Arrow Electronics, Inc. Second Quarter 2006 Earnings Call. July 25, 2006

Transcription

1 Arrow Electronics, Inc. Second Quarter 2006 Earnings Call July 25, 2006

2 Welcome Sabrina Weaver Director, Investor Relations

3 Safe Harbor Statement Some of the comments to be made on this morning s s call may include forward-looking statements, including statements addressing future financial results, that are subject to a number of assumptions, risks and uncertainties which could cause actual results or facts to differ materially from f such statements for a variety of reasons including, but not limited to: t industry conditions, the company s s ongoing planned implementation of its new global financial system, changes in product supply, pricing, and customer demand, competition, other vagaries in the computer products and electronic components 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 ability of the company to generate erate additional cash flow and other risks described from time to time in the company s s reports to the Securities and Exchange Commission (including the company s s Annual Report on Form 10-K K and Quarterly Reports on Form 10-Q). The company is under no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 3

4 Business Overview Bill Mitchell Chairman, President & CEO

5 Second Quarter Overview Highest level of sales and earnings since 2000 Preliminary market data indicates we gained share in all components businesses NAC: Highest sales since 1Q01, strong increase in op. income Europe: Sales matched highest level in company history, approx. 60% growth in op. income Asia/Pacific: Record sales, significant profitability improvement Fundamentals: Lead times at higher end of normal, Book to Bill: between 1 to 1.1, cancellation rates low, pricing stable Enterprise Computing Solutions continued to deliver solid profitability and returns Strength in storage, industry standard servers, and DNS Weakness in broad proprietary server market and software in NA 5

6 Second Quarter Financial Highlights Overall, we had an excellent quarter Consolidated sales of $3.44 BN 14 th consecutive Q of Y/Y sales growth +24% Y/Y (+14% Y/Y pro forma for acquisitions) Diluted EPS* of $0.77, record level excl. tech bubble period Operating expenses*/sales at 6-year 6 low; op. income* +35% Y/Y; op. margin* +40bps Y/Y Return on invested capital ** at 12.0 %; highest Q2 level in 10 years *Represents GAAP measure adjusted to exclude the impact of restructuring and other charges. See Earnings Reconciliation for a reconciliation between GAAP and Adjusted. **ROIC = Annualized, tax effected op. income excluding restructuring and other charges/(avg Debt + Avg Equity Avg Cash over $150MM). 6

7 Looking Ahead We continue to outperform the market and remain the industry s s clear leader Ongoing initiatives and favorable market conditions led to increased market share and improving margins We expect markets will remain rational and disciplined Expect components market to return to more normal conditions in Q3, which is a healthy environment for us We will continue to show consistent, steady performance 7

8 Financial Overview Paul Reilly Senior Vice President & CFO

9 Consolidated Sales ($ in millions) $3,437 $2,678 $2,768 $2,710 $2,960 $3,192 Sales of $3.4 Bn +8% sequentially and +24% year over year Pro forma for acqs. +14% year over year Q2-04 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 9

10 Worldwide Component Sales ($ in millions) $2,148 $2,170 $2,167 $2,303 $2,609 $2,757 Sales of $2.8Bn +6% Q/Q and +27% Y/Y Pro forma for Ultra Source +20% Y/Y Strong growth in all regions Q2-04 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 Operating margin +30bps+ Q/Q, +60bps+ Y/Y Strong Y/Y increases in all regions Making great progress towards Timeless Business Model Targets 10

11 Worldwide Computer Product Sales ($ in millions) $529 $598 $543 $657 $584 $680 Sales of $680MM +17% Q/Q and +14% Y/Y Storage strength offset by weakness in proprietary servers and software in NA Solidly profitable with industry leading margins and returns Q2-04 Q2-05 Q3-05 Q4-05 Q1-06 Q

12 P&L Highlights ($ in millions, except per share data, may reflect rounding) 2Q06 1Q06 Change 2Q05 Change Sales $3,437 $3,192 8% $2, % Gross Profit Margin 15.3% 15.3% flat 15.9% -60bps Operating Expenses* 10.4% 10.5% -10bps 11.5% -110bps Operating Income* $166.3 $ % $ % Operating Margin* 4.8% 4.7% +10bps 4.5% +40bps Net Income* $94.7 $ % $ % Diluted EPS* $0.77 $ % $ % * Represents GAAP measure adjusted to exclude the impact of restructuring ructuring and other charges. See Earnings Reconciliation for a reconciliation between GAAP and Adjusted. 12

13 Strong Returns and Balance Sheet Metrics (Return on Invested Capital*) 12.0% 10.3% 10.3% 4.9% Q2-03 Q2-04 Q2-05 Q2-06 Strong ROWC, increased inventory turns Y/Y ROIC* well ahead of our Cost of Capital at 12% ROIC* > WACC for 10 th consecutive quarter Working Capital/Sales** of 18.7% Balance sheet remains strong Net debt to cap. 26% *ROIC = Annualized, tax effected op. income excluding restructuring and other charges/(avg Debt + Avg Equity Avg Cash over $150MM). **Inventory + AR - AP at end of period/ annualized sales. 13

14 North America and Asia/Pacific Components Overview Mike Long President Arrow North America and Asia/Pac Components

15 North America Component Sales ($ in millions) $1,234 $1,168 $1,092 $1,057 $1,053 $1,082 Q2-04 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 Near record sales 5 th consecutive sequential increase in Daily Run Rate Indications of market share gain Sales of $1.2BN: +6% Q/Q and +17% Y/Y, 2 nd highest level for a Q2 Strong PEMCO Impressive operating results Operating expenses to sales 150bps Y/Y Operating income +30% Y/Y; 6 th sequential increase Increased ROWC 15

