NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note A – Basis of Presentation
The accompanying consolidated financial statements of Arrow Electronics, Inc. (the “company”) were prepared in accordance with accounting principles generally accepted in the United States and reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations at and for the periods presented. The consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.
These consolidated financial statements do not include all of the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with the company’s audited consolidated financial statements and accompanying notes for the year ended
December 31, 2018
, as filed in the company’s Annual Report on Form 10-K.
Quarter End
The company operates on a quarterly calendar that closes on the Saturday closest to the end of the calendar quarter.
Reclassification
Certain prior period amounts were reclassified to conform to the current period presentation. These reclassifications did not have a material impact on previously reported amounts.
Note B – Impact of Recently Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2018-15,
Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (a consensus of the FASB Emerging Issues Task Force)
(“ASU No. 2018-15”). ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop internal-use software. ASU No. 2018-15 is effective for the company in the first quarter of 2020, with early adoption permitted, and is to be applied either retrospectively or prospectively. The company is currently evaluating the potential effects of adopting the provisions of ASU No. 2018-15. The adoption is not expected to be material to the consolidated financial statements.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12,
Derivatives and Hedging (Topic 815)
(“ASU No. 2017-12”). ASU No. 2017-12 simplifies certain aspects of hedge accounting and results in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements. On January 1, 2019, the company adopted the provisions of ASU No. 2017-12 on a modified retrospective basis. The adoption of the provisions of ASU No. 2017-12 did not materially impact the company’s consolidated financial position or results of operations.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments - Credit Losses (Topic 326)
(“ASU No. 2016-13”). ASU No. 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. In November 2018, the FASB issued ASU No. 2018-19,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses
, in April 2019, the FASB issued ASU No. 2019-04,
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,
and in May 2019, the FASB issued ASU No. 2019-05,
Financial Instruments—Credit Losses (Topic 326), Targeted Transition Relief.
These ASU’s provide supplemental guidance and clarification to ASU No. 2016-13 and must be adopted concurrently with the adoption of ASU No. 2016-13, cumulatively referred to as “Topic 326.” Topic 326 is effective for the company in the first quarter of 2020, with early adoption permitted, and is to be applied using a modified retrospective approach. The company is currently evaluating the potential effects of adopting the provisions of Topic 326.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases (Topic 842)
(“ASU No. 2016-02”). ASU No. 2016-02 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets. Leases will be classified as either finance or operating, with classification affecting expense recognition in the income statement. In July 2018, the FASB issued ASU No. 2018-10,
Codification Improvements to Topic 842, Leases
, and ASU No. 2018-11,
Leases (Topic 842) Targeted Improvements.
In March 2019, the FASB issued ASU No. 2019-01,
Codification Improvements to Topic 842, Leases.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
These ASU’s provide supplemental adoption guidance and clarification to ASU No. 2016-02, and must be adopted concurrently with the adoption of ASU No. 2016-02, cumulatively referred to as “Topic 842.”
On January 1, 2019, the company adopted Topic 842 applying the optional transition method, which allows an entity to apply the new standard at the adoption date with a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, the company elected a package of practical expedients and the short-term lease exception outlined in Topic 842. The company also implemented internal controls and key systems to enable the preparation of financial information on adoption. As a result of adopting Topic 842, the company recognized assets and liabilities for the rights and obligations created by operating leases, refer to Note L.
Note C – Significant Accounting Policies
Except for the changes below and the impairments disclosed in Notes D and E, no material changes have been made to the company’s significant accounting policies disclosed in Note 1, Summary of Significant Accounting Policies, in its Annual Report on Form 10-K, filed on February 7, 2019, for the year ended December 31, 2018.
Leases
The company determines if a contract contains a lease at inception based on whether it conveys the right to control the use of an identified asset. Substantially all of the company’s leases are classified as operating leases. The company has determined that operating lease right-of-use assets will be recorded to “Other assets” and lease liabilities will be recorded to “Other liabilities” and “Accrued expenses” in the consolidated balance sheets. Lease expense will be recorded to “Selling, general, and administrative expenses” in the consolidated statements of operations. Operating lease payments will be recorded to “Operating cash flows” in the consolidated statements of cash flows.
Operating lease right-of-use assets and lease liabilities are recognized based on the net present value of future minimum lease payments over the lease term starting on the commencement date. The company generally is not able to determine the rate implicit in its leases and, as such, will apply an incremental borrowing rate based on the company’s cost of borrowing for the relevant terms of each lease. Lease expense for minimum lease payments are recognized on a straight-line basis over the lease term. Lease terms may include an option to extend or terminate a lease if it is reasonably certain that the company will exercise such options. The company has elected the practical expedient to not separate lease components from non-lease components, and also has elected not to record a right-of-use asset or lease liability for leases which, at inception, have a term of twelve months or less. Variable lease payments are recognized in the period in which the obligation for those payments is incurred.
Note D – Impairment of Long-Lived Assets
The company committed to a plan to close its personal computer and mobility asset disposition business within the global components business segment. In light of the plan, the company performed an impairment analysis of the long-lived assets of the personal computer and mobility asset disposition business in accordance with ASC 360 and recorded a pre-tax impairment charge of
$74,908
to write-down certain assets of the personal computer and mobility asset disposition business to estimated fair value in the second quarter of 2019. The company also recorded
$6,910
in impairment charges related to various other fixed assets in the second quarter of 2019, unrelated to the personal computer and mobility asset disposition business.
Note E – Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The company tests goodwill and other indefinite-lived intangible assets for impairment annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist.
During the
second quarter
of
2019
, as a result of the company’s downward revision of forecasted future earnings previously disclosed in Item 2.02 Form 8-K filed on
July 15, 2019
and the decision to wind down the company’s personal computer and mobility asset disposition business, the company determined that it was more likely than not that an impairment may exist within the Americas components and Asia-Pacific components reporting units. The company evaluated its other four reporting units and concluded an interim impairment analysis was not required based on the results of those reporting units and historical levels of headroom in each of those reporting units. The interim goodwill impairment analysis related to the Americas components reporting
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
unit resulted in partial goodwill impairment charge of
$509,000
(
$457,806
net of tax) with
$601,336
of goodwill remaining in the reporting unit and full impairment of
$61,175
(
$61,175
net of tax) within the Asia-Pacific reporting unit.
