艾睿電子 (ARW) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to your Arrow Electronics first quarter 2003 earnings conference call. At this time, all parties have been placed on 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 floor over to your host, Mr. Robert Klatell, Executive Vice President. Sir, the floor is yours.

Thank you, J.T. Good afternoon, everyone. Welcome to the Arrow Electronics first quarter conference call. I will be serving as the moderator on today's call. With us on the call today are Dan Duval, Chairman of the Board, Bill Mitchell , President and CEO of the company, P.J. Chang, Senior Vice President of the company , Paul J. Reilly, our Chief Financial Officer, Michael Long, president of our North American computer products businesses, and Jan M. Salsgiver, President of our North American components businesses, and Eileen O'Connor, our Vice President of Investor Relations.

As usual, let me review housekeeping matters before we get into the meat of the call. By now you all should have received a copy of our earnings release. If you haven't, contact either my office or Eileen O'Connor and we will get you copies. Alternatively, you can access the release on our web site, which as you know, is www.arrow.com. Let me remind everyone that some of the comments on today's conference call may contain forward-looking statements. Those statements are of course subject to risks and uncertainties as described in the company's SEC filing. Rather than read the entire disclaimer contained in those filings, let me state that as always, they do apply to this call. Again, as a reminder to the members of the press, you are currently in a listen-only mode on this call. But please feel free to contact us afterwards and we will set up some time to answer any questions that you may have.

We will begin with several minutes of prepared remarks, which will be followed by a Q&A period. At this time, I would like to introduce Bill Mitchell, our president and CEO. Bill?

Thanks, Rob. Before I begin, I'd like to thank Dan Duval for all that he has done for Arrow during these past months. As I've been getting started in Arrow, Dan has made my orientation incredibly smooth. So personally, and on behalf of the entire Arrow team, I want to take this opportunity to thank Dan for his commitment to Arrow and for all that he has done and continues to do for the company.

Now, let me give you a brief overview of the quarter before we get into the details. We are generally pleased with the overall performance, but like so many others, remain cautious about the future. We posted sales gains in our components businesses around the world, and the seasonal decline in the enterprise space in our computer products business was somewhat less than we have traditionally experienced.

Broadly speaking, there's still limited visibility in the end market demand on the part of both customers and suppliers. I've personally talked with over 100 of our key suppliers and customers in the past few months and generally speaking, no one has a clear view of demand in the coming months. Not surprisingly, most of our business remains on a book ship or turns basis, and customers are placing smaller orders today for delivery within a very short time period. Product remains readily available and lead times are short. If you listened to our call last quarter, you will recall we said the component pricing seemed to have stabilized.

This quarter saw a resurgence of pricing pressure which Jan will discuss in greater detail later on in the call. Like many others, we are also being impacted by the macroeconomic and geopolitical uncertainties in the world today. We consummated the acquisition of Pioneer Standards industrial electronics distribution business at the end of February, and completed the integration of that business into Arrow over the ensuing weekend. We opened for business at eight-thirty a.m. on Monday, March 3rd, with no disruption in service to our customers or to our suppliers. I happened to be visiting our Dallas branch on that Monday, and to watch the phones start ringing, the screens flicker on, and the orders begin to flow was truly inspiring.

This was a world class effort by the Arrow team, led by Jan M. Salsgiver and P.J. Chang and their respective teams. We remain confident that the acquisition will be accretive to earnings to the tune of at least 20 cents per year. For modeling purposes, keep in mind that the first quarter only had one month of Pioneer IED sales and we estimated that it added penny or two to EPS.

In our fourth quarter conference call, we described some of the steps we are taking to make our organizational structure systems and processes in North America more efficient, and we're on track to achieve targeted cost savings of 40 million per year, and we expect to see a significant portion of these savings by the end of quarter two. Now I'd like to ask Paul J. Reilly, our Chief Financial Officer, to review our financial results.

Thanks, Bill. As you've seen from our press release there are a number of items that impact the comparability of our results with those in the trailing quarter in Q1 of last year. I'll start by reviewing our results, excluding the one-off items and then at the end of my comments I will describe these items in greater detail for you. Sales for the first quarter were $1.98 billion, up 5% over the fourth quarter and 7.4% from last year.

Sales, excluding the impact of FX, and the estimated impact of the Pioneer IED acquisition, increased by 1% versus the fourth quarter. Two points of clarity. First, IED has been integrated into our existing NAC business, but it's difficult to track the exact amount of sales from that business, especially given the extensive amount of customer overlap. Secondly, Q4 is our strongest quarter in the computer products business. So while consolidated sales were virtually flat with Q4, it is important to understand the changes in our sales for both the components and computer products business. Sales in our worldwide core components business, excluding the impact of FX and the estimated impact of the IED acquisition rose 9% versus the fourth quarter, and versus Q1 of last year, sales on this basis advanced 4%.

