Arrow Electronics - 10-Q quarterly report FY2010 Q3

Washington, D.C.  20549

For the quarterly period ended October 2, 2010

OR

For the transition period from           to           

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There were 115,801,922 shares of Common Stock outstanding as of October 22, 2010.

See accompanying notes.

See accompanying notes.

See accompanying notes.

The accompanying consolidated financial statements of Arrow Electronics, Inc. (the "company" or "Arrow") 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 Form 10-Q for the quarterly periods ended July 3, 2010 and April 3, 2010, as well as the audited consolidated financial statements and accompanying notes for the year ended December 31, 2009, as filed in the company's Annual Report on Form 10-K.

The company operates on a quarterly reporting calendar that closes on the Saturday following the end of the calendar quarter.

Certain prior period amounts were reclassified to conform to the current period presentation.

In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU No. 2009-13"). ASU No. 2009-13 amends guidance included within Accounting Standards Codification ("ASC") Topic 605-25 to require an entity to use an estimated selling price when vendor specific objective evidence or acceptable third party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. ASU No. 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Early adoption and retrospective application are also permitted.  The company is currently evaluating the impact of adopting the provisions of ASU No. 2009-13.

In October 2009, the FASB issued Accounting Standards Update No. 2009-14, "Certain Revenue Arrangements That Include Software Elements" ("ASU No. 2009-14"). ASU No. 2009-14 amends guidance included within ASC Topic 985-605 to exclude tangible products containing software components and non-software components that function together to deliver the product’s essential functionality.  Entities that sell joint hardware and software products that meet this scope exception will be required to follow the guidance of ASU No. 2009-13.  ASU No. 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Early adoption and retrospective application are also permitted.  The company is currently evaluating the impact of adopting the provisions of ASU No. 2009-14.

The results of operations of the below acquisitions were included in the company's consolidated results from their respective dates of acquisition.

In September 2010, the company announced an agreement to acquire Nu Horizons Electronics Corp. ("Nu Horizons"), a leading global distributor of advanced technology semiconductor, display, illumination, and power solutions to a wide variety of commercial original equipment manufacturers and electronic manufacturing services providers in the components business, for approximately $130,000 in cash, or $7.00 per share.  Nu Horizons has sales facilities in more than 50 locations across North America, Asia and Europe, as well as regional logistics centers throughout the world, serving a wide variety of end markets including industrial, military, networking, and data communications. Nu Horizons is headquartered in Melville, N.Y., and has over 700 employees globally.  The acquisition has been approved by the Boards of Directors of both companies and is now subject to approval by Nu Horizons’ shareholders as well as customary regulatory approvals and is expected to close during the fourth quarter of 2010.  The company was named as a defendant in four shareholder class action lawsuits filed in the New York State Supreme Court in Suffolk County, relating to the proposed acquisition of Nu Horizons.  The complaints assert virtually identical claims for alleged breaches of fiduciary duty by Nu Horizons and its Board of Directors arising from their attempt to sell Nu Horizons to Arrow and charge the company with aiding and abetting those breaches of fiduciary duty.  The company does not expect the outcome of this matter to have a material adverse affect on its consolidated financial position or results of operations.

In September 2010, the company announced an agreement to acquire all the assets and operations of the RF, Wireless and Power Division ("RFPD") of Richardson Electronics, Ltd. ("Richardson") for approximately $210,000 in cash, subject to a post-closing working capital adjustment.  Richardson RFPD is a leading value-added global component distributor and provider of engineered solutions serving the global radio frequency and wireless communications market. Based in the Chicago area, with approximately 400 employees, Richardson RFPD’s product set includes solutions for infrastructure and wireless networks, power management and alternative energy markets.  The acquisition has been approved by the Boards of Directors of both companies and is now subject to the approval of Richardson's shareholders as well as customary regulatory approvals and is expected to close in early 2011.

On September 8, 2010, the company acquired Shared Technologies Inc. ("Shared") for a purchase price of $261,288, which included debt paid at closing of $61,898, and is subject to a final working capital adjustment based upon a closing audit. Shared sells, installs, and maintains communications solutions, including the latest in unified communications, voice and data technologies, contact center, network security, and traditional telephony.  Shared is based in Irving, Texas, with locations throughout the U.S. and has approximately 1,000 employees.  Since the date of acquisition, Shared sales of $17,461 were included in the company's consolidated results of operations for both the third quarter and first nine months of 2010.  Total Shared sales for 2009 were approximately $250,000.

The following table summarizes the preliminary allocation of the net consideration paid to the fair value of the assets acquired and liabilities assumed for the Shared acquisition:

The company allocated $28,900 of the purchase price to intangible assets relating to customer relationships, with a useful life of 10 years, $78,000 to trade names with an indefinite useful life, $1,700 to developed technology, with a useful life of 10 years, and $5,100 to other intangible assets (consisting of non-competition agreements and sales backlog), with useful lives ranging from 1 to 2 years.

The cost in excess of net assets acquired related to the Shared acquisition was recorded in the company's global enterprise computing solutions business segment.  The intangible assets related to the Shared acquisition are not expected to be deductible for income tax purposes.

On June 1, 2010, the company acquired PCG Parent Corp., doing business as Converge ("Converge"), for a purchase price of $138,363, which included cash acquired of $4,803, and debt paid at closing of $27,546.  Converge is a leading provider of reverse logistics services, headquartered in Peabody, Massachusetts.  Converge, with approximately 350 employees, also has offices in Singapore and Amsterdam, with support centers throughout Europe, Asia, and the Americas.  Since the date of acquistion, Converge sales of $79,016 and $106,259 were included in the company's consolidated results of operations for the third quarter and first nine months of 2010, respectively.  Total Converge sales for 2009 were approximately $280,000.

