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ARROW ELECTRONICS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Overview Arrow Electronics, Inc. (the "company") is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company provides one of the broadest product offerings in the electronic components and enterprise computing solutions distribution industries and a wide range of value-added services to help customers introduce innovative products, reduce their time to market, and enhance their overall competitiveness. The company has two business segments, the global components business segment and the global enterprise computing solutions ("ECS") business segment. The company distributes electronic components to original equipment manufacturers and contract manufacturers through its global components business segment and provides enterprise computing solutions to value-added resellers through its global ECS business segment. For the first six months of 2014, approximately 65% of the company's sales were from the global components business segment, and approximately 35% of the company's sales were from the global ECS business segment. The company's financial objectives are to grow sales faster than the market, increase the markets served, grow profits faster than sales, and increase return on invested capital. To achieve its objectives, the company seeks to capture significant opportunities to grow across products, markets, and geographies. To supplement its organic growth strategy, the company continually evaluates strategic acquisitions to broaden its product and value-added service offerings, increase its market penetration, and/or expand its geographic reach. During the first six months of 2014, the company completed one acquisition. During 2013, the company completed five acquisitions, including the acquisition of CSS Computer Security Solutions Holding GmbH, doing business as ComputerLinks AG. Refer to Note C, "Acquisitions," of the Notes to the Consolidated Financial Statements for further discussion of the company's recent acquisition activity. Executive Summary Consolidated sales for the second quarter and first six months of 2014 increased by 7.0% and 5.9%, respectively, compared with the year-earlier periods. The increase for the second quarter and first six months of 2014 was driven by an increase in the global components business segment sales of 5.0% and 6.1%, respectively, and an increase in the global ECS business segment sales of 10.5% and 5.7%, respectively. The translation of the company's international financial statements into U.S. dollars resulted in an increase in consolidated sales of 1.2% and 1.1% for the second quarter and first six months of 2014, respectively, compared with the year-earlier periods, due to a weaker U.S. dollar. Net income attributable to shareholders increased to $127.9 million and $235.0 million in the second quarter and first six months of 2014, respectively, compared with net income attributable to shareholders of $89.9 million and $167.8 million in the year-earlier periods. The following items impacted the comparability of the company's results: Second quarters of 2014 and 2013: • restructuring, integration, and other charges of $9.6 million ($7.5 million net of related taxes) in 2014 and $30.2 million ($20.7 million net of related taxes) in 2013; • identifiable intangible asset amortization of $10.9 million ($8.9 million net of related taxes) in 2014 and $8.9 million ($7.0 million net of relates taxes) in 2013; and • an increase in the provision for income taxes of $5.4 million and interest expense of $1.5 million ($.9 million net of related taxes) relating to the settlement of certain international tax matters in 2013. First six months of 2014 and 2013: • restructuring, integration, and other charges of $21.2 million ($15.5 million net of related taxes) in 2014 and $51.8 million ($36.2 million net of related taxes) in 2013; • identifiable intangible asset amortization of $21.8 million ($17.8 million net of related taxes) in 2014 and $17.8 million ($14.1 million net of relates taxes) in 2013; • a loss on prepayment of debt of $4.3 million ($2.6 million net of related taxes) in 2013; and • an increase in the provision for income taxes of $5.4 million and interest expense of $1.5 million ($.9 million net of related taxes) relating to the settlement of certain international tax matters in 2013. Excluding the aforementioned items, net income attributable to shareholders for the second quarter and first six months of 2014 increased compared to the year-earlier periods, primarily due to an increase in sales in the global components segment, an increase 25 --------------------------------------------------------------------------------in gross profit margins, the impact of recent acquisitions, and the effect of a weaker U.S. dollar on the translation of the company's