Arrow Electronics, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Arrow Electronics is a global distributor of electronic components and enterprise computing solutions. Its two reportable segments are Global Components and Global Enterprise Computing Solutions (ECS). The unaudited quarter ended April 1, 2017 is compared with the quarter ended April 2, 2016.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Sales | $5.760 billion | $5.474 billion | 5.2% |
| Gross profit | $759.9 million | $748.9 million | 1.5% |
| Gross margin | 13.2% | 13.7% | Down 50 bps |
| Operating income | $191.7 million | $181.4 million | 5.7% |
| Operating margin | 3.3% | 3.3% | Flat |
| Net income attributable to shareholders | $113.8 million | $106.2 million | 7.1% |
| Diluted EPS | $1.26 | $1.14 | 10.5% |
| Net cash used in operating activities | $20.9 million | $33.6 million | Improved |
Adjusted operating income was $220.1 million, or 3.8% of sales, versus $215.1 million, or 3.9%, in the prior-year quarter. Adjusted net income attributable to shareholders was $132.4 million versus $132.2 million. These measures exclude identifiable intangible-asset amortization and restructuring, integration, and other charges.
Cash and cash equivalents were $521.6 million at April 1, 2017, compared with $534.3 million at December 31, 2016. Total assets were $13.4 billion. Accounts receivable were $5.9 billion and inventories were $2.9 billion. Working capital as a percentage of sales increased to 17.2% from 15.9% in the comparable 2016 period.
Total debt, based on short-term borrowings and long-term debt, was approximately $2.9 billion at April 1, 2017, compared with approximately $2.8 billion at December 31, 2016. The company had $42.5 million outstanding under its $1.8 billion revolving credit facility, $85.2 million of commercial paper outstanding under a $1.2 billion program, and $480.0 million outstanding under a $910.0 million accounts-receivable securitization program. The company was in compliance with its debt covenants.
Investing cash use was $54.2 million, including $62.1 million of capital expenditures. Financing cash provided was $64.0 million, including $68.8 million of share repurchases, $23.4 million paid to acquire additional Data Modul shares, and $138.9 million of short- and long-term borrowings, partly offset by other financing uses. Cash declined by $12.8 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Global Components sales increased 10.4% to $4.1 billion, while Global ECS sales decreased 5.4% to $1.7 billion.
- On a constant-currency and acquisition-adjusted basis, consolidated sales increased 5.8%; Global Components increased 11.5% and Global ECS declined 5.7%.
- Gross margin declined 50 basis points, primarily due to business and regional sales mix.
- Operating income increased despite higher sales, general, and administrative expenses, helped by lower depreciation and amortization and lower restructuring-related charges.
- Restructuring, integration, and other charges declined to $15.5 million from $20.8 million. The prior-year amount included a $13.2 million fraud loss; the 2017 amount included $8.0 million of current-period efficiency initiatives and $2.7 million of acquisition-related expenses.
- Net interest and other financing expense increased to $38.1 million from $35.6 million because of higher average debt and variable interest rates.
- The company acquired an additional 11.9% of Data Modul AG for $23.4 million, raising its ownership to 69.2%; the transaction was not material to consolidated results.
- Share repurchases during the quarter totaled $68.8 million. Approximately $463.7 million remained available under approved repurchase programs at April 1, 2017.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide specific quarterly or full-year financial guidance. Management stated that customer and supplier visibility is limited beyond a few months because sales are generally made on an order-by-order basis.
Management expects current cash, borrowing capacity, future operating cash flows, and access to capital markets to be sufficient for projected needs for the foreseeable future. Management also stated that no material adjustments were anticipated relating to the disclosed restructuring and integration plans.
- Key operating risks include product supply, pricing, customer demand, competition, supplier relationships, margin pressure, global economic conditions, ERP implementation, and integration of acquired businesses.
- Cash held outside the United States totaled $423.7 million. Repatriation could result in significant U.S. income taxes, and local regulations may restrict cash transfers.
- Environmental obligations associated with former Wyle facilities remain unresolved. Estimated additional costs include approximately $3.3 million to $4.6 million at Huntsville and $20.6 million to $31.3 million at Norco, with potential additional costs that cannot currently be estimated.
- A Federal Trade Commission civil investigative demand regarding an industry database program remains outstanding; the filing states that no proceedings have been instituted and the potential impact cannot be predicted.
- A customer had approximately $19.5 million of combined notes and accounts receivable and had become delinquent on its note. Management expects recovery but acknowledges a possible loss.
- Restructuring and integration accruals totaled $20.8 million at quarter-end and are expected to be paid in cash over several years.
- The company adopted certain accounting standards effective January 1, 2017, with no material reported impact. It was evaluating the future effects of revenue recognition, leases, financial instruments, and credit-loss standards.
Investor Verification Checklist
- Verify the sustainability of Global Components growth and the recovery prospects for declining Global ECS demand.
- Monitor gross-margin trends and the effect of product, customer, and regional mix.
- Reconcile adjusted, non-GAAP results with GAAP results and assess recurring versus unusual charges.
- Track debt maturities, commercial paper usage, securitized receivables, interest-rate exposure, and covenant compliance.
- Evaluate working-capital intensity, particularly receivables, inventories, payables, and operating cash conversion.
- Follow ERP implementation, restructuring execution, acquisition integration, and Data Modul performance.
- Assess potential environmental, regulatory, litigation, customer-credit, and foreign-currency exposures, including amounts not yet estimable.