Arrow's 4Q EPS Beats, Guidance Dull

Arrow Electronics Inc. ( ARW - Analyst Report ) posted fourth-quarter 2012 adjusted earnings per share (EPS) of $1.23, surpassing the Zacks Consensus Estimate by 13.9%. The quarterly result came much above management’s expectations but was down from $1.38 per share in the year-ago quarter.

Revenues

Arrow reported revenues of $5.40 billion, down 0.7% year over year. Excluding the impact of acquisitions and foreign currency, sales declined 3.0% year over year.

On a segmental basis, Global component sales were $3.19 billion, down 7.5% year over year. Asia-Pacific posted a 7.0% year-over-year increase, due to strong performances in China and ASEAN regions. Revenues from America dropped 6.0% year over year due to overall macro uncertainty. Sales from Europe were down 20.0% owing to Euro concerns.

Revenues from Global enterprise computing solutions (ECS) came in at $2.22 billion, up 11.0% year over year. Arrow posted solid double-digit year-over-year growth in services, storage and software, which was partially offset by a decline in servers. Americas posted solid performance as sales in the core value-added distribution business was at par with expectations in a seasonally slow quarter. Europe was also strong even amid the weak market conditions.

Operating Results

Gross margin was down 60 basis points year over year to 13.1% due to the ongoing pricing pressure and a change in mix of products. Operating margin came in at 4.9%, up from 4.3% from the year-ago quarter, as the company gained from a legal settlement.

Reported net income came in at $174.7 million or $1.62 per share during the quarter compared to a net income of $174.1 million or $1.53 per share in the year-ago quarter. Excluding the effect of restructuring cost and legal settlement, adjusted net income was $132.4 million or $1.23 per share compared with $157.3 million or $1.38 per share in the year-ago quarter.

Balance Sheet and Cash Flows

Arrow ended the quarter with cash and cash equivalents of $409.7 million, up from $358.5 million at the end of the previous quarter. As of Dec 31 2012, long-term debt was $1.59, up from $1.56 billion at the end of the previous quarter.

During the quarter, the company generated $187.8 million in cash from operating activities and incurred $36.7 million in capital expenditure compared with $176.3 million and $26.7 million, respectively, in the prior quarter.

Arrow repurchased shares worth $38.1 million in the fourth quarter.

Fiscal 2012 Update

Total revenues declined 5.0% year over year to $20.4 billion. Reported EPS was $4.56, down from $5.17. Adjusted EPS was $4.40 versus $5.19 in the year-ago quarter.

Guidance

Going forward, Arrow expects sales in the first quarter of 2013 to range between $4.60 billion and $5.50 billion. Global components sales are projected between $3.05 billion and $3.25 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 1.35 to 1, earnings per share (excluding any one-time charges) are projected around 80 cents to 92 cents for the first quarter of 2013.

Tax rate is expected between 28.0% and 29.0%, and share outstanding is likely to be roughly 108.3 million.

The sequentially weak guidance reflects the ongoing macro uncertainty and fiscal cliff in the U.S. and Euro issues. Arrow also believes that business activity could be lower than normal seasonality. However, the company mentioned that it will fight back the challenges by initiating a productivity enhancement program including an annual cost saving program of about $40.0 million.

Our Take

Electronic component distributor Arrow posted better-than-expected fourth-quarter results with its EPS surpassing the Zacks Consensus Estimate. Like the previous quarter, revenues witnessed a year-over-year decline, but the rate of decline moderated. First-quarter guidance was disappointing reflecting macro concerns. However, 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.

We are also encouraged by Arrow’s recent deal wins. In the past two weeks, the company signed distribution agreements with SAP AG’s ( SAP - Analyst Report ) American arm and Lantronix Inc. ( LTRX - Snapshot Report ) .

Currently, Arrow has a Zacks Rank #3 (Hold). Its archrival Avnet Inc. ( AVT - Analyst Report ) , which posted decent second-quarter 2013 results, has a Zacks Rank #1 (Strong Buy).