financial statements. Certain Non-GAAP Financial Information In addition to disclosing financial results that are determined in accordance with accounting principles generally accepted in the United States ("GAAP"), the company also discloses certain non-GAAP financial information, including: • Sales, income, or expense items as adjusted for the impact of changes in foreign currencies (referred to as "impact of changes in foreign currencies") and the impact of acquisitions by adjusting the company's prior periods to include the operating results of businesses acquired, including the amortization expense related to acquired intangible assets, as if the acquisitions had occurred at the beginning of the period presented (referred to as "impact of acquisitions"); • Operating income as adjusted to exclude identifiable intangible asset amortization and restructuring, integration, and other charges; and • Net income attributable to shareholders as adjusted to exclude identifiable intangible asset amortization, restructuring, integration, and other charges, loss on prepayment of debt, and settlement of certain international tax matters. Management believes that providing this additional information is useful to the reader to better assess and understand the company's operating performance, especially when comparing results with previous periods, primarily because management typically monitors the business adjusted for these items in addition to GAAP results. However, analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP. Sales Substantially all of the company's sales are made on an order-by-order basis, rather than through long-term sales contracts. As such, the nature of the company's business does not provide for the visibility of material forward-looking information from its customers and suppliers beyond a few months. Following is an analysis of net sales by reportable segment (in millions): Quarter Ended Six Months Ended % June 29, % June 28, 2014 June 29, 2013 Change June 28, 2014 2013 Change Consolidated sales, as reported $ 5,677 $ 5,306 7.0 % $ 10,759 $ 10,156 5.9 % Impact of changes in foreign currencies - 63 - 108 Impact of acquisitions - 264 - 522 Consolidated sales, as adjusted $ 5,677 $ 5,633 .8 % $ 10,759 $ 10,786 (.3 )% Global components sales, as reported $ 3,569 $ 3,399 5.0 % $ 6,991 $ 6,591 6.1 % Impact of changes in foreign currencies - 41 - 70 Impact of acquisitions - 55 - 112 Global components sales, as adjusted $ 3,569 $ 3,495 2.1 % $ 6,991 $ 6,773 3.2 % Global ECS sales, as reported $ 2,107 $ 1,907 10.5 % $ 3,768 $ 3,564 5.7 % Impact of changes in foreign currencies - 21 - 38 Impact of acquisitions - 209 - 410 Global ECS sales, as adjusted $ 2,107 $ 2,137 (1.4 )% $ 3,768 $ 4,012 (6.1 )% Consolidated sales for the second quarter and first six months of 2014 increased by $370.5 million, or 7.0%, and $602.9 million, or 5.9%, respectively, compared with the year-earlier periods. The increase for the second quarter and first six months of 2014 was driven by an increase in global components business segment sales of $170.7 million, or 5.0%, and $399.3 million, or 6.1%, respectively, and by an increase in global ECS business segment sales of $199.8 million or 10.5%, and $203.6 million or 5.7%, respectively, compared with the year-earlier periods. The translation of the company's international financial statements into U.S. dollars resulted in an increase in consolidated sales of 1.2% and 1.1% for the second quarter and first six months of 2014, respectively, 26 -------------------------------------------------------------------------------- compared with the year-earlier periods, due to a weaker U.S. dollar. Adjusted for the impact of changes in foreign currencies and acquisitions, the company's consolidated sales increased by .8% for the second quarter of 2014 and remained relatively flat for the first six months of 2014, compared with the year-earlier periods. In the global components business segment, sales for the second quarter and first six months of 2014 increased 5.0% and 6.1%, respectively, compared with the year-earlier periods primarily due to an increase in demand for products worldwide, the impact of recently acquired businesses, and the impact of a weaker U.S. dollar on the translation of the company's international financial statements. Sales for the second quarter of 2014 increased 9.2% in the EMEA (Europe, Middle East, and Africa) region, 5.4% in the Asia Pacific region, and 2.1% in the Americas region, compared with the year-earlier period. Sales for the first six months of 2014 increased 10.4% in the EMEA region, 8.4% in the Asia Pacific region, and 1.7% in the Americas region, compared with the year-earlier period. Adjusted for the impact of changes in foreign currencies and acquisitions, the company's global components business segment sales increased by 2.1% and 3.2% for the