ARW Arrow Electronics Inc

By Nina Trentmann 

The finance chief of Arrow Electronics Inc. is turning to software to help eke out $130 million in annual cost savings across the electronics distributor's operations, an effort that could be widened should the company's outlook worsen as a consequence of the trade tensions between the U.S. and China.

The Centennial, Colo.-based company in mid-July reduced its forecast following lower sales. It booked a net loss of $549 million in the second quarter, compared with a $170 million profit in the same quarter a year earlier. Arrow cited lower demand across all component products, all regions and most industries in an earnings release in early August.

"We don't want a sustained impact on operating income and earnings per share," Chief Financial Officer Chris Stansbury said Tuesday in an interview. "Barring the dampening effects on demand from tariffs and trade wars, Arrow would have expected operating income to be up year over year," Mr. Stansbury said.

Arrow plans to take out $130 million in costs by the end of the year and its new enterprise resource planning system is expected to play a key role in achieving that target, Mr. Stansbury said.

The company's ERP system ties together a range of business processes in a common data, or network, structure. ERP systems combine information on finance, inventory management, supply chain management and human resource management.

Arrow now operates three versions of the same ERP program in three business regions, the Americas, Europe and Asia. The integration of previously separate systems into the three they have now allows the CFO to take a more global look at the company's operations, Mr. Stansbury said.

The company is focusing on back-office functions such as finance and human resources alongside warehousing and operations to bring down its costs, Mr. Stansbury said. It will also wind down its personal computer and mobility asset disposition business, a repair and recycling unit. Engineering and front-line sales staff won't see cuts, Mr. Stansbury said.

"The ERP has allowed us to do all these cost cuts," Mr. Stansbury said. "We would not have been able to do them without it."

Analysts expect much of the savings to come from job cuts.

"Their biggest cost is people," said Shawn Harrison, a vice president at Longbow Research LLC. "The one area where they are not cutting back is their engineering and design teams."

The company employed about 20,100 people as of Dec. 31, according to Arrow's annual report.

The new ERP system will help the company during the current phase of economic uncertainty, Mr. Harrison said. Arrow gets better visibility of its accounts receivables and of its accounts payables thanks to the software, he said.

The system might also boost efficiency across departments, reducing the potential need for additional cuts in a year or two, said Steven Fox, a managing director at Cross Research LLC.

"If there are secondary economic effects, we obviously have to go at it again," Mr. Stansbury said. He added the current cost savings actions wouldn't be sufficient to fully offset the company's lost profits.

Trade tensions between the U.S. and China hurt Arrow's customers, Mr. Stansbury said. "I don't think tariffs will go away," he said, adding that "it is a moving target."

Arrow passes along the cost of tariffs to its customers in the form of higher prices, Mr. Stansbury said. "The pain from tariffs comes in the form of lower demand, leading to lower sales, leading to lower ability to drive profits over our fixed expense base," he said.

The company has about 200,000 customers world-wide, many of them small- and medium-size industrial companies. "What they see in their business is a direct read of manufacturing trends globally," Longbow's Mr. Harrison said.

U.S. factory activity contracted for the first time in three years in August. New factory orders, employment and production all declined last month from July, according to manufacturing figures released Tuesday by the Institute for Supply Management.

--Mark Maurer contributed to this article.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

(END) Dow Jones Newswires

September 03, 2019 18:21 ET (22:21 GMT)

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