Post on 22-Jun-2015
First Quarter 2008 Earnings Call
April 23, 2008
WELCOME
Sabrina Weaver
Director, Investor Relations
First Quarter EarningsApril 23, 2008
SAFE HARBOR STATEMENT
Some of the comments to be made on this morning’s call may include forward-looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons including, but not limited to: industry conditions, the company’s implementation of its new global financial system and the company’s planned implementation of its new enterprise resource planning system, changes in product supply, pricing and customer demand, competition, other vagaries in the global components and global ECS markets, changes in relationships with key suppliers, increased profit margin pressure, the effects of additional actions taken to become more efficient or lower costs, the company’s ability to generate additional cash flow and the other risks described from time to time in the company’s reports to the Securities and Exchange Commission (including the company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q). Forward-looking statements are those statements, which are not statements of historical fact. These forward-looking statements can be identified by forward-looking words such as "expects," "anticipates," "intends," "plans," "may," "will," "believes," "seeks," "estimates," and similar expressions. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any of the forward-looking statements.
BUSINESS OVERVIEW
Bill Mitchell
Chairman & CEO
First Quarter EarningsApril 23, 2008
OVERVIEW
Record level first-quarter sales and WC/sales, positive cash flow generation
Increasingly challenging market conditions at quarter end
Global Enterprise Computing SolutionsStrong growth in storage, software and services offset by weakness in serversTook actions to adjust cost structure, yet we continue to focus on investing for the long-term+ Launch of midmarket initiative, LOGIX acquisition (closing pending)+ Successful implementation of ERP in North American Sun business
Global ComponentsExecuted well in cautious marketplaceNorth America stable, double-digit growth in Asia Pac, Europe softBook-to-bill above 1 globally+ North America and Asia Pac above 1.05Strong Y/Y increase in design registrations in North America Achieva acquisition further strengthens Asia Pac (closing pending)
Challenging quarter…
First Quarter EarningsApril 23, 2008
IN SUMMARY…
Global scale and financial strength allow us to take advantage of opportunities in the market
Continue to invest in the long-term future of Arrow
Taken steps to be more efficient in all areas of our business
Strategic priorities are clearContinue to pursue transformational opportunities in ECSLeverage global scale in componentsInstall world class systems and processes Pursue growth opportunities across products, markets and geographies
FINANCIAL OVERVIEW
Paul Reilly
Senior Vice President & CFO
First Quarter EarningsApril 23, 2008
CONSOLIDATED SALES
$2,727$3,192
$3,498$4,028
Q1-05 Q1-06 Q1-07 Q1-08
($ in millions)
*Includes KeyLink Systems Group sales in Q1-07 and excludes procurement agreement sales in Q1-08.
Sales $4.0Bn
+15% Y/Y, -9% Q/Q
+5%Y/Y Pro forma for KeyLink*
First Quarter EarningsApril 23, 2008
GLOBAL ENTERPRISE COMPUTING SOLUTIONS
$460 $511
$712
$1,106
Q1-05 Q1-06 Q1-07 Q1-08
($ in millions)
*Includes KeyLink Systems Group sales in Q1-07 and excludes procurement agreement sales in Q1-08.
