10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
OR
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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)
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New York
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11-1806155 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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50 Marcus Drive, Melville, New York
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11747 |
(Address of principal executive offices)
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(Zip Code) |
(631) 847-2000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, $1 par value
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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 [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Exchange Act.
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 [ ]
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 registrants 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, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer [X] |
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Accelerated filer o |
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Non-accelerated filer
o (Do not check if a smaller reporting company) |
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Smaller reporting company o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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
registrants most recently completed second fiscal quarter was $3,595,644,549.
There
were 119,335,854 shares of Common Stock outstanding as of February 20, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement related to the registrants Annual Meeting of Shareholders, to be held May 1, 2009, is
incorporated by reference in Part III to the extent described therein.
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 800 suppliers and
approximately 130,000 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 variety
of online supply chain tools.
Arrows diverse worldwide customer base consists of OEMs, CMs, and other 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 approximately 250 sales facilities and 21 distribution and value-added
centers in 53 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, introduce
innovative products through demand creation opportunities, and enhance their overall
competitiveness.
The company has two business segments. 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 2008,
approximately 68% of the companys sales were from the global components business segment, and
approximately 32% of the companys sales were from the global ECS business segment. The financial
information about the companys business segments and geographic operations can be found in Note 16
of the Notes to Consolidated Financial Statements.
Operating efficiency and working capital management remain a key focus of the companys 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 continually evaluates strategic acquisitions to broaden its
product offerings, increase its market penetration, and/or expand its geographic reach.
Global Components
The companys global components business segment, one of the largest distributors of electronic
components and related services in the world, covers the worlds 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 February 2008, the global components business segment acquired all the assets and operations of
ACI Electronics LLC (ACI), a distributor of electronic components used in defense and aerospace
applications. This acquisition further bolstered the companys leading position in the North
American defense and aerospace market and expanded the companys leading market share in many
technology segments including military discretes.
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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, the 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, Thailand, and Vietnam. Over the past three
years the global components business segment completed the following strategic acquisitions to
broaden its product offerings and expand its geographic reach in the Asia Pacific region:
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In June 2007, acquired the component distribution business of Adilam Pty. Ltd.
(Adilam), a leading electronic components distributor in Australia and New Zealand. |
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In November 2007, acquired Universe Electron Corporation (UEC), a distributor of
semiconductor and multimedia products in Japan. |
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In February 2008, acquired the franchise components distribution business of Hynetic
Electronics and Shreyanics Electronics (Hynetic) in India. |
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In July 2008, acquired the components distribution business of Achieva Ltd. (Achieva),
a value-added distributor of semiconductors and electro-mechanical devices based in
Singapore. Achieva has a presence in eight countries within the Asia Pacific region and is
focused on creating value for its partners through technical support and demand creation
activities. |
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In December 2008, acquired Excel Tech, Inc. (Excel Tech), the sole Broadcom
distributor in Korea, and Eteq Components Pte Ltd (Eteq Components), a Broadcom-based
franchise components distribution business in the ASEAN region and China. |
Within the global components business segment, approximately 68% of the companys sales consist of
semiconductor products and related services, approximately 21% consist of passive,
electro-mechanical, and interconnect products, consisting primarily of capacitors, resistors,
potentiometers, power supplies, relays, switches, and connectors, and approximately 11% consist of
computing, memory, and other products.
Most of the companys customers require delivery of their orders on schedules or volumes that are
generally not available on direct purchases from 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, technical support, and
financial intermediary, the distributor relieves manufacturers of a portion of the costs and
personnel associated with these functions (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 to 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 companys global ECS business segment is a leading distributor of enterprise and midrange
computing products, services, and solutions to VARs in North America, Europe, the Middle East and
Africa. Over the past three years, the company has transformed its enterprise computing solutions business into a
stronger organization with broader global reach, increased market share in the fast-growing product
segments of
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software and storage, and a more robust customer and supplier base. Execution on the
companys strategic objectives resulted in the global ECS business segment becoming a leading
value-added distributor of enterprise products for various suppliers including IBM, Sun
Microsystems, and Hewlett-Packard and a leading distributor of enterprise storage and security and
virtualization software. The global ECS geographic footprint has expanded from two countries (the
United States and Canada) in 2005, to 28 countries around the world, including Austria, Belgium,
Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary,
Israel, Latvia, Lithuania, Luxembourg, Morocco, the Netherlands, Norway, Poland, Romania, Serbia,
Slovakia, Slovenia, Sweden, Switzerland, the United Kingdom, and the United States. Over the past
three years, the global ECS business segment completed the following acquisitions:
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In February 2006, acquired SKYDATA Corporation, a Canadian value-added distributor of
data storage solutions, which significantly strengthened the companys presence in Canada. |
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In November 2006, 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. |
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In December 2006, acquired InTechnology Distribution plcs specialty distribution
division (InTechnology) that further strengthened the companys software and storage
capabilities. Based in Harrogate, England, the InTechnology transaction extended the
business operations into the United Kingdom, the second largest information technology
market in Europe. |
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In March 2007, acquired substantially all of the assets and operations of its KeyLink
Systems Group business (KeyLink) from Agilysys, Inc. (Agilysys). 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 companys global ECS business segment. The companys
global ECS business segment also entered into a long-term procurement agreement with
Agilysys. |
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In September 2007, acquired Centia Group Limited and AKS Group AB (Centia/AKS),
specialty distributors of access infrastructure, security and virtualization software
solutions in Europe. |
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In June 2008, acquired LOGIX S.A. (LOGIX), a subsidiary of Groupe OPEN. LOGIX is a
leading value-added distributor of midrange servers, storage, and software to over 6,500
partners in 11 countries. This acquisition established the global ECS business segments
presence in the Middle East and Africa, increased its scale throughout Europe, strengthened
existing relationships with key suppliers, and brought a highly talented management team to
the company. |
Within the global ECS business segment, approximately 25% of the companys sales consist of
proprietary servers, 8% consist of industry standard servers, 27% consist of software, 27% consist
of storage, and 13% consist of services.
Information technology (IT) demands for todays 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 in a competitive
manner.
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 ECS
Solutions Centers, financing support, marketing augmentation, complex order configuration, and
access to a one-stop-shop for mission critical solutions. Midsize and large companies rely on VARs
for their IT needs, and global
ECS works with these VARs to tailor complex, highly-technical mid-market and enterprise solutions
in a cost competitive manner. VARs range in size from small and medium-sized businesses to large
global organizations and are typically structured as sales organizations and service providers.
They purchase
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enterprise and mid-market 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 global ECS
value-added services. Global ECS suppliers benefit from affordable mid-market access, demand
creation, speed to market, and enhanced supply chain efficiency. For suppliers, global ECS is the
aggregation point to over 18,000 VARs.
In better serving the needs of both suppliers and VARs, the companys focus is to be an extension
of the suppliers sales and marketing organization and manage the supply chain, as well as to
leverage the companys strong relationships with the worlds foremost hardware, software and
storage manufacturers to better enable VARs to deliver end-to-end solutions to their customers.
Customers and Suppliers
The company and its affiliates serve approximately 130,000 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 3% of the
companys 2008 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 or email from the companys selling locations. The company also has sales teams that
focus on small and emerging customers where sales representatives regularly call on customers by
telephone or email from centralized selling locations, and inbound sales agents serve customers
that call into the company.
Each of the companys North American selling locations and primary distribution centers in the
global components business segment are electronically linked to the companys 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 companys
international operations in the global components business segment utilize similar online,
real-time computer systems, with access to the companys Worldwide Stock Check System. This system
provides global access to real-time inventory data.
The company sells the products of approximately 800 suppliers. Sales from products and services
from IBM accounted for approximately 11% of the companys consolidated sales in 2008. No other
single supplier accounted for more than 10% of the companys consolidated sales in 2008. The
company believes that many of the products it sells are available from other sources at competitive
prices. However, certain parts of the companys business, such as the companys 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 suppliers and VARs. Most of the
companys 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, scrap allowances, 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, 2008, this type of arrangement covered approximately 72% of the
companys 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
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the distributor the total amount of its products carried in inventory. As of
December 31, 2008, this type of repurchase arrangement covered approximately 74% of the companys
consolidated inventories.
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 companys 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 worlds largest electronics distributors, the companys financial resources and sales
are greater than most of its competitors.
Employees
The company and its affiliates employed approximately 12,700 employees worldwide as of December 31,
2008.
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 companys
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, 2008, includes the certifications of the companys 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 companys public disclosure. The companys 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.
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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 26, 2009:
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William E. Mitchell
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64 |
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Chairman of the Board of Directors and Chief Executive Officer |
Michael J. Long
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50 |
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Director, President, and Chief Operating Officer |
Peter S. Brown
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58 |
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Senior Vice President, General Counsel, and Secretary |
John P. McMahon
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56 |
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Senior Vice President, Human Resources |
Paul J. Reilly
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Senior Vice President and Chief Financial 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 Board of Directors in May 2006 and has been Chief
Executive Officer of the company since February 2003. He also served as President of the company
from February 2003 until February 2008. Prior to joining the company, he served as Executive Vice
President of Solectron Corporation and President of Solectron Global Services, Inc. since March
1999.
Michael J. Long was appointed Director, President, and Chief Operating Officer of the company in
February 2008. Prior thereto he served as Senior Vice President of the company from January 2006
to February 2008 and previously served as Vice President of the company for more than five years.
He served as President, Arrow Global Components from September 2006 to February 2008; 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.
Peter S. Brown has been Senior Vice President, General Counsel, and Secretary of the company for
more than five years.
John P. McMahon was appointed Senior Vice President, Human Resources of the company 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.
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.
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Item 1A. Risk Factors.
Described below and throughout this report are certain risks that the companys management believes
are applicable to the companys business and the industry in which it operates. If any of the
described events occur, the companys 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 companys business, it means that such
risk may have one or more of these effects. 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 could materially adversely affect the company, including those associated with an economic
recession, and global economic slowdown. The recent financial crisis affecting the banking systems
and financial markets and the current uncertainty in global economic conditions have resulted in a
tightening in the credit markets, a low level of liquidity in many financial markets, and extreme
volatility in the credit and equity markets. These factors affect businesses generally and, as a
result, are not discussed in detail below except to the extent such conditions could materially
affect the company and its customers and suppliers in particular ways.
If the company is unable to maintain its relationships with its suppliers or if the suppliers
materially change the terms of their existing agreements with the company, the companys business
could be materially adversely affected.
A substantial portion of the companys 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 companys business, such as the
companys global ECS business, rely on a limited number of suppliers. For example, sales from
products and services from one of the companys suppliers, IBM, accounted for approximately 11% of
the companys consolidated sales in 2008. To the extent that the companys significant suppliers
reduce the amount of products they sell through distribution, or are unwilling to continue to do
business with the company, or are unable to continue to meet its obligations, the companys
business could be materially adversely affected. In addition, to the extent that the companys
suppliers modify the terms of their contracts with the company, or extend lead times, limit
supplies due to capacity constraints, or other factors, there could be a material adverse effect on
the companys business.
The competitive pressures the company faces could have a material adverse effect on the companys
business.
The market for the companys 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 companys failure to maintain and
enhance its competitive position could adversely affect its business and prospects. Furthermore,
the companys efforts to compete in the marketplace could cause deterioration of gross profit
margins and, thus, overall profitability. The sizes of the companys 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 a more extensive customer base than the
company in one or more of its market sectors.
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, the company may face claims
for damages (such as consequential 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 companys ability to
avoid
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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
companys 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 associated
damages. 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 companys inventory could materially
adversely affect its business.
The market for the companys 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 various factors including an oversupply of product and, therefore,
there may be greater risk of declines in inventory value. Although most of the companys 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 companys 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 companys 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 companys 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 three European Union (EU) directives known as the (i) Restriction of Certain
Hazardous Substances Directive (RoHS), (ii) the Waste Electrical and Electronic Equipment
Directive, and (iii) the Registration, Evaluation and Authorisation of Chemicals (REACH). The
first two directives restrict the distribution of products within the EU containing certain
substances and require a manufacturer or importer to recycle products containing those substances.
REACH will require companies to inform all purchasers of certain products in the EU to what extent
they contain certain substances covered by the legislation. In addition, China has passed the
Management Methods on Control of Pollution from Electronic Information Products, which prohibits
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 companys 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 companys 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 unexpected liabilities.
The foregoing matters could materially adversely affect the companys business.
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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.
In 2000, the company acquired Wyle Electronics (Wyle) and assumed its outstanding liabilities,
including responsibility for environmental problems at sites Wyle had previously owned. The Wyle
purchase agreement includes an indemnification from the seller, now known as E.ON AG, in favor of
the company, covering virtually all costs arising out of or in connection with those environmental
obligations. Two sites are known to have environmental issues, one at Norco, California and the
other at Huntsville, Alabama. 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 spent approximately $32 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.
E.ON AG acknowledged liability under the contractual indemnities with respect to the Norco and
Huntsville sites and made a small initial payment, but has subsequently refused to make further
payments. As a result, the company is suing E.ON AG in the Regional Court in Frankfurt, Germany.
In addition, the company is a defendant in two actions brought in Riverside, California, County
Court by landowners and residents alleging personal injury and property damage caused by
contaminated groundwater and related soil-vapor found in certain residential areas adjacent to the
Norco site. Co-defendant Wyle Laboratories, formerly a division of Wyle, has demanded defense and
indemnification from the company in connection with the litigation, which the company must provide
subject to the terms of several related agreements and orders. These costs are also part of the
companys claim against E.ON AG.
As successor-in-interest to Wyle, the company is the beneficiary of the various Wyle insurance
policies that covered liabilities arising out of operations at the two contaminated sites. Certain
of the carriers of the primary insurance policies implicated in the pending claims have undertaken
substantial portions of the defense of the company in the Riverside County cases, and the company
has recovered approximately $10 million from them to date. The company has sued certain of the
umbrella liability policy carriers, however, they have yet to make payment on the tendered losses.
The company believes strongly in the merits of its positions regarding the E.ON AG indemnity, the
liabilities of the insurance carriers, and the absence of compensable damage to the Riverside
County plaintiffs, but there can be no guarantee of the outcome of litigation. Should and to the
extent some or all of the insurance policies at issue prove insufficient or unavailable, and E.ON
AG prevails in the litigation pending in Germany, the company would be responsible for the costs.
The total costs of 1) the investigation and remediation of the two sites, 2) the defense of the
company and the defense and indemnity of Wyle Laboratories in the Riverside County cases, 3) the
potential amount of any adverse verdict in those cases, and 4) the amount of any shortfall in the
availability of the E.ON AG indemnity and/or the insurance coverage are all as yet undetermined.
Any or all of those costs could have a material adverse effect on the companys business.
The company may not have adequate or cost-effective liquidity or capital resources.
The company requires cash or committed liquidity facilities for general corporate purposes, such as
funding its ongoing working capital, acquisition, and capital expenditure needs, as well as to make
interest payments on and to refinance indebtedness. At December 31, 2008, the company had cash and
cash
equivalents of $451.3 million. In addition, the company currently has access to committed credit
lines of $1.4 billion. The companys ability to satisfy its cash needs depends on its ability to
generate
11
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 companys ability to obtain external financing is affected by general financial market
conditions and the companys debt ratings. While, thus far, uncertainties in global credit markets
have not significantly affected the companys access to capital, future financing could be
difficult or more expensive. Further, any increase in the companys level of debt, change in
status of its debt from unsecured to secured debt, or deterioration of its operating results may
cause a reduction in its current debt ratings. Any downgrade in the companys current debt rating
or tightening of credit availability could impair the companys ability to obtain additional
financing or renew existing credit facilities 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 companys 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. The
companys lack of access to cost-effective capital resources, an increase in the companys
financing costs, or a breach of debt instrument covenants could have a material adverse effect on
the companys business.
The agreements governing some of the companys financing arrangements contain various covenants and
restrictions that limit some of managements discretion 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 companys financings contain various covenants and restrictions that,
in certain circumstances, could limit its ability to:
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grant liens on assets; |
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make restricted payments (including paying dividends on capital stock or redeeming or
repurchasing capital stock); |
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make investments; |
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merge, consolidate, or transfer all or substantially all of its assets; |
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incur additional debt; or |
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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 companys failure to have long-term sales contracts may have a material adverse effect on its
business.
Most of the companys 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, and
the levels of utilization of personnel and other resources. A variety of conditions, both specific
to each customer and generally affecting each customers industry, may cause customers to cancel,
reduce, or delay orders that were either previously made or anticipated, go bankrupt or fail, or
default on their payments. 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 guarantee that such agreements
will adequately protect the company. Significant or numerous cancellations, reductions, delays in
orders by customers, losses of customers, and/or customer defaults on payment could materially
adversely affect the companys business.
12
A large portion of the companys revenues comes from the sale of semiconductors, which, in the
past, has been a cyclical industry.
The semiconductor industry historically has experienced fluctuations in product supply and demand,
often associated with changes in technology and manufacturing capacity and subject to significant
economic market upturns and downturns. Sales of semiconductor products and related services
represented approximately 46%, 48%, and 56% of the companys consolidated sales in 2008, 2007, and
2006, respectively, and the companys revenues and profitability, particularly in its global
components business segment, tend to closely follow the strength or weakness of the semiconductor
market. Any cyclical downturn in the technology industry, particularly in the semiconductor sector,
could have a material adverse effect on the companys business and negatively impact its ability to
maintain historical profitability levels.
The companys non-U.S. sales represent a significant portion of its revenues, and consequently, the
company is increasingly exposed to risks associated with operating internationally.
In 2008, 2007, and 2006, approximately 54%, 50%, and 53%, respectively, of the companys sales came
from its operations outside the United States. As a result of the companys international sales
and locations, its operations are subject to a variety of risks that are specific to international
operations, including the following:
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import and export regulations that could erode profit margins or restrict exports; |
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the burden and cost of compliance with international laws, treaties, and technical
standards and changes in those regulations; |
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potential restrictions on transfers of funds; |
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currency fluctuations; |
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import and export duties and value-added taxes; |
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transportation delays and interruptions; |
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uncertainties arising from local business practices and cultural considerations; and |
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potential military conflicts and political risks. |
Furthermore, products the company sells which are either manufactured in the United States or based
on U.S. technology (U.S. Products) are subject to the Export Administration Regulations (EAR)
when exported and re-exported to and from all international jurisdictions, in addition to the local
jurisdictions export regulations applicable to individual shipments. 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 companys business.
Also, the companys 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 and, therefore, could have a material adverse effect on its business.
13
When the company makes acquisitions, it may not be able to successfully integrate them.
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.
The companys goodwill and identifiable intangible assets could become impaired, which could reduce
the value of its assets and reduce its net income in the year in which the write-off occurs.
Goodwill represents the excess of the cost of an acquisition over the fair value of the assets
acquired. The company also ascribes value to certain identifiable intangible assets, which consist
primarily of customer relationships, non-competition agreements, a long-term procurement agreement,
customer databases, and sales backlog, among others, as a result of acquisitions. The company may
incur impairment charges on goodwill or identifiable intangible
assets if it determines that the
fair values of the goodwill or identifiable intangible assets are less than their current carrying
values. The company evaluates, on a regular basis, whether events or circumstances have occurred
that indicate all, or a portion, of the carrying amount of goodwill may no longer be recoverable,
in which case an impairment charge to earnings would become necessary.
