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12 Nov 2003
MOODY'S INVESTORS SERVICE AFFIRMS Baa3 SENIOR UNSECURED RATING OF ARROW ELECTRONICS, INC.; OUTLOOK REMAINS NEGATIVE
Approximately $2 billion of debt securities affected
New York, November 12, 2003 -- Moody's affirmed the Baa3 senior unsecured rating of Arrow Electronics,
taking into consideration higher than expected improvement in revenue
growth but continued deficiency in profitability and credit protection
measures. The outlook is negative.
Ratings affirmed include:
Senior unsecured debt at Baa3
Shelf registration for senior unsecured, subordinated, and
preferred stock at (P)Baa3, (P)Ba1 and (P)Ba2, respectively
$450 million revolving credit facility maturing February 2004 at
The rating affirmation and negative outlook reflect: (i) revenue
growth that has been stronger than previously anticipated, (ii)
margins and returns that remain challenged, (iii) very high debt
levels that have limited near term maturities and (iv) very low interest
coverage and cash flow to debt ratios. The outlook also considers
the limitations for Arrow to meaningfully reduce debt and improve credit
protection measures over the intermediate term.
Despite recent quarterly revenue growth on a year-over-year
basis, overall margin improvement is not likely to be sufficient
to offset increases in working capital necessary to continue Arrow's
recent revenue growth. Accordingly, Moody's believes
that debt protection measures will remain weak over the intermediate term,
unless the company raises a considerable amount of equity in order to
reduce its significant debt balance. In the absence of meaningful
debt reduction over the near term, ratings could experience significant
downward pressure. The rating has had a negative outlook since
February 2003, reflecting reductions in the company's internal
liquidity following its $230 million cash acquisition of the Industrial
Electronics Division of Agilysys (formerly Pioneer-Standard) and
credit metrics that have remained sub-par for the rating category.
Arrow has demonstrated some recent improvement in operating performance.
Revenue in each of the last two quarters has grown over 15 percent from
the prior year's corresponding quarter, indicating increased
demand for components and computer products. Cash flow from operations
has increased sequentially from negative $46 million in the first
quarter ended March 2003 to $113 million in the third quarter as
the company continues to manage its working capital cycle. However,
Arrow continues to face pricing pressure, as quarterly gross margins
have steadily declined from 17.3 percent in the June 2002 quarter
to 16.4 percent in the September 2003 quarter. Despite higher
recent revenue growth and cost reduction efforts that have stabilized
operating margins on an adjusted basis, LTM EBITDA interest coverage
remains low at just over 2 times as of the September 2003 third quarter.
Capital adequacy, as measured by LTM free cash flow to debt,
is also low at approximately 8 percent for the third quarter.
Arrow has no outstandings under its $450 million revolving credit
working capital facility maturing February 2004, and no outstandings
under its $550 million accounts receivable securitization program
maturing February 2004. Financial covenants under Arrow's credit
facility remain tight and currently limit full usage of the credit facility
and accounts receivable securitization program. Both facilities
are expected to be renewed shortly with terms and conditions substantially
similar to the existing agreements.
The negative outlook takes into consideration the limited prospects for
the company to materially improve debt protection measures over the intermediate
term. Meaningful debt reduction through operating cash flows appears
unlikely given the company's weak earnings and limited ongoing benefits
from working capital reductions. Given the company's significant
debt leverage, issuance of a considerable amount of equity would
be expected over the near term in order to maintain the current rating.
Going forward, improvements in operating profitability will be the
significant driver of free cash flow, which is likely to remain
at low levels over the intermediate term. To the extent that operating
results show signs of weakening, the company exhibits significant
reduction in cash flow or the prospects for any financial improvement
protract, the rating would likely come under pressure and be subject
Arrow Electronics, Inc., headquartered in Melville,
New York, is one of the world's largest distributors of electronic
components and computer products to industrial and commercial customers.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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