projected benefit obligation at end of year |
$ | 53,065 | $ | 49,103 | ||||
Funded status |
$ | (53,065 | ) | $ | (49,103 | ) | ||
Components of net periodic pension cost: |
||||||||
Service cost
(Arrow SERP) |
$ | 2,651 | $ | 2,292 | ||||
Interest cost |
2,800 | 2,697 | ||||||
Amortization of net loss |
411 | 499 | ||||||
Amortization of prior service cost (Arrow SERP) |
549 | 549 | ||||||
Amortization of transition obligation (Arrow SERP) |
411 | 411 | ||||||
Net periodic pension cost |
$ | 6,822 | $ | 6,448 | ||||
Weighted average assumptions used to determine benefit obligation: |
||||||||
Discount rate |
5.75 | % | 5.75 | % | ||||
Rate of compensation increase (Arrow SERP) |
5.00 | % | 5.00 | % | ||||
Weighted average assumptions used to determine net periodic
pension cost: |
||||||||
Discount rate |
5.75 | % | 5.50 | % | ||||
Rate of compensation increase (Arrow SERP) |
5.00 | % | 5.00 | % | ||||
The amounts reported for net periodic pension cost and the respective benefit obligation amounts
are dependent upon the actuarial assumptions used. The company reviews historical trends, future
expectations, current market conditions, and external data to determine the assumptions. The
discount rate represents the market rate for a high quality corporate bond. For purposes of
calculating the 2007 net periodic benefit cost, the company used a discount rate of 5.75%. For
purposes of calculating the benefit obligation, the company used a discount rate of 5.75% for 2007
and 2006. The rate of compensation increase is determined by the company, based upon its
long-term plans for such increases. The actuarial assumptions used to determine the net periodic
pension cost are based upon the prior year’s assumptions used to determine the benefit obligation.
70
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Benefit payments are expected to be paid as follows:
2008 |
$ | 2,779 | ||
2009 |
3,474 | |||
2010 |
3,557 | |||
2011 |
3,643 | |||
2012 |
3,614 | |||
2013 - 2017 |
19,552 |
Defined Benefit Plan
Wyle provided retirement benefits for certain employees under a defined benefit plan. Benefits
under this plan were frozen as of December 31, 2000 and former participants may now participate in
the company’s employee stock ownership and 401(k) plans. The company uses a December 31
measurement date for this plan. Pension information for the years ended December 31 is as
follows:
| 2007 | 2006 | |||||||
Accumulated benefit obligation |
$ | 101,494 | $ | 98,168 | ||||
Changes in projected benefit obligation: |
||||||||
Projected benefit obligation at beginning of year |
$ | 98,168 | $ | 100,717 | ||||
Interest cost |
5,441 | 5,401 | ||||||
Actuarial (gain)/loss |
2,957 | (2,959 | ) | |||||
Benefits paid |
(5,072 | ) | (4,991 | ) | ||||
Projected benefit obligation at end of year |
$ | 101,494 | $ | 98,168 | ||||
Changes in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
$ | 79,875 | $ | 77,107 | ||||
Actual return on plan assets |
6,561 | 7,759 | ||||||
Benefits paid |
(5,072 | ) | (4,991 | ) | ||||
Fair value of plan assets at end of year |
$ | 81,364 | $ | 79,875 | ||||
Funded status |
$ | (20,130 | ) | $ | (18,293 | ) | ||
Components of net periodic pension cost: |
||||||||
Interest cost |
$ | 5,441 | $ | 5,401 | ||||
Expected return on plan assets |
(6,546 | ) | (6,326 | ) | ||||
Amortization of net loss |
1,209 | 1,761 | ||||||
Net periodic pension cost |
$ | 104 | $ | 836 | ||||
Weighted average assumptions used to determine benefit obligation: |
||||||||
Discount rate |
5.75 | % | 5.75 | % | ||||
Expected return on plan assets |
8.50 | % | 8.50 | % | ||||
Weighted average assumptions used to determine net periodic
pension cost: |
||||||||
Discount rate |
5.75 | % | 5.50 | % | ||||
Expected return on plan assets |
8.50 | % | 8.50 | % | ||||
71
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The amounts reported for net periodic pension cost and the respective benefit obligation amounts
are dependent upon the actuarial assumptions used. The company reviews historical trends, future
expectations, current market conditions, and external data to determine the assumptions. The
discount rate represents the market rate for a high quality corporate bond. For purposes of
calculating the 2007 net periodic benefit cost, the company used a discount rate of 5.75%. For
purposes of calculating the benefit obligation, the company used a discount rate of 5.75% for 2007
and 2006. The expected return on plan assets is based on current and expected asset allocations,
historical trends, and expected returns on plan assets. Based upon the above factors and the
long-term nature of the returns, the company did not change the 2007 assumption from the prior
year. The actuarial assumptions used to determine the net periodic pension cost are based upon
the prior year’s assumptions used to determine the benefit obligation.
The company makes contributions to the plan so that minimum contribution requirements, as
determined by government regulations, are met. The company was not required to make a contribution
in 2007 and expects to make an estimated contribution in 2008 of $6,000.
Benefit payments are expected to be paid as follows:
2008 |
$ | 5,636 | ||
2009 |
5,787 | |||
2010 |
5,917 | |||
2011 |
5,964 | |||
2012 |
6,062 | |||
2013 - 2017 |
32,405 |
The plan asset allocations at December 31 are as follows:
| 2007 | 2006 | |||||||
Equities |
61 | % | 63 | % | ||||
Fixed income |
38 | 35 | ||||||
Cash |
1 | 2 | ||||||
| 100 | % | 100 | % | |||||
The investment portfolio contains a diversified blend of common stocks, bonds, cash equivalents,
and other investments, which may reflect varying rates of return. The investments are further
diversified within each asset classification. The portfolio diversification provides protection
against a single security or class of securities having a disproportionate impact on aggregate
performance. The target allocations for plan assets are 65% in equities and 35% in fixed income,
although the actual plan asset allocations may be within a range around these targets. The actual
asset allocations are reviewed and rebalanced on a regular basis to maintain the target
allocations.
Defined Contribution Plan
The company has a defined contribution plan for eligible employees, which qualifies under Section
401(k) of the Internal Revenue Code. The company’s contribution to the plan, which is based on a
specified percentage of employee contributions, amounted to $8,783, $7,967, and $8,174 in 2007,
2006, and 2005, respectively. Certain international subsidiaries maintain separate defined
contribution plans for their employees and made contributions hereunder, which amounted to $11,113,
$6,593, and $4,814 in 2007, 2006, and 2005, respectively.