second quarter and first six months of 2014, respectively, compared with the year-earlier periods. In the global ECS business segment, sales for the second quarter and first six months of 2014 increased 10.5% and 5.7%, respectively, compared with the year-earlier periods, primarily driven by growth in services and software, offset, in part, by a decrease in demand for servers. Adjusted for the impact of changes in foreign currencies and acquisitions, the company's global ECS business segment sales decreased by 1.4% and 6.1% for the second quarter and first six months of 2014, respectively, compared with the year-earlier periods. Gross Profit Following is an analysis of gross profit (in millions): Quarter Ended Six Months Ended June 28, 2014 June 29, 2013 Change June 28, 2014 June 29, 2013 Change Consolidated gross profit, as reported $ 748 $ 690 8.4 % $ 1,451 $ 1,332 9.0 % Impact of changes in foreign currencies - 9 - 17 Impact of acquisitions - 43 - 83 Consolidated gross profit, as adjusted $ 748 $ 742 .9 % $ 1,451 $ 1,432 1.4 % Consolidated gross profit as a percentage of sales, as reported 13.2 % 13.0 % 20 bps 13.5 % 13.1 % 40 bps Consolidated gross profit as a percentage of sales, as adjusted 13.2 % 13.2 % flat 13.5 % 13.3 % 20 bps The company recorded gross profit of $747.5 million and $1.45 billion in the second quarter and first six months of 2014, respectively, compared with $689.6 million and $1.33 billion in the year-earlier periods. The increase in gross profit was primarily due to the aforementioned 7.0% and 5.9% increase in sales during the second quarter and first six months of 2014, respectively. Gross profit margins for the second quarter and first six months of 2014 increased by approximately 20 and 40 basis points, respectively, compared with the year-earlier periods. Adjusted for the impact of changes in foreign currencies and acquisitions, the company's consolidated gross profit margins were flat in the second quarter of 2014 and increased approximately 20 basis points in the first six months of 2014, compared with the year-earlier periods. The increase in the first six months of 2014 is primarily due to a higher percentage of the company's sales derived from its global components business segment, as well as a more favorable product mix in the global ECS business segment, as compared with the year-earlier period. 27--------------------------------------------------------------------------------Selling, General, and Administrative Expenses and Depreciation and Amortization Following is an analysis of operating expenses (in millions): Quarter Ended Six Months Ended % % June 28, 2014 June 29, 2013 Change June 28, 2014 June 29, 2013 Change Selling, general, and administrative expenses, as reported $ 490 $ 471 4.0 % $ 968 $ 922 4.9 % Depreciation and amortization, as reported 40 33 21.8 % 76 64 19.0 % Operating expenses, as reported 530 504 5.2 % 1,044 986 5.9 % Impact of changes in foreign currencies - 8 - 13 Impact of acquisitions - 36 - 71 Operating expenses, as adjusted $ 530 $ 548 (3.2 )% $ 1,044 $ 1,070 (2.4 )% Selling, general, and administrative expenses increased by $19.0 million, or 4.0%, in the second quarter of 2014 on a sales increase of 7.0%, and increased by $45.5 million, or 4.9%, in the first six months of 2014 on a sales increase of 5.9%, compared with the year-earlier periods, primarily due to recent acquisitions. Selling, general, and administrative expenses, as a percentage of sales were 8.6% and 9.0% for the second quarter and first six months of 2014, respectively, compared with 8.9% and 9.1% in the year-earlier periods. Depreciation and amortization expense increased by $7.1 million, or 21.8%, and $12.2 million, or 19.0%, for the second quarter and first six months of 2014, compared with the year-earlier periods, primarily due to recent acquisitions and further implementation of the company's enterprise resource planning ("ERP") initiative. Included in depreciation and amortization expense is identifiable intangible asset amortization of $10.9 million ($8.9 million net of related taxes or $.09 per share on both a basic and diluted basis) and $21.8 million ($17.8 million net of related taxes or $.18 per share on both a basic and diluted basis) for the second quarter and first six months of 2014, respectively, and $8.9 million ($7.0 million net of related taxes or $.07 per share on both a basic and diluted basis) and $17.8 million ($14.1 million net of related taxes or $.14 and $.13 per share on a basic and diluted basis, respectively) for the second quarter and first six months of 2013, respectively. Adjusted for the impact of changes in foreign currencies and acquisitions, operating expenses for the second quarter and first six months of 2014 decreased 3.2% and 2.4%, respectively. Restructuring, Integration, and Other Charges 2014 Charges The company recorded