ARROW ELECTRONICS, INC.
50 MARCUS DRIVE
MELVILLE, NEW YORK 11747

 

ARROW ELECTRONICS LOGO

 

WILLIAM E. MITCHELL
CHAIRMAN OF THE BOARD

 

 

April 5, 2007

 

 

Dear Shareholder:

 

You are invited to Arrow’s Annual Meeting of Shareholders, which will be held on Tuesday, May 8, 2007, at the Grand Hyatt New York, 109 East 42nd Street, New York, New York at 11:00 a.m. The formal notice of the meeting and the proxy statement soliciting your vote at the meeting appear on the following pages.

 

The two matters being put to a vote at the meeting are the election of directors and a proposal to ratify the appointment of our independent auditors. Both matters are discussed more fully in the proxy statement.

 

The Board recommends the approval of the proposals as being in the best interests of Arrow, and urges you to read the proxy statement carefully before you vote. Your vote is important, regardless of the number of shares you own.

 

Please make sure you vote whether or not you plan to attend the meeting. You can cast your vote by signing, dating and promptly mailing the enclosed proxy card in the postage-paid return envelope. You can also vote by telephone or through the internet by following the instructions on the proxy card.

 

Sincerely yours,

 

William E. Mitchell

  Chairman of the Board

 

ARROW ELECTRONICS, INC.

50 Marcus Drive
Melville, New York 11747

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

 

TIME AND DATE

 

11:00 a.m. on Tuesday, May 8, 2007

 

PLACE

 

Grand Hyatt New York

109 East 42nd Street

New York, New York 10017

 

ITEMS OF BUSINESS

 

The annual meeting will be held for the following purposes:

 

 

RECORD DATE

 

Only shareholders of record at the close of business on March 23, 2007 are entitled to notice of and to vote at the meeting or any adjournments thereof.

 

ANNUAL REPORT

 

Our 2006 Annual Report, which is not a part of the proxy soliciting material, is enclosed.

 

PROXY VOTING

 

It is important that your shares be voted at the meeting. You can vote your shares by completing and returning the proxy card sent to you. Most shareholders also have the option of voting their shares through the mail, by telephone or through the internet. To use any of these options, follow the voting instructions on your proxy card. You can revoke your proxy (change or withdraw your vote) at any time prior to its exercise at the meeting by following the instructions in the proxy statement.

 

By Order of the Board of Directors

 

Peter S. Brown

Secretary

 

ARROW ELECTRONICS, INC.

 

ANNUAL MEETING OF SHAREHOLDERS

To Be Held May 8, 2007

 

 

TABLE OF CONTENTS

 

 

ARROW ELECTRONICS, INC.

 

50 Marcus Drive

 

Melville, New York 11747

 

 

ANNUAL MEETING OF SHAREHOLDERS

 

To be Held May 8, 2007

 

 

PROXY STATEMENT

 

 

 

The Board of Directors of Arrow Electronics, Inc., a New York corporation (“Arrow” or the “company”), is sending this proxy statement to all shareholders of record to solicit proxies to be voted at the 2007 Annual Meeting of Shareholders, and any adjournments of the meeting, as described in the accompanying Notice of Annual Meeting. By returning the completed proxy card, or voting over the telephone or internet, you are giving instructions on how your shares are to be voted at the Annual Meeting.

 

You are invited to attend the 2007 Annual Meeting of Shareholders on Tuesday, May 8, 2007, beginning at 11:00 a.m. The meeting will be held at Grand Hyatt New York, 109 East 42nd Street, New York, New York 10017.

 

This proxy statement, proxy, and voting instructions are being mailed starting April 5, 2007. Please complete, sign, and date the enclosed proxy and return it promptly in the enclosed postage-paid return envelope, or vote your shares by telephone or through the internet. Whether or not you plan to attend the meeting, your prompt response will assure a quorum and reduce solicitation expense.

 

Only shareholders of Arrow’s common stock at the close of business on March 23, 2007 (the “record date”) are entitled to notice of and to vote at the meeting or any adjournments thereof. As of the record date, there were 123,841,073 shares of Arrow common stock outstanding. Each share of common stock is entitled to one vote on each matter properly brought before the meeting.

 

The person giving the proxy may revoke it at any time prior to the time it is voted at the meeting by giving written notice to Arrow’s Secretary. If the proxy was given by telephone or through the internet, it may be revoked in the same manner. You may also revoke your proxy by attending the Annual Meeting and voting in person, though merely attending the Annual Meeting will not automatically revoke your proxy.

 

Arrow pays the cost of soliciting proxies. Arrow employees are conducting this solicitation through the mail, in person, and by telephone. In addition, Arrow has retained D.F. King & Co., Inc. to assist in soliciting proxies at an anticipated cost of $10,500 plus expenses. Arrow also will request brokers and other nominees holding Arrow common stock to forward these soliciting materials to the beneficial owners of that stock and will reimburse them for their expenses in so doing.

Holders of More than 5% of Common Stock

 

The following table sets forth certain information with respect to the only shareholders known to management to own beneficially more than 5% of the outstanding common stock of Arrow as of March 23, 2007.

 

 

 

 

As of March 23, 2007, all of the executive officers and directors of Arrow as a group were the beneficial owners of 3,543,333 shares of the company’s common stock, which is 2.9% of the total shares of common stock outstanding. This amount includes 2,626,466 shares (2.1% of the company’s outstanding common stock) held by the Arrow Electronics Employee Stock Ownership Plan (the “ESOP”) of which William E. Mitchell, Peter S. Brown and Paul J. Reilly are the trustees. As trustees, they have shared power to vote the shares held by the ESOP, and for that reason are deemed to be beneficial owners of them under SEC regulations. The ESOP total also includes shares allocated to the individual accounts of each of the trustees.

