艾睿電子 (ARW) 2002 Q4 法說會逐字稿

Good morning, and welcome to the Arrow Electronics fourth quarter earnings conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions and comments following the presentation.

It is now my pleasure to turn the call over to Mr. Robert Clatell.

Thank you for joining us today on our fourth quarter earnings conference call. I will serve as the moderator of today's call. With me are Dan Duval, Chairman of the Board of the company; Paul Reilly, our Chief Financial Officer; Mike Long, President of our North American Computer Products Business; Jan Salsgiver; President of our North American Components Businesses; Eileen O'Connor, our Vice President of Investor Relations, and also present is Bill Mitchell, our new President and CEO.

Before we begin with the formal proceedings, Bill, would you like to say a few words?

Thank you, Rob, and good morning to everyone. First let me say I'm absolutely delighted to be here at arrow. And I just want to let you know that I am, in fact, on the call even though I will do more listening than talking today, but also I'd like to lick you let you know one other thing, I will start talking hopefully sooner rather than later and I hope we never get to the point where you get tired of hearing me talking. At the end of the call, I want to give you some of an update of what I've been doing since I've been here and some of my preliminary impressions, and again, let me just say that I'm delighted to be here, and let me turn it back over to Rob for the balance of the program.

Thanks, Bill. By now you all should have received a copy of our earnings release. If not, please contact either my office or Eileen O'Connor. We will get you copies. Obviously you can alternatively access the release on the Web site www.arrow.com. Let me remind everyone that some of the comments made on today's conference call may contain forward-looking statements. Those statements are, of course, subject to risks and uncertainties as described in our SEC filings. Rather than read the entire disclaimer contained in those SEC filings, let me just state that as always, they do apply to this call.

Again as a reminder to members of the press, you are in a listen-only mode on the call, but please feel free to contact us afterwards and we can set up some time to answer any questions you may have. We'll begin with several minutes of prepared remarks which will be followed by a Q&A period.

Paul Reilly, Chief Financial Officer, will now review our financial results.

Thanks, Rob. There are a number of unusual items affecting the (inaudible) of our numbers. I wanted to review those with you before we get into our actual results. We continue to be opportunistic when it comes to repurchasing our debt. During the fourth quarter we repurchased $79 million of the 8.20% notes due in the fourth quarter of 2003. The premium we paid along with the write-offs resulted in an extraordinary charge of $1.3 million net of tax or a penny per share in the fourth quarter. Our return on these purchases is well in excess of the return we are earning on our cash investments, and will add a penny per share to our quarterly earnings through the third quarter of 03.

We adopted FAS 142, the new rules governing goodwill, on January 1st of 2002. Accordingly, in 2002, we did not amortize goodwill. In the fourth quarter of 2001, goodwill amortization was $12.6 million pre-tax, and that's $11 million after taxes. As we have previously discussed, we sold the Arrow commodity computer business in 2002, and our accounting for the sale of Gates Arrow as a discontinued operation. Accordingly, we have restated our prior year results to exclude the individual components of the Gates Arrow business. That is sales, gross profit, operating expenses, et cetera. Instead, Gates Arrow's results are now shown as a single line item in our income statement. For those trying to keep your models straight. Sales of Gates Arrow in Q4 of 2001 were $138 million. For comparative purposes, I will exclude all of these comments items from my comments.

Sales for the fourth quarter were $1.89 billion, up 4.4 percent over the third quarter, but down 6.4 percent from last year. Excluding the impact of strengthening European currencies, sales increased sequentially by 3.8 percent. Sales were very strong on North American mid range computer products business, and in our Asia Pac core components business. Gross profit was 16.8 percent, down slightly from Q3 17 percent, but up 30 basis points from Q4 of last year. The decrease in Q4 versus Q3 was driven principally by a change in mix as a result of the sharp seasonal increase in sales of lower margin mid range computer products.

