Arrow Electronics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 28, 2014, compared with the periods ended June 29, 2013. The interim financial statements are unaudited. Arrow distributes electronic components through its Global Components segment and enterprise computing solutions through its Global ECS segment.
Financial Performance and Position
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Sales | $5.677 billion | $5.306 billion | $10.759 billion | $10.156 billion |
| Gross profit | $747.5 million | $689.6 million | $1.45 billion | $1.33 billion |
| Gross margin | 13.2% | 13.0% | 13.5% | 13.1% |
| Operating income | $208.3 million | $155.9 million | $386.0 million | $293.4 million |
| Operating margin | 3.7% | 2.9% | 3.6% | 2.9% |
| Net income attributable to shareholders | $127.9 million | $89.9 million | $235.0 million | $167.8 million |
| Diluted EPS | $1.27 | $0.86 | $2.33 | $1.58 |
- Sales increased 7.0% in the quarter and 5.9% for the first six months. Global Components sales increased 5.0% and 6.1%, respectively; Global ECS sales increased 10.5% and 5.7%.
- After adjusting for acquisitions and foreign currency, consolidated sales increased 0.8% in the quarter and were approximately flat for the first six months. Adjusted Global ECS sales declined 1.4% and 6.1%, respectively.
- Adjusted operating income, excluding identifiable intangible amortization and restructuring, integration, and other charges, was $228.8 million in Q2 and $429.1 million for six months, compared with $195.0 million and $363.1 million in the prior-year periods.
- Net cash provided by operating activities was $283.5 million for the first six months, versus $154.5 million in 2013. Investing cash outflows were $122.2 million, including $60.2 million for acquisitions and $62.0 million for capital expenditures. Financing cash outflows were $244.1 million, including $138.8 million of share repurchases and $120.0 million of long-term bank debt repayments.
- Cash and cash equivalents were $308.9 million at June 28, 2014, compared with $390.6 million at December 31, 2013. Approximately $267.4 million was held outside the United States.
- Accounts receivable were $5.138 billion and inventories were $2.295 billion at quarter-end. Total assets were $11.560 billion and shareholders’ equity was $4.303 billion.
- Short-term borrowings were $17.3 million and long-term debt was $2.104 billion. The company had no borrowings under its $1.5 billion revolving credit facility and $300.0 million outstanding under its asset securitization program.
Material Changes Versus Prior Comparable Period
- Profitability improved materially: Q2 operating income rose approximately 34% and six-month operating income rose approximately 32%, while diluted EPS increased 48% and 47%, respectively.
- Gross margin increased 20 basis points in Q2 and 40 basis points for the first six months.
- Restructuring, integration, and other charges declined to $9.6 million in Q2 and $21.2 million for six months, from $30.2 million and $51.8 million in the prior-year periods.
- Prior-year results included a $4.3 million loss on debt prepayment and additional tax and interest expense related to the settlement of international tax matters; these items did not recur in 2014.
- Operating expenses increased on a reported basis, primarily due to acquisitions, but declined after adjusting for acquisitions and currency.
- Cash from operations increased substantially, while acquisition spending, capital expenditures, debt repayment, and share repurchases produced a net decline in cash.
- During the first six months of 2014, Arrow completed one acquisition for aggregate consideration of $66.3 million, including contingent consideration. Management stated that the acquisition was not material to consolidated results.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide a specific quantitative earnings or sales outlook. Management stated that current cash availability, borrowing capacity, expected operating cash flows, and capital-markets access should be sufficient for projected needs for the foreseeable future.
- Management noted limited forward visibility because substantially all sales are made on an order-by-order basis rather than under long-term contracts.
- Restructuring actions included eliminating approximately 150 positions in Global ECS and 140 positions in Global Components, as well as exiting nine facilities. Restructuring accruals totaled $17.7 million at June 28, 2014 and were expected to be spent in cash.
- The company amended its asset securitization program, increasing borrowing capacity from $775.0 million to $900.0 million and extending maturity to March 2017. Covenants were met at quarter-end.
- Environmental liabilities related to former Wyle facilities remain uncertain. Estimated additional costs were $0.5 million to $0.75 million for investigation and related work at Huntsville, plus an estimated $3.0 million to $4.0 million for potential remediation; Norco additional activities were estimated at $16.1 million to $24.5 million. The company stated that further costs cannot yet be fully estimated.
- The FTC issued a Civil Investigative Demand regarding an industry database program. The company responded and stated that no proceedings had been instituted; the potential impact could not be predicted.
- Newly identified risks include cybersecurity and privacy breaches, including risks involving third-party service providers. Other risks include demand and pricing pressure, supplier relationships, ERP implementation, acquisition integration, foreign currency movements, regulatory matters, and the ability to generate cash.
- Foreign currency translation increased first-half sales by $107.8 million and operating income by $4.6 million. A hypothetical 10% decline in average foreign exchange rates would have reduced first-half sales by approximately $341.5 million and operating income by approximately $12.6 million.
- Approximately 81% of debt was fixed-rate and 19% floating-rate at June 28, 2014. Management stated that a one-percentage-point change in average interest rates would not materially affect first-half net interest expense.
- The company completed phased ERP implementation in selected Asia-Pacific operations during the quarter and reported no significant difficulties to date. Disclosure controls were concluded to be effective.
Most Important Facts to Verify
- Whether reported sales growth is sustainable after excluding acquisition and foreign-currency effects, particularly the decline in adjusted Global ECS sales.
- The conversion of improved earnings into cash, including the effects of inventory growth, working-capital requirements, acquisitions, capital expenditures, debt repayments, and share repurchases.
- Debt maturities, asset-securitization utilization, covenant compliance, and the company’s ability to maintain liquidity while continuing repurchases and acquisitions.
- The ultimate cost and timing of Wyle-related environmental remediation and the status of potential insurance recoveries.
- Developments in the FTC antitrust inquiry and any resulting legal or regulatory exposure.
- Progress, costs, and control implications of the multi-year ERP implementation and integration of acquired businesses.
- The impact of cybersecurity incidents, foreign currency movements, supplier concentration, demand volatility, and margin pressure on future results.