The company estimated the fair value of these reporting units using the income approach. For the purposes of the income approach, fair value was determined based on the present value of estimated future cash flows, discounted at an appropriate risk adjusted rate. The fair value conclusion as of
June 29, 2019
for the Americas components reporting unit is highly sensitive to changes in the assumptions used in the income approach which include forecasted revenues, gross profit margins, operating income margins, working capital cash flow, forecasted capital expenditures, perpetual growth rates, and long-term discount rates, among others, all of which require significant judgments by management. As the Americas components reporting unit has
0%
excess fair value over the carrying value of the reporting unit, the remaining
$601,336
of goodwill is susceptible to future period impairments. For example, a 100 basis point decrease in forecasted gross profit margin could result in a full impairment of the remaining
$601,336
of goodwill, absent other inputs improving. The company has used recent historical performance, current forecasted financial information, and broad-based industry and economic statistics as a basis to estimate the key assumptions utilized in the discounted cash flow model. These key assumptions are inherently uncertain and require a high degree of estimation and judgment based on an evaluation of historical performance, current industry and global economic and geo-political conditions, and the timing and success of the implementation of current strategic initiatives.
Goodwill of companies acquired, allocated to the company’s business segments, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Components
|
|
Global ECS
|
|
Total
|
|
Balance as of December 31, 2018 (a)
|
|
$
|
1,437,501
|
|
|
$
|
1,187,189
|
|
|
$
|
2,624,690
|
|
|
Impairments and dispositions
|
|
(570,175
|
)
|
|
(1,386
|
)
|
|
(571,561
|
)
|
|
Foreign currency translation adjustment
|
|
16,823
|
|
|
(2,453
|
)
|
|
14,370
|
|
|
Balance as of June 29, 2019 (b)
|
|
$
|
884,149
|
|
|
$
|
1,183,350
|
|
|
$
|
2,067,499
|
|
|
|
|
|
(a)
|
The total carrying value of goodwill as of
December 31, 2018
in the table above is reflected net of
$1,018,780
of accumulated impairment charges, of which
$716,925
was recorded in the global components business segment and
$301,855
was recorded in the global enterprise computing solutions (“ECS”) business segment.
|
|
|
|
|
(b)
|
The total carrying value of goodwill as of
June 29, 2019
in the table above is reflected net of
$1,588,955
of accumulated impairment charges, of which
$1,287,100
was recorded in the global components business segment and
$301,855
was recorded in the global enterprise computing solutions (“ECS”) business segment.
|
Intangible assets, net, are comprised of the following as of
June 29, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Customer relationships
|
|
10 years
|
|
$
|
443,223
|
|
|
$
|
(225,446
|
)
|
|
$
|
217,777
|
|
|
Developed technology
|
|
5 years
|
|
1,940
|
|
|
(1,035
|
)
|
|
905
|
|
|
Amortizable trade name
|
|
8 years
|
|
76,407
|
|
|
(4,853
|
)
|
|
71,554
|
|
|
|
|
|
|
$
|
521,570
|
|
|
$
|
(231,334
|
)
|
|
$
|
290,236
|
|
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Intangible assets, net, are comprised of the following as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Non-amortizable trade names
|
|
indefinite
|
|
$
|
101,000
|
|
|
$
|
—
|
|
|
$
|
101,000
|
|
|
Customer relationships
|
|
11 years
|
|
475,050
|
|
|
(221,822
|
)
|
|
253,228
|
|
|
Developed technology
|
|
5 years
|
|
6,340
|
|
|
(4,311
|
)
|
|
2,029
|
|
|
Amortizable trade name
|
|
9 years
|
|
19,940
|
|
|
(3,553
|
)
|
|
16,387
|
|
|
|
|
|
|
$
|
602,330
|
|
|
$
|
(229,686
|
)
|
|
$
|
372,644
|
|
During the second quarter of 2019, the company initiated actions to further integrate two global components businesses. These businesses held indefinite-lived trade names with a carrying value of
$101,000
. As a result of the company’s decision to integrate these brands, we determined the useful lives of the trade names were no longer indefinite. The company will begin amortizing these trade names over their estimated remaining useful lives. The trade names were tested for impairment during the second quarter as a result of the change in estimated useful lives. The company estimated the fair value of the trade names to be
$55,000
using the relief from royalty method and recorded a non-cash impairment charge of
$46,000
(
$34,653
net of tax). The drivers of the impairment were primarily due to the shortened useful lives of the asset and a decline of the forecasted revenues attributable to the trade names as integration to the Arrow brand occurs over the estimated remaining useful lives.
During the
second quarter
of
2019
and
2018
, the company recorded amortization expense related to identifiable intangible assets of
$11,413
and
$11,955
, respectively. During the
first six months
of
2019
and
2018
, amortization expense related to identifiable intangible assets was
$23,343
and
$25,475
, respectively.
Note F – Investments in Affiliated Companies
The company owns a
50%
interest in several joint ventures with Marubun Corporation (collectively “Marubun/Arrow”) and several interests ranging from
19%
to
50%
in other joint ventures and equity method investments. These investments are accounted for using the equity method.
