Arrow Electronics, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Arrow Electronics is a global distributor and value-added provider of electronic components and enterprise computing solutions. Its two segments are Global Components and Global Enterprise Computing Solutions (ECS). The unaudited report covers the quarter and nine months ended September 30, 2023, compared with the quarter and nine months ended October 1, 2022.
- Q3 sales mix: approximately 78% Global Components and 22% Global ECS.
- Shares outstanding were 54.2 million as of October 26, 2023.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Sales | $8.007 billion | $9.266 billion | $25.258 billion | $27.801 billion |
| Gross profit | $980 million | $1.187 billion | $3.159 billion | $3.631 billion |
| Gross margin | 12.2% | 12.8% | 12.5% | 13.1% |
| Operating income | $340 million | $503 million | $1.154 billion | $1.546 billion |
| Operating margin | 4.2% | 5.4% | 4.6% | 5.6% |
| Net income attributable to shareholders | $199 million | $342 million | $709 million | $1.077 billion |
| Diluted EPS | $3.53 | $5.27 | $12.28 | $16.12 |
- Non-GAAP net income attributable to shareholders was $233 million in Q3 and $757 million for the first nine months, versus $354 million and $1.114 billion, respectively, in the prior-year periods.
- Non-GAAP operating income was $379 million in Q3 and $1.222 billion for the first nine months, with margins of 4.7% and 4.8%, respectively.
- Q3 Global Components sales declined 14.5% to $6.245 billion; Global ECS sales declined 10.4% to $1.762 billion.
- Reported Q3 sales declined 13.6%; on a constant-currency basis, sales declined 14.9%. Nine-month sales declined 9.1%, or 8.9% on a constant-currency basis.
Cash flow, balance sheet, debt, and liquidity
- Cash provided by operating activities was $419 million for the first nine months of 2023, compared with cash used of $142 million in the prior-year period.
- Investing cash use was $47 million, including $58 million of capital expenditures. Management expects approximately $80 million of capital expenditures for full-year 2023.
- Financing cash use was $215 million, including $720 million of share repurchases, $567 million of net long-term bank debt repayments, $300 million of note redemptions, and $496 million of net proceeds from a $500 million note offering.
- Cash and cash equivalents were $333 million at September 30, 2023, compared with $177 million at December 31, 2022.
- Short-term debt was $1.589 billion and long-term debt was $2.615 billion, for total reported debt of approximately $4.204 billion.
- Commercial paper borrowings were $903 million, and borrowings under the North American asset securitization program were $605 million.
- Management reported more than $1.9 billion of committed and undrawn liquidity in addition to cash on hand and believes liquidity is sufficient for the next 12 months and the foreseeable future.
- Working capital was $7.378 billion, compared with $7.182 billion at year-end 2022. Working capital as a percentage of annualized quarterly sales increased to 23.0% from 18.2% in the prior-year quarter.
Material changes versus the prior comparable period
- Sales, gross profit, operating income, net income, and diluted EPS declined materially, primarily because of lower demand, reduced shortage-market activity, weaker components volumes, and unfavorable product mix.
- Gross margin decreased 60 basis points in both the quarter and nine-month period. Management attributed the decline mainly to lower shortage-market activity in the Americas and weaker demand and lower-margin mix in Asia/Pacific.
- Operating expenses decreased in absolute dollars, but increased as a percentage of sales to 8.0% from 7.4% in Q3 and to 7.9% from 7.5% for the nine-month period.
- Interest and other financing expense increased to $82 million in Q3 and $247 million for the nine months, compared with $51 million and $123 million, respectively, due primarily to higher interest rates and higher average borrowings.
- Accounts receivable decreased to $10.663 billion from $12.323 billion at year-end 2022, while inventories increased to $5.806 billion from $5.319 billion.
- Allowance-for-credit-loss charges increased, primarily because of aging receivables from a limited number of customers. The allowance balance increased to $144 million from $93 million at year-end 2022.
- The company repurchased 5.7 million shares for $701 million during the first nine months, excluding excise taxes. Approximately $622 million remained available under the repurchase authorization at September 30, 2023.
Guidance, outlook, commentary, risks, and unusual items
- Management provided a full-year 2023 capital-expenditure expectation of approximately $80 million but did not provide clear quantitative revenue or earnings guidance in the filing.
- Management stated that customer and supplier visibility is limited because substantially all sales are made on an order-by-order basis rather than under long-term contracts.
- Management cited softer demand, supply-chain and industry conditions, product pricing and availability, competition, margin pressure, inflation, interest rates, foreign exchange, geopolitical events, regulation, and the ability to generate positive cash flow as material risks.
- Q3 included $31 million of restructuring, integration, and other charges, including $21 million related to environmental liabilities. Nine-month charges totaled $44 million.
- The company received $62 million in capacitor-related legal settlement funds during Q3, recorded as a reduction of selling, general, and administrative expenses.
- Environmental liabilities for the Huntsville and Norco sites were estimated at future costs of $6 million to $18 million and $23 million to $39 million, respectively. The company stated that ultimate costs cannot currently be estimated and could materially affect financial position, results, or cash flows.
- The EMEA asset securitization program has capacity of up to €600 million and matures in December 2025, subject to its terms. Supplier-finance obligations included in accounts payable were $944 million at September 30, 2023.
- The company was in compliance with applicable financial covenants, and management reported effective disclosure controls as of September 30, 2023.
Most important facts for an investor to verify
- Whether demand and inventory levels stabilize, particularly in Global Components and the Americas and Asia/Pacific regions.
- Whether gross margins recover from the 60-basis-point year-over-year decline and whether lower-margin ECS mix continues.
- The sustainability of operating cash flow amid elevated inventory, supplier-finance obligations, and increased short-term borrowings.
- Debt refinancing needs, floating-rate exposure, and the effect of higher interest rates on future earnings and liquidity.
- Credit quality of key customers and the potential for further increases in credit-loss allowances.
- Ultimate environmental remediation costs and timing for the Huntsville and Norco sites.
- The extent to which the $62 million legal settlement and other unusual items affect comparability of reported earnings.
- The pace of share repurchases relative to working-capital requirements, debt obligations, acquisitions, and other capital needs.