Arrow Electronics Reports Strong Sales Growth of 17% Year over Year

Arrow Electronics, Inc. (NYSE:ARW) today reported third quarter 2007 net income of $98.3 million ($.80 and $.79 per share on a basic and diluted basis, respectively) on sales of $4.03 billion, compared with net income of $85.9 million ($.70 per share on both a basic and diluted basis) on sales of $3.45 billion in the third quarter of 2006. Sales increased 17 percent year over year. On a pro forma basis, sales increased 4 percent year over year as acquisitions also benefited sales growth. The company's results for the third quarters of 2007 and 2006 include a number of items outlined below that impact their comparability. A complete reconciliation of these items is provided under the heading "Certain Non-GAAP Financial Information.” Excluding those items, on a non-GAAP basis, net income for the quarter ended September 30, 2007 would have been $95.0 million ($.77 and $.76 per share on a basic and diluted basis, respectively) and net income for the quarter ended September 30, 2006, would have been $87.0 million ($.71 per share on both a basic and diluted basis). "We performed well in a market that was challenging. Our level of sales, as well as working capital to sales, remained near record levels and we generated the highest level of cash flow for a third quarter in six years and the highest return on working capital for a third quarter in seven years, all while we continued to invest in the long-term future of Arrow,” said William E. Mitchell, chairman, president and chief executive officer of Arrow Electronics, Inc. Global enterprise computing solutions ("ECS”) sales of $1.17 billion increased 97 percent year over year and decreased 8 percent sequentially in the seasonally soft third quarter. Year-over-year growth was aided by the impact of the acquisitions of KeyLink Systems Group, Alternative Technology, Inc. and the storage and security distribution business of InTechnology plc. On a pro forma basis, sales increased 15 percent year over year. "We again outgrew the market with strong double-digit performance in industry standard servers, storage, software, and services, as well as modest growth in proprietary servers. While we achieved strong top-line performance with revenue near the high end of our guidance, our mix of products and investments in the business to accelerate future growth had an unfavorable impact on profitability this quarter. We expect to continue to outgrow the market and return to more normal levels of profitability in the fourth quarter,” said Mr. Mitchell. Global components sales of $2.86 billion increased 3 percent compared with the second quarter and were flat year over year as the well-publicized weakness within the large EMS customer base continued. "We again gained market share on a worldwide basis and added to our industry leading position in the face of an increasingly more competitive market in all regions this quarter. We were particularly pleased with our success in Asia Pacific, where we generated record operating income dollars for a third quarter as earnings increased 173 percent year over year. We had good success with efficiency initiatives to drive down our operating expenses worldwide going forward, and we will continue to invest in strategic opportunities to build for the future,” Mr. Mitchell said. The company's results for the third quarter of 2007 and 2006 include the items outlined below that impact their comparability: During the third quarter of 2007, the company recorded restructuring and integration charges of $4.5 million ($2.7 million net of related taxes or $.02 per share on both a basic and diluted basis) primarily related to initiatives taken by the company in the period to improve operating efficiencies. During the third quarter of 2007, the company took a series of additional steps to make its organizational structure more efficient. These actions are expected to reduce costs by approximately $30 million per annum in North America, of which approximately $3 million was realized in the third quarter of 2007 and approximately $7 million is expected to be realized in the fourth quarter of 2007. The estimated restructuring charges to be recorded over the next several quarters associated with these actions total approximately $8 million. During the third quarter of 2007, the company recorded an income tax benefit of $6.0 million, net, ($.05 per share on both a basic and diluted basis) principally due to a reduction in