The following table presents the company’s investment in affiliated companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 31,
2018
|
|
Marubun/Arrow
|
|
$
|
75,532
|
|
|
$
|
73,253
|
|
|
Other
|
|
10,625
|
|
|
10,440
|
|
|
|
|
$
|
86,157
|
|
|
$
|
83,693
|
|
The equity in earnings (losses) of affiliated companies consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
|
Marubun/Arrow
|
|
$
|
227
|
|
|
$
|
1,483
|
|
|
$
|
1,453
|
|
|
$
|
2,574
|
|
|
Other
|
|
155
|
|
|
(966
|
)
|
|
(2,538
|
)
|
|
(2,730
|
)
|
|
|
|
$
|
382
|
|
|
$
|
517
|
|
|
$
|
(1,085
|
)
|
|
$
|
(156
|
)
|
Under the terms of various joint venture agreements, the company is required to pay its pro-rata share of the third party debt of the joint ventures in the event that the joint ventures are unable to meet their obligations. At
June 29, 2019
and
December 31, 2018
, the company’s pro-rata share of this debt was approximately
$6,800
and
$2,860
, respectively. The company believes there is sufficient equity in each of the joint ventures to meet the obligations.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note G – Accounts Receivable
Accounts receivable, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 31,
2018
|
|
Accounts receivable
|
|
$
|
8,045,924
|
|
|
$
|
9,021,051
|
|
|
Allowances for doubtful accounts
|
|
(69,321
|
)
|
|
(75,588
|
)
|
|
|
|
$
|
7,976,603
|
|
|
$
|
8,945,463
|
|
The company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowances for doubtful accounts are determined using a combination of factors, including the length of time the receivables are outstanding, the current business environment, and historical experience. The company also has notes receivables with certain customers, which are included in “Accounts receivable, net” in the company’s consolidated balance sheets.
Note H – Debt
Short-term borrowings, including current portion of long-term debt, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 31,
2018
|
|
6.00% notes, due 2020
|
|
$
|
209,234
|
|
|
$
|
—
|
|
|
Borrowings on lines of credit
|
|
—
|
|
|
180,000
|
|
|
Other short-term borrowings
|
|
69,924
|
|
|
66,257
|
|
|
|
|
$
|
279,158
|
|
|
$
|
246,257
|
|
Other short-term borrowings are primarily utilized to support working capital requirements. The weighted-average interest rate on these borrowings was
3.68%
and
2.49%
at
June 29, 2019
and
December 31, 2018
, respectively.
The company has
$200,000
in uncommitted lines of credit. There were
no o
utstanding borrowings and
$180,000
of
o
utstanding borrowings under the uncommitted lines of credit at
June 29, 2019
and
December 31, 2018
, respectively. These borrowings were provided on a short-term basis and the maturity is agreed upon between the company and the lender. The lines had a weighted-average effective interest rate of
3.36%
and
3.39%
at
June 29, 2019
and
December 31, 2018
, respectively.
The company has a commercial paper program and the maximum aggregate balance of commercial paper outstanding may not exceed the borrowing capacity of
$1,200,000
. The company had no outstanding borrowings under this program at
June 29, 2019
and
December 31, 2018
. The program had a weighted-average effective interest rate of
2.96%
and
2.93%
at
June 29, 2019
and
December 31, 2018
, respectively.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 31,
2018
|
|
Asset securitization program
|
|
$
|
930,000
|
|
|
$
|
810,000
|
|
|
6.00% notes, due 2020
|
|
—
|
|
|
209,147
|
|
|
5.125% notes, due 2021
|
|
130,618
|
|
|
130,546
|
|
|
3.50% notes, due 2022
|
|
347,684
|
|
|
347,288
|
|
|
4.50% notes, due 2023
|
|
297,882
|
|
|
297,622
|
|
|
3.25% notes, due 2024
|
|
494,564
|
|
|
494,091
|
|
|
4.00% notes, due 2025
|
|
346,062
|
|
|
345,762
|
|
|
7.50% senior debentures, due 2027
|
|
109,817
|
|
|
109,776
|
|
|
3.875% notes, due 2028
|
|
494,368
|
|
|
494,095
|
|
|
Other obligations with various interest rates and due dates
|
|
6,279
|
|
|
788
|
|
|
|
|
$
|
3,157,274
|
|
|
$
|
3,239,115
|
|
The
7.50%
senior debentures are not redeemable prior to their maturity. All other notes may be called at the option of the company subject to “make whole” clauses.
The estimated fair market value, using quoted market prices, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 31,
2018
|
|
6.00% notes, due 2020
|
|
$
|
214,500
|
|
|
$
|
214,500
|
|
|
5.125% notes, due 2021
|
|
135,500
|
|
|
134,500
|
|
|
3.50% notes, due 2022
|
|
356,000
|
|
|
345,000
|
|
|
4.50% notes, due 2023
|
|
315,000
|
|
|
303,500
|
|
|
3.25% notes, due 2024
|
|
500,500
|
|
|
467,000
|
|
|
4.00% notes, due 2025
|
|
359,000
|
|
|
340,500
|
|
|
7.50% senior debentures, due 2027
|
|
133,500
|
|
|
128,000
|
|
|
3.875% notes, due 2028
|
|
495,500
|
|
|
458,500
|
|
The carrying amount of the company’s short-term borrowings in various countries, revolving credit facility, asset securitization program, commercial paper, and other obligations approximate their fair value.
The company has a
$2,000,000
revolving credit facility maturing in December 2023. This facility may be used by the company for general corporate purposes including working capital in the ordinary course of business, letters of credit, repayment, prepayment or purchase of long-term indebtedness, acquisitions, and as support for the company’s commercial paper program, as applicable. Interest on borrowings under the revolving credit facility is calculated using a base rate or a Eurocurrency rate plus a spread (
1.18%
at
June 29, 2019
), which is based on the company’s credit ratings, or an effective interest rate of
3.50%
at
June 29, 2019
. The facility fee, which is based on the company’s credit ratings, was
.20%
of the total borrowing capacity at
June 29, 2019
. The company had no outstanding borrowings under the revolving credit facility at
June 29, 2019
and
December 31, 2018
.
The company has an asset securitization program collateralized by accounts receivable of certain of its subsidiaries. The company may borrow up to
$1,200,000
under the asset securitization program, which matures in June 2021. The asset securitization program is conducted through Arrow Electronics Funding Corporation (“AFC”), a wholly-owned, bankruptcy remote subsidiary. The asset securitization program does not qualify for true sale treatment. Accordingly, the accounts receivable and related debt obligation remain on the company’s consolidated balance sheets. Interest on borrowings is calculated using a base rate plus a spread (
.40%
at
June 29, 2019
), or an effective interest rate of
2.90%
at
June 29, 2019
. The facility fee is
.40%
of the total borrowing capacity.
