Attached files
| file | filename |
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| EX-99.1 - EXHIBIT 99.1 - ARROW ELECTRONICS INC | q22017pressreleaseexhibit9.htm |
| 8-K - 8-K - ARROW ELECTRONICS INC | q220178-kpressrelease.htm |
1 investor.arrow.com
Second Quarter
2017
CFO Commentary
As reflected in our earnings release, there are a
number of items that impact the comparability of
our results with those in the trailing quarter and
prior quarter of last year. The discussion of our
results may exclude these items to give you a
better sense of our operating results. As always,
the operating information we provide to you
should be used as a complement to GAAP
numbers. For a complete reconciliation between
our GAAP and non-GAAP results, please refer to
our earnings release and the earnings
reconciliation found at the end of this document.
The following reported and adjusted information
included in this CFO commentary is unaudited
and should be read in conjunction with the
company’s Form 10-Q for the quarterly period
ended July 1, 2017, and the Annual Report on
form 10-K as filed with the Securities and
Exchange Commission.
Second-quarter 2017
sales increased 8%
year over year; sales
increased 9% year
over year adjusted
for acquisitions and
changes in foreign
currencies.
Second-Quarter 2017 CFO Commentary
2 investor.arrow.com
Second-Quarter Summary
We delivered record second-quarter sales, gross profit, and non-GAAP
earnings per share. Second-quarter sales were above the high end of our
expectation. Second-quarter operating expenses were well-managed and
aligned to our business mix.
Global components achieved record second-quarter sales that exceeded our
expectation. Second-quarter global component sales grew 16% year over
year. Asia sales grew 21% year over year driven by our investments in sales
and engineering resources. Americas sales grew 15% year over year with
growth from our digital platform, sustainable technology solutions, and our core
distribution business. Europe again delivered sales growth, up 16% year over
year adjusted for changes in foreign currencies, the 17th straight quarter of
adjusted year-over-year growth. Global components' operating income
increased 11% year over year and non-GAAP operating income increased 9%
year over year.
Second-quarter enterprise computing solutions sales declined 5% year over
year adjusted for changes in foreign currencies and were in line with our
expectation. Billings grew led by software, including cloud, but were offset by a
decline in hardware. Second-quarter enterprise computing solutions operating
income decreased 2% year over year and non-GAAP operating income
decreased 3% year over year.
We delivered record
second-quarter sales,
gross profit, and non-GAAP
earnings per share.
Second-Quarter 2017 CFO Commentary
3 investor.arrow.com
P&L Highlights* Q2 2017 Y/Y Change
Y/Y Change Adjusted for
Acquisitions & Currency Q/Q Change
Sales $6,465 8% 9% 12%
Gross Profit Margin 12.7% -70bps -70bps -50bps
Operating Income $230 3% 3% 20%
Operating Margin 3.6% -10bps -20bps +30bps
Non-GAAP Operating
Income $267 5% 5% 21%
Non-GAAP Operating
Margin 4.1% -20bps -20bps +30bps
Net Income $100 (26)% (26)% (12)%
Diluted EPS $1.11 (23)% (23)% (12)%
Non-GAAP Net Income $160 5% 5% 21%
Non-GAAP Diluted EPS $1.78 8% 8% 22%
Consolidated Overview
Second Quarter 2017
$ in millions, except per share data; may reflect rounding
• Consolidated sales were $6.47 billion
– Above the high end of our prior expectation of
$5.975-$6.375 billion
• Consolidated gross profit margin was 12.7%
– Decreased 70 basis points points year over year due
to global components business mix, principally in the
Americas and Europe
– Decreased 50 basis points quarter over quarter due
to mix across the businesses.
