Arrow Electronics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 1, 2017, compared with July 2, 2016. The filing was dated August 3, 2017. Arrow distributes electronic components to original equipment and contract manufacturers through Global Components and provides enterprise computing solutions to value-added resellers through Global ECS.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $6.465 billion | $5.972 billion | $12.225 billion | $11.446 billion |
| Gross profit | $824.0 million | $798.8 million | $1.584 billion | $1.548 billion |
| Gross margin | 12.7% | 13.4% | 13.0% | 13.5% |
| Operating income | $229.8 million | $223.6 million | $421.5 million | $405.0 million |
| Operating margin | 3.6% | 3.7% | 3.4% | 3.5% |
| Net income attributable to shareholders | $99.7 million | $134.3 million | $213.4 million | $240.5 million |
| Diluted EPS | $1.11 | $1.45 | $2.37 | $2.59 |
Adjusted net income attributable to shareholders, excluding amortization, restructuring and other charges, the debt extinguishment loss, and the investment gain, was $160.0 million for the quarter and $292.3 million for the six months, compared with $152.7 million and $285.0 million, respectively, in the prior-year periods. Adjusted operating income was $266.6 million, or 4.1% of sales, in the quarter and $486.7 million, or 4.0% of sales, for the six months.
- Segment sales: Global Components increased 16.4% in the quarter and 13.5% for the six months; Global ECS declined 6.4% and 5.9%, respectively.
- Geographic sales: Q2 sales were $2.969 billion in the Americas, $1.834 billion in EMEA, and $1.662 billion in Asia/Pacific.
- Cash flow: Six-month operating cash flow was negative $133.1 million versus positive $115.1 million in 2016, primarily reflecting working-capital investment supporting higher sales. Investing cash flow was negative $83.0 million, including $101.9 million of capital expenditures. Financing cash flow was positive $91.4 million.
- Liquidity: Cash and equivalents were $419.9 million at July 1, 2017, compared with $534.3 million at December 31, 2016. Approximately $246.7 million was held outside the United States.
- Debt: Short-term borrowings were $427.0 million and long-term debt was $2.642 billion. Total reported debt was approximately $3.069 billion. The company had no borrowings under its $1.8 billion revolving credit facility and $45.0 million under its commercial paper program.
- Working capital: Accounts receivable were $6.531 billion and inventories were $3.045 billion at July 1, 2017. Working capital as a percentage of sales increased to 17.6% from 15.6% in the comparable quarter.
Material changes versus the prior comparable period
- Sales growth was driven by strong Global Components demand, partially offset by declining Global ECS hardware demand.
- Gross margin contracted by 70 basis points in Q2 and 50 basis points for the six months, primarily due to business and regional mix.
- Reported earnings declined because Q2 2017 included a $58.8 million loss on extinguishment of debt and higher restructuring, integration, and other charges of $24.4 million versus $16.1 million in Q2 2016.
- Interest and other financing expense increased to $42.4 million in Q2 and $80.4 million for the six months, primarily due to higher average debt and variable interest rates.
- In June 2017, Arrow issued $500.0 million of 3.875% notes due 2028. Net proceeds of $494.6 million were used to redeem and refinance portions of existing debt, including the 6.875% senior debenture due 2018.
- Arrow repurchased $123.7 million of common stock during the first six months. Approximately $408.9 million remained available under approved repurchase programs at July 1, 2017.
- Arrow acquired an additional 11.9% of Data Modul AG for $23.4 million, increasing ownership to 69.2%; the effect was not material.
Outlook, commentary, risks, and unusual items
Management stated that current cash, borrowing capacity, expected operating cash flow, and access to capital markets should be sufficient for projected needs for the foreseeable future. The filing does not provide specific numerical revenue or earnings guidance.
- Demand visibility is limited because substantially all sales are order-by-order rather than under long-term contracts.
- Key disclosed risks include product supply and pricing, customer demand, competition, supplier relationships, margin pressure, ERP implementation, acquisition integration, cost-reduction actions, foreign exchange, legal and regulatory matters, and cash-flow generation.
- Restructuring, integration, and other charges were $39.9 million for the first six months. Restructuring accruals totaled $27.0 million at July 1, 2017 and were expected to be paid in cash over multiple years.
- Environmental obligations related to former Wyle facilities remain subject to uncertainty. Estimated additional costs were $4.8 million to $10.6 million for Huntsville and $20.1 million to $30.8 million for Norco, excluding potential costs that cannot yet be estimated.
- A customer with approximately $27.1 million of combined notes and accounts receivable was delinquent on repayment of the note; management expected full recovery but acknowledged a possible loss.
- The company reported compliance with debt covenants and no material change in previously disclosed risk factors. Disclosure controls were evaluated as effective.
Investor verification points
- Verify whether Global ECS demand weakness and lower consolidated gross margins persisted after the reporting date.
- Reconcile GAAP earnings with management’s adjusted measures and assess the recurring nature of restructuring and acquisition-related charges.
- Monitor operating cash conversion, inventory growth, receivables, and working-capital requirements.
- Review debt maturities, refinancing execution, interest-rate exposure, and utilization of the asset securitization and commercial paper programs.
- Assess potential environmental remediation costs and the recoverability of the delinquent customer receivable.
- Track ERP implementation, acquisition integration, foreign-exchange exposure, and the remaining share-repurchase authorization.