restructuring, integration, and other charges of $9.6 million ($7.5 million net of related taxes or $.08 and $.07 per share on a basic and diluted basis, respectively) and $21.2 million ($15.5 million net of related taxes or $.16 and $.15 per share on a basic and diluted basis, respectively) for the second quarter and first six months of 2014, respectively. Included in the restructuring, integration, and other charges for the second quarter and first six months of 2014 are restructuring and integration charges of $11.0 million and $21.4 million, respectively, related to initiatives taken by the company to improve operating efficiencies. Also included in the restructuring, integration, and other charges for the second quarter and first six months of 2014 are charges (credits) of $(.5) million and $(.4) million related to restructuring and integration actions taken in prior periods and acquisition-related expenses (credits) of $(.8) million and $.2 million, respectively. The restructuring and integration charge of $11.0 million and $21.4 million for the second quarter and first six months of 2014, respectively, includes personnel costs of $10.0 million and $18.3 million, facilities costs of $.5 million and $2.0 million, and other costs of $.7 million and $1.2 million, respectively. The personnel costs are related to the elimination of approximately 150 positions within the global ECS business segment and approximately 140 positions within the global components business segment. The facilities costs are related to exit activities for nine vacated facilities in the Americas and EMEA due to the company's continued efforts to streamline its operations and reduce real estate costs. These restructuring initiatives are due to the company's continued efforts to lower cost and drive operational efficiency. Integration costs are primarily related to the integration of acquired businesses within the company's pre-existing business and the consolidation of certain operations. 28 --------------------------------------------------------------------------------2013 Charges The company recorded restructuring, integration, and other charges of $30.2 million ($20.7 million net of related taxes or $.20 per share on both a basic and diluted basis) and $51.8 million ($36.2 million net of related taxes or $.35 and $.34 per share on a basic and diluted basis, respectively) for the second quarter and first six months of 2013, respectively. Included in the restructuring, integration, and other charges for the second quarter and first six months of 2013 are restructuring and integration charges of $27.3 million and $45.9 million, respectively, related to initiatives taken by the company to improve operating efficiencies. Also included in the restructuring, integration, and other charges for the second quarter and first six months of 2013 are charges of $.7 million and $.9 million, respectively, related to restructuring and integration actions taken in prior periods and acquisition-related expenses of $2.2 million and $5.0 million, respectively. The restructuring and integration charge of $27.3 million and $45.9 million for the second quarter and first six months of 2013, respectively, includes personnel costs of $23.8 million and $40.7 million, facilities costs of $2.8 million and $4.5 million, and other costs of $.7 million and $.7 million, respectively. The personnel costs are related to the elimination of approximately 590 positions within the global components business segment and approximately 180 positions within the global ECS business segment. The facilities costs are related to exit activities for 26 vacated facilities worldwide due to the company's continued efforts to streamline its operations and reduce real estate costs. These restructuring initiatives are due to the company's continued efforts to lower cost and drive operational efficiency. Integration costs are primarily related to the integration of acquired businesses within the company's pre-existing business and the consolidation of certain operations. As of June 28, 2014, the company does not anticipate there will be any material adjustments relating to the aforementioned restructuring and integration plans. Refer to Note I, "Restructuring, Integration, and Other Charges," of the Notes to the Consolidated Financial Statements for further discussion of the company's restructuring and integration activities. Operating Income Following is an analysis of operating income (in millions): Quarter Ended Six Months Ended June 28, 2014 June 29, 2013 June 28, 2014 June 29, 2013 Consolidated operating income, as reported $ 208 $ 156 $ 386 $ 293 Identifiable intangible asset amortization 11 9 22 18 Restructuring, integration, and other charges 10 30 21 52 Consolidated operating income, as adjusted* $ 229 $ 195 $ 429 $ 363 Consolidated operating income, as reported as a percentage of sales, as reported 