Four Takeaways From Arrow Electronics

Michael Long, president and CEO of global distributor Arrow Electronics Inc. (NYSE: ARW), faced two big audiences this week: his peers at the annual Electronic Components Industry Association conference, and Wall Street analysts on today's earnings conference call. His message to both: "There is no better time to be in the electronics industry than right now."

The message resonated with the ECIA, but Wall Street remains skeptical. Component demand at the end of Q3 dropped off, and analysts are trying to figure out -- as most of us are -- if the industry is facing a double-dip recession. Long says there's no reason to expect a downturn like the one we saw in 2009.

"We typically see a downturn in Q4, and [our Q4 projections] reflect typical seasonality," Long said on the Q3 conference call. "We think it will be below normal, but our expectations are this is not a continuing decline. Right now, based on what we see, we are not panicking. We believe we are nearing the end."

In spite of softening demand at the end of Q3, Arrow reported record results. Third quarter net income reached $132.2 million on sales of $5.19 billion, compared with net income of $118.5 million on sales of $4.66 billion in Q3 2010. For Q4, however, demand from all regions is expected to be soft.

"In the Americas, we see weaker demand and increased caution among our customers," Long said. "In Europe, we are expecting below normal seasonality due to macroeconomics and sovereign debt. In Asia Pacific, we do expect the balance to return to normal seasonality." The key concern for Q4 is the European economy, although Arrow executives note that customers in Europe do not appear to be facing any credit-related issues.

Long reminded both audiences that the electronics industry continues to grow faster than the GDP of many nations. Companies that survived the downturn in 2009 are in good shape to weather 2011. "I think that for the most part the industry has managed fairly well, and if you made it through the last downturn, I applaud that today," Long said.

Here are some of the key takeaways from this week's presentations:

Inventory remains high. Arrow was not able to reduce inventory as much as expected in Q3 due to decreased demand. Executives expect that will balance out in Q4. Arrow is also being cautious about siphoning off too much inventory -- during the last downturn, inventory was cut so deep that an uptick created a whipsaw effect. "We don't want to take too much out and then expect our suppliers to FedEx [orders] in," said Long.

Prices will remain stable. Prices dropped dramatically in 2009 to move inventory off the shelves. Arrow isn't seeing that this time around. "We are not in that type of situation right now," said Long. "We do see prices softening but not like last time. If the market does take a turn for the worse we will adjust to keep up with the market."

Distribution is in the innovation business. "Our job is to make the complex simple," Long told the ECIA attendees. Distribution has evolved from merely shipping parts to providing design solutions, global logistics, and complex supply chain management programs. "We give innovators what they need while still delivering goods," Long said. (See: Reconnecting With the Spirit of Innovation.)

The impact of Thailand is still unclear. Arrow does not do a lot of business in hard disk drives and does not expect to see an impact on its business from the floods in Asia/Pacific. (See: Thai Floods Devastate Supply Chain.) That said, the distributor has seen some transportation delays out of the region and the price of HDDs starting to rise.