Arrow Electronics, Inc. — 2011 Form 10-Q Summary
Business context and reporting period
Arrow Electronics is a global distributor of electronic components and enterprise computing solutions, operating through Global Components and Global Enterprise Computing Solutions (ECS). The filing covers the quarter and nine months ended October 1, 2011, compared with October 2, 2010. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Sales | $5.187 billion | $4.658 billion | $15.950 billion | $13.507 billion |
| Operating income | $209.2 million | $184.5 million | $676.7 million | $519.0 million |
| Operating margin | 4.0% | 4.0% | 4.2% | 3.8% |
| Net income attributable to shareholders | $132.2 million | $118.5 million | $424.7 million | $321.7 million |
| Diluted EPS | $1.15 | $1.00 | $3.64 | $2.68 |
| Operating cash flow | Not separately reported | Not separately reported | $(25.6) million | $(241.3) million |
Gross profit was $711.1 million in the quarter and $2.20 billion for the first nine months. Gross margin increased approximately 60 basis points year over year in the quarter and approximately 100 basis points for the nine-month period. Selling, general and administrative expense was 9.0% of sales in Q3 and 8.9% for the nine months, compared with 8.4% in each comparable 2010 period. The effective tax rate was 28.9% for Q3 and 29.8% for the nine months.
At October 1, 2011, cash and cash equivalents were $544.6 million, down from $926.3 million at December 31, 2010. Accounts receivable were $4.174 billion and inventories were $2.194 billion. Total assets were $9.869 billion and shareholders’ equity was $3.531 billion.
Total debt, including short-term borrowings, was approximately $2.223 billion, consisting of $431.6 million of short-term borrowings and $1.792 billion of long-term debt. The company had $197.0 million outstanding under a $1.2 billion revolving credit facility and $400.0 million outstanding under a $600.0 million receivables securitization program. The company was in compliance with applicable debt covenants at October 1, 2011.
Material changes versus the prior comparable period
- Q3 sales increased 11.4%; nine-month sales increased 18.1%. Global Components grew 6.1% in Q3 and 16.1% for nine months, while Global ECS grew 26.0% and 23.3%, respectively.
- Excluding foreign exchange and acquisitions, consolidated sales declined 0.9% in Q3 but increased 3.8% for the nine-month period. The stronger U.S. dollar translation effect was favorable, adding $169.0 million to Q3 sales and $492.0 million to nine-month sales.
- Net income attributable to shareholders increased 11.6% in Q3 and 32.0% for the first nine months. Diluted EPS increased to $1.15 from $1.00 in Q3 and to $3.64 from $2.68 for nine months, aided by lower average shares outstanding.
- Gross-margin improvement was driven primarily by recent acquisitions, improved pricing, and product mix. Higher SG&A, interest expense, and depreciation and amortization partly offset the benefit.
- The company completed or integrated several acquisitions, including Richardson RFPD and Nu Horizons, and paid $523.3 million for acquired businesses during the first nine months of 2011.
- Operating cash use improved substantially from $241.3 million to $25.6 million, but investing cash use increased to $611.6 million, primarily because of acquisitions and capital expenditures.
Guidance, outlook, commentary, risks, and unusual items
Management stated that cash availability, borrowing capacity, expected operating cash flows, and access to capital markets were sufficient for projected needs for the foreseeable future. No quantitative revenue or earnings guidance was provided. Management noted that most sales are order-by-order rather than under long-term contracts, limiting visibility beyond a few months.
- Restructuring, integration, and other charges were $8.8 million in Q3 and $23.7 million for nine months, including workforce reductions, facility exits, and acquisition-related costs. Approximately 300 positions were eliminated during the nine-month period.
- The company recorded a $5.9 million legal settlement charge and a $1.8 million bargain-purchase gain during the first nine months of 2011.
- A global enterprise resource planning initiative was expected to require $50 million to $60 million of cash in 2011, with the impact expected to remain flat in 2012.
- Management identified risks from product supply, pricing, customer demand, competition, supplier relationships, margin pressure, global economic conditions, ERP implementation, and the ability to generate cash flow.
- The filing added a risk concerning the Japan earthquake and tsunami, which could disrupt suppliers and cause component shortages.
- Environmental matters at former Wyle facilities in Norco, California, and Huntsville, Alabama, remain subject to uncertain remediation costs and indemnification recoveries. The company believes recoveries are probable, but collection may take several years.
- The company tested goodwill and indefinite-lived intangible assets for impairment after a temporary decline in market capitalization and concluded that no impairment existed.
- The company repurchased approximately $196.8 million of common stock during the first nine months and had repurchased 4.35 million shares under its announced programs as of October 1, 2011. On October 24, 2011, the board authorized an additional $150 million repurchase.
Important facts for investors to verify
- Whether sales and margins excluding acquisitions and foreign exchange continue to support reported growth.
- The sustainability of gross-margin gains relative to higher SG&A, acquisition integration costs, and increased amortization.
- Working-capital trends, particularly inventory growth, accounts payable reductions, and the company’s ability to convert earnings into operating cash flow.
- Refinancing or repayment plans for the $400.0 million securitization balance maturing in April 2012 and debt maturing in 2013.
- Compliance with debt covenants and the company’s continued access to revolving and capital-market funding.
- Execution and cash requirements of the ERP implementation and acquisition integration programs.
- Potential effects of supply disruptions in Japan, foreign-exchange movements, and demand weakness in Asia/Pacific.
- Timing and collectability of environmental and tax indemnification receivables from E.ON AG and related insurers.