14. Lease Commitments
The company leases certain office, distribution, and other property under non-cancelable operating
leases expiring at various dates through 2022. Rental expense under non-cancelable operating
leases, net of sublease income, amounted to $60,173, $54,790, and $54,286 in 2007, 2006, and 2005,
respectively.
72
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Aggregate minimum rental commitments under all non-cancelable operating leases, exclusive of real
estate taxes, insurance, and leases related to facilities closed as a result of the integration of
acquired businesses and the restructuring of the company, are as follows:
2008 |
$ | 61,479 | ||
2009 |
47,960 | |||
2010 |
34,605 | |||
2011 |
27,179 | |||
2012 |
18,411 | |||
Thereafter |
33,218 |
15. Contingencies
Tekelec Matters
In 2000, the company purchased Tekelec from Airtronic 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 has
commenced legal proceedings against Tekelec and its insurers to recover damages in the amount of
€3,742 and expenses of €312 plus interest.
Environmental and Related Matters
Wyle Claims
In connection with the purchase of Wyle from the VEBA Group (“VEBA”) in 2000, the company assumed
certain of the then outstanding obligations of Wyle, including its 1994 indemnification of 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 VEBA, VEBA agreed to indemnify the company for costs associated
with the Wyle environmental indemnities, among other things. The company is aware of two Wyle
Laboratories facilities (in Huntsville, Alabama and Norco, California) at which contaminated
groundwater was identified. Each site will require remediation, the final form and cost of which
is as yet undetermined.
Wyle Laboratories has demanded indemnification from the company with respect to the work at both
sites (and in connection with the litigation discussed below), and the company has, in turn,
demanded indemnification from VEBA. VEBA merged with a publicly–traded, German conglomerate in June
2000 and the combined entity is now known as E.ON AG, which remains responsible for VEBA’s
liabilities. E.ON AG acknowledged liability under the terms of the VEBA contract in connection with
the Norco and Huntsville sites and made an initial, partial payment. Neither the company’s demands
for subsequent payments nor its demand for defense and indemnification in the related litigation
and other costs associated with the Norco site were met.
Related Litigation
In September 2004, the company filed suit against E.ON AG in the United States District Court for
the Northern District of Alabama seeking further payments related to those sites and additional
damages. The case has since been transferred to the United States District Court for the Central
District of California, where it was consolidated with a case commenced by the company and Wyle
Laboratories in May 2005 against E.ON AG seeking indemnification, contribution, and a declaration
of the parties’ respective rights and obligations in connection with the Riverside County
litigation (discussed below) and other costs associated with the Norco site. The court has ruled
that the enforcement and interpretation of E.ON AG’s
contractual obligations are matters for a court in Germany, a ruling with which the company
disagrees
73
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
and which it is appealing. Nevertheless, in October 2005, the company filed a related
action with regard to such matters against E.ON AG in the Frankfurt am Main Regional Court in
Germany.
The company was named as a defendant in three suits related to the Norco facility, all of which
were consolidated for pre-trial purposes. In January 2005, an action was filed in the California
Superior Court in Riverside County, California (Gloria Austin, et al. v. Wyle Laboratories, Inc. et
al.) in which 91 plaintiff landowners and residents sued a number of defendants under a variety of
theories for unquantified damages allegedly caused by environmental contamination at and around the
Norco site. Also filed in the Superior Court in Riverside County were Jimmy Gandara, et al. v. Wyle
Laboratories, Inc. et al. in January 2006, and Lisa Briones et al. v. Wyle Laboratories, Inc. et
al. in May 2006, both of which contain allegations similar to those in the Austin case on behalf of
approximately 20 additional plaintiffs. The outcome of the cases and the amount of any associated
liability are all as yet unknown.
The company was also named as a defendant in a lawsuit filed in September 2006 in the United States
District Court for the Central District of California (Apollo Associates, L.P., et anno, v. Arrow
Electronics, Inc. et al.) in connection with alleged contamination at a third site, an industrial
building formerly leased by Wyle Laboratories, in El Segundo, California. The lawsuit was settled,
though the possibility remains that government entities or others may attempt to involve the
company in further characterization or remediation of groundwater issues in the area.
Investigation and Remediation – 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 $1,500 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 $600 to $2,000. 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 $2,500 and $4,000.
Investigation and Remediation – Norco
In October 2003, the company entered into a consent decree among it, 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 through
December 2007, providing the technical basis for a final Remedial Investigation Report that will be
submitted to DTSC during the first quarter of 2008. An estimated $19,600 was expended to date on
investigative and feasibility study activities.
Remedial actions are under way pursuant to a Removal Action Work Plan 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 July 2007, DTSC conditionally approved implementation of a
hydraulic containment system to capture and treat groundwater before it moves into the adjacent
offsite area. The system, the construction of which began in the fourth quarter of 2007, is
expected to be operational beginning in the first quarter of 2008. Approximately $3,800 was
expended on these activities to date, and it is anticipated that these activities, along with the
initial phases of the treatment of contaminated groundwater in the offsite area, will give rise to
an estimated $3,000 to $4,000.
Costs categories related to environmental activities at Norco include those for Project Management
and Regulatory Oversight, Remedial Investigations, Feasibility Studies, and Interim Remedial
Actions. Project Management and Regulatory Oversight include costs incurred by Wyle Laboratories
and project consultants for project management and costs billed by DTSC to provide regulatory
oversight.
74
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The company currently estimates that the additional cost of project management and regulatory
oversight will range from $1,500 to $2,500. Ongoing remedial investigations (including costs
related to soil and groundwater investigations), and the preparation
of a final remedial investigation
report are projected to cost between $3,000 and $4,000. Feasibility studies, including a final
report and the design of remedial measures, are estimated to cost $410 to $750.
Despite the amount of work undertaken and planned to date, the complete scope of work under the
consent decree is not yet known, and, accordingly, the associated costs have not yet been
determined.
Impact on Financial Statements
The company believes that any cost which it may incur in connection with environmental conditions
at the Norco, Huntsville, and El Segundo sites and the related litigation is covered by the
contractual indemnifications (except, under the terms of the environmental indemnification, for the
first $450), discussed above. The company has received an opinion of counsel that the recovery of
costs incurred to date associated with the environmental clean-up costs related to the Norco and
Huntsville sites, is probable. Based on the opinion of counsel received in the fourth quarter of
2007, the company increased the receivable for amounts due from E.ON AG by $7,244 during 2007 to
$24,944. The company’s net costs for such indemnified matters may vary from period to period as
estimates of recoveries are not always recognized in the same period as the accrual of estimated
expenses. During 2006, the company recorded a charge of $1,449 ($867 net of related taxes or $.01 per
share on both a basic and diluted basis) related to the environmental matters arising out of the
company’s purchase of Wyle.