As Bill mentioned, each region around the world posted sales gains. Sales in the computer products business, excluding the impact of FX, decreased by 15% from the seasonally strong fourth quarter, and that's somewhat less than expected. Jan and Mike will comment on what they're seeing in the North American businesses shortly. At 16.9%, gross profit margins were up 10 basis points over Q4 and down 20 basis points from Q1 of last year. As Bill mentioned, we saw downward pressure on component pricing this quarter, after a period of relative stability in Q4.

Operating expenses as a percentage of sales were 14.5% in Q1, a 10 basis point increase over Q4 and down 20 basis points from Q1 of 2002. The $15 million increase in operating expenses versus the fourth quarter is principally due to the impact of foreign exchange, the newly acquired IED business, and valuable expenses tied to changes in the mix of sales between components and computer products. Operating income as a percentage of sales was 2.4%, flat with both the trailing quarter and last year's first quarter.

Importantly, operating income dollars were up over both periods. Net interest expense was $33.3 million, up from $32.1 million in Q4 but down from $42.1m last year. As you all are well aware, interest rates on high quality liquid investments continue to decline. This, coupled with the loss of interest income from the cash utilized to paid for the IED acquisition resulted in an increase in net interest. As you may recall from our previous calls, we believe that the significant cash flow generation resulting from a cyclical downturn and improvements in working capital management was behind us, and as we bounced along the bottom the cycle, our cash generation or cash usage will depend upon a number of factors. This quarter, cash flow from operations was a negative $49 million. This cash usage was principally driven by the timing of our sales.

Our sales in the month of March were higher than the month of December, and since our standard terms with customers is 30 days in North America, and longer in other countries, the related receivables did not have a chance to turn into cash before quarter-end. Our effective tax rate for the quarter was 33.6%. The rate is down from 2002, principally because certain nondeductible expense items which are generally fixed in terms of dollar amounts will represent a smaller percentage of our profit before tax. For modeling purposes, you should use this rest for the rest of 2003. Net income for the quarter was $10.1 million, up 13% from $8.9m in Q4 and nearly a five-fold increase over last year's $2.1 million.

EPS for the quarter was 10 cents versus 9 cents in the fourth quarter and 2 cents in Q1 of 2002. Depreciation amortization for the quarter was $16.9 million. Noncash interest expense in the quarter related to the zero coupon convertible debentures was $7.4 million. And the number of actual shares outstanding at end of the quarter was 100,124,000. As you saw in our earnings release, we reported a net loss of $900,000 or one cent per share on a GAAP basis. As I mentioned earlier for comparability purposes and to give you a better sense of our operating results, I excluded a number of one-off items. The difference between our reported GAAP basis numbers and the numbers I have been discussing are due to the following items.

We continue to be opportunistic when it comes to repurchasing our debt obligations. During the first quarter we repurchased $70 million of the 8.2% notes that mature in October of '03. The premium we paid, along with the write off of the related deferred issuance cost, resulted in a charge of $1.5 million net of tax or one cent per share. Keep in mind that under the newly effective accounting rules the premium paid to repurchase a company's debt is no longer recorded as an extraordinary charge. In the fourth quarter of 2002, we purchased $79 million of the same notes, resulting in a charge of $1.3 million net of tax, or once again, a penny per share. As this was recorded as an extraordinary charge last quarter, we'll restate our prior year's results to reflect the new accounting rules. As we have previous discussed, we sold the Gates Arrow commodity consumer products business in Q2 of 2002 and are accounting for the sale as a discontinued operation. Accordingly, we have restated our prior year's results to exclude the individual components of the Gates Arrow business, that is, sales, gross profits, and operating expenses. Instead, Gates Arrow's results are shown as a single line item in our income statement. For modeling purposes, sales of Gates Arrow Q1 '02 were $108 million.

Q1 results include a special charge of $6.9m pre-tax, or $4.8m net of tax, and that's 5 cents per share, related to the integration of the IED business which was completed over the weekend of February 28th. Jan will have further comments on the IED acquisition and integration shortly. On our fourth quarter conference call, we stated we had taken a series of steps in order to become more effectively organized in North America and to improve our operating efficiencies, leading to a reduction in our cost structure by $40 million annually. Restructuring costs associated with these actions are currently estimated to be in the $12 million to $15 million range. Of this amount, $6.7 million was recorded in the first quarter, that's $4.7 million net of taxes, or five cents a share with the remaining amounts associated with these efforts to be recorded in Q2. As we've said before, looking at our operational efficiency as an evolutionary process that continues each and every day, ultimately, we may take additional actions that could result in increased cost savings and incremental restructuring charges.