As a result of significant declines in macroeconomic conditions, there has been a
decline in global equity valuations since October 1, 2008. Both of these factors have impacted the
companys market capitalization, and the company determined it
was necessary to perform an interim
impairment test of its goodwill and identifiable intangible assets. Based upon the results of such
testing, the company concluded that a portion of its goodwill was impaired and, as such, recognized
a non-cash impairment charge of $1.02 billion
($905.1 million net of related taxes or $7.49 per
share on both a basic and diluted basis) as of December 31, 2008. The impairment charge did not impact the
companys consolidated cash flows, liquidity, capital resources,
and covenants
under its existing revolving credit facility, asset securitization program, and other outstanding
borrowings. No impairment existed as of December 31, 2008 with
respect to the companys identifiable intangible assets. See Notes 1 and 3 of the Notes to the Consolidated Financial
Statements and Critical Accounting Policies in Managements Discussion and Analysis of Financial
Condition and Results of Operations for further discussion of the impairment testing of goodwill
and identifiable intangible assets.
A continued decline in general economic conditions or global equity valuations, could impact the
judgments and assumptions about the fair value of the companys
businesses and the company could be required to record
an additional impairment charge in the future, which could impact the companys consolidated
balance sheet, as well as the companys consolidated statement of operations. If the company was
required to recognize an additional impairment charge in the future, the charge would not impact
the companys consolidated cash flows, current liquidity,
capital resources and covenants under its existing revolving credit facility, asset securitization program, and other
outstanding borrowings.
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 companys 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
14
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 companys independent registered public accounting firm
discovers material weaknesses in the companys internal controls, it may be unable to produce
reliable financial reports or prevent fraud, which could have a material adverse effect on the
companys 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 companys
financial statements, which could cause the market price of its common stock to decline or limit
the companys access to capital.
The company relies heavily on its internal information systems, which, if not properly functioning,
could materially adversely affect the companys business.
The companys 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 companys business. Because most of the
companys systems consist of a number of legacy, internally developed applications, it can be
harder to upgrade and may be more difficult to adapt 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 several years.
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 companys ability to perform necessary business operations, which
could materially, adversely affect the companys 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 companys ability to use
certain technologies in the future.
Certain of the companys products include intellectual property owned by the company and/or our
third party suppliers. Substantial litigation and threats of litigation regarding intellectual
property rights exist in the semiconductor/integrated circuit and software industries. From time
to time, third parties (including 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) may assert patent, copyright and/or other intellectual property
rights to technologies that are important to the companys business. 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 or that the company is fully protected against such claims. In
addition, the company is exposed to potential liability for technology that it develops itself for
which we have no indemnification protections. In any dispute involving products that incorporate
intellectual property developed or licensed by the company, the companys customers could also
become the target of litigation. We are obligated in many instances to indemnify and defend our
customers if the products or services we sell are alleged to infringe any third partys
intellectual property rights. Any infringement claim brought against the company, regardless of
the duration, outcome or size of damage award, could:
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result in substantial cost to the company; |
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divert managements attention and resources; |
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be time consuming to defend; |
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|
result in substantial damage awards; |
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cause product shipment delays; or |
15
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|
require the company to seek to enter into royalty or other licensing agreements. |
Additionally, if an infringement claim is successful the company may be required 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 our operating expenses and
harm the companys 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 companys ability to compete effectively.
Item 1B. Unresolved Staff Comments.
None.
16
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 320 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.
Preference Claim From 2001
In 2008, an opinion was rendered in a bankruptcy proceeding (Bridge Information Systems, et. anno
v. Merisel Americas, Inc. & MOCA) in favor of Bridge Information Systems (Bridge), the estate of
a former global ECS customer that declared bankruptcy in 2001. The proceeding is related to sales
made in 2000 and early 2001 by the MOCA division of ECS, a company Arrow purchased from Merisel
Americas in the fourth quarter of 2000. The court held that certain of the payments received by
the company at the time were preferential and must be returned to Bridge. Accordingly, during
2008, the company recorded a charge of $10.9 million ($6.6 million net of related taxes or $.05 per
share on both a basic and diluted basis), in connection with the preference claim from 2001,
including legal fees.
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 2000 purchase of Wyle from the VEBA Group (VEBA), the company assumed
certain of the then outstanding obligations of Wyle, including Wyles 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
companys 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 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 publiclytraded, German conglomerate in
June 2000. The combined entity, now known as E.ON AG, remains responsible for VEBAs liabilities. E.ON AG
17
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 companys 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 October 2005, the company filed suit against E.ON AG in the Frankfurt am Main Regional Court in
Germany. The suit seeks 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. That action is now proceeding.
The company was named as a defendant in several 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.). Approximately 90 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 Gandara matter has since been
resolved to the satisfaction of the parties, but the outcome of the Austin and Briones cases and
the amount of any associated liability are 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 believes that recovery of costs incurred to date
associated with the environmental clean-up costs related to the Norco and Huntsville sites, is
probable. Accordingly, the company increased the receivable for amounts due from E.ON AG by $8.7
million during 2008 to $33.6 million. The companys 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 companys 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 were not 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.
As successor-in-interest to Wyle, the company is the beneficiary of the various Wyle insurance
policies
that covered liabilities arising out of operations at Norco and Huntsville. Certain of the
carriers of the
18
primary insurance policies implicated in the pending claims have undertaken
substantial portions of the defense of the company in the Riverside County cases (Austin and
Briones), and the company has recovered approximately $10 million from them to date. The company
has sued certain of the umbrella liability policy carriers, however, because they have yet to make
payment on the tendered losses.
The company believes strongly in the merits of its positions regarding the E.ON AG indemnity, the
liabilities of the insurance carriers, and the absence of compensable damages to the Riverside
County plaintiffs.
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
matters will materially impact the companys consolidated financial position, liquidity, or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
19
PART II
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Item 5. |
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities. |
Market Information
The companys common stock is listed on the NYSE (trading symbol: ARW). The high and low sales
prices during each quarter of 2008 and 2007 were as follows:
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Year |
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High |
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Low |
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2008: |
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Fourth Quarter |
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$26.60 |
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$11.74 |
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Third Quarter |
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36.00 |
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24.95 |
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Second Quarter |
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34.97 |
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26.50 |
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First Quarter |
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39.44 |
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29.00 |
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2007: |
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Fourth Quarter |
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$44.95 |
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$34.68 |
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Third Quarter |
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43.55 |
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33.17 |
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Second Quarter |
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43.13 |
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37.29 |
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First Quarter |
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39.83 |
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32.00 |
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Holders
On
February 20, 2009, there were approximately 2,700 shareholders of record of the companys common
stock.
Dividend History
The company did not pay cash dividends on its common stock during 2008 or 2007. 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 companys earnings, financial condition, and other
relevant factors, including debt covenants.
20
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2008, relating to the Omnibus
Incentive Plan, which was approved by the companys 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.
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Number of |
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Weighted |
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|
Securities to be |
|
|
Average |
|
|
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|
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|
Issued Upon |
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|
Exercise |
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Number of |
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|
Exercise |
|
|
Price of |
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|
Securities |
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of Outstanding |
|
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Outstanding |
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Remaining |
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|
Options, |
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|
Options, |
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|
Available for |
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|
Warrants and |
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|
Warrants and |
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Future |
|
Plan Category |
|
Rights |
|
|
Rights |
|
|
Issuance |
|
|
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|
|
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|
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|
Equity compensation
plans approved by
security holders |
|
|
5,413,473 |
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|
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$31.88 |
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|
|
6,957,960 |
|
Equity compensation
plans not approved
by security holders |
|
|
- |
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- |
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- |
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Total |
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5,413,473 |
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$31.88 |
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6,957,960 |
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Performance Graph
The following graph compares the performance of the companys common stock for the periods
indicated with the performance of the Standard & Poors 500 Stock Index (S&P 500 Stock Index) and
the average performance of a group consisting of the companys 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, 2003 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.
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2003 |
|
2004 |
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2005 |
|
2006 |
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2007 |
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2008 |
|
Arrow Electronics |
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100 |
|
|
|
105 |
|
|
|
138 |
|
|
|
136 |
|
|
|
170 |
|
|
|
81 |
|
Peer Group |
|
|
100 |
|
|
|
85 |
|
|
|
108 |
|
|
|
113 |
|
|
|
148 |
|
|
|
89 |
|
S&P 500 Stock Index |
|
|
100 |
|
|
|
111 |
|
|
|
116 |
|
|
|
135 |
|
|
|
142 |
|
|
|
90 |
|
21
Item 6. Selected Financial Data.
The following table sets forth certain selected consolidated financial data and should be read in
conjunction with the companys 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: |
|
2008 (a) |
|
|
2007 (b) |
|
|
2006 (c) |
|
|
2005 (d) (f) |
|
|
2004 (e) (f) |
|
|
Sales |
|
$ |
16,761,009 |
|
|
$ |
15,984,992 |
|
|
$ |
13,577,112 |
|
|
$ |
11,164,196 |
|
|
$ |
10,646,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
(493,569 |
) |
|
$ |
686,905 |
|
|
$ |
606,225 |
|
|
$ |
480,258 |
|
|
$ |
439,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(613,739 |
) |
|
$ |
407,792 |
|
|
$ |
388,331 |
|
|
$ |
253,609 |
|
|
$ |
207,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(5.08 |
) |
|
$ |
3.31 |
|
|
$ |
3.19 |
|
|
$ |
2.15 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(5.08 |
) |
|
$ |
3.28 |
|
|
$ |
3.16 |
|
|
$ |
2.09 |
|
|
$ |
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and
inventories |
|
$ |
4,713,849 |
|
|
$ |
4,961,035 |
|
|
$ |
4,401,857 |
|
|
$ |
3,811,914 |
|
|
$ |
3,470,600 |
|
Total assets |
|
|
7,118,285 |
|
|
|
8,059,860 |
|
|
|
6,669,572 |
|
|
|
6,044,917 |
|
|
|
5,509,101 |
|
Long-term debt |
|
|
1,223,985 |
|
|
|
1,223,337 |
|
|
|
976,774 |
|
|
|
1,138,981 |
|
|
|
1,465,880 |
|
Shareholders equity |
|
|
2,676,698 |
|
|
|
3,551,860 |
|
|
|
2,996,559 |
|
|
|
2,372,886 |
|
|
|
2,194,186 |
|
|
|
|
(a) |
|
Operating loss and net loss
include a non-cash impairment charge associated with goodwill of
$1.02 billion ($905.1 million net
of related taxes or $7.49 per share on both a basic and diluted basis), restructuring and
integration charges of $70.1 million ($55.3 million net of related taxes or $.46 per share on
both a basic and diluted basis), and a charge related to the preference claim from 2001 of
$10.9 million ($6.6 million net of related taxes or $.05 per share on both a basic or diluted
basis). Net loss also includes a loss of $10.0 million ($.08 per
share on both a basic and diluted basis) on the write-down of an
investment, and a reduction of the provision for income taxes of $8.5 million
($.07 per share on both a basic and diluted basis) and an increase in interest expense of $1.0
million ($1.0 million net of related taxes or $.01 per share on both a basic and diluted
basis) primarily related to the settlement of certain international income tax matters. |
|
(b) |
|
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 net income includes 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. |
|
(c) |
|
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 companys 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. |
|
(d) |
|
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 |
22
|
|
|
|
|
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. |
|
(e) |
|
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. |
|
(f) |
|
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, 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. Had compensation expense been
determined in accordance with the fair value method of accounting at the grant dates for
awards under the companys various stock-based compensation plans, operating income and net
income would be reduced by $15.2 million and $9.1 million ($.08 and $.07 per share on a basic
and diluted basis, respectively) for 2005, and $18.5 million and $11.1 million ($.10 and $.09
per share on a basic and diluted basis, respectively) for 2004. |
23
|
|
|
Item 7. |
|
Managements 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 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. 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 2008, approximately 68% of the companys sales were
from the global components business segment, and approximately 32% of the companys sales were from
the global ECS business segment.
Operating efficiency and working capital management remain a key focus of the companys 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 continually evaluates strategic acquisitions to broaden its
product offerings, increase its market penetration, 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 June 2, 2008, the company acquired LOGIX, a subsidiary of Groupe OPEN for a purchase price of
$205.9 million, which included $15.5 million of debt paid at closing, cash acquired of $3.6
million, and acquisition costs. In addition, there was the assumption of $46.7 million in debt.
Headquartered in France, LOGIX has approximately 500 employees and is a leading value-added
distributor of midrange servers, storage, and software to over 6,500 partners in 11 European
countries. Total LOGIX sales for 2007 were approximately $600 million (approximately 440
million). For 2008, LOGIX sales of $376.9 million were included in the companys consolidated
results of operations from the date of acquisition.
On March 31, 2007, the company acquired from Agilysys substantially all of the assets and
operations of KeyLink 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. Total KeyLink sales for 2006, including estimated revenues
associated with the above-mentioned procurement agreement, were approximately $1.6 billion.
Consolidated sales for 2008 grew by 4.9%, compared with the year-earlier period, due to a 14.3%
increase in the global ECS business segment sales and a less than 1% increase in the global
components business segment sales. On a pro forma basis, adjusted for acquisitions, consolidated
sales increased less than 1%.
The increase in global ECS business segment sales of 14.3% for 2008 was primarily due to the
KeyLink and LOGIX acquisitions. On a pro forma basis, which includes KeyLink and LOGIX as though
these acquisitions occurred on January 1, 2007 and excluding KeyLink sales from the related
long-term procurement agreement with Agilysys for the first quarter of 2008, the global ECS
business segment sales for 2008 decreased by less than 1% when compared with the year-earlier
period. This decrease was primarily due to weakness in sales of servers offset, in part, by the
impact of a weaker U.S. dollar on the translation of the companys international financial
statements, and growth in storage, software, and services. Excluding the impact of foreign
currency, the companys global ECS business segment sales increased by 13.3% in 2008.
In the global components business segment, sales for 2008 increased primarily due to strength in
the Asia Pacific region and the impact of a weaker U.S. dollar on the translation of the companys
international financial statements, offset, in part, by weakness in North America and Europe.
Excluding
the impact of foreign currency, the companys global components business segment sales decreased by
24
1.3% in 2008.
The
company recorded a net loss of $613.7 million in 2008,
principally due to a non-cash impairment charge of $1.02 billion
associated with goodwill as a result of significant declines in
macroeconomic conditions and related declines in global equity
valuations, compared with net income of $407.8
million in 2007. The following items impacted the comparability of the companys results for the
years ended December 31, 2008 and 2007:
|
|
|
a non-cash impairment charge
associated with goodwill of $1.02 billion ($905.1 million net of related taxes) in 2008; |
|
|
|
|
restructuring and integration charges of $70.1 million ($55.3 million net of related
taxes) in 2008 and $11.7 million ($7.0 million net of related taxes) in 2007; |
|
|
|
|
a charge related to the preference claim from 2001 of $10.9 million ($6.6 million net of
related taxes) in 2008; |
|
|
|
|
a loss of $10.0 million
on the write-down of an investment in 2008; |
|
|
|
|
a reduction of the provision for income taxes of $8.5 million and an increase in
interest expense of $1.0 million ($1.0 million net of related taxes) primarily related to
the settlement of certain international income tax matters in 2008; and |
|
|
|
|
an 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 in 2007. |
Excluding the above-mentioned items, the decrease in net income in 2008 was primarily the result of
the sales decline in the more profitable components businesses in North America and Europe and
increased expenditures related to the companys global enterprise resource planning (ERP)
initiative offset, in part, by increased sales in the global ECS business segment and the global
components businesses in the Asia Pacific region and by a lower effective tax rate.
Substantially all of the companys sales are made on an order-by-order basis, rather than through
long-term sales contracts. As such, the nature of the companys 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 2008 increased by $776.0 million, or 4.9%, compared with the year-earlier
period. The increase was driven by an increase in the global ECS business segment of $680.3
million, or 14.3%, and an increase in the global components business segment of $95.7 million, or
less than 1%.
In the global ECS business segment, sales for 2008 increased by 14.3%, compared with the
year-earlier period, primarily due to the KeyLink and LOGIX acquisitions. On a pro forma basis,
which includes KeyLink and LOGIX as though these acquisitions occurred on January 1, 2007 and
excluding KeyLink sales from the related long-term procurement agreement with Agilysys for the
first quarter of 2008, the global ECS business segment sales for 2008 decreased by less than 1%,
compared with the year-earlier period. This decrease was primarily due to weakness of servers
offset, in part, by the impact of a weaker U.S. dollar on the translation of the companys
international financial statements and growth in storage, software, and services.
In the global components business segment, sales for 2008 increased by less than 1% compared with
the year-earlier period, primarily due to strength in the Asia Pacific region and the impact of a
weaker U.S. dollar on the translation of the companys international financial statements, offset,
in part, by weakness in North America and Europe.
The translation of the companys international financial statements into U.S. dollars resulted in
increased sales of $293.4 million for 2008, compared with the year-earlier period, due to a weaker
U.S. dollar. Excluding the impact of foreign currency, the companys consolidated sales increased
by 3.0% in 2008.
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.
25
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. This was primarily due to the growth in
storage, software, and industry standard servers and due to the companys 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 companys increased focus on sales-related initiatives
and the impact of a weaker U.S. dollar on the translation of the companys international financial
statements. The increase was offset, in part, by continued weakness at large EMS customers and the
companys initiative to exit lower-margin business in the Asia Pacific region.
The translation of the companys 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 companys consolidated sales increased
by 14.8% in 2007.
Gross Profit
The company recorded gross profit of $2.28 billion and $2.29 billion for 2008 and 2007,
respectively. The gross profit margin for 2008 decreased by approximately 70 basis points when
compared with the year-earlier period. The decrease was due, in part, to the KeyLink and LOGIX
acquisitions, which are both lower gross profit margin businesses. On a pro forma basis, which
includes KeyLink and LOGIX as though these acquisitions occurred on January 1, 2007, the gross
profit margin for 2008 decreased by approximately 60 basis points when compared with the
year-earlier period. This was primarily due to a change in the mix in the companys business, with
the global ECS business segment and Asia Pacific region 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 region 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 and lower working capital requirements in these businesses relative to the
companys other businesses.
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 are lower gross profit
margin businesses. 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 companys business, with the
global ECS business segment and Asia/Pacific being a greater percentage of total sales.
Other Charges
Impairment Charge
The company tests goodwill for impairment annually as of the first day of the fourth quarter,
or more frequently if indicators of potential impairment exist. As a result of significant declines in macroeconomic conditions, there has
been a decline in global equity valuations since October 1, 2008. Both of these
factors have impacted the companys market capitalization, and the company determined it was
necessary to perform an interim impairment test of its goodwill and identifiable intangible assets. Based
upon the results of such testing, the company concluded that a portion of its goodwill was impaired
and, as such, recognized a non-cash impairment charge of
$1.02 billion ($905.1 million net of
related taxes or $7.49 per share on both a basic and diluted basis)
as of December 31, 2008,
of which $716.9 million
related to the companys global components business segment and $301.9
million related to the companys global ECS business segment.
26
The impairment charge did
not impact the companys consolidated cash flows, liquidity,
capital resources and covenants under its existing revolving credit facility, asset securitization program, and
other outstanding borrowings. No impairment existed as of December 31,
2008 with respect to the companys identifiable intangible
assets.