Also included in the proceedings against E.ON AG is a claim for the reimbursement of
pre-acquisition tax liabilities of Wyle in the amount of $8,729 for which E.ON AG is also
contractually liable to indemnify the company. E.ON AG has specifically acknowledged owing the
company not less than $6,335 of such amounts, but its promises to make payments of at least that
amount have not been kept. The company also believes that the recovery of these amounts is
probable.
In connection with the acquisition of Wyle, the company acquired a $4,495 tax receivable due from
E.ON AG (as successor to VEBA) in respect of certain tax payments made by Wyle prior to the
effective date of the acquisition, the recovery of which the company also believes is probable.
The company believes strongly in the merits of its actions against E.ON AG, and is pursuing them
vigorously.
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, and tax matters. While such
matters are subject to inherent uncertainties, it is not currently anticipated that any such other
matters will materially, adversely impact the company’s financial position, liquidity, or results
of operations.
16. 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 enterprise computing solutions to VARs 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.
Effective April 1, 2007, the company’s business segments were realigned as part of the company’s
continued efforts to strengthen its market leadership position, streamline the business, and
further leverage cost synergies globally. The company’s global components business segment was
formed to
75
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
bring a single, global organization to leverage the collective enterprise to speed services and
solutions to customers and suppliers. The company’s global ECS business segment was formed to
bring a single organization with an expanded geographic reach, increased exposure in faster growing
product segments, and a more robust customer and supplier base. As a result, the UK Microtronica,
ATD (in Spain), and Arrow Computer Products (in France) businesses, previously included in the
computer products business segment, were transitioned into the company’s global components business
segment. As a result of this realignment, global components and global ECS are the business
segments upon which management primarily evaluates the operations of the company and upon which it
bases its operating decisions. Prior period segment data was adjusted to conform to the current
period presentation.
Effective January 1, 2007, stock option expense, which was previously included in corporate, is
allocated to global components, global ECS, and corporate. Prior period segment data was adjusted
to conform with the current period presentation.
Sales and operating income (loss), by segment, for the years ended December 31 are as follows:
| 2007 | 2006 | 2005 | ||||||||||
Sales: |
||||||||||||
Global components |
$ | 11,223,751 | $ | 11,086,359 | $ | 9,130,943 | ||||||
Global ECS |
4,761,241 | 2,490,753 | 2,033,253 | |||||||||
Consolidated |
$ | 15,984,992 | $ | 13,577,112 | $ | 11,164,196 | ||||||
Operating income (loss): |
||||||||||||
Global components (b) |
$ | 604,217 | $ | 582,978 | $ | 457,088 | ||||||
Global ECS (b) |
202,223 | 123,653 | 123,193 | |||||||||
Corporate (a) (b) |
(119,535 | ) | (100,406 | ) | (100,023 | ) | ||||||
Consolidated |
$ | 686,905 | $ | 606,225 | $ | 480,258 | ||||||
| (a) | Includes restructuring and integration charges of $11,745, $11,829, and $12,716 in 2007,
2006, and 2005, a charge related to a pre-acquisition warranty claim of $2,837, a charge
related to pre-acquisition environmental matters arising out of the company’s purchase of
Wyle of $1,449 in 2006, and an acquisition indemnification credit of $1,672 in 2005. |
| (b) | Includes stock option expense of $8,946, $886, and $1,358 in global components, global ECS,
and corporate, respectively, in 2007 and $8,378, $572, and $4,029 in global components,
global ECS, and corporate, respectively, in 2006, resulting from the company’s adoption of
Statement No. 123(R). |
Total assets, by segment, at December 31 are as follows:
| 2007 | 2006 | |||||||
Global components |
$ | 5,164,822 | $ | 4,973,797 | ||||
Global ECS |
2,245,417 | 1,063,907 | ||||||
Corporate |
649,621 | 631,868 | ||||||
Consolidated |
$ | 8,059,860 | $ | 6,669,572 | ||||
76
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sales, by geographic area, for the years ended December 31 are as follows:
| 2007 | 2006 | 2005 | ||||||||||
North America (c) |
$ | 8,565,247 | $ | 6,846,468 | $ | 6,337,613 | ||||||
EMEASA |
4,970,585 | 4,348,484 | 3,360,643 | |||||||||
Asia/Pacific |
2,449,160 | 2,382,160 | 1,465,940 | |||||||||
| $ | 15,984,992 | $ | 13,577,112 | $ | 11,164,196 | |||||||
| (c) | Includes sales related to the United States of $7,962,526, $6,337,169, and $5,879,863 in
2007, 2006, and 2005, respectively. |
Net property, plant and equipment, by geographic area, at December 31 is as follows:
| 2007 | 2006 | |||||||
North America (d) |
$ | 261,134 | $ | 169,840 | ||||
EMEASA |
74,937 | 72,521 | ||||||
Asia/Pacific |
19,090 | 20,012 | ||||||
| $ | 355,161 | $ | 262,373 | |||||
| (d) | Includes net property, plant and equipment related to the United States of $259,948 and
$168,541 in 2007 and 2006, respectively. |
17. Quarterly Financial Data (Unaudited)
A summary of the company’s consolidated quarterly results of operations are as follows:
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| 2007 | ||||||||||||||||
Sales |
$ | 3,497,564 | $ | 4,038,083 | $ | 4,030,363 | $ | 4,418,982 | ||||||||
Gross profit |
539,631 | 578,970 | 552,557 | 614,119 | ||||||||||||
Net income |
96,294 | (b) | 99,211 | (c) | 98,324 | (d) | 113,963 | (e) | ||||||||
Net income per share (a): |
||||||||||||||||
Basic |
$ | .78 | (b) | $ | .80 | (c) | $ | .80 | (d) | $ | .93 | (e) | ||||
Diluted |
.77 | (b) | .79 | (c) | .79 | (d) | .92 | (e) | ||||||||
2006 |
||||||||||||||||
Sales |
$ | 3,192,463 | $ | 3,437,032 | $ | 3,454,297 | $ | 3,493,320 | ||||||||
Gross profit |
487,543 | 524,424 | 508,083 | 511,343 | ||||||||||||
Net income |
81,579 | (f) | 92,763 | (g) | 85,918 | (h) | 128,071 | (i) | ||||||||
Net income per share (a): |
||||||||||||||||
Basic |
$ | .68 | (f) | $ | .76 | (g) | $ | .70 | (h) | $ | 1.05 | (i) | ||||
Diluted |
.66 | (f) | .76 | (g) | .70 | (h) | 1.04 | (i) | ||||||||
| (a) | Quarterly net income per share is calculated using the weighted average number of shares
outstanding during each quarterly period, while net income per share for the full year is
calculated using the weighted average number of shares outstanding during the year.
