Arrow Electronics, Inc. — 2011 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Arrow Electronics is a global distributor of electronic components and enterprise computing solutions, operating through its Global Components and Global ECS segments. The filing covers the unaudited quarter ended April 2, 2011, compared with the quarter ended April 3, 2010.
Global Components represented approximately 74% of first-quarter sales and Global ECS approximately 26%. The company completed the acquisitions of Nu Horizons on January 3, 2011, and Richardson RFPD on March 1, 2011; these acquisitions contributed $186.3 million of reported first-quarter sales.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Sales | $5.223 billion | $4.235 billion | Up 23.3% |
| Gross profit | $722.5 million | $537.9 million | Up 34.3% |
| Gross margin | 13.8% | 12.7% | Up approximately 110 bps |
| Operating income | $219.2 million | $145.3 million | Up 50.9% |
| Operating margin | 4.2% | 3.4% | Improved |
| Net income attributable to shareholders | $136.3 million | $87.0 million | Up 56.6% |
| Diluted earnings per share | $1.16 | $0.71 | Up 63.4% |
| Cash flow from operations | $(179.7) million | $(282.2) million | Less cash used |
Global Components sales increased 24.3% to $3.887 billion, while Global ECS sales increased 20.7% to $1.336 billion. Excluding acquisitions and foreign-currency effects, consolidated sales increased 10.1%.
SG&A increased 26.8% to $464.9 million, or 8.9% of sales versus 8.7% in the prior-year quarter, primarily because of acquisitions, higher sales-related costs, and currency translation. Net interest and other financing expense rose 35.0% to $25.8 million, mainly due to higher average debt used to fund acquisitions. The effective tax rate was 30.5%, compared with 31.6% in the prior-year quarter.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $521.3 million at April 2, 2011, down from $926.3 million at December 31, 2010. Approximately $475.9 million was held outside the United States and was intended to remain permanently reinvested overseas.
- Total debt, including current and long-term debt, was approximately $2.009 billion, compared with $1.822 billion at year-end 2010. Short-term borrowings increased to $449.9 million from $61.2 million, while long-term debt declined to $1.559 billion from $1.761 billion.
- Operating cash use was $179.7 million, primarily reflecting reductions in accounts payable and accrued expenses, partially offset by earnings and working-capital improvements.
- Investing cash use was $397.2 million, including $379.0 million for acquisitions and $18.2 million of capital expenditures.
- Financing cash provided was $173.3 million, including $190.8 million of revolving-credit borrowings, partially offset by $46.4 million of share repurchases.
- The company had an $800.0 million revolving credit facility maturing in January 2012, with $190.8 million outstanding, and a $600.0 million receivables-backed securitization program expiring in April 2012, with no borrowings outstanding at quarter-end.
- Management stated that current cash, borrowing capacity, expected operating cash flow, and access to capital markets were sufficient for projected needs. The company was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected stronger demand, acquisitions, and a $67.3 million favorable foreign-currency translation impact. Asia/Pacific components sales declined 7.3%, primarily because of weakness in low-end mobile handset components.
- Gross margin improved because of better pricing, product mix, and higher margins at acquired businesses.
- Operating expenses grew faster than sales, reflecting acquisition-related cost structures. Pro forma operating expenses increased 4.7% against pro forma sales growth of 11.6%.
- The company recorded $9.6 million of restructuring, integration, and other charges, compared with $7.4 million in the prior-year quarter. The 2011 amount included $5.3 million of acquisition-related expenses.
- A $5.9 million pre-tax charge was recorded for settlement of a customer legal dispute originating in 1997.
- The company recognized a $1.8 million pre-tax gain on the Nu Horizons bargain purchase.
- Shares outstanding declined year over year, partly reflecting repurchases: diluted weighted-average shares were 117.4 million versus 121.9 million.
- The company adopted new multiple-deliverable and software-element revenue guidance effective January 1, 2011; adoption did not materially affect the financial statements.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
No specific quantitative revenue or earnings guidance was provided. Management expects to pursue organic growth, acquisitions, operating-efficiency initiatives, and improved asset utilization. The global ERP implementation is expected to require approximately $40 million to $60 million of cash in 2011, with the impact expected to decrease by approximately $10 million in 2012.
- Forward-looking results depend on product supply, customer demand, pricing, competition, supplier relationships, margin pressure, ERP execution, cost-reduction actions, and the ability to generate cash flow.
- The Japan earthquake and tsunami could disrupt suppliers, cause component shortages, and materially affect the business.
- Environmental matters at the Huntsville and Norco sites remain unresolved. Estimated additional costs disclosed were approximately $3.0 million to $5.0 million at Huntsville and $13.5 million to $25.2 million at Norco, excluding costs that cannot yet be estimated.
- The company recorded a $46.7 million receivable from E.ON AG for expected environmental and tax reimbursements. Collection timing depends on mediation, insurer settlements, and litigation and could take several years.
- The company disclosed a potential E.ON AG counterclaim of approximately $16.0 million and other legal and environmental contingencies, but does not expect these matters to materially adversely affect consolidated results.
- Approximately 51% of debt was fixed-rate and 49% floating-rate at quarter-end. A hypothetical 10% decline in foreign-exchange rates against the U.S. dollar would have reduced first-quarter sales and operating income by approximately $178.9 million and $9.3 million, respectively.
Important Facts for Investors to Verify
- Whether acquisition-driven revenue growth converts into sustainable organic growth and operating leverage.
- The integration, customer retention, and margin performance of Nu Horizons, Richardson RFPD, and prior acquisitions.
- Liquidity and refinancing plans as the revolving credit facility and receivables securitization program approach their 2012 maturities.
- Working-capital requirements, particularly accounts receivable, inventories, and accounts payable, given recurring first-quarter operating cash outflows.
- The cost and execution progress of the global ERP initiative.
- The ultimate cost, timing, and recoverability of environmental indemnification and tax receivables from E.ON AG and insurers.
- The effect of Japan-related supply disruptions, foreign-exchange movements, and potential component shortages on sales and margins.
- Whether restructuring, acquisition-related, legal, and bargain-purchase items recur or distort comparisons in future periods.