At
June 29, 2019
and
December 31, 2018
, the company had
$930,000
and
$810,000
, respectively, in outstanding borrowings under the asset securitization program, which was included in
“
Long-term debt” in the company’s consolidated balance sheets. Total
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
collateralized accounts receivable of approximately
$2,413,243
and
$2,754,400
, respectively, were held by AFC and were included in
“
Accounts receivable, net” in the company’s consolidated balance sheets. Any accounts receivable held by AFC would likely not be available to other creditors of the company in the event of bankruptcy or insolvency proceedings before repayment of any outstanding borrowings under the asset securitization program.
Both the revolving credit facility and asset securitization program include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels. The company was in compliance with all covenants as of
June 29, 2019
and is currently not aware of any events that would cause non-compliance with any covenants in the future.
During 2018, the company redeemed
$300,000
principal amount of its
3.00%
notes due March 2018.
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.
Interest and other financing expense, net, includes interest and dividend income of
$14,492
and
$28,537
for the
second quarter
and
first six months
of 2019, respectively. Interest and other financing expense, net, includes interest and dividend income of
$11,303
and
$20,557
for the
second quarter
and
first six months
of 2018, respectively.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note I – Financial Instruments Measured at Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
|
|
|
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
|
|
Level 2
|
Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
|
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
|
The following table presents assets (liabilities) measured at fair value on a recurring basis at
June 29, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash equivalents (a)
|
|
Cash and cash equivalents/
other assets
|
|
$
|
22,120
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,120
|
|
|
Equity investments (b)
|
|
Other assets
|
|
42,637
|
|
|
—
|
|
|
—
|
|
|
42,637
|
|
|
Interest rate swaps
|
|
Other liabilities
|
|
—
|
|
|
(9,168
|
)
|
|
—
|
|
|
(9,168
|
)
|
|
Foreign exchange contracts
|
|
Other current assets/
other assets
|
|
—
|
|
|
13,122
|
|
|
—
|
|
|
13,122
|
|
|
Foreign exchange contracts
|
|
Accrued expenses
|
|
—
|
|
|
(2,950
|
)
|
|
—
|
|
|
(2,950
|
)
|
|
|
|
|
|
$
|
64,757
|
|
|
$
|
1,004
|
|
|
$
|
—
|
|
|
$
|
65,761
|
|
The following table presents assets (liabilities) measured at fair value on a recurring basis at
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash equivalents (a)
|
|
Cash and cash equivalents/
other assets
|
|
$
|
22,883
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,883
|
|
|
Equity investments (b)
|
|
Other assets
|
|
38,045
|
|
|
—
|
|
|
—
|
|
|
38,045
|
|
|
Interest rate swaps
|
|
Other liabilities
|
|
—
|
|
|
(589
|
)
|
|
—
|
|
|
(589
|
)
|
|
Foreign exchange contracts
|
|
Other current assets
|
|
—
|
|
|
4,163
|
|
|
—
|
|
|
4,163
|
|
|
Foreign exchange contracts
|
|
Accrued expenses
|
|
—
|
|
|
(2,384
|
)
|
|
—
|
|
|
(2,384
|
)
|
|
|
|
|
|
$
|
60,928
|
|
|
$
|
1,190
|
|
|
$
|
—
|
|
|
$
|
62,118
|
|
|
|
|
|
(a)
|
Cash equivalents include highly liquid investments with an original maturity of less than three months.
|
|
|
|
|
(b)
|
The company has an
8.4%
equity ownership interest in Marubun Corporation and a portfolio of mutual funds with quoted market prices. The company recorded an unrealized gain of
$8
and
$1,842
for the
second quarter
and
six months ended
June 29, 2019
, respectively, on equity securities held at the end of the quarter. The company recorded an unrealized loss of
$4,633
and
$7,288
for the second quarter and
six months ended
June 30, 2018
, respectively, on equity securities held at the end of the quarter.
|
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to goodwill, identifiable intangible assets, and long-lived assets (see Notes D and E). The company tests these assets for impairment if indicators of potential impairment exist or at least annually if indefinite lived.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Derivative Instruments
The company uses various financial instruments, including derivative instruments, for purposes other than trading. Certain derivative instruments are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. Derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings.
Interest Rate Swaps
The company occasionally enters into interest rate swap transactions that convert certain fixed-rate debt to variable-rate debt or variable-rate debt to fixed-rate debt in order to manage its targeted mix of fixed- and floating-rate debt. The company uses the hypothetical derivative method to assess the effectiveness of its interest rate swaps designated as fair value hedges on a quarterly basis. The 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 change in fair value of interest rate swaps designated as cash flow hedges is recorded in the shareholders’ equity section in the company’s consolidated balance sheets in
“
Accumulated other comprehensive income.”
As of
June 29, 2019
and
December 31, 2018
, the company had one outstanding interest rate swap designated as a fair value hedge, the terms of which are as follows:
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Notional Amount
|
|
Interest rate due from counterparty
|
|
Interest rate due to counterparty
|
|
April 2020
|
|
50,000
|
|
6.000%
|
|
6 mo. USD LIBOR + 3.896%
|
In May 2019, the company entered into a series of ten-year forward-starting interest rate swaps (the “2019 swaps”) which locked in an average treasury rate of
2.33%
on a total aggregate notional amount of
$300,000
. The 2019 swaps were designated as cash flow hedges and managed the risk associated with changes in treasury rates and the impact of future interest payments on anticipated debt issuances to replace the company's
6%
notes due to mature in April 2020. The fair value of the 2019 swaps is recorded in the shareholders' equity section in the company's consolidated balance sheets in “Accumulated other comprehensive income (loss)” and will be reclassified into income over the life of the anticipated debt issuance. Losses of
$6,849
related to the 2019 swaps were recorded in other comprehensive income (loss), net of taxes, for the
second quarter
of
2019
.