deferred income taxes as a result of the reduction in the statutory tax rate in Germany. During the third quarter of 2006, the company recorded restructuring and integration charges of $1.8 million ($1.1 million net of related taxes or $.01 per share on both a basic and diluted basis). "Based upon the information known to us today, we generally expect normal seasonality in both of our businesses. We believe that total fourth quarter sales will be between $4.15 and $4.45 billion, with global component sales between $2.65 and $2.85 billion and global enterprise computing solutions sales between $1.50 and $1.60 billion. Earnings per share, on a diluted basis, excluding any charges and including estimated amortization of intangible assets of $.02 to $.03, are expected to be in the range of $.90 to $.95, an increase of 25 percent to 32 percent from last year’s fourth quarter,” said Paul J. Reilly, senior vice president and chief financial officer. NINE-MONTH RESULTS Arrow’s net income for the first nine months of 2007 was $293.8 million ($2.38 and $2.36 per share on a basic and diluted basis, respectively) on sales of $11.57 billion, compared with net income of $260.3 million ($2.14 and $2.12 per share on a basic and diluted basis, respectively) on sales of $10.08 billion in the first nine months of 2006. Net income for the first nine months of 2007 includes restructuring and integration charges of $1.8 million ($0.4 million net of related taxes), primarily related to initiatives taken by the company in the period to improve operating efficiencies and the acquisition of KeyLink, and an income tax benefit of $6.0 million, net, ($.05 per share on both a basic and diluted basis) principally due to a decrease in deferred income taxes as a result of a reduction in the statutory tax rate in Germany. Excluding these items, net income would have been $288.2 million ($2.34 and $2.31 per share on a basic and diluted basis, respectively) for the first nine months of 2007. Net income for the first nine months of 2006 includes restructuring and integration charges of $6.4 million ($3.9 million net of related taxes or $.03 per share on both a basic and diluted basis) and a loss on prepayment of debt of $2.6 million ($1.6 million net of related taxes or $.01 per share on both a basic and diluted basis) on the redemption of the total amount outstanding of $283.2 million principal amount ($156.4 million accreted value) of its zero coupon convertible debentures due in 2021 and on the repurchase of $4.1 million principal amount of its 7% Senior Notes due in January 2007. Excluding these items, net income would have been $265.7 million ($2.19 and $2.16 per share on a basic and diluted basis, respectively) for the first nine months of 2006. Arrow Electronics (www.arrow.com) is a global provider of products, services and solutions to industrial and commercial users of electronic components and computer products. Headquartered in Melville, New York, Arrow serves as a supply channel partner for more than 600 suppliers and 140,000 original equipment manufacturers, contract manufacturers and commercial customers through a global network of 260 locations in 55 countries and territories. Certain Non-GAAP Financial Information In addition to disclosing results that are determined in accordance with Generally Accepted Accounting Principles ("GAAP”), the company provides certain non-GAAP financial information relating to operating income, net income and net income per basic and diluted share, each as adjusted for certain charges, credits and losses that the company believes impact the comparability of its results of operations. These charges, credits and losses arise out of the company’s efficiency enhancement initiatives, the company’s acquisitions of other companies, deferred tax adjustments, and the prepayment of debt. A reconciliation of the company’s non-GAAP financial information to GAAP is set forth in the table below. The company believes that such non-GAAP financial information is useful to investors to assist in assessing and understanding the company’s operating performance and underlying trends in the company’s business because management considers the charges, credits and losses referred to above to be outside the company’s core operating results. This non-GAAP financial information is among the primary indicators management uses as a basis for evaluating the company’s financial and operating performance. In addition, the company’s Board of Directors may use this non-GAAP