TEXT-Fitch affirms Arrow Electronics IDR at 'BBB-'
Dec 5 - Fitch Ratings has affirmed the ratings for Arrow Electronics, Inc. (Arrow) as follows: --Issuer Default Rating (IDR) at 'BBB-'; --Senior unsecured notes at 'BBB-'; --Senior unsecured bank credit facility at 'BBB-'. The Rating Outlook is Stable. Fitch's stable outlook for IT distributors in 2013 reflects the companies' strong liquidity and countercyclical cash flows, which help offset Fitch's expectations for a difficult competitive environment and softening end market demand. Fitch's base scenario is for flat to modestly negative revenue change in 2013, although risk is weighted to the downside with the potential for a cyclical decline pending global economic conditions. Fitch views a reasonable stress scenario for the distributors at this point in time as consisting of a double digit decline in 2013 continuing through part of 2014. Under both scenarios, Fitch would expect significant margin compression but for EBITDA margins to remain positive across the sector. FCF generation would likely be significantly positive, given the expected resulting decline in working-capital balances under such a scenario. Fitch believes Arrow Electronics, Inc. would maintain its investment-grade ratings under such a scenario. This assumes cash generated from working-capital declines does not go to shareholders or aggressive acquisitions that would ultimately result in higher leverage once growth returns and working capital would be expected to increase. Fitch would be concerned if revenues declined from a loss of market share, either to other distributors or suppliers increasingly going direct to market. The ratings and Outlook incorporate the above considerations as well as the following: --Fitch expects flat to mid-single digit organic revenue declines in 2013 as Arrow manages choppy end market demand and macroeconomic concerns. Fitch would expect EBITDA margins (currently 4.7% for the LTM ending Sept. 29, 2012) to continue to compress given slowing end market demand. In a stress scenario, Fitch would expect EBITDA margins to decline to levels near the trough of the last downturn, roughly 3%, or moderately lower if revenue declines are more severe. In a flat revenue environment, Fitch estimates Arrow would generate approximately $500 million in annual free cash flow. In a stress scenario, Fitch would expect working capital cash inflows to roughly offset lower EBITDA levels and free cash flow to be near $500 million. --The ratings incorporate expectations that Arrow would maintain leverage (total debt to total operating EBITDA) of 2.5 times (x) or below (3.0x when adjusted operating leases) given Arrow's business model and credit profile. Fitch estimates leverage at 2.0x (approximately 2.4x adjusted) and interest coverage (EBITDA to total interest expense) at 9.0x as of Sept. 29, 2012. --Fitch expects uses of cash flow and excess cash will principally go to fund organic growth, working capital needs, potential small acquisitions, and share repurchases. Arrow has roughly $124 million in remaining share repurchase authorization and has repurchased $223 million in the LTM period. 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 additional 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 short-run through the use of free cash flow for debt reduction and EBITDA growth. Fitch believes Arrow's diversification efforts into areas like software and network security as well as services like IT asset disposition and reverse logistics are important developments for Arrow's credit profile. Fitch would expect demand for these services to be less volatile than traditional hardware and components businesses. As these services 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. 29, 2012, financial flexibility was solid with $359 million in cash and $1.1 billion available from a $1.2 billion senior unsecured revolving credit facility which expires in August 2016. Arrow has roughly $540 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 $400 million over past five years. Arrow's next scheduled maturity is $332 million of notes due in 2013 which Fitch expects to be refinanced in the coming months. Total debt as of Sept. 29, 2012 was $1.9 billion and consisted primarily of: --$94 million drawn on the company's $1.2 billion revolving credit facility expiring August 2016; --$235 million drawn on the company's $750 million A/R securitization facility expiring December 2014; --$332 million 6.875% notes due 2013; --$250 million of 3.375% notes due 2015; --$200 million 6.875% senior debentures due 2018; --$300 million 6% notes due 2020; --$200 million 7.5% senior debentures due 2027; and --$250 million of 5.125% notes due 2021. WHAT COULD TRIGGER A RATING ACTION 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; --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'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'Corporate Rating Methodology', dated Aug. 8, 2012; --'Evaluating Corporate Governance', dated Dec. 13, 2011; --'Rating Technology Companies', dated Aug. 9, 2012. Applicable Criteria and Related Research: Corporate Rating Methodology Evaluating Corporate Governance Rating Technology Companies
- Insight: How U.S. spying cost Boeing multibillion-dollar jet contract
- Exclusive: Secret contract tied NSA and security industry pioneer |
- With Fed out of the way, what's next on Wall Street?
- Yemeni al Qaeda says attack on hospital was mistake
- Insight: For Chinese farmers, a rare welcome in Russia's Far East