by 
MELVILLE, N.Y. — Arrow Electronics, Inc. (NYSE:ARW) today reported third quarter 2010 net income of $118.5 million ($1.01 and $1.00 per share on a basic and diluted basis, respectively) on sales of $4.66 billion, compared with net income of $12.6 million ($.10 per share on both a basic and diluted basis) on sales of $3.67 billion in the third quarter of 2009.
“The positive momentum we have seen in our businesses during the first half of the year has continued with another quarter of terrific performance. Earnings per share came in well ahead of our expectations and almost tripled year over year to a record third-quarter level”
The company's results for the third quarters of 2010 and 2009 include a number of items outlined below that impact their comparability. A complete reconciliation of these items is provided under the heading “Certain Non-GAAP Financial Information.” Excluding those items, on a non-GAAP basis, net income for the quarter ended October 2, 2010 would have been $128.0 million ($1.09 and $1.08 per share on a basic and diluted basis, respectively) and net income for the quarter ended October 3, 2009 would have been $44.9 million ($.37 per share on both a basic and diluted basis).
“The positive momentum we have seen in our businesses during the first half of the year has continued with another quarter of terrific performance. Earnings per share came in well ahead of our expectations and almost tripled year over year to a record third-quarter level,” said Michael J. Long, chairman, president, and chief executive officer. “Our strategy to accelerate growth and gain market share through sales excellence, value-added services, and expansion of markets served is paying off.”
“The third quarter results once again demonstrate our ability to deliver industry-leading results and drive gross margin improvements, and the significant operating leverage we have in the model, with operating income growing more than 5x faster than sales on a year-over-year basis,” said Paul J. Reilly, executive vice president, finance and operations and chief financial officer. “Equally important, our returns continue to reflect our strategic accomplishments, with both our return on working capital and return on invested capital almost doubling year over year.”
Global components sales of $3.44 billion increased 35 percent year over year. “Our components business experienced its fifth consecutive quarter of better than normal seasonality. Gross and operating margins have also seen sequential improvements over the past year,” Mr. Long said.
Global enterprise computing solutions (“ECS”) sales of $1.22 billion increased 8 percent year over year. “Storage, software, and industry-standard servers grew at very strong double-digits rates on a year-over-year basis,” said Mr. Long. “We also saw terrific growth in some of our newer initiatives including security and networking,” Mr. Long added.
The company's results for the third quarters of 2010 and 2009 include the items outlined below that impact their comparability:
• restructuring, integration, and other charges of $14.3 million ($9.5 million net of related taxes or $.08 per share on both a basic and diluted basis) in 2010 and $37.6 million ($29.1 million net of related taxes or $.24 per share on a both basic and diluted basis) in 2009.
• loss on prepayment of debt of $5.3 million ($3.2 million net of related taxes or $.03 per share on both a basic and diluted basis) in 2009.
NINE-MONTH RESULTS
Arrow’s net income for the first nine months of 2010 was $321.7 million ($2.71 and $2.68 per share on a basic and diluted basis, respectively) on sales of $13.51 billion, compared with net income of $60.4 million ($.50 per share on both a basic and diluted basis) on sales of $10.48 billion in the first nine months of 2009. Sales in the first nine months of 2010 increased 29 percent year over year.
Net income for the first nine months of 2010 includes restructuring, integration, and other charges of $27.4 million ($19.1 million net of related taxes or $.16 per share on both a basic and diluted basis) primarily related to initiatives taken by the company to improve operating efficiencies and a loss on prepayment of debt of $1.6 million ($1.0 million net of taxes or $.01 per share on both a basic and diluted basis). Excluding these items, net income would have been $341.9 million ($2.88 and $2.84 per share on a basic and diluted basis, respectively) for the first nine months of 2010.
Net income for the first nine months of 2009 includes restructuring, integration, and other charges of $80.9 million ($61.3 million net of related taxes or $.51 per share on both a basic and diluted basis) primarily related to initiatives taken by the company to improve operating efficiencies and a loss on prepayment of debt of $5.3 million ($3.2 million net of taxes or $.03 per share on both a basic and diluted basis). Excluding these items, net income would have been $124.9 million ($1.04 per share on both a basic and diluted basis) for the first nine months of 2009.
GUIDANCE
“Looking ahead, we believe that total fourth quarter sales will be between $5.0 and $5.4 billion, with global components sales between $3.325 and $3.525 billion and global enterprise computing solutions sales between $1.675 and $1.875 billion. Earnings per share, on a diluted basis, excluding any charges, are expected to be in the range of $1.22 to $1.32,” said Mr. Reilly.
{complink 453|Arrow Electronics Inc.}
This is a worrying development. Corporations refuse to spend because they are worried, and consumers are reticent to loosen their purse strings due to persistent frights about the housing and financial markets. We all seem to be afraid of our shadows.
Unfortunately, I agree. This is clearly a problem which doesn't have a clear solution.
