Attached files
| file | filename |
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| EX-99.1 - EXHIBIT 99.1 - ARROW ELECTRONICS INC | q32017pressreleaseexhibit9.htm |
| 8-K - 8-K - ARROW ELECTRONICS INC | q320178-kpressrelease.htm |
1 investor.arrow.com
Third 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 September 30, 2017, and the Annual
Report on form 10-K as filed with the Securities
and Exchange Commission.
Third-quarter 2017
sales increased 17%
year over year.
Third-Quarter 2017 CFO Commentary
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Third-Quarter Summary
We delivered record third-quarter sales, gross profit, and earnings per share.
Third-quarter sales were above the high end of our expectation. Third-quarter
operating expenses were well-managed and aligned to our business mix.
Third-quarter gross profit, operating income, and earnings per share year-over-
year growth accelerated compared to the first and second quarters of 2017.
Global components achieved record third-quarter sales that exceeded our
expectation. Third-quarter global component sales increased 25% year over
year. Americas sales increased 24% year over year with growth from our core
distribution business, digital platform, and sustainable technology solutions.
Asia sales increased 24% year over year driven by our investments in sales
and engineering resources. Europe sales increased 25% year over year and
increased 19% year over year adjusted for changes in foreign currencies, the
18th straight quarter of adjusted year-over-year growth. Global components'
operating income increased 21% year over year and non-GAAP operating
income increased 20% year over year.
Third-quarter enterprise computing solutions sales increased 3% year over
year and were toward the higher end of our expectation. Europe sales
increased 16% year over year and increased 11% year over year adjusted for
changes in foreign currencies. Americas sales decreased 2% year over year.
Billings grew in all regions led by software, including cloud, and industry-
standard servers. Third-quarter enterprise computing solutions operating
income decreased 1% year over year and non-GAAP operating income
decreased 2% year over year.
We delivered record third-
quarter sales, gross profit,
and earnings per share.
Third-Quarter 2017 CFO Commentary
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P&L Highlights* Q3 2017 Y/Y Change
Y/Y Change Adjusted for
Acquisitions & Currency Q/Q Change
Sales $6,954 17% 16% 8%
Gross Profit Margin 12.1% -90 bps -100 bps -60 bps
Operating Income $236 19% 17% 3%
Operating Margin 3.4% 10 bps Flat -20 bps
Non-GAAP Operating
Income $265 12% 10% (1)%
Non-GAAP Operating
Margin 3.8% -20 bps -20 bps -30 bps
Net Income $135 14% 12% 35%
Diluted EPS $1.50 17% 15% 35%
Non-GAAP Net Income $163 14% 12% 2%
Non-GAAP Diluted EPS $1.82 17% 15% 2%
Consolidated Overview
Third Quarter 2017
$ in millions, except per share data; may reflect rounding
• Consolidated sales were $6.95 billion
– Above the high end of our prior expectation of
$6.325-$6.725 billion
• Consolidated gross profit margin was 12.1%
– Decreased 90 basis points points year over year due
to global components business mix, principally in the
Americas and Europe
– Decreased 60 basis points quarter over quarter due
to mix across the businesses
• Operating income margin was 3.4% and non-GAAP
operating income margin was 3.8%
– Operating expenses as a percentage of sales were
8.5%, down 80 basis points year over year
– Non-GAAP operating expenses as a percentage of
sales were 8.3%, down 70 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 $40 million
– Increased $3 million year over year due to higher
debt balances and higher interest rates on floating-
rate debt
Third-Quarter 2017 CFO Commentary
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• Effective tax rate for the quarter was 25.4%, and non-
GAAP effective tax rate was 27.5%
– Non-GAAP effective tax rate was below the
midpoint of our longer term range of 27-29%
• Diluted shares outstanding were 89.5 million
– Slightly above our prior expectation of 89 million
• Diluted earnings per share were $1.50
– In line with our prior expectation of $1.49 - 1.61
– Included a $0.11 charge for loss on investment
and for extinguishment of debt
• Non-GAAP diluted earnings per share were $1.82
– Toward the higher end of our prior expectation of
$1.74 - 1.86
A reconciliation of non-GAAP adjusted financial measures,
including sales, as adjusted, operating income, as
adjusted, net income attributable to shareholders, as
adjusted, and net income per share, as adjusted, to GAAP
financial measures is presented in the reconciliation tables
included herein.
Third-Quarter 2017 CFO Commentary
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Components
Global
• Sales increased 25% year over year
– Increased 23% year over year adjusted for
changes in foreign currencies
• Lead times are in line with historical norms
• Backlog increased significantly year over year
• Book-to-bill was 1.07, up from 1.04 in the third quarter
of 2016
• Operating margin of 4.4% decreased 10 basis points
year over year
• Non-GAAP operating margin of 4.5% decreased 20
basis points year over year
– The operating margin decline was principally
attributable to business mix in the Americas region
• Return on working capital decreased 60 basis points
year over year due to investments in inventory to
support growth and new supplier engagements, and
collections timing on rapidly growing sales
Global components
posted record third-
quarter sales and
operating income.
Non-GAAP Operating Income
($ in millions)
Third-Quarter 2017 CFO Commentary
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Components
Americas
• Sales increased 24% year over year
– Record third-quarter sales
– Strong growth in core components distribution
due to new and expanded supplier agreements
– Strong growth in digital platform and sustainable
technology solutions
– Strong growth in the aerospace & defense,
consumer, communications, and alternative
energy verticals year over year
– Growth in the industrial and medical devices
verticals and from large supply chain customers
Americas components
sales increased 24%
year over year.