The following table summarizes the company's unaudited consolidated results of operations for the third quarter and first nine months of 2010, as well as the unaudited pro forma consolidated results of operations of the company, as though the Shared and Converge acquisitions occurred on January 1, 2010:

The unaudited pro forma consolidated results of operations do not purport to be indicative of the results obtained had the Shared and Converge acquisitions occurred as of the beginning of 2010, or of those results that may be obtained in the future. Additionally, the above table does not reflect any anticipated cost savings or cross-selling opportunities expected to result from these acquisitions.

In April 2010, the company acquired Verical Incorporated, an ecommerce business geared towards meeting the end-of-life components and parts shortage needs of customers.  In June 2010, the company acquired Sphinx Group Limited, a United Kingdom-based value-added distributor of security and networking solutions.  In August 2010, the company acquired Transim Technology Corporation, a leading service provider of online component design and engineering solutions for technology manufacturers. On October 1, 2010, the company acquired Eshel Technology Group, Inc., a leading solid-state lighting distributor and value-added service provider.  The impact of these acquisitions was not material to the company's consolidated financial position and results of operations.  Annual sales for these acquisitions were approximately $103,000.

On December 20, 2009, the company acquired A.E. Petsche Company, Inc. ("Petsche"), a leading provider of interconnect products, including specialty wire, cable, and harness management solutions, to the aerospace and defense markets. Petsche provides value-added distribution services to over 3,500 customers in the United States, Canada, Mexico, the United Kingdom, France, and Belgium.  Total Petsche sales for 2009 were approximately $190,000.

The following table summarizes the company's unaudited consolidated results of operations for the third quarter and first nine months of 2009, as well as the unaudited pro forma consolidated results of operations of the company, as though the Shared, Converge, and Petsche acquisitions occurred on January 1, 2009:

The unaudited pro forma consolidated results of operations do not purport to be indicative of the results obtained had the Shared, Converge, and Petsche acquisitions occurred as of the beginning of 2009, or of those results that may be obtained in the future.  Additionally, the above table does not reflect any anticipated cost savings or cross-selling opportunities expected to result from these acquisitions.

Amortization expense related to identifiable intangible assets was $5,342 and $14,636 for the third quarter and first nine months of 2010 and $3,855 and $11,531 for the third quarter and first nine months of 2009, respectively.

In March 2010, the company made a payment of $3,060 to increase its ownership in a majority-owned subsidiary.  The payment was recorded as a reduction to capital in excess of par value, partially offset by the carrying value of the noncontrolling interest.

Cost in excess of net assets of companies acquired, allocated to the company's business segments, is as follows:

Goodwill represents the excess of the cost of an acquisition over the fair value of the assets acquired.  The company tests goodwill for impairment annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist.

The company owns a 50% interest in several joint ventures with Marubun Corporation (collectively "Marubun/Arrow") and a 50% interest in Altech Industries (Pty.) Ltd. ("Altech Industries"), a joint venture with Allied Technologies Limited.  These investments are accounted for using the equity method.

The following table presents the company's investment in Marubun/Arrow and the company's investment and long-term note receivable in Altech Industries:

The equity in earnings (loss) of affiliated companies consists of the following:

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 October 2, 2010, the company's pro-rata share of this debt was approximately $23,700. The company believes that there is sufficient equity in the joint ventures to meet their obligations.

Accounts receivable, net, consists of the following:

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.

Short-term borrowings, including current portion of long-term debt, consist of the following:

Short-term borrowings in various countries are primarily utilized to support the working capital requirements of certain international operations.  The weighted average interest rates on these borrowings at October 2, 2010 and December 31, 2009 were 2.3% and 3.5%, respectively.

Long-term debt consists of the following:

The 7.5% senior debentures are not redeemable prior to their maturity.  The 6.875% senior notes, 6.875% senior debentures, and 6.00% notes may be called at the option of the company subject to "make whole" clauses.

The estimated fair market value is as follows:

The carrying amount of the company's short-term borrowings, revolving credit facility, bank term loan, and other obligations approximate their fair value.

During the second quarter of 2010, the company sold a property and was required to repay the related collateralized debt with a face amount of $9,000.  For the first nine months of 2010, the company recognized a loss on prepayment of debt of $1,570 ($964 net of related taxes or $.01 per share on both a basic and diluted basis) in the accompanying consolidated statements of operations.

In September 2009, the company repurchased $130,455 principal amount of its 9.15% senior notes due 2010.  The related loss on the repurchase for the third quarter and first nine months of 2009, including the premium paid and write-off of the related deferred financing costs, offset by the gain for terminating a portion of the related interest rate swaps aggregated $5,312 ($3,228 net of related taxes or $.03 per share on both a basic and diluted basis) and was recognized as a loss on prepayment of debt.  During the third quarter of 2010, the company repaid the remaining $69,545 principal amount of its 9.15% senior notes upon maturity.

In September 2009, the company completed the sale of $300,000 principal amount of 6.00% notes due in 2020.  The net proceeds of the offering of $297,430 were used to repay a portion of the previously discussed 9.15% senior notes due 2010 and for general corporate purposes.

The company has an $800,000 revolving credit facility with a group of banks that matures in January 2012.  Interest on borrowings under the revolving credit facility is calculated using a base rate or a euro currency rate plus a spread based on the company's credit ratings (.425% at October 2, 2010). The facility fee related to the credit facility is .125%.  At October 2, 2010, the company had $360,400 in outstanding borrowings under the revolving credit facility.  There were no outstanding borrowings under the revolving credit facility at December 31, 2009.