The increase in gross profit percent compared with last year's fourth quarter stems from several things. First, we had an increase in the percentage of business in the core components area. As we continue to reduce our exposure to the CPU business. Second, we had decreased percentage of business from traditionally lower margined customers. That's principally in the large telecom and networking accounts. And third, we had the positive impact of valued programs. Operating expenses, as a percentage of sales, this was a 60 basis point decrease. Excluding the impact of foreign exchange, operating expenses were flat on a sales increase of 3.8 percent. When compared to last year's fourth quarter, operating expenses increased by $2.1 million. The strengthening of European currencies caused expenses to increase by $7.9 million. So if you were to exclude the impact of foreign exchange, operate being expenses were actually down.

Also, as part of our early cost containment efforts, the North American work force took reduction in salaries beginning in September of 2001, and this program ended on June 1st of 2002. As such, operating expenses for the fourth quarter of 2001 are not directly comparable with those of Q4 2002. If we were to exclude the impact of the temporary salary reductions and foreign exchange, operate being expenses would be down 3.5 percent on a sales increase of 3.8 percent. Dan will have some additional comments on our operating structure later in the call.

Operating income as percentage of sales was 2.4 percent, up 30 basis points from the prior quarter, or down 80 basis points from last year. Interest expense was $32.1 million, down from 38.4 million in Q3, and 41.8 million last year's fourth quarter. Since the downturn began, we have had eight consecutive quarters of positive cash flow from operations, generating in excess of $2.2 billion in free cash flow. And since the fourth quarter of 2000, quarterly interest expenses decreased by more than 50 percent, a $32 million decrease in interest expense, and we paid off $1.5 billion in borrowings. And cash and short-term investments today exceed $694 million. As you know, our plans are to use an estimated $285 million of this in connection with our acquisition, applying our standards, IED business. The significant cash generation reflects sales coupled with improved working capital utilization. Not only have we shortened our cash to cash cycle in recent quarters, we have also improved the quality of our assets.

Our effective tax rate for the quarter was 35.1 percent, and for modeling purposes for 2003, you should use 35 percent as our full-year rate. Net income for the quarter was $8.9 million, up substantially from Q3's $500,000, yet down from last year's fourth quarter's level of $17.4 million. EPS for the quarter was 9 cents versus a penny in the third quarter, and 17 cents in Q4 of last year. Again remember that 2001 has been restated to exclude goodwill amortization. Here's a couple of other stats to help you with your analysis in model building. Depreciation and amortization for the quarter was $15.6 million. Rent expense for the quarter -- non-cash interest expense in the quarter that's related to the zero coupon convertible was $7.3 million, and the actual number of shares outstanding at the end of the quarter was 99,983,000.

Thanks, Paul. Jan Salsgiver, President of our North American Components Operations, will now discuss her group's performance in the quarter.

Thank you, Rob, and good morning. Our North American components business generated sales of just over 600 million in Q4, down about 4 percent from Q3. From the published data, this is consistent with the overall market which experienced weakened sales in the back half of December, due in part to the holidays and so some customer shut-downs or reduced work weeks. Sales to our core component customers including small to medium size industrial and military OEMs decreased slightly, following what had been five consecutive quarters of flat or marginally improving sales. The decline was spread evenly across end markets, except for military, where sales increased. Sales to contract manufacturers were up quarter on quarter with slight growth in both the small to medium sized CM as well as the large global CM. And finally, the decline in the large global OEMs heavily weighted toward telecom and networking continued in the fourth quarter. The percent decline has slowed, but the absolute level of sales continues to fall. All product categories in both semiconductor and passive electromechanical (inaudible) continue to be readily available with short stable lead times.

Overall, average selling prices appear to have stabilized, but it's still a very competitive environment. Logic, programmable, nonvolatile memory, which includes Flash, embedded processors and communications products all showed an increase in ASP quarter on quarter. Analog and discreet ASPs were almost flat, and we saw a decline in ASPs for volatile memory products which include DRAMs and static. For passive electromechanical and connector products, prices held firm with Q3. This ability in all customer groups continues to be limited. Customers are placing smaller orders more frequently, which drives up our line item activity. They don't get us much scheduled backlog and about two-thirds of our business is booked and shipped in the same quarter.