• Operating income margin was 3.6% and non-GAAP
operating income margin was 4.1%
– Operating expenses as a percentage of sales were
8.8%, down 60 basis points year over year
– Non-GAAP operating expenses as a percentage of
sales were 8.6%, down 50 basis points year over
year
– The decline in operating expense as a percentage of
sales reflects the operational efficiencies we
achieved to align our costs to our business mix
• Interest and other expense, net was $42 million
– Increased $3 million year over year due to higher
debt balances and higher interest rates on floating-
rate debt
Second-Quarter 2017 CFO Commentary
4 investor.arrow.com
• Effective tax rate for the quarter was 22.7%, and non-
GAAP effective tax rate was 28.4%
– Non-GAAP effective tax rate was toward the higher
end of our longer term range of 27-29% due to
timing of discrete items between the first and
second quarters
• Diluted shares outstanding were 90 million
– In line with our prior expectation
• Diluted earnings per share were $1.11
– Below our prior expectation of $1.50-1.62
– Included a net $0.40 charge for extinguishment of
debt
• Non-GAAP diluted earnings per share were $1.78
– Toward the higher end of our prior expectation of
$1.70-1.82
A reconciliation of non-GAAP adjusted financial measures,
including sales, as adjusted, operating income, as
adjusted, net income attributable to shareholders, as
adjusted, and net income per share, as adjusted, to GAAP
financial measures is presented in the reconciliation tables
included herein.
Second-Quarter 2017 CFO Commentary
5 investor.arrow.com
Components
Global
• Sales increased 17% year over year adjusted for
acquisitions and changes in foreign currencies
– Increased 16% year over year as reported
• Lead times are in line with historical norms
• Backlog increased significantly year over year
• Book-to-bill was 1.14, up from 1.03 in the second
quarter of 2016
• Operating margin of 4.4% decreased 20 basis points
year over year
• Non-GAAP operating margin of 4.6% decreased 30
basis points year over year
– The operating margin decline was principally
attributable to business mix in the Americas region
• Return on working capital declined 260 basis points
year over year due to investments in inventory to
support growth and new supplier engagements, and
collections timing on rapidly growing sales
Global components
posted record second-
quarter sales.
Non-GAAP Operating Income
($ in millions)
Second-Quarter 2017 CFO Commentary
6 investor.arrow.com
Components
Americas
• Sales increased 15% year over year
– Record second-quarter sales
– Strong growth in digital platform and sustainable
technology solutions
– Growth in core components distribution
– Growth across nearly all verticals year over year
Americas components
sales increased 15%
year over year.
Sales ($ in millions)
Second-Quarter 2017 CFO Commentary
7 investor.arrow.com
Components
Europe
• Sales increased 16% year over year adjusted for the
impact of changes in foreign currencies
– Sales increased 13% year over year as reported
– Record second-quarter sales
– Growth in the aerospace and defense,
transportation, and lighting verticals year over
year
Europe components
sales increased 16%
year over year adjusted
for changes in foreign
currencies.
Sales ($ in millions)
Second-Quarter 2017 CFO Commentary
8 investor.arrow.com
Components
Asia
• Sales increased 21% year over year
– Record second-quarter sales
– Strong growth in the transportation vertical year
over year
Asia components sales
increased 21% year
over year.
Sales ($ in millions)
Second-Quarter 2017 CFO Commentary
9 investor.arrow.com
Enterprise Computing Solutions
Global
• Sales decreased 6% year over year
– Sales decreased 5% year over year adjusted for
acquisitions and changes in foreign currencies
• Billings increased year over year adjusted for
changes in foreign currencies
• Operating margin of 5.3% increased 20 basis points
year over year
• Non-GAAP operating margin of 5.6% increased 20
basis points year over year
• Return on working capital increased year over year
for the 15th consecutive quarter
Enterprise computing
solutions posted record
second-quarter
operating margin.
Non-GAAP Operating Income
($ in millions)
Second-Quarter 2017 CFO Commentary
10 investor.arrow.com
Enterprise Computing Solutions
Americas
• Sales decreased 4% year over year
– Growth in infrastructure software led by
virtualization and security
– Growth in networking
– Servers and storage declined year over year
ECS Americas
infrastructure software
and networking grew
year over year.