Thanks, Paul. Jan M. Salsgiver, president of North American components business will now discuss her group's performance in the quarter.

Thanks, Rob. Including one month of sales from IED, our North American components businesses generated sales of $676 million in Q1, up 9% from Q4 and up about 4% versus Q1 a year ago. Our strongest customer segment in Q1 was the industrial OEMs. Sales to these customers were up over 10% quarter on quarter. We focused for a long time on penetrating a very broad range of OEMs, including small to medium-sized OEMs. These represent a core customer base for distribution. A close second in gross quarter on quarter were the small to medium-sized contract manufacturers. This segment, comprised of about 800 active contract manufacturers, grew just under 10%.

The most challenging segment continues to be the communications customers. Especially the large global OEMs and the CMs that serve them. Our sales to that customer base were essentially flat quarter on quarter. On February 28th, we completed the purchase of Pioneer Standards' industrial electronics distribution division. We fully integrated the Pioneer business into NAC over the weekend of March 1st and opened for business on Monday, March 3rd. By fully integrating the business, I mean that we converted all of the customer and supplier data on to the Arrow system, moved the inventory into our distribution centers, and moved new employees into Arrow facilities and trained them on the Arrow system. As Paul mentioned, since Pioneer was integrated into NAC rather than being left as a standalone business, it is very difficult to track which sales came from Pioneer and which came from Arrow. As of March, they are all Arrow sales. What I can say is that the transition was smooth on the customer, employee, and supplier side and we're very pleased with the way things are going. Moving on to price and availability, all product categories in both semi conductor and [inaudible] electrical and mechanical connector technologies continue to be readily available with short, stable lead times. That strong availability plus very competitive market conditions, put significant pressure on average selling prices. Last quarter, I told you that ASPs were down from a year ago, and from prior quarters but they appeared to have stabilized.

This quarter, we saw ASP declines ranging from single digit to double digit in almost every technology. Commodity products such as standard logic, standard analog discrete, connectors, and passes all saw significant ASP declines. However , in all of these technologies our unit sales were up in the 20 plus% percent range. So overall sales increased. As we've said in prior calls, line item activity continues to increase faster than sales, as customers take product in smaller, more frequent deliveries. ASP declines were less severe in some of the more proprietary products such as microcontrollers and programmables.

Thanks, Jan. I would now like to turn to Michael Long , president of our North American computer products business. Mike, would you care to discuss your group's operating performance?

Thanks, Rob. In the first quarter, sales of our computer products businesses were approximately $383 million, down 15% sequentially from the December quarter, and flat with Q1 02. As you all know, Q4 is seasonally the strongest quarter in the enterprise space and Q1 is the weakest. Sales in our mid range businesses were down about 18% over the seasonally strong fourth quarter. Somewhat less than a decline than we normally see, but up 10% over last year's first quarter. Notably, all of our mid range lines showed year over year increases. Additionally , we continue to gain new resellers through successful recruitment. Storage area network components, storage management software, and modular storage systems demonstrated the strongest growth in Q1.

As customers remain focused on improved infrastructure utilization, mid range and low end storage solutions, which can be purchased under budget levels for discretionary spending, showed significantly better trending than the more expensive storage solutions. Our OEM sales were up sequentially by just over 10% in the quarter and up 5% from Q1 of last year. The customer base for this business is principally telecom and networking accounts, which all of you know continues to be a very difficult market sector. NAC's operating income as a percentage of sales was down from the all-time high set in Q4, but still very healthy. Operating income dollars were at an all-time high for any first quarter on record, and were nearly 60% ahead of last year's first quarter. Thanks, Rob.

Thank you, Mike. We'd like to now turn the call to Bill Mitchell, who will discuss our businesses in Europe and Asia. Bill?

Thanks, Rob. First let me turn to Europe . Sales in Europe, which remains a difficult market for us, because of weak economic environments, were up 14% over the fourth quarter at approximately $722 million. Excluding the impact of foreign exchange, the increase was still a healthy 8%. Year over year, the increase was 15%, but excluding foreign exchange, sales were virtually flat. Sales in the core components business, excluding the impact of FX, were up 19% from Q4 and virtually flat with last year. Much like the computer products business in North America , Q4 is traditionally the strongest for our European computer businesses. Q1 saw a 15% decline in computer product sales from Q4, and sales were flat compared to Q1 of last year.

It's worth noting that our European businesses remain among our most profitable with the core components businesses being solidly profitable, despite very difficult market conditions and the performance of the computer businesses being similar to that seen at other companies. Turning to Asia-Pacific , sales in our core components business in Asia-Pacific were up 4% sequentially and 18% year on year. This growth builds on the strong momentum generated in the second half of 2002, as we continue to invest in penetrating a broad customer base. Gross profit margins came under pressure during the quarter , and accordingly, operating income as a percentage of sales was just about break-even.