Thank you, Jan. I'd now like to ask Mike Long, President of our North American Computer Products Businesses, to discuss his group's operating performance - Mike.

Thanks, Rob. Sales for North American computer products group were approximately $448 million, up 11 percent sequentially from the September quarter. NACP's operating income as a percentage of sales hit a record in the seasonally strong fourth quarter, exceeding the record set in Q2 of 1999. Operating income dollars were the highest level ever and nearly 40 percent ahead of last year's fourth quarter. Sales in our mid range businesses were up 22 percent over the prior quarter, and up 11 percent over last year's fourth quarter. And as you know, the fourth quarter is the end of the fiscal year for IBM, and we usually see a resulting surge in our business with them. This quarter was no different, as our IBM business was up 35 percent sequentially.

Our HP business showed a substantial sequential increase in the fourth quarter as well, but remember that we do not book the sale, just the fee on the sale. Our Sun business also showed both sequential and year-over-year increases. As Sun continues to demonstrate that the channel is their preferred route to market. In the enterprise space, we continue to see softness, and as we said in our Q3 call, activity continues to be focused on upgrades and enhancements. Storage solutions and resource management are the focal point for IT managers, with somewhat sluggish growth.

The OEM market continues to be impacted by large complex telecom and networking companies. As a result, our OEM sales were down in the single digits from the third quarter.

Thank you, Mike. We'll now turn the call over to Dan Duval, Chairman of the Board - Dan.

OK, Rob. Thank you, and good morning, everyone. Let me talk about Europe first. Our sales in Europe were up 8 percent over the third quarter at approximately 632 million. Excluding the impact of foreign exchange, the increase was still a healthy 6 percent. Sales in the core components business excluding impact of foreign exchange were flat for Q3 and down 6 percent from last year.

As everyone knows, European economy and especially Germany still remains very soft. But it's worth noting, however, that our European businesses remain among our most profitable. Our senior managers and their teams continue to do an excellent job running efficient businesses and managing their costs very well. Moving to Asia, the fourth quarter was the best of the year for our Asia Pac business with sales increasing by 11 percent over the third quarter to $174 million.

In our core component business, sales were up 15 percent. This is the highest level of sales in the core component business in Asia Pac since the first quarter of 2001, and the largest sequential increase in sales since the second quarter of 2000. Additionally, the business moved from a slight operating loss position to one of positive operating income with percentages of sales in the low single digits. I thought I might be in order to update you on the acquisition of Pioneer Standards industrial electronics division that we announced earlier in the year. First the waiting period has expired and we expect to close the transaction at the end of this month as planned.

Our plans to integrate IED with our North American components business are moving ahead, and thanks to a great deal of hard work by both the Arrow and pioneer people, we expect to actually combine the businesses at the end of this month as well. As you know, we feel that this acquisition will provide us with some new lines that will compliment our existing line card, we'll add new customers, we'll broaden our value-added offerings, but the acquisition is really much more about cost synergies and enhanced earnings.

And why do I say that? Well, today Arrow is primarily a fixed cost business with capabilities to handle a significant increase in business levels with minimal investments. Think of it this way. We exited the fourth quarter of the year 2000 at a $16 billion run rate with the distribution and value-added centers in place to support that business level. Today we have the same physical footprint, yet our run rate is closer to $8 billion. So we're able to support the incremental sales from IED without significant investment in our physical assets, systems or people to support functions like HR, finance or IT.

We're confident that we will get the cost synergies of at least $60 million annually from the pioneer acquisition. Even if we assume sales attrition as high as 20 to 25 percent, the addition of this business to the Arrow family will be accretive to annual earnings per share by at least 20 percent in the first full year following integration. Over the past several months, the senior management team and I have focused quite a bit on our organization structure, systems and processes in North America, including the corporate office functions.