And then another issue is that many of these corporations — especially in the tech sector — are hoarding cash right now because they're hoping some of their competitors fail in this economy, and then they can use some of that cash to acquire their assets of the fallen at an affordable price. That's potentially a good deal for the buyer, but acquisitions traditionally don't help drive job growth: if anything, it's the opposite because of course the new company comes in, declares many positions redundant, trashes the parts of the company they aren't particularly interested in, etc.
Ultimately, like you say, it's a confidence crisis. That's a hard thing to restore, especially with the general lack of positive financial news in the media. And with the holidays coming up… well… I'm sure there will be plenty of stories about probably-not-so-great consumer spending and retail performance getting published. That won't help.
I am trying to summon outrage on the action of companies that are hoarding cash but it's an almost impossible task. I am not hoarding myself but I am not drawing out my checkbook either at the sight of the neatest gadgets around. I would like to take the iPad or any of the rival tablet PCs for a spin but won't go near them because of job insecurity.
If I had money to hoard, I would. However, I am not a company and it's a bit unnerving to see four technology companies keeping billions of dollars in the bank whereas it could be used to generate more profits and jobs. That's a hypothetical situation, though, and many companies are as concerned about the first quarter of 2011 as I am about my job security. Who's going to blink first, consumers, corporations or governments?
Hawk, I share your outrage, but this is an epidemic among many companies across many industries…just not cash rich tech companies. Banks, hedge funds, venture funds and other large institutions have boat loads of money right now just sitting on the side lines. When they plan to unload is anyone’s guess, but my guess is that there will still be a ton of money on the side lines same time next year.
It’s a catch-22. These companies will unload when the economy starts recovering and they feel more at ease letting go of their cash reserves. The economy needs this money that is sitting on the side lines to spur growth through lending and investments. Which will come first?
Dave, What should these companies spend money on even if they want to? Seriously, what's there to go and buy in this current economy? I am not being cynical. I would just like to know what anyone of us would expect these companies to spend their money on. Should they buy real estate in the U.S., government bonds in Greece, a rival business in strike-plagued France or put down stakes in Africa? Corporations will spend when the conditions are ripe for investment. Not a second before.
Hawk,
I hear you on that. What people fail to remember is that these companies have staffs of accountants that provide some advice on what they should do with their cash reserves. In these times, what worse way to operate than spending without any real purpose. Sure we individuals can sit back & say shame on them & that they should spend because they have billions. But it take billions to build a large organization and stay relevant.
They will always do what makes them money. That's a no-brainer. But it has to be spent wisely if you want to stay in business for a decent amount of time.
Anna, as I mentioned I don’t think companies will be releasing major funds soon until we start seeing a significant recovery and the overall economic outlook improves. With that said, I touched upon this on Bolaji’s blog: (See: Richest Tech Firms & the Challenge of Managing Huge Cash Hoards ), in which I believe that the new innovations of the future (which they mostly come from anyway) will come from agile start-ups and entrepreneurs. I would like to see more money being funneled into these types of ventures which will spur innovation and job growth. The outrage I was sharing with Hawk had more to do with the overall environment of holding on to cash reserves. While I understand the rationale, it would be beneficial if the banks, which received bail-out money from the taxpayers, would do what they said they were going to do and lend. On the contrary, it has gotten even more difficult for small businesses to get loans, which hurts small businesses looking to expand and entrepreneurs looking to start new businesses. This stunts job growth, innovation and confidence.
I can't agree more. Fear has taken hold of corporate accounts and consumer wallets and won't let go. Banks are the water carriers for our society, lubricating the system and kicking up innovation with their lending. Companies are not in the business of lending and even the ones with a lot of cash–in good times and not-so good–themselves turn to the money markets for financing. When banks stop lending, and that's the situation now, the economy stiffens and innovation becomes a harder task. Bolaji's report identified non-financial hoarders. It's time somebody did a story on financial hoarders.
I picked up some information this week that likely does not reflect the industry overall but was nevetheless interesting….on its earnings conference call Avnet, which has acquired two major distributors within the past 6 months, said it would not have problems obtaining credit for future acquisitions and wouldn't rule out additional buys. Acquisition targets would have to be strategic–bring in suppliers or customers Avnet doesn't already have–and be able to meet Avnet's ROI goals which is more than 12% after integration.
Arrow has also made two acquisitions within the past 3 months and noted capital is not a problem. In fact, Arrow spent some money on inventory which it considered strategic–there aren't current orders in for these products but the price was right and Arrow fully expects it's going to need that inventory going forward.
Analysts on both calls seemed concerned that both Arrow and Avnet increased their inventory significantly. Both companies fully expect to use that inventory in the coming months.
The issue of jobs and hiring did not come up–my sense is neither distributor is planning on expanding its workforce beyond acquisitions.
Adding to what Barbara has mentioned, Semiconductor companies who have managed to have a strong Cash supply are also on the offensive, adding capacity through purchae of fabs and A&T sites, mainly in the east where they are up for discounted prices. I think it is a win-win for they are adding capability to be ready for when the market comes up. It will help gain share as and when the market bounces back.