Foreign Exchange Contracts
The company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. The company’s transactions in its foreign operations are denominated primarily in the following currencies: Euro, Chinese Renminbi, Canadian Dollar, Indian Rupee, and British Pound. 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 related to these transactions. These contracts are executed to facilitate the hedging of foreign currency exposures resulting from inventory purchases and sales and generally have terms of no more than six months. Gains or losses on these contracts are deferred and recognized when the underlying future purchase or sale is recognized or when the corresponding asset or liability is revalued. The company does not enter into foreign exchange contracts for trading purposes. The risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the company minimizes by limiting its counterparties to major financial institutions. The fair value of the foreign exchange contracts are estimated using market quotes. The notional amount of the foreign exchange contracts at
June 29, 2019
and
December 31, 2018
was
$941,093
(inclusive of foreign exchange contracts designated as a net investment hedge) and
$607,747
, respectively.
Gains and losses related to non-designated foreign currency exchange contracts are recorded in
“
Cost of sales” in the company’s consolidated statements of operations. Gains and losses related to foreign currency exchange contracts designated as cash flow hedges are recorded in
“
Cost of sales,”
“
Selling, general, and administrative expenses,” and
“
Interest and other financing expense, net” based upon the nature of the underlying hedged transaction, in the company’s consolidated statements of operations and were not material for the
second quarter
and
first six months
of
2019
and
2018
.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
During the first quarter of 2019, the company entered into a series of foreign exchange contracts to sell Euro and buy United States Dollars, with various maturity dates as noted in the table below:
|
|
|
|
|
|
|
Maturity Date
|
|
Notional Amount
|
|
March 2023
|
|
EUR 50,000
|
|
September 2024
|
|
EUR 50,000
|
|
April 2025
|
|
EUR 100,000
|
|
January 2028
|
|
EUR 100,000
|
|
Total
|
|
EUR 300,000
|
The contracts above have been designated as a net investment hedge which is in place to hedge a portion of the company’s net investment in subsidiaries with euro-denominated net assets. The change in the fair value of derivatives designated as net investment hedges will be recorded in
“
foreign currency translation adjustment” (
“
CTA”) within
“
Accumulated other comprehensive loss” in the company’s consolidated balance sheets. Amounts excluded from the assessment of hedge effectiveness will be included in
“
Interest and other financing expense, net” in the company’s consolidated statements of operations.
The gains (losses) recorded in CTA within other comprehensive income (loss) related to net investment hedges were
$224
and
$6,816
for the
second quarter
and
six months ended
June 29, 2019
, net of taxes, respectively. For the
second quarter
and
six months ended
June 29, 2019
gains of
$2,192
and
$3,598
for outstanding net investment hedges were reclassified from CTA to
“
Interest and other financing expense, net” in the company’s consolidated statements of operations.
The effects of derivative instruments on the company’s consolidated statements of operations and other comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
|
Gain (Loss) Recognized in Income
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
774
|
|
|
$
|
6,260
|
|
|
$
|
4,263
|
|
|
$
|
518
|
|
|
Interest rate swaps
|
|
(322
|
)
|
|
(308
|
)
|
|
(641
|
)
|
|
(611
|
)
|
|
Total
|
|
$
|
452
|
|
|
$
|
5,952
|
|
|
$
|
3,622
|
|
|
$
|
(93
|
)
|
|
Gain (Loss) Recognized in Other Comprehensive Income before reclassifications, net of tax
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
1,294
|
|
|
$
|
(58
|
)
|
|
$
|
7,247
|
|
|
$
|
(1,135
|
)
|
|
Interest rate swaps
|
|
(6,849
|
)
|
|
—
|
|
|
(6,849
|
)
|
|
—
|
|
|
Total
|
|
$
|
(5,555
|
)
|
|
$
|
(58
|
)
|
|
$
|
398
|
|
|
$
|
(1,135
|
)
|
Other
The carrying amount of cash and cash equivalents, accounts receivable, net, and accounts payable approximate their fair value due to the short maturities of these financial instruments.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note J – Restructuring, Integration, and Other Charges
Restructuring initiatives are due to the company’s continued efforts to lower cost and drive operational efficiency. Integration costs are primarily related to the integration of acquired businesses within the company’s pre-existing business and the consolidation of certain operations. The following table presents the components of the restructuring, integration, and other charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
|
Restructuring and integration charges - current period actions
|
|
$
|
5,071
|
|
|
$
|
8,798
|
|
|
$
|
8,078
|
|
|
$
|
20,230
|
|
|
Restructuring and integration charges - actions taken in prior periods
|
|
1,424
|
|
|
2,931
|
|
|
1,363
|
|
|
4,280
|
|
|
Other charges
|
|
13,417
|
|
|
7,454
|
|
|
22,131
|
|
|
15,844
|
|
|
|
|
$
|
19,912
|
|
|
$
|
19,183
|
|
|
$
|
31,572
|
|
|
$
|
40,354
|
|
Restructuring and Integration Accrual Summary
The restructuring and integration accrual was
$13,516
and
$25,829
at
June 29, 2019
and
December 31, 2018
, respectively. A transition adjustment of
$9,968
was recorded on January 1, 2019 to reclassify restructuring and integration accruals for facilities costs by adjusting the related lease right-of-use assets recorded upon adoption of ASU No. 2016-02, Topic 842. During the six months ended
June 29, 2019
, the company made
$11,977
of payments related to restructuring and integration accruals. Substantially all amounts accrued at
June 29, 2019
and all restructuring and integration charges for the six months ending
June 29, 2019
relate to the termination of personnel. All amounts accrued at
June 29, 2019
are expected to be spent in cash within two years.