2008 Restructuring and Integration Charge
In 2008, the company recorded a restructuring and integration charge of $70.1 million ($55.3
million net of related taxes or $.46 per share on both a basic and diluted basis). Included in the
restructuring and integration charge for 2008 is a restructuring charge of $69.8 million related to
initiatives by the company to improve operating efficiencies. These actions are expected to reduce
costs by approximately $57 million per annum, with approximately $17 million realized in 2008. Also
included in the restructuring and integration charge for 2008 is a restructuring credit of $.3
million related to adjustments to reserves previously established through restructuring charges in
prior periods and an integration charge of $.6 million, primarily related to the ACI and KeyLink
acquisitions.
The restructuring charge of $69.8 million in 2008 primarily includes personnel costs of $39.4
million, facility costs of $4.3 million, and a write-down of a building and related land of $25.4
million. These initiatives are the result of the companys continued efforts to lower cost and
drive operational efficiency. The personnel costs are primarily associated with the elimination of
approximately 750 positions across multiple functions and multiple locations. The facilities costs
are related to the exit activities of 9 vacated facilities in North America and Europe. During the
fourth quarter of 2008, the companys management approved a plan to actively market and sell a
building and related land in North America within the companys global components business segment
acquired in 2000 in connection with the acquisition of Wyle. The decision to exit this location
was made to enable the company to consolidate facilities and reduce future operating costs. The
sale is expected to be completed within the next twelve months. As a result of this action, the
asset was designated as an asset held for sale in accordance with FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, and is included in Prepaid
expenses and other assets on the companys consolidated balance sheet as of December 31, 2008.
Upon the designation, the carrying values of the building and related land were recorded at the
lower of their carrying values or their estimated fair values less cost to sell, and the company
ceased recording depreciation. The company wrote-down the carrying values of the building and
related land by $25.4 million to $9.5 million.
2007 Restructuring and Integration Charge
In 2007, the company recorded a restructuring and integration charge of $11.7 million ($7.0 million
net of related taxes or $.06 per share on both a basic and diluted basis). Included in the
restructuring and integration charge for 2007 is $9.7 million related to initiatives by the company
to improve operating efficiencies, resulting in expected cost savings of approximately $40 million
per annum. Also included in the restructuring and integration charge for 2007 is a 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 companys continued efforts to
reduce real estate costs, and an integration charge of $2.9 million primarily related to the
acquisition of KeyLink.
The restructuring charge of $9.7 million in 2007 primarily includes personnel costs of $11.3
million related to the elimination of approximately 400 positions. These positions were primarily
within the companys global components business segment in North America and related to the
companys continued focus on operational efficiency. Facilities include 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. This was offset by facilities costs of $6.6 million, primarily
related to exit activities for a vacated facility in Europe due to the companys continued efforts
to reduce real estate costs.
Integration costs of $3.7 million in 2007 include $2.9 million recorded as an integration charge
and $.8
million recorded as additional costs in excess of net assets of companies acquired. The
integration costs
27
include personnel costs of $1.7 million associated with the elimination of
approximately 50 positions in North America related to the acquisition of KeyLink, a credit of $.5
million primarily related to the reversal of excess facility-related accruals in connection with
certain acquisitions made prior to 2005 and other costs of $2.6 million.
2006 Restructuring and Integration Charge
In 2006, the company recorded a restructuring and integration charge of $11.8 million ($9.0 million
net of related taxes or $.07 per share on both a basic and diluted basis). Included in the
restructuring and integration charge for 2006 is a restructuring charge of $12.3 million related to
initiatives by the company to improve operating efficiencies, resulting in expected cost savings of
approximately $9 million per annum. Also included in the restructuring and integration charge for
2006 is a 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. These positions were primarily within the
companys global components business segment in North America and related to the outsourcing of
certain administrative functions and the closure of a warehouse facility. Facilities costs of $1.2
million were incurred related to exit activities of three vacated facilities in Europe due to the
companys 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 companys decision in the fourth quarter of 2006 to implement a
global ERP system, which caused these software costs to become redundant and have no future
benefit.
Preference Claim From 2001
In 2008, an opinion was rendered in a bankruptcy proceeding (Bridge Information Systems, et. anno
v. Merisel Americas, Inc. & MOCA) in favor of Bridge Information Systems (Bridge), the estate of
a former global ECS customer that declared bankruptcy in 2001. The proceeding is related to sales
made in 2000 and early 2001 by the MOCA division of ECS, a company Arrow purchased from Merisel
Americas in the fourth quarter of 2000. The court held that certain of the payments received by
the company at the time were preferential and must be returned to Bridge. Accordingly, during
2008, the company recorded a charge of $10.9 million ($6.6 million net of related taxes or $.05
per share on both a basic and diluted basis), in connection with the preference claim from 2001,
including legal fees.
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 connection with the
2000 purchase of Wyle from VEBA, the company assumed certain of the then outstanding obligations of
Wyle, including Wyles 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 companys purchase of Wyle from VEBA, VEBA agreed
to indemnify the company for costs associated with the Wyle environmental indemnities, among other
things. VEBA has since merged with E.ON AG, a German-based, multinational conglomerate. The
companys 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 companys purchase of Wyle.
28
Operating Income (Loss)
The
company recorded an operating loss of $493.6 million in 2008 as compared with operating income
of $686.9 million in 2007. Included in the operating loss for 2008 was the previously discussed
impairment charge associated with goodwill of $1.02 billion,
restructuring and integration charges of $70.1 million, and a
charge related to the preference claim from 2001 of $10.9 million. Included in operating income
for 2007 was the previously discussed restructuring and integration charges of $11.7 million.
Selling, general and administrative expenses increased $87.4 million, or 5.7%, in 2008, as compared
with 2007, on a sales increase of 4.9%. The dollar increase in selling, general and administrative
expenses compared with the year-earlier period, was due to the impact of foreign exchange rates,
selling, general and administrative expenses incurred by acquired companies and increased
expenditures related to the companys global ERP initiative. Selling, general and administrative
expenses, as a percentage of sales, were 9.6% and 9.5% for 2008 and 2007, respectively.
Depreciation and amortization increased by $2.6 million, or 3.8%, in 2008, compared with the
year-earlier period, primarily due to acquisitions.
The company recorded operating income of $686.9 million in 2007 as compared with operating income
of $606.2 million in 2006. Included in operating income for 2007 was the previously discussed
restructuring and integration charges of $11.7 million. Included in operating income for 2006 were
the previously discussed restructuring and integration charges of $11.8 million, pre-acquisition
warranty claim of $2.8 million, and pre-acquisition environmental matters of $1.4 million.
Selling, general and administrative expenses increased by $157.8 million, or 11.6%, in 2007, as
compared with 2006, on a sales increase of 17.7%. The dollar increase in selling, general and
administrative expenses 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 companys 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.
Loss on Prepayment of Debt
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 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.
Loss
on the Write-Down of an Investment
During
the fourth quarter of 2008, 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 $10.0 million ($.08 per share on both a basic and diluted
basis) on the write-down of this investment.
Interest Expense
Net interest expense decreased by 1.7% in 2008 to $99.9 million, compared with $101.6 million in
2007,
primarily due to lower interest rates on the companys variable rate debt offset, in part, by an
increase in interest expense of $1.0 million primarily related to the settlement of certain
international income tax
29
matters (discussed in Income Taxes below).
Net interest expense increased by 12.2% in 2007 to $101.6 million, compared with $90.6 million in
2006. The increase was 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.
Income Taxes
The company recorded a provision for income taxes of $16.7 million (an effective tax rate of
(2.8%)) for 2008. During the fourth quarter of 2008, the company recorded a reduction of the provision for income taxes
of $8.5 million ($.07 per share on both a basic and diluted basis) primarily related to the
settlement of certain international tax matters covering multiple tax years. The companys
provision for income taxes and effective tax rate for 2008 were impacted by the previously
discussed settlement of certain international income tax matters,
impairment charge associated with goodwill, restructuring
and integration charges, preference claim from 2001, and a loss on
the write-down of an investment. Excluding the impact of the previously
discussed settlement of certain international income tax matters,
impairment charge associated with goodwill, restructuring
and integration charges, preference claim from 2001, and a loss on the
write-down of an investment, the companys effective tax rate was 30.7%
for 2008.
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 companys 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 companys 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 companys provision for income taxes and effective tax rate were impacted by the
previously discussed settlement 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 settlement of certain income
tax matters, restructuring and integration charges, pre-acquisition warranty claim, and
pre-acquisition environmental matters, the companys effective tax rate was 32.4% for 2006.
The companys provision for income taxes and effective tax rate are 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 (Loss)
The
company recorded a net loss of $613.7 million for 2008, compared with net income of $407.8
million in the year-earlier period. Included in the net loss for 2008 was the previously discussed
impairment charge associated with goodwill of $905.1 million, restructuring and integration charges of $55.3 million,
preference claim from
2001 of $6.6 million, a loss on the write-down of an investment
of $10.0 million and a reduction of the provision for income taxes of $8.5 million and an
increase in interest expense, net of related taxes, of $1.0 million related to the settlement of
certain international income tax matters. Included in net income for 2007 was the previously
discussed restructuring and
30
integration charges of $7.0 million and income tax benefit of $6.0
million, net, principally due to a reduction in deferred income tax as a result of the statutory
tax rate change in Germany. Excluding the above-mentioned items, the decrease in net income in
2008 was primarily the result of the sales decline in the more profitable components businesses in
North America and Europe and increased expenditures related to the companys global ERP initiative
offset, in part, by increased sales in the global ECS business segment and the global components
businesses in the Asia Pacific region and by a lower effective tax rate.
The company recorded net income of $407.8 million for 2007, compared with $388.3 million in the
year-earlier period. Included in net income for 2007 were 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 net income for 2006 were 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 companys
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. Excluding the above-mentioned items, the increase in net income for 2007 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.
Liquidity and Capital Resources
At December 31, 2008 and 2007, the company had cash and cash equivalents of $451.3 million and
$447.7 million, respectively.
During 2008, the net amount of cash provided by the companys operating activities was $619.8
million, the net amount of cash used for investing activities was $492.7 million, and the net
amount of cash used for financing activities was $111.1 million. The effect of exchange rate
changes on cash was a decrease of $12.5 million.
During 2007, the net amount of cash provided by the companys 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 companys 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.
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 66.2% and 61.6%
at December 31, 2008 and 2007, respectively.
The net amount of cash provided by the companys operating activities during 2008 was $619.8
million and was primarily due to earnings from operations, adjusted for non-cash items, and a
reduction in accounts receivable and inventory offset, in part, by a decrease in accounts payable.
The net amount of cash provided by the companys operating activities during 2007 was $850.7
million and
was primarily due to earnings from operations, adjusted for non-cash items, a reduction in
inventory, and an increase in accounts payable and accrued expenses. This was offset, in part, by
an increase in accounts receivable supporting increased sales.
31
The net amount of cash provided by the companys operating activities during 2006 was $120.8
million and was primarily due to earnings from operations, adjusted for non-cash items, offset, in
part, by increased inventory purchases, and increased accounts receivable that supported increased
sales in the global components businesses.
Working capital, as a percentage of sales, was 13.4%, 15.2%, and 19.2% in 2008, 2007, and 2006,
respectively.
Cash Flows from Investing Activities
The net amount of cash used for investing activities during 2008 was $492.7 million, primarily
reflecting $333.5 million of cash consideration paid for acquired businesses and $158.7 million for
capital expenditures, which includes $113.4 million of capital expenditures related to the
companys global ERP initiative.
During 2008, the company acquired Hynetic, a franchise components distribution business in India,
ACI, a distributor of electronic components used in defense and aerospace applications, LOGIX, a
leading value-added distributor of midrange servers, storage, and software, Achieva, a value-added
distributor of semiconductors and electro-mechanical devices, Excel Tech, the sole Broadcom
distributor in Korea, and Eteq Components, a Broadcom-based franchise components distribution
business in the ASEAN region and China, for aggregate cash consideration of $319.9 million. In
addition, the company made payments of $13.6 million to increase its ownership interest in
majority-owned subsidiaries.
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 companys
global ERP initiative. This was offset, in part, by $13.0 million of cash proceeds, primarily
related to the sale of the companys Lenexa, Kansas and Harlow, England facilities.
During 2007, the company acquired KeyLink, a leading enterprise computing solutions distributor in
North America, Adilam, 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 UEC, 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 cash 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.
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 several years. For 2009, the estimated cash flow impact of this initiative
is expected to be in the $80 to $100 million range with the annual impact decreasing by
approximately $50 million in 2010. The company expects to finance these costs with cash flows from
operations.
32
Cash Flows from Financing Activities
The net amount of cash used for financing activities during 2008 was $111.1 million, primarily
reflecting $115.8 million of repurchases of common stock offset, in part, by $4.4 million of cash
proceeds from the exercise of stock options.
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 companys 7% senior notes that were repaid in January 2007 in accordance with their
terms, and repurchases of common stock of $84.2 million 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 company has an $800.0 million revolving credit facility with a group of banks that matures in
January 2012. Interest on borrowings under the revolving credit facility is calculated using a
base rate or a euro currency rate plus a spread based on the companys credit ratings (.425% at
December 31, 2008). The facility fee related to the revolving credit facility is .125%. The
company also entered into a $200.0 million term loan with the same group of banks, which is
repayable in full in January 2012. Interest on the term loan is calculated using a base rate or
euro currency rate plus a spread based on the companys credit ratings (.60% at December 31, 2008).
The company has a $600.0 million asset securitization program collateralized by accounts receivable
of certain of its North American subsidiaries which expires in March 2010. Interest on borrowings
is calculated using a base rate or a commercial paper rate plus a spread, which is based on the
companys credit ratings (.225% at December 31, 2008). The facility fee is .125%.
There were no outstanding borrowings under the revolving credit facility or the asset
securitization program at December 31, 2008 and 2007. The revolving credit facility and asset
securitization program include terms and conditions that limit the incurrence of additional
borrowings, limit the companys ability to pay cash dividends or repurchase stock, and require
that certain financial ratios be maintained at designated levels. The company was in compliance
with all covenants as of December 31, 2008. The company is not aware of any events that would
cause non-compliance in the future.
33
Contractual Obligations
Payments due under contractual obligations at December 31, 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
1-3 |
|
|
4-5 |
|
|
After |
|
|
|
|
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
Total |
|
|
Debt |
|
$ |
52,332 |
|
|
$ |
258,212 |
|
|
$ |
562,183 |
|
|
$ |
402,580 |
|
|
$ |
1,275,307 |
|
Interest on long-term debt |
|
|
81,105 |
|
|
|
131,874 |
|
|
|
93,486 |
|
|
|
270,708 |
|
|
|
577,173 |
|
Capital leases |
|
|
561 |
|
|
|
1,009 |
|
|
|
1 |
|
|
|
- |
|
|
|
1,571 |
|
Operating leases |
|
|
57,052 |
|
|
|
77,664 |
|
|
|
43,477 |
|
|
|
14,460 |
|
|
|
192,653 |
|
Purchase obligations (a) |
|
|
1,329,874 |
|
|
|
14,193 |
|
|
|
1,825 |
|
|
|
197 |
|
|
|
1,346,089 |
|
Other (b) |
|
|
30,375 |
|
|
|
18,358 |
|
|
|
10,915 |
|
|
|
8,091 |
|
|
|
67,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,551,299 |
|
|
$ |
501,310 |
|
|
$ |
711,887 |
|
|
$ |
696,036 |
|
|
$ |
3,460,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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,
2008. Most of the companys 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 2015. 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 the joint ventures in the event that the joint ventures are unable
to meet their obligations. At December 31, 2008, the companys pro-rata share of this debt was
approximately $11.8 million. The company believes there is sufficient equity in the joint ventures
to meet their obligations.
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, 2008,
the company had a liability for unrecognized tax benefits and a liability for the payment of
related interest totaling $81.4 million, of which approximately $10.3 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.
Off-Balance Sheet Arrangements
The company has no off-balance sheet financing or unconsolidated special-purpose entities.
Critical Accounting Policies and Estimates
The companys 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.
34
The company believes the following critical accounting policies involve the more significant
judgments and estimates used in the preparation of its consolidated financial statements:
Revenue Recognition
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, which historically were not
material.
A portion of the companys 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.
Generally, these transactions relate to the sale of supplier service contracts to customers where
the company has no future obligation to perform under these contracts or the rendering of logistics
services for the delivery of inventory for which the company does not assume the risks and rewards
of ownership.
Accounts Receivable
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
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.
Investments
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 companys 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 companys 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 companys 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:
35
|
§ |
|
broad economic factors impacting the investees industry; |
|
|
§ |
|
publicly available forecasts for sales and earnings growth for the industry and
investee; and |
|
|
§ |
|
the cyclical nature of the investees industry. |
During
the fourth quarter of 2008, the company determined an
other-than-temporary decline in the fair value of its investment in
Marubun Corporation had occurred and, accordingly, recognized a loss
of $10.0 million ($.08 per share on both a basic and diluted basis) on
the write-down of this investment.
The
company could incur an additional impairment charge in future periods if, among other factors, the
investees future earnings differ from currently available forecasts.
Income Taxes
The carrying value of the companys deferred tax assets is dependent upon the companys 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 companys policy to provide for uncertain tax positions and the related interest and
penalties based upon managements assessment of whether a tax benefit is more likely than not to be
sustained upon examination by tax authorities. At December 31, 2008, 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 companys effective tax rate in a given financial statement
period may be affected.
Financial Instruments
The company uses various financial instruments, including derivative financial instruments, for
purposes other than trading. Derivatives used as part of the companys 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 is recorded as a change to the
carrying value of the related hedged debt, and the effective portion of the change in fair value of
interest rate swaps designated as cash flow hedges is recorded in the shareholders equity section
in the companys consolidated balance sheets in Other. The ineffective portion of the interest
rate swap, if any, is recorded in Interest expense, net in the companys consolidated statements
of operations.
The effective portion of the change in the fair value of derivatives designated as net investment
hedges is recorded in Foreign currency translation adjustment included in the companys
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.
Contingencies and Litigation
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.
Restructuring and Integration
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.
36
Stock-Based Compensation
The company records share-based payment awards exchanged for employee services at fair value on the
date of grant and expenses the awards in the consolidated statements of operations over the
requisite employee service period. Stock-based compensation expense includes an estimate for
forfeitures and is recognized over the expected term of the award on a straight-line basis. The
fair value of stock options is determined using the Black-Scholes valuation model and the
assumptions shown in Note 12 of the Notes to Consolidated Financial Statements. The assumptions
used in calculating the fair value of share-based payment awards represent managements best
estimates. The companys 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.
Employee Benefit Plans
The costs and obligations of the companys 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.
Costs in Excess of Net Assets of Companies Acquired
Goodwill represents the excess of the cost of an acquisition over the fair value of the assets
acquired. The company tests goodwill for impairment annually as of the first day of the fourth
quarter, and when an event occurs or circumstances change such that it is more likely than not that
an impairment may exist, such as (i) a significant adverse change in legal factors or in business
climate, (ii) an adverse action or assessment by a regulator, (iii) unanticipated competition, (iv)
a loss of key personnel, (v) a more-likely-than-not sale or disposal of all or a significant
portion of a reporting unit, (vi) the testing for recoverability of a significant asset group
within a reporting unit, or (vii) the recognition of a goodwill impairment loss of a subsidiary
that is a component of the reporting unit. In addition, goodwill is required to be tested for
impairment after a portion of the goodwill is allocated to a business targeted for disposal.
Goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment
test requires the identification of the reporting units and comparison of the fair value of each of
these reporting units to the respective carrying value. The companys reporting units are defined
as global ECS and each of the three regional businesses within the global components business
segment, which are North America, EMEASA, and Asia/Pacific. If the carrying value of the reporting
unit is less than its fair value, no impairment exists and the second step is not performed. If
the carrying value of the reporting unit is higher than its fair
value, the second step must be performed to compute the amount of the
goodwill impairment, if any.