Recently, we have taken a series of additional steps so that we are more effectively organized in North America and to improve our operating efficiencies. The net result of these steps will be to reduce our cost structure by at least $40 million annually. The programs and the positions to be affected have been identified, and most of the people have been notified. The majority of the impact of these initiatives will be seen in our Q2 results, and we will record a special row restructuring charge of somewhere in the range of $12 million to $15 million pretax in the first quarter.

Rob, I'll turn it back to you.

Good. Dan, one thing, in your comment about Pioneer Standard, I'm not sure everybody heard it clearly. I think you were saying that the accretion to earnings per share is likely -- is expected to be in excess of 20 cents per share in the first full year, not 20 percent.

I'm sorry. It is 20 cents. You're correct.

Right. Good. OK. Thanks, Dan. Bill, is there anything that you'd like to say before we move to Q&A?

Indeed, there is. And thanks, Rob, and thanks to all the other members of the team.

I joined Arrow on April 3rd, and since that time, I've been spending a lot of time getting to know the people in operations of Arrow. These are critical to our success, and it's important that I get out and meet them and understand what's going on as soon as possible. I've been meeting with teams here in New York about to leave with Mike Long and go visit folks out in Denver. Been in Europe last week with Dan Duval. I'll be in Asia-Pacific within the next several weeks to be with our teams there. I've also been reaching out to our customers and suppliers to introduce myself, to thank them for their support, to gain their insight into Arrow and how we can drive our businesses forward, and to understand their view of today's business landscape. The results of these conversations have provided invaluable insight to me as to what these critical and crucial partners need from Arrow as we move forward.

Over time, I also look forward to meeting with you, our investment constituencies, our shareholders in the investment community, in getting to know you as well. Your comments and concerns are really important to me, and I look forward to addressing them with you both in group settings and individually. As I said before, there may come a time when you get tired of listening to me about Arrow, but I'm very, very excited to be here and am absolutely delighted to have the opportunity to work with this wonderful management team to build a future -- a great future for Arrow.

Thanks very much, and Rob, let me turn it back to you.

Thank you, Bill. Enrique, if you would start the question and answer period now, please.

The floor is now open for questions. If you do have a question or comment, press 1 followed by 4 on your touch-tone phone. If you're on a speakerphone, we do ask that you please pick up your handset to minimize any background noise, and if at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

Our first question is coming from Patrick Parr from UBS.

Good morning, guys. Clarification regarding the Pioneer Standard deal. When you talk about the accretion to earnings being annualized 20 cents, is that from the deal closure time or is that from the integration completion date? And if so, when would you (ph) begin to model that sort of accretion?

Paul, why don't you take that one?

Pat, that number is from the point of time of integration, and our integration plans are on track. My suggests would be that you would start to model that into your own models around beginning of second quarter of 03.

So the deal closes end of this month, and you'll have it integrated by beginning of the June quarter?

No, beginning of the second quarter, which is April 1st.

Right. OK. That's fair. And I noticed that after, I guess, seven or so quarters of inventory declining, it picked up a little bit in the quarter. I'm wondering what sort of trend one would expect in that area moving forward.

Paul, why don't you ...

Let me first address the question about inventory being up. In fact, it's all -- the dollar basis that you're making comparison to is all driven by the strengthening European currency, so if we were to exclude that and have it on a steady state basis, our exchange rate, the inventory dollars would be basically flat.

OK. And as far as working capital moving forward, I would assume that you've managed it very closely, but would I expect to see free cash flow from working capital in a stable, flat environment right now still or are we kind of squeezing that turnip dry?

I think as we talked in the last quarter, a lot of it's dependent on timing if sales say flat. We had a pretty good quarter in cash flow generation. I'm not quite sure that we can continue to generate $65 million of positive cash flow as of relatively flat sales. We're watching it very closely, managing it very closely and cog our best to make sure that it either doesn't get choked off and choke off sales or actually invest too much when we don't need to.

