Arrow Electronics, Inc. 2015 Form 10-K Summary
Business Context and Reporting Period
Arrow Electronics is a global distributor of electronic components and enterprise computing solutions, serving more than 100,000 customers through operations in 53 countries. The company reports two segments: Global Components, representing approximately 62% of 2015 sales, and Global Enterprise Computing Solutions, representing approximately 38%.
This filing covers the fiscal year ended December 31, 2015. Fourth-quarter 2015 results are also included in the filing's unaudited quarterly data.
Financial Performance and Key Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Sales | $23.282 billion | $22.769 billion | +2.3% |
| Gross profit | $3.035 billion | $2.996 billion | +1.3% |
| Gross margin | 13.0% | 13.2% | Down 20 bps |
| Operating income | $824.5 million | $762.3 million | +8.2% |
| Operating margin | 3.5% | 3.3% | Up 20 bps |
| Adjusted operating income | $944.3 million | $924.2 million | +2.2% |
| Net income attributable to shareholders | $497.7 million | $498.0 million | Flat |
| Adjusted net income | $592.3 million | $593.0 million | Flat |
| Diluted EPS | $5.20 | $4.98 | +4.4% |
| Operating cash flow | $655.1 million | $673.3 million | Down $18.2 million |
Global Components sales increased 0.6% to $14.406 billion, while Global ECS sales increased 5.0% to $8.876 billion. Excluding currency effects and acquisitions, consolidated sales increased 2.9%.
Fourth-quarter 2015 sales were $6.751 billion, gross profit was $839.0 million, net income attributable to shareholders was $158.5 million, and diluted EPS was $1.69.
At December 31, 2015, cash and cash equivalents were $273.1 million, accounts receivable were $6.161 billion, inventories were $2.466 billion, total assets were $13.022 billion, shareholders' equity was $4.142 billion, and long-term debt was $2.381 billion.
Cash Flow, Debt, Liquidity, and Capital Allocation
- Operating activities generated $655.1 million of cash.
- Investing activities used $664.0 million, including $514.7 million for acquisitions and $154.8 million for capital expenditures. ERP-related capital expenditures were $48.8 million.
- Financing activities used $84.2 million, including $356.4 million of share repurchases, $254.3 million for note redemptions, and $128.0 million of net repayments of long-term bank borrowings.
- The company issued $700 million principal amount of new notes due 2022 and 2025, generating $688.2 million of net proceeds, primarily to refinance 3.375% notes due in 2015 and for general corporate purposes.
- The company had a $1.5 billion revolving credit facility, with $72.0 million drawn, and a $900 million asset securitization program, with $75.0 million drawn, at year-end.
- Management stated that cash, borrowing capacity, expected operating cash flow, and capital-market access were sufficient for foreseeable needs. The company was in compliance with its debt covenants at year-end.
- Arrow repurchased 8.5 million shares for approximately $480.2 million under its repurchase programs through year-end, including 2.6 million shares for $149.6 million in the fourth quarter.
- No cash dividends were paid during 2015 or 2014.
Material Changes Versus the Prior Comparable Period
- Sales growth slowed from 6.6% in 2014 to 2.3% in 2015 on a reported basis, largely reflecting a stronger U.S. dollar. Currency translation reduced reported 2015 sales by approximately 5.4%.
- Gross margin declined 20 basis points, primarily because of competitive pricing pressure in Global ECS.
- Operating margin improved to 3.5% from 3.3%, despite higher restructuring, integration, and acquisition-related charges.
- 2015 restructuring, integration, and other charges rose to $68.8 million from $39.8 million. Identifiable intangible-asset amortization increased to $51.0 million from $44.1 million.
- The 2014 $78.0 million non-cash trade-name impairment charge did not recur in 2015.
- Net interest and other financing expense increased 16.7% to $135.4 million, primarily because of higher average debt outstanding.
- Cash declined to $273.1 million from $400.4 million, while long-term debt increased to $2.381 billion from $2.068 billion.
- Arrow completed ten acquisitions in 2015, including immixGroup and a majority investment in Data Modul AG. Acquisition spending increased substantially from $162.9 million in 2014 to $514.7 million in 2015.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear quantitative revenue, earnings, or margin guidance target. Management emphasized growth through acquisitions, expansion of product and service offerings, geographic reach, digital capabilities, managed services, unified computing, and operational-efficiency initiatives. Forward visibility remains limited because most sales are made on an order-by-order basis rather than under long-term contracts.
- Key operating risks include technology and semiconductor-market cyclicality, competitive pricing pressure, inventory obsolescence, supplier concentration and cancelable distribution agreements, customer defaults, and exposure to international markets and foreign currencies.
- Foreign operations represented approximately 54% of sales. A hypothetical 10% decline in average foreign exchange rates against the U.S. dollar would have reduced 2015 sales by approximately $680.3 million and operating income by approximately $30.2 million, according to the filing's sensitivity analysis.
- Arrow is continuing a complex global ERP implementation. EMEA and Asia/Pacific conversions were substantially complete; the Americas implementation was expected to continue over the following years. Delays, cost overruns, or business interruptions remain risks.
- Goodwill was $2.369 billion at year-end. Annual impairment testing in 2015 indicated no impairment, but future impairment charges remain possible if operating performance, market conditions, foreign exchange rates, or valuation assumptions deteriorate.
- Environmental matters related to former Wyle facilities in Huntsville, Alabama, and Norco, California, remain unresolved. Estimated additional costs were approximately $3.4 million to $4.75 million for Huntsville investigative and remediation work and $14.1 million to $24.5 million for Norco activities, with further costs not yet estimable.
- An FTC Civil Investigative Demand concerning an industry sales-data database program remained at a preliminary information-gathering stage. The filing states that no proceedings had been instituted, and the potential impact could not be predicted.
- In January 2016, Arrow experienced an executive-impersonation fraud involving unauthorized cash transfers from a European account to Asia. The company expected to record an approximately $13 million charge in the first quarter of 2016. The investigation was ongoing, but the company stated that the event appeared isolated and was not associated with a security breach or data loss.
- Management and Ernst & Young identified a material weakness in internal control over financial reporting related to preventing or timely detecting unauthorized cash disbursements. Ernst & Young issued an adverse opinion on internal control effectiveness, although it issued an unqualified opinion on the consolidated financial statements. Management expected remediation during the first quarter of 2016.
Most Important Facts for Investors to Verify
- Whether the internal-control remediation related to unauthorized cash disbursements was completed and independently validated.
- The final amount and recovery prospects related to the January 2016 fraud loss.
- Post-filing trends in Global Components and Global ECS demand, gross margin, and currency-adjusted growth.
- Debt maturities, refinancing requirements, covenant compliance, and the March 2017 maturity of the asset securitization program.
- Integration results and return on capital from the ten 2015 acquisitions, including immixGroup and Data Modul AG.
- Progress, remaining costs, and operational risks associated with the Americas ERP implementation.
- Changes in estimated environmental remediation costs at the Huntsville and Norco sites, as well as developments in the FTC investigation and other contingencies.
- The sustainability of share repurchases given the decline in cash balances and increase in debt.