Arrow Electronics, Inc. — FY2014 Form 10-K Summary
Business context and reporting period
Arrow Electronics is a global distributor of electronic components and enterprise computing products, services, and solutions. Its two reportable segments are Global Components, representing approximately 63% of 2014 sales, and Global Enterprise Computing Solutions (ECS), representing approximately 37%. The company served more than 100,000 customers through over 300 sales facilities and 40 distribution and value-added centers in 56 countries. The filing covers the fiscal year ended December 31, 2014; quarterly data identifies the fourth quarter as an unaudited period.
Financial performance and financial position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Sales | $22.769 billion | $21.357 billion | +6.6% |
| Gross profit | $2.996 billion | $2.791 billion | +7.3% |
| Gross margin | 13.2% | 13.1% | +10 bps |
| Operating income | $762.3 million | $693.5 million | +9.9% |
| Operating margin | 3.3% | 3.2% | +10 bps |
| Net income attributable to shareholders | $498.0 million | $399.4 million | +24.7% |
| Diluted EPS | $4.98 | $3.85 | +29.4% |
| Cash flow from operations | $673.3 million | $450.7 million | +$222.6 million |
Global Components sales increased 6.1% to $14.313 billion, while Global ECS sales increased 7.6% to $8.456 billion. Adjusted for acquisitions and foreign-currency effects, consolidated sales increased 2.5%; adjusted ECS sales were flat and adjusted Components sales increased 4.2%.
Adjusted operating income, excluding identifiable intangible amortization, restructuring and integration charges, and the trade-name impairment, was approximately $924.2 million, or 4.1% of sales, versus $822.9 million, or 3.9%, in 2013. Adjusted net income attributable to shareholders was approximately $593.0 million versus $519.0 million.
Cash and cash equivalents were $400.4 million at year-end, including $300.9 million held outside the United States. Accounts receivable were $6.044 billion and inventories were $2.335 billion. Total assets were $12.443 billion and shareholders’ equity was $4.154 billion. Long-term debt was $2.075 billion, with total debt including current borrowings of approximately $2.089 billion. The company had a $1.50 billion revolving credit facility with no borrowings outstanding and a $900 million asset securitization program with $275 million outstanding.
Investing cash uses included $162.9 million for acquisitions and $122.5 million for capital expenditures, including $57.0 million for the global ERP initiative. Financing cash uses included $304.8 million of share repurchases and $145.0 million of net repayments of long-term bank borrowings. The company repurchased 6.23 million shares under its programs for approximately $338.8 million, including 2.19 million shares for approximately $115.2 million in the fourth quarter. No cash dividends were paid.
Material changes versus the prior comparable period
- Sales growth accelerated across both segments, although reported growth benefited from acquisitions and was reduced by foreign-currency translation.
- Reported gross and operating margins improved modestly. Cost discipline lowered adjusted operating expenses 0.8% despite 2.5% adjusted sales growth.
- Net income increased substantially, aided by higher operating performance, lower restructuring charges, and the absence of the 2013 debt-prepayment loss and international tax settlement charges.
- 2014 included a $78.0 million non-cash impairment charge, or $47.9 million after tax, for a discontinued ECS trade name in connection with the global rebranding initiative.
- 2014 included a $29.7 million gain on sale of the company’s WPG Holdings investment, or $18.3 million after tax.
- Restructuring, integration, and other charges declined to $39.8 million from $92.7 million in 2013.
- Other comprehensive income attributable to shareholders declined to a loss of $290.2 million, primarily due to a $265.0 million foreign-currency translation loss.
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 company continues to pursue acquisitions and efficiency initiatives. Subsequent to year-end, Arrow acquired RDC for approximately $87 million and announced a tender offer for Data Modul AG of approximately $105 million.
The filing does not provide specific numerical 2015 revenue or earnings guidance. Management noted limited forward visibility because substantially all sales are made on an order-by-order basis rather than under long-term contracts.
- Key operating risks include cyclical semiconductor and information-technology demand, supplier concentration and cancellable distribution agreements, competitive pricing pressure, inventory obsolescence, and customer defaults.
- International operations represented approximately 54% of 2014 sales and expose the company to foreign-exchange, regulatory, tax, political, export-control, and economic risks.
- The global ERP implementation remains a significant execution risk; EMEA and Asia/Pacific conversions were substantially complete, while the Americas implementation was expected over the following several years.
- Environmental liabilities from former Wyle facilities in Huntsville, Alabama, and Norco, California, remain unresolved. Estimated additional costs disclosed were approximately $3.5 million to $4.75 million for Huntsville investigations and remediation, and $16.5 million to $24.5 million for Norco activities, excluding currently unestimable additional costs.
- The FTC issued a Civil Investigative Demand regarding an industry database program. The company stated that no proceeding had been instituted and that the potential impact could not yet be predicted.
- Unrecognized tax benefits and related interest totaled $56.9 million at year-end, including $44.7 million of unrecognized tax benefits.
- The company was in compliance with its debt covenants at December 31, 2014. Approximately 82% of debt carried fixed rates and 18% carried floating rates.
Most important facts for investors to verify
- Whether reported sales and earnings growth can continue without comparable acquisition contributions and despite foreign-currency headwinds.
- Underlying gross-margin and operating-margin trends, particularly pricing pressure and the lower-margin Asia/Pacific business.
- Working-capital requirements, inventory valuation protections, and the conversion of receivables and inventories into operating cash flow.
- Debt maturities, asset-securitization reliance, covenant headroom, and the company’s ability to fund acquisitions and repurchases.
- Progress, cost, and operational effects of the Americas ERP implementation.
- Ultimate costs and insurance recoveries related to Wyle environmental matters, and the status of the FTC investigation.
- The effect of the trade-name impairment, restructuring charges, investment-sale gain, and other nonrecurring items when assessing sustainable earnings.