 

As of March 23, 2007, the “named executive officers” (the Chief Executive Officer, the Chief Financial Officer and each of the other three most highly compensated executive officers of the company) and directors had beneficial ownership of the company’s common stock as follows:

 

 

 

Each member of the Board of Directors of Arrow (the “Board”) is to be elected at the meeting to hold office until the next Annual Meeting of Shareholders and until his or her successor has been duly elected and qualified. By resolution of all the current directors, the Board will consist of ten directors unless and until that number is changed by a resolution of the then current Board. Shareholder proxies solicited under this proxy statement cannot be voted for more than ten directors.

 

The Board of Directors recommends a vote for all of the nominees.

 

Nominees receiving a plurality of votes cast at the meeting will be elected directors. Consequently, any shares not voted (whether by abstention or broker non-votes) have no effect on the election of directors.

 

Management does not contemplate that any of the nominees will be unable or unwilling to serve as a director, but should that happen prior to the voting of the proxies, the persons named in the accompanying proxy reserve the right to substitute another person of their choice when voting at the meeting.

 

All of the nominees are currently directors of Arrow and were elected at Arrow’s last annual meeting.

 

Following are the biographies of the ten nominees:

 

Daniel W. Duval, 70, director since 1987

 

Mr. Duval has been Lead Director of Arrow since May 2006. He was Chairman of the Board from June 2002 to May 2006. He also served as Arrow’s interim Chief Executive Officer from September 2002 to February 2003. He served as interim President and Chief Executive Officer of Robbins & Myers, Inc., a manufacturer of fluids management systems, from December 2003 through July 2004. Mr. Duval is a director of Robbins & Myers, Inc., The Manitowoc Company, Inc., Miller-Valentine Group and Gosiger, Inc.

 

John N. Hanson, 65, director since 1997

 

Mr. Hanson has been Chairman of the Board of Joy Global, Inc., a manufacturer of mining equipment for both underground and surface applications, for more than five years. He was also Chief Executive Officer and President of Joy Global Inc. for more than five years until December 2006. He is a director of the Milwaukee Symphony Orchestra and the Boys & Girls Clubs of Milwaukee.

 

Richard S. Hill, 55, director since 2006

 

Mr. Hill has been Chief Executive Officer and Chairman of the Board of Novellus Systems, Inc., a maker of devices used in the manufacture of advanced integrated circuits, for more than five years. He is a director of Agere Systems Inc. and the University of Illinois Foundation.

 

M.F. (Fran) Keeth, 60, director since 2004

 

Mrs. Keeth is retired. She was Executive Vice President of Shell Chemicals Limited, a services company responsible for the global petrochemical businesses of the Royal Dutch/Shell Group of companies, from January 2005 to December 2006. She held positions as Executive Vice President of Customer Fulfillment and Product Business Units for Shell Chemicals Limited from July 2001 to January 2005 and Chief Financial Officer and Executive Vice President Finance and Business Systems from September 1997 to July 2001. Mrs. Keeth was President

and Chief Executive Officer of Shell Chemical LP, a U.S. petrochemical member of the Royal Dutch/Shell Group, a position she held from July 2001 to July 2006, prior to which she was Chief Financial Officer, beginning in September 1997. Mrs. Keeth also serves as a director of Verizon Communications Inc.

 

Roger King, 66, director since 1995

 

Mr. King is retired. He was the Chief Executive Officer of Sa Sa International Holdings Limited, a retailer of cosmetics, from August 1999 to May 2002. He also served as the Executive Director of Orient Overseas (International) Limited, an investment holding company with investments principally in integrated containerized transportation businesses for more than five years ending August 1999. Mr. King also serves as a director of Orient Overseas (International) Limited, Sincere Watch (Hong Kong) Limited and TNT N.V.

 

Karen Gordon Mills, 53, director since 1994

 

Mrs. Mills was a founding partner and has served as a Managing Director of Solera Capital LLC, a venture capital fund, since 1999. She has also been President of MMP Group, Inc. since 1993. MMP Group provides capital and operating expertise in private equity transactions. Mrs. Mills is currently Lead Director of The Scotts Miracle-Gro Company. She is Chair of the Council on Jobs, Innovation and the Economy for the State of Maine and serves on the Governor’s Advisory Council for the Redevelopment of the Brunswick Naval Air Station.

 

William E. Mitchell, 63, director since 2003

 

Mr. Mitchell has been President and Chief Executive Officer of Arrow since February 2003 and Chairman of the Board since May 2006. Mr. Mitchell previously served as Executive Vice President of Solectron Corporation as well as the President of Solectron Global Services, Inc. from March 1999 to January 2003. Mr. Mitchell also serves as a director of Rogers Corporation and Brown-Forman Corporation.

 

Stephen C. Patrick, 57, director since 2003

 

Mr. Patrick has served as the Chief Financial Officer of the Colgate-Palmolive Company, a global consumer products company, for more than five years. In his more than 20 years at Colgate-Palmolive he has also held positions as Vice President, Corporate Controller and Vice President of Finance for Colgate Latin America.

 

Barry W. Perry, 60, director since 1999

 

Mr. Perry retired in June 2006 as Chief Executive Officer and Chairman of the Board of Engelhard Corporation, a surface and materials science company, a position he held for more than five years prior to his retirement. Mr. Perry is also a director of the Cookson Group, PLC, U.K. and Ashland Inc.

 

John C. Waddell, 69, director since 1969

 

Mr. Waddell retired as the Chairman of the Board of Arrow in May 1994 and since that time has served as the Vice Chairman.

 

The Board meets in general sessions with Chairman Mitchell presiding, in meetings limited to non-management directors, which are led by Lead Director Duval, and in its various committees.

 

 

5 Chairman  • Member

 

The audit committee of the Board consists of Mr. Patrick, as Chairman, Mr. Hill, Mrs. Keeth, Mrs. Mills, and Mr. Waddell. The audit committee reviews and evaluates Arrow’s financial reporting process and other matters including its accounting policies, reporting practices, and internal accounting controls. The committee also monitors the scope and reviews the results of the audit conducted by Arrow’s independent auditors. The committee reviews with the internal audit department the status and results of the annual internal audit plan, assessments of the adequacy and effectiveness of internal controls, and the sufficiency of the department’s resources. The Board has determined that Mr. Patrick is an “audit committee financial expert” as defined by the SEC. In light of the possibility that Mr. Patrick might at some time be unable to attend a meeting of the committee, the Board has also determined that Mrs. Keeth qualifies as an “audit committee financial expert.”

