Second Quarter 2008 Earnings Call July 23, 2008
Second Quarter EarningsJuly 23, 2008Page 3
SAFE HARBOR STATEMENT
Some of the comments to be made on today’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.
Second Quarter EarningsJuly 23, 2008Page 5
OVERVIEW
Sales and EPS exceeded expectationsStrong performance in both Global Components and Global ECS
Near record levels of performance across the board
Macro conditions remain challenging, but we continue to run our business for consistent performance
Global Enterprise Computing SolutionsSales above expectations and operating margin at industry leading levelMajor ERP milestone achieved with successful transition of NorthAmerican Sun group
Impressive results in a challenging environment…
Second Quarter EarningsJuly 23, 2008Page 6
OVERVIEWImpressive results in a challenging environment…
Global ComponentsPerformance above expectations+ Above-seasonal growth in Asia Pacific
- Significantly outgrew the market+ North America stable+ Europe softMarket has continued to be relatively stable, yet cautiousMoving forward with efficiency initiatives and vertical market objectives
Second Quarter EarningsJuly 23, 2008Page 7
IN SUMMARY…
Continue to invest in the long-term future of Arrow
Strategic priorities are clearPursue growth opportunities across products, markets and geographiesLeverage efficiencies of scale and build best-in-class capabilitiesBuild world class systems and processes to enable strategic initiatives and change value proposition
Continue to manage the company in a prudent, fiscally disciplined mannerIncrease profitabilityMaintain positive cash flowContinue to strengthen balance sheet
Second Quarter EarningsJuly 23, 2008Page 9
CONSOLIDATED SALES($ in millions)
Sales $4.3Bn
+8% Y/Y and Q/Q
+6%Y/Y and Q/Q excluding LOGIX
+1% Y/Y and +5% Q/Q excluding LOGIX and FX
$2,768
$3,437
$4,038$4,347
Q2-05 Q2-06 Q2-07 Q2-08
Second Quarter EarningsJuly 23, 2008Page 10
GLOBAL ENTERPRISE COMPUTING SOLUTIONS
$528$625
$1,269$1,389
Q2-05 Q2-06 Q2-07 Q2-08
($ in millions)
Sales $1.4Bn
+9% Y/Y, +26% Q/Q
+4%Y/Y and +19% Q/Q excluding LOGIX
18th consecutive quarter of Y/Y growth
Increased operating margin 160 bps Q/Q to 4.4%
Grew earnings 4x faster than sales Q/Q
ROWC increased more than 50% Q/Q
Second Quarter EarningsJuly 23, 2008Page 11
GLOBAL COMPONENTS
$2,239
$2,812 $2,769$2,958
Q2-05 Q2-06 Q2-07 Q2-08
($ in millions)
Sales $3.0Bn
+7% Y/Y, +1% Q/Q
+2% Y/Y, Flat Q/Q excluding FX
Decreased operating expense/sales 40 bps Y/Y
Operating margin pressure due to softness in Europe and geographic mix
Second Quarter EarningsJuly 23, 2008Page 12
ASIA PAC COMPONENTS
$325
$569 $562
$743
Q2-05 Q2-06 Q2-07 Q2-08
($ in millions)
Sales $743MM
+32% Y/Y, 14% Q/Q
Increased operating income more than 40% Y/Y
Grew earnings 5x faster than sales Q/Q
Improved ROWC by almost 700 bps Q/Q
2x normal seasonal increase
Second Quarter EarningsJuly 23, 2008Page 13
NORTH AMERICAN COMPONENTS
$1,076
$1,255$1,165 $1,125
Q2-05 Q2-06 Q2-07 Q2-08
($ in millions)
Sales $1.1Bn
-4% Y/Y, -3% Q/Q
Continued focus on efficiency initiatives
Increased operating margin 30 bps Y/Y
Second Quarter EarningsJuly 23, 2008Page 14
EUROPE COMPONENTS
$838$988 $1,041 $1,090
Q2-05 Q2-06 Q2-07 Q2-08
($ in millions)
Sales $1.1Bn
+5% Y/Y, -2% Q/Q
-8% Y/Y, -5% Q/Q excluding FX
Market conditions remain soft, in line with expectations
Focused on initiatives to drive profitability
Second Quarter EarningsJuly 23, 2008Page 15
P&L HIGHLIGHTS($ in millions, except per share data, may reflect rounding)
2Q08 Q/Q Change
Y/Y Change
Sales $4,347 +8% +8%
Gross Profit Margin 14.1% -50bps -30bps
Operating Exp*/Sales 10.1% -40bps +10bps
Operating Income* $173.2 +6% -2%
Operating Margin* 4.0% -10bps -40bps
Net Income* $102.1 +4% +1%
Diluted EPS* $0.84 +6% +4%
•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.
Second Quarter EarningsJuly 23, 2008Page 16
STRONG FINANCIAL POSITION
Cash flow of $101MM in Q27th consecutive quarter of positive cash flow generation
Financial StabilityStrong balance sheetConservative debt levelsDebt to capital near record low level
Focused management of working capitalMaintained near record low level of working capital to sales
ROIC* exceeded cost of capital for the 18th 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).