3.7 % 2.9 % 3.6 % 2.9 % Consolidated operating income, as adjusted as a percentage of sales, as reported 4.0 % 3.7 % 4.0 % 3.6 % * The sum of the components for consolidated operating income, as adjusted may not agree to totals, as presented, due to rounding. The company recorded operating income of $208.3 million, or 3.7% of sales, and $386.0 million, or 3.6% of sales, in the second quarter and first six months of 2014, respectively, compared with operating income of $155.9 million, or 2.9% of sales, and $293.4 million, or 2.9% of sales, in the year-earlier periods. Excluding identifiable intangible asset amortization and restructuring, integration, and other charges, operating income, as adjusted was $228.8 million, or 4.0% of sales, and $429.1 million, or 4.0% of sales, in the second quarter and first six months of 2014, respectively, compared with operating income, as adjusted of $195.0 million, or 3.7% of sales, and $363.1 million, or 3.6% of sales, in the year-earlier periods. Loss on Prepayment of Debt During the first six months of 2013, the company recorded a loss on prepayment of debt of $4.3 million ($2.6 million net of related taxes or $.03 and $.02 per share on a basic and diluted basis, respectively), related to the redemption of $332.1 million principal amount of its 6.875% senior notes due July 2013. 29 --------------------------------------------------------------------------------Interest and Other Financing Expense, Net The company recorded net interest and other financing expense of $28.9 million and $58.6 million for the second quarter and first six months of 2014, compared with $30.2 million and $59.7 million in the year-earlier periods. The second quarter and first six months of 2013 include an increase in interest expense of $1.5 million ($.9 million net of related taxes or $.01 per share on both a basic and diluted basis) primarily related to the settlement of certain international tax matters. Excluding this item net interest and other financing expense remained relatively flat. Income Taxes The company recorded a provision for income taxes of $52.5 million and $94.8 million (an effective tax rate of 29.1% and 28.7%) for the second quarter and first six months of 2014, respectively. The company's provision for income taxes and effective tax rate for the second quarter and first six months of 2014 were impacted by the previously discussed restructuring, integration, and other charges. Excluding the impact of the aforementioned item, the company's effective tax rate for the second quarter and first six months of 2014 was 28.7% and 28.6%, respectively. The company recorded a provision for income taxes of $37.0 million and $64.8 million (an effective tax rate of 29.1% and 27.8%) for the second quarter and first six months of 2013, respectively. In the second quarter of 2013, the company recorded an increase in the provision for income taxes of $5.4 million ($.05 per share on both a basic and diluted basis) relating to the settlement of certain international tax matters. The company's provision for income taxes and effective tax rate for the second quarter and first six months of 2013 was impacted by the previously discussed settlement of certain international tax matters and restructuring, integration, and other charges. The company's provision for income taxes and effective tax rate for the first six months of 2013 was also impacted by the previously discussed loss on prepayment of debt. Excluding the impact of the aforementioned items, the company's effective tax rate for the second quarter and first six months of 2013 was 26.3% and 26.6%, respectively. The company's 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 Attributable to Shareholders Following is an analysis of net income attributable to shareholders (in millions): Quarter Ended Six Months Ended June 28, June 28, 2014 June 29, 2013 2014 June 29, 2013 Net income attributable to shareholders, as reported $ 128 $ 90 $ 235 $ 168 Identifiable intangible asset amortization 9 7 18 14 Restructuring, integration, and other charges 8 21 16 36 Loss on prepayment of debt - - - 3 Settlement of tax matters: Income taxes - 5 - 5 Interest (net of taxes) - 1 - 1 Net income attributable to shareholders, as adjusted* $ 144 $ 124 $ 268 $ 227 * The sum of the components for net income attributable to shareholders, as adjusted may not agree to totals, as presented, due to rounding. The company recorded net income attributable to shareholders of $127.9 million and $235.0 million in the second quarter and first six months of 2014, respectively, compared with net income attributable to shareholders of $89.9 million and $167.8 million in the year-earlier periods. Excluding identifiable intangible asset amortization, restructuring, integration, and other charges, loss on prepayment of debt, and settlement of certain international tax matters, net income attributable to shareholders, as adjusted was $144.3 million and $268.3 million for the second quarter and first six months of 2014, respectively, compared with net income attributable to shareholders, as adjusted was $124.0 million and $227.1 million in the year earlier periods primarily due to an increase in sales in the global components segment, an increase in gross profit margins, the impact of recent acquisitions, and the effect of a weaker U.S. dollar on the translation of the company's financial statements. 