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. 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 quarter and six months ended June 27, 2020, compared with June 29, 2019. Approximately 71% of second-quarter sales came from Global Components and 29% from Global ECS.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Sales | $6.606 billion | $7.345 billion | $12.988 billion | $14.501 billion |
| Gross profit | $750.5 million | $814.9 million | $1.479 billion | $1.677 billion |
| Gross margin | 11.4% | 11.1% | 11.4% | 11.6% |
| Operating income (loss) | $196.6 million | $(549.2) million | $334.9 million | $(303.6) million |
| Operating margin | 3.0% | (7.5%) | 2.6% | (2.1%) |
| Net income (loss) attributable to shareholders | $132.8 million | $(549.0) million | $182.3 million | $(408.2) million |
| Diluted EPS | $1.68 | $(6.48) | $2.28 | $(4.80) |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $885.1 million | $76.4 million |
Adjusted operating income was $200.3 million in the quarter and $356.8 million for the six months, compared with $242.7 million and $519.5 million, respectively, in the prior-year periods. Adjusted net income attributable to shareholders was $126.1 million in the quarter and $205.1 million for the six months, versus $136.6 million and $300.3 million, respectively.
At June 27, 2020, cash and cash equivalents were $205.8 million. Current liabilities were $8.132 billion, including $244.3 million of short-term borrowings and current debt, and long-term debt was $2.098 billion. Total debt was approximately $2.343 billion, implying debt net of cash of approximately $2.137 billion. Accounts receivable were $7.954 billion and inventories were $3.421 billion.
Material Changes Versus the Prior Comparable Period
- Reported sales declined 10.0% in the quarter and 10.4% for the six months. On a basis adjusted for currency, dispositions, and the personal computer and mobility asset disposition business wind-down, sales declined 8.3% and 8.5%, respectively.
- Global Components sales declined 10.4% in the quarter and 11.4% for the six months, primarily because of weaker demand in the Americas and EMEA, particularly in automotive and aerospace. Asia-Pacific demand was stronger.
- Global ECS sales declined 9.1% in the quarter and 8.0% for the six months, reflecting weaker server and networking demand, partially offset by demand for network security and storage solutions.
- Adjusted gross margin decreased approximately 40 basis points in the quarter and 50 basis points for the six months, primarily because of regional mix, including a greater contribution from lower-margin Asia-Pacific Components sales.
- Reported operating results improved substantially because the prior-year periods included $623.1 million of goodwill and other impairments, $20.1 million of digital inventory write-downs, and other wind-down and AFS-related charges. The 2020 periods included $4.9 million of long-lived-asset impairments and materially lower restructuring charges.
- Operating expenses declined 15.2% in the quarter and 9.6% for the six months on a reported basis, reflecting cost reductions and lower selling, general, and administrative expenses.
- Operating cash flow increased to $885.1 million, aided by earnings, working-capital movements, and approximately $977.4 million of receivables sold under the new EMEA securitization program.
- Cash declined by $94.3 million during the first six months, primarily because $904.8 million of financing cash uses exceeded operating cash generation. Financing uses included $411.7 million of net long-term debt repayments, repayment of $209.4 million of notes due April 2020, $231.7 million of share repurchases, and a $48.4 million interest-rate-swap settlement.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide quantitative revenue, earnings, or margin guidance. Management stated that sales visibility is limited because substantially all sales are made on an order-by-order basis rather than under long-term contracts. Management expects current cash, borrowing capacity, and anticipated operating cash flow to be sufficient for projected needs for the foreseeable future; committed and undrawn liquidity was stated to exceed $3.2 billion, in addition to cash on hand.
- COVID-19: The pandemic caused supply-chain, employee-resource, travel, and business disruptions. Demand remained strong for work-from-home and business-continuity solutions, but the severity and duration of the pandemic, customer credit deterioration, reduced demand, recession risk, and capital-market access remain uncertain.
- Goodwill and impairment risk: Americas Components and eInfochips reporting units had less than 10% fair-value headroom at March 28, 2020. No additional impairment indicator was identified at June 27, 2020, but COVID-19 and changes in forecasts, margins, discount rates, or cash flows could produce future impairment.
- Receivables and credit risk: The allowance for doubtful accounts rose to $98.9 million, including the $47.0 million increase from adoption of the expected-credit-loss standard. Management had not observed significant deterioration in payment trends at quarter-end, but future credit losses could increase.
- Receivables securitization: The EMEA program had sold $977.4 million of receivables during the six months. Approximately $324.2 million of sold receivables remained uncollected and $192.6 million of collateralized receivables were held by the bankruptcy-remote entity at quarter-end.
- Restructuring and contingencies: Restructuring, integration, and other charges were $0.7 million in the quarter and $9.8 million for the six months. The company recorded approximately $32.7 million of reserves and other adjustments, primarily for foreign-tax and other loss contingencies. OFAC continues to review previously disclosed export-control matters; potential penalties could not be estimated.
- Environmental matters: Estimated additional remediation costs were $3.5 million to $10.0 million for the Huntsville site and $6.8 million to $17.7 million for the Norco site, with potential additional costs not currently estimable.
- Capital allocation: The company repurchased $231.7 million of common stock during the first six months. In July 2020, the board authorized an additional $600 million repurchase program, subject to modification, suspension, or discontinuation.
Important Facts for Investors to Verify
- Whether COVID-19-related demand, supply-chain constraints, customer defaults, and macroeconomic weakness cause further sales, margin, or goodwill pressure.
- The sustainability of operating cash flow, particularly the extent to which it depends on receivables sales and working-capital releases.
- Upcoming debt maturities, covenant compliance, borrowing capacity, and the effect of the EMEA and North American asset securitization programs on liquidity.
- Whether the Americas Components and eInfochips reporting units retain sufficient goodwill headroom under updated forecasts and discount rates.
- The eventual cost and timing of environmental remediation, OFAC-related matters, foreign-tax contingencies, and other legal or regulatory exposures.
- Whether adjusted earnings trends, which declined despite a reported return to profitability, support management’s long-term margin and return objectives.