Arrow Electronics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 3, 2021; comparative periods ended June 27, 2020. The filing was submitted August 5, 2021. Results are unaudited and prepared under U.S. GAAP.
Business context
Arrow is a global distributor of electronic components and enterprise computing solutions. Its two reportable segments are Global Components, serving original equipment and contract manufacturers, and Global Enterprise Computing Solutions (ECS), serving value-added resellers and managed service providers. Global Components represented approximately 77% of second-quarter sales and Global ECS approximately 23%.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $8.563 billion | $6.606 billion | $16.949 billion | $12.988 billion |
| Gross profit | $1.000 billion | $750.5 million | $1.930 billion | $1.479 billion |
| Gross margin | 11.7% | 11.4% | 11.4% | 11.4% |
| Operating income | $340.5 million | $196.6 million | $640.0 million | $334.9 million |
| Operating margin | 4.0% | 3.0% | 3.8% | 2.6% |
| Net income attributable to shareholders | $240.6 million | $132.8 million | $447.0 million | $182.3 million |
| Diluted EPS | $3.23 | $1.68 | $5.94 | $2.28 |
- Global Components sales increased 40.0% in Q2 and 40.8% for the first six months; Global ECS sales increased 3.5% and 4.8%, respectively.
- Foreign-currency-adjusted consolidated sales increased 25.5% in Q2 and 26.4% for the first six months.
- Non-GAAP operating income was $358.8 million in Q2 and $673.3 million for the first six months, with margins of 4.2% and 4.0%, respectively.
- Non-GAAP net income attributable to shareholders was $249.3 million in Q2 and $464.9 million for the first six months.
- The effective tax rate was 23.5% in Q2 and 23.2% for the first six months, compared with 23.5% and 27.3% in the prior-year periods.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $276.8 million, compared with $885.1 million in the prior-year period. The decline primarily reflected timing of payments and increased working capital, including inventory, during a period of higher demand.
- Investing cash flow was an outflow of $18.9 million, including $41.1 million of capital expenditures and $22.2 million of proceeds from selling a distribution warehouse.
- Financing cash flow was an outflow of $381.6 million, including $411.3 million of share repurchases and $130.9 million repayment of notes due March 2021, partly offset by $134.2 million of net proceeds from long-term borrowings.
- Cash and cash equivalents were $244.1 million at July 3, 2021, down from $373.6 million at December 31, 2020. Approximately $234.6 million was held outside the United States.
- Short-term borrowings, including the current portion of long-term debt, were $357.0 million; long-term debt was $1.884 billion. Total reported debt was approximately $2.241 billion.
- Arrow had no borrowings under its $2.0 billion revolving credit facility, its $1.2 billion commercial paper program, or its $200.0 million uncommitted credit lines at quarter-end. It had $135.0 million outstanding under its North American asset securitization program.
- Management reported more than $3.4 billion of committed and undrawn liquidity in addition to cash on hand and stated that available liquidity and expected operating cash flow should meet projected needs for the foreseeable future.
- The company was in compliance with applicable financial covenants at July 3, 2021.
Material changes versus prior comparable periods
- Sales growth was led by strong demand, higher volumes, and favorable pricing in Global Components, particularly in Asia/Pacific, where Q2 sales increased 49%.
- Gross margin increased 30 basis points in Q2 despite a greater mix of lower-margin Asia/Pacific Components sales. Management attributed the improvement primarily to pricing and margin gains amid supply-chain constraints, as well as growth in services.
- Operating expenses grew more slowly than sales, reducing operating expenses as a percentage of sales by 70 basis points in Q2 and 120 basis points for the first six months.
- Operating income increased 73.2% in Q2 and 91.1% for the first six months. The improvement reflected higher Components sales and operating leverage, partially offset by regional mix.
- Interest and other financing expense declined to $30.7 million in Q2 and $64.3 million for the first six months, primarily because of lower borrowings and interest rates.
- Average diluted shares declined to 74.6 million in Q2 from 79.2 million, reflecting share repurchases and supporting EPS growth.
- Cash generated from operations was substantially below the prior-year period, while inventory increased to $3.636 billion from $3.287 billion at year-end 2020.
Guidance, outlook, risks, and unusual items
- Management expects Global Components sales in Q3 2021 to be slightly below Q2 levels because of supply-chain constraints and the timing of quarter-end.
- The company reported continuing COVID-19-related uncertainty, component shortages, logistics issues, extended lead times, customer credit risk, and potential volatility in demand and pricing.
- Most sales are made on an order-by-order basis rather than under long-term contracts, limiting visibility beyond a few months.
- Q2 results included $4.5 million of restructuring, integration, and other charges, $4.5 million of impairments, $9.3 million of identifiable intangible-asset amortization, and $6.7 million of net investment gains.
- The company received $8.2 million in Q2 and $12.5 million for the first six months from settlements involving alleged capacitor price fixing; these amounts reduced selling, general, and administrative expenses.
- Environmental remediation obligations related to former Wyle facilities remain unresolved. Estimated additional remediation costs were $3.0 million to $11.0 million for Huntsville and $4.7 million to $17.0 million for Norco, excluding potential costs that cannot currently be estimated.
- Arrow continues to cooperate with OFAC regarding historical export-control activities. Potential penalties could be imposed, but the company cannot currently estimate the amount.
- The company authorized $411.3 million of share repurchases during the first six months. A further $600 million repurchase authorization was approved on July 21, 2021.
- Management stated that disclosure controls were effective as of July 3, 2021 and that there were no material changes in internal control over financial reporting or risk factors from the 2020 Form 10-K.
Important facts for investors to verify
- Whether supply constraints, lead times, and pricing conditions support or pressure Global Components revenue and margins in subsequent quarters.
- The sustainability of Q2 margin expansion and operating leverage, particularly as geographic and segment mix changes.
- Working-capital requirements, inventory growth, and the resulting conversion of earnings into operating cash flow.
- Debt maturities, utilization of the North American asset securitization program, and compliance with liquidity and financial covenants.
- The financial impact and timing of environmental remediation, OFAC review, tax matters, and other contingencies.
- The effect of continued share repurchases on diluted share count, cash balances, and leverage.
- The filing does not provide a full-year revenue or earnings forecast; the principal explicit near-term outlook is that Q3 Global Components sales are expected to be slightly below Q2 levels.