Therefore, the sum of the net income per share for each of the four quarters may not equal
the net income per share for the full year. |
77
Table of Contents
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
| (b) | Includes a restructuring and integration credit ($4,522 net of related taxes or $.04 per
share on both a basic and diluted basis). |
| (c) | Includes a restructuring and integration charge ($2,286 net of related taxes or $.02 per
share on both a basic and diluted basis). |
| (d) | Includes a restructuring and integration charge ($2,674 net of related taxes or $.02 per
share on both a basic and diluted basis) and an income tax benefit ($6,024 net of related
taxes or $.05 per share on both a basic and diluted basis), principally due to a reduction
in deferred income taxes as a result of the statutory rate change in Germany. |
| (e) | Includes a restructuring and integration charge ($6,598 net of related taxes or $.05 per
share on both a basic and diluted basis). |
|
| (f) | Includes a restructuring and integration charge ($920 net of related taxes or $.01 per share
on both a basic and diluted basis), and a loss on prepayment of debt ($1,558 net of related
taxes or $.01 per share on both a basic and diluted basis). |
| (g) | Includes a restructuring and integration charge ($1,894 net of related taxes or $.02 per
share on both a basic and diluted basis). |
| (h) | Includes a restructuring and integration charge ($1,101 net of related taxes or $.01 per
share on both a basic and diluted basis). |
|
| (i) | Includes a charge related to a pre-acquisition warranty claim ($1,861 net of related taxes
or $.02 per share on both a basic and diluted basis), a charge related to the pre-acquisition
environmental matters arising out of the company’s purchase of Wyle ($867 net of related
taxes or $.01 per share on both a basic and diluted basis), and a restructuring and
integration charge ($5,062 net of related taxes or $.04 per share on both a basic and diluted
basis). Also includes the reduction of the provision for income taxes of $46,176 and the
reduction of interest expense of $6,900 ($4,200 net of related taxes) related to the
settlement of certain income tax matters. |
78
Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure. |
None.
| Item 9A. | Controls and Procedures. |
Disclosure Controls and Procedures
The company’s management, under the supervision and with the participation of the company’s Chief
Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of
the design and operation of the company’s disclosure controls and procedures as of December 31,
2007 (the “Evaluation”). Based upon the Evaluation, the company’s Chief Executive Officer and
Chief Financial Officer concluded that the company’s disclosure controls and procedures (as defined
in Exchange Act Rule 13a-15(e)) are effective.
Management’s Report on Internal Control Over Financial Reporting
The company’s management is responsible for establishing and maintaining adequate “internal control
over financial reporting” (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Management
evaluates the effectiveness of the company’s internal control over financial reporting using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control – Integrated Framework. Management, under the supervision and with the
participation of the company’s Chief Executive Officer and Chief Financial Officer, assessed the
effectiveness of the company’s internal control over financial reporting as of December 31, 2007,
and concluded that it is effective.
The company acquired substantially all of the assets and operations of the KeyLink Systems Group
business (“KeyLink”) in March 2007, Centia Group Limited and AKS Group AB (“Centia/AKS”) in
September 2007, and Universe Electron Corporation (“UEC”) in November 2007. The company has
excluded KeyLink, Centia/AKS, and UEC from its assessment of and conclusion on the effectiveness of
the company’s internal control over financial reporting. KeyLink, Centia/AKS, and UEC accounted
for 12.2 percent of total assets (6.1 percent excluding cost in excess of net assets of companies
acquired recorded in connection with these acquisitions) and 1.2 percent of net assets as of
December 31, 2007 and 8.2 percent of the company’s consolidated sales and 4.5 percent of the
company’s consolidated net income for the year ended December 31, 2007.
The company’s independent registered public accounting firm, Ernst & Young LLP, has audited the
effectiveness of the company’s internal control over financial reporting as of December 31, 2007,
as stated in their report, which is included herein.
79
Table of Contents
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Arrow Electronics, Inc.
Arrow Electronics, Inc.
We have audited Arrow Electronics, Inc.’s (the “company”) internal control over financial reporting
as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
criteria”). The company’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report of Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial
reporting did not include the internal controls of the KeyLink Systems Group business (“KeyLink”),
Centia Group Limited (“Centia”), AKS Group AB (“AKS”), and Universe Electron Corporation (“UEC”),
acquired by the company during 2007 and which were included in the company’s 2007 consolidated
financial statements and which constituted 12.2 percent of total assets (6.1 percent
excluding cost in excess of net assets of companies acquired recorded in connection with these
acquisitions) and 1.2 percent of net assets as of December 31, 2007 and 8.2 percent of the
company’s consolidated sales and 4.5 percent of the company’s consolidated net income for the year
then ended. Our audit of internal control over financial reporting of the company also did not
include an evaluation of the internal control over financial reporting of KeyLink, Centia, AKS, and
UEC.
In our opinion, Arrow Electronics, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Arrow Electronics, Inc. as of December
31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2007 and our report dated
February 8, 2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 8, 2008
New York, New York
February 8, 2008
80
Table of Contents
Changes
in Internal Control Over Financial Reporting
There was no change in the company’s internal control over financial reporting that occurred during
the company’s most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the company’s internal control over financial reporting.
Item 9B. Other Information.
None.
81
Table of Contents
PART III
Item 10. Directors and Executive Officers of the Registrant.
See “Executive Officers” in Part I of this annual report on Form 10-K. In addition, the
information set forth under the headings “Election of Directors” and “Section 16(A) Beneficial
Ownership Reporting Compliance” in the company’s Proxy Statement, filed in connection with the
Annual Meeting of Shareholders scheduled to be held on May 2, 2008, are incorporated herein by
reference.
Information about the company’s audit committee financial experts set forth under the heading “The
Board and its Committees” in the company’s Proxy Statement, filed in connection with the Annual
Meeting of Shareholders scheduled to be held on May 2, 2008, is incorporated herein by reference.
Information about the company’s code of ethics governing the Chief Executive Officer, Chief
Financial Officer, and Corporate Controller, known as the “Finance Code of Ethics,” as well as a
code of ethics governing all employees, known as the “Worldwide Code of Business Conduct and
Ethics,” is available free-of-charge on the company’s website at http://www.arrow.com and is
available in print to any shareholder upon request.
Information about the company’s “Corporate Governance Guidelines” and written committee charters
for the company’s Audit Committee, Compensation Committee, and Corporate Governance Committee is
available free-of-charge on the company’s website at http://www.arrow.com and is available in
print to any shareholder upon request.
Item 11. Executive Compensation.
