January 22, 2017 | 9 Pages

CFA Report

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Fiscal Year Ends Dec

Rating: Hold

Price: $71.30

Price Target: $78.08

52-wk Range: $45.23-$73.15

Market Capitalization (M): 6,387.5

Shares Outstanding (M): 89.6

P/E: 11.56x

Enterprise Value (M) 8,840.2

EV/EBITDA

9

Arrow Electronics Inc.

DATE: 30-DEC-2016

TICKER: NYSE: ARW

GICS SECTOR: INFORMATION TECHNOLOGY

RECOMMENDATION: BUY (9.5% RETURN)

CLOSING PRICE: $71.30 TARGET PRICE: $78.08

INDUSTRY: TECHNOLOGY DISTRIBUTORS

Executive Summary

Investment Recommendation

We are initiating coverage with a BUY rating and 12-month price

target of $78. Our target price is calculated using a discounted free

cash flow valuation method. We validated our target price by using

comparative analysis with eight competitors. The target price

represents a 9.5% return on investment from the December 30th

closing price of $71.30, which implies an alpha of 0.9%. Arrow

Electronics Inc. is the leading global distributor of electronic

components by market share.

Evolution of the Internet of Things

The electronics equipment wholesaler industry is benefitting from the

evolution of the Internet of Things (IoT). According to Gartner, Inc

the IoT base will grow to 26 billion units installed by 2020,

representing a 28x increase from 0.9 billion in 2009. Due to Arrow’s

value add services we believe that it is well positioned to take

advantage of this explosive trend; however, the company’s ability to

maintain its market share will be a key component of future

performance.

Investment in Cloud Computing Services

Arrow has highlighted a fundamental driver of future growth to be

increased investment in Cloud Computing Services and Engineering

Consulting Solutions. The firm has expressed interest in pursuing this

business segment due to 100% gross margins and increasing demand

for Data Processing and Hosting services. Arrow Electronics has been

able to grow revenue in this segment by 121% in the past 5 years

alone. Reports from IBISWorld and the Bureau of Labor Statistics

project that this industry will experience rapid growth in the next 5

years.

Steep Growth in Asia

Roughly 21% of revenue for ARW is generated from Asia. Their

exposure to this region primarily stems from sales in China, India, and

Japan. Rapid GDP growth expectancies in these countries coupled

with increased demand for electronic components and consulting

services put Arrow in a great position to capitalize from overseas

expansion.

Financial Data 2011 2012 2013 2014 2015

Revenue Growth 14.1% -4.6% 4.7% 6.6% 2.3%

Gross Margin 13.8% 13.4% 13.1% 13.2% 13.0%

EBITDA Gross

Margin 5.1% 4.5% 4.5% 4.6% 4.5%

EPS 5.3% 4.4% 4.7% 5.6% 5.8%

ROE 17.3% 13.2% 9.8% 12.0% 12.0%

ROA 6.2% 4.9% 3.5% 4.1% 9.3%

Debt/Equity 53.4% 49.0% 53.8% 50.1% 57.8%

-20%

0%

20%

40%

60%

80%

100%

120%

5 Year Total Return

S&P 500 ARW

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Investment Risks

Key investment risks associated with Arrow consist of diminishing

margins in electronics equipment sales and increasing competition for

the Electronic Component Wholesale industry. This risk originates from

low barriers to entry and a lack of differentiation between products.

Component revenue for Arrow is primarily driven by global

semiconductor sales; Bank of America Merrill Lynch analysts estimate

growth in this sector to be stagnant in upcoming years. The firm also

relies on a concentrated group of vendors in the Enterprise Computing

Solutions space which exposes them to supply-side risk. ARW has

historically relied heavily on debt financing, so increasing interest rates

could potentially prevent lucrative investment opportunities including

stock repurchases and acquisitions.

