Arrow Electronics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 27, 2015, compared with June 28, 2014. Financial statements are unaudited. Arrow distributes electronic components and provides enterprise computing solutions through its Global Components and Global ECS segments.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $5.830 billion | $5.677 billion | $10.832 billion | $10.759 billion |
| Gross profit | $768.6 million | $747.5 million | Approximately $1.45 billion | Approximately $1.45 billion |
| Gross margin | 13.2% | 13.2% | 13.4% | 13.5% |
| Operating income | $206.9 million | $208.3 million | $384.4 million | $386.0 million |
| Operating margin | 3.5% | 3.7% | 3.5% | 3.6% |
| Net income attributable to shareholders | $123.9 million | $127.9 million | $230.0 million | $235.0 million |
| Diluted earnings per share | $1.28 | $1.27 | $2.37 | $2.33 |
- Reported sales increased 2.7% in the quarter and 0.7% year to date. Excluding foreign exchange and acquisitions, sales increased 2.8% and 3.1%, respectively.
- Global Components sales increased 3.6% in the quarter and 0.8% year to date; Global ECS sales increased 1.2% and 0.5%, respectively.
- Adjusted operating income, excluding acquired intangible amortization and restructuring, integration, and other charges, was $238.0 million in Q2 and $442.7 million year to date, versus $228.8 million and $429.1 million in the comparable periods.
- Adjusted net income attributable to shareholders was $148.9 million in Q2 and $276.7 million year to date, versus $144.3 million and $268.3 million, respectively.
- Net interest and other financing expense increased to $34.7 million in Q2 and $65.6 million year to date, primarily because of higher average debt outstanding.
Cash flow, balance sheet, debt, and liquidity
- Six-month operating cash flow was $219.4 million, compared with $283.5 million in 2014. Investing cash outflow was $537.5 million, including $470.7 million for acquisitions and $68.8 million for capital expenditures. Financing cash inflow was $325.3 million.
- Cash and cash equivalents were $399.7 million at June 27, 2015, essentially unchanged from $400.4 million at December 31, 2014. Cash held outside the United States was $166.8 million.
- Accounts receivable declined to $5.085 billion from $6.044 billion at year-end, while inventories increased to $2.518 billion from $2.335 billion.
- Total debt, including short-term borrowings and long-term debt, was approximately $2.631 billion, compared with approximately $2.081 billion at December 31, 2014.
- Arrow issued $350 million of 3.50% notes due 2022 and $350 million of 4.00% notes due 2025, using net proceeds of $688.2 million partly to refinance its 3.375% notes. It redeemed $250 million principal amount of those notes and recorded a $2.9 million pretax loss on prepayment.
- The company had a $1.5 billion revolving credit facility maturing in December 2018, with $19.4 million outstanding, and a $900 million asset securitization program maturing in March 2017, with $290.0 million outstanding. Arrow reported compliance with applicable debt covenants.
- Management believes cash, borrowing capacity, expected operating cash flow, and capital-market access are sufficient for projected needs for the foreseeable future.
Material changes versus the prior comparable period
- Reported revenue grew modestly, but currency translation reduced first-half sales by approximately $670.4 million and operating income by $21.6 million.
- Gross margin declined approximately 10 basis points year to date, primarily from competitive pricing pressure in Global ECS.
- Reported operating income and net income declined slightly despite higher adjusted operating income and adjusted net income.
- Restructuring, integration, and other charges increased to $17.1 million in Q2 and $33.3 million year to date, compared with $9.6 million and $21.2 million, respectively.
- Arrow completed six acquisitions during the first six months, including immixGroup and a 53.7% acquisition of Data Modul AG. immixGroup contributed $96.5 million of Q2 sales. Goodwill increased to $2.341 billion from $2.069 billion at year-end.
- Share repurchases totaled $156.4 million in the first six months. The company had repurchased 4.955 million shares for $280.6 million under the approved $400 million program as of June 27, 2015.
Outlook, commentary, risks, and unusual items
- The filing does not provide specific quantitative revenue or earnings guidance. Management stated that the order-based business provides limited visibility beyond a few months.
- Management continues to target sales growth above market growth, faster profit growth than sales, expanded markets, and improved return on invested capital. Acquisitions remain part of the growth strategy.
- Restructuring initiatives are intended to reduce costs and improve operating efficiency. Remaining restructuring and integration accruals totaled $16.7 million at quarter-end, primarily expected to be spent within one year.
- Principal risks include foreign exchange movements, product supply and customer demand, pricing and margin pressure, competition, supplier relationships, ERP implementation, acquisition integration, legal and regulatory matters, and the company’s ability to generate cash.
- Environmental remediation obligations related to former Wyle facilities remain uncertain. Estimated additional costs were $0.5 million to $0.75 million for Huntsville investigations, $3 million to $4 million for potential Huntsville remediation under described assumptions, and $16.3 million to $24.5 million for Norco activities; further costs cannot currently be estimated.
- The FTC had issued a Civil Investigative Demand concerning a trade-group database program. No proceedings had been instituted, and the potential impact could not be predicted.
- Foreign exchange contracts had a notional amount of $372.1 million. Approximately 81% of debt was fixed-rate and 19% floating-rate at quarter-end.
- Arrow adopted the accounting guidance on debt issuance costs effective January 1, 2015 without a material effect. The company was evaluating the future revenue-recognition standard and its transition method.
Facts investors should verify
- Whether acquisition contributions and organic demand offset currency headwinds and continued competitive pricing pressure.
- The sustainability of adjusted margin and earnings improvements after excluding restructuring, amortization, acquisition-related costs, and other unusual items.
- Debt growth, refinancing needs, interest expense, and compliance with revolving-credit and securitization-program covenants.
- Cash conversion, working-capital requirements, inventory levels, and the effect of additional acquisitions on operating cash flow.
- Progress and final costs of ERP implementation, restructuring programs, acquisition integration, and environmental remediation.
- Potential developments in the FTC investigation and other legal, regulatory, product, tax, and environmental contingencies.