Arrow Electronics, Inc. 10-Q Summary
Business Context and Reporting Period
Arrow Electronics is a global distributor of electronic components and provider of enterprise computing solutions. Its two reportable segments are Global Components, serving OEMs and contract manufacturers, and Global Enterprise Computing Solutions (ECS), serving value-added resellers and managed service providers. The filing covers the unaudited quarter ended April 3, 2021, compared with the quarter ended March 28, 2020.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $8.386 billion | $6.381 billion | 31.4% |
| Gross profit | $930.1 million | $728.4 million | 27.7% |
| Gross margin | 11.1% | 11.4% | Down 30 bps |
| Operating income | $299.5 million | $138.3 million | 116.6% |
| Operating margin | 3.6% | 2.2% | Up 140 bps |
| Net income attributable to shareholders | $206.3 million | $49.5 million | Significant increase |
| Diluted earnings per share | $2.72 | $0.61 | Significant increase |
| Cash flow from operations | $(4.5) million | $466.9 million | Decrease |
Global Components sales increased 41.6% to $6.443 billion, while Global ECS sales increased 6.1% to $1.943 billion. Global Components represented approximately 77% of consolidated sales and ECS approximately 23%.
Income before taxes was $268.3 million versus $77.6 million. The effective tax rate was 22.7%, compared with 35.9% in the prior-year quarter. Non-GAAP net income attributable to shareholders was $215.5 million versus $79.0 million, excluding specified nonrecurring and other comparability items.
At April 3, 2021, cash and cash equivalents were $227.7 million, down from $373.6 million at December 31, 2020. Total debt, including current and long-term debt, was approximately $2.265 billion, compared with approximately $2.257 billion at year-end. Total equity was $5.214 billion, and total assets were $16.174 billion.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by higher Global Components volumes and favorable pricing, particularly in Asia/Pacific, where sales increased 88%.
- Gross margin declined because Asia/Pacific components sales represented 49% of Global Components sales versus 37% in the prior-year quarter; this region generally carries lower margins.
- Operating margin improved through volume-driven operating leverage, higher Components sales, lower operating expenses as a percentage of sales, and the absence of approximately $32.7 million of prior-year foreign tax and other loss-contingency reserves.
- Net investment results improved from a $16.8 million loss in Q1 2020 to a $2.8 million gain in Q1 2021. Interest and other financing expense declined to $33.7 million from $43.3 million.
- Operating cash flow decreased to an outflow of $4.5 million, primarily reflecting the timing of payments, including an $840.1 million reduction in accounts payable, partly offset by collections of accounts receivable.
- The company repurchased $160.6 million of common stock and 1.444 million shares under publicly announced programs during the quarter. Approximately $313.5 million remained available under the repurchase authorization.
Liquidity, Debt, and Cash Flow
Financing cash outflows included $160.6 million of share repurchases and repayment of $130.9 million of 5.125% notes due March 2021. These uses were partly offset by $154.7 million of net proceeds from long-term borrowings and $26.1 million from stock-option exercises.
Arrow had a $2.0 billion revolving credit facility maturing in December 2023, with $55.0 million outstanding at quarter-end; a $1.25 billion North American asset securitization program, with $100.0 million outstanding; a $1.2 billion commercial paper program with no borrowings; and $200.0 million of uncommitted credit lines with no borrowings. Management reported more than $3.4 billion of committed and undrawn liquidity, in addition to cash on hand, and stated that available liquidity and expected operating cash flows should meet foreseeable needs.
Guidance, Outlook, Risks, and Unusual Items
- Management expected Global Components sales in Q2 2021 to be slightly above Q1 levels, although supply-chain constraints and quarter-end timing were expected to limit the sequential increase. The company described the Components industry as experiencing supply constraints.
- Management cited continued recovery in the Americas and EMEA and a mix shift toward higher-value component sales as growth drivers, while noting that regional mix can pressure margins.
- COVID-19 remained a risk to operations, employee availability, customer credit quality, payment timing, and future demand. The ultimate effects were described as highly uncertain.
- Substantially all sales are made on an order-by-order basis rather than under long-term contracts, limiting visibility beyond a few months.
- Restructuring, integration, and other charges were $5.7 million, down from $9.1 million. The company did not anticipate material additional adjustments from the related plans.
- The EMEA receivables securitization program sold approximately $517.0 million of receivables during the quarter. Receivables sold but not collected were $386.6 million, and collateralized receivables held by the program were $678.5 million.
- Environmental remediation obligations at the Huntsville and Norco sites remain subject to uncertainty. Estimated additional costs were $3.2 million to $10.0 million for Huntsville and $5.5 million to $17.0 million for Norco, excluding potential costs that cannot yet be estimated.
- Arrow voluntarily reported historical shipments potentially involving sanctioned parties to OFAC and BIS. BIS closed its investigation with a warning letter; OFAC’s review remained ongoing, and potential penalties could not be estimated.
- The company stated that there were no material changes to previously disclosed risk factors or market risks and that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether supply-chain constraints, product availability, pricing, and regional sales mix affect Q2 and full-year revenue and gross margins.
- Whether operating cash flow normalizes after the substantial working-capital movements in Q1.
- The sustainability of unusually strong year-over-year earnings growth after adjusting for prior-year tax reserves, investment losses, and other comparability items.
- Debt maturities, borrowing levels under the revolving facility and asset securitization programs, and continued compliance with financial covenants.
- Potential OFAC penalties and the ultimate cost and timing of the Huntsville and Norco environmental matters.
- Future effects of COVID-19 on customer credit losses, demand, employee resources, and global operations.