The information set forth under the heading “Compensation Discussion and Analysis” in the
company’s Proxy Statement, filed in connection with the Annual Meeting of Shareholders scheduled
to be held on May 2, 2008, is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters. |
The information required by Item 12 is included in the company’s Proxy Statement filed in
connection with the Annual Meeting of Shareholders scheduled to be held on May 2, 2008, and is
incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions. |
The information required by Item 13 is included in the company’s Proxy Statement filed in
connection with the Annual Meeting of Shareholders scheduled to be held on May 2, 2008, and is
incorporated herein by reference.
| Item 14. | Principal Accounting Fees and Services. |
The information set forth under the heading “Principal Accounting Firm Fees” in the company’s
Proxy Statement, filed in connection with the Annual Meeting of Shareholders scheduled to be held
on May 2, 2008, is incorporated herein by reference.
82
Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
| Page | ||||||||
| 1. | Financial Statements. |
|||||||
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm |
37 | |||||||
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006, and 2005 |
38 | |||||||
Consolidated Balance Sheets as of December 31, 2007 and 2006 |
39 | |||||||
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006, and 2005 |
40 | |||||||
Consolidated Statements of Shareholders’ Equity for the years ended
December 31, 2007, 2006, and 2005 |
41 | |||||||
Notes to Consolidated Financial Statements |
43 | |||||||
| 2. | Financial Statement Schedule. |
|||||||
Schedule II – Valuation and Qualifying Accounts |
91 | |||||||
All other schedules are omitted since the required information is not
present, or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
consolidated financial statements, including the notes thereto. |
||||||||
| 3. | Exhibits. |
|||||||
See Index of Exhibits included on pages 84 - 90 |
||||||||
83
Table of Contents
INDEX OF EXHIBITS
| Exhibit | ||
| Number | Exhibit | |
2(a)
|
Share Purchase Agreement, dated as of February 7, 2000, by and
between Arrow Electronics, Inc., Tekelec Airtronic, Zedtek,
Investitech, and Natec (incorporated by reference to Exhibit
2(g) to the company’s Annual Report on Form 10-K for the year
ended December 31, 2000, Commission File No. 1-4482). |
|
2(b)
|
Share Purchase Agreement, dated as of August 7, 2000, among
VEBA Electronics GmbH, EBV Verwaltungs GmbH i.L., Viterra
Grundstucke Verwaltungs GmbH, VEBA Electronics LLC, VEBA
Electronics Beteiligungs GmbH, VEBA Electronics (UK) Plc, Raab
Karcher Electronics Systems Plc and E.ON AG and Arrow
Electronics, Inc., Avnet, Inc., and Cherrybright Limited
regarding the sale and purchase of the VEBA electronics
distribution group (incorporated by reference to Exhibit 2(i)
to the company’s Annual Report on Form 10-K for the year ended
December 31, 2000, Commission File No. 1-4482). |
|
2(c)
|
Agreement for Sale and Purchase of Shares of DNSint.com AG,
dated as of October 26, 2005, by and between the company and
the Sellers referred to therein (incorporated by reference to
Exhibit 2 to the company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2005, Commission File No.
1-4482). |
|
2(d)
|
Asset Purchase Agreement, dated January 2, 2007, for sale of
certain assets of KeyLink Systems, a business of Agilysys,
Inc., and Agilysys Canada Inc., to Arrow Electronics, Inc.,
Arrow Electronics Canada Ltd., and Support Net, Inc.
(incorporated by reference to Exhibit 2(e) to the company’s
Annual Report on Form 10-K for the year ended December 31,
2006, Commission File No. 1-4482). |
|
3(a)(i)
|
Restated Certificate of Incorporation of the company, as
amended (incorporated by reference to Exhibit 3(a) to the
company’s Annual Report on Form 10-K for the year ended
December 31, 1994, Commission File No. 1-4482). |
|
3(a)(ii)
|
Certificate of Amendment of the Certificate of Incorporation
of Arrow Electronics, Inc., dated as of August 30, 1996
(incorporated by reference to Exhibit 3 to the company’s
Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, Commission File No. 1-4482). |
|
3(a)(iii)
|
Certificate of Amendment of the Restated Certificate of
Incorporation of the company, dated as of October 12, 2000
(incorporated by reference to Exhibit 3(a)(iii) to the
company’s Annual Report on Form 10-K for the year ended
December 31, 2000, Commission File No. 1-4482). |
|
3(b)
|
Amended Corporate By-Laws, dated July 29, 2004 (incorporated
by reference to Exhibit 3(ii) to the company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004,
Commission File No. 1-4482). |
|
4(a)(i)
|
Rights Agreement, dated as of March 2, 1988, between Arrow
Electronics, Inc. and Manufacturers Hanover Trust Company, as
Rights Agent, which includes, as Exhibit A, a Certificate of
Amendment of the Restated Certificate of Incorporation for
Arrow Electronics, Inc. for the Participating Preferred Stock,
as Exhibit B, a letter to shareholders describing the Rights
and a summary of the provisions of the Rights Agreement, and,
as Exhibit C, the forms of Rights Certificate and Election to
Exercise (incorporated by reference to Exhibit 1 to the
company’s Current Report on Form 8-K, dated March 3, 1988,
Commission File No. 1-4482). |
84
Table of Contents
| Exhibit | ||
| Number | Exhibit | |
4(a)(ii)
|
First Amendment, dated June 30, 1989, to the Rights Agreement
in (4)(a)(i) above (incorporated by reference to Exhibit 4(b)
to the company’s Current Report on Form 8-K, dated June 30,
1989, Commission File No. 1-4482). |
|
4(a)(iii)
|
Second Amendment, dated June 8, 1991, to the Rights Agreement
in (4)(a)(i) above (incorporated by reference to Exhibit
4(i)(iii) to the company’s Annual Report on Form 10-K for the
year ended December 31, 1991, Commission File No. 1-4482). |
|
4(a)(iv)
|
Third Amendment, dated July 19, 1991, to the Rights Agreement
in (4)(a)(i) above (incorporated by reference to Exhibit
4(i)(iv) to the company’s Annual Report on Form 10-K for the
year ended December 31, 1991, Commission File No. 1-4482). |
|
4(a)(v)
|
Fourth Amendment, dated August 26, 1991, to the Rights
Agreement in (4)(a)(i) above (incorporated by reference to
Exhibit 4(i)(v) to the company’s Annual Report on Form 10-K
for the year ended December 31, 1991, Commission File No.