In the second step, the impairment is computed by comparing the implied fair value of the
reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized for the excess.
Historically, the company estimated the fair value of a reporting unit using a three-year weighted
average multiple of earnings before interest and taxes from comparable companies, which utilizes a
look-back approach. The assumptions utilized in the evaluation of the impairment of goodwill under
this approach include the identification of reporting units and the selection of comparable
companies, which are critical
accounting estimates subject to change. As of the first day of the fourth quarter of 2008, the
companys historical approach did not indicate impairment at any of the companys
reporting units.
As a result of significant declines in macroeconomic conditions, there has been a
decline in global equity valuations since October 1, 2008. Both of these factors have impacted the
companys
37
market capitalization, and the company determined that it was prudent to supplement its
historical goodwill impairment testing methodology with a forward-looking discounted cash flow
methodology. The assumptions included in the discounted cash flow methodology included forecasted
revenues, gross profit margins, operating income margins, working capital cash flow, perpetual
growth rates, and long-term discount rates, among others, all of which require significant judgments
by management. The company also reconciled its discounted
cash flow analysis to its current market
capitalization allowing for a reasonable control premium. Based upon
the results of the supplemental discounted cash flow approach, no impairment
existed as of October 1, 2008. Based upon the results of the discounted
cash flow approach as of December 31, 2008, the carrying value
of the global
ECS reporting unit and the EMEASA and Asia/Pacific reporting units within the global components
business segment were higher than their fair value and, accordingly,
the company performed a step-two impairment analysis. The fair value
of the North America reporting unit within the global components
business segment was higher than its carrying value and a step-two
impairment analysis was not required. The results of the step-two impairment analysis indicated that goodwill related
to the EMEASA and Asia/Pacific reporting units within the global components business segment were
fully impaired and the goodwill related to the global ECS business segment was partially impaired.
The company recognized a total non-cash impairment charge of
$1.02 billion ($901.5 million net of
related taxes or $7.49 per share on both a basic and diluted basis)
as of December 31, 2008,
of which $716.9 million
related to the companys global components business segment and $301.9 million related to the
companys global ECS business segment.
The
impairment charge did not impact the companys consolidated cash
flows, liquidity, capital
resources, and covenants under its existing revolving credit facility, asset
securitization program, and other outstanding borrowings. A continued decline in
general economic conditions or global equity valuations, could impact the judgments and assumptions
about the fair value of the companys business. If general economic conditions or global equity
valuations continue to decline, the company could be required to record an additional impairment
charge in the future, which could impact the companys consolidated balance sheet, as well as the
companys consolidated statement of operations. If the company was required to recognize an
additional impairment charge in the future, the charge would not impact the companys consolidated
cash flows, current liquidity, capital resources, and covenants under its
existing revolving credit facility, asset securitization program, and
other outstanding borrowings.
Impairment of Long-Lived Assets
The company reviews long-lived assets, including property, plant and equipment and identifiable
intangible assets, 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.
During the fourth quarter of 2008, the company recorded an impairment charge of $25.4 million in
connection with an approved plan to market and sell a building and related land in North America
within the companys global components business segment. The company wrote-down the carrying
values of the building and related land to their estimated fair values less cost to sell and ceased
recording depreciation. The asset was designated as an asset held for sale and is included in
Prepaid expenses and other assets on the companys consolidated balance sheet as of December 31,
2008. The sale is expected to be completed within the next twelve months.
During 2006, the company recorded a charge related to the write-down of certain capitalized
software in Europe of $4.5 million. This write-down resulted from the companys decision to
implement a global ERP system, which caused these software costs to become redundant and have no
future benefit.
Factors which may cause an impairment of long-lived assets include significant changes in the
manner of
use of these assets, negative industry or market trends, a significant underperformance relative to
historical or projected future operating results, or a likely sale or disposal of the asset before
the end of its estimated useful life. If any of these factors exist, the company would be required
to test the long-lived asset for recoverability and may be required to recognize an impairment
charge for all or a portion of the assets carrying value.
38
As a result of significant declines in macroeconomic conditions, there has been a decline in global equity valuations since October 1, 2008. Both of these factors have impacted the
companys market capitalization, and the company determined it was necessary to review the
recoverability its long-lived assets to be held and used, including property, plant and equipment
and identifiable intangible assets, by comparing the carrying value of the related asset groups to the
undiscounted cash flows directly attributable to the asset groups over the estimated useful life of
those assets. Based upon the results of such tests as of December 31, 2008, the companys
long-lived assets to be held and used were not impaired.
Shipping and Handling Costs
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 2008 would decrease from 13.6% to
13.2% with no impact on reported earnings.
Impact of Recently Issued Accounting Standards
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities (Statement No. 161). Statement No. 161
changes the disclosure requirements for derivative instruments and hedging activities. Entities
are required to provide disclosures about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entitys
financial position, results of operations, and cash flows. Statement No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008 and requires comparative
disclosures only for periods subsequent to initial adoption. The adoption of the provisions of
Statement No. 161 will not impact the companys consolidated financial position and results of
operations.
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) requires, among
other things, the acquiring entity in a business combination to recognize the fair value of all the
assets acquired and liabilities assumed; the recognition of acquisition-related costs in the
consolidated results of operations; the recognition of restructuring costs in the consolidated
results of operations for which the acquirer becomes obligated after the acquisition date; and
contingent purchase consideration to be recognized at their fair values on the acquisition date
with subsequent adjustments recognized in the consolidated results of operations. 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 that noncontrolling interests be reported as a
component of shareholders equity; net income attributable to the parent and the noncontrolling
interest be separately identified in the consolidated results of operations; changes in a parents
ownership interest be treated as equity transactions if control is maintained; and upon a loss of
control, any gain or loss on the interest be recognized in the consolidated results of operations.
Statement No. 160 also requires expanded disclosures to 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 companys consolidated financial position and results of operations.
39
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
companys 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 companys 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.
40
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 companys financial results in the future. The companys 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 companys 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
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, 2008 and 2007 was $315.0 million and $262.9 million, respectively. The carrying
amounts, which are nominal, approximated fair value at December 31, 2008 and 2007.
The translation of the financial statements of the non-United States operations is impacted by
fluctuations in foreign currency exchange rates. The change in consolidated sales and operating
loss was impacted by the translation of the companys international financial statements into U.S.
dollars. This resulted in increased sales of $293.4 million and a decreased operating loss of
$18.1 million for 2008, compared with the year-earlier period, based on 2007 sales and operating
income at the average rate for 2008. Sales would decrease and the operating loss would increase by
approximately $534.8 million and $19.8 million, respectively, if average foreign exchange rates had
declined by 10% against the U.S. dollar in 2008. This amount was determined by considering the
impact of a hypothetical foreign exchange rate on the sales and operating income of the companys
international operations.
In May 2006, the company entered into a cross-currency swap, with a maturity date of July 2011, 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 $10.0 million and $14.4
million at December 31, 2008 and 2007, 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 $36.5
million and $46.2 million at December 31, 2008 and 2007, respectively.
41
Interest Rate Risk
The companys 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, 2008, approximately 60% of the companys debt was subject to fixed rates, and 40%
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 2008. This was determined
by considering the impact of a hypothetical interest rate on the companys average floating rate on
investments and outstanding 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 companys financial structure.
In December 2007 and January 2008, the company entered into a series of interest rate swaps (the
2007 and 2008 swaps) with a notional amount of $100.0 million. The 2007 and 2008 swaps modify
the companys interest rate exposure by effectively converting the variable rate (3.201% at
December 31, 2008) on a portion of its $200.0 million term loan to a fixed rate of 4.457% per annum
through December 2009. The 2007 and 2008 swaps are designated as cash flow hedges and had a
negative fair value of $1.9 million and $.2 million at December 31, 2008 and 2007, respectively.
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 companys 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 8.19% and 9.50% at December 31,
2008 and 2007, 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 5.01% and 7.24%
at December 31, 2008 and 2007, respectively), through their maturities. The 2004 swaps are
designated as fair value hedges and had a fair value of $21.4 million and $7.5 million at December
31, 2008 and 2007, respectively.
42
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.
We have audited the accompanying consolidated balance sheets of Arrow Electronics, Inc. (the
company) as of December 31, 2008 and 2007, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three years in the period ended December 31,
2008. 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 companys 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, 2008 and
2007, and the consolidated results of their operations and their cash flows for each of the three
years in the period ended December 31, 2008, 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Arrow Electronics, Inc.s internal control over financial reporting as of
December 31, 2008, 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
24, 2009 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 24, 2009
43
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
16,761,009 |
|
|
$ |
15,984,992 |
|
|
$ |
13,577,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
14,478,296 |
|
|
|
13,699,715 |
|
|
|
11,545,719 |
|
Selling, general and administrative expenses |
|
|
1,607,261 |
|
|
|
1,519,908 |
|
|
|
1,362,149 |
|
Depreciation and amortization |
|
|
69,286 |
|
|
|
66,719 |
|
|
|
46,904 |
|
Restructuring and integration charges |
|
|
70,065 |
|
|
|
11,745 |
|
|
|
11,829 |
|
Impairment charge |
|
|
1,018,780 |
|
|
|
- |
|
|
|
- |
|
Preference claim from 2001 |
|
|
10,890 |
|
|
|
- |
|
|
|
- |
|
Pre-acquisition warranty claim |
|
|
- |
|
|
|
- |
|
|
|
2,837 |
|
Pre-acquisition environmental matters |
|
|
- |
|
|
|
- |
|
|
|
1,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,254,578 |
|
|
|
15,298,087 |
|
|
|
12,970,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(493,569 |
) |
|
|
686,905 |
|
|
|
606,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliated companies |
|
|
6,549 |
|
|
|
6,906 |
|
|
|
5,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on prepayment of debt |
|
|
- |
|
|
|
- |
|
|
|
2,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on the
write-down of an investment |
|
|
10,030 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
99,863 |
|
|
|
101,628 |
|
|
|
90,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest |
|
|
(596,913 |
) |
|
|
592,183 |
|
|
|
518,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
16,722 |
|
|
|
180,697 |
|
|
|
128,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
(613,635 |
) |
|
|
411,486 |
|
|
|
389,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
104 |
|
|
|
3,694 |
|
|
|
1,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(613,739 |
) |
|
$ |
407,792 |
|
|
$ |
388,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(5.08 |
) |
|
$ |
3.31 |
|
|
$ |
3.19 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(5.08 |
) |
|
$ |
3.28 |
|
|
$ |
3.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
120,773 |
|
|
|
123,176 |
|
|
|
121,667 |
|
Diluted |
|
|
120,773 |
|
|
|
124,429 |
|
|
|
123,181 |
|
See accompanying notes.
44
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
451,272 |
|
|
$ |
447,731 |
|
Accounts receivable, net |
|
|
3,087,290 |
|
|
|
3,281,169 |
|
Inventories |
|
|
1,626,559 |
|
|
|
1,679,866 |
|
Prepaid expenses and other assets |
|
|
180,647 |
|
|
|
180,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
5,345,768 |
|
|
|
5,589,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost: |
|
|
|
|
|
|
|
|
Land |
|
|
25,127 |
|
|
|
41,553 |
|
Buildings and improvements |
|
|
147,138 |
|
|
|
175,979 |
|
Machinery and equipment |
|
|
698,156 |
|
|
|
580,278 |
|
|
|
|
|
|
|
|
|
|
|
870,421 |
|
|
|
797,810 |
|
Less: Accumulated depreciation and amortization |
|
|
(459,881 |
) |
|
|
(442,649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
410,540 |
|
|
|
355,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in affiliated companies |
|
|
46,788 |
|
|
|
47,794 |
|
Cost in excess of net assets of companies acquired |
|
|
905,848 |
|
|
|
1,779,235 |
|
Other assets |
|
|
409,341 |
|
|
|
288,275 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,118,285 |
|
|
$ |
8,059,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,459,922 |
|
|
$ |
2,535,583 |
|
Accrued expenses |
|
|
455,547 |
|
|
|
438,898 |
|
Short-term borrowings, including current portion of long-term debt |
|
|
52,893 |
|
|
|
12,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,968,362 |
|
|
|
2,987,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
1,223,985 |
|
|
|
1,223,337 |
|
Other liabilities |
|
|
249,240 |
|
|
|
297,289 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock, par value $1: |
|
|
|
|
|
|
|
|
Authorized - 160,000 shares in 2008 and 2007
Issued - 125,048 and 125,039 shares in 2008 and 2007, respectively |
|
|
125,048 |
|
|
|
125,039 |
|
Capital in excess of par value |
|
|
1,035,302 |
|
|
|
1,025,611 |
|
Retained earnings |
|
|
1,571,005 |
|
|
|
2,184,744 |
|
Foreign currency translation adjustment |
|
|
172,528 |
|
|
|
312,755 |
|
Other |
|
|
(36,912 |
) |
|
|
(8,720 |
) |
|
|
|
|
|
|
|
|
|
|
2,866,971 |
|
|
|
3,639,429 |
|
|
|
|
|
|
|
|
|
|
Less: Treasury stock (5,740 and 2,212 shares in 2008 and 2007,
respectively), at cost |
|
|
(190,273 |
) |
|
|
(87,569 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
2,676,698 |
|
|
|
3,551,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
7,118,285 |
|
|
$ |
8,059,860 |
|
|
|
|
|
|
|
|
See accompanying notes.
45
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(613,739 |
) |
|
$ |
407,792 |
|
|
$ |
388,331 |
|
Adjustments to reconcile net income (loss) to net cash provided by
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
69,286 |
|
|
|
66,719 |
|
|
|
46,904 |
|
Amortization of stock-based compensation |
|
|
18,092 |
|
|
|
21,389 |
|
|
|
21,268 |
|
Amortization of deferred financing costs and discount on notes |
|
|
2,162 |
|
|
|
2,144 |
|
|
|
2,808 |
|
Equity in earnings of affiliated companies |
|
|
(6,549 |
) |
|
|
(6,906 |
) |
|
|
(5,221 |
) |
Minority interest |
|
|
104 |
|
|
|
3,694 |
|
|
|
1,489 |
|
Deferred income taxes |
|
|
(88,212 |
) |
|
|
8,661 |
|
|
|
(9,433 |
) |
Restructuring and integration charges |
|
|
55,300 |
|
|
|
7,036 |
|
|
|
8,977 |
|
Impairment charge |
|
|
1,018,780 |
|
|
|
- |
|
|
|
- |
|
Preference claim from 2001 |
|
|
6,576 |
|
|
|
- |
|
|
|
- |
|
Impact of settlement of tax matters |
|
|
(7,488 |
) |
|
|
- |
|
|
|
(50,376 |
) |
Excess tax benefits from stock-based compensation arrangements |
|
|
(161 |
) |
|
|
(7,687 |
) |
|
|
(6,661 |
) |
Accretion of discount on zero coupon convertible debentures |
|
|
- |
|
|
|
- |
|
|
|
876 |
|
Pre-acquisition warranty claim and environmental matters |
|
|
- |
|
|
|
- |
|
|
|
2,728 |
|
Loss on prepayment of debt |
|
|
- |
|
|
|
- |
|
|
|
1,558 |
|
Loss on the
write-down of an investment |
|
|
10,030 |
|
|
|
- |
|
|
|
- |
|
Change in assets and liabilities, net of effects of acquired
businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
269,655 |
|
|
|
(279,636 |
) |
|
|
(202,135 |
) |
Inventories |
|
|
85,489 |
|
|
|
116,657 |
|
|
|
(119,612 |
) |
Prepaid expenses and other assets |
|
|
11,504 |
|
|
|
(19,315 |
) |
|
|
(25,131 |
) |
Accounts payable |
|
|
(191,669 |
) |
|
|
475,155 |
|
|
|
52,561 |
|
Accrued expenses |
|
|
2,977 |
|
|
|
32,458 |
|
|
|
98 |
|
Other |
|
|
(22,338 |
) |
|
|
22,582 |
|
|
|
11,811 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
619,799 |
|
|
|
850,743 |
|
|
|
120,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment |
|
|
(158,688 |
) |
|
|
(138,834 |
) |
|
|
(66,078 |
) |
Cash consideration paid for acquired businesses |
|
|
(333,491 |
) |
|
|
(539,618 |
) |
|
|
(176,235 |
) |
Proceeds from sale of facilities |
|
|
- |
|
|
|
12,996 |
|
|
|
- |
|
Other |
|
|
(512 |
) |
|
|
(23 |
) |
|
|
3,652 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(492,691 |
) |
|
|
(665,479 |
) |
|
|
(238,661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in short-term borrowings |
|
|
2,604 |
|
|
|
(90,318 |
) |
|
|
(22,298 |
) |
Repayment of
revolving credit facility borrowings |
|
|
(3,953,950 |
) |
|
|
(2,312,251 |
) |
|
|
(15,687 |
) |
Proceeds
from revolving credit facility borrowings |
|
|
3,951,461 |
|
|
|
2,510,800 |
|
|
|
- |
|
Repurchase/repayment of senior notes |
|
|
- |
|
|
|
(169,136 |
) |
|
|
(4,268 |
) |
Redemption of zero coupon convertible debentures |
|
|
- |
|
|
|
- |
|
|
|
(156,330 |
) |
Proceeds from exercise of stock options |
|
|
4,392 |
|
|
|
55,228 |
|
|
|
59,194 |
|
Excess tax benefits from stock-based compensation arrangements |
|
|
161 |
|
|
|
7,687 |
|
|
|
6,661 |
|
Repurchases of common stock |
|
|
(115,763 |
) |
|
|
(84,236 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities |
|
|
(111,095 |
) |
|
|
(82,226 |
) |
|
|
(132,728 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(12,472 |
) |
|
|
6,963 |
|
|
|
7,618 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
3,541 |
|
|
|
110,001 |
|
|
|
(242,931 |
) |
Cash and cash equivalents at beginning of year |
|
|
447,731 |
|
|
|
337,730 |
|
|
|
580,661 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
451,272 |
|
|
$ |
447,731 |
|
|
$ |
337,730 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
46
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Capital |
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
in Excess |
|
|
|
|
|
|
Currency |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
at Par |
|
|
of Par |
|
|
Retained |
|
|
Translation |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
|
|
Value |
|
|
Value |
|
|
Earnings |
|
|
Adjustment |
|
|
Stock |
|
|
Income (Loss) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
120,286 |
|
|
$ |
859,485 |
|
|
$ |
1,399,415 |
|
|
$ |
13,308 |
|
|
$ |
(7,278 |
) |
|
$ |
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Tax benefits related to exercise of stock options |
|
|
- |
|
|
|
9,791 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,791 |
|
Restricted stock and performance share awards,
net |
|
|
197 |
|
|
|
(2,394 |
) |
|
|
- |
|
|
|
- |
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Capital |
|
|
|
|
|
|
Currency |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
at Par |
|
|
in Excess of Par |
|
|
Retained |
|
|
Translation |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
|
|
Value |
|
|
Value |
|
|
Earnings |
|
|
Adjustment |
|
|
Stock |
|
|
Income (Loss) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
125,039 |
|
|
$ |
1,025,611 |
|
|
$ |
2,184,744 |
|
|
$ |
312,755 |
|
|
$ |
(87,569 |
) |
|
$ |
(8,720 |
) |
|
$ |
3,551,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
- |
|
|
|
- |
|
|
|
(613,739 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(613,739 |
) |
Translation adjustments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(140,227 |
) |
|
|
- |
|
|
|
- |
|
|
|
(140,227 |
) |
Unrealized loss on securities, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,678 |
) |
|
|
(14,678 |
) |
Unrealized loss on interest rate swaps
designated as cash flow hedges, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,032 |
) |
|
|
(1,032 |
) |
Other employee benefit plan items, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,482 |
) |
|
|
(12,482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(782,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation |
|
|
- |
|
|
|
18,092 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18,092 |
|
Exercise of stock options |
|
|
8 |
|
|
|
(1,709 |
) |
|
|
- |
|
|
|
- |
|
|
|
6,050 |
|
|
|
- |
|
|
|
4,349 |
|
Tax benefits related to exercise of stock options |
|
|
- |
|
|
|
318 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
318 |
|
Restricted stock and performance share awards,
net |
|
|
1 |
|
|
|
(7,010 |
) |
|
|
- |
|
|
|
- |
|
|
|
7,009 |
|
|
|
- |
|
|
|
- |
|
Repurchase of common stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(115,763 |
) |
|
|
- |
|
|
|
(115,763 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
125,048 |
|
|
$ |
1,035,302 |
|
|
$ |
1,571,005 |
|
|
$ |
172,528 |
|
|
$ |
(190,273 |
) |
|
$ |
(36,912 |
) |
|
$ |
2,676,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
48
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 companys 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 is recorded as a change to the
carrying value of the related hedged debt, and the effective portion of the change in fair value of
interest rate swaps designated as cash flow hedges is recorded in the shareholders equity section
in the companys consolidated balance sheets in Other. The ineffective portion of the interest
rate swaps, if any, is recorded in Interest expense, net in the companys consolidated statements
of operations.