The company has a $300,000 asset securitization program collateralized by accounts receivables of certain of its North American subsidiaries which expires in March 2011.  The asset securitization program is conducted through Arrow Electronics Funding Corporation, 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 sheet.  Interest on borrowings is calculated using a base rate or a commercial paper rate plus a spread, which is based on the company's credit ratings (.60% at October 2, 2010).  The facility fee is .50%.  The company had no outstanding borrowings under the asset securitization program at October 2, 2010 and December 31, 2009.

stock, and require that certain financial ratios be maintained at designated levels.As of October 2, 2010, the company was in compliance with all covenants relating to its revolving credit facility and is currently not aware of any events that would cause non-compliance with any covenants in the future.  In connection with the asset securitization program, on October 27, 2010, the lenders under the program agreed to waive any potential breach resulting from any failure by the company to comply with a non-financial covenant to maintain appropriate UCC filings arising out of a merger and changes in the names of several of the company’s subsidiaries that are originators of accounts receivable under the program.  Under certain circumstances the failure to file or amend the UCC filings may have resulted in the company being out of compliance with its obligations under the program and the company has taken the necessary actions to cure any non-compliance.

Interest and other financing expense, net, includes interest income of $1,635 and $3,255 for the third quarter and first nine months of 2010 and $278 and $2,686 for the third quarter and first nine months 2009, respectively.

Note H – 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:

The following table presents assets/(liabilities) measured at fair value on a recurring basis at October 2, 2010:

The following table presents assets/(liabilities) measured at fair value on a recurring basis at December 31, 2009:

The company has a 2.7% equity ownership interest in WPG Holdings Co., Ltd. ("WPG") and an 8.4% equity ownership interest in Marubun Corporation ("Marubun"), which are accounted for as available-for-sale securities.

The fair value of the company's available-for-sale securities is as follows:

The fair value of these investments are included in "Other assets" in the accompanying consolidated balance sheets, and the related unrealized holding gains or losses are included in "Other" in the shareholders' equity section in the accompanying consolidated balance sheets.

The company uses various financial instruments, including derivative financial instruments, for purposes other than trading.  Derivatives used as part of the company's risk management strategy are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis.

The fair values of derivative instruments in the consolidated balance sheets are as follows:

The effect of derivative instruments on the consolidated statement of operations is as follows:

The company enters into interest rate swap transactions that convert certain fixed-rate debt to variable-rate debt or variable-rate debt to fixed-rate debt in order to manage its targeted mix of fixed- and floating-rate debt.  The effective portion of the change in the fair value of interest rate swaps designated as fair value hedges are recorded as a change to the carrying value of the related hedged debt, and the effective portion of the change in fair value of interest rate swaps designated as cash flow hedges are recorded in the shareholders' equity section in the accompanying consolidated balance sheets in "Other."  The ineffective portion of the interest rate swap, if any, is recorded in "Interest and other financing expense, net" in the accompanying consolidated statements of operations.

In June 2004 and November 2009, the company entered into interest rate swaps, with an aggregate notional amount of $275,000.  The swaps modify the company's interest rate exposure by effectively converting a portion of the fixed 6.875% senior notes to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 4.37% and 4.18% at October 2, 2010 and December 31, 2009, respectively), through its maturity.  The swaps are classified as fair value hedges and had a fair value of $17,787 and $9,556 at October 2, 2010 and December 31, 2009, respectively.

The company occasionally enters into cross-currency swaps to hedge a portion of its net investment in euro-denominated net assets. The company’s cross-currency swaps are derivatives designated as net investment hedges.  The effective portion of the change in the fair value of derivatives designated as net investment hedges is recorded in "Foreign currency translation adjustment" included in the accompanying consolidated balance sheets and any ineffective portion is recorded in "Interest and other financing expense, net" in the accompanying consolidated statements of operations.  As the notional amounts of the company’s cross-currency swaps are expected to equal a comparable amount of hedged net assets, no material ineffectiveness is expected.  The company uses the hypothetical derivative method to assess the effectiveness of its net investment hedges on a quarterly basis.

In May 2006, the company entered into a cross-currency swap, with a maturity date of July 2011, for approximately $100,000 or €78,281 (the "2006 cross-currency swap").  In October 2005, the company entered into a cross-currency swap, with a maturity date of October 2010, for approximately $200,000 or €168,384 (the "2005 cross-currency swap").  These cross-currency swaps hedge a portion of the company's net investment in euro-denominated net assets, by effectively converting the interest expense on $300,000 of long-term debt from U.S. dollars to euros.   During the second quarter of 2010, the company paid $2,282, plus accrued interest, to terminate these cross-currency swaps.  The 2006 cross-currency swap and the 2005 cross-currency swap had a negative fair value at December 31, 2009 of $12,497 and $41,943, respectively.

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.  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

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.

Cash equivalents consist primarily of overnight time deposits and institutional money market funds with quality financial institutions.  These financial institutions are located in many different geographical regions, and the company's policy is designed to limit exposure with any one institution.  As part of its cash and risk management processes, the company performs periodic evaluations of the relative credit standing of these financial institutions.

During the third quarters of 2010 and 2009, the company recorded restructuring, integration, and other charges of $14,338 ($9,506 net of related taxes or $.08 per share on both a basic and diluted basis) and $37,583 ($29,075 net of related taxes or $.24 per share on both a basic and diluted basis), respectively.  

During the first nine months of 2010 and 2009, the company recorded restructuring, integration, and other charges of $27,424 ($19,146 net of related taxes or $.16 per share on both a basic and diluted basis) and $80,853 ($61,268 net of related taxes or $.51 per share on both a basic and diluted basis), respectively.