Other Charges
Included in restructuring, integration, and other charges for the
second quarter
and the
first six months
of
2019
are other expenses of
$13,417
and
$22,131
, respectively. The following items were included in other charges and credits recorded to restructuring, integration, and other charges for the
second quarter
and
six months ended
June 29, 2019
:
|
|
|
|
•
|
acquisition-related charges for the
second quarter
and
first six months
of
$223
and
$1,245
, respectively, related to professional and other fees directly related to recent acquisition activity as well as contingent consideration for acquisitions completed in prior years.
|
|
|
|
|
•
|
relocation and other charges associated with centralization efforts to maximize operating efficiencies for the
second quarter
and
first six months
of
$3,174
and
$8,733
, respectively.
|
Included in restructuring, integration, and other charges for the
second quarter
and
first six months
of
2018
are other expenses of
$7,454
and
$15,844
, respectively. The following items represent other charges and credits recorded to restructuring, integration, and other charges for the
second quarter
and
six months ended
June 30, 2018
:
|
|
|
|
•
|
acquisition related charges for the
second quarter
and
first six months
of
$1,384
and
$7,538
, respectively, related to professional and other fees directly related to recent acquisition activity as well as contingent consideration for acquisitions completed in prior years.
|
As previously disclosed in Item 2.02 Form 8-K filed on
July 15, 2019
, the company has also initiated separate and distinct actions to reduce its annual operating expenses, which are expected to generate approximately
$130,000
in annualized cost savings. Substantially all of these actions will be completed by the end of 2019. The company expects to recognize approximately
$45,000
in cash severance costs as well as approximately
$4,000
in other non-cash asset impairments and approximately
$10,000
in cash contract termination costs. Substantially all of the severance, assets impairments, and termination costs are expected to be recognized in the third quarter of 2019.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note K – Net Income (Loss) per Share
The following table presents the computation of net income (loss) per share on a basic and diluted basis (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
|
Net income (loss) attributable to shareholders
|
|
$
|
(548,966
|
)
|
|
$
|
169,915
|
|
|
$
|
(408,231
|
)
|
|
$
|
309,009
|
|
|
Weighted-average shares outstanding - basic
|
|
84,652
|
|
|
87,802
|
|
|
85,022
|
|
|
87,878
|
|
|
Net effect of various dilutive stock-based compensation awards
|
|
—
|
|
|
850
|
|
|
—
|
|
|
963
|
|
|
Weighted-average shares outstanding - diluted
|
|
84,652
|
|
|
88,652
|
|
|
85,022
|
|
|
88,841
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(6.48
|
)
|
|
$
|
1.94
|
|
|
$
|
(4.80
|
)
|
|
$
|
3.52
|
|
|
Diluted (a)
|
|
$
|
(6.48
|
)
|
|
$
|
1.92
|
|
|
$
|
(4.80
|
)
|
|
$
|
3.48
|
|
|
|
|
|
(a)
|
As the company reported a net loss attributable to shareholders for the second quarter and first six months of 2019, basic and diluted net loss per share attributable to shareholders are the same. Stock-based compensation awards for the issuance of
915
and
515
shares for the
second quarter
and
first six months
of
2018
, respectively, were excluded from the computation of net income per share on a diluted basis as their effect was anti-dilutive.
|
Note L - Lease Commitments
The company leases certain office, distribution, and other property under non-cancelable operating leases expiring at various dates through
2033
. Substantially all leases are classified as operating leases. During the
second quarter
and
first six months
of
2019
, the company recorded operating lease cost of
$23,264
and
$49,990
, respectively.
The following amounts were recorded in the consolidated balance sheets at
June 29, 2019
:
|
|
|
|
|
|
|
|
|
|
|
June 29, 2019
|
|
|
Operating Leases
|
|
|
|
Right-of-use asset
|
|
$
|
312,975
|
|
|
|
|
|
|
Lease liability - current
|
|
52,792
|
|
|
Lease liability - non-current
|
|
311,075
|
|
|
Total operating lease liabilities
|
|
$
|
363,867
|
|
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Maturities of operating lease liabilities at
June 29, 2019
were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 29, 2019
|
|
|
2019
|
|
$
|
47,470
|
|
|
2020
|
|
76,683
|
|
|
2021
|
|
60,112
|
|
|
2022
|
|
47,123
|
|
|
2023
|
|
36,713
|
|
|
Thereafter
|
|
158,150
|
|
|
Total lease payments
|
|
426,251
|
|
|
Less imputed interest
|
|
(62,384
|
)
|
|
Total
|
|
$
|
363,867
|
|
|
|
|
|
Other information pertaining to leases consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 29, 2019
|
|
Supplemental Cash Flow Information
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
$
|
57,791
|
|
|
Right-of-use assets obtained in exchange for operating lease obligations
|
|
37,957
|
|
|
|
|
|
|
Operating Lease Term and Discount Rate
|
|
|
|
Weighted-average remaining lease term in years
|
|
8
|
|
Weighted-average discount rate
|
|
5.2
|
%
|
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note M – Shareholders’ Equity
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in Accumulated other comprehensive income (loss), excluding noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
|
Foreign Currency Translation Adjustment and Other:
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications (a)
|
|
$
|
15,560
|
|
|
$
|
(146,203
|
)
|
|
$
|
20,836
|
|
|
$
|
(99,803
|
)
|
|
Amounts reclassified into income
|
|
(54
|
)
|
|
1,055
|
|
|
(240
|
)
|
|
(123
|
)
|
|
Unrealized Gain (Loss) on Foreign Exchange Contracts Designated as Net Investment Hedges, Net:
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
224
|
|
|
—
|
|
|
6,816
|
|
|
—
|
|
|
Amounts reclassified into income
|
|
(1,651
|
)
|
|
—
|
|
|
(2,710
|
)
|
|
—
|
|
|
Unrealized Gain (Loss) on Interest Rate Swaps Designated as Cash Flow Hedges, Net:
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
(6,849
|
)
|
|
—
|
|
|
(6,849
|
)
|
|
—
|
|
|
Amounts reclassified into income
|
|
243
|
|
|
231
|
|
|
483
|
|
|
459
|
|
|
Employee Benefit Plan Items, Net:
|
|
|
|
|
|
|
|
|
|
Amounts reclassified into income
|
|
85
|
|
|
613
|
|
|
404
|
|
|
895
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
Retained earnings adjustment (b)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22,354
|
)
|
|
Net change in Accumulated other comprehensive income (loss)
|
|
$
|
7,558
|
|
|
$
|
(144,304
|
)
|
|
$
|
18,740
|
|
|
$
|
(120,926
|
)
|
|
|
|
|
(a)
|
Includes intra-entity foreign currency transactions that are of a long-term investment nature of
$9,079
and
$780
for the
second quarter
and
first six months
of
2019
and
$14,774
and
$2,850
for the
second quarter
and
first six months
2018
, respectively.