The unfortunate occurrence of SARS in the region, while unnerving, does not appear to have had a noticeable impact on our sales in the first quarter. We view this as one of the many uncertainties in the world today along with the war and reconstruction in the Middle East, economic instability, et cetera. We will continue to monitor these going forward, along with everyone else. That's about all I'd like to say in the way of formal remarks, but there are a few other things

I'd like to touch on before we move into the fun part, the Q&A. As I've gone around the world, a number of people have asked me, why did you come to Arrow? And at first, I decided to make the move based on what I saw of Arrow from the outside, and what I thought about the industry. I truly believed that the distribution industry in particular and the technology sector in general is yet at other inflection point in its history. The sector that continues to reinvent or reshape itself to meet the increasing needs of customers and suppliers, often anticipating those needs before they become apparent. Arrow has consistently proven to be an innovative leader in this industry and is one of the world's leaders in electronics distribution; Arrow will no doubt have a seat at the table in deciding how this next transformation takes place, as it's more deeply embedded in the supply chain than ever before.

The title of this annual report, "Powering the Supply Chain," I believe that's a role Arrow can play as both our industry and the sector changes to meet the challenges of the 21st century. That's what I saw from the outside about Arrow and about the industry. I spent the last two months getting to know the people of Arrow from senior management to field sales and marketing to operations, and to the many people in finance, HRIT, and the other functions. Because of that, I've added a third reason to my list of why I came to Arrow, one that you can't see until you get here, and that's the backbone of Arrow and it's its people. There are over 11,000 people at Arrow who have great knowledge and experience, as well as a passionate commitment to make sure the company is the best it can be.

These folks are experienced, and they're dedicated. And when you see an organization that is collectively as ready to go out there, roll up their sleeves, do whatever it takes to be successful, you want to join them. It's truly a pleasure to lead an organization that wants to actually go somewhere, not just to sit still and be content to the status quo. I could not be more delighted to be here. Now on to another area that I know is of great interest to you and that's Asia.

Strategically, we see Asia's role in the electronics supply chain continuing to develop going forward. Arrow's well-positioned to participate in this market with an infrastructure that presently includes a presence in 11 countries and territories, 37 sales offices, two primary distribution centers, five local warehouses serving over 10,000 customers.

In China alone, we are present in ten cities. We're beginning to open advanced programming centers in several parts of Asia to serve this portion of the market, and we're adding field applications engineers to support our expanding customer base. Keep in mind that the supply chain is still maturing in Asia-Pacific and that the distribution business is currently very fragmented, in some ways appearing very much the way it looked in Europe in the '80s and North America in the '70s. So there's much work to be done, but more importantly, there's great opportunity.

We have a strong foundation in place, and we expect to build from this foundation an evermore powerful presence. One of the strong messages I have received from my many conversations with suppliers and customers is that they want Arrow to be present in Asia with the full range of capabilities that we offer in North America and Europe. As I stated before, this is both a challenge and a great opportunity, and I expect to spend a good amount of my time in this area. To date, we have not seen much of our traditional customer base in North America [and] Europe moving to Asia. From my discussions with suppliers and customers, most of the business transitioning to Asia right now is high volume, low-mix manufacturing traditionally direct [business] and not in the markets customarily served by distribution.

This may change in the future and as it does, Arrow will be prepared to offer the full range of our services. I continue to be confident that if our global customers migrate to the Asia-Pacific region, we will continue to provide them with the seamless support they require. I don't want to get in the way of Q and A, so why don't we pass this back to Rob.

Thanks, Bill. J.T., let's open the floor for questions.

Ladies and gentlemen , if you do have a question or a comment at this time, please press the numbers one, followed by four, on your telephone keypad. Questions will be taken in the order they are received, and we do is ask that before posing your question, you pick up your hand to provide optimum sound quality. Please hold while we poll for questions. Thank you, our first question is coming from Steven Fox with Merrill Lynch. Sir, your line is live.

Good afternoon. Could you talk a little bit about, from a financial aspect, first, Paul , the interest expense line, what are we sort of looking at on a regular run rate basis the next couple of quarters. And then secondly, when we look at the inventory and receivables jump and payables for that matter -- is there a way to disaggregate the Pioneer acquisition from it [inaudible] to get an idea of how inventories and receivables

did in the quarter?

