Fitch Affirms Arrow's IDR at 'BBB-'; Outlook Stable
NEW YORK -- December 3, 2013
Fitch Ratings has affirmed the IDR for Arrow Electronics, Inc. (Arrow) at
'BBB-' with a Stable Outlook.
KEY RATINGS DRIVERS
The ratings and Outlook incorporate the following considerations:
--Arrow maintains a leading market position in both segments of its business.
The growth in scale and breadth of its business over the years has enabled
Arrow to increase its importance and value in the global supply chain. Fitch
believes should serve to boost the relative permanence of its value-added
--Arrow has maintained a reasonably conservative balance sheet and approach to
capital allocation with leverage (total debt to total operating EBITDA)
currently at 2.2x based on Fitch's estimates. Further, the company has
consistently produced positive free cash flow across the cycle, aided in part
by the countercyclical nature of its working capital cash flow.
--Arrow's credit strengths are balanced by the relative low margins and high
capital intensity of the distributor model, as well as the inherent volatility
in the markets it serves. The company's acquisition growth strategy is also a
potential source of event risk for bondholders. Some larger acquisitions also
carry execution risk in integration which is complicated by the relative low
margin nature of the business.
--Fitch expects low to mid-single digit organic revenue growth in 2014 as
Arrow manages modestly improving end market demand despite continuing
macroeconomic concerns. Fitch would expect EBITDA margins (currently 4.3% for
the LTM ending Sept. 28, 2013) to stabilize near the 4.5% level as the company
adjusts to a slow end-market environment. In a flat revenue environment, Fitch
estimates Arrow would generate approximately $500 million in annual free cash
--In a stress scenario, Fitch would expect revenue declines and EBITDA margins
to reflect trough levels of the last downturn in 2009, or roughly 10% revenue
declines and 3% EBITDA margins. In a stress scenario, Fitch would expect
working capital cash inflows to largely offset lower EBITDA levels and free
cash flow to fall only modestly from normalized levels, if at all.
--The ratings incorporate expectations that Arrow will maintain leverage of
2.5x or below (3x when adjusted operating leases) on a normalized basis given
Arrow's business model and credit profile. Fitch estimates leverage at 2.2x
(approximately 2.7x adjusted) and interest coverage (EBITDA to total interest
expense) at 8.1x as of Sept. 28, 2013.
--Fitch expects uses of cash flow and excess cash will principally fund
organic growth, working capital needs, potential small acquisitions, and share
repurchases. Arrow has roughly $200 million in remaining share repurchase
authorization and has repurchased $351 million in shares over the LTM period
(including a modest amount of repurchases related to stock compensation which
falls outside of the board authorized repurchase program). Fitch believes
Arrow has headroom for a moderate amount of share repurchases given the cash
generative nature of the business model. However, aggressive
shareholder-friendly actions in the face of increasing macroeconomic
uncertainty could pressure ratings if such action would be expected to lead to
higher leverage once revenue growth returns.
--Fitch believes Arrow could potentially pursue debt-financed acquisitions
resulting in higher than expected leverage if opportunities arise going
forward. Such a scenario could pressure ratings if Fitch did not reasonably
expect that Arrow would reduce leverage closer to historical levels in the
Fitch believes Arrow's diversification efforts into areas like software,
network security, cloud-based services and reverse logistics are important
developments for Arrow's credit profile. Fitch would expect demand for these
products and services to be less volatile than the traditional hardware and
components businesses. As these areas of focus grow to comprise a greater
portion of Arrow's business through organic growth and additional
acquisitions, Fitch believes the resulting diversification of revenue streams
would help solidify Arrow's rating in the investment-grade category.
Credit strengths include the company's leading market positions in both
component and enterprise computing distribution worldwide; the ability to
generate cash from operations in a normal revenue growth environment, as well
as achieve significant free cash flow in a downturn from reduced working
capital; and a highly diversified supplier and customer base.
Credit concerns include Arrow's thin operating margins, which are typical of
the IT distribution market; significant investment levels required to increase
share in the faster-growing Asia-Pacific region, including potentially
debt-financed acquisitions; integration risk stemming from Arrow's acquisition
growth strategy; Arrow's exposure to the cyclical demand patterns and cash
flows associated with the semiconductor and networking sectors; and the
potential for future partially debt-financed share-repurchase programs.
As of Sept. 28, 2013, financial flexibility was solid with $252 million in
cash and $1.16 billion available from a $1.2 billion senior unsecured
revolving credit facility which expires in August 2016. Arrow has roughly $705
million available under a three-year $775 million accounts receivable
securitization (ARS) facility maturing in December 2014. Fitch expects Arrow
to produce strong free cash flow, with minimal working capital requirements.
Fitch estimates that Arrow has produced average annual free cash flow in
excess of $350 million over past five years.
Total debt as of Sept. 28, 2013 was $1.9 billion and consisted primarily of:
--$36 million drawn on the company's $1.2 billion revolving credit facility
expiring August 2016;
--$70 million drawn on the company's $775 million A/R securitization facility
expiring December 2014;
--$250 million of 3.375% notes due 2015;
--$200 million 6.875% senior debentures due 2018;
--$300 million 3.0% notes due 2018;
--$300 million 6% notes due 2020;
--$250 million of 5.125% notes due 2021;
--$300 million 4.5% notes due 2023; and
--$200 million 7.5% senior debentures due 2027.
Fitch has affirmed the following ratings for Arrow:
--Issuer Default Rating (IDR) at 'BBB-';
--$1.2 billion senior unsecured revolving credit facility at 'BBB-';
--Senior unsecured debt at 'BBB-'.
The rating Outlook is Stable.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Revenue declines that signal a loss of market share, either to other
distributors or suppliers increasingly going direct to market;
--Severe operating margin compression resulting from intense competition or
supplier price pressures;
--Significant debt-financed acquisitions and/or share repurchases,
particularly if funded from cash generated from working capital declines.
Positive: Upside movement in the ratings is limited given Arrow's the
razor-thin operating margin profile with significant cyclical demand exposure.
Significant sustained improvement in credit metrics paired with a long-term
strategic business rationale and demonstrated commitment from management to
maintain a higher rating would be necessary.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Jason Paraschac, CFA, +1-212-908-0746
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Jamie Rizzo, CFA, +1-212-908-0548
Megan Neuburger, +1-212-908-0501
Brian Bertsch, New York, +1 212-908-0549
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