 

The compensation committee of the Board consists of Mr. Perry, as Chairman, Mr. Duval, Mrs. Keeth, Mr. King, and Mrs. Mills. The committee’s primary responsibilities include the oversight, review and approval of the salaries, benefits and other compensation of Arrow’s senior executives on behalf of the full Board.

 

On behalf of the Board, the committee manages all elements of executive pay to ensure that pay levels are consistent with Arrow’s compensation philosophy. In addition, the Board and the committee administer Arrow’s short-term, medium-term and long-term executive compensation programs to ensure that Arrow’s objectives of linking executive pay to improved financial performance and increased shareholder value continue to be fostered.

 

The committee meets throughout the year in both scheduled and ad hoc sessions to review and manage compensation, review executive-level hiring, retention and termination arrangements, and a number of related issues. The meetings are open to all members of the Board and are regularly attended by the following members of Arrow’s management: the Chief Executive Officer, the General Counsel (who

also serves as the company’s Secretary), the head of human resources, and, as required, the Chief Financial Officer, who is present to provide the business and financial context regarding financial metrics and performance.

 

In addition to the conduct of the committee’s regular duties, each of the four regularly scheduled meetings per year has a specific focus:

 

 

The committee’s consideration of the performance and compensation of the Chief Executive Officer is conducted in executive session. The committee reviews and approves corporate goals and objectives relevant to Chief Executive Officer compensation and evaluates the Chief Executive Officer’s performance and the performance of the company itself in light of those goals and objectives.

 

Under its charter, the committee may delegate its authority only to a subcommittee consisting of one or more members, or, with respect to certain matters other than Chief Executive Officer compensation, to management.

 

It is the practice of the committee to meet at least once each year with its compensation consultant. In 2006, the committee directly engaged Hewitt Associates as a consultant to examine and report to the committee on best practices in the alignment of compensation programs for the Chief Executive Officer and other members of senior management with corporate goals by providing competitive data, analyses, and recommendations with regards to plan design.

 

In addition, in 2006 management retained Watson Wyatt, which was engaged to assist in the ongoing day-to-day management of the compensation programs and their application within the company. On more than one occasion the committee met with Watson Wyatt to gain a full understanding of its advice to management.

 

Compensation consultants are used by both management and the committee only to aid in the design of the company’s various compensation programs, provide benchmarking data with respect to target compensation and provide related advice.

 

The committee operates under the Compensation Committee Charter, a copy of which is available at the investor relations section of the company’s website, www.arrow.com. No member of the compensation committee is a present or former employee of the company, except for Mr. Duval, who served as interim Chief Executive Officer from September 2002 to February 2003. Under the rules of the New York Stock Exchange, such interim service does not alter Mr. Duval’s status as an independent, non-management

director. No member of the compensation committee is an employee or director of any company where any employee or director of Arrow serves on the compensation committee.

 

The corporate governance committee of the Board consists of Mr. Hanson, as Chairman, Mr. Duval, Mr. Hill, Mr. King, and Mr. Waddell. The corporate governance committee will consider shareholder recommendations for nominees for membership on the Board. Such recommendations may be submitted to Arrow’s Secretary, Peter S. Brown, at Arrow Electronics, Inc., 50 Marcus Drive, Melville, New York, 11747, who will forward them to the corporate governance committee. The committee’s expectations as to the specific qualities and skills required for directors are set forth in Section 4 of Arrow’s corporate governance guidelines (available at the investor relations section of the company’s website, www.arrow.com). Under those guidelines, the committee considers potential nominees recommended by current directors, company officers, employees, shareholders, and others. The committee has retained the services of a third-party executive recruitment firm to assist committee members in the identification and evaluation of potential nominees for the Board. The committee’s initial review of the potential candidate is typically based on any written materials provided to the committee. In connection with the evaluation of potential nominees, the committee determines whether to interview the nominee, and if warranted, the committee, the Chairman of the Board and Chief Executive Officer, and others as appropriate, interview the potential nominees. The corporate governance committee also has primary responsibility for developing the corporate governance guidelines for Arrow and for making recommendations with respect to committee assignments and other governance issues. The committee regularly reviews and makes recommendations to the Board regarding the compensation of non-employee directors.

 

The company’s corporate governance guidelines provide that the Board should consist primarily of independent, non-management directors. For a director to be considered independent under the guidelines, the Board must determine that the director does not have any direct or indirect material relationship with the company and that he or she is not involved in any activity or interest that might appear to conflict with his or her fiduciary duties to the company.

 

To be deemed independent, a director must also meet the independence standards in the New York Stock Exchange listing rules. Those rules add to the requirement of the absence of a material relationship the requirement that neither such a director nor any member of his or her immediate family:

 

i) is, or has been within the last three years, an officer or employee of the company;

 

ii) received more than $100,000 from the company (except for director or committee fees) during any twelve-month period in the last three years;

 

iii) is employed by or a partner in the company’s outside audit firm (or, if a former employee or partner, has worked on the audit of the company within the past three years);

 

iv) is or has been at any time in the last three years, an executive officer of another company where any of Arrow’s executive officers serves as a member of such other company’s board of directors and compensation committee; and

 

v) is an employee (or, in the case of a family member, an executive officer) of a company which has made payments to or received payment from Arrow in excess of the larger of $1 million or 2% of such other company’s consolidated gross revenues in any of the last three fiscal years.

 

In addition to applying these guidelines, the Board will consider all relevant facts and circumstances in making an independence determination. In making this determination regarding Mr. Hill, the Board considered that Mr. Hill is an independent director of Agere Systems, Inc., a semiconductor manufacturer for which the company is an authorized distributor. In 2006, the company sold approximately $20,000,000 of Agere products worldwide, approximately 1% of Agere’s total sales and .1% of the company’s sales. In addition to the immateriality of the amount of sales involved, the Board determined that this relationship did not impair Mr. Hill’s independence because he is an independent director of Agere, and receives compensation from Agere only in connection with his services as such. In addition, Novellus Systems, Inc., of which Mr. Hill is Chairman and Chief Executive Officer, purchased less than $25,000 of product from Arrow in 2006.