Sales $1.1Bn
+55% Y/Y, -31% Q/Q
+6%Y/Y Pro forma for KeyLink*
17th consecutive quarter of Y/Y growth
Lower than anticipated volume, margin, and rebates on servers and a lag in return on investments in growth initiatives pressured margins
Increased ROWC 28% Y/Y
First Quarter EarningsApril 23, 2008
GLOBAL COMPONENTS
$2,267
$2,681 $2,785 $2,922
Q1-05 Q1-06 Q1-07 Q1-08
($ in millions)
Sales $2.9Bn
+5% Y/Y, +4% Q/Q
Decreased operating expense/sales 20 bps Y/Y
Operating margin close to financial target
Decreased WC/sales 70 bps Y/Y
First Quarter EarningsApril 23, 2008
ASIA PAC COMPONENTS
$304
$531 $545
$653
Q1-05 Q1-06 Q1-07 Q1-08
($ in millions)
Sales $653MM
+20% Y/Y, Flat Q/Q
Stronger than normal seasonality
Increased operating income almost 47% Y/Y
Improved ROWC 200 bps Y/Y
First Quarter EarningsApril 23, 2008
NORTH AMERICAN COMPONENTS
$1,046
$1,191$1,165 $1,162
Q1-05 Q1-06 Q1-07 Q1-08
($ in millions)
Sales $1.2Bn
Up slightly Q/Q, flat Y/Y
Sales in core SMB +2% Q/Q, +2% Y/Y
Grew core SMB operating income 3-4x sales Q/Q and Y/Y
Increased ROWC 18% Y/Y
First Quarter EarningsApril 23, 2008
EUROPE COMPONENTS
$916 $959$1,075 $1,107
Q1-05 Q1-06 Q1-07 Q1-08
($ in millions)
Sales $1.1Bn
+11% Q/Q, +3% Y/Y
+8% Q/Q, -9% Y/Y, excluding FX
Increased operating margin 70 bps Q/Q
Grew earnings 2x the rate of sales Q/Q
First Quarter EarningsApril 23, 2008
P&L HIGHLIGHTS($ in millions, except per share data, may reflect rounding)
1Q08 Q/Q Change
Y/Y Change
Sales $4,028 -9% +15%
Gross Profit Margin 14.6% +70bps -90bps
Operating Exp*/Sales 10.5% +120bps -50bps
Operating Income* $163.6 -20% +5%
Operating Margin* 4.1% -50bps -40bps
Net Income* $97.9 -19% +7%
Diluted EPS* $0.79 -19% +7%
•Represents GAAP measure adjusted to exclude the impact of restructuring and integration and other items affecting comparability. Includes amortization of intangible assets of $.02. See “Earnings Reconciliation” for a reconciliation between GAAP and “Adjusted” results.
* $47MM of total expense reductions announced in last 3 quarters *
First Quarter EarningsApril 23, 2008
STRONG FINANCIAL POSITION
Cash flow of $40MM in Q16th consecutive quarter of positive cash flow generationAbility to self-fund growth initiatives
Financial StabilityStrong balance sheetAccess to committed liquidity facilities
Focused management of working capitalIncreased ROWC almost 160 bps Y/YDecreased WC/sales 280 bps Y/Y
ROIC* significantly exceeded cost of capital for the 17th consecutive quarter
*ROIC = Annualized, tax effected op. income and equity in earnings of affiliates excluding restructuring and other charges - annualized minority interest /( Avg Debt + Avg Equity – Avg Cash over $150MM).
Competitive advantage
BUSINESS UNIT REVIEW
Mike Long
President & COO
First Quarter EarningsApril 23, 2008
ENTERPRISE COMPUTING SOLUTIONS
Double-digit Y/Y increases in storage, software, and services
End-of-quarter weakness in servers
Lower than anticipated volume, margin, and rebates on servers and a lag on return on investments pressured operating margin
ECS Europe moving forwardLOGIX acquisition to bring scale and senior leadership (closing pending)Andy Bryant to spend significant time in Europe
Launched midmarket initiative
Implemented ERP in North American Sun businessSuccessful transition with no delays in orders/shipmentOn budget and on time
Mixed results in the first quarter…
First Quarter EarningsApril 23, 2008
GLOBAL COMPONENTS REGIONAL PERFORMANCE
Asia PacificStrong Y/Y growth in Taiwan, India, Australia/NZ, and ASEAN regionContinued to outgrow the marketStrategic expansion in Asia Pac+ Hynetic & Shreyanics in India+ Achieva in the ASEAN region (closing pending)
North AmericaStrong sequential increase in book-to-billDouble-digit Y/Y growth in design registrationsStrong performance in military segment+ Acquired and integrated ACI Electronics
EuropeMarket conditions weakened in Q1Strong Euro impacting export market
Sales at the high end of guidance range in a cautious market…