|
|
|
|
|
(b)
|
Amounts relate to unrealized gains and losses on investments and stranded tax effects reclassified from “Accumulated other comprehensive income” to “Retained earnings” in accordance with ASU No. 2018-02 and ASU No. 2016-01.
|
Share-Repurchase Program
The following table shows the company’s Board of Directors (the “Board”) approved share-repurchase programs as of
June 29, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month of Board Approval
|
|
Dollar Value Approved for Repurchase
|
|
Dollar Value of Shares Repurchased
|
|
Approximate
Dollar Value of
Shares that May
Yet be
Purchased
Under the
Program
|
|
December 2016
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
$
|
—
|
|
|
December 2018
|
|
600,000
|
|
|
61,463
|
|
|
538,537
|
|
|
Total
|
|
$
|
1,000,000
|
|
|
$
|
461,463
|
|
|
$
|
538,537
|
|
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note N – Contingencies
Environmental Matters
In connection with the purchase of Wyle in August 2000, the company acquired certain of the then outstanding obligations of Wyle, including Wyle’s indemnification obligations to the purchasers of its Wyle Laboratories division for environmental clean-up costs associated with any then existing contamination or violation of environmental regulations. Under the terms of the company’s purchase of Wyle from the sellers, the sellers agreed to indemnify the company for certain costs associated with the Wyle environmental obligations, among other things. In 2012, the company entered into a settlement agreement with the sellers pursuant to which the sellers paid
$110,000
and the company released the sellers from their indemnification obligation. As part of the settlement agreement, the company accepted responsibility for any potential subsequent costs incurred related to the Wyle matters. The company is aware of two Wyle Laboratories facilities (in Huntsville, Alabama and Norco, California) at which contaminated groundwater was identified and will require environmental remediation. In addition, the company was named as a defendant in several lawsuits related to the Norco facility and a third site in El Segundo, California which have now been settled to the satisfaction of the parties.
The company expects these environmental liabilities to be resolved over an extended period of time. Costs are recorded for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accruals for environmental liabilities are adjusted periodically as facts and circumstances change, assessment and remediation efforts progress, or as additional technical or legal information becomes available. Environmental liabilities are difficult to assess and estimate due to various unknown factors such as the timing and extent of remediation, improvements in remediation technologies, and the extent to which environmental laws and regulations may change in the future. Accordingly, the company cannot presently fully estimate the ultimate potential costs related to these sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed and, in some instances, implemented. To the extent that future environmental costs exceed amounts currently accrued by the company, net income would be adversely impacted and such impact could be material.
Accruals for environmental liabilities are included in “Accrued expenses” and “Other liabilities” in the company’s consolidated balance sheets. The company has determined that there is no amount within the environmental liability range that is a better estimate than any other amount, and therefore has recorded the accruals at the minimum amount of the ranges.
As successor-in-interest to Wyle, the company is the beneficiary of various Wyle insurance policies that covered liabilities arising out of operations at Norco and Huntsville. To date, the company has recovered approximately
$37,000
from certain insurance carriers relating to environmental clean-up matters at the Norco site. The company is considering the best way to pursue its potential claims against insurers regarding liabilities arising out of operations at Huntsville. The resolution of these matters will likely take several years. The company has not recorded a receivable for any potential future insurance recoveries related to the Norco and Huntsville environmental matters, as the realization of the claims for recovery are not deemed probable at this time.
Environmental Matters - Huntsville
In February 2015, the company and the Alabama Department of Environmental Management (“ADEM”) finalized and executed a consent decree in connection with the Huntsville, Alabama site. Characterization of the extent of contaminated soil and groundwater is complete and has been approved by ADEM. Approximately
$6,600
was spent to date and the company currently anticipates no additional investigative and related expenditures. The nature and scope of subsequent remediation at the site has not yet been determined, but assuming the outcome includes source control and certain other measures, the cost is estimated to be between
$3,800
and
$10,000
.
Despite the amount of work undertaken and planned to date, the company is unable to estimate any potential costs in addition to those discussed above because the complete scope of the work is not yet known, and, accordingly, the associated costs have yet to be determined.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Environmental Matters - Norco
In October 2003, the company entered into a consent decree with Wyle Laboratories and the California Department of Toxic Substance Control (the “DTSC”) in connection with the Norco site. In April 2005, a Remedial Investigation Work Plan was approved by DTSC that provided for site-wide characterization of known and potential environmental issues. Investigations performed in connection with this work plan and a series of subsequent technical memoranda continued until the filing of a final Remedial Investigation Report early in 2008. Work is under way pertaining to the remediation of contaminated groundwater at certain areas on the Norco site and of soil gas in a limited area immediately adjacent to the site. In 2008, a hydraulic containment system (“HCS”) was installed to capture and treat groundwater before it moves into the adjacent offsite area. In September 2013, the DTSC approved the final Remedial Action Plan (“RAP”) and work is currently progressing under the RAP. The approved RAP included the potential for additional remedial action after the five year review of the HCS if the review found that contaminants were not sufficiently reduced in the offsite area. The HCS five year review submitted to DTSC in December 2016 identified significant reductions in contaminants offsite except in a key area identified in the RAP. This exception triggered the need for additional offsite remediation that began in 2018.
Approximately
$72,200
was spent to date on remediation, project management, regulatory oversight, and investigative and feasibility study activities. The company currently estimates that these activities will give rise to an additional
$8,500
to
$19,200
. Project management and regulatory oversight include costs incurred by project consultants for project management and costs billed by DTSC to provide regulatory oversight.
Despite the amount of work undertaken and planned to date, the company is unable to estimate any potential costs in addition to those discussed above because the complete scope of the work under the RAP is not yet known, and, accordingly, the associated costs have yet to be determined.
Other
From time to time, in the normal course of business, the company may become liable with respect to other pending and threatened litigation, environmental, regulatory, labor, product, and tax matters. While such matters are subject to inherent uncertainties, it is not currently anticipated that any such matters will materially impact the company’s consolidated financial position, liquidity, or results of operations.