The following table presents the components of the restructuring, integration, and other charges:

The following table presents the components of the 2010 restructuring charge of $19,419 and activity in the restructuring accrual for the first nine months of 2010:

$12,389 and facilities costs of $2,429.  The personnel costs are related to the elimination of approximately 160 positions within the global ECS business segment and approximately 90 positions within the global components business segment.  The facilities costs are related to exit activities for 7 vacated facilities in Europe and North America due to the company's continued efforts to streamline its operations and reduce real estate costs. These initiatives are due to the company's continued efforts to lower cost and drive operational efficiency.

The following table presents the activity in the restructuring accrual for the first nine months of 2010 related to the 2009 restructuring:

The following table presents the activity in the restructuring and integration accruals for the first nine months of 2010 related to restructuring and integration actions taken prior to 2009:

In summary, the restructuring and integration accruals aggregate $20,363 at October 2, 2010, all of which is expected to be spent in cash, and are expected to be utilized as follows:

Included in restructuring, integration, and other charges for the third quarter and first nine months of 2010 are $5,592 and $6,598, respectively, of other acquisition-related expenses, primarily consisting of professional fees directly related to recent acquisition activity.

The following table sets forth the computation of net income per share on a basic and diluted basis (shares in thousands):

The components of comprehensive income are as follows:

In March 2010, the company announced its Board of Directors approved the repurchase of up to $100,000 of the company's common stock through a share-repurchase program.  In July 2010, the company's Board of Directors approved an additional repurchase of up to $100,000 of the company's common stock. As of October 2, 2010, the company repurchased 4,693,900 shares under these plans with a market value of $124,993 at the dates of repurchase.

The company maintains supplemental executive retirement plans and a defined benefit plan.  The components of the net periodic benefit costs for these plans are as follows:

Environmental and Related Matters

In 2000, the company assumed certain of the then outstanding obligations of Wyle Electronics ("Wyle"), including Wyle's obligation to indemnify the purchasers of its Laboratories division for environmental clean-up costs associated with pre-1995 contamination or violation of environmental regulations.  Under the terms of the company's purchase of Wyle from the VEBA Group ("VEBA"), VEBA agreed to indemnify the company for, among other things, costs related to environmental pollution associated with Wyle, including those associated with Wyle's sale of its Laboratories division.  The company is currently engaged in clean up and/or investigative activities at the Wyle sites in Huntsville, Alabama and Norco, California.

Characterization of the extent of contaminated soil and groundwater continues at the site in Huntsville, and approximately $3,000 was spent to date.  The company currently estimates additional investigative and related expenditures at the site of approximately $500 to $1,000, depending on the results of which the cost of subsequent remediation is estimated to be between $2,500 and $4,000.

At the Norco site, approximately $29,000 was expended to date on project management, regulatory oversight, and investigative and feasibility study activities, providing the technical basis for a final Remedial Investigation Report that was submitted to California oversight authorities during the first quarter of 2008.

Remedial activities underway include 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, and a hydraulic containment system that captures and treats groundwater before it moves into the adjacent offsite area.  Approximately $9,000 was spent on these activities to date, and it is anticipated that these activities, along with the initial phases of the treatment of contaminated groundwater offsite and remaining Remedial Action Work Plan costs, will cost an additional $9,700 to $18,700.

The company currently estimates that the additional cost of project management and regulatory oversight on the Norco site will range from $400 to $500.  Ongoing remedial investigations (including costs related to soil and groundwater investigations), and the preparation of a final remedial investigation report are projected to cost between $400 to $700.

Despite the amount of work undertaken and planned to date, the complete scope of work in connection with the Norco site is not yet known, and, accordingly, the associated costs not yet determined.

In October 2005, the company filed suit against E.ON AG in the Frankfurt am Main Regional Court in Germany.  The suit seeks indemnification, contribution, and a declaration of the parties’ respective rights and obligations in connection with the related litigation and other costs associated with the Norco site.  In its answer to the company’s claim filed in March 2009 in the German proceedings, E.ON AG filed a counterclaim against the company for approximately $16,000. The litigation is currently suspended while the company engages in a court-facilitated mediation with E.ON AG. The mediation commenced in December 2009 and will continue well into 2010.  The company believes it has reasonable defenses to the counterclaim and plans to defend its position vigorously. The company believes that the ultimate resolution of the counterclaim will not have a material adverse impact on the company’s consolidated financial position, liquidity, or results of operations.

During the second quarter of 2009, the company entered into binding settlement agreements resolving several of the lawsuits associated with the above-mentioned environmental liabilities (Gloria Austin, et al. v. Wyle Laboratories, Inc. et al., the other claims of plaintiff Norco landowners and residents which were consolidated with it, and an action by Wyle Laboratories, Inc. for defense and indemnification in connection with the Austin and related cases).  Arrow's actions against E.ON AG, successor to VEBA, for the judicial enforcement of the various indemnification provisions; and Arrow's claim against a number of insurers on policies relevant to the Wyle sites are ongoing and unresolved. The litigation is described more fully in Note 15 and Item 3 of Part I of the company's Annual Report on Form 10-K for the year ended December 31, 2009.  

The company believes that the recovery of costs incurred to date associated with the environmental clean-up costs related to the Norco and Huntsville sites is probable.  Accordingly, the company increased the receivable for indemnified amounts due from E.ON AG by $2,606 during the first nine months of 2010 to $43,518. The company’s net costs for such indemnified matters may vary from period to period as estimates of recoveries are not always recognized in the same period as the accrual of estimated expenses.

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 have a material impact on the company's consolidated financial position, liquidity, or results of operations.

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 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.