30 --------------------------------------------------------------------------------Liquidity and Capital Resources At June 28, 2014 and December 31, 2013, the company had cash and cash equivalents of $308.9 million and $390.6 million, respectively, of which $267.4 million and $347.4 million, respectively, were held outside the United States. Liquidity is affected by many factors, some of which are based on normal ongoing operations of the company's business and some of which arise from fluctuations related to global economics and markets. Cash balances are generated and held in many locations throughout the world. It is the company's current intent to permanently reinvest these funds outside the United States and its current plans do not demonstrate a need to repatriate them to fund its United States operations. If these funds were to be needed for the company's operations in the United States it would be required to record and pay significant United States income taxes to repatriate these funds. Additionally, local government regulations may restrict the company's ability to move cash balances to meet cash needs under certain circumstances. The company currently does not expect such regulations and restrictions to impact its ability to make acquisitions or to pay vendors and conduct operations throughout the global organization. During the first six months of 2014, the net amount of cash provided by the company's operating activities was $283.5 million, the net amount of cash used for investing activities was $122.2 million, and the net amount of cash used for financing activities was $244.1 million. The effect of exchange rate changes on cash was an increase of $1.2 million. During the first six months of 2013, the net amount of cash provided by the company's operating activities was $154.5 million, the net amount of cash used for investing activities was $65.9 million, and the net amount of cash used for financing activities was $153.5 million. The effect of exchange rate changes on cash was an increase of $1.1 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 64.3% at June 28, 2014 and 65.8% at December 31, 2013. The net amount of cash provided by the company's operating activities during the first six months of 2014 was $283.5 million and was primarily due to earnings from operations, adjusted for non-cash items. The net amount of cash provided by the company's operating activities during the first six months of 2013 was $154.5 million and was primarily due to earnings from operations, adjusted for non-cash items, offset, in part, by a reduction in accrued expenses. Working capital as a percentage of sales was 14.8% in the second quarter of 2014 compared with 15.1% in the second quarter of 2013. Cash Flows from Investing Activities The net amount of cash used for investing activities during the first six months of 2014 was $122.2 million, reflecting $60.2 million of cash consideration paid, net of cash acquired, for acquired businesses and $62.0 million for capital expenditures. Included in capital expenditures for the first six months of 2014 is $30.4 million related to the company's global ERP initiative. During the first six months of 2014, the company completed one acquisition. The aggregate consideration paid for this acquisition was $60.2 million, net of cash acquired, contingent consideration, and other amounts withheld. The net amount of cash used for investing activities during the first six months of 2013 was $65.9 million, reflecting $9.4 million of cash consideration paid, net of cash acquired, for acquired businesses, $53.6 million for capital expenditures, and other cash outflows of $3.0 million. Included in capital expenditures for the first six months of 2013 is $27.4 million related to the company's global ERP initiative. During the first six months of 2013, the company completed one acquisition. The aggregate consideration paid for this acquisition was $9.4 million, net of contingent consideration. Cash Flows from Financing Activities The net amount of cash used for financing activities during the first six months of 2014 was $244.1 million. The uses of cash from financing activities included $138.8 million of repurchases of common stock, $120.0 million of net repayments of long-term bank borrowings, and a $9.9 million decrease in short-term and other borrowings. The sources of cash from financing activities during the first six months of 2014 were $24.6 million of proceeds from the exercise of stock options and other benefits related to stock-based compensation arrangements. 