IM Ingram Micro Inc. (delisted)

Arrow Electronics Inc. (ARW) posted first quarter 2013 adjusted earnings per share (EPS) of 89 cents, surpassing the Zacks Consensus Estimate of 86 cents. The quarterly result came within management’s expectations but was down from $1.05 per share in the year-ago quarter.

Revenues

Arrow reported revenues of $4.85 billion, down 0.8% year over year but slightly above the Zacks Consensus Estimate of $4.80 billion. Excluding the impact of acquisitions and foreign currency, sales declined roughly 1.0% year over year.

On a segmental basis, Global component sales were $3.19 billion, down 4.7% year over year. Asia Pacific posted an 11.0% year-over-year increase due to strong performances in core businesses. Revenues from America dropped 5.0% year over year due to overall macro uncertainty and a tight spending environment. Sales from Europe were down 16.0% owing to Euro concerns and change in accounting policy to record revenues from certain contracts.

Revenues from Global enterprise computing solutions (ECS) came in at $1.66 billion, up 7.6% year over year. Arrow posted solid double-digit year-over-year growth in services, storage and software and servers. Americas posted solid performance as sales in the core value-added distribution business was at par with expectations in a seasonally slow quarter. But revenues from Europe lacked luster to reflect continuing weak market conditions.

Operating Results

Gross margin was down 70 basis points year over year to 13.2% due to the ongoing pricing pressure and a change in mix of products. Operating margin came in at 2.8%, down from 3.8% in the year-ago quarter, mainly due to acquisition-related costs.

Reported net income came in at $77.9 million or 72 cents per share during the quarter compared with $113.6 million or $1.00 per share in the year-ago quarter. Excluding the effect of restructuring cost and legal settlement, adjusted net income was $96.0 million or 89 cents per share compared with $119.8 million or $1.05 per share in the year-ago quarter.

Balance Sheet and Cash Flows

Arrow ended the quarter with cash and cash equivalents of $364.2 million, down from $409.7 million at the end of the previous quarter. Long-term debt was $2.20, up from $1.59 billion at the end of the previous quarter.

During the quarter, the company used $179.4 million cash from operations as against $187.8 million cash generated from operating activities in the prior quarter. Arrow incurred $26.8 million in capital expenditure compared with $36.7 million in the prior quarter.

Arrow repurchased shares worth $113.5 million in the first quarter.

Guidance

Anticipating economic uncertainty, Arrow expects its second quarter results to be at par with the first quarter. It also expects normal seasonality across its businesses.

For the second quarter of 2013, Arrow expects sales to range between $4.90 billion and $5.30 billion, reflecting a sequential growth of 1.0%–9.3%. Global components sales are projected between $3.15 billion and $3.35 billion. Global enterprise computing solutions sales are estimated between $1.75 billion and $1.95 billion. Assuming an average Euro to USD exchange rate of 1.30 to 1, earnings per share (excluding any one-time charges) are projected around 95 cents to $1.07 for the second quarter of 2013.

Tax rate is expected between 27.0% and 29.0% and share outstanding is likely to be roughly 107.1 million.

During the fourth quarter of 2012, management mentioned that it will initiate a productivity enhancement program including an annual cost saving program of about $40.0 million. Currently, it mentioned that the company 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 into long-term opportunities.

Our Take

Electronic component distributor Arrow posted better-than-expected first quarter results with its earnings and revenues surpassing the Zacks Consensus Estimates. Like the previous quarter, revenues witnessed a year-over-year decline. Second 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.

Last week, its archrival Avnet Inc. (AVT) posted decent third quarter 2013 results and provided a modest fourth quarter guidance.

Currently, Arrow has a Zacks Rank #3 (Hold). You can also consider other technology stocks that are performing better. Ingram Micro Inc. (IM) and Symantec Corp. (SYMC) both have a Zacks Rank #2 (Buy) and are worth buying.

 
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