 

The Board has determined that all of its directors and nominees, other than Mr. Mitchell, satisfy both the New York Stock Exchange’s independence requirements and the company’s guidelines.

 

As required by the company’s corporate governance guidelines and the New York Stock Exchange’s listing rules, all members of the audit, compensation and corporate governance committees are independent, non-management directors.

 

No member of the compensation committee is a present or former employee of the company, except for Mr. Duval, who served as interim Chief Executive Officer from September 2002 to February 2003. Under the rules of the New York Stock Exchange, such interim service does not alter Mr. Duval’s status as an independent, non-management director. No member of the compensation committee is an employee or director of any company where any employee or director of Arrow serves on the compensation committee.

 

All members of the audit committee also satisfy an additional SEC independence requirement, which provides that they may not accept directly or indirectly any consulting, advisory or other compensatory fee from Arrow or any of its subsidiaries other than the compensation they receive as directors.

 

In general, it is the practice of the Board for all of its non-management directors to meet in “executive session” at each Board meeting, with the Lead Director presiding. Consistent with Arrow’s corporate governance guidelines, in 2006 these non-management director meetings included one under the guidance of the Chairman of the compensation committee to evaluate the performance of the Chief Executive Officer and one under the guidance of the Chairman of the corporate governance committee to discuss senior management development and succession.

 

During 2006 there were 11 meetings of the Board, 10 meetings of the audit committee, 7 meetings of the compensation committee, and 5 meetings of the corporate governance committee. All directors attended 75% or more of all of the meetings of the Board and the committees on which they served. It is the policy of the Board that all of its members attend the Annual Meeting of Shareholders absent exceptional cause, and all then incumbent members of the Board did so in 2006.

 

The following table shows the total dollar value of compensation received by all non-employee directors in or in respect of 2006 and the expense recorded by the company in connection with the vesting during 2006 of stock-based compensation.

 

Director Compensation

 

 

The following table reflects the number of unvested restricted stock units and unexercised options held by each independent director as of year-end 2006. The company no longer uses stock options as a part of the compensation of independent directors. The prior grants reflected on the table below had ten-year terms. Each vested in two equal installments beginning on the first anniversary of the grant date and had exercises prices set at the market price of Arrow common stock at the close on the date of grant.

 

Outstanding Equity Awards at Fiscal Year-End

 

 

 

 

The independent members of the Board (that is, all members except Mr. Mitchell) receive the following fees:

 

 

In addition, Mr. Duval received a fee of $100,000 for that portion of 2006 during which he served as Chairman of the Board.

 

Under the terms of the Non-Employee Director Deferral Plan, non-employee directors may defer the payment of all or any portion of their annual retainers and meeting fees until the end of their service on the Board. Unless a different amount is chosen by the director, 50% of the director’s annual retainer fee is deferred and converted to units of Arrow common stock. When the director leaves the Board, each whole stock unit credited to his or her account will be settled with the issuance of one share of common stock. Other amounts that are deferred may be invested for the benefit of the director, or should a director so choose, be converted into the stock units. The units held by each director are included under the heading “Common Stock Units” in the Shares of Stock Beneficially Owned table above. The amounts deferred by each director for 2006 are included under the heading “Fees Earned or Paid in Cash” on the Directors Compensation table above.

 

Each non-employee director receives an annual grant of restricted stock units valued at $60,000, based on the fair market value of Arrow common stock on the date of grant. Based on the closing market price of $36.15 on May 2, 2006, the 2006 grant resulted in 1,659.75 restricted stock units being awarded to each director. The units vest on the first anniversary of the grant date, but are not transferable into Arrow common stock, salable or available to be used as collateral until one year after the director leaves the Arrow Board, when each vested unit is settled with the issuance of one share of Arrow common stock.

 

For his service as Lead Director, Mr. Duval received an additional grant of restricted stock units valued at $30,000 (829.88 units in 2006, based on the grant-date closing market price of $36.15 vesting one year after the date of grant.) In May 2006, Mr. Duval received a one-time grant of an additional 5,000 restricted stock units (valued at $180,750, based on the grant-date closing market price of $36.15, and also vesting one year after the date of grant), in recognition of his prior service as Chairman of the Board.

 

Mr. Mitchell receives no regular compensation for his Board service. In recognition of his assumption of the duties of Chairman of the Board in May 2006, however, he received a one-time grant of 20,000 shares of restricted stock. These shares vest only if and when Mr. Mitchell retires from Arrow (or in the event of his death, disability, or termination without cause following a change of control.)

 

Arrow’s corporate governance guidelines, the charter of the corporate governance committee, the audit committee charter, the compensation committee charter, the company’s Worldwide Code of Business Conduct and Ethics and the Finance Code of Ethics can be found at the investor relations section of the company’s website, www.arrow.com, and are available in print to any shareholder who requests them.

 

Shareholders and other interested parties who wish to communicate with the Chairman of the Board or any of the non-management members of the Board may do so by submitting such communication to Arrow’s Secretary, Peter S. Brown, at Arrow Electronics, Inc., 50 Marcus Drive, Melville, New York 11747, who will present any such communication to the directors in accordance with their instructions.

 

The audit committee represents and assists the Board by overseeing the company’s financial statements and internal controls; the independent auditor’s qualifications and independence; and the performance of the company’s internal audit function and of its independent auditor. The committee operates under the Audit Committee Charter, a copy of which is available at the investor relations section of the company’s website, www.arrow.com.

 

The audit committee currently consists of five directors, all of whom are independent in accordance with New York Stock Exchange listing standards and other applicable regulations. The Board has determined that Mr. Patrick is an “audit committee financial expert” as defined by the SEC. In light of the possibility that Mr. Patrick might at some time be unable to attend a meeting of the committee, the Board has also determined that Mrs. Keeth qualifies as an “audit committee financial expert.”

