ARROW ELECTRONICS, INC. annual report, FY2022

Arrow Electronics, Inc. — Fiscal 2022 Form 10-K Summary

Business context and reporting period

Arrow Electronics is a global distributor and technology solutions provider serving more than 210,000 industrial and commercial customers in over 90 countries. Its two reportable segments are Global Components, which represented approximately 78% of 2022 sales, and Global Enterprise Computing Solutions (ECS), which represented approximately 22%.

The filing covers the fiscal year ended December 31, 2022, with comparisons primarily to fiscal 2021. The company reports in U.S. dollars under U.S. GAAP. Sean J. Kerins became Chief Executive Officer in June 2022, and Rajesh K. Agrawal became Chief Financial Officer in September 2022.

Key financial metrics

Metric	2022	2021	Change
Sales	$37.12 billion	$34.48 billion	7.7% increase
Gross profit	$4.84 billion	$4.20 billion	15.1% increase
Gross margin	13.0%	12.2%	80 basis-point increase
Operating income	$2.07 billion	$1.56 billion	32.9% increase
Operating margin	5.6%	4.5%	110 basis-point increase
Net income attributable to shareholders	$1.43 billion	$1.11 billion	28.8% increase
Diluted earnings per share	$21.80	$15.10	44.4% increase
Net cash from operating activities	$(33.1) million	$419.0 million	$452.1 million decrease

Global Components sales increased 9.2% to $28.79 billion; Global ECS sales increased 2.7% to $8.34 billion.
On a constant-currency basis, consolidated sales increased 11.5%, but currency movements reduced reported sales growth by approximately $1.2 billion, operating income by $58.8 million, and diluted EPS by $0.53.
Non-GAAP net income attributable to shareholders was $1.47 billion, compared with $1.14 billion in 2021. Adjustments included amortization, restructuring and integration charges, and investment gains or losses.
Net interest and other financing expense increased to $185.6 million from $131.7 million, primarily due to higher interest rates and borrowings. The effective tax rate increased to 23.8% from 22.7%.
Cash and cash equivalents were $176.9 million at year-end, compared with $222.2 million in 2021. Working capital increased to $7.18 billion from $5.71 billion.
Inventory was $5.32 billion, approximately $1.1 billion higher than at December 31, 2021. Accounts receivable was $12.32 billion and accounts payable was $10.46 billion.
Total debt was approximately $3.8 billion, including $589.9 million due within 12 months. Long-term debt was $3.18 billion. The company had a $2.0 billion revolving credit facility with no borrowings outstanding and a $1.5 billion North American asset securitization program with $1.235 billion outstanding.
Management reported more than $2.1 billion of committed and undrawn liquidity in addition to cash on hand and stated that available liquidity and expected operating cash flow should meet needs for the foreseeable future.
Capital expenditures were $78.8 million in 2022; management expected approximately $80.0 million in fiscal 2023.
The company repurchased 9.3 million shares for approximately $1.05 billion in 2022. Approximately $328.7 million remained authorized at year-end, and the board approved an additional $1.0 billion authorization on January 31, 2023.

Material changes versus the prior comparable period

Revenue growth accelerated in both segments, led by stronger demand, improved component supply, elevated product pricing, and growth in the Americas and EMEA Components businesses.
Gross margins expanded in 2022, particularly in Global Components, due to product mix, pricing, and supply-chain conditions. Management cautioned that these margin benefits may not be sustainable.
Fourth-quarter gross margin declined 40 basis points from the fourth quarter of 2021 as component shortage conditions began to normalize; fourth-quarter sales were approximately $9.3 billion.
Operating expenses grew more slowly than sales, reducing operating expenses to 7.5% of sales from 7.7%.
Operating cash flow turned negative primarily because of increased investment in accounts receivable and inventory. The company also increased borrowings by approximately $1.0 billion year over year.
Short-term debt increased by $207 million and long-term debt increased by $939 million. The North American asset securitization program was expanded to $1.5 billion and its maturity extended to September 2025.
Share repurchases increased from $900 million in 2021 to approximately $1.05 billion in 2022, reducing weighted-average diluted shares from 73.4 million to 65.5 million.

Guidance, outlook, management commentary, risks, contingencies, and unusual items

Management did not provide a clear consolidated revenue or earnings forecast in the filing. It expected approximately $80 million of capital expenditures in 2023.
Management believes 2022 gross-margin performance benefited from temporary shortage-market conditions and may not represent future results. Improved supply has also increased inventory levels and could raise obsolescence or write-down risk if demand weakens.
Key operating risks include semiconductor and technology-industry cyclicality, supply-chain disruptions, non-cancellable purchase commitments, pricing and margin pressure, rapid product obsolescence, limited supplier concentration, and the absence of long-term customer contracts.
One supplier represented approximately 13% of consolidated 2022 sales; no customer represented more than 2%. Approximately 65% of sales originated outside the United States, creating foreign-exchange, geopolitical, trade, tariff, tax, and regulatory exposure.
COVID-19-related lockdowns in Asia/Pacific caused fulfillment and inventory-receipt delays during 2022. The Russia-Ukraine conflict, tariffs, export controls, cyber incidents, and broader macroeconomic weakness remain identified risks.
Environmental remediation obligations related to former Wyle facilities remain ongoing. Estimated additional costs were $2.3 million to $10.0 million for the Huntsville site and $5.0 million to $17.0 million for the Norco site, although the company stated that ultimate costs cannot yet be fully estimated.
Purchase obligations totaled approximately $13.4 billion, including $11.0 billion expected within 12 months. Many non-cancellable inventory commitments remain elevated and may expose the company to excess inventory risk.
The annual goodwill impairment test identified no impairment. Goodwill was approximately $2.0 billion, and management reported that each reporting unit’s fair value exceeded carrying value by more than 20%.
The company recorded $13.7 million of restructuring, integration, and other charges in 2022 and a $2.9 million net loss on investments. The filing does not identify a material unresolved legal matter expected to affect consolidated financial condition, liquidity, or results, but environmental and other claims remain subject to uncertainty.
Management and Ernst & Young reported unqualified opinions on the financial statements and effective internal control over financial reporting.

Most important facts an investor should verify

Whether component supply normalization leads to lower pricing, gross margins, sales growth, or inventory turns in 2023.
Inventory aging, supplier price-protection and stock-rotation coverage, non-cancellable purchase commitments, and potential excess or obsolete inventory charges.
Operating cash-flow conversion and whether working-capital investment, particularly inventory and receivables, declines from 2022 levels.
Debt maturities, interest-rate exposure, refinancing requirements, covenant compliance, and the sustainability of share repurchases alongside increased borrowings.
Actual 2023 performance by Global Components and Global ECS, including the effects of foreign currency, regional demand, and technology-market cyclicality.
Progress and ultimate cost estimates for the Huntsville and Norco environmental matters.
Dependence on the supplier contributing approximately 13% of sales and the effect of any changes to supplier distribution agreements.