financial information in evaluating management performance and setting management compensation. The presentation of this additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for, or alternative to, operating income, net income and net income per basic and diluted share determined in accordance with GAAP. Analysis of results and outlook on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP. ARROW ELECTRONICS, INC. EARNINGS RECONCILIATION (In thousands except per share data)       Three Months Ended Nine Months Ended September 30, September 30, 2007   2006 2007   2006   Operating income, as reported $ 157,509 $ 152,472 $ 493,322 $ 464,846 Restructuring and integration charges   4,512   1,779   1,790   6,418 Operating income, as adjusted $ 162,021 $ 154,251 $ 495,112 $ 471,264 Net income, as reported $ 98,324 $ 85,918 $ 293,829 $ 260,260 Restructuring and integration charges 2,674 1,101 438 3,915 Deferred tax adjustment* (6,024 ) - (6,024 ) - Loss on prepayment of debt   -   -   -   1,558 Net income, as adjusted $ 94,974 $ 87,019 $ 288,243 $ 265,733 Net income per basic share, as reported $ .80 $ .70 $ 2.38 $ 2.14 Restructuring and integration charges .02 .01 - .03 Deferred tax adjustment* (.05 ) - (.05 ) - Loss on prepayment of debt   -   -   -   .01 Net income per basic share, as adjusted $ .77 $ .71 $ 2.34 $ 2.19   Net income per diluted share, as reported** $ .79 $ .70 $ 2.36 $ 2.12 Restructuring and integration charges .02 .01 - .03 Deferred tax adjustment* (.05 ) - (.05 ) - Loss on prepayment of debt   -   -   -   .01 Net income per diluted share, as adjusted $ .76 $ .71 $ 2.31 $ 2.16 The sum of the components for basic and diluted net income per share, as adjusted, may not agree to totals, as presented, due to rounding.   * During the third quarter and first nine months of 2007, the company recorded an income tax benefit of $6.0 million, net ($.05 per share on both a basic and diluted basis) principally due to a reduction in deferred income taxes as a result of the statutory tax rate change in Germany. These deferred income taxes primarily related to the amortization of intangible assets for income tax purposes, which are not amortized for accounting purposes.   ** In computing net income per diluted share for the first nine months of 2006, net income was increased by $524 for interest (net of taxes) related to the zero coupon convertible debentures ("convertible debentures") which are dilutive common stock equivalents. In addition, the diluted average number of shares outstanding for the first nine months of 2006 includes 623 shares related to the convertible debentures. Information Relating to Forward-Looking Statements This press release includes forward-looking statements that are subject to numerous assumptions, risks, and uncertainties, which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: industry conditions, the company's implementation of its new global financial system and the company's planned implementation of its new enterprise resource planning system, changes in product supply, pricing and customer demand, competition, other vagaries in the global components and global enterprise computing solutions markets, changes in relationships with key suppliers, increased profit margin pressure, the effects of additional actions taken to become more efficient or lower costs, and the company’s ability to generate additional cash flow. Forward-looking statements are those statements, which are not statements of historical fact. These forward-looking statements can be identified by forward-looking words such as "expects," "anticipates," "intends," "plans," "may," "will," "believes," "seeks," "estimates," and similar expressions. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any of the forward-looking statements. ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data)     Three Months Ended Nine Months Ended September 30, September 30, 2007     2006 2007     2006   Sales $ 4,030,363 $ 3,454,297 $ 11,566,010 $ 10,083,792 Costs and expenses: Cost of products sold 3,477,806 2,946,214 9,894,852 8,563,742 Selling, general and administrative expenses 373,796 342,951 1,127,958 1,015,607 Depreciation and amortization 16,740 10,881 48,088 33,179 Restructuring and integration charges   4,512   1,779   1,790   6,418   3,872,854   3,301,825   11,072,688   9,618,946 Operating income 157,509 152,472 493,322 464,846 Equity in earnings of affiliated companies 2,172 1,550 5,842 3,540 Loss on prepayment of debt - - - 2,605 Interest