Company Description

Arrow Electronics Inc. (ARW) was founded in 1935. It is now a global

corporation that is listed as a fortune 150 company. Arrow is divided into

two primary business segments, Global Components Retail and

Enterprise Computing Solutions. The primary target market for Arrow

consists of industrial and commercial consumers of electronic

components. Arrow specializes in supply chain logistics and serves as an

intermediary between producers and consumers of electronic equipment.

The firm partners with over 100,000 manufacturers and industrial clients.

Arrow is headquartered in Colorado; however, the company has over 460

locations in 85 different countries.

Products and Services

Enterprise Computing Solutions (ECS)

Arrow ECS is a “comprehensive portfolio of IT solutions” that accounts

for 38% of total revenue. ECS consists of 5 parts:

1) Comprehensive Distribution Services including everything from

engineering and integration support to warehousing.

2) Advanced Solutions Lab for resellers to design, test, build and demo

solutions for their customers.

3) Global Training Services with more than 1,000 vendor authorized

training courses available on-site, online and in 42 Arrow training

classrooms in North America.

887.6, 7%

5,858.3, 48%

1,686.5,

14%

443.8, 4%

3,384.0, 27%

FY 2015 Global ECS Revenue

Storage

Software

Standard

Servers

Proprietary

Servers

Other

Products and

Services

Numbers in Millions USD

Source: Bloomberg Finance, LP and ARW FY '15 10K

11,721.5

50%6,788.7

29%

4,771.8

21%

ARW FY'15 Revenue by

Geography

North America

Europe

Asia/Pacific Source: Bloomberg Finance LP

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4) Business Intelligence Services for solution providers to help them

better understand the current/future industry environment and support

business growth opportunities.

5) Financial Solutions for both solution providers and their end-users.

Global Components Retail

Arrow is the largest global distributor of electronic components. This

segment of the business currently makes up 62% of total revenue. Within

the global components business segment about 66.0% of the company’s

sales consist of semiconductor products and related services; about

19.0% consist of passive, electro-mechanical and interconnect products

(capacitors, resistors, potentiometers, power supplies, relays, switches

and connectors); about 10.0% consist of computing and memory, and

about 5.0% consist of other products and services.

Competitive Positioning

Enterprise Computing Solutions (ECS)

Arrow’s ECS prospects can be viewed in the context of Data Processing

& Hosting Services and Enterprise Software Publishing. According to a

2016 report from IBISWorld, total revenue of Data Processing & Hosting

Services was $144.4 billion and expected to grow at a rate of 4.8%

through 2021. The industry’s growth is characterized by the trend of

businesses outsourcing their IT storage to capitalize on the dependability

and integration offered by cloud-based solutions. While Arrow does not

engineer or host the platforms that increasingly house industrial

information, its role as an intermediary allows the company to bridge the

gap between smaller to medium-sized value added resellers (VAR’s) that

do not have the capital or expertise to engineer the design-chain of their

own data systems. ECS also consists of the distribution of enterprise

software, the total market of which saw revenues of $37.9 billion in 2016

and forecasted to grow at 4.5% through 2021. The products delivered by

this industry consist of customer relationship management (CRM) and

enterprise resource planning systems (ERP). Vertical integration in this

segment may pose a threat to Arrow’s foothold; the company recognizes

this and attempts to proactively offer its customers leading-edge

solutions that easily fit into their supply chains.

Electronic Components

No major players currently have an influential position in the global

electronic parts and equipment wholesale sector. 13,261 businesses

compete for $361.7 billion in revenue worldwide. Forecasts from

IBISWorld predict annual growth between 2016-21 will average

3.2%. In a mature life-cycle industry with a significant number of

competitors, success is driven by strategic acquisitions that increase

geographic reach and effective customer relationship management. Over

the past several years, distributors such as ARW have flocked to the

developing world where rising incomes and increased usage of

electronics have given way to higher demand. Meanwhile, prices for

semiconductors and other components have declined as a result of

manufacturing improvements. Due to the high concentration of

competitors, distributors have not been able to realize the increased

margins that would otherwise be brought about by these two factors, and

many, including ARW, accept lower operating margins as a cost of

higher volume.