Let me first answer your question on interest, I expect it to be relatively flat going forward, throughout the rest of the year. Obviously, as we've talked about in the past, Steve, that's dependent upon whether there's a rebound in the marketplace and sales grow and then we have to invest in working capital. On a steady basis right now, I think our interest expense will stay right around the level we're at now. As it relates to the question on working capital, we have fully integrated the IED business into our own business so it's difficult to track it separately. Let me tell you the measures we looked at it internally, was basically the working capital we assumed at the closing date, and that really accounts for the vast majority of the increase in accounts receivable inventory, and accounts payable.

In fact , when we look at accounts receivable and the way we evaluate DSOs internally , it looks like it slipped one day but that's all explained by the fact that March had many, many more sales than the month of December. So that was to be expected in the calculation. Our turns are right around where they were in Q4 which is kind of interesting, in light of the fact that we have more computer product sales in Q4 which has higher turns, and our DPO -- the way we measure our payable days, we're down about a day or two. Once again, that's driven by the change in mix of our sales, where we have some extended payment terms in the computer products business.

So as you work out some of the working capital inefficiencies from the acquisition, and you move forward, I guess roughly speaking, should we expect to see some more improvement in working capital or not really?

Steve, that's a good question and one of the things that happened was that Pioneer itself wrung some of the working capital of efficiencies out of it before it transferred to us. I wouldn't expect us to see as big of improvement we might have thought of back in the earnings call in February going through the earnings call then.

Thank you.

Thank you. Our next question is coming from Patrick Parr with UBS Warburg. Sir, your line is live.

Good afternoon, guys. Question regarding inventory, it picked up a little bit sequentially. Is that mostly due to the IED acquisition or is there something else going on there as well?

Pat, it's Paul J. Reilly. In terms of dollar amounts it's principally because of the IED business, which probably accounted for 98% of the increase in the dollar amount.

: Okay. And then I guess, more on the working capital subject, I guess you have about a $200 million payment on your 8.2s in the fourth quarter this year. Is the intention to continue to buy those back opportunistically? What's the view from you guys on that right now?

We will continue to operate the way that we have over the last several quarters. If it makes sense economically, we'll do it. If not, we'll sit tight and wait until the maturities in the fourth quarter.

: What would you do at the maturity, would use your revolver or something like that to pay it off?

Right now, we have more than enough cash on our balance sheet. We have $341 million plus of cash, and the maturity is about $207 million at this point in time. So we'd be able to fund it right out of the

cash balance.

: That would imply that you shouldn't be burning cash between now and then, hypothetically?

Boldly speaking, I would agree with that.

: Then a second question being a clarification, I guess from Jan on the components business, the numbers that she was quoting regarding ASPs being down single to double digits, were those down sequentially or down year over year, and then the same question about units being up 20%, were they year on year or sequential changes?

Pat, the numbers were sequential quarters. In both cases, ASPs and in units it was Q1 comparison to Q4.

: And Jan, can you give any color as to where within those commodity products the biggest and smallest price increases may have come, i.e., passive, electromechanical, memory, whatever?

As I said, it was basically, if you look in the commodities, the commodities took a much harder hit and were more in the double digit declines and the proprietary products more in the single digit lines. There isn't a broad range of difference among the commodities.

: It strikes me as being pretty significant. Was that higher than you anticipated?

You know, as I said on the last call, prices had continued to decline, but appeared to have stabilized, and so the fact that they went down this quarter is, it's really back to products are readily available. It's a competitive environment and we knew it was going to be a competitive environment.

: Okay, I'm sorry , Jan, one more question for you. Regarding the numbers you were quoting, did they include that one month of IED or were they exclusive of that?

The $676 million that I quoted included the one month of IED sales in March.

Do have you any sense what the attrition might be in that business? I mean, I know we were talking 15%, 20% year on year after the consolidation?

You know, it's very hard to have any idea, once you merge the two businesses together to know which, you know, where the attrition is or if there was attrition. So that was a tough one.

: Okay. Thanks.

Pat, this is Rob. With the degree of customer overlap that we had with Pioneer It's hard to tell whether a sale in March came from a customer buying with his old Pioneer hat or buying with his old Arrow hat on. We lose the traceability that way. We're not trying to hide anything. We just don't have the -- the data doesn't exist that way.

: Maybe when Bill was at the Dallas office that day, he should have picked up the phone and asked.

That was not one of the things that they were going to allow me to do on the telephone.

I don't think we're ready to let Bill talk to the actual buyers yet.

: Okey doke. Thanks.

Thank you. Our next question comes from Matt Shering with Thomas Weisel partners. Sir, your line is live.

Thanks, another question for Jan. Obviously, you had some strong sequential growth across the components business. You talked about some of the markets where you saw that growth. Do you think, was there true end market demand or did production fall off in December and in your customer inventories were so low that there was some refresh? Could you give us a little color of what's been going on there?

