Arrow Electronics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 2, 2021; comparative periods ended September 26, 2020. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Arrow distributes electronic components to original equipment and contract manufacturers through its Global Components segment and provides enterprise computing solutions to value-added resellers and managed service providers through Global ECS. For the quarter, approximately 78% of sales came from Global Components and 22% from Global ECS.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales | $8.512 billion | $7.231 billion | $25.461 billion | $20.219 billion |
| Gross profit | $1.076 billion | $789 million | $3.006 billion | $2.267 billion |
| Gross margin | 12.6% | 10.9% | 11.8% | 11.2% |
| Operating income | $405 million | $238 million | $1.045 billion | $573 million |
| Operating margin | 4.8% | 3.3% | 4.1% | 2.8% |
| Net income attributable to shareholders | $290 million | $166 million | $737 million | $348 million |
| Diluted EPS | $4.00 | $2.13 | $9.92 | $4.39 |
Cash flow and balance sheet: Nine-month operating cash flow was $391 million, compared with $1.160 billion in the prior-year period. Capital expenditures were $62 million, and investing cash flow was negative $40 million. Financing cash flow was negative $474 million, including $662 million of share repurchases and repayment of $131 million of notes. Cash and cash equivalents were $216 million at October 2, 2021, versus $374 million at December 31, 2020.
Accounts receivable were $9.329 billion and inventories were $3.835 billion at quarter-end. Current liabilities were $9.502 billion. Short-term borrowings, including the current portion of long-term debt, were $354 million, and long-term debt was $2.040 billion.
Arrow had $35 million outstanding under its $2.0 billion revolving credit facility and $255 million outstanding under its $1.25 billion North American asset securitization program. No commercial paper or uncommitted-line borrowings were outstanding. Management reported more than $3.0 billion of committed and undrawn liquidity in addition to cash on hand and stated that available liquidity and expected operating cash flow should meet foreseeable needs.
Material Changes Versus Prior Comparable Period
- Q3 sales increased 17.7%; nine-month sales increased 25.9%. On a constant-currency basis, increases were 16.8% and 23.0%, respectively.
- Global Components sales rose 24.8% in Q3 and 35.0% for the first nine months, driven by stronger volumes and favorable pricing across regions. Global ECS sales declined 1.8% in Q3 but increased 2.5% year to date.
- Gross margin expanded 170 basis points in Q3 and 60 basis points year to date, primarily due to pricing, product mix, supply-chain conditions, and stronger services activity.
- Operating income increased 70.0% in Q3 and 82.3% year to date. Operating expense as a percentage of sales increased in Q3 but declined for the nine-month period.
- Net income attributable to shareholders increased 74.7% in Q3 and 111.6% year to date. Year-to-date 2020 results included approximately $32.7 million of after-tax foreign tax and other loss-contingency charges.
- Operating cash flow declined substantially because higher customer demand required increased investment in receivables and inventory, consistent with management’s description of the company’s counter-cyclical working-capital pattern.
- The company amended its revolving credit facility, extending maturity to September 2026, and amended its North American asset securitization program, increasing capacity to $1.25 billion and extending maturity to March 2024.
- The company repurchased $661.5 million of common stock during the first nine months and had $413.5 million remaining under the July 2021 authorization at quarter-end.
Guidance, Outlook, Risks, and Unusual Items
Management expected component supply to remain below demand through the better part of 2022. Due to supply-chain constraints and the timing of seasonal builds, fourth-quarter 2021 Global Components sales were expected to be slightly below third-quarter levels. Management cautioned that current gross-margin benefits may not be sustainable.
Principal risks include COVID-19 effects, component shortages and logistics disruptions, uncertain customer demand, supplier and pricing pressures, margin compression, foreign currency and interest-rate exposure, customer credit losses, and legal or regulatory matters. The filing states that customer orders generally are placed order by order, limiting sales visibility beyond a few months.
Unusual or nonrecurring items included restructuring and integration charges of $7.2 million for the first nine months, $12.5 million of capacitor-related legal settlement proceeds recorded in selling, general, and administrative expenses, and net investment gains of $10.9 million. The company also disclosed ongoing environmental remediation obligations related to former Wyle facilities and an unresolved OFAC review concerning historical shipments; potential OFAC penalties could not be estimated.
The company reported compliance with applicable financial covenants, effective disclosure controls, and no material changes to previously disclosed risk factors or market risks.
Important Facts for Investors to Verify
- Whether elevated Global Components pricing, margins, and supply-driven demand persist after supply constraints ease.
- The sustainability of working-capital requirements, particularly the $3.835 billion inventory balance and reduced operating cash conversion.
- Upcoming debt maturities, refinancing needs, and utilization of the revolving credit and receivables-securitization facilities.
- The effect of continued share repurchases on cash, leverage, and diluted share count.
- Potential customer credit deterioration, including risks associated with COVID-19 and delayed payments.
- Ultimate costs of Huntsville and Norco environmental remediation and any penalties or outcomes from the ongoing OFAC review.
- Reconciliation of non-GAAP results to GAAP results, including the effects of amortization, investment gains, restructuring items, impairments, and prior-period contingencies.