1,440.6,

10%

9,507.8, 66%

2,737.1, 19%

720.3, 5%

FY 2015 Global Components Revenue

Memory

Products

Semiconductors

Interconnect

Products

Other Products

and Services

Numbers in Millions USD

Source: Bloomberg Finance, LP and ARW FY '15 10K

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

FY '06 FY '07 FY '08 FY '09 FY '10 FY '11 FY '12 FY '13 FY '14 FY '15

Total Global Components Global Enterprise Computing Solutions

Source: Bloomberg Finance LP

ARW YOY Segment Revenue Growth

0

5,000

10,000

15,000

20,000

25,000

FY '06 FY '07 FY '08 FY '09 FY '10 FY '11 FY '12 FY '13 FY '14 FY '15

ARW Total Annual Revenue by Segment

$Millions USD

Source: Bloomberg Finance LP

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Porter’s Five Forces

Threat of New Entrants - LOW-MEDIUM

The high concentration of small electronic components distributors is

emblematic of the sector’s low barriers to entry. Ease of entry is made

possible by the sector’s low capital intensity and light regulatory

qualifications. Conversely, the resulting market saturation may be a

deterrent to prospective distributors that lack the client base or supplier

agreements needed to withstand the competition. As noted above,

shrinking operating margins and increased consolidation may reverse the

industry’s high fragmentation, potentially benefitting larger value-added

distributors (VAD) such as Arrow or manufacturers targeting end-

users. In the scope of ECS, distributors seeking to offer such solutions

require sophisticated supplier networks and higher levels of capital and

logistics expertise, making the shift to a VAD of cloud-based industrial

solutions less attainable for smaller participants.

Power of Suppliers - MEDIUM-HIGH

The electronics components industry is characterized by a large number

of supplier firms (Circuit Board & Electronic Component Manufacturing

consisted of 2,740 businesses in 2016), little differentiation, and few

switching costs which result in low supplier power in this industry. With

regards to ECS, supplier power is somewhat higher; the Enterprise

Software Publishing and Data Hosting industries were each comprised

of 1,628 and 63,762 businesses in 2016, respectively. While these

numbers sound large, it is important to note that each industry has several

players that maintain at least 10% of market share. As a percentage of

COGS, ARW’s top three suppliers provide over 26%. In aggregate,

supplier power faced by Arrow is medium-to-high when considering that

no single supplier accounted for Arrow’s 2015 revenue, but the company

notes its ECS segment relies on a limited number of suppliers.

Power of Buyers - MEDIUM-HIGH

For reasons similar to Arrow’s components supplier power being low,

the company finds itself on the opposite side of the relationship with

respect to its buyer power. The high concentration of competitors in

electronic components distribution and lack of product differentiation

affords buyers many options when purchasing components. It is

important to note, however, that the bulk of competing firms are small

regional businesses except for Arrow’s major global competitors such as

Avnet, Ingram Micro, and Tech Data. The company historically notes in

its 10K’s that no more than 2% to 3% of sales are attributed to any one

customer; however, outsider estimates for 2016 put some larger clients

at 3% or more. When targeting small-to-medium buyers, Arrow aims to

differentiate itself by “selling the enterprise” through offering integrative

hardware and software solutions to its existing clients in addition to

consultative customer support.

Availability of Substitutes – LOW

As all users of electronics transition from locally hosted storage to

integrative cloud-based offerings, Arrow is capitalizing on the growing

substitute to components by penetrating the cloud computing

segment. For this reason, availability of substitutes for Arrow’s total

offerings is low.