1-4482). |
|
4(a)(vi)
|
Fifth Amendment, dated February 25, 1998, to the Rights
Agreement in (4)(a)(i) above (incorporated by reference to
Exhibit 7 to the company’s Current Report on Form 8-A/A dated
March 2, 1998, Commission File No. 1-4482). |
|
4(b)(i)
|
Indenture, dated as of January 15, 1997, between the company
and the Bank of Montreal Trust Company, as Trustee
(incorporated by reference to Exhibit 4(b)(i) to the company’s
Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 1-4482). |
|
4(b)(ii)
|
Officers’ Certificate, as defined by the Indenture in 4(b)(i)
above, dated as of January 22, 1997, with respect to the
company’s $200,000,000 7% Senior Notes due 2007 and
$200,000,000 7 1/2% Senior Debentures due 2027 (incorporated
by reference to Exhibit 4(b)(ii) to the company’s Annual
Report on Form 10-K for the year ended December 31, 1996,
Commission File No. 1-4482). |
|
4(b)(iii)
|
Officers’ Certificate, as defined by the indenture in 4(b)(i)
above, dated as of January 15, 1997, with respect to the
$200,000,000 6 7/8% Senior Debentures due 2018, dated as of
May 29, 1998 (incorporated by reference to Exhibit 4(b)(iii)
to the company’s Annual Report on Form 10-K for the year ended
December 31, 1998, Commission File No. 1-4482). |
|
4(b)(iv)
|
Supplemental Indenture, dated as of February 21, 2001, between
the company and The Bank of New York (as successor to the Bank
of Montreal Trust Company), as trustee (incorporated by
reference to Exhibit 4.2 to the company’s Current Report on
Form 8-K, dated March 12, 2001, Commission File No. 1-4482). |
|
4(b)(v)
|
Supplemental Indenture, dated as of December 31, 2001, between
the company and The Bank of New York (as successor to the Bank
of Montreal Trust Company), as trustee (incorporated by
reference to Exhibit 4(b)(vi) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2001, Commission
File No. 1-4482). |
|
4(b)(vi)
|
Supplemental Indenture, dated as of March 11, 2005, between
the company and The Bank of New York (as successor to the Bank
of Montreal Trust Company), as trustee (incorporated by
reference to Exhibit 4(b)(vii) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2004, Commission
File No. 1-4482). |
85
Table of Contents
| Exhibit | ||
| Number | Exhibit | |
10(a)
|
Arrow Electronics Savings Plan, as amended and restated on
January 1, 2007 (incorporated by reference to Exhibit 10(a) to
the company’s Annual Report on Form 10-K for the year ended
December 31, 2006, Commission File No. 1-4482). |
|
10(b)
|
Wyle Electronics Retirement Plan, as amended and restated on
March 17, 2003 (incorporated by reference to Exhibit 10(b) to
the company’s Annual Report on Form 10-K for the year ended
December 31, 2003, Commission File No. 1-4482). |
|
10(c)
|
Arrow Electronics Stock Ownership Plan, as amended and
restated on March 7, 2005 (incorporated by reference to
Exhibit 10(b) to the company’s Quarterly Report on Form 10-Q
for the quarter ended April 1, 2005, Commission File No.
1-4482). |
|
10(d)(i)
|
Arrow Electronics, Inc. 2004 Omnibus Incentive Plan as of May
27, 2004 (incorporated by reference to Exhibit 10(d) to the
company’s Annual Report on Form 10-K for the year ended
December 31, 2004, Commission File No. 1-4482). |
|
10(d)(ii)
|
Form of Stock Option Award Agreement (Senior Management) under
10(d)(i) above (incorporated by reference to Exhibit 10-0 to
the company’s Current Report on Form 8-K, dated June 23, 2005,
Commission File No. 1-4482). |
|
10(d)(iii)
|
Form of Stock Option Award Agreement (Other) under 10(d)(i)
above (incorporated by reference to Exhibit 10-1 to the
company’s Current Report on Form 8-K, dated June 23, 2005,
Commission File No. 1-4482). |
|
10(d)(iv)
|
Form of Stock Option Award Agreement under 10(d)(i) above
(incorporated by reference to Exhibit 10-0 to the company’s
Current Report on Form 8-K, dated March 23, 2006, Commission
File No. 1-4482). |
|
10(d)(v)
|
Form of Performance Share Award Agreement under 10(d)(i) above
(incorporated by reference to Exhibit 10-0 to the company’s
Current Report on Form 8-K, dated August 31, 2005, Commission
File No. 1-4482). |
|
10(d)(vi)
|
Form of Restricted Stock Award Agreement under 10(d)(i) above
(incorporated by reference to Exhibit 10-0 to the company’s
Current Report on Form 8-K, dated September 14, 2005,
Commission File No. 1-4482). |
|
10(e)(i)
|
Arrow Electronics, Inc. Stock Option Plan, as amended and
restated effective February 27, 2002 (incorporated by
reference to Exhibit 10(d)(i) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2002, Commission
File No. 1-4482). |
|
10(e)(ii)
|
Paying Agency Agreement, dated November 11, 2003, by and
between Arrow Electronics, Inc. and Wachovia Bank, N.A.
(incorporated by reference to Exhibit 10(d)(iii) to the
company’s Annual Report on Form 10-K for the year ended
December 31, 2003, Commission File No. 1-4482). |
|
10(f)
|
Restricted Stock Plan of Arrow Electronics, Inc., as amended
and restated effective February 27, 2002 (incorporated by
reference to Exhibit 10(e)(i) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2002, Commission
File No. 1-4482). |
|
10(g)
|
2002 Non-Employee Directors Stock Option Plan as of May 23,
2002 (incorporated by reference to Exhibit 10(f) to the
company’s Annual Report on Form 10-K for the year ended
December 31, 2002, Commission File No. 1-4482). |
86
Table of Contents
| Exhibit | ||
| Number | Exhibit | |
10(h)
|
Non-Employee Directors Deferral Plan as of May 15, 1997
(incorporated by reference to Exhibit 99(d) to the company’s
Registration Statement on Form S-8, Registration No.
