Arrow Electronics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 1, 2023, compared with July 2, 2022. Financial statements are unaudited and prepared under U.S. GAAP. Arrow distributes electronic components and provides enterprise computing solutions through its Global Components and Global ECS segments.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $8.515 billion | $9.461 billion | $17.251 billion | $18.535 billion |
| Gross profit | $1.066 billion | $1.236 billion | $2.180 billion | $2.444 billion |
| Gross margin | 12.5% | 13.1% | 12.6% | 13.2% |
| Operating income | $392.3 million | $532.8 million | $814.4 million | $1.043 billion |
| Operating margin | 4.6% | 5.6% | 4.7% | 5.6% |
| Net income attributable to shareholders | $236.6 million | $370.3 million | $510.3 million | $735.1 million |
| Diluted EPS | $4.12 | $5.54 | $8.74 | $10.84 |
- Segment sales: Global Components sales were $6.683 billion in Q2, down 10.4%; Global ECS sales were $1.832 billion, down 8.4%. Components represented approximately 78% of Q2 sales and ECS approximately 22%.
- Cash flow: Six-month operating cash flow was $97.0 million, compared with cash usage of $282.8 million in the prior-year period. Investing cash usage was $26.1 million, including $37.1 million of capital expenditures. Financing cash usage was $58.1 million.
- Liquidity: Cash and equivalents were $240.4 million at July 1, 2023, compared with $176.9 million at December 31, 2022. Management reported more than $1.8 billion of committed and undrawn liquidity in addition to cash.
- Debt: Short-term debt was $488.2 million and long-term debt was $3.673 billion. Total reported debt increased from approximately $3.773 billion at year-end 2022 to $4.161 billion. Commercial paper outstanding was $449.2 million, and $1.220 billion was outstanding under the North American asset securitization program.
- Working capital: Working capital was $7.507 billion, up from $7.182 billion at year-end. Working capital as a percentage of annualized quarterly sales increased to 22.0% from 17.4% in the comparable prior-year quarter.
- Share repurchases: Arrow repurchased 1.6 million shares for $200.7 million in Q2 and 4.2 million shares for $500.9 million in the first six months, excluding excise taxes. Approximately $823.5 million remained authorized for repurchase at July 1, 2023.
Material changes versus prior comparable periods
- Q2 sales declined 10.0% and six-month sales declined 6.9%; constant-currency declines were 9.8% and 5.8%, respectively.
- Gross margin contracted by 60 basis points in both the quarter and six-month period. Management attributed the decline primarily to normalization of component shortages, lower shortage-related pricing, and softer Asia/Pacific demand.
- Operating income decreased 26.4% in Q2 and 21.9% for the first six months. Operating expense declined in absolute dollars but increased as a percentage of sales because of lower operating leverage.
- Net interest and other financing expense increased to $84.8 million in Q2 and $164.5 million for the first six months, versus $38.5 million and $72.5 million, respectively, primarily due to higher interest rates and higher average borrowings.
- Foreign-currency changes reduced Q2 sales by approximately $17.6 million, operating income by $2.6 million, and diluted EPS by $0.03 versus the prior-year quarter. Six-month impacts were approximately $220.3 million, $14.3 million, and $0.15, respectively.
- Restructuring, integration, and other charges increased to $10.3 million in Q2 and $12.9 million for the first six months, compared with $2.5 million and $7.4 million in the prior-year periods.
- Arrow issued $500 million of 6.125% notes due 2026 in the first quarter, using proceeds partly to repay $300 million of 4.50% notes due March 2023. The new notes were swapped to a floating rate based on SOFR plus 0.508%.
Guidance, outlook, commentary, and risks
- Management expects 2023 capital expenditures of approximately $80 million and believes available liquidity and expected operating cash flow are sufficient for the next 12 months and the foreseeable future.
- Component shortages and ECS hardware supply constraints had largely normalized by Q2. Management expects pricing and margins on previously constrained products to move closer to historical levels as supply improves.
- Global ECS demand for software, cloud, cybersecurity, and public-sector solutions remained comparatively stronger, while hardware demand declined.
- Management stated that substantially all sales are order-by-order rather than under long-term contracts, limiting visibility beyond a few months.
- Key risks include economic weakness, recession, inflation, interest rates, foreign exchange, supply-chain disruption, customer demand and pricing changes, supplier relationships, margin pressure, competition, geopolitical events and sanctions, regulatory compliance, litigation, environmental remediation, and the company’s ability to generate cash flow.
- Environmental obligations remain uncertain. Estimated subsequent costs range from $2.3 million to $17.8 million for the Huntsville site and $6.5 million to $39.9 million for the Norco site. Updated testing and operating-cost information could require an increase to the environmental obligation in the second half of 2023.
- The company adopted new supplier-finance disclosure requirements and reported $1.1 billion of supplier-finance obligations in accounts payable at July 1, 2023, compared with $1.5 billion at December 31, 2022.
- Management reported compliance with the financial covenants governing its revolving credit facility, asset securitization programs, and EMEA receivables program. No material changes to previously disclosed risk factors were reported.
Investor verification checklist
- Verify whether component pricing normalization and softer Asia/Pacific demand continue to pressure Global Components margins.
- Monitor interest expense, commercial paper balances, floating-rate exposure, and debt maturities, particularly the 2024 and 2025 notes.
- Assess working-capital trends, inventory levels, supplier-finance obligations, and the sustainability of operating cash generation.
- Review the effect of continued share repurchases on leverage, liquidity, and per-share results.
- Track developments at the Huntsville and Norco environmental sites and any resulting changes in recorded liabilities.
- Distinguish GAAP results from management’s non-GAAP measures, which exclude items including intangible amortization, restructuring charges, investment gains or losses, and certain tax effects.