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Competitive Rivalry – HIGH

The components distribution industry is characterized by a mature life-

cycle stage with low market share concentration. No single company

accounts for more than 5% of industry sales. Small regional distributors

who hire four or fewer employees comprise over 50% of the industry’s

13,261 players. Industry trends of consolidation caused by acquisitions

and vertical integration initiated by manufacturers are expected to

increase market share concentration among larger participants. Different

conditions exist in the Enterprise Software Publishing and Data Hosting

industries in which Arrow exists as a VAD; both sectors are

characterized by high growth with the former experiencing medium

competition and the latter high. While industry figures are more

representative of developers for these two sectors, Arrow’s role as an

intermediary enables it to capitalize on increased utilization of such

products and services. Arrow’s major components competitors such as

Avnet, Tech Data, and Ingram Micro are also exploiting the IoT by

offering solutions similar to those of Arrow’s ECS. Additionally,

vertical integration on the part of application providers increases the level

of competitive rivalry in this segment.

Investment Risks

Political/ Legislative

Serving customers in over 85 countries and realizing over 50% of

revenue from outside of the United States, Arrow faces numerous

potential challenges related to varying sovereign and municipal

regulations and international agreements. Such risks include import and

export regulations and taxes, funds transfer restrictions, labor laws, and

environmental laws with particular regard to disposition and use of

hazardous materials. Additionally political upheaval in developing

countries could threaten Arrow’s customer relationships or ability to

conduct business. Arrow’s reliance on international sales requires strict

compliance with US Export Administration Regulations with regards to

products manufactured in the US. Failure to comply can result in denial

of export privileges, inventory seizure, fines, or criminal penalties. The

changing political landscape in the US has brought rise to the potential

of a decrease in corporate taxes. Arrow, as compared to its competitors,

receives a greater share of its revenue from the US making it better

positioned to take advantage of the decrease in corporate taxes.

Supply

Arrow engages in short-term non-exclusive distribution contracts with

its suppliers that do not guarantee long-term stability of its supply

chain. Vertical integration, specifically within the components

distribution sector, threatens to upend Arrow’s position as a value-added

intermediary. Additionally, certain verticals (particularly those of ECS)

involve a limited number of suppliers, increasing the magnitude of

adverse material effects on Arrow’s role in the supply chain should any

disruptions occur.

Execution

In its components segment, Arrow aims to maintain a cost-leadership

strategy which requires that it sell components at prices which are

proportionately less than the value they contribute to the finished

products sold by Arrow’s customers. This emphasis on price opens the

potential for possibly defective products to be distributed to Arrow’s

customers which could result in litigation. Arrow attempts to mitigate

Top 10 Suppliers as a % of COGS

Supplier % of COGS

Cisco Systems Inc 14.56%

HP Inc 6.09%

NetApp Inc 5.97

VMware Inc 4.87%

NXP Semiconductors 3.45%

Texas Instruments Inc 2.99%

Linear Technology Corp 2.33%

Samsung Electronics Co Ltd 2.24%

Source: Bloomberg Finance LP

United States Revenue Exposure

Company US Rev. as a % of

TOT Rev.

Arrow Electronics Inc 46.20%

Avnet, Inc 36.00%

Tech Data Corp. 35.30%

WPG Holdings Limited 3.60%

Source: FactSet

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these risks through the use of liability insurance (which has maximum

claim payouts) and supplier agreements which shift liability to the

manufacturers. Attempts at managing these risks are further complicated

by differing legal standards across the countries in which Arrow operates

and possible qualitative damages to Arrow’s reputation and client

relationships. Furthermore, the company faces the risk of inventory

impairment given the rapidly evolving nature of its offerings. This risk

is mitigated by agreements with suppliers that compensate Arrow for loss

in inventory value or the option to return goods at cost, but these

agreements are limited in duration and do not exist with all of its

suppliers.