Total assets, by segment, are as follows:

Sales, by geographic area, are as follows:

Net property, plant and equipment, by geographic area, is as follows:

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 reduce time to market, lower their total cost of ownership, introduce innovative products through demand creation opportunities, and enhance their overall competitiveness. The company has two business segments, the global components business segment and the global enterprise computing solutions ("ECS") business segment.  The company distributes electronic components to original equipment manufacturers ("OEMs") and contract manufacturers ("CMs") through its global components business segment and provides enterprise computing solutions to value-added resellers ("VARs") through its global ECS business segment.   For the first nine months of 2010, approximately 73% of the company's sales were from the global components business segment, and approximately 27% of the company's sales were from the global ECS business segment.

The company's business initiatives are to grow sales faster than the market, grow profits faster than sales, and increase return on invested capital.  To achieve its financial objectives, the company seeks to capture significant opportunities to grow across products, markets, and geographies.  To supplement its organic growth strategy, the company continually evaluates strategic acquisitions to broaden its product offerings, increase its market penetration, and/or expand its geographic reach.  Cash flow needed to fund this growth is primarily expected to be generated through continuous corporate-wide initiatives to improve profitability and increase effective asset utilization.

On September 8, 2010, the company acquired Shared Technologies Inc. ("Shared") which sells, installs, and maintains communications solutions, including the latest in unified communications, voice and data technologies, contact center, network security, and traditional telephony.  On June 1, 2010, the company acquired PCG Parent Corp., doing business as Converge ("Converge"), a leading provider of reverse logistics services. On December 20, 2009, the company acquired A.E. Petsche Company, Inc. ("Petsche"), a leading provider of interconnect products, including specialty wire, cable, and harness management solutions, to the aerospace and defense markets.  Results of operations of Shared, Converge, and Petsche are included in the company's consolidated results from their respective dates of acquisition.  Results of operations of Shared are included within the company's global ECS business segment and results of operations of Converge and Petsche are included within the company's global components business segment.

Consolidated sales for the third quarter of 2010 increased by 26.9%, compared with the year-earlier period, due to a 35.3% increase in the global components business segment sales and a 7.9% increase in the global ECS business segment sales.  On a pro forma basis, which includes Shared, Converge, and Petsche as though these acquisitions occurred on January 1, 2009, consolidated sales increased 22.2%. The translation of the company's international financial statements into U.S. dollars resulted in a reduction in consolidated sales of $75.1 million for the third quarter of 2010, compared with the year-earlier period, due to a stronger U.S. dollar.  Excluding the impact of foreign currency, the company's consolidated sales increased by 29.5% for the third quarter of 2010.

Net income attributable to shareholders increased to $118.5 million in the third quarter of 2010, compared with net income attributable to shareholders of $12.6 million in the year-earlier period.  The following items impacted the comparability of the company's results:

Excluding the above-mentioned items, the increase in net income attributable to shareholders for the third quarter of 2010 was primarily the result of the sales increases in both the global components business segment and the global ECS business segment, increased gross profit margins, reduced selling, general and administrative expenses as a percentage of sales due to the company's continuing efforts to streamline and simplify processes, and a lower effective income tax rate. This was offset, in part, by increased depreciation and amortization expense due primarily to increased acquisition activity.

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):

Consolidated sales for the third quarter and first nine months of 2010 increased by $986.0 million, or 26.9%, and $3.03 billion, or 28.9%, compared with the year-earlier periods.  The increase was driven by an increase in the global components business segment sales of $896.3 million, or 35.3%, and $2.67 billion, or 37.3%, for the third quarter and first nine months of 2010, respectively, and an increase in the global ECS business segment sales of $89.7 million, or 7.9%, and $358.6 million, or 10.8%, for the third quarter and first nine months of 2010, respectively.  On a pro forma basis, which includes Shared, Converge, and Petsche as though these acquisitions occurred on January 1, 2009, consolidated sales for the third quarter and first nine months of 2010 increased 22.2% and 25.4%, respectively.  The translation of the company's international financial statements into U.S. dollars resulted in a reduction in consolidated sales of $75.1 million and $53.8 million for the third quarter and first nine months of 2010, compared with the year-earlier periods, due to a stronger U.S. dollar.  Excluding the impact of foreign currency, the company's consolidated sales increased by 29.5% for both the third quarter and first nine months of 2010, respectively.

In the global components business segment, sales for the third quarter and first nine months of 2010 increased primarily due to strength in all three of the company's regional businesses as a result of strengthening in the world's economies.  On a pro forma basis, which includes Converge and Petsche as though these acquisitions occurred on January 1, 2009, global components business segment sales for the third quarter and first nine months of 2010 increased 29.5% and 32.7%, respectively.  The growth in

In the global ECS business segment, the sales for the third quarter and first nine months of 2010 increased primarily due to higher demand for products.  On a pro forma basis, which includes Shared as though this acquisition occurred on January 1, 2009, global ECS business segment sales for the third quarter and first nine months of 2010 increased 5.9% and 9.7%, respectively.  The increase in sales for the third quarter and first nine months of 2010 was due to growth in storage, software, services, and industry standard servers, offset, in part, by declines principally in proprietary servers.   Excluding the impact of foreign currency, the company's global ECS business segment sales increased by 10.4% and 11.9% for the third quarter and first nine months of 2010, respectively.  

