ARW

Arrow Electronics, Inc. 2009 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: Arrow Electronics, Inc.
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: A global provider of electronic components and enterprise computing solutions. The company operates two segments: Global Components (66% of 2009 sales) and Global Enterprise Computing Solutions (ECS) (34% of 2009 sales). It serves over 125,000 customers and 900 suppliers across 51 countries.

Key Financial Metrics (2009)

Material Changes vs. Prior Period

• Revenue Decline: Consolidated sales decreased 12.4% year-over-year, driven by a 13.9% drop in Global Components and a 9.3% drop in Global ECS. The decline was attributed to the worldwide economic recession and a stronger U.S. dollar (which reduced reported sales by $350.7 million).
• Profitability Recovery: The company returned to profitability ($123.5 million net income) compared to a significant loss in 2008. The 2008 loss was heavily impacted by a non-cash goodwill impairment charge of $1.02 billion, which did not recur in 2009.
• Margin Pressure: Gross profit margin decreased by approximately 170 basis points due to competitive pricing pressure and a shift in sales mix toward lower-margin ECS and Asia Pacific regions.
• Restructuring: The company incurred $105.5 million in restructuring, integration, and other charges in 2009, primarily for personnel costs ($90.9 million) related to eliminating approximately 1,925 positions to improve operating efficiency.
• Liquidity Improvement: Cash and cash equivalents more than doubled to $1.14 billion, supported by strong operating cash flows and the issuance of $300 million in new notes.

Guidance, Outlook, and Risks

• Outlook: Management focuses on operating efficiency and working capital management to grow profits faster than sales. The company expects to fund growth through organic initiatives and strategic acquisitions.
• ERP Implementation: The company is converting its global systems to a single Enterprise Resource Planning (ERP) system. Estimated cash flow impact for 2010 is $40–$60 million.
• Key Risks:
  • Supplier/Customer Concentration: IBM accounted for 12% of consolidated sales in 2009. Most distribution agreements are cancelable on short notice.
  • Inventory Obsolescence: Rapid technological change poses risks to inventory value, though 68% of inventory is covered by price protection agreements.
  • Environmental Litigation: Ongoing remediation and litigation regarding the Wyle Electronics acquisition (Norco, CA and Huntsville, AL sites). The company is pursuing indemnification from E.ON AG and insurance carriers, having spent approximately $39 million to date.
  • Goodwill Impairment: While no impairment was recorded in 2009, continued declines in economic conditions or equity valuations could trigger future charges.

Investor Verification Checklist

• Goodwill Valuation: Verify the assumptions used in the 2009 goodwill impairment testing, specifically the fair value of the North America reporting units which exceeded carrying values by significant margins (45% to 337%).
• Environmental Contingencies: Review the status of the litigation with E.ON AG regarding the Wyle environmental indemnity and the estimated remaining costs for the Norco and Huntsville remediation sites.
• Restructuring Accruals: Confirm the utilization of the $42.1 million restructuring and integration accrual balance as of year-end, particularly the timing of facility exit costs.
• Supplier Concentration: Assess the impact of the 12% sales concentration with IBM and the terms of the long-term procurement agreement with Agilysys.
• ERP Costs: Monitor the actual cash outflow for the global ERP initiative in 2010 against the estimated $40–$60 million range.