The effective portion of the change in the fair value of derivatives designated as net investment
hedges is recorded in Foreign currency translation adjustment included in the companys
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.
49
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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.
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, a
long-term procurement agreement, customer databases, and sales backlog), as a result of
acquisitions. Identifiable intangible assets are included in Other assets in the companys
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.
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 investees 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 companys 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 companys 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 companys
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 companys 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 companys
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 companys 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 investees industry; |
|
|
|
publicly available forecasts for sales and earnings growth for the industry and
investee; and |
|
|
|
the cyclical nature of the investees industry. |
50
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The company could incur an impairment charge in future periods if, among other factors, the
investees future earnings differ from currently available forecasts.
Cost in Excess of Net Assets of Companies Acquired
Goodwill represents the excess of the cost of an acquisition over the fair value of the assets
acquired. The company tests goodwill for impairment annually as of the first day of the fourth
quarter, and when an event occurs or circumstances change such that it is more likely than not that
an impairment may exist, such as (i) a significant adverse change in legal factors or in business
climate, (ii) an adverse action or assessment by a regulator, (iii) unanticipated competition, (iv)
a loss of key personnel, (v) a more-likely-than-not sale or disposal of all or a significant
portion of a reporting unit, (vi) the testing for recoverability of a significant asset group
within a reporting unit, or (vii) the recognition of a goodwill impairment loss of a subsidiary
that is a component of the reporting unit. In addition, goodwill is required to be tested for
impairment after a portion of the goodwill is allocated to a business targeted for disposal.
Goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment
test requires the identification of the reporting units and comparison of the fair value of each of
these reporting units to the respective carrying value. The companys reporting units are defined
as global ECS and each of the three regional businesses within the global components business
segment, which are North America, EMEASA, and Asia/Pacific. If the carrying value of the reporting
unit is less than its fair value, no impairment exists and the second step is not performed. If
the carrying value of the reporting unit is higher than its fair
value, the second step must be performed to compute the amount of the
goodwill impairment, if any.
In the second step, the impairment is computed by comparing the implied fair value of the
reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized for the excess.
Historically, the company estimated the fair value of a reporting unit using a three-year weighted
average multiple of earnings before interest and taxes from comparable companies, which utilizes a
look-back approach. The assumptions utilized in the evaluation of the impairment of goodwill under
this approach include the identification of reporting units and the selection of comparable
companies, which are critical accounting estimates subject to change.
As a result of significant declines in macroeconomic conditions, there has been a decline in global equity valuations since October 1, 2008. Both of these factors have impacted
the companys market capitalization, and the company determined that it was prudent to supplement
its historical goodwill impairment testing methodology with a forward-looking discounted cash flow
methodology. The assumptions included in the discounted cash flow methodology included forecasted
revenues, gross profit margins, operating income margins, working capital cash flow, perpetual
growth rates, and long-term discount rates, among others, all of which require significant
judgments by management.
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 companys 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 companys deferred tax assets is
dependent upon the companys ability to generate sufficient future taxable income in certain tax
jurisdictions. Should the company
51
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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 companys policy to provide for uncertain tax positions and the related interest and
penalties based upon managements assessment of whether a tax benefit is more likely than not to be
sustained upon examination by tax authorities. At December 31, 2008, 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 companys effective tax rate in a given financial statement
period may be affected.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) 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 (Loss)
Comprehensive income (loss) consists of net income (loss), 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 (loss). Except for unrealized gains or losses resulting from the companys
cross-currency swaps, foreign currency translation adjustments included in comprehensive income
(loss) were not tax effected as investments in international affiliates are deemed to be
permanent.
Stock-Based Compensation
The company records share-based payment awards exchanged for employee services at fair value on the
date of grant and expenses the awards in the consolidated statements of operations over the
requisite employee service period. Stock-based compensation expense includes an estimate for
forfeitures and is recognized over the expected term of the award on a straight-line basis. The
company recorded, as a component of selling, general and administrative expenses, amortization of
stock-based compensation of $18,092, $21,389, and $21,268 in 2008, 2007, and 2006, 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 companys 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, which historically were not material.
A portion of the companys business involves shipments directly from its suppliers to its
customers. In
52
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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.
Generally, these transactions relate to the sale of supplier service contracts to customers where
the company has no future obligation to perform under these contracts or the rendering of logistics
services for the delivery of inventory for which the company does not assume the risks and rewards
of ownership.
Shipping and Handling Costs
Shipping and handling costs included in selling, general and administrative expenses totaled
$73,617, $67,911, and $65,599 in 2008, 2007, and 2006, 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 March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities (Statement No. 161). Statement No. 161
changes the disclosure requirements for derivative instruments and hedging activities. Entities
are required to provide disclosures about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entitys
financial position, results of operations, and cash flows. Statement No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008 and requires comparative
disclosures only for periods subsequent to initial adoption. The adoption of the provisions of
Statement No. 161 will not impact the companys consolidated financial position and results of
operations.
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) requires, among
other things, the acquiring entity in a business combination to recognize the fair value of all the
assets acquired and liabilities assumed; the recognition of acquisition-related costs in the
consolidated results of operations; the recognition of restructuring costs in the consolidated
results of operations for which the acquirer becomes obligated after the acquisition date; and
contingent purchase consideration to be recognized at their fair values on the acquisition date
with subsequent adjustments recognized in the consolidated results of operations. 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
53
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Statement No. 160). Statement No. 160 requires that noncontrolling interests be reported as a
component of shareholders equity; net income attributable to the parent and the noncontrolling
interest be separately identified in the consolidated results of operations; changes in a parents
ownership interest be treated as equity transactions if control is maintained; and upon a loss of
control, any gain or loss on the interest be recognized in the consolidated results of operations.
Statement No. 160 also requires expanded disclosures to 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 companys consolidated financial position and results of
operations.
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.
2008
On June 2, 2008, the company acquired LOGIX S.A. (LOGIX), a subsidiary of Groupe OPEN for a
purchase price of $205,937, which included $15,508 of debt paid at closing, cash acquired of
$3,647, and acquisition costs. In addition, there was the assumption of $46,663 in debt.
Headquartered in France, LOGIX has approximately 500 employees and is a leading value-added
distributor of midrange servers, storage, and software to over 6,500 partners in 11 European
countries. Total LOGIX sales for 2007 were approximately $600,000 (approximately 440,000).
For 2008, LOGIX sales of $376,852 were included in the companys consolidated results of operations
from the date of acquisition.
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 LOGIX acquisition:
|
|
|
|
|
Accounts receivable, net |
|
$ |
115,778 |
|
Inventories |
|
|
26,931 |
|
Prepaid expenses and other assets |
|
|
6,473 |
|
Property, plant and equipment |
|
|
5,234 |
|
Identifiable intangible assets |
|
|
23,262 |
|
Cost in excess of net assets of companies acquired |
|
|
183,333 |
|
Accounts payable |
|
|
(95,697 |
) |
Accrued expenses |
|
|
(7,654 |
) |
Debt (including short-term borrowings of $43,096) |
|
|
(46,663 |
) |
Other liabilities |
|
|
(8,707 |
) |
|
|
|
|
Cash consideration paid, net of cash acquired |
|
$ |
202,290 |
|
|
|
|
|
During the third quarter of 2008, the company completed its valuation of identifiable intangible
assets. The company allocated $21,401 of the purchase price to intangible assets relating to
customer relationships, with a useful life of 10 years, and $1,861 to other intangible assets
(consisting of non-competition agreements and sales backlog), with useful lives ranging from one to
two years.
54
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The preliminary allocation is subject to refinement as the company has not yet completed its final
evaluation of the fair value of all of the assets acquired and liabilities assumed.
The cost in excess of net assets of companies acquired related to the LOGIX acquisition was
recorded in the companys global ECS business segment. The intangible assets related to the LOGIX
acquisition are not expected to be deductible for income tax purposes.
The following table summarizes the companys unaudited consolidated results of operations for 2008
and 2007, as well as the unaudited pro forma consolidated results of operations of the company, as
though the LOGIX acquisition occurred on January 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
As Reported |
|
|
Pro Forma |
|
|
As Reported |
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
16,761,009 |
|
|
$ |
16,968,023 |
|
|
$ |
15,984,992 |
|
|
$ |
16,590,101 |
|
Net income (loss) |
|
|
(613,739 |
) |
|
|
(621,702 |
) |
|
|
407,792 |
|
|
|
406,501 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(5.08 |
) |
|
$ |
(5.15 |
) |
|
$ |
3.31 |
|
|
$ |
3.30 |
|
Diluted |
|
$ |
(5.08 |
) |
|
$ |
(5.15 |
) |
|
$ |
3.28 |
|
|
$ |
3.27 |
|
The unaudited pro forma consolidated results of operations does not purport to be indicative of the
results obtained if the LOGIX acquisition had occurred as of the beginning of 2008 and 2007, or of
those results that may be obtained in the future.
In February 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. Total Hynetic sales for 2007 were approximately $20,000.
In February 2008, the company acquired all of the assets and operations of ACI Electronics LLC
(ACI), a distributor of electronic components used in defense and aerospace applications. ACI is
based in Denver, Colorado and distributed products in the United States, Israel, and Italy. Total
ACI sales for 2007 were approximately $60,000.
In July 2008, the company acquired the components distribution business of Achieva Ltd.
(Achieva), a value-added distributor of semiconductors and electromechanical devices. Achieva is
based in Singapore and has a presence in eight countries within the Asia Pacific region. Total
Achieva sales for 2007 were approximately $210,000.
In December 2008, the company acquired Excel Tech, Inc. (Excel Tech), the sole Broadcom
distributor in Korea, and Eteq Components Pte Ltd (Eteq Components), a Broadcom-based franchise
components distribution business in the ASEAN region and China. Total combined Excel Tech and Eteq
Components sales for 2007 were approximately $30,000.
The impact of the Hynetic, ACI, Achieva, Excel Tech, and Eteq Components acquisitions were not
material to the companys consolidated financial position and results of operations.
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
55
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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. KeyLinks highly experienced sales and
marketing professionals strengthen the companys 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 allocation of the net consideration paid to the fair value of
the assets acquired and liabilities assumed for the KeyLink acquisition:
|
|
|
|
|
Accounts receivable, net |
|
$ |
170,231 |
|
Inventories |
|
|
47,100 |
|
Prepaid expenses and other assets |
|
|
4,893 |
|
Property, plant and equipment |
|
|
10,046 |
|
Identifiable intangible assets |
|
|
78,700 |
|
Cost in excess of net assets of companies acquired |
|
|
374,635 |
|
Accounts payable |
|
|
(198,970 |
) |
Accrued expenses |
|
|
(2,955 |
) |
Other liabilities |
|
|
(3,040 |
) |
|
|
|
|
Net consideration paid |
|
$ |
480,640 |
|
|
|
|
|
During the first quarter of 2008, the company completed its valuation of identifiable intangible
assets. The company allocated $63,000 of the purchase price to intangible assets relating to
customer relationships, with a useful life of 11 years, $12,000 to a long-term procurement
agreement, with a useful life of five years, and $3,700 to other intangible assets (consisting of
non-competition agreements and sales backlog), with a useful life of one year.
The cost in excess of net assets of companies acquired related to the KeyLink acquisition was
recorded in the companys global ECS business segment. Substantially all of the intangible assets
related to the KeyLink acquisition are expected to be deductible for income tax purposes.
The following table summarizes the companys 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 KeyLink 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
56
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
leading electronic component distributor in Australia and New Zealand. Total Adilam sales for 2006
were approximately $18,000.
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.
In November 2007, the company acquired Universe Electron Corporation (UEC), a distributor of
semiconductor and multimedia products in Japan. Total UEC sales for the full year 2007 were
approximately $15,000.
The impact of the Adilam, Centia/AKS, and UEC acquisitions were not material to the companys
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 based in Englewood, Colorado, has approximately 150 employees and supports
VARs in delivering solutions that optimize, accelerate, monitor, and secure end-users networks.
Total Alternative Technology sales for 2006 were approximately $250,000, of which $48,699 were
included in the companys 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 plcs storage and security distribution
business (InTechnology) for a purchase price of $80,457, which included acquisition costs.
InTechnology, which is based 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 following table summarizes the companys consolidated results of operations for 2006, as well
as the unaudited pro forma consolidated results of operations of the company, as though the
acquisitions of Alternative Technology and InTechnology occurred on January 1:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
December 31, 2006 |
|
|
|
As Reported |
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
13,577,112 |
|
|
$ |
14,094,895 |
|
Net income |
|
|
388,331 |
|
|
|
392,578 |
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.19 |
|
|
$ |
3.23 |
|
Diluted |
|
$ |
3.16 |
|
|
$ |
3.19 |
|
The unaudited pro forma consolidated results of operations does not purport to be indicative of the
results obtained if the above acquisitions had occurred as of the beginning of 2006, 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
material to the companys consolidated financial position and results of operations.
57
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Other
Amortization expense related to identifiable intangible assets for the years ended December 31,
2008, 2007, and 2006 was $15,324, $14,546, and $1,609, respectively. Amortization expense for each
of the years 2009 through 2013 are estimated to be approximately $14,971, $14,364, $13,822,
$12,022, and $11,422, 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 $8,699 to increase its ownership interest in Ultra Source to 100%.
Additionally, during 2008 and 2006, the company made payments of $4,859 and $4,666, 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.
3. Cost in Excess of Net Assets of Companies Acquired
Cost in excess of net assets of companies acquired allocated to the companys business segments is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global |
|
|
|
|
|
|
|
|
|
Components |
|
|
Global ECS |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Acquisitions |
|
|
105,734 |
|
|
|
84,479 |
|
|
|
190,213 |
|
Impairment charge |
|
|
(716,925 |
) |
|
|
(301,855 |
) |
|
|
(1,018,780 |
) |
Other (primarily foreign currency translation) |
|
|
(26,580 |
) |
|
|
(18,240 |
) |
|
|
(44,820 |
) |
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
453,478 |
|
|
$ |
452,370 |
|
|
$ |
905,848 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill represents the excess of the cost on an acquisition over the fair value of the assets
acquired. The company tests goodwill for impairment annually as of the first day of the fourth
quarter, or more frequently if indicators of potential impairment exist.
Goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment
test requires the identification of the reporting units and comparison of the fair value of each of
these reporting units to the respective carrying value. The companys reporting units are defined
as global ECS and each of the three regional businesses within the global components business
segment, which are North America, EMEASA, and Asia/Pacific. If the carrying value of the reporting
unit is less than its fair value, no impairment exists and the second step is not performed. If
the carrying value of the reporting unit is higher than its fair
value, the second step must be performed to compute the amount of the
goodwill impairment, if any.
In the second step, the impairment is computed by comparing the implied fair value of the
reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized for the excess.
58
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Historically, the company estimated the fair value of a reporting unit using a three-year weighted
average multiple of earnings before interest and taxes from comparable companies, which utilizes a
look-back approach. The assumptions utilized in the evaluation of the impairment of goodwill under
this approach include the identification of reporting units and the selection of comparable
companies, which are critical accounting estimates subject to change. As of the first day of the fourth quarter of 2008, the
companys historical approach did not indicate impairment at any of the companys
reporting units.
As a result of significant declines in macroeconomic conditions, there has been a decline in global equity valuations since October 1, 2008. Both of these factors have impacted the
companys market capitalization, and the company determined that it was prudent to supplement its
historical goodwill impairment testing methodology with a forward-looking discounted cash flow
methodology. The assumptions included in the discounted cash flow methodology included forecasted
revenues, gross profit margins, operating income margins, working capital cash flow, perpetual
growth rates, and long-term discount rates, among others, all of which require significant judgments
by management. The company also reconciled its discounted cash flow analysis to its current market
capitalization allowing for a reasonable control premium. Based upon
the results of the supplemental discounted cash flow approach, no impairment
existed as of October 1, 2008. Based upon the results of the
discounted
cash flow approach as of December 31, 2008, the carrying value of the global
ECS reporting unit and the EMEASA and Asia/Pacific reporting units within the global components
business segment were higher than their fair value and, accordingly,
the company performed a step-two impairment analysis. The fair value
of the North America reporting unit within the global components
business segment was higher than its carrying value and a step-two
analysis was not required. The results of the step-two impairment analysis indicated that goodwill related
to the EMEASA and Asia/Pacific reporting units within the global components business segment were
fully impaired and the goodwill related to the global ECS business segment was partially impaired.
The company recognized a total non-cash impairment charge of
$1,018,780 ($905,069 net of related
taxes or $7.49 per share on both a basic and diluted basis) as of
December 31, 2008, of which
$716,925 related to the
companys global components business segment and $301,855 related to the companys global ECS
business segment.
The
impairment charge did not impact the companys consolidated cash
flows, liquidity, capital
resources, and covenants under its existing revolving credit facility, asset
securitization program, and other outstanding borrowings.
4. Investments in 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 companys investment in Marubun/Arrow, the companys investment
and long-term note receivable in Altech Industries, and the companys other equity investments at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Marubun/Arrow |
|
$ |
34,881 |
|
|
$ |
31,835 |
|
Altech Industries |
|
|
11,888 |
|
|
|
15,782 |
|
Other |
|
|
19 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
$ |
46,788 |
|
|
$ |
47,794 |
|
|
|
|
|
|
|
|
59
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The equity in earnings (loss) of affiliated companies for the years ended December 31 consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marubun/Arrow |
|
$ |
5,486 |
|
|
$ |
5,440 |
|
|
$ |
4,024 |
|
Altech Industries |
|
|
1,233 |
|
|
|
1,550 |
|
|
|
1,244 |
|
Other |
|
|
(170 |
) |
|
|
(84 |
) |
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,549 |
|
|
$ |
6,906 |
|
|
$ |
5,221 |
|
|
|
|
|
|
|
|
|
|
|
Under the terms of various joint venture agreements, the company is required to pay its pro-rata
share of the third party debt of the joint ventures in the event that the joint ventures are
unable to meet their obligations. At December 31, 2008, the companys pro-rata share of this debt
was approximately $11,750. The company believes there is sufficient equity in the joint ventures
to meet their obligations.
