ARROW ELECTRONICS, INC. quarterly report, Q2 FY2022

Arrow Electronics, Inc. — Q2 2022 Form 10-Q Summary

Business context and reporting period

Arrow Electronics is a global distributor of electronic components and enterprise computing solutions. Its two segments are Global Components, serving OEMs and contract manufacturers, and Global Enterprise Computing Solutions (ECS), serving value-added resellers and managed service providers. The filing covers the quarter and six months ended July 2, 2022, compared with July 3, 2021. The interim financial statements are unaudited and prepared under U.S. GAAP.

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Sales	$9.461 billion	$8.563 billion	$18.535 billion	$16.949 billion
Gross profit	$1.236 billion	$1.000 billion	$2.444 billion	$1.930 billion
Operating income	$532.8 million	$340.5 million	$1.043 billion	$640.0 million
Net income attributable to shareholders	$370.3 million	$240.6 million	$735.1 million	$447.0 million
Diluted EPS	$5.54	$3.23	$10.84	$5.94
Operating cash flow	Not separately provided	Not separately provided	$(282.8) million	$276.8 million

Financial performance and liquidity

Q2 sales increased 10.5%; currency-adjusted sales increased 14.4%. Six-month sales increased 9.4%, or 12.3% on a currency-adjusted basis.
Global Components sales rose 12.9% in Q2 and 12.3% for the six-month period. ECS sales rose 2.4% in Q2 but declined 0.5% for the six-month period.
Gross margin was 13.1% in Q2 and 13.2% for six months, up 140 and 180 basis points, respectively. Management attributed the improvement primarily to pricing, product mix, supply-chain conditions, and stronger Global Components margins.
Operating margin improved to 5.6% in both Q2 and the six-month period, versus 4.0% and 3.8% in the comparable periods.
Q2 net income attributable to shareholders increased 53.9%; six-month net income increased 64.5%. Diluted EPS increased 71.5% in Q2 and 82.5% for six months, aided by earnings growth and lower share count.
Six-month operating cash flow was negative $282.8 million, primarily because inventories increased $755.9 million and accounts payable declined $315.5 million. Management described this as consistent with counter-cyclical working-capital investment during periods of strong demand.
At July 2, 2022, cash was $225.6 million, working capital was $6.575 billion, short-term debt was $626.0 million, and long-term debt was $2.856 billion.
The company reported more than $2.0 billion of committed and undrawn liquidity in addition to cash on hand and stated that available liquidity and expected operating cash flow should meet projected needs for the next 12 months and foreseeable future.
Six-month investing cash outflow was $15.7 million, including $36.2 million of capital expenditures. Fiscal 2022 capital expenditures are expected to be approximately $100 million.
Six-month financing cash inflow was $387.6 million, including $910 million of long-term bank borrowings, partially offset by $350 million of note redemptions and $484.0 million of share repurchases.

Material changes versus the prior comparable period

Gross profit increased 23.6% in Q2 and 26.6% for six months, outpacing sales growth because of improved pricing and margins in Global Components.
Operating income increased 56.5% in Q2 and 63.0% for six months. Non-GAAP operating income increased 51.7% and 58.7%, respectively.
Interest and other financing expense increased to $38.5 million in Q2 and $72.5 million for six months, from $30.7 million and $64.3 million, primarily due to higher borrowings and interest rates.
Investment results shifted from gains of $6.7 million in Q2 2021 and $9.5 million for six months 2021 to losses of $9.7 million and $7.7 million, respectively.
Foreign currency translation produced a $221.2 million Q2 loss and a $271.1 million six-month loss in other comprehensive income, materially reducing comprehensive income despite higher net income.
Inventory increased to $4.887 billion from $4.202 billion at year-end 2021, reflecting supply shortages, inflation, extended lead times, and efforts to support demand.
Total debt increased by approximately $855 million from year-end 2021, including $910 million drawn under the North American asset securitization program and $256 million of commercial paper outstanding.
The company repurchased 3.945 million shares for approximately $475.0 million during the first six months. Approximately $288.5 million remained authorized for repurchases at July 2, 2022.

Guidance, outlook, commentary, risks, and unusual items

Management expected component supply to remain well below demand through much of 2022, while acknowledging that current margins may not be sustainable.
COVID-19 lockdowns in Asia/Pacific caused delays in fulfilling orders and receiving inventory. Supply-chain constraints, inflation, slower growth or recession, customer credit deterioration, and political uncertainty could adversely affect future results.
The company identified the Russia-Ukraine conflict as a new material risk, including sanctions, export restrictions, economic disruption, and potential cyberattacks. No material infrastructure or supply disruption from the conflict had occurred as of the filing.
Q2 restructuring, integration, and other charges were $2.5 million, compared with $9.0 million in Q2 2021. Six-month charges were $7.4 million versus $14.7 million. Management did not anticipate material additional adjustments related to the disclosed plans.
Non-GAAP Q2 net income attributable to shareholders was $386.3 million, compared with $249.3 million in the prior year; six-month non-GAAP net income was $759.8 million versus $464.9 million. Adjustments primarily excluded intangible amortization, restructuring charges, and investment gains or losses.
Environmental remediation obligations related to former Wyle facilities remain uncertain. Estimated additional costs were $2.5 million to $10.0 million for Huntsville and $4.0 million to $17.0 million for Norco, with possible additional costs not currently estimable.
An OFAC review remains pending regarding historical unauthorized shipments with approximately $4.8 million of invoiced value to sanctioned or restricted parties. Potential penalties were not estimable.
The company was in compliance with applicable debt and securitization financial covenants as of July 2, 2022. Disclosure controls were considered effective, with no material changes in internal control over financial reporting.

Important facts for investors to verify

Whether Global Components pricing and margin benefits persist after supply constraints ease and product mix normalizes.
Inventory turnover, working-capital requirements, customer collections, and the pace of operating-cash-flow recovery.
Debt maturities, floating-rate exposure, commercial paper usage, and continued compliance with borrowing covenants.
The financial impact of currency movements, particularly the significant translation losses recorded in accumulated other comprehensive loss.
Developments in COVID-19-related supply disruptions, inflation, the Russia-Ukraine conflict, and potential cyber or sanctions-related effects.
Ultimate environmental remediation costs and the outcome of the pending OFAC review and other contingencies.
The sustainability of share repurchases given negative operating cash flow, higher inventory investment, and increased debt.