333-45631). |
|
10(i)
|
Arrow Electronics, Inc. Supplemental Executive Retirement
Plan, as amended effective January 1, 2002 (incorporated by
reference to Exhibit 10(h) to the company’s Annual Report on
Form 10-K for the year ended December 31, 2002, Commission
File No. 1-4482). |
|
10(j)
|
Arrow Electronics, Inc. Executive Deferred Compensation Plan
as of October 1, 2004 (incorporated by reference to Exhibit
10(j) to the company’s Annual Report on Form 10-K for the year
ended December 31, 2005, Commission File No. 1-4482). |
|
10(k)(i)
|
Employment Agreement, dated as of January 1, 2001, by and
between the company and Michael J. Long (incorporated by
reference to Exhibit 10(c)(v) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2000, Commission
File No. 1-4482). |
|
10(k)(ii)
|
Employment Agreement, dated as of December 13, 2002, by and
between the company and Peter S. Brown (incorporated by
reference to Exhibit 10(i)(vii) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2002, Commission
File No. 1-4482). |
|
10(k)(iii)
|
Employment Agreement, dated as of January 14, 2003, by and
between the company and Paul J. Reilly (incorporated by
reference to Exhibit 10(i)(x) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2002, Commission
File No. 1-4482). |
|
10(k)(iv)
|
Employment Agreement, dated as of February 3, 2003, by and
between the company and William E. Mitchell (incorporated by
reference to Exhibit 10(i)(xi) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2002, Commission
File No. 1-4482). |
|
10(k)(v)
|
Amendment, dated as of March 16, 2005, to the Employment
Agreement dated as of February 3, 2003, by and between the
company and William E. Mitchell (incorporated by reference to
Exhibit 10.1 to the company’s Current Report on Form 8-K,
dated March 18, 2005, Commission File No. 1-4482). |
|
10(k)(vi)
|
Employment Agreement, dated as of August 29, 2006, by and
between the company and Vincent Melvin (incorporated by
reference to Exhibit 10.1 to the company’s Current Report on
Form 8-K dated September 8, 2006, Commission File No. 1-4482). |
|
10(k)(vii)
|
Employment Agreement, dated as of January 1, 2007, by and
between the company and Kevin Gilroy (incorporated by
reference to Exhibit 10.1 to the company’s Current Report on
Form 8-K dated December 12, 2006, Commission File No. 1-4482). |
|
10(k)(viii)
|
Employment Agreement, dated as of February 1, 2007, by and
between the company and John P. McMahon (incorporated by
reference to Exhibit 10.1 to the company’s Current Report on
Form 8-K, dated February 9, 2007, Commission File No. 1-4482). |
|
10(k)(ix)
|
Employment Agreement, dated as of January 1, 2007, by and
between the company and M. Catherine Morris (incorporated by
reference to Exhibit 10.1 to the company’s Current Report on
Form 8-K, dated February 22, 2007, Commission File No.
1-4482). |
87
Table of Contents
| Exhibit | ||
| Number | Exhibit | |
10(k)(x)
|
Form of agreement between the company and all corporate
officers, including the employees party to the Employment
Agreements listed in 10(k)(ii)-(xv) above, providing extended
separation benefits under certain circumstances (incorporated
by reference to Exhibit 10(c)(ix) to the company’s Annual
Report on Form 10-K for the year ended December 31, 1988,
Commission File No. 1-4482). |
|
10(k)(xi)
|
Form of agreement between the company and non-corporate
officers providing extended separation benefits under certain
circumstances (incorporated by reference to Exhibit 10(c)(x)
to the company’s Annual Report on Form 10-K for the year ended
December 31, 1988, Commission File No. 1-4482). |
|
10(k)(xii)
|
Grantor Trust Agreement, as amended and restated on November
11, 2003, by and between Arrow Electronics, Inc. and Wachovia
Bank, N.A. (incorporated by reference to Exhibit 10(i)(xvii)
to the company’s Annual Report on Form 10-K for the year ended
December 31, 2003, Commission File No. 1-4482). |
|
10(k)(xiii)
|
First Amendment, dated September 17, 2004, to the amended and
restated Grantor Trust Agreement in 10(k)(xii) above by and
between Arrow Electronics, Inc. and Wachovia Bank, N.A.
(incorporated by reference to Exhibit 10(a) to the company’s
Quarterly Report on Form 10-Q for the quarter ended September
30, 2004, Commission File No. 1-4482). |
|
10(l)(i)
|
9.15% Senior Exchange Notes due October 1, 2010, dated as of
October 6, 2000, among Arrow Electronics, Inc. and Goldman,
Sachs & Co.; Chase Securities Inc.; Morgan Stanley & Co.
Incorporated; Bank of America Securities LLC; Donaldson,
Lufkin & Jenrette Securities Corporation; BNY Capital Markets,
Inc.; Credit Suisse First Boston Corporation; Deutsche Bank
Securities Inc.; Fleet Securities, Inc.; and HSBC Securities
(USA) Inc., as underwriters (incorporated by reference to
Exhibit 4.4 to the company’s Registration Statement on Form
S-4, Registration No. 333-51100). |
|
10(l)(ii)
|
6.875% Senior Exchange Notes due 2013, dated as of June 25,
2003, among Arrow Electronics, Inc. and Goldman, Sachs & Co.;
JPMorgan; and Bank of America Securities LLC, as joint
book-running managers; Credit Suisse First Boston, as lead
manager; and Fleet Securities, Inc.; HSBC, Scotia Capital; and
Wachovia Securities, as co-managers (incorporated by reference
to Exhibit 99.1 to the company’s Current Report on Form 8-K
dated June 25, 2003, Commission File No. 1-4482). |
|
10(m)
|
Amended and Restated Five Year Credit Agreement, dated as of
January 11, 2007, among Arrow Electronics, Inc. and certain of
its subsidiaries, as borrowers, the lenders from time to time
party thereto, JPMorgan Chase Bank, N.A., as administrative
agent, and Bank of America, N.A., The Bank of Nova Scotia, BNP
Paribas and Wachovia Bank National Association, as syndication
agents (incorporated by reference to Exhibit 10(n) to the
company’s Annual Report on Form 10-K for the year ended
December 31, 2006, Commission File No. 1-4482). |
|
10(n)(i)
|
Transfer and Administration Agreement, dated as of March 21,
2001, by and among Arrow Electronics Funding Corporation,
Arrow Electronics, Inc., individually and as Master Servicer,
the several Conduit Investors, Alternate Investors and Funding
Agents and Bank of America, National Association, as
administrative agent (incorporated by reference to Exhibit
10(m)(i) to the company’s Annual Report on Form 10-K for the
year ended December 31, 2001, Commission File No. 1-4482). |
|
10(n)(ii)
|
Amendment No. 1 to the Transfer and Administration Agreement,
dated as of November 30, 2001, to the Transfer and
Administration Agreement in (10)(o)(i) above (incorporated by
reference to Exhibit 10(m)(ii) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2001, Commission
File No. 1-4482). |
88
Table of Contents
| Exhibit | ||
| Number | Exhibit | |
10(n)(iii)
|
Amendment No. 2 to the Transfer and Administration Agreement,
dated as of December 14, 2001, to the Transfer and
Administration Agreement in (10)(o)(i) above (incorporated by
reference to Exhibit 10(m)(iii) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2001, Commission
File No. 1-4482). |
|
10(n)(iv)
|
Amendment No. 3 to the Transfer and Administration Agreement,
dated as of March 20, 2002, to the Transfer and Administration
Agreement in (10)(o)(i) above (incorporated by reference to
Exhibit 10(m)(iv) to the company’s Annual Report on Form 10-K
for the year ended December 31, 2001, Commission File No.