5. Accounts Receivable
The company has a $600,000 asset securitization program collateralized by accounts receivables of
certain of its North American subsidiaries which expires 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 companys consolidated balance sheet. Interest on borrowings is calculated using a
base rate or a commercial paper rate plus a spread, which is based on the companys credit ratings
(.225% at December 31, 2008). The facility fee is .125%.
The company had no outstanding borrowings under the program at December 31, 2008 and 2007.
Accounts receivable, net, consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
3,140,076 |
|
|
$ |
3,352,401 |
|
Allowance for doubtful accounts |
|
|
(52,786 |
) |
|
|
(71,232 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
3,087,290 |
|
|
$ |
3,281,169 |
|
|
|
|
|
|
|
|
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
At December 31, 2008 and 2007, short-term borrowings of $52,893 and $12,893, respectively, were
primarily utilized to support the working capital requirements of certain international operations.
The weighted average interest rates on these borrowings at December 31, 2008 and 2007 were 3.6%
and 4.2%, respectively.
Long-term debt consists of the following at December 31:
60
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
9.15% senior notes, due 2010 |
|
$ |
199,994 |
|
|
$ |
199,991 |
|
Bank term loan, due 2012 |
|
|
200,000 |
|
|
|
200,000 |
|
6.875% senior notes, due 2013 |
|
|
349,694 |
|
|
|
349,627 |
|
6.875% senior debentures, due 2018 |
|
|
198,032 |
|
|
|
197,822 |
|
7.5% senior debentures, due 2027 |
|
|
197,470 |
|
|
|
197,331 |
|
Cross-currency swap, due 2010 |
|
|
36,467 |
|
|
|
46,198 |
|
Cross-currency swap, due 2011 |
|
|
9,985 |
|
|
|
14,438 |
|
Interest rate swaps designated as fair value hedges |
|
|
21,394 |
|
|
|
7,546 |
|
Other obligations with various interest rates and due dates |
|
|
10,949 |
|
|
|
10,384 |
|
|
|
|
|
|
|
|
|
|
$ |
1,223,985 |
|
|
$ |
1,223,337 |
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
9.15% senior notes, due 2010 |
|
|
103 |
% |
|
|
111 |
% |
6.875% senior notes, due 2013 |
|
|
94 |
% |
|
|
109 |
% |
6.875% senior debentures, due 2018 |
|
|
80 |
% |
|
|
106 |
% |
7.5% senior debentures, due 2027 |
|
|
76 |
% |
|
|
107 |
% |
The carrying amount of the companys bank term loan, cross-currency swaps, interest rate swaps, and
other obligations approximate their fair value.
Annual payments of borrowings during each of the years 2009 through 2013 are $52,893, $247,715,
$11,506, $200,382, and $361,802, respectively, and $402,580 for all years thereafter.
The company has an $800,000 revolving credit facility with a group of banks that matures in January
2012. Interest on borrowings under the revolving credit facility is calculated using a base rate
or a euro currency rate plus a spread based on the companys credit ratings (.425% at December 31,
2008). The company had no outstanding borrowings under the revolving credit facility at December
31, 2008 and 2007. The facility fee related to the revolving credit facility is .125%. The
company also entered into a $200,000 term loan with the same group of banks, which is repayable in
full in January 2012. Interest on the term loan is calculated using a base rate or a euro currency
rate plus a spread based on the companys credit ratings (.60% at December 31, 2008).
The revolving credit facility and the asset securitization program include terms and conditions
that limit the incurrence of additional borrowings, limit the companys ability to pay cash
dividends or repurchase stock, and require that certain financial ratios be maintained at
designated levels. The company was in compliance with all covenants as of December 31, 2008. The
company is not aware of any events that 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
61
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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.
Interest expense, net, includes interest income of $5,337, $5,726, and $7,817 in 2008, 2007, and
2006, respectively. Interest paid, net of interest income, amounted to $96,993, $98,881, and
$105,078 in 2008, 2007, and 2006, respectively.
7. Financial Instruments Measured at Fair Value
Fair Value Measurements
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 does not require
any new fair value measurements.
In February 2008, the FASB issued FASB Staff Position 157-2, which provides 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.
Effective January 1, 2008, the company adopted the provisions of Statement No. 157 for financial
assets and liabilities, as well as for any other assets and liabilities that are carried at fair
value on a recurring basis. The adoption of the 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 did not materially impact the companys consolidated financial position and
results of operations.
Statement No. 157 defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
Statement No. 157 also establishes a fair value hierarchy, which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Statement No. 157 describes three levels of inputs that may be used to measure fair value:
|
|
|
Level 1
|
|
Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities. |
|
|
|
Level 2
|
|
Quoted prices in markets that are not active; or other inputs that
are observable, either directly or indirectly, for substantially
the full term of the asset or liability. |
|
|
|
Level 3
|
|
Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable. |
62
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The following table presents assets/(liabilities) measured at fair value on a recurring basis at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
$ |
21,187 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
21,187 |
|
Cross-currency swaps |
|
|
- |
|
|
|
(46,452 |
) |
|
|
- |
|
|
|
(46,452 |
) |
Interest rate swaps |
|
|
- |
|
|
|
19,541 |
|
|
|
- |
|
|
|
19,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,187 |
|
|
$ |
(26,911 |
) |
|
$ |
- |
|
|
$ |
(5,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-For-Sale Securities
The company has a 3.1% 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 companys available-for-sale securities are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
Marubun |
|
|
WPG |
|
|
Marubun |
|
|
WPG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost basis |
|
$ |
10,016 |
|
|
$ |
10,798 |
|
|
$ |
20,046 |
|
|
$ |
10,798 |
|
Unrealized holding gain (loss) |
|
|
- |
|
|
|
373 |
|
|
|
(1,212 |
) |
|
|
17,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
10,016 |
|
|
$ |
11,171 |
|
|
$ |
18,834 |
|
|
$ |
27,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the fourth quarter of 2008, the company determined that an
other-than-temporary decline in the fair value of Marubun occurred
based upon various factors including the
financial condition and near-term prospects of Marubun, the magnitude of the loss compared to the
investments cost, the length of time the investment was in an unrealized loss position, and
publicly available information about the industry and geographic
region in which Marubun operates and, accordingly recorded a loss of
$10,030 ($.08 per share on both a basic and diluted basis) on the
write-down of this investment.
The fair value of these investments are included in Other assets in the companys consolidated
balance sheets, and the related net unrealized holding gains and losses are included in Other in
the shareholders equity section in the companys consolidated balance sheets.
Cross-Currency Swaps
In May 2006, the company entered into a cross-currency swap, with a maturity date of July 2011, 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 comparable amount of hedged net assets, no material ineffectiveness is expected. The 2006
cross-currency swap had a negative fair value of $9,985 and $14,438 at December 31, 2008 and 2007,
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
63
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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 $36,467 and $46,198 at December 31, 2008 and 2007,
respectively.
Interest Rate Swaps
In December 2007 and January 2008, the company entered into a series of interest rate swaps (the
2007 and 2008 swaps) with a notional amount of $100,000. The 2007 and 2008 swaps modify the
companys interest rate exposure by effectively converting the variable rate (3.201% at December
31, 2008) on a portion of its $200,000 term loan to a fixed rate of 4.457% per annum through
December 2009. The 2007 and 2008 swaps are designated as cash flow hedges and had a negative fair
value of $1,853 and $155 at December 31, 2008 and 2007, respectively.
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 companys 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 8.19% and 9.50% at December 31, 2008 and
2007, 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 5.01% and 7.24% at December
31, 2008 and 2007, respectively), through their maturities. The 2004 swaps are designated as fair
value hedges and had a fair value of $21,394 and $7,546 at December 31, 2008 and 2007,
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, 2008 and 2007 was $315,021 and $262,940, respectively. The
carrying amounts, which are nominal, approximated fair value at December 31, 2008 and 2007.
64
ARROW ELECTRONICS, INC.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
55,459 |
|
|
$ |
101,077 |
|
|
$ |
92,842 |
|
State |
|
|
5,510 |
|
|
|
13,410 |
|
|
|
19,159 |
|
International |
|
|
43,965 |
|
|
|
57,549 |
|
|
|
25,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,934 |
|
|
|
172,036 |
|
|
|
137,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(33,232 |
) |
|
|
(6 |
) |
|
|
(11,892 |
) |
State |
|
|
(1,892 |
) |
|
|
5,124 |
|
|
|
953 |
|
International |
|
|
(53,088 |
) |
|
|
3,543 |
|
|
|
1,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88,212 |
) |
|
|
8,661 |
|
|
|
(9,433 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,722 |
|
|
$ |
180,697 |
|
|
$ |
128,457 |
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
5,409 |
|
|
$ |
262,068 |
|
|
$ |
252,334 |
|
International |
|
|
(602,322 |
) |
|
|
330,115 |
|
|
|
265,943 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
$ |
(596,913 |
) |
|
$ |
592,183 |
|
|
$ |
518,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision at statutory tax rate |
|
$ |
(208,919 |
) |
|
$ |
207,264 |
|
|
$ |
181,397 |
|
State taxes, net of federal benefit |
|
|
2,352 |
|
|
|
12,047 |
|
|
|
13,073 |
|
International effective tax rate differential |
|
|
(28,801 |
) |
|
|
(54,448 |
) |
|
|
(24,492 |
) |
Non-deductible impairment charge |
|
|
237,602 |
|
|
|
- |
|
|
|
- |
|
Other non-deductible expenses |
|
|
10,424 |
|
|
|
3,270 |
|
|
|
2,280 |
|
Changes in tax accruals and reserves |
|
|
4,188 |
|
|
|
15,838 |
|
|
|
(40,426 |
) |
Other |
|
|
(124 |
) |
|
|
(3,274 |
) |
|
|
(3,375 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
16,722 |
|
|
$ |
180,697 |
|
|
$ |
128,457 |
|
|
|
|
|
|
|
|
|
|
|
During
the fourth quarter of 2008, the company recorded a reduction of the provision for income taxes of $8,450 and an
increase in interest expense of $1,009 ($962 net of related taxes) primarily related to the
settlement of certain international income tax matters covering multiple years.
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 the provision for income
taxes of
65
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
$46,176, of which $40,426 related to tax years prior to 2006, and recorded a reduction of
interest expense of $6,900 ($4,200 net of related taxes), of which $3,994 related to tax years
prior to 2006, in the companys consolidated statements of operations.
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 companys
consolidated financial position and results of operations as a result of the adoption of the
provisions of FIN 48. At December 31, 2008, the company had a liability for unrecognized tax
benefits of $69,719 (of which $69,820, if recognized, would favorably affect the companys
effective tax rate). 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 companys consolidated statements of operations. Penalties, if any, are
recognized as a component of Selling, general and administrative expenses. In 2008 and 2007, the
company recognized $1,476 and $4,149, respectively, of interest expense related to unrecognized tax
benefits. At December 31, 2008 and 2007, the company had a liability for the payment of interest
of $11,634 and $10,395, respectively, related to unrecognized tax benefits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years
ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
77,702 |
|
|
$ |
43,308 |
|
Additions based on tax positions taken during a prior period |
|
|
12,179 |
|
|
|
22,714 |
|
Reductions based on tax positions taken during a prior period |
|
|
(19,446 |
) |
|
|
- |
|
Additions based on tax positions taken during the current period |
|
|
4,125 |
|
|
|
14,943 |
|
Reductions based on tax positions taken during the current period |
|
|
- |
|
|
|
- |
|
Reductions related to settlement of tax matters |
|
|
(3,866 |
) |
|
|
(2,762 |
) |
Reductions related to a lapse of applicable statute of limitations |
|
|
(975 |
) |
|
|
(501 |
) |
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
69,719 |
|
|
$ |
77,702 |
|
|
|
|
|
|
|
|
In many cases the companys 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, 2008:
|
|
|
|
|
United States Federal
|
|
2005 present
|
|
|
United States State
|
|
1998 present
|
|
|
Germany (a)
|
|
2007 present |
|
|
Hong Kong
|
|
2001 present |
|
|
Italy (a)
|
|
2004 present |
|
|
Sweden
|
|
2003 present |
|
|
United Kingdom
|
|
2006 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.
66
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The significant components of the companys deferred tax assets and liabilities, included
primarily in Prepaid expenses and other assets, Other assets, and Other liabilities in the
companys consolidated balance sheets, consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
36,991 |
|
|
$ |
39,154 |
|
Capital loss carryforwards |
|
|
2,242 |
|
|
|
12,457 |
|
Inventory adjustments |
|
|
32,037 |
|
|
|
36,335 |
|
Allowance for doubtful accounts |
|
|
12,917 |
|
|
|
14,232 |
|
Accrued expenses |
|
|
43,839 |
|
|
|
52,692 |
|
Other
compensation income items |
|
|
23,096 |
|
|
|
5,135 |
|
Derivative financial instruments |
|
|
18,225 |
|
|
|
23,981 |
|
Restructuring and integration reserves |
|
|
5,233 |
|
|
|
2,060 |
|
Goodwill |
|
|
31,574 |
|
|
|
- |
|
Other |
|
|
6,084 |
|
|
|
4,045 |
|
|
|
|
|
|
|
|
|
|
|
212,238 |
|
|
|
190,091 |
|
Valuation allowance |
|
|
(27,068 |
) |
|
|
(34,814 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
185,170 |
|
|
$ |
155,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
- |
|
|
$ |
(60,887 |
) |
Other |
|
|
- |
|
|
|
(2,734 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
$ |
- |
|
|
$ |
(63,621 |
) |
|
|
|
|
|
|
|
Total net deferred tax assets |
|
$ |
185,170 |
|
|
$ |
91,656 |
|
|
|
|
|
|
|
|
At December 31, 2008, certain international subsidiaries had tax loss carryforwards of
approximately $129,773 expiring in various years after 2009. Deferred tax assets related to the
tax loss carryforwards of the international subsidiaries in the amount of $33,006 as of December
31, 2008 were recorded with a corresponding valuation allowance of $17,832. 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, 2008, the company had a capital loss carryforward of approximately $5,716. This
loss will expire through 2009. A full valuation allowance of $2,242 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 $1,246,688 at December 31,
2008. No deferred U.S. federal income taxes were provided for the undistributed earnings as they
are permanently reinvested in the companys international operations.
Income taxes paid, net of income taxes refunded, amounted to $144,215, $189,620, and $163,889 in
2008, 2007, and 2006, respectively.
67
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
9. Restructuring and Integration Charges
2008 Restructuring and Integration Charge
In 2008, the company recorded a restructuring and integration charge of $70,065 ($55,300 net of
related taxes or $.46 per share on both a basic and diluted basis). Included in the restructuring
and integration charge for 2008 is a restructuring charge of $69,836 related to initiatives by the
company to improve operating efficiencies. These actions are expected to reduce costs by
approximately $57,000 per annum, with approximately $17,000 realized in 2008. Also included in the
restructuring and integration charge for 2008 is a restructuring credit of $322 related to
adjustments to reserves previously established through restructuring charges in prior periods and
an integration charge of $551, primarily related to the ACI and KeyLink acquisitions.
The following table presents the 2008 restructuring charge and activity in the related
restructuring accrual for 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
|
|
|
|
|
|
Personnel |
|
|
|
|
|
|
Write- |
|
|
|
|
|
|
|
|
|
Costs |
|
|
Facilities |
|
|
Downs |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charge |
|
$ |
39,383 |
|
|
$ |
4,305 |
|
|
$ |
25,423 |
|
|
$ |
725 |
|
|
$ |
69,836 |
|
Payments |
|
|
(24,238 |
) |
|
|
(474 |
) |
|
|
- |
|
|
|
(225 |
) |
|
|
(24,937 |
) |
Non-cash usage |
|
|
- |
|
|
|
- |
|
|
|
(25,423 |
) |
|
|
- |
|
|
|
(25,423 |
) |
Reclassification of capital lease |
|
|
- |
|
|
|
810 |
|
|
|
- |
|
|
|
- |
|
|
|
810 |
|
Foreign currency translation |
|
|
(949 |
) |
|
|
78 |
|
|
|
- |
|
|
|
- |
|
|
|
(871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
14,196 |
|
|
$ |
4,719 |
|
|
$ |
- |
|
|
$ |
500 |
|
|
$ |
19,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring charge of $69,836 in 2008 primarily includes personnel costs of $39,383, facility
costs of $4,305, and a write-down of a building and related land of $25,423. These initiatives are
the result of the companys continued efforts to lower cost and drive operational efficiency. The
personnel costs are primarily associated with the elimination of approximately 750 positions across
multiple functions and multiple locations. The facilities costs are related to the exit activities
of 9 vacated facilities in North America and Europe. During the fourth quarter of 2008, the
companys management approved a plan to actively market and sell a building and related land in
North America within the companys global components business segment acquired in 2000 in
connection with the acquisition of Wyle. The decision to exit this location was made to enable the
company to consolidate facilities and reduce future operating costs. The sale is expected to be
completed within the next twelve months. As a result of this action, the asset was designated as
an asset held for sale, in accordance with FASB Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, and is included in Prepaid expenses and other assets on the
companys consolidated balance sheet as of December 31, 2008. Upon the designation, the carrying
values of the building and related land were recorded at the lower of their carrying values or
their estimated fair values less cost to sell, and the company ceased recording depreciation. The
company wrote-down the carrying values of the building and related land by $25,423 to $9,500.
2007 Restructuring and Integration Charge
In 2007, the company recorded a restructuring and integration charge of $11,745 ($7,036 net of
related taxes or $.06 per share on both a basic and diluted basis). Included in the restructuring
and integration charge for 2007 is a restructuring charge of $9,708 related to initiatives by the
company to improve operating efficiencies, resulting in expected cost savings of approximately
$40,000 per annum. Also included in the restructuring and integration charge for 2007 is a
restructuring credit of $359 primarily related to the reversal of excess reserves, which were
previously established through restructuring
68
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
charges in prior periods, a gain on the sale of the
Lenexa, Kansas facility of $548 that was vacated in 2007 due to the companys continued efforts to
reduce real estate costs, and an integration charge of
$2,944 primarily related to the acquisition of KeyLink.
The following table presents the 2007 restructuring charge and activity in the related
restructuring accrual for 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
|
|
|
|
|
|
|
|
|
|
|
|
Costs |
|
|
Facilities |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charge (credit) |
|
$ |
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 |
|
Restructuring charge |
|
|
586 |
|
|
|
540 |
|
|
|
- |
|
|
|
1,126 |
|
Payments |
|
|
(3,807 |
) |
|
|
(1,245 |
) |
|
|
(14 |
) |
|
|
(5,066 |
) |
Foreign currency translation |
|
|
(129 |
) |
|
|
(1,286 |
) |
|
|
- |
|
|
|
(1,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
465 |
|
|
$ |
3,825 |
|
|
$ |
- |
|
|
$ |
4,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring charge of $9,708 in 2007 primarily includes personnel costs of $11,312 related to
the elimination of approximately 400 positions. These positions were primarily within the
companys global components business segment in North America and related to the companys
continued focus on operational efficiency. Facilities include 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. This was offset by facilities costs of $6,559, primarily related to exit activities for a
vacated facility in Europe due to the companys continued efforts to reduce real estate costs.
