Arrow Electronics, Inc. — Form 10-Q Summary
Business context and reporting period
Arrow Electronics is a global distributor of electronic components and enterprise computing solutions through its Global Components and Global ECS segments. The filing covers the quarter and six months ended July 2, 2011, compared with the periods ended July 3, 2010. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $5.540 billion | $4.613 billion | $10.763 billion | $8.849 billion |
| Gross profit | $770.1 million | $588.5 million | Approximately $1.493 billion | Approximately $1.132 billion |
| Operating income | $248.3 million | $189.2 million | $467.5 million | $334.5 million |
| Net income attributable to shareholders | $156.2 million | $116.2 million | $292.5 million | $203.2 million |
| Diluted EPS | $1.33 | $0.96 | $2.49 | $1.68 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(144.7) million | $(217.5) million |
- Second-quarter sales increased 20.1%; six-month sales increased 21.6%.
- Gross margin was approximately 13.9% in the second quarter and approximately 13.9% for the six months, about 110 basis points above the comparable 2010 periods.
- Second-quarter operating margin was approximately 4.5%, versus 4.1% in 2010. Six-month operating margin was approximately 4.3%, versus 3.8%.
- Cash and cash equivalents were $531.0 million at July 2, 2011, down from $926.3 million at December 31, 2010. Approximately $515.9 million was held outside the United States.
- Total debt was approximately $2.115 billion, consisting of $550.7 million of short-term borrowings and $1.564 billion of long-term debt, compared with approximately $1.822 billion at year-end 2010.
- Six-month investing cash outflows were $502.7 million, including $442.3 million for acquisitions and $60.3 million for capital expenditures. Financing activities provided $242.3 million, including $286.1 million of additional borrowings, partly offset by $96.9 million of share repurchases.
- Accounts receivable increased to $4.347 billion and inventories increased to $2.248 billion from $4.103 billion and $1.909 billion, respectively, at December 31, 2010.
Material changes versus the prior comparable period
- Global Components sales increased 18.9% in the quarter and 21.5% for the six months; Global ECS sales increased 22.9% and 21.9%, respectively.
- Excluding foreign currency and acquisitions, consolidated sales increased 2.9% in the quarter and 6.3% for the six months. Foreign currency translation added $255.7 million and $323.0 million to reported sales, respectively.
- Growth benefited from acquisitions, improved pricing, favorable product mix, and higher margins at acquired businesses. SG&A increased 30.5% in the quarter and 28.7% for the six months, faster than sales, primarily due to acquired businesses and higher operating costs.
- Interest and other financing expense increased 37.1% in the quarter and 36.1% for the six months because of higher average debt, primarily used to fund acquisitions.
- 2011 acquisitions included Nu Horizons, Richardson RFPD, Pansystem, and Cross. Acquired businesses contributed $243.1 million of second-quarter sales and $429.4 million of six-month sales.
Guidance, outlook, risks, contingencies, and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management states that current cash, borrowing capacity, expected operating cash flow, and capital-market access are sufficient for projected needs for the foreseeable future.
- The company expects the global ERP initiative to require $40 million to $60 million of cash during full-year 2011, with the impact expected to decline by approximately $10 million in 2012.
- Restructuring, integration, and other charges were $5.2 million in the quarter and $14.8 million for the six months. Six-month charges included personnel reductions of approximately 130 positions and costs associated with vacating 10 facilities.
- The company recorded a $5.9 million legal-settlement charge and a $1.8 million bargain-purchase gain during the first six months of 2011.
- The $800 million revolving credit facility matures in January 2012 and had $222.5 million outstanding. The $600 million accounts-receivable securitization program expires in April 2012 and had $70.0 million outstanding. The company was in compliance with applicable covenants at July 2, 2011.
- Environmental matters at the Norco and Huntsville sites remain unresolved. Management believes contractual indemnifications and insurance coverage will substantially offset costs, but the ultimate scope, timing, and recoverability are uncertain.
- Management identified potential supply disruptions and component shortages arising from the 2011 Japan earthquake, tsunami, and related events as an additional material risk.
- Foreign exchange exposure is significant: management estimates that a 10% decline in average foreign exchange rates against the U.S. dollar would reduce six-month sales by approximately $355.7 million and operating income by approximately $17.8 million.
- On July 26, 2011, after quarter-end, the board approved an additional $100 million share-repurchase authorization following completion of the initial $50 million program.
Important facts for investors to verify
- Whether acquisition-related revenue growth and improved gross margins are sustained after integration costs and acquired-business operating structures normalize.
- Refinancing or repayment plans for the revolving facility and securitization borrowings maturing in 2012.
- The company’s ability to convert earnings into operating cash flow while inventories, receivables, and working-capital requirements remain elevated.
- Progress, cost, and execution risks associated with the ERP implementation and restructuring initiatives.
- The outcome and timing of environmental indemnification, insurance recoveries, and related litigation.
- Potential effects of supply-chain disruptions, foreign currency movements, customer demand, pricing pressure, and supplier relationships.
- Future acquisition spending, goodwill and intangible-asset valuation, and the sustainability of the company’s repurchase program.