 

Company management has the primary responsibility for financial statements and for the reporting process, including the establishment and maintenance of Arrow’s systems of internal controls over financial reporting. The company’s independent auditors are responsible for auditing the financial statements prepared by management, expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, and auditing the company’s internal controls over financial reporting and management’s assessment of those controls.

 

In fulfilling its oversight responsibilities, the audit committee reviewed and discussed with both management and the independent auditors the company’s quarterly earnings releases, quarterly reports on Form 10-Q and the 2006 Annual Report on Form 10-K. Such reviews included a discussion of critical or significant accounting policies, the reasonableness of significant judgments, the quality (not just the acceptability) of the accounting principles, the reasonableness and clarity of the financial statement disclosures, and such other matters as are required to be reviewed with them under the standards promulgated by the Public Company Accounting Oversight Board (United States). Also discussed with both management and the independent auditors were the design and efficacy of the company’s internal controls over financial reporting.

 

In addition, the audit committee received from and discussed with the independent auditors the written disclosure required by Independence Standards Board Standard No. 1 (“Independence Discussions with Audit Committees”) and considered the compatibility of non-audit services rendered to Arrow with the auditors’ independence. The committee also discussed with the independent auditors those matters required to be considered by Statement on Auditing Standards No. 61 (“Communication with Audit Committees”), as amended.

 

The audit committee also discussed with the independent auditors and Arrow’s internal audit group the overall scope and plans for their respective audits. The committee periodically met with the independent auditors and the internal audit group, with and without management present, to discuss the results of their examinations, their evaluations of Arrow’s internal controls, and the overall quality of Arrow’s financial reporting.

 

In reliance on these reviews and discussions, the audit committee recommended to the Board that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for filing with the SEC.

 

Stephen C. Patrick, Chairman

Richard S. Hill

M.F. (Fran) Keeth

Karen Gordon Mills

John C. Waddell

 

The aggregate fees billed by Arrow’s principal accounting firm, Ernst & Young LLP, for auditing the annual financial statements and the company’s internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act and related regulations included in the Form 10-K, the reviews of the quarterly financial statements included in the Forms 10-Q, statutory audits, assistance with and review of documents filed with the SEC and consultations on various accounting and reporting matters for each of the last two fiscal years are set forth as “Audit Fees” in the table below.

 

Also set forth for the last two fiscal years are “audit-related” fees. Such fees are for services rendered in connection with business acquisitions, employee benefit plan audits, and other accounting consultations. Tax fees relate to assistance in tax return preparation and tax audits, tax interpretation and compliance, and transfer pricing in various tax jurisdictions around the world. Ernst & Young did not provide any services related to financial information systems design or implementation or personal tax work or other services for any of the company’s executive officers or members of the Board of Directors.

 

 

The amounts in the table above do not include fees charged by Ernst & Young to Marubun/Arrow, a joint venture between the company and the Marubun Corporation, which totaled $194,441 (audit-related fees) and $12,662 (tax fees) in 2006, and $145,300 (audit-related fees) and $20,100 (tax fees) in 2005.

 

Consistent with the audit committee charter, all audit, audit-related, tax return and compliance and other tax related services were pre-approved by the audit committee, or by a designated member thereof. The committee has determined that the provision of the non-audit services described above is compatible with maintaining Ernst & Young’s independence.

 

Shareholders will be asked to ratify the appointment of Ernst & Young as Arrow’s independent auditors for 2007. Arrow expects that representatives of Ernst & Young will be present at the meeting with the opportunity to make a statement if they desire to do so and that they will be available to answer appropriate inquiries raised at the meeting.

 

The Board recommends that the shareholders vote for the ratification of the appointment of Ernst & Young LLP.

 

The substantive discussion of the material elements of all of the company’s executive compensation programs and the determinations by the committee with respect to compensation and executive performance for 2006 are contained in the Compensation Discussion and Analysis that follows this report. The committee has reviewed the Compensation Discussion and Analysis with the management representatives responsible for its preparation and their compensation consultants. In reliance on these reviews and discussions, the compensation committee recommended to the Board that the Compensation Discussion and Analysis be included in the Definitive Proxy Statement on Schedule 14A for the fiscal year ended December 31, 2006 for filing with the SEC and be incorporated by reference in the company’s Annual Report on Form 10-K for 2006.

 

Barry W. Perry, Chairman

Daniel W. Duval

M.F. (Fran) Keeth

Roger King

Karen Gordon Mills

 

The compensation committee of the Board of Directors and the company’s senior management review the company’s executive compensation and benefit programs to ensure that they are consistent with the company’s compensation philosophy, which requires that each of those programs aim to achieve the following objectives:

 

 

Following is a discussion of each of the company’s executive compensation programs, its objectives, and what it is designed to reward. The various elements of the compensation of each of the named executive officers is described, as is the reason it was provided, the procedures for determining the levels at which it was provided and its relationship to the other elements of compensation and the company’s overall compensation objectives.

 

The amounts received or earned by the Chief Executive Officer and each of the other named executives in or with respect to 2006 under the programs are included in the various tables below. Future compensation and benefit commitments the company has undertaken with respect to the Chief Executive Officer and each of the other named executives are also discussed below and disclosed in tabular format.

 

Each of these matters is addressed below following the discussion of the applicable plan and the 2006 compensation paid in connection with it.

 

The company uses a variety of compensation programs that are designed to work together to reward the company’s executives for sustained performance in light of market conditions, industry trends and the performance of the company’s competitors. Benchmarking is used with respect to both the individual programs used and compensation levels selected, and the compensation packages as a whole to ensure that they will be effective in attracting and retaining talented executives capable of achieving the company’s objectives.

 

The compensation committee, in consultation with management, reviews the competitiveness of the compensation offered to the company’s executives relative to those companies and industries identified as peers or competitors for talent. Such companies include Arrow’s competitors, customers and suppliers, and companies of similar size and scope from other industries worldwide. The lists of companies used for compensation benchmarking is attached as Annex A.