2006 Restructuring and Integration Charge
In 2006, the company recorded a restructuring and integration charge of $11,829 ($8,977 net of
related taxes or $.07 per share on both a basic and diluted basis). Included in the restructuring
and integration charge for 2006 is a restructuring charge of $12,280 related to initiatives by the
company to improve operating efficiencies, resulting in expected cost savings of approximately
$9,000 per annum. Also included in the restructuring and integration charge for 2006 is a
restructuring credit of $451 primarily related to the reversal of excess reserves, which were
previously established through restructuring charges in prior periods.
69
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The following table presents the 2006 restructuring charge and activity in the related
restructuring accrual for 2006, 2007, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 credit |
|
|
(330 |
) |
|
|
(548 |
) |
|
|
- |
|
|
|
- |
|
|
|
(878 |
) |
Payments |
|
|
(1,568 |
) |
|
|
13 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,555 |
) |
Foreign currency translation |
|
|
32 |
|
|
|
23 |
|
|
|
- |
|
|
|
- |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
345 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
345 |
|
Restructuring credit |
|
|
(73 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(73 |
) |
Payments |
|
|
(59 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(59 |
) |
Foreign currency translation |
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
207 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring charge of $12,280 in 2006 includes personnel costs of $6,542 related to the
elimination of approximately 300 positions. These positions were primarily within the companys
global components business segment in North America and related to the outsourcing of certain
administrative functions and the closure of a warehouse facility. Facilities costs of $1,228 were
incurred related to exit activities of three vacated facilities in Europe due to the companys
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 companys 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.
70
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Restructuring Accrual Related to Actions Taken Prior to 2006
The following table presents the activity in the restructuring accrual during 2006, 2007, and 2008
related to actions taken prior to 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
|
|
|
|
|
|
|
|
|
|
|
|
Costs |
|
|
Facilities |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
$ |
4,640 |
|
|
$ |
5,525 |
|
|
$ |
3,821 |
|
|
$ |
13,986 |
|
Restructuring charge (credit) |
|
|
(236 |
) |
|
|
888 |
|
|
|
(1,103 |
) |
|
|
(451 |
) |
Payments |
|
|
(3,933 |
) |
|
|
(3,828 |
) |
|
|
62 |
|
|
|
(7,699 |
) |
Foreign currency translation |
|
|
(81 |
) |
|
|
(46 |
) |
|
|
26 |
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
390 |
|
|
|
2,539 |
|
|
|
2,806 |
|
|
|
5,735 |
|
Restructuring charge (credit) |
|
|
(176 |
) |
|
|
1,509 |
|
|
|
(1,362 |
) |
|
|
(29 |
) |
Payments |
|
|
(214 |
) |
|
|
(1,470 |
) |
|
|
- |
|
|
|
(1,684 |
) |
Foreign currency translation |
|
|
- |
|
|
|
146 |
|
|
|
183 |
|
|
|
329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
- |
|
|
|
2,724 |
|
|
|
1,627 |
|
|
|
4,351 |
|
Restructuring credit |
|
|
- |
|
|
|
(124 |
) |
|
|
(1,251 |
) |
|
|
(1,375 |
) |
Payments |
|
|
- |
|
|
|
(1,006 |
) |
|
|
- |
|
|
|
(1,006 |
) |
Non-cash usage |
|
|
- |
|
|
|
- |
|
|
|
(201 |
) |
|
|
(201 |
) |
Foreign currency translation |
|
|
- |
|
|
|
(181 |
) |
|
|
105 |
|
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
- |
|
|
$ |
1,413 |
|
|
$ |
280 |
|
|
$ |
1,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration
Included in the restructuring and integration charges referenced above is an integration charge of
$551 for 2008, primarily related to the ACI and KeyLink acquisitions, and an integration charge of
$2,944 for 2007, primarily related to the acquisition of KeyLink.
The following table presents the integration charge and activity for 2006, 2007, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
|
|
|
|
|
|
|
|
|
|
|
|
Costs |
|
|
Facilities |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (a) |
|
|
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 |
|
Integration costs (b) |
|
|
774 |
|
|
|
435 |
|
|
|
(323 |
) |
|
|
886 |
|
Payments |
|
|
(1,091 |
) |
|
|
(1,186 |
) |
|
|
- |
|
|
|
(2,277 |
) |
Foreign currency translation |
|
|
- |
|
|
|
11 |
|
|
|
- |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
240 |
|
|
$ |
834 |
|
|
$ |
2,693 |
|
|
$ |
3,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(a) |
|
Integration costs of $3,740 in 2007 include $2,944 recorded as an integration charge and $796
recorded as additional costs in excess of net assets of companies acquired. The integration
costs include personnel costs of $1,666 associated with the elimination of approximately 50
positions in North America related to the acquisition of KeyLink, a credit of $535 primarily
related to the reversal of excess facility-related accruals in connection with certain
acquisitions made prior to 2005 and other costs of $2,609. |
|
(b) |
|
Integration costs of $886 in 2008 include $551 recorded as an integration charge and $335
recorded as additional costs in excess of net assets of companies acquired. Integration costs
primarily include personnel costs of $774 related to the elimination of 11 positions in North
America related to the ACI and KeyLink acquisitions and 1 position in Europe related to the
Centia/AKS acquisition. Integration costs also include costs related to a vacated facility in
Asia associated with the Achieva acquisition. |
Restructuring and Integration Summary
In summary, the restructuring and integration accruals aggregate $29,372 at December 31, 2008, of
which $28,658 is expected to be spent in cash, and are expected to be utilized as follows:
|
|
The accruals for personnel costs of $15,108 to cover the termination of personnel are
primarily expected to be spent within one year. |
|
|
|
The accruals for facilities totaling $10,791 relate to vacated leased properties that have
scheduled payments of $3,310 in 2009, $3,114 in 2010, $1,191 in 2011, $948 in 2012, $935 in
2013, and $1,293 thereafter. |
|
|
|
Other accruals of $3,473 are expected to be utilized over several years. |
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, 2005 |
|
|
120,286 |
|
|
|
272 |
|
|
|
120,014 |
|
Restricted stock awards, net |
|
|
- |
|
|
|
(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 |
|
Exercise of stock options |
|
|
2,216 |
|
|
|
- |
|
|
|
2,216 |
|
Restricted stock and performance share awards, net |
|
|
197 |
|
|
|
(70 |
) |
|
|
267 |
|
Repurchases of common stock |
|
|
- |
|
|
|
2,075 |
|
|
|
(2,075 |
) |
|
|
|
|
|
|
|
|
|
|
Common stock outstanding at December 31, 2007 |
|
|
125,039 |
|
|
|
2,212 |
|
|
|
122,827 |
|
Exercise of stock options |
|
|
8 |
|
|
|
(167 |
) |
|
|
175 |
|
Restricted stock and performance share awards, net |
|
|
1 |
|
|
|
(146 |
) |
|
|
147 |
|
Repurchases of common stock |
|
|
- |
|
|
|
3,841 |
|
|
|
(3,841 |
) |
|
|
|
|
|
|
|
|
|
|
Common stock outstanding at December 31, 2008 |
|
|
125,048 |
|
|
|
5,740 |
|
|
|
119,308 |
|
|
|
|
|
|
|
|
|
|
|
72
ARROW ELECTRONICS, INC.
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, 2008 and 2007.
Share-Repurchase Programs
In February 2006, the Board of Directors authorized the company to repurchase up to $100,000 of the
companys outstanding common stock through a share-repurchase program. In December 2007, the Board
of Directors authorized the company to repurchase an additional $100,000 of the companys
outstanding common stock. As of December 31, 2008, the company repurchased 5,916,596 shares under
these programs with a market value of $200,000 at the dates of repurchase.
11. Net Income (Loss) 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported |
|
$ |
(613,739 |
) |
|
$ |
407,792 |
|
|
$ |
388,331 |
|
Adjustment for interest expense on convertible debentures,
net of tax |
|
|
- |
|
|
|
- |
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as adjusted |
|
$ |
(613,739 |
) |
|
$ |
407,792 |
|
|
$ |
388,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(5.08 |
) |
|
$ |
3.31 |
|
|
$ |
3.19 |
|
|
|
|
|
|
|
|
|
|
|
Diluted (a) |
|
$ |
(5.08 |
) |
|
$ |
3.28 |
|
|
$ |
3.16 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic |
|
|
120,773 |
|
|
|
123,176 |
|
|
|
121,667 |
|
Net effect of various dilutive stock-based compensation awards |
|
|
- |
|
|
|
1,253 |
|
|
|
1,047 |
|
Net effect of dilutive convertible debentures |
|
|
- |
|
|
|
- |
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-diluted |
|
|
120,773 |
|
|
|
124,429 |
|
|
|
123,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The effect of options to purchase 4,368, 43, and 2 shares for the years ended December 31,
2008, 2007, and 2006, respectively, was excluded from the calculation of net income (loss) per
share on a diluted basis as their effect was 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 companys 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.
73
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Under the terms of the Omnibus Plan, a maximum of 13,300,000 shares of common stock may be awarded,
subject to adjustment. There were 6,957,960 and 3,549,067 shares available for grant under the
Omnibus Plan as of December 31, 2008 and 2007, 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 Arrows 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,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Life |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
4,481,816 |
|
|
$ |
31.30 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
484,078 |
|
|
|
32.18 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(175,902 |
) |
|
|
24.72 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(422,051 |
) |
|
|
33.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
4,367,941 |
|
|
|
31.42 |
|
|
80 months |
|
$ |
1,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008 |
|
|
2,267,139 |
|
|
|
28.16 |
|
|
65 months |
|
$ |
1,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
difference between the companys closing stock price on the last trading day of 2008 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, 2008. This
amount changes based on the market value of the companys stock.
The total intrinsic value of options exercised during 2008, 2007, and 2006 was $1,398, $30,739, and
$21,158, respectively.
Cash received from option exercises during 2008, 2007, and 2006 was $4,392, $55,228, and $59,194,
respectively, and is included within the financing activities section in the companys consolidated
statements of cash flows. The actual tax benefit realized from share-based payment awards during
2008, 2007, and 2006 was $3,551, $11,249, and $7,297, respectively.
74
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
The fair value of stock options was estimated using the Black-Scholes valuation model with the
following weighted-average assumptions for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility (percent) * |
|
|
33 |
|
|
|
29 |
|
|
|
35 |
|
Expected term (in years) ** |
|
|
5.5 |
|
|
|
3.6 |
|
|
|
4.4 |
|
Risk-free interest rate (percent) *** |
|
|
2.9 |
|
|
|
4.6 |
|
|
|
4.7 |
|
|
|
|
* |
|
Volatility is measured using historical daily price changes of the companys 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 $11.63, $11.03, and $11.11 during 2008,
2007, and 2006, respectively.
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 companys 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 companys 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 basis 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 companys 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
75
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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 directors 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
directors annual retainer fee is deferred and converted into units based on the fair market value
of the companys stock as of the date it was payable. Upon a non-employee directors retirement
from the Board, each unit in their deferral account will be converted into a share of company stock
and distributed to the non-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 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
Non-vested shares at December 31, 2007 |
|
|
848,364 |
|
|
$ |
34.07 |
|
Granted |
|
|
995,866 |
|
|
|
32.04 |
|
Vested |
|
|
(325,898 |
) |
|
|
28.49 |
|
Forfeited |
|
|
(91,085 |
) |
|
|
34.93 |
|
|
|
|
|
|
|
|
|
Non-vested shares at December 31, 2008 |
|
|
1,427,247 |
|
|
|
33.88 |
|
|
|
|
|
|
|
|
|
As of December 31, 2008, there was $13,092 of total unrecognized compensation cost related to
non-vested shares which is expected to be recognized over a weighted-average period of 2.5 years.
The total fair value of shares vested during 2008, 2007, and 2006 was $10,313, $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 companys common stock. Contributions, which are
determined by the Board, are in the form of common stock or cash, which is used to purchase the
companys common stock for the benefit of participating employees. Contributions to the plan for
2008, 2007, and 2006 amounted to $11,290, $10,857, and $9,668, 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 companys 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 companys consolidated balance sheets in accordance with the provisions of
Statement No. 87.
76
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
In 2008 and 2007, actuarial losses of $14,045 and $3,749, respectively, were recognized in
comprehensive income, net of related taxes. In 2008 and 2007, the following amounts were
recognized
as a reclassification adjustment of comprehensive income, net of related taxes, as a result of
being recognized in net periodic pension cost: transition obligation of $299 and $293,
respectively, prior service cost of $323 and $315, respectively, and an actuarial loss of $939 and
$1,274, respectively.
Included in accumulated other comprehensive loss at December 31, 2008 and 2007 are the following
amounts, net of related taxes, that have not yet been recognized in net periodic pension cost:
unrecognized transition obligation of $757 and $1,056, respectively, unrecognized prior service
costs of $289 and $612, respectively, and unrecognized actuarial losses of $31,950 and $18,844,
respectively.
The transition obligation, prior service cost, and actuarial loss included in accumulated other
comprehensive loss, net of related taxes, which are expected to be recognized in net periodic
pension cost for the year ended December 31, 2009 are $306, $323, and $2,312, 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 26 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.
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.
77
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation |
|
$ |
46,286 |
|
|
$ |
44,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in projected benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
53,065 |
|
|
$ |
49,103 |
|
Service cost (Arrow SERP) |
|
|
2,587 |
|
|
|
2,651 |
|
Interest cost |
|
|
2,929 |
|
|
|
2,800 |
|
Actuarial (gain)/loss |
|
|
(1,768 |
) |
|
|
1,223 |
|
Benefits paid |
|
|
(2,928 |
) |
|
|
(2,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year |
|
$ |
53,885 |
|
|
$ |
53,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
(53,885 |
) |
|
$ |
(53,065 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic pension cost: |
|
|
|
|
|
|
|
|
Service cost (Arrow SERP) |
|
$ |
2,587 |
|
|
$ |
2,651 |
|
Interest cost |
|
|
2,929 |
|
|
|
2,800 |
|
Amortization of net loss |
|
|
321 |
|
|
|
411 |
|
Amortization of prior service cost (Arrow SERP) |
|
|
549 |
|
|
|
549 |
|
Amortization of transition obligation (Arrow SERP) |
|
|
411 |
|
|
|
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
6,797 |
|
|
$ |
6,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine benefit obligation: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
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 |
% |
|
|
5.75 |
% |
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. 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 years assumptions used to determine the benefit obligation.
78
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Benefit payments are expected to be paid as follows:
|
|
|
|
|
2009 |
|
$ |
3,587 |
|
2010 |
|
|
3,517 |
|
2011 |
|
|
3,601 |
|
2012 |
|
|
3,573 |
|
2013 |
|
|
3,611 |
|
2014 - 2018 |
|
|
20,411 |
|
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 companys 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:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation |
|
$ |
101,077 |
|
|
$ |
101,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in projected benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
101,494 |
|
|
$ |
98,168 |
|
Interest cost |
|
|
5,769 |
|
|
|
5,441 |
|
Actuarial (gain)/loss |
|
|
(1,033 |
) |
|
|
2,957 |
|
Benefits paid |
|
|
(5,153 |
) |
|
|
(5,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year |
|
$ |
101,077 |
|
|
$ |
101,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
81,364 |
|
|
$ |
79,875 |
|
Actual return on plan assets |
|
|
(19,691 |
) |
|
|
6,561 |
|
Company contributions |
|
|
5,808 |
|
|
|
- |
|
Benefits paid |
|
|
(5,153 |
) |
|
|
(5,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
62,328 |
|
|
$ |
81,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
(38,749 |
) |
|
$ |
(20,130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic pension cost: |
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
5,769 |
|
|
$ |
5,441 |
|
Expected return on plan assets |
|
|
(6,830 |
) |
|
|
(6,546 |
) |
Amortization of net loss |
|
|
1,552 |
|
|
|
1,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
491 |
|
|
$ |
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine benefit obligation: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
5.75 |
% |
Expected return on plan assets |
|
|
8.00 |
% |
|
|
8.50 |
% |
79
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine net periodic pension cost: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
5.75 |
% |
Expected return on plan assets |
|
|
8.50 |
% |
|
|
8.50 |
% |
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. The expected return
on plan assets is based on current and expected asset allocations, historical trends, and expected
returns on plan assets. The actuarial assumptions used to determine the net periodic pension cost
are based upon the prior years 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 made contributions of $5,808 in 2008 and
expects to make estimated contributions in 2009 of $11,400.
Benefit payments are expected to be paid as follows:
|
|
|
|
|
2009 |
|
$ |
5,960 |
|
2010 |
|
|
6,091 |
|
2011 |
|
|
6,126 |
|
2012 |
|
|
6,222 |
|
2013 |
|
|
6,357 |
|
2014 - 2018 |
|
|
33,795 |
|
The plan asset allocations at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Equities |
|
|
52 |
% |
|
|
61 |
% |
Fixed income |
|
|
47 |
|
|
|
38 |
|
Cash |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
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 long-term 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 periodic 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 companys contribution to the plan, which is based on a
specified percentage of employee contributions, amounted to $9,420, $8,783, and $7,967 in 2008,
2007, and 2006, respectively. Certain international subsidiaries maintain separate defined
contribution plans for their
80
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
employees and made contributions thereunder, which amounted to
$17,759, $11,113, and $6,593 in 2008, 2007, and 2006, 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 $67,334, $60,173, and $54,790 in 2008, 2007, and 2006,
respectively.
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:
|
|
|
|
|
2009 |
|
$ |
57,052 |
|
2010 |
|
|
43,678 |
|
2011 |
|
|
33,986 |
|
2012 |
|
|
23,820 |
|
2013 |
|
|
19,657 |
|
Thereafter |
|
|
14,460 |
|
15. Contingencies
Preference Claim From 2001
In 2008, an opinion was rendered in a bankruptcy proceeding (Bridge Information Systems, et. anno
v. Merisel Americas, Inc. & MOCA) in favor of Bridge Information Systems (Bridge), the estate of
a former global ECS customer that declared bankruptcy in 2001. The proceeding is related to sales
made in 2000 and early 2001 by the MOCA division of ECS, a company Arrow purchased from Merisel
Americas in the fourth quarter of 2000. The court held that certain of the payments received by
the company at the time were preferential and must be returned to Bridge. Accordingly, during
2008, the company recorded a charge of $10,890 ($6,576 net of related taxes or $.05 per share on
both a basic and diluted basis), in connection with the preference claim from 2001, including legal
fees.
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 11,333. 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 2000 purchase of Wyle from the VEBA Group (VEBA), the company assumed
certain of the then outstanding obligations of Wyle, including Wyles 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
companys purchase of
81
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
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 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 publiclytraded, German conglomerate in
June 2000.
The combined entity, now known as E.ON AG, remains responsible for VEBAs 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 companys 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 October 2005, the company filed suit against E.ON AG in the Frankfurt am Main Regional Court in
Germany. The suit seeks 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. That action is now proceeding.
The company was named as a defendant in several 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.). Approximately 90 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 Gandara matter has since been
resolved to the satisfaction of the parties, but the outcome of the Austin and Briones cases and
the amount of any associated liability are 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.
Environmental Matters Huntsville
Characterization of the extent of contaminated soil and groundwater continues at the site in
Huntsville, Alabama. Under the direction of the Alabama Department of Environmental Management,
approximately $1,800 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 $350 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.
