Arrow Electronics, Inc. 2010 Q3 SEC Filing Summary
Business Context and Reporting Period
Arrow Electronics is a global distributor of electronic components and enterprise computing solutions, serving OEMs, contract manufacturers, and value-added resellers through its Global Components and Global ECS segments. This unaudited Form 10-Q covers the quarter and nine months ended October 2, 2010, compared with the periods ended October 3, 2009.
- Global Components represented approximately 73% of nine-month sales; Global ECS represented approximately 27%.
- Shares outstanding at October 22, 2010: 115.8 million.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Sales | $4.658 billion | $3.672 billion | $13.507 billion | $10.481 billion |
| Gross profit | $608.8 million | $421.1 million | $1.735 billion | $1.254 billion |
| Gross margin | 13.1% | 11.5% | 12.8% | 12.0% |
| Operating income | $184.5 million | $45.1 million | $519.0 million | $157.5 million |
| Operating margin | 4.0% | 1.2% | 3.8% | 1.5% |
| Net income attributable to shareholders | $118.5 million | $12.6 million | $321.7 million | $60.4 million |
| Diluted EPS | $1.00 | $0.10 | $2.68 | $0.50 |
Q3 2010 SG&A was $390.7 million, or 8.4% of sales, versus 8.8% in the prior-year quarter. The effective tax rate was 29.1% in Q3 and 30.8% for the nine months, versus 46.7% and 37.9%, respectively, in the comparable 2009 periods.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents declined to $509.7 million at October 2, 2010 from $1.137 billion at December 31, 2009.
- Nine-month operating cash flow was negative $241.3 million, compared with positive $649.3 million in 2009. The deterioration primarily reflected increases in accounts receivable and inventories.
- Nine-month investing cash flow was negative $526.4 million, including $460.0 million for acquisitions and $83.4 million of capital expenditures. ERP-related capital expenditures were $46.1 million.
- Nine-month financing cash flow was positive $163.6 million, including $360.4 million of revolving-credit borrowings, partially offset by $131.3 million of share repurchases and $69.5 million of senior-note repayment.
- Total debt was approximately $1.644 billion, consisting of $16.9 million of current borrowings and $1.628 billion of long-term debt. Net debt was approximately $1.134 billion based on reported cash.
- The company had $360.4 million outstanding under an $800 million revolving credit facility maturing in January 2012. Its $300 million accounts-receivable securitization program had no outstanding borrowings and expires in March 2011.
- Management stated that cash, available borrowing capacity, expected operating cash flow, and capital-market access were sufficient for projected needs. The company reported compliance with revolving-credit covenants.
Material Changes Versus Prior Comparable Period
- Sales increased 26.9% in Q3 and 28.9% for the first nine months. Global Components grew 35.3% and 37.3%, respectively; Global ECS grew 7.9% and 10.8%.
- On a pro forma basis for acquisitions, sales increased 22.2% in Q3 and 25.4% for the nine months.
- Excluding foreign-currency effects, sales increased 29.5% in both periods. A stronger U.S. dollar reduced reported sales by $75.1 million in Q3 and $53.8 million for the nine months.
- Gross margin expanded approximately 160 basis points in Q3 and 90 basis points for the nine months, reflecting less pricing pressure in Components, improved ECS product mix in Q3, and a larger Components mix.
- Restructuring, integration, and other charges declined to $14.3 million in Q3 and $27.4 million for the nine months, versus $37.6 million and $80.9 million, respectively, in 2009.
- Arrow acquired Converge and Shared Technologies during 2010, among other smaller acquisitions. These transactions increased goodwill to $1.253 billion from $926.3 million at year-end 2009.
- Arrow repurchased 4.7 million shares for approximately $125.0 million under 2010 programs, with approximately $75.0 million remaining authorized at October 2, 2010.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide specific formal revenue or earnings guidance. Management noted that most sales are order-by-order rather than under long-term contracts, providing only a few months of visibility.
- Management’s objectives are to grow sales faster than the market, grow profits faster than sales, and improve return on invested capital through organic growth, acquisitions, operating efficiencies, and asset utilization.
- 2010 restructuring actions eliminated approximately 250 positions and involved the exit of seven facilities. Restructuring and integration accruals totaled $20.4 million at October 2, 2010, expected to be spent in cash over several years.
- Announced pending acquisitions included Nu Horizons for approximately $130 million, expected to close in Q4 2010 subject to approvals, and Richardson RFPD for approximately $210 million, expected to close in early 2011. Four shareholder lawsuits relating to the Nu Horizons transaction were disclosed; management did not expect a material adverse effect.
- Environmental contingencies remain at the Huntsville and Norco sites. Estimated additional costs are provided for certain activities, but the full Norco scope and related costs are not yet known. Arrow also disclosed an approximately $16 million counterclaim by E.ON AG and ongoing indemnification litigation.
- Key forward-looking risks include demand and pricing pressure, product supply, competition, supplier relationships, foreign exchange, ERP implementation, acquisition integration, liquidity, and the ability to generate operating cash flow.
- At October 2, 2010, approximately 52% of debt was floating-rate and 48% fixed-rate. A 10% decline in average foreign-exchange rates against the U.S. dollar was estimated to reduce nine-month sales by approximately $402.4 million and operating income by $17.5 million.
- Management reported effective disclosure controls. A phased global ERP implementation continued without significant difficulties to date.
Most Important Facts to Verify
- Whether negative operating cash flow and higher working-capital requirements improve as sales growth moderates.
- Progress on integrating Shared, Converge, and other acquisitions, including realization of expected synergies and the risk of goodwill impairment.
- Completion, financing, and regulatory approval of the Nu Horizons and Richardson RFPD acquisitions.
- Refinancing or repayment plans for the $360.4 million revolving-credit balance due in January 2012 and the March 2011 securitization-program expiration.
- Actual future restructuring spending, acquisition-related charges, ERP costs, and their effect on reported earnings and cash flow.
- Resolution and ultimate cost of the environmental matters, E.ON counterclaim, Nu Horizons litigation, and other contingencies.