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Rating Action:

MOODY'S INVESTORS SERVICE AFFIRMS Baa3 SENIOR UNSECURED RATING OF ARROW ELECTRONICS, INC.; OUTLOOK REMAINS NEGATIVE

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 Baa3

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 to review.

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.

New York
Tom Marshella
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Paul Hsi
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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