 

Arrow manages to a total compensation philosophy, meaning that decisions regarding each element of compensation, as well as total compensation, are made in consideration of the individual’s contributions, current compensation structure, market conditions and the furtherance of the company’s overall goals.

 

The compensation committee reviews each element of each executive officer’s compensation annually. For executives other than the Chief Executive Officer, that review begins with the recommendations made to the committee by the Chief Executive Officer, which includes both a recommended total target compensation (the amount the executive will earn if 100% of his or her targets and goals are achieved) and the suggested allocation among the forms of compensation. These recommendations are based on individual performance, the scope of the executive’s duties and their relationship to the goals of the company and competitive compensation market data for both the peer group discussed above and industry generally. For each executive, the committee also considers these recommendations in light of the compensation levels of other company executives, levels of responsibility, prior experience, breadth of knowledge, and job performance. The committee considers a similar range of factors in setting compensation for the Chief Executive Officer.

 

A description of the objectives of each element of Arrow’s executive compensation program is set forth below. The actual amounts paid under each program to each of the named executive officers are found on the Summary Compensation table at the end of this section.

 

Base salary is an integral component of overall total compensation. The primary purpose of base salary is to recognize an employee’s level of responsibility, immediate contributions, knowledge, skills, experience, and abilities. Salary is also designed to attract top candidates.

 

As is further discussed below under the heading “Employment Agreements”, each of the named executive officers has an employment agreement, which provides for a minimum base salary. Each year the committee evaluates whether it is appropriate to approve salaries in excess of the contractual minimums. In conducting its salary deliberations, the compensation committee does not strictly tie senior executive base pay to a defined competitive standard or the passage of time. Rather, salary increases are based on the individual contributions expected of and contributed by each of the executives.

 

The Chief Executive Officer’s base salary was evaluated based on Mr. Mitchell’s level and scope of responsibility and his contributions during the past year to the company’s success, as well as on his knowledge, skills, experience, and abilities. These were reviewed against prevailing levels of pay among chief executives of the benchmarked companies (described above under the heading “Benchmarking”) and relative compensation levels of the other executive officers of the company. Based upon these criteria, the committee increased Mr. Mitchell’s base salary from $850,000 to $890,000 for 2006.

 

In addition to his base salary, Mr. Mitchell receives an annual payment of $100,000 which replaced the company’s prior contractual obligation to cover a number of expenses on behalf Mr. Mitchell, including, among other things, expenses related to club dues, automobile and local transportation, tax preparation, and financial planning. (This amount is part of the $990,000 total appearing under the heading “Salary” in the Summary Compensation Table, below.)

 

Mr. Reilly’s base salary went from $419,997 in 2005 to $425,000 in 2006, in recognition of the increasing value of his contributions as Chief Financial Officer, as well as the competitive and other factors discussed above.

 

In connection with his assumption of the role of Chairman of Arrow’s EMEASA (Europe, Middle East, Africa and South America) business, Mr. Fanelli entered into an amended contract with the company (discussed under the heading, “Employment Agreements” below) and received his contractual base salary of $494,158 in 2006 (the amount was set and paid in euros and converted at the average exchange rate for 2006.)

 

Mr. Kong joined the company in March 2006, and received salary at his contractual rate, $400,000 per year, during 2006.

 

Mr. Long’s base salary went from $419,998 in 2005 to $460,000 in 2006 as he added the presidency of the company’s Asia/Pacific components business to his responsibilities as president of the company’s North American components business. During 2006, Mr. Long led the development, and assumed the presidency, of the company’s new Arrow Global Components business.

 

The base salary adjustments discussed above also reflect the committee’s continued emphasis on variable compensation as the most effective way to motivate executives and align their achievements with the company’s goals, while maintaining base salaries at levels that are in line with those at the companies with which Arrow competes for talent.

 

Variable compensation, in the form of cash bonuses and equity awards linked to the achievement of certain goals, plays a significant role in executives’ overall compensation and Arrow’s pay-for-performance philosophy.

 

Arrow’s variable compensation programs have the following objectives:

 

 

Arrow’s variable compensation is administered through plans that are designed to drive and reward short-term performance (annual), medium-term performance (over a period of three years) and long-term performance (over a period of up to ten years.) Participation varies based on an individual’s performance and role in the organization as well as prevalent market practice. All of the named executive officers participate in each program.

 

Short-term incentives, which are administered through the Management Incentive Compensation Plan, are used to reward employees for individual and company performance on an annual basis while ensuring that Arrow’s compensation practices remain competitive with practices at the benchmarked companies. Arrow’s short-term incentives serve to reinforce pay for performance and individual accountability for optimizing operating results throughout the year and driving profitability, efficiency and

shareholder value. Each participant’s short-term incentive program comprises financial targets, the achievement of which is linked to 80% of the targeted annual incentive, and individual, non-financial goals, the achievement of which is linked to 20% of the targeted annual incentive.

 

Management, in consultation with the compensation committee, establishes short-term financial targets that relate to one or more key indicators of corporate financial performance. For 2006, these financial targets were based on a mix of the company’s achievement of specified levels of operating income and average net working capital as a percentage of sales. For corporate executives, including Messrs. Mitchell and Reilly among the named executive officers, the operating income and working capital financial targets are based on the results obtained by Arrow as a whole. For operating group executives, including Messrs. Fanelli, Long and Kong, the results obtained by their individual operating groups are also factors. The goal reflected in the targets selected is superior performance, which is generally defined as performance beyond both the company’s historical achievements and the projected growth of the markets in which the company operates.

 

In 2006, for the named executive officers to earn 100% of their targeted total short-term incentive, the company had to achieve specified operating income targets that ranged between $30 million (on an operating group level) to $554 million (at the consolidated corporate level) and targets for net working capital, expressed as a percentage of sales, that ranged between 16.2% and 24%. For the operating group executives, Messrs. Long, Fanelli and Kong, three quarters of the financial portion of the annual incentive is determined by the performance of the executive’s operating group and one quarter of it is determined by the performance of Arrow overall. Executives have the potential to earn anywhere from 0% to 200% of their targeted short-term incentive compensation depending on the operating income and net working capital percentages actually attained.