Sure, Matt. What I see, as I said, is that products are readily available with short, stable lead times, and a lot of our business is turned business. So I mean, we can all derive our own conclusions from that, but, you know, it appears to me that all customers are on the same path to working capital efficiencies, and they're placing short, small orders, consistent with product being readily available.

Okay. So do you think that then reflects that there was some end market demand there? If you're not building inventories?

I don't know, but I would say you know, if sales increased and products were readily available, that that was -- they needed the product.

Okay, and any comments on book to bill, even though I know turns is high are. Any sort of backlog, which leads to the question that I guess needs to be asked which is guidance in general, and sort of what you're seeing in terms of demand going into the June quarter, and any expectations for either revenue for EPS?

Matt, this is Rob. As you know, we haven't been giving guidance for a number of quarters now , and frankly, with the lack of visibility that we have today, as Bill and Jan and Paul have all mentioned in their presentations, we're not going to be giving formal guidance at this point. Jan, do you have anything that you want to say about the market conditions currently?

Yes, I guess, again, it's basically our book to bills are about at the one level -- varies a little bit by end segment, but very consistent with the kind of environment, you know, big turns environment.

Speaking of the international operations, the same is true. We don't have the visibility in the international operations, but the same thing is true, book to bills are running about one.

Okay, fine, and then just one quick question regarding Asia. Could you tell us what percentage of your component sales comes from Asia?

Let's see --

Hang on. We'll get you that.

If we had that number, we could get it to you, but it's not off the top of my head.

Okay, great.

Let me turn on my calculator. About 12%.

Okay, thank you .

Sir, does that answer your question? Thank you, our next question is coming from Rob Damron with Southwest Securities. Sir, your line is live.

I have a question regarding the Pioneer Standard acquisition. When you first announced it, the price that was initially quoted about $285 million. When it actually closed the price was closer to about 230 million. Just curious, what changed during that period of time? Did you acquire less inventory? Were there fewer lines you actually acquired? What changed during that period of time, and then I know you're kind of hedging with regard to what kind of revenue increased Pioneer is adding, but they were at a $700 million run rate when acquired them. Are we still in that ballpark or is it something less than that number?

Paul?

Let me answer the question, Rob, you asked around the purchase price. You may recall from our announcement on the transaction that it's predicated upon networking capital acquired plus a couple other items with a fixed premium built into the contract itself. So between December year-end and the February close , the balance sheet they were able to work out some of the working capital they collected out of the fourth quarter sales, I'm sure they were a little bit more efficient in how they managed the business and there were some lines that we expected to not bring over to us and they didn't bring them over. That really drove the working capital down in total to the lower amount.

Remember, Rob -- this is Rob here -- that we were acquiring only continuing lines. So that if a line terminated, then it stayed with Pioneer. They got the benefit of liquidating that inventory and turning it into cash. We got a reduced purchase price.

Okay, so does that also then translate into the fact that obviously that $700 million run rate wasn't really truly a run rate for Arrow , it's something closer to -- well, I don't know, do you want to try to put a number on it?

No.

Okay. Okay, all right, that helps. Thank you.

Thank you. Our next question is coming from Mark Altair of CSFB. Sir, your line is live.

It's Mike Altair. What was CAPEX in the quarter and how would we model that for the rest of the year?

The CAPEX number was right below $9 million for the quarter. That would be if you annualize it around $35 million to $36 million. That's a good number for right now.

: Okay, and the other question on that debt payment for the rest of the year, you're implying you're going pay that back with the cash. That wouldn't leave you with a whole lot of cash if you're not generating much. Any consideration, you'd just refinance it at some point?

Well, it's a good question. Right now, we are not utilizing at all our asset securitization or bank revolver. We have plenty untapped liquidity at this point in time which gives us a lot of flexibility. As we evaluate the business going forward, it's a bit difficult with the lack of clarity [inaudible] demand. We're going to have to see what the conditions call for.

: Okay. I guess on that last point then, you're covenants do increase over the rest of the year. What are your projections at this point, are you going to have to go back and revisit those in the second half of the year if things don't pick up?

To the best of our knowledge we're not going to need to renegotiate any of the covenants.

: thank you.

Thank you. Next question is coming from Mark Hassenburg with Nottingham Capital . Sir your line is live.

Good afternoon.

Hi, Mark.

I wanted to touch on the pricing a little more. When you're talking about pricing pressure, is that pressure on the prices themselves , but are pressure on your ability to mark-up your margin or both?

Mark, this is Jan. I'll take that one. It's very interesting, particularly on commodity products. The customers are applying a lot of pressure on the actual resale price. The suppliers are eager to get the business, and will Often times work with us in terms of trying to keep margins whole so that they will get that business. So I would say the pressure in this kind of environment is on the resale from the customer's side, but less so on the cost from the supplier side.