31 -------------------------------------------------------------------------------- The net amount of cash used for financing activities during the first six months of 2013 was $153.5 million. The uses of cash from financing activities included $338.2 million of redemption of senior notes, $312.3 million of repurchases of common stock, $85.3 million repayment of long-term bank borrowings, and a $27.7 million decrease in short-term and other borrowings. The sources of cash from financing activities during the first six months of 2013 were $591.2 million of net proceeds from a note offering, and $18.9 million of proceeds from the exercise of stock options and other benefits related to stock-based compensation arrangements. During the first six months of 2013, the company completed the sale of $300.0 million principal amount of 3.00% notes due in 2018 and $300.0 million principal amount of 4.50% notes due in 2023. The net proceeds of the offering of $591.2 million were used to refinance the company's 6.875% senior notes due July 2013 and for general corporate purposes. During the first six months of 2013, the company redeemed $332.1 million principal amount of its 6.875% senior notes due July 2013. The related loss on the redemption for the first six months of 2013 aggregated $4.3 million ($2.6 million net of related taxes or $.03 and $.02 per share on a basic and diluted basis, respectively) and was recognized as a loss on prepayment of debt. The company has a $1.50 billion revolving credit facility, maturing in December 2018. This facility may be used by the company for general corporate purposes including working capital in the ordinary course of business, letters of credit, repayment, prepayment or purchase of long-term indebtedness and acquisitions, and as support for the company's commercial paper program, as applicable. Interest on borrowings under the revolving credit facility is calculated using a base rate or a euro currency rate plus a spread (1.30% at June 28, 2014), which is based on the company's credit ratings. The facility fee is .20%. There were no outstanding borrowings under the revolving credit facility at June 28, 2014 and December 31, 2013. During the first six months of 2014 and 2013, the average daily balance outstanding under the revolving credit facility was $416.7 million and $396.1 million, respectively. The company has an asset securitization program collateralized by accounts receivable of certain of its subsidiaries. In March 2014, the company amended its asset securitization program and, among other things, increased its borrowing capacity from $775.0 million to $900.0 million and extended its term to mature in March 2017. The asset securitization program is conducted through Arrow Electronics Funding Corporation ("AFC"), a wholly-owned, bankruptcy remote subsidiary. The asset securitization program does not qualify for sale treatment. Accordingly, the accounts receivable and related debt obligation remain on the company's consolidated balance sheets. Interest on borrowings is calculated using a base rate or a commercial paper rate plus a spread (.40% at June 28, 2014), which is based on the company's credit ratings, or an effective interest rate of .59% at June 28, 2014. The facility fee is .40%. The company had $300.0 million and $420.0 million in outstanding borrowings under the asset securitization program at June 28, 2014 and December 31, 2013, respectively. During the first six months of 2014 and 2013, the average daily balance outstanding under the asset securitization program was $396.6 million and $262.2 million, respectively. Both the revolving credit facility and asset securitization program include terms and conditions that limit the incurrence of additional borrowings, limit the company's ability to pay cash dividends or repurchase stock, and require that certain financial ratios be maintained at designated levels. The company was in compliance with all covenants as of June 28, 2014 and is currently not aware of any events that would cause non-compliance with any covenants in the future. In April 2014, the company entered into an agreement for an uncommitted line of credit. Under this agreement, the company may borrow up to a total of $70.0 million at the discretion of the participating bank. There were no outstanding borrowings under the uncommitted line of credit at June 28, 2014. In the normal course of business certain of the company's subsidiaries have agreements to sell, without recourse, selected trade receivables to financial institutions. The company does not retain financial or legal interests in these receivables, and accordingly they are accounted for as sales