The company recorded gross profit of $608.8 million and $1.74 billion in the third quarter and first nine months of 2010, respectively, compared with $421.1 million and $1.25 billion in the year-earlier periods.  The increase in gross profit was primarily due to the 26.9% and 28.9% increase in sales during the third quarter and first nine months of 2010, respectively.  The gross profit margin for the third quarter of 2010 increased by approximately 160 basis points, compared with the year-earlier period, due primarily to a lessening of pricing pressure in the global components business and an improvement in gross profit margin in the global ECS business due to a change in product mix. The gross profit margin for the first nine months of 2010 increased by approximately 90 basis points, compared with the year-earlier period, due primarily to a lessening of pricing pressure in the global components business, offset, in part, by a lower gross profit margin in the global ECS business due to a change in product mix.  In addition, the global components business segment sales comprised a larger percentage of the company's consolidated sales for the third quarter and first nine months of 2010 as compared with the year-earlier periods.  The gross profit margins of products sold in the global components business segment are typically higher than the profit margins of products in the global ECS business segment.

The company recorded restructuring, integration, and other charges of $14.3 million ($9.5 million net of related taxes or $.08 per share on both a basic and diluted basis) and $27.4 million ($19.1 million net of related taxes or $.16 per share on both a basic and diluted basis) for the third quarter and first nine months of 2010, respectively.   Included in the restructuring, integration, and other charges for the third quarter and first nine months of 2010 are restructuring charges of $8.4 million and $19.4 million, respectively, related to initiatives taken by the company to improve operating efficiencies. Also included in the restructuring, integration, and other charges for the third quarter and first nine months of 2010 are charges of $.3 million and $1.4 million, respectively, related to restructuring and integration actions taken in prior periods and acquisition-related expenses of $5.6 million and $6.6 million, respectively.

The restructuring charges of $8.4 million and $19.4 million for the third quarter and first nine months of 2010 primarily includes personnel costs of $3.4 million and $12.4 million and facilities costs of $2.2 million and $2.4 million, respectively.  The personnel costs are related to the elimination of approximately 160 positions within the global ECS business segment and approximately 90 positions within the global components business segment.  The facilities costs are related to exit activities for 7 vacated facilities in Europe and North America due to the company's continued efforts to streamline its operations and reduce real estate costs. These initiatives are due to the company's continued efforts to lower cost and drive operational efficiency.

The company recorded restructuring, integration, and other charges of $37.6 million ($29.1 million net of related taxes or $.24 per share on both a basic and diluted basis) and $80.9 million ($61.3 million net of related taxes or $.51 per share on both a basic and diluted basis) for the third quarter and first nine months of 2009, respectively. Included in the restructuring, integration, and other charges for the third quarter and first nine months of 2009 are restructuring charges of $35.3 million and $78.8 million, respectively, related to initiatives taken by the company to improve operating efficiencies.  Also, included in the restructuring, integration, and other charges for the third quarter and first nine months of 2009 are charges of $2.3 million and $2.1 million, respectively, related to restructuring and integration actions taken in prior periods.

The restructuring charges of $35.3 million and $78.8 million for the third quarter and first nine months of 2009, respectively, primarily includes personnel costs of $31.2 million and $70.6 million and facilities costs of $4.0 million and $7.7 million, respectively.  The personnel costs are related to the elimination of approximately 1,305 positions within the global components business segment and approximately 260 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 initiatives are due to the company's continued efforts to lower cost and drive operational efficiency.

The company recorded operating income of $184.5 million and $519.0 million in the third quarter and first nine months of 2010, respectively, as compared with operating income of $45.1 million and $157.5 million in the year-earlier periods.  Included in operating income for the third quarter and first nine months of 2010 were the previously discussed restructuring, integration, and other charges of $14.3 million and $27.4 million, respectively.  Included in operating income for the third quarter and first nine months of 2009 were the previously discussed restructuring and integration charges of $37.6 million and $80.9 million, respectively.

Selling, general and administrative expenses increased $69.2 million, or 21.5%, in the third quarter of 2010 on a sales increase of 26.9% compared with the third quarter of 2009 and $167.7 million, or 17.4%, for the first nine months of 2010 on a sales increase of 28.9% compared with the first nine months of 2009.  The dollar increase in selling, general and administrative expenses was primarily due to higher variable selling, general and administrative expenses to support the increased sales, the reinstatement of certain employee-related costs that were temporarily suspended during the global economic downturn, and selling, general and administrative expenses incurred by Shared, Converge, and Petsche, which were acquired in September 2010, June 2010, and December 2009, respectively.  These increases were offset, in part, by the impact of a stronger U.S. dollar on the translation of the company's international financial statements for both the third quarter and first nine months of 2010 compared with the year-earlier periods. Selling, general and administrative expenses as a percentage of sales for the third quarters of 2010 and 2009 decreased to 8.4% from 8.8%, respectively, and to 8.4% from 9.2% for the first nine months of 2010 and 2009, respectively. This decrease was primarily due to the company's continuing efforts to streamline and simplify processes and the company's ability to better leverage its existing cost structure to manage the increased level of sales relative to the year-earlier periods.

Depreciation and amortization expense increased by $2.3 million, or 13.5%, and $5.2 million, or 10.3%, for the third quarter and first nine months of 2010, respectively, compared with the year-earlier periods, primarily due to acquisitions.

During the second quarter of 2010, the company sold a property and was required to repay the related collateralized debt with a face amount of $9.0 million.  For the first nine months of 2010, the company recognized a loss on prepayment of debt of $1.6 million ($1.0 million net of related taxes or $.01 per share on both a basic and diluted basis) in the accompanying consolidated statements of operations.  The loss was offset by a gain on the sale of this property of $1.7 million included in restructuring, integration, and other charges in the accompanying consolidated statements of operations.

The company recorded a loss on prepayment of debt of $5.3 million ($3.2 million net of related taxes or $.03 per share on both a basic and diluted basis) for both the third quarter and first nine months of 2009, related to the repurchase of $130.5 million principal amount of its 9.15% senior notes due 2010.  The loss on prepayment of debt includes the related premium paid and write-off of the related deferred financing costs, offset by the gain for terminating a portion of the related interest rate swaps.