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Note O – Segment and Geographic Information
The company is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company distributes electronic components to original equipment manufacturers and contract manufacturers through its global components business segment and provides enterprise computing solutions to value-added resellers and managed service providers through its global ECS business segment. As a result of the company’s philosophy of maximizing operating efficiencies through the centralization of certain functions, selected fixed assets and related depreciation, as well as borrowings, are not directly attributable to the individual operating segments and are included in the corporate business segment.
Sales, by segment by geographic area, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
|
Components:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
1,876,799
|
|
|
$
|
1,937,882
|
|
|
$
|
3,783,828
|
|
|
$
|
3,734,580
|
|
|
EMEA (a)
|
|
1,415,888
|
|
|
1,447,972
|
|
|
2,919,254
|
|
|
2,926,358
|
|
|
Asia/Pacific
|
|
1,978,248
|
|
|
1,898,510
|
|
|
3,759,780
|
|
|
3,553,358
|
|
|
Global components
|
|
$
|
5,270,935
|
|
|
$
|
5,284,364
|
|
|
$
|
10,462,862
|
|
|
$
|
10,214,296
|
|
|
|
|
|
|
|
|
|
|
|
|
ECS:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
1,372,456
|
|
|
$
|
1,387,034
|
|
|
$
|
2,573,363
|
|
|
$
|
2,582,445
|
|
|
EMEA (a)
|
|
701,157
|
|
|
721,130
|
|
|
1,464,314
|
|
|
1,471,400
|
|
|
Global ECS
|
|
$
|
2,073,613
|
|
|
$
|
2,108,164
|
|
|
$
|
4,037,677
|
|
|
$
|
4,053,845
|
|
|
Consolidated (b)
|
|
$
|
7,344,548
|
|
|
$
|
7,392,528
|
|
|
$
|
14,500,539
|
|
|
$
|
14,268,141
|
|
|
|
|
|
(a)
|
Defined as Europe, the Middle East, and Africa.
|
|
|
|
|
(b)
|
Includes sales related to the United States of
$2,902,393
and
$5,684,428
for the
second quarter
and
first six months
of
2019
and
$2,968,469
and
$5,618,137
for the
second quarter
and
first six months
of
2018
, respectively.
|
Operating income (loss), by segment, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Global components (c)
|
|
$
|
(561,878
|
)
|
|
$
|
253,840
|
|
|
$
|
(327,346
|
)
|
|
$
|
483,386
|
|
|
Global ECS
|
|
98,388
|
|
|
109,417
|
|
|
185,106
|
|
|
193,223
|
|
|
Corporate (d)
|
|
(85,700
|
)
|
|
(76,430
|
)
|
|
(161,390
|
)
|
|
(153,787
|
)
|
|
Consolidated
|
|
$
|
(549,190
|
)
|
|
$
|
286,827
|
|
|
$
|
(303,630
|
)
|
|
$
|
522,822
|
|
|
|
|
|
(c)
|
Global components operating income includes impairments of
$697,993
for the
second quarter
and
first six months
of
2019
. Also included is a non-recurring charge of
$20,114
in the second quarter of 2019 related to a subset of inventory held by its digital business and a non-recurring charge of
$15,851
related to the receivables and inventory of its financing solutions business. The company has made the decision to narrow its digital inventory offerings and will no longer provide notes to its components customers.
|
|
|
|
|
(d)
|
Includes restructuring, integration, and other charges of
$19,912
and
$31,572
for the
second quarter
and
first six months
of
2019
and
$19,183
and
$40,354
for the
second quarter
and
first six months
of
2018
, respectively.
|
ARROW ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
Total assets, by segment, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 31,
2018
|
|
Global components
|
|
$
|
10,644,553
|
|
|
$
|
11,425,579
|
|
|
Global ECS
|
|
4,571,761
|
|
|
5,632,102
|
|
|
Corporate
|
|
808,055
|
|
|
726,764
|
|
|
Consolidated
|
|
$
|
16,024,369
|
|
|
$
|
17,784,445
|
|
Net property, plant, and equipment, by geographic area, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 31,
2018
|
|
Americas (e)
|
|
$
|
630,645
|
|
|
$
|
673,228
|
|
|
EMEA
|
|
132,722
|
|
|
110,996
|
|
|
Asia/Pacific
|
|
50,550
|
|
|
40,476
|
|
|
Consolidated
|
|
$
|
813,917
|
|
|
$
|
824,700
|
|
|
|
|
|
(e)
|
Includes net property, plant, and equipment related to the United States of
$627,908
and
$670,201
at
June 29, 2019
and
December 31, 2018
, respectively.
|
Note P – Income Taxes
The principal causes of the difference between the U.S. federal statutory tax rate of
21%
and effective income tax rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
|
Provision (benefit) at statutory tax rate
|
|
$
|
(126,025
|
)
|
|
$
|
46,771
|
|
|
$
|
(84,798
|
)
|
|
$
|
85,928
|
|
|
State taxes, net of federal benefit
|
|
(11,533
|
)
|
|
3,732
|
|
|
(7,504
|
)
|
|
7,984
|
|
|
International effective tax rate differential
|
|
3,238
|
|
|
(758
|
)
|
|
8,217
|
|
|
2,798
|
|
|
U.S. Tax on foreign earnings
|
|
4,953
|
|
|
2,592
|
|
|
9,880
|
|
|
8,213
|
|
|
Changes in tax accruals
|
|
902
|
|
|
306
|
|
|
920
|
|
|
1,293
|
|
|
Tax credits
|
|
(1,971
|
)
|
|
(1,868
|
)
|
|
(4,001
|
)
|
|
(3,737
|
)
|
|
Non-deductible portion of impairment of goodwill
|
|
76,153
|
|
|
—
|
|
|
76,153
|
|
|
—
|
|
|
Tax Act's impact on deferred taxes (a)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,340
|
)
|
|
Other
|
|
1,914
|
|
|
906
|
|
|
2,671
|
|
|
132
|
|
|
Provision (benefit) for income taxes
|
|
(52,369
|
)
|
|
51,681
|
|
|
1,538
|
|
|
98,271
|
|
|
|
|
|
(a)
|
Tax benefit related to the net change in deferred tax liabilities stemming from the U.S. federal government enacting tax legislation reducing the U.S. federal tax rate from 35% to 21%.
|