of the related receivables and the receivables are removed from the company's consolidated balance sheets. Financing costs related to these transactions were not material and are included in "Interest and other financing expense, net" in the company's consolidated statements of operations. The company filed a shelf registration statement with the Securities and Exchange Commission in October 2012 registering debt securities, preferred stock, common stock, and warrants of Arrow Electronics, Inc. that may be issued by the company from time to time. As set forth in the shelf registration statement, the net proceeds from the sale of the offered securities may be used by the company for general corporate purposes, including repayment of borrowings, working capital, capital expenditures, acquisitions, and stock repurchases, or for such other purposes as may be specified in the applicable prospectus supplement. Management believes that the company's current cash availability, its current borrowing capacity under its revolving credit facility, and asset securitization program, its expected ability to generate future operating cash flows, and the company's access to capital markets are sufficient to meet its projected cash flow needs for the foreseeable future. The company continually evaluates its liquidity requirements and would seek to amend its existing borrowing capacity or access the financial markets as deemed necessary. 32 --------------------------------------------------------------------------------Contractual Obligations The company has contractual obligations for short-term and long-term debt, interest on short-term and long-term debt, capital leases, operating leases, purchase obligations, and certain other long-term liabilities that were summarized in a table of Contractual Obligations in the company's Annual Report on Form 10-K for the year ended December 31, 2013. Since December 31, 2013, there were no material changes to the contractual obligations of the company, outside the ordinary course of the company's business, except that in March 2014, the company amended its asset securitization program and, among other things, increased its borrowing capacity from $775.0 million to $900.0 million and extended its term to mature in March 2017. At June 28, 2014 and December 31, 2013, the company had $300.0 million and $420.0 million, respectively, in outstanding borrowings under this program. Share-Repurchase Programs In July 2013, the company's Board of Directors (the "Board") approved the repurchase of up to $200 million of the company's common stock through a share-repurchase program. In May 2014, the company's Board approved an additional repurchase of up to $200 million of the company's common stock. As of June 28, 2014, the company repurchased 3,185,089 shares under these programs with a market value of $173.6 million at the dates of repurchase, of which 890,926 shares with a market value of $50.0 million were repurchased during the second quarter of 2014. Off-Balance Sheet Arrangements The company has no off-balance sheet financing or unconsolidated special purpose entities. Critical Accounting Policies and Estimates The company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. The company evaluates its estimates on an ongoing basis. The company bases its estimates on historical experience and on various other assumptions that are believed reasonable under the circumstances; the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes during the first six months of 2014 to the items disclosed as Critical Accounting Policies and Estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in the company's Annual Report on Form 10-K for the year ended December 31, 2013. Impact of Recently Issued Accounting Standards See Note B of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on the company's consolidated financial position and results of operations. Information Relating to Forward-Looking Statements This report includes forward-looking statements that are subject to numerous assumptions, risks, and uncertainties, which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: industry conditions, the company's implementation of its new 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, risks related to the integration of acquired businesses, change in legal and regulatory matters, and the company's ability to generate additional cash flow. Forward-looking statements are those statements, which are not statements of historical fact. These forward-looking statements can be identified by forward-looking words such as "expects," "anticipates," "intends," "plans," "may," "will," "believes," "seeks," "estimates," and similar expressions. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any of the forward-looking statements. 33-------------------------------------------------------------------------------- |