Arrow Electronics, Inc. (ARW) Earnings

Management highlights

### Core Business Results & Drivers - Q2 2026 results exceeded consensus expectations, driven by four primary factors: sustained unit volume growth with incremental price inflation benefits, disciplined expense and working capital execution, positive operating leverage driving margin expansion, and a favorable mix of higher-margin value-added services. - Growth is broad-based across end markets: ongoing AI investment, strength in industrial, aerospace and defense, and a reemergence of transportation demand; the mass market upturn remains in early stages with backlog continuing to ramp gradually. - Leading indicators are positive: book-to-bill ratios remain well above parity, and backlog continues to build out into the first half of 2027, supporting visibility into sustained momentum. ### Product & Service Innovation - Launched Digital Test Drive, a new remote AI-powered engineering platform that lets customers evaluate hardware and accelerate product development without delays from physical equipment logistics, expanding global reach and improving engineering service scalability. - e-info chips, Arrow's engineering services business, was named to Gartner's Emerging Market Quadrant for Physical AI services, recognizing its differentiated silicon-to-cloud capabilities that support customers through complex product lifecycles. - Expanded ECS Experience Centers, which offer partners access to over 100 pre-built hybrid infrastructure, cybersecurity, and AI solutions, with a historical 90% proposal close rate for these engagements. - Earned three key Microsoft distinctions for ECS: Frontier Distributor Status, specializations in Copilot, and Azure Virtual Desktop, validating scale and expertise across AI and cloud to support recurring revenue growth. ### Balance Sheet & Capital Allocation - Working capital declined $100 million sequentially to $6.8 billion, return on working capital increased 10.9 percentage points year-over-year to 23.6%, and cash conversion improved 23 days year-over-year. - Gross debt declined $300 million sequentially and $650 million year-over-year to $2.2 billion, bringing the adjusted leverage ratio down to 1.75x, supporting increased financial flexibility. - Arrow repurchased $43 million in shares during the quarter, maintaining a capital allocation strategy focused on organic reinvestment, disciplined M&A, and returning excess capital to shareholders while retaining an investment-grade credit rating. ### Leadership Update - Announced Dee Merriweather as new President and Chief Operating Officer, joining in September 2026 to strengthen succession planning; Bill Austen will remain interim CEO until a permanent CEO is appointed.

Guidance

- Full Q3 2026 total revenue is expected to be between $9.6 billion and $10.2 billion, representing 28% year-over-year growth at the midpoint of the range. - Global Components Q3 sales are guided between $7.5 billion and $7.9 billion, representing 5% sequential growth at the midpoint, with performance expected to meet or exceed seasonal trends across all regions for the remainder of 2026. Asia is expected to be seasonally strong in Q3, while EMEA will be seasonally weaker consistent with historical patterns. - ECS Q3 sales are expected between $2.1 billion and $2.3 billion, representing 2% year-over-year growth at the midpoint, with full-year low double-digit billings growth still expected; the softer sequential guidance reflects lapping a large partner addition from the prior year. - Q3 non-GAAP diluted EPS is expected between $4.83 and $5.03, with an effective tax rate of 23% to 25% and interest expense of approximately $50 million. - Management expects supply chain services profitability to return to more normal levels in Q3 after a strong Q2, and maintains confidence in broader business momentum, healthy business mix, and the ability to deliver additional operating leverage through the remainder of the year.

Segment performance

Arrow Electronics reported total Q2 2026 revenue of $10 billion, a 32% year-over-year increase. Total non-GAAP operating income was $403 million, with a 4% non-GAAP operating margin, up 120 basis points year-over-year. Non-GAAP diluted EPS was $5.45, a 124% year-over-year increase. 1. Global Components: Revenue hit $7.4 billion, an 11% sequential increase, representing 74% of total company revenue. Non-GAAP operating income was $397 million, a 9% sequential increase, with a non-GAAP operating margin of 5.4%, up 180 basis points year-over-year. Growth is broad-based across all geographies and verticals, with IP&E surpassing $1 billion in sales for the second consecutive quarter, and memory accounting for a low double-digit percentage of segment revenue. 2. Global Enterprise Computing Solutions (ECS): Revenue reached $2.6 billion, a 14% year-over-year increase (13% year-over-year on a constant currency basis), representing 26% of total company revenue. Total ECS billings grew 14% year-over-year to $5.9 billion, and backlog grew 75% year-over-year to an all-time high. A $27 million charge on underperforming multi-year partner contracts pulled non-GAAP operating margin down 100 basis points year-over-year.

Risks & headwinds

- ECS has ongoing restructuring of underperforming Beyond Distribution contracts with a key strategic partner; additional charges are expected in the second half of 2026, albeit at a lower level than the $27 million charge recorded in Q2. - On-premise hardware solutions for ECS remain supply-constrained due to ongoing memory and SSD shortages. - Quarter-to-quarter results can vary in timing and linearity due to external macroeconomic and market factors. - Forward-looking results are subject to general market risks and uncertainties that could cause actual outcomes to differ materially from management projections, as detailed in Arrow's SEC filings.

Analyst Q&A

• Q: The component cycle has had five quarters of robust year-over-year growth; what inning is the cycle in, and is there risk it is nearing its end? /

  A: Management stated the component upturn is still in the early innings, specifically the second inning. Growth is split across three segments: the still-evolving new AI market, memory, and the core legacy component business. Core business growth is steady, backlog continues to build, and there is substantial remaining runway for the upturn.

• Q: ECS Q3 guidance is below typical seasonality, and there was a reported departure of a $1.4 billion supplier relationship; what is the impact of this change? /

  A: The reported $1.4 billion revenue impact was incorrect; actual annual revenue from the contract was roughly $700 million. The departure was a mutual agreement due to diverging strategy: the vendor wanted a volume PC/laptop distributor, which does not align with Arrow ECS's focus on infrastructure, cloud and software. There is no material impact to full-year low double-digit billings growth, and the core ECS business remains very strong with 75% year-over-year backlog growth.

• Q: Automotive OEMs are asking tier-one suppliers to carry more buffer inventory after inventories became too lean during the recent correction; is this dynamic happening across the business and is it irrational? /

  A: After the post-pandemic inventory drawdown, the market is seeing a gradual, disciplined recovery where customers are adding reasonable buffer inventory back into supply chains and providing longer-term order visibility. No segment is behaving abnormally, and there is no evidence of irrational panic-driven overstocking at this point in the cycle.

• Q: The $27 million Q2 ECS charge reduced margins by 100 basis points; what is the margin outlook for ECS and components for the second half? /

  A: The charge related to the ongoing partner contract restructuring, and the core ECS business would have posted margins over 4% without it. Additional smaller charges are expected in H2 2026, but typical Q4 seasonal margin expansion (driven by higher volume and operating leverage) is still expected. For components, margins are expected to hold above 5% in Q3 after normalizing supply chain service profits to more typical levels, with favorable mix and cost leverage supporting a strong margin profile going forward.