expense, net   24,273   25,869   75,376   73,831 Income before income taxes and minority interest 135,408 128,153 423,788 391,950 Provision for income taxes   36,554   42,097   127,593   130,834 Income before minority interest 98,854 86,056 296,195 261,116 Minority interest   530   138   2,366   856 Net income $ 98,324 $ 85,918 $ 293,829 $ 260,260 Net income per share: Basic $ .80 $ .70 $ 2.38 $ 2.14 Diluted $ .79 $ .70 $ 2.36 $ 2.12 Average number of shares outstanding: Basic 123,161 122,053 123,321 121,493 Diluted 124,292 122,850 124,598 123,179 This interim report is subject to independent audit at year-end. ARROW ELECTRONICS, INC. CONSOLIDATED BALANCE SHEETS (In thousands except par value)     September 30, 2007 December 31, 2006   ASSETS Current assets: Cash and cash equivalents $ 317,607 $ 337,730 Accounts receivable, net 3,101,272 2,710,321 Inventories 1,624,958 1,691,536 Prepaid expenses and other assets   170,293   156,034 Total current assets   5,214,130   4,895,621 Property, plant and equipment, at cost: Land 41,378 41,810 Buildings and improvements 175,133 167,157 Machinery and equipment   554,089   481,689 770,600 690,656 Less: Accumulated depreciation and amortization   (434,345 )   (428,283 ) Property, plant and equipment, net   336,255   262,373 Investments in affiliated companies 47,009 41,960 Cost in excess of net assets of companies acquired 1,787,128 1,231,281 Other assets   269,454   238,337 Total assets $ 7,653,976 $ 6,669,572 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,245,026 $ 1,795,089 Accrued expenses 462,741 402,536 Short-term borrowings, including current portion of long-term debt     57,746   262,783 Total current liabilities   2,765,513   2,460,408   Long-term debt 1,208,403 976,774 Other liabilities 256,279 235,831 Shareholders' equity: Common stock, par value $1: Authorized – 160,000 shares in 2007 and 2006 Issued – 124,900 and 122,626 shares in 2007 and 2006, respectively 124,900 122,626 Capital in excess of par value 1,017,668 943,958 Retained earnings 2,070,781 1,787,746 Foreign currency translation adjustment 285,465 155,166 Other   4,641   (7,407 ) 3,503,455 3,002,089 Less: Treasury stock (2,031 and 207 shares in 2007 and 2006, respectively), at cost   (79,674 )   (5,530 ) Total shareholders' equity   3,423,781   2,996,559 Total liabilities and shareholders' equity $ 7,653,976 $ 6,669,572 This interim report is subject to independent audit at year-end. ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)   Three Months Ended September 30, 2007   2006   Cash flows from operating activities: Net income $ 98,324 $ 85,918 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation and amortization 16,740 10,881 Amortization of deferred financing costs and discount on notes 531 520 Amortization of stock-based compensation 5,440 6,020 Excess tax benefits from stock-based compensation arrangements (622 ) (55 ) Deferred income taxes (2,533 ) (17,640 ) Restructuring and integration charges 2,674 1,101 Equity in earnings of affiliated companies (2,172 ) (1,550 ) Minority interest 530 138 Change in assets and liabilities, net of effects of acquired businesses: Accounts receivable 16,728 (20,929 ) Inventories (17,055 ) 199,811 Prepaid expenses and other assets (14,140 ) 12,423 Accounts payable 56,036 (342,457 ) Accrued expenses 19,159 34,362 Other   (8,248 )   (4,658 ) Net cash provided by (used for) operating activities   171,392   (36,115 ) Cash flows from investing activities: Acquisition of property, plant and equipment (41,527 ) (14,130 ) Cash consideration paid for acquired businesses (43,248 ) - Other   (40 )   510 Net cash used for investing activities   (84,815 )   (13,620 ) Cash flows from financing activities: Change in short-term borrowings (15,299 ) (29,087 ) Repayment of long-term borrowings (887,434 ) 92 Proceeds from long-term borrowings 887,400 - Proceeds from exercise of stock options 4,691 587 Excess tax benefits from stock-based compensation arrangements 622 55 Repurchases of common stock   (42,925 )   - Net cash used for financing activities   (52,945 )   (28,353 ) Effect of exchange rate changes on cash   4,978   1,090 Net decrease in cash and cash equivalents 38,610 (76,998 ) Cash and cash equivalents at beginning of period   278,997   329,849 Cash and cash equivalents at end of period $ 317,607 $ 252,851 This interim report is subject to independent audit at year-end. ARROW ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)   Nine Months Ended September 30, 2007   2006   Cash