Arrow Electronics, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Arrow Electronics is a global distributor of electronic components and enterprise computing solutions. Its two segments are Global Components and Global Enterprise Computing Solutions (ECS). The unaudited quarter ended April 1, 2023 is compared with the quarter ended April 2, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $8.736 billion | $9.074 billion | (3.7%) |
| Gross profit | $1.114 billion | $1.208 billion | (7.8%) |
| Gross margin | 12.7% | 13.3% | (60) bps |
| Operating income | $422.2 million | $510.4 million | (17.3%) |
| Operating margin | 4.8% | 5.6% | (80) bps |
| Net income attributable to shareholders | $273.8 million | $364.7 million | (24.9%) |
| Diluted EPS | $4.60 | $5.31 | (13.4%) |
| Cash flow from operations | $223.8 million | $(200.2) million | Improved by $424.1 million |
Constant-currency sales declined 1.5%, compared with a reported decline of 3.7%. Non-GAAP net income attributable to shareholders was approximately $273.6 million, compared with $373.5 million in the prior-year period.
- Global Components sales were $6.856 billion, down 4.8% reported and 2.8% on a constant-currency basis. Operating income was $417.5 million, with a 6.1% margin versus 6.9% previously.
- Global ECS sales were $1.881 billion, approximately flat reported and up 3.4% on a constant-currency basis. Operating income was $81.1 million, with a 4.3% margin versus 4.6% previously.
- Interest and other financing expense increased to $79.7 million from $34.0 million, primarily due to higher interest rates and higher average borrowings.
- The effective income tax rate declined to 21.8% from 23.5%.
Balance sheet, debt, liquidity, and capital allocation
- Cash and cash equivalents were $205.6 million at April 1, 2023, compared with $176.9 million at December 31, 2022.
- Accounts receivable were $10.656 billion and inventories were $5.526 billion. Accounts payable included $971.0 million of supplier-finance obligations.
- Short-term debt was $144.3 million and long-term debt was $3.719 billion, for total reported debt of approximately $3.863 billion.
- The company reported more than $2.1 billion of committed and undrawn liquidity, in addition to cash on hand, and stated that available liquidity and expected operating cash flow should meet projected needs for the next 12 months and the foreseeable future.
- The company issued $500 million of 6.125% notes due March 2026 and used the net proceeds primarily to repay $300 million of 4.50% notes due March 2023. An interest-rate swap effectively converts the new notes to floating-rate debt based on SOFR plus 0.508%.
- The $2.0 billion revolving credit facility had $15 million outstanding. The $1.5 billion North American asset securitization program had approximately $1.255 billion outstanding.
- The company repurchased 2.6 million shares for approximately $300.2 million during the quarter. Approximately $1.0 billion remained available under the repurchase authorization at April 1, 2023.
- Capital expenditures were $20.1 million in Q1 2023; management expects approximately $80 million for fiscal 2023.
Material changes versus the prior comparable period
- Sales, gross profit, operating income, net income, and diluted EPS all declined, reflecting weaker Global Components demand, normalization of shortage-related pricing and activity, lower operating leverage, and higher financing costs.
- Global Components operating margin decreased 80 basis points, primarily because shortage conditions normalized in the Americas.
- Foreign-currency movements reduced year-over-year sales by approximately $202.8 million, operating income by $11.7 million, and diluted EPS by $0.13.
- Operating cash flow improved substantially to $223.8 million from an outflow of $200.2 million, consistent with the company’s historically counter-cyclical cash generation during periods of slower demand growth.
- Inventory increased while sales declined, and working capital as a percentage of annualized quarterly sales rose to 20.6% from 17.0% in the year-earlier period.
- Short-term debt declined by $445.6 million from year-end, while long-term debt increased by $536.1 million, primarily reflecting the refinancing activity and additional long-term borrowings.
Outlook, commentary, risks, and unusual items
- Management stated that component supply shortages and supply-chain conditions continued to normalize during Q1 2023. Product prices remained elevated in some areas, while prices for products most affected by shortages declined toward historical norms.
- Management expects long-term profitability to remain above historical levels after remaining shortage conditions resolve, but the filing does not provide clear formal revenue or earnings guidance.
- The ECS business continues to face supply constraints in hardware and large, complex IT projects; management views the backlog of demand as an opportunity as supply improves.
- Key risks include economic recession, inflation, interest rates, foreign exchange, customer demand, pricing and margin pressure, supply-chain disruption, supplier relationships, competition, geopolitical and military events, regulatory compliance, and the company’s ability to generate cash flow.
- Restructuring, integration, and other charges were $2.6 million, compared with $4.9 million in the prior-year quarter. Management did not anticipate material further adjustments related to the identified plans.
- The company recorded a $10.3 million net gain on investments, primarily related to changes in the fair value of assets associated with the Arrow SERP pension plan and the investment in Marubun Corporation.
- Environmental remediation liabilities remain uncertain. Estimated additional costs are $2.1 million to $10.0 million for the Huntsville site and $6.0 million to $17.0 million for the Norco site, excluding potential costs that cannot presently be estimated.
- The company reported compliance with the covenants under its revolving credit facility, North American asset securitization program, and EMEA asset securitization program.
Important facts for investors to verify
- Whether normalization of shortage-related pricing and supply conditions causes further declines in Global Components sales and margins.
- Whether inventory levels and working-capital intensity improve relative to sales trends.
- The sustainability of operating cash flow and the effect of share repurchases on liquidity and leverage.
- Exposure to higher interest rates, including the floating-rate exposure created by the swap on the 6.125% notes.
- The amount and timing of future environmental remediation costs beyond current accruals.
- Future foreign-exchange effects, particularly involving the euro, Chinese renminbi, Japanese yen, and British pound.
- Progress in converting ECS hardware and project backlog into revenue as supply availability improves.