Arrow's (ARW) Q3 Earnings & Revenues Top Estimates, Down Y/Y

Arrow Electronics Inc. (NYSE:ARW) reported third-quarter 2019 adjusted earnings per share of $1.86, which decreased 13.5% on a year-over-year basis. However, the figure surpassed the Zacks Consensus Estimate of $1.67.

Revenues came in at $7.08 billion, down 5.5% from the year-ago quarter. As adjusted, revenues were down 3% year over year. The figure, however, beat the consensus estimate of $7.06 billion.

Demand for components declined during the third quarter as a result of ongoing geopolitical tensions. Demand from smaller customers was weaker than expected. Moreover, U.S. tariffs took a toll on the company’s top line.
Additionally, consumption of Arrow’s European exports declined. Expectations for demand recovery are being pushed further out into 2020. Moreover, design activities remained slow.

Further, the company faced foreign currency headwinds amounting to $103 million on sales and 4 cents on earnings during the quarter.

However, strong uptrend in design activity in Asia was a breather. Also, progress in cost optimization, focus on long-term growth strategy, and commitment toward the expansion of engineering were positives.

Segmental Details

Adjusted revenues from Global Components decreased 4% year over year to $5.05 billion. The segment gained from design activity. On a reported basis, revenues declined 6%.

Region wise, the segment’s adjusted revenues from the Americas decreased 15% due to high levels of inventory with customers. Also, adjusted sales from Asia climbed 5%. Global components contribution from Europe fell 2% on an adjusted basis due to lower demand for products from Arrow’s exporting customers.

Adjusted revenues from Global Enterprise Computing Solutions (ECS) came in at $2.03 billion, down 1.6% year over year. Also, revenues from this segment declined 3.8% on a reported basis. Decline in legacy systems took a toll on revenues from this segment. However, strong momentum infrastructure software, next generation hardware and hybrid cloud architectures were positives.

ECS revenues from the Americas declined 2.3% after adjusting for foreign currency changes. Adjusted sales from Europe inched up 0.1% year over year but declined 6.3% on a reported basis.

Many customers continued to shift their manufacturing operations out of the United States to avoid tariffs. This posed a significant threat to Arrow.

Moreover, backlog and lead times declined year over year in the reported quarter. Lead times contracted more for semiconductors than for passive and electromechanical parts. The overall book to bill remained below parity at 0.91.

Margins

Non-GAAP gross profit decreased 12.1% from the prior-year quarter to $796.4 million.

Arrow’s non-GAAP operating income plunged 18.9% to $252.6 million. Non-GAAP operating margin of 3.6% was 60 basis points lower.

Demand shift to lower margin products coupled with lower revenues kept margins under pressure.

However, Arrow’s focus on realigning the enterprise computing solutions business toward new technologies and nontraditional customers was a positive.

Balance Sheet and Cash Flow

Arrow exited the quarter with cash and cash equivalents of $262.3 million compared with $270 million in the previous quarter.

Long-term debt was $2.94 billion compared with $3.20 billion at the end of the prior quarter.

The company’s cash flow from operations was $286.8 million.

In the third quarter, Arrow returned approximately $100 million to shareholders through stock repurchase program, and was left with approximately $439 million of authorization.

Guidance

Excluding the financial impact from the PC and mobility asset disposition business, for the fourth quarter of 2019, sales are expected between $7.13 billion and $7.53 billion.

Global components sales are projected in the range of $4.63-$4.83 billion. Global ECS sales are estimated to be $2.5-$2.7 billion.

Interest and other expenses will presumably be about $52 million, as a result of which, the company projects non-GAAP earnings per share in the range of $2.10-$2.26. Average non-GAAP tax rate around the low end of the 23-25% range is included in the guidance.

Management expects ECS operating income to increase in the fourth quarter. Moreover, strong cash flow is expected in the fourth quarter.

Foreign currency headwind of approximately $100 million on sales and 5 cents on earnings per share is expected in the fourth quarter.

Moreover, the winding down of PC and mobility device disposition business is expected to enable accelerated implementation of next generation technologies like AI, industrial automation, smart cities and vehicles. This is likely to boost the company’s business and returns to shareholders.

Zacks Rank and Key Picks

Arrow currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few better-ranked stocks in the broader technology sector are CDW Corporation (NASDAQ:CDW) , Anixter International (NYSE:AXE) and Benefitfocus, Inc. (NASDAQ:BNFT) , each flaunting a Zacks Rank #1.

Long-term earnings growth rate for CDW, Anixter and Benefitfocus is currently projected to be 13.1%, 8% and 20%, respectively.

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