OK. Then a final question. You don't really put any guidance in the press release and you haven't mentioned any on the call, but I thought I'd ask. Any sense of how the two segments are trending in the March quarter and how would one, you know, model those at least for March and June components and computers separately?

Dan, do you want to jump in on this guidance question?

Well, at the present time, we're not giving any guidance on that. The visibility is still extremely limited. Our shipped business that we book and ship in the same month is running very, very high as Jan said, we don't have much in the way of scheduled orders, so we're still kind of suffering from a lack of visibility ourself and just feel inappropriate to give any advice.

All right. Just thought I'd ask.

Dan, let me follow up with one. Pat, this is Bill Mitchell. One of the things that I have been doing is been out talking with our customers and suppliers, and I've had more than 20 of those conversations over the past couple of weeks in some depth and detail. One of the questions I've been asking them is, what's their outlook. And it's been an interesting set of inputs that I've gotten, and fundamentally what it says is as follows, as I read it. One, the worst is behind us, but no one is ready to call an up Kansas City turn. No one says we have an upturn yet.

There are some pockets of strength in some verticals. Most everyone will talk about their Asian business looking good but it's not clear whether that's transfer business or whether that's true demand creation. No one has good insight into that yet. And there are some products sets that look good. Overall, it continues to be from the input I have gotten over these 20-plus conversations continues to be a very mixed landscape looking forward with the bottom line being no one is ready to call an upturn yet. It's still flat, we're bumping along the bottom, but the general consensus seems to be the worst is behind us.

Bill, if I could ask one final question. A little more specificity on which verticals may look better and which product sets may look better?

Really it depends on the customer or supplier you're talking to, and there is no general one that says this one looks better than any other ones, and so as you look across it, there really isn't a general conclusion that I certainly could draw. You might want to talk about that with some of the specific customers and suppliers as you have calls with them and ask them how their business is going.

OK. Great. Thank you.

Thank you. Our next question is coming from Mark Hassenberg (ph) of Nottingham Capital.

The guidance in terms of the benefits that you're going to get from the Pioneer acquisition, you've assumed the possibility of losing 20 or 25 percent of the combined business, and if you look back historically, I think it's been less than that, and particularly if you look over the last five to 10 years, certainly last five years as the number of options that people have for distribution has been decreased, it's been substantially less than that. Is there anything unusual about the product lines of Pioneer or Arrow that make you feel that the -- that there might be more loss in this combination than you've seen historically?

Jan?

Hi, Mark. What we did is we did an analysis as we've always done when we do mergers, and I'd say that there's a lot of product lines that we and Pioneer both have in common, and when we look at sales attrition, we do, in fact, use a higher percentage if there's a lot of commonality in line. So that would probably be the only thing that would lead us to go to a higher level of sales attrition in our own model.

Mark, you alluded to it when you phrased the question, the consolidation in the industry has occurred and it has produced higher overlaps than we've seen in the past.

Right. But also fewer option options of other people to do business with.

But viable places that they can go.

Right. And have you -- I'm sure you have, but can you share with us the sensitivity of what would happen if the loss were 15 percent instead of 20 to 25?

Mark, I don't think we're really going to go that fast at this time. Let's see how the sales attrition works out, and we'll show you the numbers.

Great. Thank you very much.

Thank you. Our next question is coming from Matt Sheeran (ph) of Thomas Weisel Partners.

Good morning. I'm hoping I can take another stab he at the guidance question. It looks like in the components business, you know, we're generally looking at sort of flattish sales for the last four quarters give or take 20 million or so. Obviously with the very high turns environment, it's hard to -- the visibility is tough, but given that you're halfway through the quarter, would it be fair to say that we're still relatively stable? I mean, things are not getting worse, are they?

Jan?

In the North American business, you're right, things are not getting worse. And we measure things looking at daily run rates and how many days as everybody does, and it's very -- you're correct to characterize it as stable and not getting worse.

OK. In Pioneer's call, they suggested that their components business would be down because some customers that are also Arrow customers would prefer to start buying from Arrow before the deal concludes. Are you starting to see that?

