Arrow Electronics' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Arrow Electronics (ARW)

Q3 2011 Earnings Call

October 26, 2011 1:00 pm ET

Executives

Michael J. Long - Chairman, Chief Executive Officer and President

Greer Aviv - Investor Relations

Andrew S. Bryant - President of Enterprise Computing Solutions Business Segment

Paul J. Reilly - Chief Financial Officer and Executive Vice President of Finance & Operations

Analysts

Robbie Wilkins

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

William Stein - Crédit Suisse AG, Research Division

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Sherri Scribner - Deutsche Bank AG, Research Division

Scott D. Craig - BofA Merrill Lynch, Research Division

Jim Suva - Citigroup Inc, Research Division

Unknown Analyst -

Shawn M. Harrison - Longbow Research LLC

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Arrow Electronics Earnings Conference Call. My name is Tuwanda, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Greer Aviv. Please proceed.

Greer Aviv

Thank you, Tuwanda. Good afternoon, everyone, and welcome to the Arrow Electronics third quarter conference call. I'm Greer Aviv, Senior Manager of Investor Relations program and I will be serving as a moderator on today's call. If you would like to access today's call via webcast, please visit our Investor Relations website at www.arrow.com/investor and click on the webcast icon. With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice President, Finance and Operations and Chief Financial Officer; Andy Bryant, President, Global ECS; and Peter Kong, President, Global Components.

By now, you should have all received the copy of our earnings release. If not, you can access our release on the Investor Relations section of our website. I would also like to point out that we issued a CFO commentary that has been posted to the Investor Relations section of our website that should be used as a complement to the earnings release. You can access a copy of our earnings reconciliation for the third quarter and our press release or on the Investor Relations section of our website.

Before we get started, I would like to review our Safe Harbor statement. Some of the comments we may 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 in such statements for a variety of reasons. Detailed information about these risks is included in Arrow's SEC filings. We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. As a reminder to members of the press, you are in a listen-only mode on this call but please feel free to contact us after today's call with any questions you may have.

At this time, I would like to introduce our Chairman, President and CEO, Mike Long.

Michael J. Long

Thank you, Greer, and thanks to all of you for taking your time to join us today. We had another record breaking quarter. Third quarter revenue of $5.2 billion, increased 11% year-over-year and it was in line with our guidance. Global ECS sales were in line with the high-end of our expectations while our components sales came in below our expectation.

Earnings per share of $1.20 represented the highest third quarter level in the company's history and the sixth consecutive quarter of record earnings. Based on our guidance for the fourth quarter, we're on track to achieve earnings per share in excess of $5, an increase of more than 20% from 2010's record level. Gross margins continue to improve for the quarter, increasing 60 basis points year-over-year. This represents the seventh consecutive quarter of year-over-year gross margin increases and it reflects the hard work our teams across the world to drive enhanced profitability and our initiative to acquire companies and markets that have higher margins.

We continue to create shareholder value with return on invested capital of 11.7%, well in excess of our weighted average cost of capital and return on working capital of nearly 28%.

The third quarter was yet another quarter of strong cash flow generation as we generated almost $120 million in cash from operation. On a trailing 12-month basis, we generated $436 million in cash from operations during a period where we were growing the business.

In Global Components, sales increased 6% year-over-year with growth in the Americas and Europe was partially offset by weakness in the Asia Pac [Asia-Pacific] region, reflecting difficult market conditions.

Since we reported our second quarter earnings in late July, macroeconomic conditions around the world have weakened with an increasing volatility in global markets and cautiousness across our customer base. Gartner now expects worldwide semiconductor revenue growth to be flat to down slightly in 2011 due to economic weakness, excess inventory in the supply chain and manufacturing overcapacity. For 2012, Gartner expects semi-revenue to grow a conservative 4% to 5% with overhang of certain macroeconomic conditions.

Despite these external pressures, our core business fundamentals remain healthy and we are in constant communication with our customers and suppliers. Given the lack of visibility and choppy market conditions, we expect our Global Components business to be below normal seasonality in the fourth quarter with the Americas and Asia Pac in line with normal seasonality and Europe below normal seasonality due to macro and sovereign debt issue.

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