Arrow Electronics Inc. struggled like the rest of the electronics industry in the world’s biggest economic regions in the third quarter, pounded by continuing weakness in China and a pullback in the U.S., but the distributor shone brightly in Europe. On the continent, it reaped the gains of recent investments and strategic sales initiatives that adjusted its services to match the changing needs of its European customers.
Europe was the brightest spot in an otherwise cloudy quarter for Arrow. Its third quarter results were impacted by a larger-than-expected dip in Asia especially in China where sales fell, hurt by the swooning manufacturing sector. As China struggled, Western OEMs responded by curtailing orders while awaiting better visibility into end-demand. They have since reversed course, helping to boost fourth quarter bookings, according to Michael Long, chairman, president and CEO at Arrow.
“We anticipated softer conditions in Asia during the third quarter, with decelerating growth rates,” said Long during a conference call with analysts. “The macroeconomic environment proved to be even more challenging, particularly in China, where GDP growth dropped to the lowest level since the financial crisis. The global customers declined here in the [United] States as well as in Asia-Pacific. We saw a contraction of the manufacturing, primarily in the center part of the U.S. where a lot of that lies for us, and it carried over to some of the plants in China.”
The result was a lackluster performance for Arrow during the third quarter. Sales and net income lagged analysts’ consensus forecast. Net income for the quarter fell to $109.2 million, or $1.15 per share, down from $146.9 million, or $1.47 per share, in the year-ago comparable period. Profits were hammered by higher selling, general and administrative costs and approximately $17.8 million in restructuring charges. Sales during the quarter rose slightly to $5.7 billion from $5.6 billion. Analysts on average were forecasting sales of $5.76 billion for the quarter.
Sales at Arrow’s global components division dropped to $3.69 billion from $3.73 billion, dragged down both by continuing weakness in North America and the sharp slowdown in Asia noted by CEO Long. Arrow said sales in the components division were negatively impacted to the tune of $163.8 million by the strengthening U.S. dollar. Companywide, sales would have been approximately $280 million higher had the U.S. dollar value remained constant with the year-ago period, Arrow said.
Europe was the undisputed star during Arrow’s third quarter. Despite the headwind from unfavorable currency exchange, the region reported strong growth in both the components division and the enterprise computing solutions’ (ECS) division. After adjusting for currency fluctuations, the components business rose more than 10 percent during the quarter, offsetting a 10.3 percent decline in Asia and 4 percent in the Americas. ECS Europe sales were up a torrid 15 percent on an adjusted basis, countering a 4 percent decline in the Americas.
“In Europe, sales adjusted for acquisitions and changes in foreign currencies increased significantly, advancing 11 percent year-over-year – the third quarter in a row of double-digit constant currency growth,” said Paul Reilly, CFO of Arrow, during the conference call with analysts. “Sequentially, core sales in Europe were flat quarter-over-quarter, which is in line with normal seasonality.”
What accounts for Arrow’s strong performance in Europe? The company has benefitted operationally from the completion of a major investment in its enterprise resource planning (ERP) infrastructure concluded several years ago but which is now fully throwing off the expected gains. Additionally, Arrow aligned its offerings with the demands of its European customers, many of which are increasing investments in areas such as data analytics, hybrid cloud automation and orchestration, security and computing storage needs, according to Long.
“Our Europe components business has now posted 10 straight quarters of year-over-year sales growth, adjusted for acquisitions and changes in foreign currencies,” Long said. “We began investing in sales and engineering over a year ago, and we believe our strong results in the region have validated that strategy. Our team has done an excellent job of identifying adjacent industries and targeting underserved customers. With consistent growth for over two years, and following the completion of our Europe Components ERP implementation, the segment has now delivered eight straight quarters of year-over-year operating margin improvement.”
Despite the positive performance in Europe, Arrow’s outlook for the fourth quarter remains muted, however, due to persistent concerns about China and weakness in North America, which Long said “has been interesting because it has been virtually a no-growth market now for almost four years.”
Arrow said it expects fourth quarter sales to be between $6.15 billion and $6.55 billion, the mid-point of which is slightly lower than the $6.4 billion the company reported for the corresponding quarter of 2014. With conflicting signals still coming out of Asia and other key regions of the world, Arrow may have to revise its estimate for the quarter, however.
“What we're looking at are the bookings into the fourth quarter,” Long told analysts. “It appears the bookings are picking up this month. And the fourth quarter's going to be dependent upon if they continue to pick up. If they don't, we've given you the guidance that we see.”