16 North America Components TRENDS Lead times remained at high end of normal range Bookings remained healthy on SMB strength Cancellation rates in normal range Quarterly Customer Survey Inventory well positioned at majority of customer base 16

17 Asia/Pacific Component Sales ($ in millions) $569 $531 $451 $385 $325 $290 Q2-04 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 Record Sales Sales of $569MM +7% Q/Q, +75% Y/Y Pro forma for Ultra Source +25%Y/Y Strong PEMCO, approx. 40% growth Y/Y Operating income more than doubled Q/Q Increased ROWC 17

18 Asia/Pacific Components TRENDS Market remained generally stable Order patterns strong Lead times at upper end of normal Pricing stable, with some PEMCO increases 18

19 Europe Overview Jan Salsgiver Executive Vice President Arrow EMEASA

20 Europe Sales ($ in millions) $980 $952 $825 $831 $821 $772 Q2-04 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 Record sales and indications of market share gain Sales of $980MM$ +3% Q/Q, +18%Y/Y Highest 2Q sales; matches highest sales in company history Components +5% Q/Q, +22% Y/Y Gross margin +70bps Q/Q, +10bps Y/Y Impressive gains in profitability Op. income +16% Q/Q, +59% Y/Y; over 5x and 3x sales growth Increased ROWC 20

21 Europe TRENDS Lead times continue at upper end of normal Book to bill remained positive Pricing stable for semiconductors Some selected price increases in PEMCO 21

22 Enterprise Computing Solutions Overview Ed Coleman President Arrow Enterprise Computing Solutions

23 Enterprise Computing Solutions Sales ($ in millions) $625 $574 $528 $511 $449 $471 Q2-04 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 Continued to deliver industry leading profitability and returns Sales of $625MM: +22% Q/Q, +18%Y/Y Strength in storage, industry standard servers, and DNS S S security virtualization, and software businesses Softness in proprietary servers and software in NA Operating Expenses / Sales -90bps and op. income +32% Q/Q Sequential increases in ROWC 23

24 Closing Comments Bill Mitchell Chairman, President & CEO

25 Second Quarter Highlights Review We delivered results ahead of the market and continue to manage the company for steady growth Consistently grown sales faster than the market 10 consecutive Q s Q s of components market share gain Driving efficiencies into all parts of our business Earnings* grew faster than sales 13 out of 14 consecutive Q sq Significantly improved our financial performance Advanced our ROIC** from 4.9% to 12% in three years *Represents GAAP measure adjusted to exclude the impact of restructuring and other charges. See Earnings Reconciliation for a reconciliation between GAAP and Adjusted. **ROIC = Annualized, tax effected op. income excluding restructuring and other charges/(avg Debt + Avg Equity Avg Cash over $150MM). 25

26 Third Quarter 2006 Guidance Consolidated Sales Worldwide Components Worldwide Computer Products $3.275Bn to $3.425Bn $2.670Bn to $2.770Bn $605MM to $655MM$ Diluted EPS* $0.68 to $0.72 * Includes approximately $0.02 impact of expensing stock options in accordance with FASB 123(R) and excludes any charges. 26

27 In Closing, We expect to continue to outperform the market and achieve our timeless business model targets, independent of market conditions. More progress lies ahead as we remain focused on our strategy growth, operational excellence, financial stability and shared leadership. 27

28 Questions & Answers

29 Earnings Reconciliation ($ in thousands, except per share data, may reflect rounding) 2Q06 1Q06 2Q05 Operating Income, as Reported $163,141 $149,233 $118,758 Restructuring Charges 3,118 1,521 4,847 Operating Income, as Adjusted $166,259 $150,754 $123,605 Net Income, as Reported $92,763 $81,579 $58,449 Restructuring Charges 1, ,925 Loss on Prepayment of Debt -- 1,558 1,035 Write-down of Investment ,019 Net Income, as Adjusted $94,657 $84,057 $65,428 Diluted EPS, as Reported $.76 $.66 $.48 Restructuring Charges Loss on Prepayment of Debt Write-down of Investment Diluted EPS, as Adjusted $.77 $.68 $.54 29

30 Earnings Reconciliation References to restructuring and other charges refer to the following incremental charges taken in the quarters indicated: 2Q06 Restructuring Charges: The company recorded $3.1 million ($1.9 million net of related taxes or $.02 per share on both a basic and diluted basis) of restructuring charges. Included in the restructuring charges is approximately $2.4 million related to previously announced actions the company has committed to take in an ongoing effort to improve its operating efficiencies. These previously announced actions are expected to generate annual cost savings of approximately $6 million beginning in The estimated restructuring charges to be recorded over the next several quarters associated with these actions total approximately $1 million. 2Q05 Restructuring Charges: The company recorded restructuring charges related to additional actions to better optimize the use of its mainframe, reduce real estate costs, be more efficient in its distribution centers, and to be more productive in the amount of $4.8 million ($2.9 million net of related taxes or $.02 per share on both a basic and diluted basis). 2Q05 Loss on Prepayment of Debt: The company repurchased, through a series of transactions, $80.8 million accreted value of its zero coupon convertible debentures due in 2021, which could have been put to the company in February The related loss on the repurchase, including the premium paid and the write-off of related deferred financing costs, aggregated $1.7 million ($1.0 million net of related taxes or $.01 per share on both a basic and diluted basis). 2Q05 Write-Down of Investment: The company determined that an other-than-temporary decline in the fair value of an investment occurred, and, accordingly, during the second quarter of 2005, the company recorded a loss on the write-down of an investment of $3.0 million ($.03 per share on both a basic and diluted basis) in accordance with Financial Accounting Standards Board Statement No. 115 and Emerging Issues Task Force Issue No

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