Environmental Matters 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
82
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
2005, a Remedial Investigation Work Plan was approved by DTSC that provided for site-wide
characterization of known and potential environmental issues. Investigations performed in
connection with this work plan and a series of subsequent technical memoranda continued until the
filing of a final Remedial Investigation Report early in 2008. The development of a final Remedial
Action Work Plan is ongoing. An estimated $24,000 was expended to date on project management,
regulatory oversight, and investigative and feasibility study activities.
Work is under way pertaining to the remediation of contaminated groundwater at certain areas on the
Norco site and of soil gas in a limited area immediately adjacent to the site. In the first
quarter of 2008, an hydraulic containment system was installed to capture and treat groundwater
before it moves into the adjacent offsite area. Approximately $6,000 was expended on remediation
to date, and it is anticipated that these activities, along with the initial phases of the
treatment of contaminated groundwater in the offsite area, will give rise to an additional
estimated $9,300 to $20,500.
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.
The company currently estimates that the additional cost of project management and regulatory
oversight will range from $1,000 to $2,000. 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 $400 and $1,000. Remaining feasibility study and
Remedial Action Work Plan costs, including a final report and the design of remedial measures, are
estimated to cost $600 to $800.
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 believes that the recovery of costs incurred to date
associated with the environmental clean-up costs related to the Norco and Huntsville sites, is
probable. Accordingly, the company increased the receivable for amounts due from E.ON AG by $8,675
during 2008 to $33,619. The companys 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 companys 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 were not 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.
As successor-in-interest to Wyle, the company is the beneficiary of the various Wyle insurance
policies that covered liabilities arising out of operations at Norco and Huntsville. Certain of
the carriers of the
83
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
primary insurance policies implicated in the pending claims have undertaken substantial portions of
the defense of the company in the Riverside County cases (Austin and Briones), and the company has
recovered approximately $10 million from them to date. The company has sued certain of the
umbrella liability policy carriers, however, because they have yet to make payment on the tendered
losses.
The company believes strongly in the merits of its positions regarding the E.ON AG indemnity, the
liabilities of the insurance carriers, and the absence of compensable damages to the Riverside
County plaintiffs.
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
matters will materially impact the companys consolidated 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 companys philosophy of maximizing operating efficiencies
through the centralization of certain functions, selected fixed assets and related depreciation, as
well as borrowings, are not directly attributable to the individual operating segments and are
included in the corporate business segment.
Sales and operating income (loss), by segment, for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Global components |
|
$ |
11,319,482 |
|
|
$ |
11,223,751 |
|
|
$ |
11,086,359 |
|
Global ECS |
|
|
5,441,527 |
|
|
|
4,761,241 |
|
|
|
2,490,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
16,761,009 |
|
|
$ |
15,984,992 |
|
|
$ |
13,577,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Global components |
|
$ |
533,126 |
|
|
$ |
604,217 |
|
|
$ |
582,978 |
|
Global ECS |
|
|
196,269 |
|
|
|
202,223 |
|
|
|
123,653 |
|
Corporate (a) |
|
|
(1,222,964 |
) |
|
|
(119,535 |
) |
|
|
(100,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
(493,569 |
) |
|
$ |
686,905 |
|
|
$ |
606,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes restructuring and integration charges of $70,065, $11,745, and $11,829 in 2008,
2007, and 2006, respectively. Also included in 2008 is a non-cash
impairment charge associated with goodwill of $1,018,780
and a charge of $10,890 related to the preference claim from 2001. Additionally, 2006
includes a charge related to a pre-acquisition warranty claim of $2,837 and a charge related
to pre-acquisition environmental matters arising out of the companys purchase of Wyle of
$1,449. |
84
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Total assets, by segment, at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Global components |
|
$ |
4,093,118 |
|
|
$ |
5,230,728 |
|
Global ECS |
|
|
2,325,095 |
|
|
|
2,262,946 |
|
Corporate |
|
|
700,072 |
|
|
|
566,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
7,118,285 |
|
|
$ |
8,059,860 |
|
|
|
|
|
|
|
|
Effective April 1, 2008, deferred income taxes, which were previously included in corporate, were
allocated to global components, global ECS, and corporate. Prior period segment data was adjusted
to conform to current period presentation.
Sales, by geographic area, for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America (b) |
|
$ |
8,366,124 |
|
|
$ |
8,565,247 |
|
|
$ |
6,846,468 |
|
EMEASA |
|
|
5,392,805 |
|
|
|
4,970,585 |
|
|
|
4,348,484 |
|
Asia/Pacific |
|
|
3,002,080 |
|
|
|
2,449,160 |
|
|
|
2,382,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,761,009 |
|
|
$ |
15,984,992 |
|
|
$ |
13,577,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
Includes sales related to the United States of $7,705,048, $7,962,526, and $6,337,169 in
2008, 2007, and 2006, respectively. |
Net property, plant and equipment,
geographic area, at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
North America (c) |
|
$ |
324,385 |
|
|
$ |
261,134 |
|
EMEASA |
|
|
68,215 |
|
|
|
74,937 |
|
Asia/Pacific |
|
|
17,940 |
|
|
|
19,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
410,540 |
|
|
$ |
355,161 |
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
Includes net property, plant and equipment related to the United States of $323,561 and
$259,948 in 2008 and 2007, respectively. |
85
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
17. Quarterly Financial Data (Unaudited)
A summary of the companys consolidated quarterly results of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
4,028,491 |
|
|
$ |
4,347,477 |
|
|
$ |
4,295,314 |
|
|
$ |
4,089,727 |
|
Gross profit |
|
|
586,291 |
|
|
|
612,471 |
|
|
|
563,855 |
|
|
|
520,096 |
|
Net income (loss) |
|
|
85,871 |
(b) |
|
|
96,215 |
(c) |
|
|
76,070 |
(d) |
|
|
(871,895) |
(e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.70 |
(b) |
|
$ |
.79 |
(c) |
|
$ |
.64 |
(d) |
|
$ |
(7.30) |
(e) |
Diluted |
|
|
.69 |
(b) |
|
|
.79 |
(c) |
|
|
.63 |
(d) |
|
|
(7.30) |
(e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
(f) |
|
|
99,211 |
(g) |
|
|
98,324 |
(h) |
|
|
113,963 |
(i) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.78 |
(f) |
|
$ |
.80 |
(g) |
|
$ |
.80 |
(h) |
|
$ |
.93 |
(i) |
Diluted |
|
|
.77 |
(f) |
|
|
.79 |
(g) |
|
|
.79 |
(h) |
|
|
.92 |
(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. |
|
(b) |
|
Includes a restructuring and integration charge ($4,159 net of related taxes or $.03 per
share on both a basic and diluted basis) and a charge related to the preference claim from
2001 ($7,822 net of related taxes or $.06 per share on both a basic and diluted basis). |
|
(c) |
|
Includes a restructuring and integration charge ($5,929 net of related taxes or $.05 per
share on both a basic and diluted basis). |
|
(d) |
|
Includes a restructuring and integration charge ($7,635 net of related taxes or $.06 per
share on both a basic and diluted basis). |
|
(e) |
|
Includes a non-cash
impairment charge associated with goodwill ($905,069 net of related
taxes or $7.58 per
share on both a basic and diluted basis), a restructuring and integration charge ($37,577 net
of related taxes or $.31 per share on both a basic and diluted basis), a credit related
to the preference claim from 2001 ($1,246 net of related taxes or $.01 per share on both a
basic and diluted basis), and a loss on the write-down of an investment
($10,030 net of related taxes or $.08 per share on both a basic and
diluted basis). Also includes a reduction of the provision for income taxes
($8,450 net of related taxes or $.07 per share on both a basic and diluted basis) and an
increase in interest expense ($962 net of related taxes or $.01 per share on both a basic and
diluted basis) primarily related to the settlement of certain international income tax
matters. |
|
(f) |
|
Includes a restructuring and integration credit ($4,522 net of related taxes or $.04 per
share on both a basic and diluted basis). |
86
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
|
|
|
(g) |
|
Includes a restructuring and integration charge ($2,286 net of related taxes or $.02 per
share on both a basic and diluted basis). |
|
(h) |
|
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 tax rate change in Germany. |
|
(i) |
|
Includes a restructuring and integration charge ($6,598 net of related taxes or $.05 per
share on both a basic and diluted basis). |
87
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The companys management, under the supervision and with the participation of the companys Chief
Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of
the design and operation of the companys disclosure controls and procedures as of December 31,
2008 (the Evaluation). Based upon the Evaluation, the companys Chief Executive Officer and
Chief Financial Officer concluded that the companys disclosure controls and procedures (as defined
in Exchange Act Rule 13a-15(e)) are effective.
Managements Report on Internal Control Over Financial Reporting
The companys 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 companys 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 companys Chief Executive Officer and Chief Financial Officer, assessed the
effectiveness of the companys internal control over financial reporting as of December 31, 2008,
and concluded that it is effective.
The company acquired LOGIX S.A. (LOGIX) in June 2008 and the components distribution business of
Achieva Ltd. (Achieva) in July 2008. The company has excluded LOGIX and Achieva from its annual
assessment of and conclusion on the effectiveness of the companys internal control over financial
reporting. LOGIX and Achieva accounted for 6.2 percent of total assets as of December 31, 2008 and
2.5 percent of the companys consolidated sales and less than 1 percent of the companys
consolidated net loss for the year ended December 31, 2008.
The companys independent registered public accounting firm, Ernst & Young LLP, has audited the
effectiveness of the companys internal control over financial reporting as of December 31, 2008,
as stated in their report, which is included herein.
88
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Arrow Electronics, Inc.
We have audited Arrow Electronics, Inc.s (the company) internal control over financial reporting
as of December 31, 2008, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The companys 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 Managements Report of Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the companys 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 companys 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
companys 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 companys 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 Managements Report on Internal Control Over Financial Reporting,
managements assessment of and conclusion on the effectiveness of internal control over financial
reporting did not include the internal controls of LOGIX S.A. (LOGIX) and the components
distribution business of Achieva Ltd. (Achieva) acquired by the company during 2008, which were
included in the companys 2008 consolidated financial statements and constituted 6.2 percent of
total assets as of December 31, 2008 and 2.5 and less than 1 percent of the sales and net loss,
respectively, 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
LOGIX and Achieva.
In our opinion, Arrow Electronics, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, 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, 2008 and 2007, and the related consolidated statements of operations, shareholders equity, and
cash flows for each of the three years in the period ended December 31, 2008 and our report dated
February 24, 2009 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 24, 2009
89
Changes in Internal Control Over Financial Reporting
There was no change in the companys internal control over financial reporting that occurred during
the companys most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the companys internal control over financial reporting.
Item 9B. Other Information.
None.
90
PART III
Item 10. Directors, Executive Officers, and Corporate Governance.
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 companys Proxy Statement, filed in connection with the
Annual Meeting of Shareholders scheduled to be held on May 1, 2009, are incorporated herein by
reference.
Information about the companys audit committee financial experts set forth under the heading The
Board and its Committees in the companys Proxy Statement, filed in connection with the Annual
Meeting of Shareholders scheduled to be held on May 1, 2009, is incorporated herein by reference.
Information about the companys 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 companys website at http://www.arrow.com and is
available in print to any shareholder upon request.
Information about the companys Corporate Governance Guidelines and written committee charters
for the companys Audit Committee, Compensation Committee, and Corporate Governance Committee is
available free-of-charge on the companys website at http://www.arrow.com and is available in
print to any shareholder upon request.
Item 11. Executive Compensation.
The information required by Item 11 is included in the companys Proxy Statement filed in
connection with the Annual Meeting of Shareholders scheduled to be held on May 1, 2009, and 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 companys Proxy Statement filed in
connection with the Annual Meeting of Shareholders scheduled to be held on May 1, 2009, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 is included in the companys Proxy Statement filed in
connection with the Annual Meeting of Shareholders scheduled to be held on May 1, 2009, and is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 is included in the companys Proxy Statement filed in
connection with the Annual Meeting of Shareholders scheduled to be held on May 1, 2009, and is
incorporated herein by reference.
91
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
|
|
|
|
|
|
|
Page |
|
1. Financial Statements. |
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
2. Financial Statement Schedule. |
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
All other schedules are omitted since the required information is notpresent,
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 93 - 98 |
|
|
|
|
92
INDEX OF EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Exhibit |
|
|
|
2(a)
|
|
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 companys Annual Report on Form 10-K for the year ended
December 31, 2000, 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
companys 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 companys
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
companys 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 companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004,
Commission File No. 1-4482). |
|
|
|
4(a)(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 companys
Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 1-4482). |
|
|
|
4(a)(ii)
|
|
Officers Certificate, as defined by the Indenture in 4(a)(i)
above, dated as of January 22, 1997, with respect to the
companys $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 companys Annual
Report on Form 10-K for the year ended December 31, 1996,
Commission File No. 1-4482). |
|
|
|
4(a)(iii)
|
|
Officers Certificate, as defined by the indenture in 4(a)(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 companys Annual Report on Form 10-K for the year ended
December 31, 1998, Commission File No. 1-4482). |
|
|
|
4(a)(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 companys Current Report on
Form 8-K, dated March 12, 2001, Commission File No. 1-4482). |
93
|
|
|
Exhibit |
|
|
Number |
|
Exhibit |
|
|
|
4(a)(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 companys Annual Report
on Form 10-K for the year ended December 31, 2001, Commission
File No. 1-4482). |
|
|
|
4(a)(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 companys Annual Report
on Form 10-K for the year ended December 31, 2004, Commission
File No. 1-4482). |
|
|
|
10(a)
|
|
Arrow Electronics Savings Plan, as amended and restated on
January 1, 2007 (incorporated by reference to Exhibit 10(a) to
the companys 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 companys 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 January 1, 2007 (incorporated by reference to
Exhibit 10(a) to the companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2007, Commission File No.
1-4482). |
|
|
|
10(d)(i)
|
|
Arrow Electronics, Inc. 2004 Omnibus Incentive Plan as amended
February 28, 2007 and February 27, 2008 (incorporated by
reference to Exhibit 10.1 to the companys Current Report on
Form 8-K, dated May 2, 2008, 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 companys 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
companys 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 companys
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 companys
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 companys
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 companys Annual Report
on Form 10-K for the year ended December 31, 2002, Commission
File No. 1-4482). |
94
|
|
|
Exhibit |
|
|
Number |
|
Exhibit |
|
|
|
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
companys 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 companys 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
companys Annual Report on Form 10-K for the year ended
December 31, 2002, Commission File No. 1-4482). |
|
|
|
10(h)
|
|
Non-Employee Directors Deferral Plan as of May 15, 1997
(incorporated by reference to Exhibit 99(d) to the companys
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 companys 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 companys 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 December 30, 2008, by and
between the company and Michael J. Long. |
|
|
|
10(k)(ii)
|
|
Employment Agreement, dated as of December 30, 2008, by and
between the company and Peter S. Brown. |
|
|
|
10(k)(iii)
|
|
Employment Agreement, dated as of December 30, 2008, by and
between the company and Paul J. Reilly. |
|
|
|
10(k)(iv)
|
|
Employment Agreement, dated as of December 30, 2008, by and
between the company and William E. Mitchell. |
|
|
|
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 companys Current Report on Form 8-K,
dated March 18, 2005, Commission File No. 1-4482). |
|
|
|
10(k)(vi)
|
|
Employment Agreement, dated as of December 30, 2008, by and
between the company and John P. McMahon. |
95
|
|
|
Exhibit |
|
|
Number |
|
Exhibit |
|
|
|
10(k)(vii)
|
|
Form of agreement between the company and all corporate
officers, including the employees party to the Employment
Agreements listed in 10(k)(i)-(vi) above, providing extended
separation benefits under certain circumstances (incorporated
by reference to Exhibit 10(c)(ix) to the companys Annual
Report on Form 10-K for the year ended December 31, 1988,
Commission File No. 1-4482). |
|
|
|
10(k)(viii)
|
|
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 companys Annual Report on Form 10-K for the year ended
December 31, 1988, Commission File No. 1-4482). |
|
|
|
10(k)(ix)
|
|
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 companys Annual Report on Form 10-K for the year ended
December 31, 2003, Commission File No. 1-4482). |
|
|
|
10(k)(x)
|
|
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 companys
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 companys 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 companys 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
companys 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 companys Annual Report on Form 10-K for the
year ended December 31, 2001, Commission File No. 1-4482). |
96
|
|
|
Exhibit |
|
|
Number |
|
Exhibit |
|
|
|
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)(n)(i) above (incorporated by
reference to Exhibit 10(m)(ii) to the companys Annual Report
on Form 10-K for the year ended December 31, 2001, Commission
File No. 1-4482). |
|
|
|
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)(n)(i) above (incorporated by
reference to Exhibit 10(m)(iii) to the companys 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)(n)(i) above (incorporated by reference to
Exhibit 10(m)(iv) to the companys 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)(n)(i) above (incorporated by reference to
Exhibit 10(n)(v) to the companys 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)(n)(i) above (incorporated by reference to
Exhibit 10(n)(vi) to the companys 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)(n)(i) above (incorporated by
reference to Exhibit 10(n)(vii) to the companys 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)(n)(i) above (incorporated by
reference to Exhibit 99.1 to the companys 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)(n)(i) above (incorporated by reference to
Exhibit 10(n)(ix) to the companys 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)(n)(i) above (incorporated by
reference to Exhibit 10(n)(x) to the companys 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)(n)(i) above (incorporated by
reference to Exhibit 10(n)(xi) to the companys Annual Report
on Form 10-K for the year ended December 31, 2003, Commission
File No. 1-4482). |
97
|
|
|
Exhibit |
|
|
Number |
|
Exhibit |
|
|
|
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)(n)(i) above (incorporated by
reference to Exhibit 10(b) to the companys 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)(n)(i) above (incorporated by
reference to Exhibit 10(o)(xiii) to the companys Annual
Report on Form 10-K for the year ended December 31, 2004,
Commission File No. 1-4482). |
|
|
|
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)(n)(i) above (incorporated by
reference to Exhibit 10(o)(xiv) to the companys 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(n)(i) above (incorporated by
reference to Exhibit 10(o)(xv) to the companys 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(n)(i) above (incorporated by
reference to Exhibit 10(o)(xvi) to the companys Annual Report
on Form 10-K for the year ended December 31, 2006, Commission
File No. 1-4482). |
|
|
|
10(n)(xvii)
|
|
Amendment No. 16 to the Transfer and Administration Agreement,
dated as of March 27, 2007, to the Transfer and Administration
Agreement in 10(n)(i) above (incorporated by reference to
Exhibit 10(b) to the companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2007, 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
companys 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. |
98
ARROW ELECTRONICS, INC.
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
71,232 |
|
|
$ |
14,866 |
|
|
$ |
7,787 |
|
|
$ |
41,099 |
|
|
$ |
52,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
75,404 |
|
|
$ |
14,211 |
|
|
$ |
1,372 |
|
|
$ |
19,755 |
|
|
$ |
71,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
$ |
47,076 |
|
|
$ |
13,023 |
|
|
$ |
26,179 |
|
|
$ |
10,874 |
|
|
$ |
75,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the allowance for doubtful accounts of the businesses acquired by the company
during 2008, 2007, and 2006. |
99
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 26, 2009 |
|
|
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 26, 2009:
|
|
|
|
|
By:
|
|
/s/ William E. Mitchell
William E. Mitchell, Chairman 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/ Gail E. Hamilton
Gail E. Hamilton, 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/ Michael J. Long
Michael J. Long, Director, President and
|
|
|
|
|
Chief Operating Officer |
|
|
|
|
|
|
|
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
|
|
|
100