: So that you're getting squeezed or -- I'm not sure I follow that.

Okay , so let me try -- the customers -- here's what's happening. The customers are reducing the resale on the part.

Right.

Therefore, we get less dollars for each part that we sell. However, the suppliers are, in fact , eager to get that business, so they will be competitive to make sure that you make a good margin. Our margins won't suffer, but the absolute size of the line item, because the ASP per part is down. Does that make sense?

ASPs are down. The percent margin is squeezed a little bit.

A little bit but nowhere where near as much as the ASP.

: What we hoped would happen if the distribution industry consolidated that we would have more rational pricing than maybe we've had in some other downturns for the moment seems to be working?

That's an interesting point. I hadn't thought it about it that way but you think you're right, Mark. We haven't seen the race to the bottom, the deterioration of gross profit margins that we've seen in other cycles, and whether that's a consequence of consolidation or not, you know, it is certainly is a plausible explanation. That's interesting.

And do you feel that it's right across the board? Do you think that the EMS industry is having more impact than it might have before or they're just, you know, not that big an input to this total pricing pressure?

I don't see them having any different pressure than any other customer base.

I think, Mark, that the ASP decline is really driven by the free availability of product. It's not so much driven by the customer side, no matter what class of customer it is.

: Yes, the only point there is that that availability of product has been around awhile. There's obviously more pressure from the buyer as this downturn extends.

Absolutely.

That's right.

Absolutely.

That's correct.

Thank you.

Thank you. Our next question is coming from John Horvath with Lehman Brothers. Sir, your line is live.

Thanks. I may have missed this, but could you just give the revenue breakout for the overall business by geography, and then also the sequential impact of the currency of the Euro on the European revenues?

Sure, let me start with the second question first. You asked what the impact was on revenues for the strengthening of the Euro. The Euro strengthening in the first quarter compared to the fourth quarter added about $33 million of incremental sales. The strengthening of the Euro compared to the first quarter of 2002 added about $100 million of sales to our results.

Okay, and the absolute revenues by geography ?

I can give it to you by geography broadly speaking. So that in the Americas, total revenues were $1.075b. Europe about $725m and Asia-Pac $180 million.

And one other question. In terms of guidance, you mentioned that you don't have too much visibility into the revenue or EPS guidance. What about the operating cost for Q2? I mean, at this point, you must have pretty good visibility into what that number is going to be. Do you have any guidance for that?

As we've stated before , we have put in -- in place our cost reduction efforts and as we stated, we are on track to achieve the expected portion of that in the second quarter. And so that should help you to get into the right ballpark of what we expect our expenses to be for the quarter.

As you know, we targeted 40 million and we think we'll have the majority of that 40 million by the end of the second quarter. Don't plug it in on April 1st. It's going to build throughout the quarter as so that as we exit the quarter it will be almost there.

$40 million on an annualized basis. We expect it's coming in and should be fully deployed by the end of the quarter.

All right , thanks a lot.

Thank you. Our next question is coming from Steve Savas with Goldman Sachs. Sir, your line is live.

Thanks, good afternoon. I guess first, not to beat a dead horse on this ASP drop for the components business. Jan, on the last conference call it was February 20th. Were you looking at or describing the stability in ASPs for the December quarter or is that what you were seeing at that point for the March quarter?

No, whenever we're on a call, my comments now are about Q1, not about current business, and at that point, they were about Q4, and if you look back at Q4 and Q3 sequentially, you did not see the kind of decline that we saw this quarter.

Okay. And then maybe flipping to computer products side of things in terms of how the quarter, the pattern of the quarter looked, I think, Paul, you had indicated that there was a surge in sales late in the quarter which was why your cash was light. Was that on computer products business or components side and can you just comment on linearity or how the computer products business looked in the quarter?

Yes, Steve, let me answer the question that when I talked about the surge in sales, seasonally, it comes out of the component business. If you think back to what we tell you about the computer products business. It's very strong in December. The change that we saw in the sales volume really didn't come out of the computer products business. It was principally in the component business.

Mike, you want to talk about the progress through the quarter a little bit, give us a little flavor on how the quarter went?

Sure, Rob. We saw, like everyone else, a pretty strong January, with February dropping a hair and a strong finish again in March. Again, we did see a decline from Q4, and Q1 was a little bit better than expected. Each of the mid range companies growing their business year over year.

And Mike, any comments on pricing?

Pricing was stable in virtually every category, and right around the March time frame there was a little pressure on servers, but servers appear to be back to normal levels again.

Okay , and last question. Are you seeing customers more so than they have in the past holding off until late in the quarter to kind of squeeze down on price?

