Reuters logo
Fitch Affirms Arrow's IDR at 'BBB-'; Outlook Stable
April 12, 2017 / 9:15 PM / 8 months ago

Fitch Affirms Arrow's IDR at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, April 12 (Fitch) Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Arrow Electronics, Inc. (Arrow) at 'BBB-'. The Rating Outlook remains Stable. A full list of ratings follows at the end of this release. As of Dec. 31, 2016, Arrow had approximately $2.8 billion of debt outstanding. The ratings are supported by Arrow's market leadership and scale, diversified supplier and customer base, modest leverage, and solid FCF generation. Factors limiting the rating include Arrow's weak position in the supply chain and thin operating margins. The Stable Outlook reflects Fitch's belief that Arrow's assets and strategy are properly aligned to take advantage of growth opportunities in components, software and new hardware technologies. As a consequence, Fitch believes Arrow is positioned stronger within the rating relative to direct competitors due to its more diversified revenue streams and higher FCF generation. Fitch expects $400 million to $500 million of mid-cycle FCF generation and for total debt adjusted for rental expense to operating EBITDAR (adjusted leverage) to remain below 3.5x over the rating horizon. Fitch believes Arrow has been more successful relative to its peers at navigating an increasingly challenging environment as enterprises shift workloads to hyperscale cloud providers. The company has invested in sales people who have the technical expertise to sell software and have strategically built out supplier relationships with software vendors. Arrow has also built a public cloud services platform, ArrowSphere, providing customers a suite of products to enable cloud capabilities. In the Enterprise Computing Solutions (ECS) segment, 65% of revenue is from software and services compared to just 25% 10 years ago; cloud revenue was $400 million in 2016 compared to approximately $200 million in 2015. Semiconductor consolidation has been elevated in recent years causing pricing pressure for distributors. In response, Arrow and its direct competitors have invested in engineers, created design communities and have been providing extensive technical product information to designers. These value-added strategies have stabilized EBITDA margins, and Fitch expects margins to remain relatively stable over the rating horizon. KEY RATING DRIVERS Market Leadership and Scale: A leading enterprise computing and components distributor, Arrow offers customers and suppliers a global footprint that optimizes logistics and connects suppliers with fragmented distribution channels. Fitch believes Arrow is likely to sustain its leadership position due to its broad product portfolio and scale that would be difficult to replicate given the fragmented nature of its customer base. Weak Position in Supply Chain: Arrow's low EBITDA margin profile reflects the bargaining power of its suppliers and lower value-added nature of the distribution business. The largest customers go direct to the supplier and during slow growth periods suppliers tend to take more customers direct, exacerbating exposure to IT spending and semiconductor cyclicality. Moreover, semiconductor supplier consolidation results in broader product portfolios which disrupts the distributor business model and results in pricing pressure. Distributors have been investing in engineers for design and technical support to generate higher margin demand-creation sales to help offset pricing pressure. FCF and Cyclicality: Fitch expects about $400 million to $500 million of mid-cycle annual FCF, driven by growth in components and software. Arrow is exposed to the cyclicality of semiconductor demand and IT spending causing significant swings to revenue and profitability. Fitch believes cyclicality is partially offset by Arrow's ability to convert working capital investments in accounts receivables and inventory into liquidity during prior downturns. Diversified Customer Base: Like most IT Distributors, Arrow benefits from a diverse customer base with no customer accounting for more than 3% of revenue in 2016. Fitch does not expect exposure to increase meaningfully as Arrow focuses on growing the number of SMB customers. Modest Leverage: Fitch expects total debt adjusted for rental expense to operating EBITDAR (adjusted leverage) to remain below 3.5x over the intermediate term and was 2.8x for the latest 12 months (LTM) ended Dec. 31, 2016. Short-term spikes in leverage to accommodate modest acquisitions would be consistent with the rating. Capital Allocation Strategy: Fitch expects Arrow to continue to invest internally on engineers and grow services but use excess cash flow to pursue acquisitions and for share repurchases. Acquisitions are expected to be bolt-on in nature with average annual spend of $200 million over the rating horizon. In December, Arrow announced it received board approval for a $400 million share repurchase program, increasing total availability to $520 million. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: --Organic revenue growth in the low single-digits over the intermediate term supported by components and software but partially offset by negative growth in legacy hardware products; --Expectation for mid-cycle operating EBITDA margins to remain stable in the mid-4% area; --Mid-cycle FCF of $400 million to $500 million annually through the rating cycle; --FCF is used principally for share repurchases and bolt-on acquisitions; --Arrow would moderate share repurchases in the face of pressured FCF. RATING SENSITIVITIES Negative: --Fitch's expectation for adjusted leverage (adjusted debt to EBITDAR) to be sustained above 3.5x or gross leverage (unadjusted debt to EBITDA) to be sustained above 3.0x, most likely due to domestic cash limitations, debt financed acquisitions and/or share repurchases; --The expectation for mid-cycle FCF to adjusted debt approaching 5% or below, resulting from a faster than anticipated shift in customer workloads to hyperscale cloud providers. Positive: Upside movement in the ratings is limited given Arrow's thin operating margin profile with significant cyclical demand exposure. Sustained improvement in credit metrics paired with a long-term strategic business rationale and demonstrated commitment from management to maintain a more conservative financial policy would be necessary. LIQUIDITY Arrow's liquidity is solid and supported by cash of approximately $534 million ($367 million held offshore) as of Dec. 31, 2016 and the expectation for mid-cycle FCF of $400 million to $500 million through the forecast. Arrow has full availability under its $1.8 billion senior unsecured revolving credit facility (RCF), expiring December 2021 and $450 million available under the company's $910 million accounts receivable securitization (ARS) facility, expiring September 2019. In December 2016, Arrow amended its RCF and increased its borrowing capacity from $1.5 billion to $1.8 billion and extended its maturity date to December 2021. The company also amended its ARS program in September 2016 and increased its borrowing capacity from $900 million to $910 million and extended the maturity to September 2019. Total debt as of Dec. 31, 2016 was $2.8 billion and consisted primarily of: --$1.8 billion senior unsecured revolving credit facility due 2021 (undrawn); --$460 million drawn on the company's $910 million A/R securitization facility due 2019; --$200 million 6.875% senior unsecured notes due 2018; --$300 million 3.000% senior unsecured notes due 2018; --$300 million 6.000% senior unsecured notes due 2020; --$250 million 5.125% senior unsecured notes due 2021; --$350 million 3.500% senior unsecured notes due 2022; --$300 million 4.500% senior unsecured notes due 2023; --$350 million 4.000% senior unsecured notes due 2025; --$200 million 7.500% senior unsecured notes due 2027; --$98 million of other debt. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings for Arrow: --IDR 'BBB-'; --Senior unsecured revolving credit facility 'BBB-'; --Senior unsecured notes at 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Zack Schroeder Associate Director +1-312-368-2056 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Jason Pompeii Senior Director +1-312-368-3210 Committee Chairperson Philip Smyth Senior Director +1-212-908-0531 Date of Relevant Rating Committee: April 11, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --No material adjustments have been made that have not been disclosed in public filings of this issuer. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below