 

The two financial metrics, operating income and net working capital as a percentage of sales, determine 80% of each executive’s incentive opportunity. Several non-financial goals, the achievement of which drives 20% of the total short-term incentive opportunity, are set at the beginning of each year for the Chief Executive Officer by the compensation committee and for each of the other named executive officers by the Chief Executive Officer. They comprise a variety of specific, measurable, strategic and tactical goals appropriate to the individual participant’s role in furthering the objectives of the company and/or the executive’s business unit as appropriate. By way of example, included among 2006 non-financial goals were:

 

 

The participants’ actual 2006 awards were determined at year-end based on the performance of the company or business unit, as applicable, against the targets discussed above, and the attainment of the individual, non-financial goals. For 2006, the named executive officers other than Mr. Mitchell, whose award is discussed below, achieved between 93.1% and 141.5% of their respective financial targets (80% of the targeted short-term incentive opportunity) and between 0% and 150% of their respective individual, non-financial targets (20% of the targeted short-term incentive opportunity.) The specific amount paid to each of the named executive officers is set forth on the Summary Compensation Table below, with the non-financial target results included under the heading “Bonus” and the financial target results included under the heading “Non-Equity Incentive Plan Compensation”.

 

Mr. Mitchell’s 2006 short-term incentive was provided under the terms of the Omnibus Incentive Plan, which provides for a performance-based bonus to Mr. Mitchell, as defined by Section 162(m) of the Internal Revenue Code. The purpose of the Chief Executive Officer’s bonus is to motivate the Chief Executive Officer to achieve strategic, financial and operating objectives, and to reward contributions towards improvement in financial performance, while insuring that all compensation paid the Chief Executive Officer is a deductible business expense of the company.

 

The maximum bonus to be awarded to the Chief Executive Officer each year is determined by a formula, which is based on a percentage of net income above a set minimum and average net working capital. For 2006, the maximum bonus which could have been awarded under the formula was $3,536,140. The committee has the discretion to determine the actual amount of the bonus to be paid, up to the maximum, and does so based on the achievement of the performance goals it has set for the Chief Executive Officer. In 2006, those performance goals targeted earnings per share of $2.49 and net working capital at 17% of sales. In determining the degree to which they would exercise their “negative discretion” as permitted by Section 162(m), the committee considered the level of achievement by the company of the financial targets, other goals, internal pay equity concerns, competitive considerations and the amounts paid for performance in prior years and awarded Mr. Mitchell a bonus of $1,100,000 for 2006.

 

Arrow provides medium-term incentives to its executives through awards of performance shares and restricted stock under the Omnibus Incentive Plan. Performance share awards maintain a medium-term timeframe, fostering retention, and exposure to share price variability, fostering greater alignment with shareholder interests, but because the executive will earn from 0% to 200% of the targeted number of shares depending on specific performance metrics (discussed below) they more accurately and specifically align compensation with the achievement of corporate goals upon which the executive can have a direct impact.

 

Grants of restricted stock vest over a four-year period. Only the market price of the shares is variable, however, and though this aligns the interests of the executive with the interests of the shareholder, market price variability (both positive and negative) often reflects forces beyond the executive’s control.

 

Accordingly, in 2004, performance shares replaced restricted stock as the principle medium-term incentive compensation vehicle. In 2006, restricted stock grants were only given to Mr. Kong upon his hiring and to Mr. Mitchell in connection with his assumption of the role of Chairman. (Both of these awards are described in more detail following the Summary Compensation Table, below.)

 

Performance Share Awards under the Medium-Term Incentive Program link executive compensation to improvements in the company’s financial results and the performance of its common stock over a three-year period. Under such awards, each year begins a new three-year performance cycle for which the compensation committee establishes financial targets and performance share targets for participating executives. The financial targets are based on each participant’s level and breadth of responsibility, his or her potential contribution to the success of the company, and competitive considerations. Each participant’s actual award is determined at the end of each three-year cycle based on how the company’s actual performance compares with such goals, and settled with the payment of shares of Arrow common stock. Awards may range between 0% and 200% of the target number of performance shares.

 

Except in the event of death, disability or a termination that follows a change of control of the company, under the terms of the plan, performance shares are forfeited by the participant if he or she leaves the

company prior to the vesting of a complete performance cycle. (Forfeiture and the impact of various termination scenarios under each of the incentive plans are discussed more fully below, under the heading “Agreements and Potential Payments upon Termination or Change of Control.”)

 

The 2004-2006 performance share cycle was the first completed under the Medium-Term Incentive Program, and, accordingly, the company does not have historical data regarding the success with which participants have attained the established targets. Like the short-term financial goals, these targets are designed to drive progress towards the company’s long-term success. The compensation committee established the medium-term target performance metrics at a level designed to significantly challenge the participants.

 

For the first cycle the target was an average EBIT percentage (earnings before interest and taxes divided by sales) of 4.8% over the three-year period of the cycle, as adjusted by the committee under the terms of the plan to exclude the impact of certain items such as those related to acquisitions and restructurings. Each named executive officer received 87.5% of target compensation for the 2004-2006 performance cycle. Actual shares awarded with respect to the 2004-2006 cycle are set forth below:

 

 

For the 2006-2008 performance share cycle, consistent with and in furtherance of the company’s medium-term financial goals, the compensation committee established a target based on a return on invested capital for 2008, the last year of the cycle, of 13%. The number of performance shares which may be earned by the named executives under the 2006-2008 award is set forth below on the table entitled “Grants of Plan-Based Awards”.

 

Mr. Mitchell received a performance share award with a target of 50,000 shares under the Medium-Term Incentive Program for the 2006-2008 performance cycle. The goals, targets and metrics of this award are the same as those discussed above for the other named executive officers. As noted above under the heading “Director Compensation”, Mr. Mitchell also received an award of 20,000 shares of restricted stock in recognition of his assumption of the role of Chairman of the Board.