Matt, in fact, you know, our policy is that before these deals are completed, we don't encourage that. We frankly have rules that are supposed to prevent it. Pioneer is a publicly held company. The results prior to closing are theirs, and we don't want to be in a position of disadvantaging any seller until -- you know, in that way, so I'd be surprised if we saw a lot of that at this time.

OK. One last question regarding the head count reductions in your corporate environment. Could you be a little bit more specific, an is that -- in terms of cost valuation, is that all coming out of SG&A or are there some other areas?

Dan, do you want to address the steps we've taken recently in ...

Yes. I would say that it's all coming out of SG&A. It is not in the field sales force, it's not anybody facing customers, but it's a reorganization of the back room. It's a streamlining of our process. It's a realization that we had built a machine that was a little too large for today's sales level, and that we don't really see it rapidly increasing back to the $14 billion level that we once were able to handle. So it's a restructuring of the back room, and building efficiencies into there, and that's an ongoing process. This is not a one-time event. This is a continuing process that we've been working on and will continue to work on, but at this time, we did make enough cuts that we will have a one-time charge in the first quarter.

And is there a head count number you could share with us?

Well, our head count changes every day and we really don't like to try to tie it to a number of heads. You know that about 65 percent of our cost is personnel, so I think you can kind of come at it that direction.

OK. Thank you.

Thank you. Our next question is coming from Steven Fox (ph) of Merrill Lynch.

Good morning. A couple questions. First of all, if you look at Asia, looks like it's approaching 10 percent of sales and it sounds like it's an area that we could count on some growth for in 2003, but it's not making a lot of money. What are the plans to increase the margins there independent of the market and how high can the margins go relative to Europe and North America?

Bill, why don't you take the first one?

Let me take a shot at that. Asia is an area that's of great interest to me and I expect to spend a good amount of time out there building on the very substantial base that Arrow has developed in the area and really building the platform for our future success. I expect that to be a very strong core of our strategy going forward, and as I say, that's an area I plan to spend a very substantial amount of my time in the coming months working with the team there, working with our worldwide teams to see how we can leverage capability.

One of the feedbacks that I have gotten almost universally in my conversations has been we want Arrow to be in Asia. We want you to be there, we want a strong presence there, we want the capabilities that we have enjoyed from you in Europe and North America to be fully deployed in Asia, and we will do that. Overall, we certainly expect the business model in Asia to be different than the one we have in other parts of the world. We certainly don't see that as we grow in Asia, that that should cause the overall results of the corporation to deteriorate in any way, and that's how we look at it going forward.

But watch this space. I would expect to get back to you with a lot more information in the coming months as we build on that very strong base that is growing and growing nicely in Asia, and build that very strong future for Arrow in that part of the world.

Thanks for that. And then two quick financial questions. Can you give the head count number at the end of calendar 2002, and a tougher one is, looking at goodwill going into 2003, would we expect another write-down or how comfortable are you with that, Paul?

That's a good question. I can tell you right now that, you know, this is a very technical accounting area with very strict rules tied to the stock exchange to determine fair value of the businesses. Based upon today's current market, I would not expect any type of write-down in goodwill going forward in 2003. So unless there's a dramatic change, I don't think you'll see anything happening there. As far as the head count at the end of 2002, it was 11,730 people.

That must be at a particular moment in time, Paul.

That's the last day of the year. We have ins and outs all of the time.

Thank you. Our next question is coming from Rob Damron (ph) of Southwest Securities.

Good morning. Just a couple questions. First, Pioneer Standard had several equity investments on their balance sheet, and I believe Arrow was picking up one of those, being WPI. Could you just describe, is there any relationship with WPI and -- or do you plan to keep this investment? I guess what are the thoughts relative to that?

Dan, why don't you address that one?