Net interest and other financing expense increased by $.9 million, or 4.9%, in the third quarter of 2010, compared with the year-earlier period, primarily due to higher average debt outstanding.

Net interest and other financing expense decreased by $.8 million, or 1.4%, in the first nine months of 2010, compared with the year-earlier period, primarily due to lower interest rates on the company's variable rate debt.

The company recorded a provision for income taxes of $48.7 million and $142.9 million (an effective tax rate of 29.1% and 30.8%) for the third quarter and first nine months of 2010, respectively.  The company's provision for income taxes and effective tax rate for the third quarter and first nine months of 2010 was impacted by the previously discussed restructuring, integration, and other charges and loss on the prepayment of debt.  Excluding the impact of the above-mentioned items, the company's effective tax rate for the third quarter and first nine months of 2010 was 29.5% and 30.7%, respectively.  

The company recorded a provision for income taxes of $11.0 million and $36.9 million (an effective tax rate of 46.7% and 37.9%) for the third quarter and first nine months of 2009, respectively.  The company's provision for income taxes and effective tax rate for the third quarter and first nine months of 2009 was impacted by the previously discussed restructuring, integration, and other charges and loss on prepayment of debt.  The higher effective tax rate was primarily due to valuation allowances recorded in certain international tax jurisdictions where the income tax benefits related to restructuring, integration, and other charges may not be realized.  Excluding the impact of the previously discussed restructuring, integration, and other charges and loss on prepayment of debt, the company's effective tax rate for both the third quarter and first nine months of 2009 was 32.5% and 31.9%, 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.

At October 2, 2010 and December 31, 2009, the company had cash and cash equivalents of $509.7 million and $1.14 billion, respectively.  

During the first nine months of 2010, the net amount of cash used for the company's operating activities was $241.3 million, the net amount of cash used for investing activities was $526.4 million, and the net amount of cash provided by financing activities was $163.6 million.  The effect of exchange rate changes on cash was a decrease of $23.2 million.

During the first nine months of 2009, the net amount of cash provided by the company's operating activities was $649.3 million, the net amount of cash used for investing activities was $98.1 million, and the net amount of cash provided by financing activities was $128.8 million.  The effect of exchange rate changes on cash was an increase of $19.6 million.

The company maintains a significant investment in accounts receivable and inventories.  As a percentage of total assets, accounts receivable and inventories were approximately 64.5% and 58.4% at October 2, 2010 and December 31, 2009, respectively.

The net amount of cash used for the company's operating activities during the first nine months of 2010 was $241.3 million and was primarily due to an increase in accounts receivable and inventory offset, in part, by earnings from operations, adjusted for non-cash items, and an increase in accounts payable and accrued expenses.

The net amount of cash provided by the company's operating activities during the first nine months of 2009 was $649.3 million primarily due to earnings from operations, adjusted for non-cash items, and a reduction in accounts receivable and inventory, offset, in part, by a decrease in accounts payable and accrued expenses.

Working capital as a percentage of sales was 13.7% in the third quarter of 2010 compared with 11.7% in the third quarter of 2009.

The net amount of cash used for investing activities during the first nine months of 2010 was $526.4 million, primarily reflecting $460.0 million of cash consideration paid for acquired businesses and $83.4 million for capital expenditures, offset, in part, by proceeds from the sale of properties of $17.0 million.  Included in capital expenditures for the first nine months of 2010 is $46.1 million related to the company's global enterprise resource planning ("ERP") initiative.

The net amount of cash used for investing activities during the first nine months of 2009 was $98.1 million, primarily reflecting $99.0 million for capital expenditures, which includes $68.3 million of capital expenditures related to the company's global ERP initiative, offset, in part, by proceeds from the sale of properties of $1.2 million.  

During 2006, the company initiated a global ERP effort to standardize processes worldwide and adopt best-in-class capabilities.  Implementation is expected to be phased-in over the next several years.  For the full year 2010, the estimated cash flow impact of this initiative is expected to be in the $40 to $60 million range with a similar cash flow impact expected for 2011.  The company expects to finance these costs with cash flows from operations.

The net amount of cash provided by financing activities during the first nine months of 2010 was $163.6 million. The primary sources of cash from financing activities during the first nine months of 2010 were $360.4 million of proceeds for revolving credit facility borrowings, $3.2 million of proceeds from the exercise of stock options, and $1.7 million related to excess tax benefits from stock-based compensation arrangements.  The primary use of cash for financing activities included $131.3 million of repurchases of common stock, a $69.5 million repayment of senior notes, and a $.9 million decrease in short-term and other borrowings.

The net amount of cash provided by financing activities during the first nine months of 2009 was $128.8 million. The primary sources of cash from financing activities were $297.4 million of net proceeds from a note offering and $3.1 million of proceeds from the exercise of stock options. The primary use of cash for financing activities during the first nine months of 2009 included $135.7 million of repurchases of senior notes, a $32.0 million decrease in short-term borrowings, $2.3 million of repurchases of common stock, and a $1.7 million shortfall in tax benefits from stock-based compensation arrangements.

In September 2009, the company repurchased $130.5 million principal amount of its 9.15% senior notes due 2010.  The related loss on the repurchase for the third quarter and first nine months of 2009, including the premium paid and write-off of the related deferred financing costs, offset by the gain for terminating a portion of the related interest rate swaps aggregated $5.3 million ($3.2 million net of related taxes or $.03 per share on both a basic and diluted basis) and was recognized as a loss on prepayment of debt. During the third quarter of 2010, the company repaid the remaining $69.5 million principal amount of its 9.15% senior notes upon maturity.

