Arrow Electronics CFO on global chip shortage: ‘you can’t fight cycles’
“I think being nimble is key to success,” says Arrow Electronics SVP and CFO Chris Stansbury. “You can’t fight cycles. You just have to figure out how you operate differently in an up cycle or down cycle, and that’s part of what we do.”
Based in Centennial, Colorado, Arrow is a distributor of semiconductor and electronic component products and trades under the ticker ARW. The company’s customers are in industries including automotive, industrial manufacturing, and aerospace and defense.
About 30% to 35% of Arrow’s total business comes from computing solutions software and security. The bigger side of the business is global components distribution and solutions. For example, Arrow can create engineering designs for semiconductor board assemblies that go into a product a customer is building, Stansbury says. “We’re dealing with many suppliers,” he says. “And we’re selling to all over 100,000 customers, globally.”
Currently, the demand for semiconductors has skyrocketed beyond supply capacity. There’s a global semiconductor chip shortage underway. But the shortage wasn’t completely unanticipated, as it’s a “cycle of the business,” Stansbury says. “We try to minimize how deep and long they are, but we can see them coming,” he says; and suppliers also signal early on that they are seeing signs of increased demand.
Despite the ebb and flow of the business cycle, Arrow actually improved financially during the pandemic. The company’s fourth-quarter 2020 sales of $8.45 billion was an increase of 15% from sales of $7.34 billion in the fourth quarter of 2019.
“Our cash flow, generally speaking, is countercyclical to the demand environment,” Stansbury explains. “In periods of really strong demand, we tend to consume cash.” Arrow is in the business of working capital—receivables, payables, and inventory, he says. “We’ll tend to build those balances up in a big growth environment,” Stansbury says. “In a downturn, it’s the exact opposite. We dramatically reduce our working capital and generate an enormous amount of cash. That countercyclicality is risk mitigation for investors, both debt and equity.”
Arrow’s stock price has increased about 65.83% from June 2020 to June 2021. “Over the last two years, we’ve generated about $2.2 billion in cash flow,” says Stansbury, who has been CFO at Arrow for five years. “And that allowed us to right-size debt and get ourselves set up well for this cycle. And we were also able to buy back stock at very attractive prices because the market was suppressed.” Arrow also has “some natural tailwinds in the business,” as more electronic content is going into products and an increase in consumer spending in areas like home improvement and home electronics.
Stansbury says there aren’t any quick fixes to the chip shortage. “Suppliers will be adding capacity in time,” but that’s a slow process in the semiconductor space, he says. “I don’t think the situation is worsening,” he noted. “At this point, I think it’s relatively stable.”
The part of finance that Stansbury likes the most is where it intersects with the business to create value. “We’re positive on the long-term outlook,” he says. “What we say to our investors is we really do represent the broader economy because we deal with broader industrial [markets] on a lot of different verticals.”
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