ARROW ELECTRONICS, INC. annual report, FY2011

Arrow Electronics, Inc. — Fiscal 2011 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone Q4 filing; selected fourth-quarter data are disclosed. Arrow distributes electronic components and enterprise computing solutions through its global components and global enterprise computing solutions (ECS) segments. Approximately 69% of 2011 sales came from global components and 31% from ECS. The company served more than 120,000 customers in over 80 countries and employed approximately 15,700 people.

Financial performance and position

Metric20112010Change
Sales$21.390 billion$18.745 billion+14.1%
Gross profit$2.949 billion$2.419 billion+21.9%
Gross margin13.8%Approximately 12.9%+90 bps
Operating income$908.8 million$750.8 million+21.0%
Operating margin4.2%4.0%+20 bps
Net income attributable to shareholders$598.8 million$479.6 million+24.9%
Diluted EPS$5.17$4.01+28.9%
Operating cash flow$120.9 million$220.8 millionDown $99.9 million

Fourth quarter: Sales were $5.440 billion, gross profit was $744.8 million, and net income attributable to shareholders was $174.1 million, or $1.53 diluted EPS. Fourth-quarter 2010 sales were $5.238 billion and net income was $157.9 million, or $1.34 diluted EPS.

Segment results: Global components sales increased 12.8% to $14.854 billion and operating income increased to $823.8 million. ECS sales increased 17.2% to $6.536 billion and operating income increased to $262.9 million. Excluding foreign currency and acquisitions, consolidated sales increased 2.0%; components sales were flat and ECS sales increased 6.9%.

Balance sheet and liquidity: Cash and cash equivalents were $396.9 million, down from $926.3 million at year-end 2010. Accounts receivable and inventories totaled $6.446 billion. Long-term debt was $1.928 billion, compared with $1.761 billion in 2010. The company reported access to $1.975 billion of committed credit lines, with $354.0 million outstanding at year-end, and stated that it was in compliance with all debt covenants. Approximately 80% of debt was fixed-rate and 20% floating-rate.

Cash deployment: Investing cash outflows were $646.5 million, including $532.6 million for acquisitions and $113.9 million for capital expenditures. Financing cash outflows were $13.9 million, including $197.0 million of common-stock repurchases, $200.0 million of term-loan repayment, and $19.3 million of senior-note repurchases. The company renewed and expanded its asset securitization program to $775.0 million, with $280.0 million outstanding at year-end.

Material changes versus the prior comparable period

  • Sales growth benefited from acquisitions, a weaker U.S. dollar, stronger EMEA and Americas demand, and higher ECS demand. Asia Pacific components sales declined, primarily because of weakness in low-end mobile handset components.
  • Gross margin improved approximately 90 basis points, reflecting acquisition mix, improved pricing, and a shift toward higher-margin products.
  • SG&A increased 21.6% to $1.893 billion, exceeding sales growth because recent acquisitions carried higher operating-cost structures. Depreciation and amortization increased 33.8% to $103.5 million.
  • Interest and other financing expense increased 38.4% to $106.0 million, primarily because of higher average debt used to fund acquisitions.
  • Operating cash flow declined because increased earnings were more than offset by working-capital investment. Working capital as a percentage of sales increased to 14.9% from 12.6%.
  • Arrow completed or acquired several businesses in 2011, including Nu Horizons, Richardson RFPD, Pansystem, Cross, InScope, LWP, Chip One Stop, and Flection. Aggregate 2011 acquisition cash consideration was $532.6 million.

Guidance, outlook, commentary, risks, and unusual items

Management did not provide a specific 2012 revenue or earnings forecast in the filing. Management stated that existing cash, borrowing capacity, expected operating cash flow, and capital-market access should be sufficient for projected needs for the foreseeable future. The global ERP implementation is expected to continue for several years; estimated 2012 cash costs were $50 million to $60 million, with the impact expected to decline by approximately $20 million in 2013.

  • 2011 included $37.8 million of restructuring, integration, and other charges, a $5.9 million legal-settlement charge, a $1.1 million bargain-purchase gain, a $0.9 million debt-prepayment loss, and a $28.9 million tax benefit principally from reversing a valuation allowance on international deferred tax assets.
  • Restructuring actions eliminated approximately 520 positions and involved 18 vacated facilities. Remaining restructuring and integration accruals were $14.4 million at year-end.
  • Goodwill totaled $1.473 billion. Annual impairment testing did not indicate impairment, but future declines in operating performance, market valuations, or economic conditions could result in non-cash impairment charges.
  • Environmental matters related to acquired Wyle facilities in Norco, California, and Huntsville, Alabama remain unresolved. Arrow had spent approximately $45 million on the sites, recorded a $49.0 million receivable from E.ON AG for expected indemnification, and is engaged in mediation and litigation. The ultimate costs and recovery timing remain uncertain.
  • Other key risks include semiconductor and technology-market cyclicality, inventory obsolescence, supplier concentration and cancellable distribution agreements, competitive margin pressure, international currency and regulatory exposure, acquisition integration, ERP implementation, cybersecurity and information-system failures, product liability, environmental compliance, and debt-covenant or refinancing risk.
  • The company paid no cash dividends in 2011 or 2010. Debt agreements restrict certain dividends, stock repurchases, additional borrowings, liens, and investments.

Most important facts for investors to verify

  • Whether sales growth excluding acquisitions and currency remains positive, particularly in global components and Asia Pacific.
  • Whether gross-margin improvement offsets higher SG&A, amortization, and financing costs from acquisitions.
  • Conversion of earnings into operating cash flow and the trajectory of receivables, inventories, and working capital.
  • Debt maturities, refinancing needs, availability under the revolving facility and asset securitization program, and continued covenant compliance.
  • Integration results and returns from the substantial 2011 acquisition program, including the higher-cost acquired businesses.
  • ERP implementation costs, execution risk, and any effect on operations or internal controls; controls were assessed as effective, although eight 2011 acquisitions were excluded from management’s assessment.
  • Resolution, collectability, and potential exposure associated with E.ON AG indemnification, insurance recoveries, and Wyle environmental obligations.
  • Potential effects of inventory obsolescence, semiconductor-cycle weakness, foreign-exchange movements, and future goodwill or intangible-asset impairment.