First Quarter EarningsApril 23, 2008
GLOBAL COMPONENTS LEADING INDICATORS
Book-to-bill above parity; at 1.03 worldwide for 3rd consecutive QNA strengthened, Asia Pac stable, Europe weakened
Lead times stable and within normal range of 8 to 12 weeks
No increase in cancellation rates
Quarterly customer survey in North AmericaInventory well positioned heading into Q2Outlook for purchase requirements softened
CLOSING COMMENTS
Bill Mitchell
Chairman & CEO
First Quarter EarningsApril 23, 2008
IN CLOSING…
Mixed performance in cautious marketComponents sales at high end of guidance rangeECS performance did not meet expectations
Continue to manage company conservatively and prudently Maintain flexibility to take advantage of opportunities
Consistently generating cash & balance sheet is in great shape
Committed to investment initiatives to position Arrow for future growth
Focus on efficiency in all areas of business to ensure premium returns to investors
First Quarter EarningsApril 23, 2008
SECOND QUARTER 2008 GUIDANCE
Consolidated Sales $3.85Bn to $4.15Bn
Global Components $2.70Bn to $2.90Bn
Global ECS $1.15Bn to $1.25Bn
Diluted EPS* $0.74 to $0.80
*Excluding Charges, including $.02 to $.03 estimated amortization of intangible assets.
QUESTIONS & ANSWERS
First Quarter EarningsApril 23, 2008
EARNINGS RECONCILIATION$ in thousands, except per share data
Q108 Q407 Q107
Operating income, as Reported $144,143 $193,583 $162,659
Restructuring and integration charges (credit) 6,478 9,955 (6,147)
Preference claim from 2001 12,941 -- --
Operating income, as Adjusted $163,562 $203,538 $156,512
Net income, as Reported $85,871 $113,963 $96,294
Restructuring and integration charges (credit) 4,159 6,598 (4,522)
Preference claim from 2001 7,822 -- --
Net income, as Adjusted $97,852 $120,561 $91,772
Diluted EPS, as Reported $.69 $.92 $.77
Restructuring and integration charges (credit) .03 .05 (.04)
Preference claim from 2001 .06 -- --
Diluted EPS, as Adjusted $.79 $.97 $.74
The sum of the components for net income per share, as Adjusted, may not agree to totals, as presented, due to rounding.
First Quarter EarningsApril 23, 2008
EARNINGS RECONCILIATIONReferences to restructuring and other charges refer to the following incremental charges taken in the quarters indicated:
Q1-08 Restructuring and Integration Charges:
During the first quarter of 2008, the company recorded a restructuring and integration charge of $6.5 million ($4.2 million net of related taxes or $.03 per share on both a basic and diluted basis) primarily related to initiatives taken by the company to improve operating efficiencies. Included in this restructuring and integration charge is a restructuring charge of $5.3 million related to efficiency initiatives taken by the company during the first quarter of 2008. These actions are expected to reduce costs by approximately $7.0 million per annum, with approximately $1.0 million realized in the first quarter of 2008.
Q1-08 Legal Settlement: As previously disclosed, during the first quarter of 2008, the company recorded a charge, including legal fees, related to a preference claim from 2001 of $12.9 million ($7.8 million net of related taxes or $.06 per share on both a basis and diluted basis).
Q4-07 Restructuring and Integration Charges:
During the fourth quarter of 2007, the company recorded a restructuring and integration charge of $10.0 million ($6.6 million net of related taxes or $.05 per share on both a basic and diluted basis) primarily related to initiatives taken by the company to improve operating efficiencies.
Q1-07 Restructuring and integration Charges: During the first quarter of 2007, the company recorded a restructuring and integration credit of $6.1 million ($4.5 million net of related taxes or $.04 per share on both a basic and diluted basis), primarily related to the sale of the company's Harlow, England facility and the acquisition of KeyLink.
First Quarter 2008 Earnings Call
April 23, 2008