Sales ($ in millions)
Second-Quarter 2017 CFO Commentary
11 investor.arrow.com
Enterprise Computing Solutions
Europe
• Sales decreased 7% year over year adjusted for
changes in foreign currencies
– Sales decreased 11% year over year as reported
– Growth in infrastructure software led by
virtualization and security adjusted for changes in
foreign currencies
– Growth in services adjusted for changes in
foreign currencies
– Hardware, including servers, storage and
networking declined year over year
– Operating income increased year over year
ECS Europe operating
income increased year
over year.
Sales ($ in millions)
Second-Quarter 2017 CFO Commentary
12 investor.arrow.com
Cash Flow from Operations
Cash flow from operating activities was negative $112
million in the quarter.
Working Capital
Working capital to sales was 16.7% in the quarter, up
180 basis points year over year. Return on working
capital was 24.8% in the quarter, down 370 basis points
year over year.
Return on Invested Capital
Return on invested capital was 10.4% in the quarter,
ahead of our weighted average cost of capital.
Share Buyback
We repurchased approximately 0.7 million shares of our
stock for $55 million. Total cash returned to
shareholders over the last 12 months was
approximately $277 million.
Debt and Liquidity
Net-debt-to-last-12-months EBITDA ratio is
approximately 2.4x. Total liquidity of $2.4 billion when
including cash of $420 million.
We repurchased
approximately $55 million
of our stock in the
second quarter.
Second-Quarter 2017 CFO Commentary
13 investor.arrow.com
Arrow Electronics Outlook
Guidance
We are expecting the average USD-to-Euro exchange rate for the third quarter of 2017 to be $1.15 to €1
compared with $1.12 to €1 in the third quarter of 2016.
Third-Quarter 2017 Guidance
Consolidated Sales $6.325 billion to $6.725 billion
Global Components $4.4 billion to $4.6 billion
Global ECS $1.925 billion to $2.125 billion
Diluted Earnings Per Share $1.49 to 1.61
Non-GAAP Diluted Earnings Per Share $1.74 to 1.86
* Assumes average diluted shares outstanding of 89 million, an average tax rate of 27 to 29%.
Second-Quarter 2017 CFO Commentary
14 investor.arrow.com
Risk Factors
The discussion of the company’s
business and operations should be
read together with the risk factors
contained in Item 1A of its 2016
Annual Report on Form 10-K, filed
with the Securities and Exchange
Commission, which describe various
risks and uncertainties to which the
company is or may become subject.
If any of the described events occur,
the company’s business, results of
operations, financial condition,
liquidity, or access to the capital
markets could be materially adversely
affected.
Information Relating
to Forward-Looking
Statements
This press release includes forward-looking
statements that are subject to numerous assumptions,
risks, and uncertainties, which could cause actual
results or facts to differ materially from such
statements for a variety of reasons, including, but not
limited to: industry conditions, company’s
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 enterprise
computing solutions markets, changes in relationships
with key suppliers, increased profit margin pressure,
effects of additional actions taken to become more
efficient or lower costs, risks related to the integration
of acquired businesses, changes in legal and
regulatory matters, and the company’s ability to
generate additional cash flow. 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.
For a further discussion of factors to consider in
connection with these forward-looking statements,
investors should refer to Item 1A Risk Factors of the
company’s Annual Report on Form 10-K for the year
ended December 31, 2016.
Second-Quarter 2017 CFO Commentary
15 investor.arrow.com
In addition to disclosing financial results that are
determined in accordance with accounting
principles generally accepted in the United States
(―GAAP‖), the company also provides certain non-
GAAP financial information relating to sales,
operating income, net income attributable to
shareholders, and net income per basic and
diluted share. The company provides sales,
income, or expense on a non-GAAP basis
adjusted for the impact of changes in foreign
currencies and the impact of acquisitions by
adjusting the company’s operating results for
businesses acquired, including the amortization
expense related to acquired intangible assets, as if
the acquisitions had occurred at the beginning of
the earliest period presented (referred to as
―impact of acquisitions‖). Operating income, net
income attributable to shareholders, and net
income per basic and diluted share are adjusted to
exclude identifiable intangible amortization,
restructuring, integration, and other charges, and
certain charges, credits, gains, and losses that the
company believes impact the comparability of its
results of operations. These charges, credits,
gains, and losses arise out of the company’s
efficiency enhancement initiatives, acquisitions
(including intangible assets amortization expense),
and financing activities. A reconciliation of the
company’s non-GAAP financial information to
GAAP is set forth in the tables herein.