Interest Rate

Arrow’s MRQ debt-to-equity ratio of 0.63 is largely in line with industry

averages and has remained relatively stable over the past several

years. While Arrow’s management is comfortable with its current

leverage ratio and BBB- credit rating, these factors could increase the

cost of borrowing in light of the Federal Funds Rate projected increase

of up to 100BPS in 2017. Rising interest rates, while uncertain, may

result in less attractive financing options when considering ARW’s

upcoming maturity of $500 million of long-term debt in 2018, $300

million of which is locked in at the lowest coupon rate (3%). While not

significant, the company may incur higher borrowing costs within the

next few years. The company’s predominant use of fixed-rate debt (88%

of total debt at the 2015 fiscal year-end) and use of interest rate swaps as

cash-flow hedges help to mitigate the risk of rising rates. Management

notes in the 2015 10K that a one percent rise in average rates would not

materially impact its bottom line.

Foreign Currency Exchange Rate

Given Arrow’s significant exposure to foreign markets, it is susceptible

to foreign currency translation effects which decreased operating income

by $41.8 million and sales by $1.2 billion in 2015. The company aims

to mitigate this risk through the use of foreign currency contracts and

natural hedges in which international transactions are dollar

denominated. Natural hedges are commonly realized in Asia which is

also ARW’s fastest-growing international market. Currency exchange

rate forecasts for 2017 are mixed, but overall dollar strengthening trends

are expected to continue mildly in the short-term and weaken in 2018.

Since Arrow only hedges cash flows against currency risk, and not

currency translations, this could generate Other Comprehensive Loss in

2017 and income in 2018.

Management and Governance

Michael J. Long was appointed Chairman, President, and CEO in May

2009. Prior to being named Chairman, President, and CEO Long served

as COO for Arrow. While do not agree with the role of Chairman, CEO

and President being granted to one individual, Long does have sufficient

knowledge of the industry and the company having been with ARW

since 1991. The combination of all three positions, creates a conflict of

interest for the board. For the board to remove an underperforming CEO

they have to turn against their chairman. The combination of the

positions also forces the CEO/Chairman to split their time between

running the board and the company.

ARW has recently seen a change in CFO with Paul Reilly announcing

his retirement back in May. Christopher Stansbury has since been named

the new CFO. Prior to being named CFO, Stansbury served as Chief

Returns Over Michael Longs's Tenure

Comparables

Total Return

(%)

Cumulative

Arrow Electronics, Inc. 210.00

S&P 500 200.38

Electronics Distributors -IND 104.98

Source: FactSet

Board Diversity

Execs. on the Board 1

Non-Execs. on the Board 8

Source: Bloomberg Finance LP

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 > 2026

ARW LT Debt by MaturityMillions USD

Revolver

LT Bonds/Notes

Source: FactSet

Arrow Electronics Baa3 62.9% 1.66 2.54x 7.13x 18.4%

Average 61.4% 1.75 3.16x 9.55x 21.8%

Median 44.3% 1.41 2.34x 9.38x 20.6%

Avnet Baa3 56.5% 2.82 2.97x 8.88x 4.0%

Ingram Micro A -- 32.0% 1.44 1.72x 9.87x 25.6%

Tech Data Baa3 17.5% 1.38 0.97x 13.51x 42.0%

WPG -- 139.7% 1.34 6.98x 5.93x 15.6%

Total

Debt/EBITDA

EBITDA/Interest

Expense

FCF/Total

Debt

Source: FactSet

ARW Credit Ratios vs Competitors

Company Name

Moody's

Issuer Rating

Total

Debt/Equity

Current

Ratio

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Accounting Officer for ARW. Reilly has agreed to stay on and work with

Stansbury until the end of January 2017. Going forward it is important

to pay attention to this transition with Stansbury only joining ARW back

in 2014 and Reilly having served as ARW’s CFO since 1991.

