Business Context and Reporting Period
Company: Arrow Electronics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: Arrow Electronics operates as a global distributor of electronic components and computer products. The company's performance is influenced by market conditions in the component distribution sector and the growth of its computer products business (Gates/Arrow).
Key Financial Metrics
| Metric (in thousands) | Nine Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1997 | Three Months Ended Sep 30, 1998 | Three Months Ended Sep 30, 1997 |
|---|---|---|---|---|
| Sales | $6,184,495 | $5,653,471 | $2,134,769 | $1,949,396 |
| Operating Income | $266,179 | $259,326 | $86,288 | $46,967 |
| Net Income | $113,498 | $111,355 | $35,563 | $9,282 |
| Diluted EPS | $1.16 | $1.11 | $0.37 | $0.09 |
| Operating Cash Flow | $32,001 | $33,314 | Not provided for quarter | Not provided for quarter |
| Total Debt (Short + Long Term) | $1,093,598 | See Note | Balance Sheet Data | Balance Sheet Data |
| Cash & Short-term Investments | $87,583 | $112,665 | Balance Sheet Data | Balance Sheet Data |
Note: Total Debt for Sep 30, 1998 is calculated as Short-term borrowings ($163,120) + Long-term debt ($930,478). 1997 comparative debt figures are not explicitly totaled in the text but can be derived from the balance sheet ($143,723 + $823,099 = $966,822).
Material Changes vs. Prior Period
- Sales Growth: Consolidated sales increased by over 9% for both the nine-month and third-quarter periods compared to 1997. This was driven by increased activity in the Gates/Arrow computer products business and recent acquisitions, partially offset by a stronger U.S. dollar and lower sales in component distribution.
- Operating Income: Operating income rose to $266.2 million (9 months) and $86.3 million (Q3) in 1998. The 1997 comparison period included $59.5 million in special pre-tax charges (realignment and integration). Excluding these charges, 1997 operating income would have been higher, indicating a decline in core operating profitability due to lower margins in component distribution.
- Net Income: Net income increased to $113.5 million (9 months) and $35.6 million (Q3) in 1998. The Q3 1997 net income was significantly depressed by the special charges mentioned above. On an adjusted basis (excluding 1997 charges), net income decreased in 1998 due to lower operating income and higher interest expense.
- Interest Expense: Interest expense increased to $59.7 million (9 months) and $20.7 million (Q3) in 1998, attributed to increased borrowing for acquisitions, stock repurchases, and working capital, partially offset by lower interest rates.
- Cash Flow: Net cash provided by operating activities decreased slightly to $32.0 million in the first nine months of 1998 compared to $33.3 million in 1997, reflecting earnings offset by investments in working capital.
Guidance, Outlook, and Risks
- Market Conditions: Management notes difficult market conditions in the worldwide component distribution business, with supply exceeding demand, pressuring average selling prices and gross margins. The financial crisis in Asia is also cited as a negative factor.
- Acquisitions: In October 1998, the company announced definitive agreements to acquire the Electronics Distribution Group of Bell Industries, Inc. and Richey Electronics, Inc. To fund these, the company sold $250 million of 6.45% Senior Notes due 2003. Closings are expected around year-end.
- Year 2000 Compliance: The company is in the remediation and testing phases of its Year 2000 initiative. While management believes modifications will prevent significant operational problems, there is a risk that failure or delay by key suppliers or customers could disrupt business.
- Forward-Looking Statements: The filing includes standard disclaimers regarding risks such as industry conditions, product supply/pricing changes, competition, and supplier relationships.
Investor Verification Checklist
- Adjusted Earnings Comparison: Verify the impact of the $59.5 million special charges in 1997 on year-over-year profitability comparisons.
- Margin Pressure: Assess the extent of gross margin compression in the component distribution segment due to oversupply and the Asian financial crisis.
- Debt Service: Review the impact of the new $250 million Senior Notes issuance on future interest expense and liquidity.
- Acquisition Integration: Monitor the closing and integration progress of the Bell Industries and Richey Electronics acquisitions.
- Year 2000 Status: Confirm the completion of remediation and testing phases and the status of key supplier compliance.