Well, there were two equity investments and we did take WPI. I think it's about 5 percent of WPI. We've known them in Taiwan for years. They're a very good company. We think it's a very good investment. We would hope that maybe someday, it might lead to some form of cooperation, but at this point, we have nothing negotiated with them or we're not meeting with them on any particular subject. It's strictly an investment at this point.

OK. And then just one other question regarding the computer systems business. Obviously it had a great Q4. Normally has a seasonal falloff in Q1. Would we anticipate that same seasonal falloff or is there anything, you know, anything else going on that might change the seasonality of that business?

Mike Long, why don't you do that one.

We're planning on the exact same seasonal falloff we've seen for the last three years in this business, and at this point in time, we're tracking exactly to that.

OK. Thank you.

Thank you. Our next question is coming from Steve Savis (ph) of Goldman Sachs.

Good morning. Thanks. I have a couple questions, I guess, related to the charges that you're anticipating. It said $12 million to $15 million restructuring charge in the March quarter. Do you know how much of that would be cash?

I would say that the majority of that is going to be cash. I'd say probably about 75 to 80 percent of it.

OK. And would most of that cash be expended during the March quarter or would you carry much over?

It would be expended during the quarter.

OK. Anything -- I know it will be in the 10-K. Is there anything -- any cash charges remaining to be expended that were charges that were taken, you know, previously?

There is, but it's not a significant amount of cash outflow. I don't have the information handy, but I would say that's probably -- you know what, why don't we come back to you with an answer on that one. I just don't have the information handy.

It's not immaterial? It's probably less than 10 million? It would not be a material amount is what you're saying?

Correct.

OK. Then related to Pioneer Standard, am I correct that this 12 million to 15 million is over and above any integration charges you would take related to Pioneer Standard?

That's correct.

And do you have an estimate for what the Pioneer Standard charges may be?

Not yet (ph). We're still working through the details of the integration plan and we really can't finalize the number until we know what the final I integration plans are, so we'll have that final for you around the first quarter earnings release.

OK.

Steve, some of that will be in goodwill and some will be charged to P&L. We've got to sort that out too.

And presumably all of that would be in March or would some of that drift over into June?

Initial thoughts are it would all be in March.

OK. That's what I thought. Actually one last question. On the drop in interest expense, which was pretty significant sequentially, the debt repurchase, I don't know about the timing but the debt repurchase as you pointed out, say it's about a penny a quarter or 1.6 million in interest expense. Anything else related to that sequential drop?

The other big driving factor was during the third quarter, we had repurchased $250 million of another issue, so we got the full quarter impact in Q4. We only had a short period of time in Q3, and that impacted the comparability.

OK. Thank you.

Our next question is coming from Keith Backman (ph).

Mike, if you're still on the call, wanted to get some perspective from you, if I could, on the computer marketing area. What would be normal seasonality associated with the current quarter? And you mentioned IBM, HP and Sun all had good results in Q4, and would the seasonality that you normally expect, are the vendors tracking to that, below it, above it? Just kind of any sense on the computer marketing business? Thanks.

Well, here's what I can tell you. We're all aware that IBM's fourth quarter is their big portion of the year. Hewlett Packard's year-end in October, so that's their big portion of the year, and Sun's ends in the second quarter, and that's when their year-end comes to play. The seasonality is impacted totally by mix, and at this point, I wouldn't speculate on what the mix is.

OK. Then no -- if you aggregate that, no macro?

I would say if you were to go back and aggregate, you know, the past years that you have our numbers, you'll see a pretty common growth rate that applies virtually every year.

OK. Let me try it this way: You mentioned that the enterprise space, you're seeing some softness. Is that softness that you think would normally be attributed to just the seasonality or is there something more there that we should be thinking about?

Probably a play on words by me, it's continued softness. As we said last quarter, we're continually seeing upgrades go in to enterprise companies. What we are not seeing are the big productivity enhancements that drive the other half of the sales that we'd be looking for before we'd be bullish on the computer market.

And Keith, remember when Mike is talking -- he's only talking about our results and our results with those suppliers, so for example, we've been doing well with Sun as they've been favoring the channel. You can't extrapolate necessarily from our performance to that of the supplier itself.

