Arrow Reports In Line in 3Q (ARW) (AVT)

Arrow Electronics, Inc. (ARW) posted an adjusted net income (excluding restructuring, integration, and other charges) of $1.02 per share in the third quarter of 2012, in line with the Zacks Consensus Estimate but toward the lower end of management’s expectations. The quarterly result was down from $1.11 per share in the previous quarter and $1.20 per share in the year-ago quarter.

Reported net income came in at $103.6 million or 94 cents per share during the quarter compared to a net income of $114.4 million or $1.02 per share in the previous quarter and a net income of $156.2 million or $1.33 per share in the third quarter of 2011.

Revenues

Arrow reported sales of $4.96 billion, down 4.0% year over year and 3.7% sequentially. Excluding the impact of acquisitions and foreign currency, sales were flat year over year.

During the quarter, Arrow revised its presentation of sales related to certain fulfilment contracts on an agency basis as net fees compared to presenting gross sales and costs of sales in the prior periods. Consequently, these contracts would have contributed approximately $176.5 million, or 3.4% to the company's top line in the third quarter of 2012 on a gross basis.

Nevertheless, this revised presentation had no impact on the company’s overall margins.

On a segmental basis, Global component sales were $3.37 billion, down 8.0% year over year. Asia Pacific posted a 10% increase on a year-over-year basis, driven by the core business and a rebound in the company’s Ultra Source business. In America, the company's business was down 1% year over year due to a weaker overall markets and caution exerted by customers. Sales from Europe were down 14% year over year owing to the macroeconomic uncertainty.

Revenues from Global enterprise computing solutions (ECS) came in at $1.59 billion, up 3.0% year over year. Arrow posted solid double-digit year-over-year growth in services, storage and software, which was partially offset by a decline in servers. Americas posted solid performance as sales in the core value-added distribution business was at par with expectations in a seasonally slow quarter. Europe was also strong even amid the weak market conditions due to the company’s matrix expansion.

Margins

Gross margin was down 40 basis points year over year at 13.4% due to the ongoing pricing pressure and a change in mix of products. Operating margin came in at 3.3% compared with 4.0% in the year-ago quarter and 3.7% in the previous quarter.

Balance Sheet and Cash Flows

Arrow ended the quarter with cash and cash equivalents of $358.5 million, up from $325.8 million at the end of the previous quarter. As of September 29, 2012, long-term debt was $1.56, down from $1.96 billion at the end of the previous quarter.

During the quarter, the company generated $176.3 million in cash from operating activities and incurred $26.7 million in capital expenditure. The company has generated more than $630 million of cash from operating activities in the last twelve months, exceeding its targeted level.

Arrow repurchased shares worth $76 million in the third quarter, thereby bringing the total amount spent on share repurchase to nearly $780 million over the last 5 years. Arrow still has $124 million remaining in its existing share repurchase program.

Guidance

Going forward, Arrow expects sales in the fourth quarter of 2012 to range between $5.1 billion and $5.5 billion. Arrow, which competes fiercely with Avnet Inc. (AVT), believes that business will be under pressure due to the weak economic environment.

Global components sales are projected between $3.0 billion and $3.2 billion. Global enterprise computing solutions sales are estimated between $2.1 billion and $2.3 billion. Assuming an average Euro to USD exchange rate of 1.29 to 1, earnings per share (excluding any one-time charges) are projected around $1.01 to $1.13.

Hence, we continue to maintain our long-term Neutral recommendation on Arrow. Our recommendation is supported by a Zacks #3 Rank, which translates into a short-term Hold rating. The results led to a 1.97% increase in its share price in regular trading to close at $35.23.