Arrow Electronics (ARW) Lags On Q2 Earnings & Revenues

Shares of Arrow Electronics Inc. (NYSE:ARW) went down more than 5% after the company reported lower-than-expected results for the second quarter of 2016.

Arrow’s adjusted earnings of $1.65 per share lagged the Zacks Consensus Estimate of $1.66. However, earnings increased 6.9% from the year-ago tally of $1.54. On a GAAP basis, earnings were $1.45, compared with $1.28 reported a year ago.

Quarter Detail

Arrow’s revenues, on a reported basis, were $5.972 billion, up 2.4% from the year-ago quarter. Quarterly revenues however missed the Zacks Consensus Estimate of $6.023 billion.

On a reported basis, revenues from Global components increased 4% to $3.83 billion. On an adjusted basis (excluding the impact of changes in foreign currencies and acquisitions), the figure grew 1%. Geographically, revenues from Europe and Asia-Pacific increased 7% and 5%, respectively. Sales from America were flat on a year-over-year basis.

Revenues at Global Enterprise Computing Solutions (ECS) came in at $2.14 billion, flat on a year-over-year basis. On an adjusted basis, revenues decreased 2.9% primarily due to the impact of acquisition and foreign currency fluctuations. Revenues in the Americas were down 2.4% year over year, whereas revenues from Europe jumped 6.2%.

Gross margin increased 20 basis points (bps) to 13.4%. Also, Arrow reported adjusted operating margin of 4.3%, up 20 bps, and operating income of $254.1 million in dollar terms, up 6.8%.

The company’s adjusted net income (excluding the effect of restructuring, gain on sale of investment and amortization) was $152.7 million or $1.65 per share, compared with $148.9 million or $1.54 per share last year.

Arrow exited the quarter with cash and cash equivalents of $495.8 million, compared with $394.7 million at the end of previous quarter. Long-term debt (including current portion) was $2.42 billion, compared with $2.73 billion at the end of the prior quarter. During the quarter, cash flow for operational activities was $147.9 million . The company spent $28.1 million for share repurchases during the quarter.

Guidance

Arrow has provided an outlook for the third quarter of 2016. Sales are expected between $5.65 billion and $6.05 billion (mid-point: $5.85 billion). The Zacks Consensus Estimate is pegged at $5.841 billion. Global components sales are projected in the range of $3.725 billion to $3.925 billion. Global enterprise computing solutions sales are estimated to be $1.925–$2.125 billion.

The company expects non-GAAP earnings per share of $1.45 to $1.57 (mid-point: $1.51). The Zacks Consensus Estimate is pegged at $1.49.

Our Take

The electronic component distributor’s second-quarter 2016 results missed estimates on both fronts. However, the metrics improved year over year. The company issued an encouraging third-quarter 2016 outlook, which was higher than the Zacks Consensus Estimate for both earnings and revenues.

Notably, original equipment manufacturers, contract manufacturers and commercial customers are selecting Arrow’s distribution channels for marketing their products. The company’s core strength in providing best-in-class services and easy-to-acquire technologies should drive growth further.

Meanwhile, incremental sales from strategic acquisitions, such as Computerlinks, are expected to boost the top line, going forward. However, uncertain economic conditions, high debt burden and competition from the likes of Avnet (NYSE:AVT) and Ingram Micro (NYSE:IM) remain concerns.

Currently, Arrow has a Zacks Rank #3 (Hold). A better-ranked stock in the broader technology sector is Facebook, Inc. (NASDAQ:FB) , sporting a Zacks Rank #1 (Strong Buy).