Fair comment. OK. Thanks very much.

Our next question is coming from John Horvath of Lehman Brothers. Your line is live.

Thank you. Just in regards to the additional 40 million in cost reductions, I just want to get an idea of -- that was all in North America, and is it split between components and the systems business, or is it in both, or how is the split, and is there also facilities reductions? I don't think I read anything about a facility reduction in that 40 million of cost reductions.

: Right. John, there is minimal impact from facilities, and when we really look at the costs associated with our personnel, it's really -- in North America, we just have two businesses, we actually have a shed service function that supports both those businesses. So when he we look across, it's more heavily weighted if the service function, little bit of impact in NAC, less of an impact in NACP.

So less in NACP. And then just one other question. In regards to the -- you may have already addressed this but in regards to the operating income reduction in the components business from Q3 to Q4, what was that attributed to, and can I expect that level kind of going forward before the cost reductions are implemented?

Could you repeat that question for us, please?

Just in regards to the sequential decline in the operating income in the component business overall, I'm just wondering if I should model that kind of operating income rate before I add in the cost reductions going forward, or if that is kind of a one-quarter sequential reduction that will kind of come back to the Q3 levels.

That's a good question, John. You know, keep in mind as we've told you that up through this point in time, we've been basically a fixed cost business, so a decline in sales has a dramatic impact on operating income, both in dollars and per September. So for your modeling purposes, I would start with Q4 and then build in the cost savings. Obviously have you to call what's going to happen with the sales up or down and try to factor that into your model also.

As we've talked about, we believe there's tremendous operating leverage, so while a small drop-off in sales has a dramatic impact on operating income, conversely, a small increase in revenues has a dramatic increase in operating income dollars and if sales growth increased, the that leverage would really be seen in our numbers.

Sales were flat from Q3 to Q4 so I'm trying to figure out if they're flat in the next quarter, should I go with the same operating income or should I increase that back to Q3 levels? Is it more of a one-time impact or is it a ...

You have to consider where the source of the sales increase is coming from, so I think as we talked on the sale, we saw a pretty nice increase in Asia Pac, we saw it down in North American components and flat in Europe.

OK. Great. Thanks.

As a reminder, if you do have a question, you may press 1 followed by 4 on your touch-tone phone.

Our next question coming from Brian Alexander (ph) from Raymond James.

Thanks. With respect to gross margins on the first quarter, if the business kind of reflects stable trends and normal seasonality, I think one would expect, you know, a higher mix of component sales like last year where you had a 50 basis point increase in gross margin sequentially. Is that how we should be thinking about gross margins for the first quarter this year?

Well, for sure the seasonality will change the mix just like we described, Brian, GP was impacted by more computer product sales, a drop would obviously impact the gross profit percent and drive it up a tad.

OK. And I guess some of the commodity computer distributors have talked about pricing pressures in their business, and I'm just kind of wondering, how would you characterize the pricing environment in your computer products business?

I would classify it as stable across all mid range platforms. We're not seeing the same type of pricing pressure that PCs, printers, peripherals are generating, and remember we did exit that business last year in the second quarter time frame, so we are cleanly an enterprise and ohm computer products business -- OEM computer products business now.

Final question on the balance sheet, Paul. It looks like payable days continue to climb. If we look at it year over year, I think 53 versus 35 days roughly, how should we think about payable days going forward? Will they come back down or are they going to continue to trend upward?

Once again, I think the timing issue, Brian, they're not going to go back to the level of 35 days, but I think the 53 days you're referring to is our best performance in that area. We're working hard to maintain that level but there's a possibility it could slide back a couple days.

OK. Thanks.

We show no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Thank you. We have nothing further to say at this point in time. Just to reminder to the press if you're on the call to call us back and obviously for any of you on the call, if you have additional questions, if you would call Eileen or me, we'll work with you, and we'll talk to you all next quarter. Thank you again. Goodbye, everybody.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.