The company believes that such non-GAAP
financial information is useful to investors to assist
in assessing and understanding the company’s
operating performance and underlying trends in
the company’s business because management
considers these items referred to above to be
outside the company’s core operating results. This
non-GAAP financial information is among the
primary indicators management uses as a basis for
evaluating the company’s financial and operating
performance. In addition, the company’s Board of
Directors may use this non-GAAP financial
information in evaluating management
performance and setting management
compensation.
The presentation of this additional non-GAAP
financial information is not meant to be considered
in isolation or as a substitute for, or alternative to,
operating income, net income attributable to
shareholders and net income per basic and diluted
share determined in accordance with GAAP.
Analysis of results and outlook on a non-GAAP
basis should be used as a complement to, and in
conjunction with, data presented in accordance
with GAAP.
Certain Non-GAAP Financial Information
The company believes that
such non-GAAP financial
information is useful to
investors to assist in
assessing and understanding
the company’s operating
performance.
Second-Quarter 2017 CFO Commentary
16 investor.arrow.com
Three months ended July 1, 2017
Reported
GAAP
measure
Intangible
amortization
expense
Restructuring
& Integration
charges Other*
Non-GAAP
measure
Operating income $ 229,822 $ 12,364 $ 24,416 $ — $ 266,602
Income before income taxes 130,179 12,364 24,416 58,009 224,968
Provision for income taxes 29,575 4,388 7,576 22,377 63,916
Consolidated net income 100,604 7,976 16,840 35,632 161,052
Noncontrolling interests 925 157 — — 1,082
Net income attributable to shareholders $ 99,679 $ 7,819 $ 16,840 $ 35,632 $ 159,970
Net income per diluted share** 1.11 0.09 0.19 0.40 1.78
Effective tax rate 22.7 % 28.4 %
Three months ended July 2, 2016
Reported
GAAP
measure
Intangible
amortization
expense
Restructuring
& Integration
charges Other
Non-GAAP
measure
Operating income $ 223,592 $ 14,446 $ 16,106 $ — $ 254,144
Income before income taxes 186,795 14,446 16,106 — 217,347
Provision for income taxes 51,457 5,119 6,370 — 62,946
Consolidated net income 135,338 9,327 9,736 — 154,401
Noncontrolling interests 1,068 592 — — 1,660
Net income attributable to shareholders $ 134,270 $ 8,735 $ 9,736 $ — $ 152,741
Net income per diluted share 1.45 0.09 0.11 — 1.65
Effective tax rate 27.5 % 29.0 %
Three months ended April 1, 2017
Reported
GAAP
measure
Intangible
amortization
expense
Restructuring
& Integration
charges Other
Non-GAAP
measure
Operating income $ 191,722 $ 12,900 $ 15,505 $ — $ 220,127
Income before income taxes 154,574 12,900 15,505 — 182,979
Provision for income taxes 39,224 4,561 4,997 — 48,782
Consolidated net income 115,350 8,339 10,508 — 134,197
Noncontrolling interests 1,582 251 — — 1,833
Net income attributable to shareholders $ 113,768 $ 8,088 $ 10,508 $ — $ 132,364
Net income per diluted share** 1.26 0.09 0.12 — 1.46
Effective tax rate 25.4 % 26.7 %
*Other includes loss on extinguishment of debt and gain on sale of investment.
**The sum of the components for diluted EPS, as adjusted, may not agree to totals, as presented, due to rounding.
Earnings Reconciliation
($ in thousands, except per share data)