1-4482). |
|
10(n)(v)
|
Amendment No. 4 to the Transfer and Administration Agreement,
dated as of March 29, 2002, to the Transfer and Administration
Agreement in (10)(o)(i) above (incorporated by reference to
Exhibit 10(n)(v) to the company’s Annual Report on Form 10-K
for the year ended December 31, 2002, Commission File No.
1-4482). |
|
10(n)(vi)
|
Amendment No. 5 to the Transfer and Administration Agreement,
dated as of May 22, 2002, to the Transfer and Administration
Agreement in (10)(o)(i) above (incorporated by reference to
Exhibit 10(n)(vi) to the company’s Annual Report on Form 10-K
for the year ended December 31, 2002, Commission File No.
1-4482). |
|
10(n)(vii)
|
Amendment No. 6 to the Transfer and Administration Agreement,
dated as of September 27, 2002, to the Transfer and
Administration Agreement in (10)(o)(i) above (incorporated by
reference to Exhibit 10(n)(vii) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2002, Commission
File No. 1-4482). |
|
10(n)(viii)
|
Amendment No. 7 to the Transfer and Administration Agreement,
dated as of February 19, 2003, to the Transfer and
Administration Agreement in (10)(o)(i) above (incorporated by
reference to Exhibit 99.1 to the company’s Current Report on
Form 8-K dated February 6, 2003, Commission File No. 1-4482). |
|
10(n)(ix)
|
Amendment No. 8 to the Transfer and Administration Agreement,
dated as of April 14, 2003, to the Transfer and Administration
Agreement in (10)(o)(i) above (incorporated by reference to
Exhibit 10(n)(ix) to the company’s Annual Report on Form 10-K
for the year ended December 31, 2003, Commission File No.
1-4482). |
|
10(n)(x)
|
Amendment No. 9 to the Transfer and Administration Agreement,
dated as of August 13, 2003, to the Transfer and
Administration Agreement in (10)(o)(i) above (incorporated by
reference to Exhibit 10(n)(x) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2003, Commission
File No. 1-4482). |
|
10(n)(xi)
|
Amendment No. 10 to the Transfer and Administration Agreement,
dated as of February 18, 2004, to the Transfer and
Administration Agreement in (10)(o)(i) above (incorporated by
reference to Exhibit 10(n)(xi) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2003, Commission
File No. 1-4482). |
|
10(n)(xii)
|
Amendment No. 11 to the Transfer and Administration Agreement,
dated as of August 13, 2004, to the Transfer and
Administration Agreement in (10)(o)(i) above (incorporated by
reference to Exhibit 10(b) to the company’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2004,
Commission File No. 1-4482). |
|
10(n)(xiii)
|
Amendment No. 12 to the Transfer and Administration Agreement,
dated as of February 14, 2005, to the Transfer and
Administration Agreement in (10)(o)(i) above (incorporated by
reference to Exhibit 10(o)(xiii) to the company’s Annual
Report on Form 10-K for the year ended December 31, 2004,
Commission File No. 1-4482). |
89
Table of Contents
| Exhibit | ||
| Number | Exhibit | |
10(n)(xiv)
|
Amendment No. 13 to the Transfer and Administration Agreement,
dated as of February 13, 2006, to the Transfer and
Administration Agreement in (10)(o)(i) above (incorporated by
reference to Exhibit 10(o)(xiv) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2005, Commission
File No. 1-4482). |
|
10(n)(xv)
|
Amendment No. 14 to the Transfer and Administration Agreement,
dated as of October 31, 2006, to the Transfer and
Administration Agreement in 10(o)(i) above (incorporated by
reference to Exhibit 10(o)(xv) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2006, Commission
File No. 1-4482). |
|
10(n)(xvi)
|
Amendment No. 15 to the Transfer and Administration Agreement,
dated as of February 12, 2007, to the Transfer and
Administration Agreement in 10(o)(i) above (incorporated by
reference to Exhibit 10(o)(xvi) to the company’s Annual Report
on Form 10-K for the year ended December 31, 2006, Commission
File No. 1-4482). |
|
10(o)
|
Form of Indemnification Agreement between the company and each
director (incorporated by reference to Exhibit 10(g) to the
company’s Annual Report on Form 10-K for the year ended
December 31, 1986, Commission File No. 1-4482). |
|
21
|
Subsidiary Listing. |
|
23
|
Consent of Independent Registered Public Accounting Firm. |
|
31(i)
|
Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
31(ii)
|
Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
32(i)
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
32(ii)
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
90
Table of Contents
ARROW ELECTRONICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
| Balance at | Charged | Balance | ||||||||||||||||||
| For the three years ended | beginning | to | Write- | at end | ||||||||||||||||
| December 31, | of year | income | Other(a) | down | of year | |||||||||||||||
Allowance for doubtful accounts |
||||||||||||||||||||
2007 |
$ | 75,404 | $ | 14,211 | $ | 1,372 | $ | 19,755 | $ | 71,232 | ||||||||||
2006 |
$ | 47,076 | $ | 13,023 | $ | 26,179 | $ | 10,874 | $ | 75,404 | ||||||||||
2005 |
$ | 42,476 | $ | 3,216 | $ | 11,168 | $ | 9,784 | $ | 47,076 | ||||||||||
| (a) | Represents the allowance for doubtful accounts of the businesses acquired by the company
during 2007, 2006, and 2005. |
91
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| ARROW ELECTRONICS, INC. |
||||
| By: | /s/ Peter S. Brown | |||
| Peter S. Brown | ||||
| Senior Vice President, General Counsel, and Secretary February 8, 2008 |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated on
February 8, 2008:
By:
|
/s/ William E. Mitchell | |||
| William E. Mitchell, Chairman, President | ||||
| and Chief Executive Officer | ||||
By:
|
/s/ Paul J. Reilly | |||
| Paul J. Reilly, Senior Vice President and | ||||
| Chief Financial Officer | ||||
By:
|
/s/ Michael A. Sauro | |||
| Michael A. Sauro, Vice President and | ||||
| Corporate Controller | ||||
By:
|
/s/ Daniel W. Duval | |||
| Daniel W. Duval, Lead Director | ||||
By:
|
/s/ John N. Hanson | |||
| John N. Hanson, Director | ||||
By:
|
/s/ Richard S. Hill | |||
| Richard S. Hill, Director | ||||
By:
|
/s/ Fran Keeth | |||
| Fran Keeth, Director | ||||
By:
|
/s/ Roger King | |||
| Roger King, Director | ||||
By:
|
/s/ Karen Gordon Mills | |||
| Karen Gordon Mills, Director | ||||
By:
|
/s/ Stephen C. Patrick | |||
| Stephen C. Patrick, Director | ||||
By:
|
/s/ Barry W. Perry | |||
| Barry W. Perry, Director | ||||
By:
|
/s/ John C. Waddell | |||
| John C. Waddell, Director |
92