 

The company provides long-term incentives to its executives through grants of stock options under the Omnibus Incentive Plan. Stock options are designed to reinforce the importance of producing satisfactory returns to shareholders over the long-term and align the interests of the executives with those of the shareholders by providing the executives with the opportunity to acquire common stock of the company. Options are also issued to support executive retention.

 

The exercise price of each stock option is equal to 100% of the closing market price of the company’s common stock on the grant date. Stock options become exercisable in equal amounts on the first, second, third and fourth anniversaries of the grant date and have a maximum term of ten years.

 

Each year, the compensation committee reviews prior stock option grants and makes grant decisions based on its assessment of each executive’s contribution, potential contribution and performance during the prior year and on the option grant practices of the benchmarked companies discussed above under the heading “Benchmarking”. It is the practice of the Board to grant stock options at the first regularly scheduled board meeting of the calendar year. Grants associated with the hiring or promotion of participants are made at the next regularly scheduled meeting of the Board that follows such an event. Limiting stock option grants to regularly scheduled meetings and only issuing stock options with an exercise price based on fair market value at the grant date ensures that participants will derive benefits only as shareholders realize corresponding gains over an extended time period. None of the options granted by the company, discussed elsewhere throughout this proxy statement, have been repriced, replaced or modified in any way since the time of the original grant.

 

Mr. Mitchell was awarded 100,000 stock options under the Long-Term Incentive Program in 2006, Mr. Reilly 15,000 options, Mr. Fanelli 5,000 options and Mr. Long 20,000 options. Mr. Kong received 23,000 options, the first-year grant set forth in his employment agreement. For more detail, see the Grant of Plan Based Awards table, below.

 

In keeping with its total compensation philosophy and in light of the need to provide a total compensation and benefit package which is competitive with those offered at the benchmarked companies, the committee believes that several retirement and other benefit programs should be made available to the company’s executive officers.

 

Supplemental Executive Retirement Plan

 

The company maintains the Arrow Electronics, Inc. Supplemental Executive Retirement Plan (the “SERP”), an unfunded retirement plan in which 26 current and former executives selected by the Board participate. The committee believes that the SERP encourages long-term retention and is an appropriate supplement for executive retirement and financial planning because it is a non-qualified retirement plan which is not subject to the limits on company and employee contribution that are required for the qualified plans the company maintains for all employees.

 

All of the named executive officers, except for Mr. Fanelli, participate in the SERP, the details of which are discussed below under the heading “Supplemental Executive Retirement Plan.”

 

Deferred Compensation

 

In order to encourage long-term retention and facilitate executive retirement and financial planning, the company maintains a compensation deferral plan pursuant to which corporate executives may defer pre-tax compensation including up to 80% of salary and 100% of bonuses, incentive compensation and performance shares. Of the named executives, only Mr. Mitchell participates in the deferral plan. His participation and earnings on the amount deferred are reflected under the heading “Change in Pension Value and NQDC Earnings” in the Summary Compensation Table, below. The deferred compensation plan is discussed in more detail under the heading “Deferred Compensation Plans,” below.

 

Qualified Plans

 

The named executive officers, other than Mr. Fanelli, also participate in the qualified plans available to all of Arrow’s U.S. employees, the ESOP and the Arrow 401(K) Savings Plan. Company contributions on their behalf to these plans are included under the heading “All Other Compensation” on the Summary Compensation Table and detailed on the All Other Compensation — Detail table, below. Mr. Fanelli does not participate in any company sponsored retirement plans and participates in the Italian State sponsored plan.

 

Management Insurance Plan

 

All of the named executive officers, other than Mr. Fanelli, participate in Arrow’s Management Insurance Program. In the event of the death of the executive, the company provides a life insurance benefit to the executive’s named beneficiary equal to four times the executive’s final planned total annual performance-based compensation.

 

Current death benefits for each participating executive are set forth on the Potential Payouts Upon Termination table, below. Premiums paid by the company on behalf of each executive are included under the heading “All Other Compensation” on the Summary Compensation Table below and set forth specifically under the heading “Management Insurance Plan” on the All Other Compensation Table — Detail, below.

 

 

The following table provides certain summary information concerning the compensation of the named executive officers for 2006.

 

Summary Compensation Table

 

 

 

 

Each of the named executive officers has an employment agreement which impacts or defines certain of the elements of the compensation shown above. The material terms of those agreements are discussed below under the heading “Employment Agreements.”

 

This table sets forth each of the elements comprising each named executive officer’s “All Other Compensation” from the Summary Compensation Table, above.

 

All Other Compensation — Detail

 

 

 

 

The following table provides information regarding the awards of performance shares and restricted stock pursuant to the Management Incentive Compensation Program to each of the named executive officers in respect of employment during 2006. Of the values shown on this table, the actual payments made in 2006 under the Non-equity Incentive Plan are included on the Summary Compensation Table,

above. The portion of the expense to the company associated with the 2006 awards of equity incentive plans and stock options is also reported there.

 

Grants of Plan-Based Awards

 

 

 

 

 

The Outstanding Equity Table shows: (i) the number of outstanding stock option awards that are vested and unvested; (ii) the exercise price and expiration date of these options; (iii) the aggregate number and value as of December 31, 2006 of all unvested restricted stock; and (iv) the aggregate number and value as of December 31, 2006 of all performance shares granted under a performance plan whose performance period has not yet been completed.

 

The values ascribed to these awards on the table below may or may not be realized by their recipients, depending on share prices at the time of vesting or exercise and the achievement of the metrics upon which the performance share awards depend. Each amount on this table is based on the closing market price of the company’s common stock on December 31, 2006, which was $31.55. For each named executive officer, the expense taken by the company during 2006 with respect to each award is included in the Summary Compensation Table, above. For additional information regarding the impact of a change of control on equity awards, see the table below under the heading “Stock Option, Restricted Stock and Performance Share Award Agreements”.

 

Outstanding Equity Awards at Fiscal Year-End