Arrow Electronics, Inc. — 2013 Form 10-K Summary
Business context and reporting period
Arrow Electronics is a global distributor of electronic components and enterprise computing solutions. It serves more than 100,000 customers through operations in 58 countries and reports two segments: Global Components and Global Enterprise Computing Solutions (ECS). The filing covers the fiscal year ended December 31, 2013; fourth-quarter data is included in the filing but the principal results are annual.
- Global Components represented approximately 63% of 2013 sales; Global ECS represented approximately 37%.
- 2013 sales were approximately 53% international.
- Arrow acquired ComputerLinks on October 28, 2013, and completed four additional acquisitions during the year.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Sales | $21.357 billion | $20.405 billion | +4.7% |
| Gross profit | $2.791 billion | $2.737 billion | +2.0% |
| Gross margin | 13.1% | 13.4% | -30 bps |
| Operating income | $693.5 million | $804.1 million | -13.7% |
| Operating margin | 3.2% | 3.9% | -70 bps |
| Net income attributable to shareholders | $399.4 million | $506.3 million | -21.1% |
| Diluted EPS | $3.85 | $4.56 | -15.6% |
| Cash flow from operations | $450.7 million | $675.0 million | -33.2% |
- Global Components sales increased 1.0% to $13.496 billion; Global ECS sales increased 11.6% to $7.862 billion.
- Adjusted operating income, excluding identifiable intangible amortization, restructuring and integration charges, and the 2012 legal settlement gain, was $822.9 million in 2013 versus $808.9 million in 2012. Adjusted operating margin declined to 3.9% from 4.0%.
- Adjusted net income attributable to shareholders was approximately $519.0 million in 2013 versus $517.8 million in 2012, excluding specified unusual items.
- Fourth-quarter 2013 sales were $6.153 billion, gross profit was $787.6 million, net income attributable to shareholders was $134.8 million, and diluted EPS was $1.32.
Liquidity, debt, capital allocation, and balance sheet
- Cash and cash equivalents were $390.6 million at December 31, 2013, including $347.4 million held outside the United States.
- Accounts receivable and inventories totaled $7.937 billion, or approximately 65.8% of total assets.
- Total assets were $12.061 billion; shareholders’ equity was $4.180 billion.
- Long-term debt was $2.226 billion, compared with $1.587 billion in 2012. Total debt obligations in the contractual-obligations table were $2.241 billion, including current maturities.
- Arrow issued $300 million of 3.00% notes due 2018 and $300 million of 4.50% notes due 2023, using proceeds partly to refinance $332.1 million of 6.875% senior notes due 2013.
- At year-end, Arrow had a $1.5 billion revolving credit facility with no borrowings outstanding and a $775 million asset securitization program with $420 million outstanding. The company stated that it was in compliance with applicable covenants.
- 2013 financing cash uses included $362.8 million of share repurchases and $338.2 million of senior-note redemptions. No cash dividends were paid in 2013 or 2012.
Material changes versus the prior comparable period
- Sales growth resumed after a 4.6% decline in 2012, led primarily by ECS and acquisitions; underlying consolidated sales growth adjusted for currency, acquisitions, and the fulfillment-contract presentation change was 3.0%.
- Gross margin declined because of product mix and competitive pricing pressure.
- Reported profitability fell because 2013 included $92.7 million of restructuring, integration, and other charges, versus $47.4 million in 2012, while 2012 benefited from a $79.2 million legal-settlement gain.
- 2013 restructuring included $79.9 million of operating-efficiency actions, approximately 1,180 position eliminations, and exit activities involving 38 facilities.
- Operating cash flow declined as higher sales required additional working capital, particularly accounts receivable.
- Goodwill increased to $2.039 billion from $1.712 billion, primarily reflecting acquisitions; annual impairment testing indicated no impairment.
- Shares repurchased under the 2013 programs totaled approximately 6.0 million, with a market value of $248.6 million at the repurchase dates.
Outlook, commentary, risks, contingencies, and unusual items
- Management’s objectives are to grow sales faster than the market, grow profits faster than sales, expand geographically and by product, and improve return on invested capital. The filing does not provide specific numerical 2014 guidance.
- Visibility is limited because substantially all sales are order-by-order rather than under long-term contracts; customer and supplier visibility generally extends only a few months.
- Key operating risks include technology and semiconductor-cycle volatility, competitive pricing pressure, supplier concentration and cancellable distribution agreements, inventory obsolescence, international operations and currency exposure, acquisition integration, and execution of the global ERP implementation.
- A 10% adverse movement in average foreign exchange rates against the U.S. dollar was estimated to reduce 2013 sales by approximately $630.1 million and operating income by approximately $17.1 million.
- Arrow received an FTC Civil Investigative Demand on January 21, 2014 concerning an industry sales-data database program. No proceeding had been instituted, and the potential impact could not be predicted.
- Environmental obligations related to former Wyle facilities remain unresolved. Estimated additional costs were approximately $0.5 million to $0.75 million for Huntsville investigation and $3 million to $4 million for certain Huntsville remediation measures, plus approximately $17.6 million to $24.5 million for Norco activities. The ultimate costs remain uncertain.
- Arrow reported no material unresolved staff comments, no off-balance-sheet financing or unconsolidated special-purpose entities, and unqualified audit opinions on the financial statements and internal controls. The internal-control assessment excluded five entities acquired during 2013.
Most important facts for an investor to verify
- Whether adjusted profitability improvements can continue despite lower gross margins and persistent competitive pricing pressure.
- The sustainability of cash generation after working-capital investment, acquisitions, ERP spending, debt service, and share repurchases.
- Refinancing and renewal requirements for the $420 million asset securitization balance maturing in December 2014 and other near-term debt obligations.
- Progress and cost discipline in the ERP rollout and restructuring program.
- Integration results and incremental earnings from ComputerLinks and other acquisitions.
- Potential financial exposure from Wyle environmental matters, the FTC investigation, tax contingencies, product liability, and other litigation.
- The effect of semiconductor and information-technology demand cycles, foreign exchange movements, and supplier relationships on future revenue and margins.