Sales ($ in millions)
Third-Quarter 2017 CFO Commentary
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Components
Europe
• Sales increased 25% year over year
– Sales increased 19% year over year adjusted for
changes in foreign currencies
– Record third-quarter sales
– Strong growth in the aerospace and defense,
lighting, and transportation verticals year over
year
Europe components
sales increased 25%
year over year.
Sales ($ in millions)
Third-Quarter 2017 CFO Commentary
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Components
Asia
• Sales increased 24% year over year
– Record third-quarter sales
– Strong growth in the IoT and transportation
verticals year over year
Asia components sales
increased 24% year
over year.
Sales ($ in millions)
Third-Quarter 2017 CFO Commentary
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Enterprise Computing Solutions
Global
• Sales increased 3% year over year
– Sales increased 1% year over year adjusted for
changes in foreign currencies
• Billings increased year over year adjusted for
changes in foreign currencies
• Operating margin of 4.5% decreased 20 basis points
year over year
• Non-GAAP operating margin of 4.8% decreased 20
basis points year over year
• Return on working capital increased year over year
for the 16th consecutive quarter
Enterprise computing
solutions posted record
third-quarter sales.
Non-GAAP Operating Income
($ in millions)
Third-Quarter 2017 CFO Commentary
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Enterprise Computing Solutions
Americas
• Sales decreased 2% year over year
– Billings increased year over year
– Strong growth in industry-standard servers
– Growth in infrastructure software across the
portfolio
– Storage, networking and proprietary servers
decreased year over year
ECS Americas industry-
standard servers and
infrastructure software
increased year over
year.
Sales ($ in millions)
Third-Quarter 2017 CFO Commentary
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Enterprise Computing Solutions
Europe
• Sales increased 16% year over year
– Sales increased 11% year over year adjusted for
changes in foreign currencies
– Record third-quarter sales
– Strong growth in industry standard servers and in
infrastructure software across the portfolio
adjusted for changes in foreign currencies
– Growth in storage and proprietary servers year
over year adjusted for changes in foreign
currencies
– Networking declined year over year
– Operating income increased year over year
ECS Europe posted
record third-quarter
sales.
Sales ($ in millions)
Third-Quarter 2017 CFO Commentary
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Cash Flow from Operations
Cash flow from operating activities was $135 million in
the quarter.
Working Capital
Working capital to sales was 16.0% in the quarter, up 10
basis points year over year. Return on working capital
was 23.8% in the quarter, down 130 basis points year
over year.
Return on Invested Capital
Return on invested capital was 10.1% in the quarter, up
30 basis points year over year, and ahead of our
weighted average cost of capital.
Share Buyback
We repurchased approximately $0.3 million shares of
our stock for $25 million. Total cash returned to
shareholders over the last 12 months was
approximately $185 million.
Debt and Liquidity
Net-debt-to-last-12-months EBITDA ratio is
approximately 2.3x. Total liquidity of $2.9 billion when
including cash of $584 million.
We repurchased
approximately $25 million
of our stock in the third
quarter.
Third-Quarter 2017 CFO Commentary
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Arrow Electronics Outlook
Guidance
We are expecting the average USD-to-Euro exchange rate for the fourth quarter of 2017 to be $1.18 to €1
compared with $1.08 to €1 in the fourth quarter of 2016. We are expecting interest expense will total
approximately $44 million.
Fourth-Quarter 2017 Guidance
Consolidated Sales $7.2 billion to $7.6 billion
Global Components $4.75 billion to $4.95 billion
Global ECS $2.45 billion to $2.65 billion
Diluted Earnings Per Share1,2 $1.86 to 2.02
Non-GAAP Diluted Earnings Per Share1 $2.21 to 2.37
1 Assumes average diluted shares outstanding of 89 million, an average tax rate of 27 to 29%.
2 Includes an approximately $11 million or $0.12 per share post-tax pension settlement expense.
Third-Quarter 2017 CFO Commentary
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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.
Third-Quarter 2017 CFO Commentary
15 investor.arrow.com
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.
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.
Third-Quarter 2017 CFO Commentary
16 investor.arrow.com
Three months ended September 30, 2017
Reported
GAAP
measure
Intangible
amortization
expense
Restructuring
& Integration
charges Other*
Non-GAAP
measure
Operating income $ 235,992 $ 12,645 $ 15,896 $ — $ 264,533
Income before income taxes 181,674 12,645 15,896 15,786 226,001
Provision for income taxes 46,199 4,474 5,319 6,089 62,081
Consolidated net income 135,475 8,171 10,577 9,697 163,920
Noncontrolling interests 845 146 — — 991
Net income attributable to shareholders $ 134,630 $ 8,025 $ 10,577 $ 9,697 $ 162,929
Net income per diluted share 1.50 0.09 0.12 0.11 1.82
Effective tax rate 25.4 % 27.5 %
Three months ended October 1, 2016
Reported
GAAP
measure
Intangible
amortization
expense
Restructuring
& Integration
charges Other
Non-GAAP
measure
Operating income $ 198,684 $ 13,893 $ 24,267 $ — $ 236,844
Income before income taxes 162,766 13,893 24,267 — 200,926
Provision for income taxes 44,931 4,959 7,439 — 57,329
Consolidated net income 117,835 8,934 16,828 — 143,597
Noncontrolling interests 108 347 — — 455
Net income attributable to shareholders $ 117,727 $ 8,587 $ 16,828 $ — $ 143,142
Net income per diluted share** 1.28 0.09 0.18 — 1.56
Effective tax rate 27.6 % 28.5 %
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 %
*Other includes loss on extinguishment of debt and loss on 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)