Second Quarter EarningsJuly 23, 2008Page 18
ENTERPRISE COMPUTING SOLUTIONS
Need for complex solutions remains strongDouble-digit Y/Y increases in storage, software, and services; and growth in proprietary serversSequential growth in all segments+ Significant gains in proprietary servers
Performance demonstrates leverage we have created in modelGrew earnings at almost 4x sales> 90% of incremental gross profit dollars fell to bottom line
Excellent results exceeding expectations…
Second Quarter EarningsJuly 23, 2008Page 19
ENTERPRISE COMPUTING SOLUTIONSExcellent results exceeding expectations…
We will continue to build scope and efficiency level in EuropeLOGIX acquisition closed on June 2+ Almost doubles size of our European operations; now in the top 3
economies in Europe+ Adds talented management and strong relationships with key
vendors
ERP implementation on trackTechnology will create the infrastructure to provide best-in-class services to our partners Sun transition exceeded expectations
Second Quarter EarningsJuly 23, 2008Page 20
Arrow ECS Seasonality
Q1 vs. Q4 -25% to -30%
Q2 vs. Q1 +15% to +20%
Q3 vs. Q2 -5% to -10%
Q4 vs. Q3 +30% to +35%
Q/Q Revenue Growth Pre LOGIX*
*Based on historical seasonality pro forma for acquisitions and anticipated seasonality in 2008. Represents current mix of business, which could materially change with future acquisitions or changes in customer or supplier mix.
Q/Q Revenue Growth Post LOGIX*Q1 vs. Q4 -30% to -35%
Q2 vs. Q1 +15% to +20%
Q3 vs. Q2 -5% to -15%
Q4 vs. Q3 +35% to +45%
Second Quarter EarningsJuly 23, 2008Page 21
GLOBAL COMPONENTS REGIONAL PERFORMANCE
Asia PacificStronger than seasonal growth driven by China, Taiwan, Australia/NZ, and ASEAN region Significantly outgrew the marketInvestments paying off with consistent gains in profitabilityAnnounced closing of Achieva acquisition on July 7th
North AmericaStable market with book-to-bill higher than second quarter of last yearY/Y weakness driven by transportation end marketStrong double-digit growth in defense and aerospace segmentContinued to focus on operational excellence
EuropePerformance in line with expectations + Weak macro conditions and less competitive export marketBroaden existing customer base and increase productivity
Solid quarter with sales above expected range…
Second Quarter EarningsJuly 23, 2008Page 22
GLOBAL COMPONENTS LEADING INDICATORS
Lead times stable and within normal range of 8 to 12 weeks
Cancellation rates within normal levels
Book-to-bill near parityDecreased Q/Q in line with normal seasonal trendsEurope flatNA above one and stronger than Q207 despite macro weaknessAsia Pac declined slightly
Quarterly customer survey in North AmericaInventory well positioned heading into Q3Outlook for purchase requirements modestly softened for second consecutive quarter
Market continues to be relatively stable, yet cautious
Second Quarter EarningsJuly 23, 2008Page 24
IN CLOSING…
Results exceeded our expectations Strong performance in a cautious marketplaceRaising the bar at ECS; returned to industry-leading level
Continue to manage company conservatively and prudently Maintain flexibility to take advantage of opportunities
Repositioned ArrowStrong balance sheetStable earningsConsistent cash flow generationDiverse revenue streamNumerous growth opportunities
Perform consistently regardless of market conditions
Second Quarter EarningsJuly 23, 2008Page 25
THIRD QUARTER 2008 GUIDANCE
Consolidated Sales $4.10Bn to $4.40Bn
Global Components $2.85Bn to $3.05Bn
Global ECS $1.25Bn to $1.35Bn
Diluted EPS* $0.73 to $0.78
*Excluding charges, including $.02 to $.03 estimated amortization of intangible assets.
Second Quarter EarningsJuly 23, 2008Page 26
ARROW’S VALUE PROPOSITION
Occupy a unique, value-added space in the supply chain with growth opportunities across every customer segment, end market, geography, and technology
Connect suppliers and customers with value-added services that can't be done any other way
“Arrow puts together demand generation, leads, customer seminars,education programs…to be able to go out and create that reach, that's real value” - Key Supplier at Arrow Investor Day 2008
We will continue to create value for our business partners and shareholders
Second Quarter EarningsJuly 23, 2008Page 28
EARNINGS RECONCILIATION$ in thousands, except per share data
Q208 Q108 Q207
Operating income, as Reported $164,958 $144,143 $173,154
Restructuring and integration charges 8,196 6,478 3,425
Preference claim from 2001 -- 12,491 --
Operating income, as Adjusted $173,154 $163,562 $176,579
Net income, as Reported $96,215 $85,871 $99,211
Restructuring and integration charges 5,929 4,159 2,286
Preference claim from 2001 -- 7,822 --
Net income, as Adjusted $102,144 $97,852 $101,497
Diluted EPS, as Reported $.79 $.69 $.79
Restructuring and integration charges .05 .03 .02
Preference claim from 2001 -- .06 --
Diluted EPS, as Adjusted $.84 $.79 $.81
The sum of the components for net income per share, as Adjusted, may not agree to totals, as presented, due to rounding.
Second Quarter EarningsJuly 23, 2008Page 29
EARNINGS RECONCILIATIONReferences to restructuring and other charges refer to the following incremental charges taken in the quarters indicated:
Q2-08 Restructuring and Integration Charges:
During the second quarter of 2008, the company recorded a restructuring and integration charge of $8.2 million ($5.9 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.
Q1-08 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.
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).
Q2-07 Restructuring and integration Charges: During the second quarter of 2007, the company recorded a restructuring and integration charge of $3.4 million ($2.3 million net of related taxes or $.02 per share on both a basic and diluted basis), primarily related to initiatives taken by the company to improve operating efficiencies and the acquisition of KeyLink.