ARW’s capital allocation strategy is based around investing organically,

M&A, and returning excess cash to its shareholders in the form of share

repurchases. Recently the board approved up to an additional $400

million worth of share repurchases, this is on top of $1.4 billion dollars

the firm has already spent since 2012. ARW does not have a dividend,

and management has told us they have no future plans on initiating one.

Since 2005 ARW has spent over $3.8 billion dollars to acquire 43

companies. This has allowed ARW to increase sales, geographical reach

and services capabilities. The electronics wholesaling industry has a low

barrier of entry so ARW active acquisition strategy is also a way for them

to consolidate competition. Going forward we believe that ARW will

continue to improve its business mix through M&A.

ARW has an overall ISS Governance QuickScore of 5. The pillar score

of 10 for audit and risk overview scores raise a big red flag. EY stated in

their audit report for the 2015 10-k that they had an adverse opinion of

Arrow’s internal controls. On top of that ARW was involved in criminal

fraud in which hackers impersonated an ARW executive and was able to

transfer $13 million dollars to outside bank accounts in Asia. When we

questioned management regarding the adverse opinion and fraud, they

responded as follows “We have already implemented the necessary

changes to address auditor’s concerns over our controls and to prevent

future fraudulent events like the one that occurred at the beginning of

2016. We are now in a period where the auditors much observe these

controls to conclude the material weakness has been properly

addressed.” We will be keeping a close on eye on their 2016 10-k audit

report and ISS Governance QuickScore to make sure the right changes

have actually been implemented.

Valuation

We used a DCF, a comps analysis, and a Monte Carlo simulation to

estimate a price target. The DCF results in a price target of $79, the

comps analysis gives a target of $77, and the Monte Carlo has a median

of $78. When avearging the results, we arrive at a price target of $78.08

for a return of 9.5%. Since the return is higher than our calculated

required return of 8.6%, it implies positive alpha and warrants a BUY

recommendation. Assuming fundamentals stay the same, if the share

price rises above $72.79, our recommendation would be less

constructive, because the return implied by our target price represents

negative alpha.

Discounted Cash Flow

We base our implied share price on our estimated free cash flow through

2021 and a long-term growth rate of 3%.

The WACC is the discount rate for our DCF. The cost of equity is

estimated using CAPM. The risk-free rate is the yield on 10-year treasury

bonds (2.4%), the beta is the raw beta as calculated by Damodaran Online

(1.37), and the market risk premium is also calculated by Damodaran

(4.5%). This outputs a cost of equity of 8.6%.

The pre-tax cost of debt is the weighted average of the given interest rates

on short-term borrowings, asset-securitization borrowings, a revolver

facility, and the marginal cost of bonds. The marginal cost of bonds is

Insider Ownership

% of Shares Held 0.67%

% Change in Last 6 mo. -7.65%

Source: Bloomberg Finance LP

ISS Governance QuickScore

Quick Score 5

Audit & Risk

Overview 10

Board Structure 4

Shareholder Rights 4

Compensation 4

Source: ISS

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found by approximating a best-fit mathematical function of the bonds’

yield curve. The average years left to maturity of bonds issued in the past

seven years is 8.9, which is plugged into the function and outputs the

likely yield on the next bonds Arrow will issue, giving a marginal cost

of bonds of 4.1%. The weighted average of all debt gives a pre-tax cost

of 3.9%, and a marginal tax rate of 28% gives a post-tax cost of debt of

2.8%.

Since Arrow intends to maintain its current capital structure, its marginal

weights are equal to its current weights. Using market values, these are

71% equity and 28% debt. Less than 1% is attributed to non-controlling

interests, which are included in the model, but are immaterial. The

resulting WACC is 6.9%.

When discounting free cash flows to the end of 2016, the DCF results in

a valuation of $72.88 per share. When discounting to the end of 2017,

the DCF results in a price target of $79.