flows from operating activities: Net income $ 293,829 $ 260,260 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation and amortization 48,088 33,179 Amortization of deferred financing costs and discount on notes 1,609 2,152 Amortization of stock-based compensation 17,212 16,302 Accretion of discount on zero coupon convertible debentures - 876 Excess tax benefits from stock-based compensation arrangements (7,315 ) (6,486 ) Deferred income taxes (465 ) (20,235 ) Restructuring and integration charges 438 3,915 Equity in earnings of affiliated companies (5,842 ) (3,540 ) Loss on prepayment of debt - 1,558 Minority interest 2,366 856 Change in assets and liabilities, net of effects of acquired businesses: Accounts receivable (114,763 ) (267,820 ) Inventories 159,609 (102,568 ) Prepaid expenses and other assets (12,379 ) (10,739 ) Accounts payable 200,615 (122,696 ) Accrued expenses 51,065 38,652 Other   (3,805 )   9,373 Net cash provided by (used for) operating activities   630,262   (166,961 ) Cash flows from investing activities: Acquisition of property, plant and equipment (102,894 ) (41,670 ) Cash consideration paid for acquired businesses (539,315 ) (19,460 ) Proceeds from sale of facilities 12,996 - Other   178   3,593 Net cash used for investing activities   (629,035 )   (57,537 ) Cash flows from financing activities: Change in short-term borrowings (40,663 ) 9,449 Repayment of long-term borrowings (1,791,351 ) (15,632 ) Proceeds from long-term borrowings 1,989,900 - Repurchase/repayment of senior notes (169,136 ) (4,268 ) Redemption of zero coupon convertible debentures - (156,330 ) Proceeds from exercise of stock options 51,118 53,705 Excess tax benefits from stock-based compensation arrangements 7,315 6,486 Repurchases of common stock   (75,684 )   - Net cash used for financing activities   (28,501 )   (106,590 ) Effect of exchange rate changes on cash   7,151   3,278 Net decrease in cash and cash equivalents (20,123 ) (327,810 ) Cash and cash equivalents at beginning of period   337,730   580,661 Cash and cash equivalents at end of period $ 317,607 $ 252,851 This interim report is subject to independent audit at year-end. ARROW ELECTRONICS, INC. SEGMENT INFORMATION (In thousands)     Three Months Ended September 30, Nine Months Ended September 30, 2007   2006 2007   2006   Sales: Global components $ 2,859,264 $ 2,860,258 $ 8,413,191 $ 8,353,608 Global ECS   1,171,099   594,039   3,152,819   1,730,184 Consolidated $ 4,030,363 $ 3,454,297 $ 11,566,010 $ 10,083,792 Operating income: Global components $ 151,663 $ 146,781 $ 458,388 $ 451,368 Global ECS 38,338 27,664 118,347 80,619 Corporate (a)   (32,492 )   (21,973 )   (83,413 )   (67,141 ) Consolidated $ 157,509 $ 152,472 $ 493,322 $ 464,846 (a) Includes restructuring and integration charges of $4.5 million and $1.8 million for the three and nine months ended September 30, 2007, respectively, and restructuring and integration charges of $1.8 million and $6.4 million for the three and nine months ended September 30, 2006, respectively. Effective April 1, 2007, the company's business segments were realigned as part of the company's continued efforts to strengthen its market leadership position, streamline the business, and further leverage cost synergies globally. The company's global components business was formed to bring a single, global organization to leverage the collective enterprise to speed services and solutions to customers and suppliers. The company's global ECS business was formed to bring a single organization with an expanded geographic reach, increased exposure in faster growing product segments, and a more robust customer and supplier base. As a result, the UK Microtronica, ATD (in Spain), and Arrow Computer Products (in France) businesses, previously included in the computer products business segment, were transitioned into the company's global components business segment. As a result of this realignment, global components and global ECS are the business segments upon which management primarily evaluates the operations of the company and upon which it bases its operating decisions. Prior period segment data was adjusted to conform to the current period presentation. Effective January 1, 2007, stock option expense, which was previously included in corporate, is allocated to global components, global ECS, and corporate. Prior period segment data was adjusted to conform with the current period presentation. This interim report is subject to independent audit at year-end.