Arrow Electronics Inc. (ARW) posted second quarter 2013 adjusted earnings per share (EPS) of $1.12, comfortably beating the Zacks Consensus Estimate of $1.03. The quarterly result came above management’s expectations and slivered past $1.11 per share reported in the year-ago quarter.
Revenues
Arrow reported revenues of $5.31 billion, up 3.0% year over year and above the Zacks Consensus Estimate of $5.12 billion. However, without the effect of acquisitions and currency fluctuations, revenues were flat year over year.
On a segmental basis, Global component sales were $3.40 billion, down 1.6% year over year. Asia Pacific posted a 10.0% year-over-year increase due to strong performances in core businesses, particularly in China and the ASEAN region. Revenues from America dropped 4.0% year over year due to overall macro uncertainty and a tight spending environment. Sales from Europe were down 9.0% owing to Euro concerns and a change in accounting policy to record revenues from certain contracts.
Revenues from Global enterprise computing solutions (ECS) came in at $1.91 billion, up 12.4% year over year. Arrow posted solid double-digit year-over-year growth in services, storage and software and servers. Revenues from Americas grew 10.0%, while Europe jumped 18.0% with synergies from the acquisition of Altimate (Jul 2012).
Operating Results
Gross margin was down 30 basis points year over year to 13.0% due to the ongoing pricing pressure and a change in geographic mix. Operating margin came in at 2.9%, down from 3.7% in the year-ago quarter, mainly due to acquisition-related costs.
Reported net income came in at $89.9 million or 86 cents per share during the quarter compared with $114.4 million or $1.02 per share in the year-ago quarter. Excluding the effect of restructuring cost and legal settlement, adjusted net income was $116.9 million or 89 cents per share compared with $124.1 million or $1.11 per share in the year-ago quarter.
Balance Sheet and Cash Flows
Arrow ended the quarter with cash and cash equivalents of $345.9 million, down from $364.2 million at the end of the previous quarter. Long-term debt was $2.10 billion, down from $2.20 billion at the end of the previous quarter.
During the quarter, the company generated $333.9 million cash from operations as against $179.4 million in the prior quarter. Arrow incurred $26.8 million in capital expenditure, flat sequentially.
Arrow repurchased shares worth $198.8 million in the second quarter.
Guidance
Anticipating economic uncertainty and cautious customer spending, Arrow expects low- to mid-point of normal seasonality across its businesses.
For the third quarter of 2013, Arrow expects sales to range between $4.90 billion and $5.30 billion, reflecting weak sequential comparison. Global components sales are projected between $3.35 billion and $3.55 billion. Global enterprise computing solutions sales are estimated between $1.55 billion and $1.75 billion. Assuming an average Euro to USD exchange rate of 1.31 to 1, earnings per share (excluding any one-time charges) are projected around $1.14 to $1.26 for the third quarter of 2013.
Tax rate is expected between 27.0% and 29.0% and shares outstanding are likely to be roughly 101.7 million.
During the fourth quarter of 2012, management mentioned that it will initiate a productivity enhancement program including an annual cost savings program of about $40.0 million. Recently, the company stated that it will be able to exceed its commitment of saving $40.0 million of expenses and can actually reduce costs by $75.0 million. The company is optimistic about selective investments in long-term opportunities.
Management now looks confident about achieving its cost-saving and productivity enhancement target by the end of 2013.
Our Take
Electronic component distributor Arrow posted better-than-expected second quarter results with its earnings and revenues surpassing the Zacks Consensus Estimate. Third quarter guidance was disappointing, reflecting macro concerns. But the company’s positive commentary about enhanced productivity, annual cost savings and successful ERP implementation across Europe is encouraging. We believe that Arrow could get better contribution from Europe as soon as the ERP program becomes operational.
Currently, Arrow has a Zacks Rank #1 (Strong Buy). Investors can also consider other technology stocks that are performing better. SanDisk Corp. (SNDK), Aspen Technology Inc. (AZPN) and Earthlink Inc. (ELNK) have a Zacks Rank #1 (Strong Buy) and are worth buying.
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