Comparable Companies Analysis

The comparable companies analysis is based on the market ratios of

Arrow’s competitors. In order of their weighting in the analysis, the

competitors are Tech Data, AVNet, Anixter, Ingram Micro, WPG

Holdings, Jabil Circuit, Flextronics, and Celestica. When applying their

market ratios to Arrow’s forecasted 2017 financials, and applying

weights to each company and ratio, we arrive at an implied target price

of $77.

Monte Carlo Simulation

Our Monte Carlo simulation runs 1M experiments, where each generates

a share price at the end of 2017 based on the DCF model. The simulation

assumes a standard deviation of 27.5%, which is the implied volatility of

Arrow’s call options with a strike of $72.50. Scenario analysis is run to

randomly generate the drift parameter based on the multinomial

distribution. The scenarios are external events that could impact Arrow’s

target price. The first scenario is a decrease of the American corporate

tax rate to 15%, a development the incoming republican administration

has intends to achieve. The other three scenarios are a hard landing in the

Chinese economy, Frexit, and worst-case forecasts of the results of

Brexit. The first scenario improves profitability, and the other three

depress macroeconomic forecasts, which reduces forecasted sales in

relevant segments.

The mean of the resulting distribution is $83, and the median is $78. Of

the simulations, 51% result in performance that warrants a BUY rating,

and 38% result in negative returns, which warrants a SELL rating. The

weighting toward outperformance strengthens our confidence in our

BUY rating.

Since the distribution is skewed, higher price outcomes affect the average

more than lower outcomes do. Therefore, the median is more

representative of the likely one-year return, so we use the median, of

$78.20, to inform our target price.

Price Target

When averaging the target prices implied by the DCF, the comparables

analysis, and the Monte Carlo, we arrive at our final target price of

$78.08.

0

50

100

150

200

250

$3

5

$4

6

$5

8

$6

9

$8

1

$9

2

$1

04

$1

15

$1

27

$1

38

$1

50

$1

61

$1

73

$1

85

$1

96

$2

08

Outc

om

es (

00

0s)

Stock price

Share Price Distribution

y = 0.010ln(x) + 0.019

R² = 0.937

0%

1%

2%

3%

4%

5%

0 2 4 6 8 10

YT

M

Years left to maturity

Arrow's Yield Curve

9 | P a g e

Financial analysis

Gross margins remain stable through the forecast, as pricing pressures in

the Components segment are offset by a shift in product mix toward ECS,

in which the sale of some products is reported net of costs, giving them

a 100% gross margin. Profit margins are also stable through the forecast.

Accounts receivable and payable, have been growing much faster than

revenue in recent years. Arrow has told us this is happening because of

the ongoing shift toward ECS products that only report net sales. Arrow

collects payments for these products, so while their share of the product

mix increases, accounts receivable will grow faster than revenue. To

maintain their leverage, they are growing accounts payable along with

accounts receivable.

Arrow has historically used higher leverage than its competitors. It has

told us they are comfortable with their current leverage, and that they

plan to maintain their net debt to EBITDA ratio between 2 – 2.5. We

forecast the ratio will stay in the middle of this range. This leads to a slow

decrease in interest coverage and a stable debt to equity ratio.

We forecast that Arrow will spend $294MM on acquisitions per year,

which is its seven-year average. This spending is reflected in the growth

of balance sheet accounts, primarily goodwill. Arrow has spent

approximately $1.4B on share repurchases and recently expanded its

program to allow for an additional $400MM. We expect it to spend its

free cash flow mainly on repurchases and forecast that these will grow

through 2021. Arrow does not have a dividend program and has told us

that it has no plans to initiate one.

-10%

0%

10%

20%

30%

2016 2017 2018 2019 2020 2021

Gro

wth

Rat

e

Income Statement Accounts

SG&A D&A

Restructuring & other Operating profit

0

200

400

600

800

2016 2017 2018 2019 2020 2021

Cash Flows in $M

Operating cash flow CAPEX

Acquisition spending Investing cash flow

Treasury buybacks Free cash flow