ARW

Business Context and Reporting Period

Company: Arrow Electronics, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Arrow is a global provider of electronic components and enterprise computing solutions. It operates two primary segments: Global Components (68% of 2008 sales) and Global Enterprise Computing Solutions (ECS) (32% of 2008 sales). The company serves approximately 130,000 customers and 800 suppliers across 53 countries.

Key Financial Metrics

Material Changes vs. Prior Period

• Goodwill Impairment: The primary driver of the 2008 net loss was a non-cash goodwill impairment charge of $1.02 billion ($905.1 million net of tax). This was triggered by significant declines in macroeconomic conditions and global equity valuations since October 1, 2008. The charge impacted the Global Components ($716.9 million) and Global ECS ($301.9 million) segments.
• Restructuring Charges: The company recorded $70.1 million in restructuring and integration charges in 2008, compared to $11.7 million in 2007. This included $39.4 million in personnel costs (elimination of ~750 positions) and a $25.4 million write-down of a building and land.
• Segment Performance:
  • Global ECS: Sales increased 14.3% to $5.44 billion, driven by the KeyLink and LOGIX acquisitions. On a pro forma basis, sales decreased slightly due to server weakness.
  • Global Components: Sales increased less than 1% to $11.32 billion. Excluding foreign currency impacts, sales decreased 1.3% due to weakness in North America and Europe, offset by strength in Asia Pacific.
• Other Charges: A $10.9 million charge was recorded related to a 2001 bankruptcy preference claim, and a $10.0 million loss was recognized on the write-down of an investment in Marubun Corporation.

Guidance, Outlook, Risks, and Contingencies

• Outlook: Management focuses on operating efficiency and working capital management. The company is in the midst of a complex global Enterprise Resource Planning (ERP) conversion, with estimated cash flow impacts of $80-$100 million in 2009.
• Liquidity: As of December 31, 2008, the company held $451.3 million in cash and had access to $1.4 billion in committed credit lines. The impairment charge did not impact liquidity or debt covenants.
• Key Risks:
  • Economic Conditions: Continued decline in global equity valuations could necessitate additional impairment charges.
  • Supplier/Customer Concentration: IBM accounted for 11% of 2008 sales. Most distribution agreements are cancelable on short notice.
  • Inventory Obsolescence: Rapid technological change poses risks to inventory value, though 72% of inventory is covered by price protection agreements.
  • Environmental Litigation: Ongoing remediation and litigation related to the 2000 acquisition of Wyle Electronics (Norco, CA and Huntsville, AL sites). The company is pursuing indemnification from E.ON AG and insurance carriers.

Investor Verification Checklist

• Goodwill Valuation: Verify the assumptions used in the discounted cash flow analysis for the $1.02 billion impairment charge and assess the risk of future impairments given the economic climate.
• ERP Implementation: Monitor the progress and cost overruns of the global ERP system conversion, which is a significant capital expenditure and operational risk.
• Environmental Liabilities: Review the status of the Wyle environmental litigation and the likelihood of recovering costs from E.ON AG and insurance carriers.
• Working Capital Trends: Analyze the reduction in accounts receivable and inventory in 2008 to determine if it reflects improved efficiency or a contraction in business volume.
• Segment Mix: Evaluate the long-term margin impact of the shift toward the lower-margin Global ECS segment and Asia Pacific region.