In September 2009, the company completed the sale of $300.0 million principal amount of 6.00% notes due in 2020.  The net proceeds of the offering of $297.4 million were used to repay a portion of the previously discussed 9.15% senior notes due 2010 and for general corporate purposes.

The company has an $800.0 million revolving credit facility with a group of banks that matures in January 2012.  Interest on borrowings under the revolving credit facility is calculated using a base rate or a euro currency rate plus a spread based on the company's credit ratings (.425% at October 2, 2010). The facility fee related to the credit facility is .125%.  At October 2, 2010, the company had $360.4 million in outstanding borrowings under the revolving credit facility.  There were no outstanding borrowings under the revolving credit facility at December 31, 2009.

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. As of October 2, 2010, the company was in compliance with all covenants relating to its revolving credit facility and is currently not aware of any events that would cause non-compliance with any covenants in the future.  In connection with the asset securitization program, on October 27, 2010, the lenders under the program agreed to waive any potential breach resulting from any failure by the company to comply with a non-financial covenant to maintain appropriate UCC filings arising out of a merger and changes in the names of several of the company’s subsidiaries that are originators of accounts receivable under the program.  Under certain circumstances the failure to file or amend the UCC filings may have resulted in the company being out of compliance with its obligations under the program and the company has taken the necessary actions to cure any non-compliance.

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.

The company has contractual obligations for long-term debt, interest on 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, 2009.  Since December 31, 2009, there were no material changes to the contractual obligations of the company, outside the ordinary course of the company’s business, except as follows:

In March 2010, the company announced its Board of Directors approved the repurchase of up to $100 million of the company's common stock through a share-repurchase program.  In July 2010, the company's Board of Directors approved an additional repurchase of up to $100 million of the company's common stock. As of October 2, 2010, the company repurchased 4,693,900 shares under these plans with a market value of $125.0 million at the dates of repurchase.

The company has no off-balance sheet financing or unconsolidated special purpose entities.

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 nine months of 2010 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, 2009.

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.

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, 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.

There were no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the company's Annual Report on Form 10-K for the year ended December 31, 2009, except as follows:

The notional amount of the foreign exchange contracts at October 2, 2010 and December 31, 2009 was $312.7 million and $294.9 million, respectively. The fair values of foreign exchange contracts, which are nominal, are estimated using market quotes.  The translation of the financial statements of the non-United States operations is impacted by fluctuations in foreign currency exchange rates.  The change in consolidated sales and operating income was impacted by the translation of the company's international financial statements into U.S. dollars.  For the first nine months of 2010, sales would have increased $53.8 million and operating income would be relatively flat, compared with the year-earlier period, based on 2009 sales and operating income at the average rate for 2010.  Sales and operating income would decrease by approximately $402.4 million and $17.5 million, respectively, if average foreign exchange rates declined by 10% against the U.S. dollar in the first nine months of 2010.  These amounts were determined by considering the impact of a hypothetical foreign exchange rate on the sales and operating income of the company's international operations.

In May 2006, the company entered into a cross-currency swap, with a maturity date of July 2011, for approximately $100.0 million or €78.3 million (the "2006 cross-currency swap").  In October 2005, the company entered into a cross-currency swap, with a maturity date of October 2010, for approximately $200.0 million or €168.4 million (the "2005 cross-currency swap").  These cross-currency swaps are designated as net investment hedges and hedge a portion of the company's net investment in euro-denominated net assets, by effectively converting the interest expense on $300.0 million of long-term debt from U.S. dollars to euros.  During the second quarter of 2010, the company paid $2.3 million, plus accrued interest, to terminate these cross-currency swaps.  The 2006 cross-currency swap and the 2005 cross-currency swap had a negative fair value at December 31, 2009 of $12.5 million and $41.9 million, respectively.

At October 2, 2010, approximately 48% of the company's debt was subject to fixed rates, and 52% of its debt was subject to floating rates.  A one percentage point change in average interest rates would not materially impact net income attributable to shareholders for the first nine months of 2010. This was determined by considering the impact of a hypothetical interest rate on the company's average floating rate on investments and outstanding debt.  This analysis does not consider the effect of the level of overall economic activity that could exist.  In the event of a change in the level of economic activity, which may adversely impact interest rates, the company could likely take actions to further mitigate any potential negative exposure to the change.  However, due to the uncertainty of the specific actions that might be taken and their possible effects, the sensitivity analysis assumes no changes in the company's financial structure.

In June 2004 and November 2009, the company entered into interest rate swaps, with an aggregate notional amount of $275.0 million.  The swaps modify the company's interest rate exposure by effectively converting a portion of the fixed 6.875% senior notes to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread (an effective rate of 4.37% and 4.18% at October 2, 2010 and December 31, 2009, respectively), through its maturity.  The swaps are classified as fair value hedges and had a fair value of $17.8 million and $9.6 million at October 2, 2010 and December 31, 2009, respectively.

The company’s management, under the supervision and with the participation of the company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the company’s disclosure controls and procedures as of October 2, 2010 (the "Evaluation"). Based upon the Evaluation, the company’s Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) are effective.

During the third quarter of 2010, the company completed the process of installing a new enterprise resource planning ("ERP") system in a select operation in Europe as part of a phased implementation schedule.  This new ERP system, which will replace multiple legacy systems of the company, is expected to be implemented globally over the next several years.  The implementation of this new ERP system involves changes to the company’s procedures for internal control over financial reporting. The company follows a system implementation life cycle process that requires significant pre-implementation planning, design, and testing.  The company also conducts extensive post-implementation monitoring, testing, and process modifications to ensure the effectiveness of internal controls over financial reporting, and the company did not experience any significant difficulties to date in connection with this implementation.

There were no other changes in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.