I think it's for a different reason. As I said the last time, we are seeing projects in the queue and what we see is those projects tend to be delayed, but it's usually due to internal capital spending of the company, not price driven.

Thank you very much.

Thank you. Our next question is from Doug Rudis with Berkshire capital. Sir, your line is live.

Hi, I jumped on late - I apologize if this has been asked. What did the components business do sequentially to the best of our ability , ex the effect of the acquisition?

Okay, so what we said was that sales in our worldwide core components business excluding the impact of foreign exchange and the estimated impact of the acquisition rose 9% versus the fourth quarter, and were up 4% versus the first quarter of last year.

All right. Okay, and that's interesting that you saw such strength at the same time you were seeing continuous ASP declines. So these two things normally don't go hand in hand. Can you talk about why you thought the unit takeaway was so good and above expectation, and where you were getting the pull from?

Jan, you want to talk on the component side? Earlier in the comments, you said that units were up in the 20% plus range.

Right. And units were up across the board, across just about every technology. So you know, I think when I started off, I said that our strongest customer base was the industrial OEMs, who are broad users of a broad range of product, and so the strength was broad-based. So it wasn't in any one narrow technology driving that.

Were your customers telling you they were under inventory -- the reason it's interesting is just because we're not seeing sort of end product consumption at those sort of rates. So were you getting any feedback or you just sort of you have the orders and it is what it is?

Yes, it's back to we get a lot of book ship business now. Lots of small orders. Which you heard, is that our line item activity is up. Customers, it appears, are buying in small quantities. You know, would you guess it's when they need it. So you know, and then March was significantly stronger than December, would be the only other comment.

Thank you very much.

Thank you. Our next question is from Tom Leach with Bennett Lawrence Management.

Thank you. You've knocked off a lot of my questions. Can you talk about in the component world, what percentage of your components are the commodity type versus the proprietary type?

Tom, we haven't for competitive reasons, given out that information in the past, and I think we're just going to have to take a pass on that right now.

Next question, given that you're handling more units and in more small quantities of orders, and at the same time even though you're not getting hit on gross margin percentages, gross margin dollars per unit will probably be lower. Should we expect our operating income to come down here? Because you got to work harder for less dollars.

I think that's what we've been doing. And I think, you know, our operating margins stayed at 2.4%,

which is pretty good performance in a difficult market condition. As Bill as talked about earlier, and Paul has, we've taken some steps to reduce our cost structure in North America and make us more efficient going forward. So we are trying, you know, we are obviously responding to that situation that way.

And this behavior of more units and tougher pricing, does this make sense to you? Have you seen this in the past in previous cycles?

Yes.

They don't have to order -- it's just basic ordering pattern. They order when they need it.

Does this occur at any particular time in the cycle, is this a flag whether things are getting worse or better or just they are what they are?

I think it's been a continuing issue. I don't think it's a flag that one looks at. The interesting thing, and Paul, you might want to comment on this a little bit, is that we have an enormous amount of the converse of this, we have an enormous amount of operating leverage in our marble right now. With increases in volume, you will see the cost structure as a percentage of sales coming down, and that will improve operating margins. Obviously the rate of incline on the incline on the sales side is a determining factor. We don't have visibility as to where it's going to come and at what rate. It's an interesting phenomenon. We're essentially running a fixed cost business today.

Then why all of the sudden this particular quarter - any guess as to why pricing pressure got tougher in this quarter? It's been kind of stable for a couple of quarters.

Yes, it has. I don't know.

Fair enough. Thank you.

Thank you. Our next question is from Peter Chung with Raymond James. Sir, your line is live.

This is Peter for Bryan Alexander. One quick question for Mike. There have been discussions recently about HP moving more products under his HIP program. Do you have any color on which product will be moved into the program and will this be a positive or negative for your business?

As you know, Hewlett-Packard is evaluating the HIP program. We've been in discussions with them for the last three quarters. At this point in time, there's no decisions and to be honest with you, I wouldn't even speculate until we get further down the line.

Okay. One more quick question. Could you give us a revenue mix of UNIX, windows, Linux based server and what the upward migration of Wintel servers mean for your revenue margins?

Mike, this is Rob. We haven't been giving that kind of detailed breakdown. Again, it's competitive information. But if you wanted to talk about the upward movement in general terms that's fine.

Okay, thanks , Rob. We have seen more Linux attached systems over the last two quarters than we saw prior to that. However, most of the revenue targets you have seen not only include the server with Linux. Most people add the storage, the printers, and all the seats around it. So it's very difficult right now to really get an industry handle on how big Linux is becoming.

Okay, thank you.

Thank you. Our next question is from John Loez with Pilgrim and Baxter. Sir, your line is live.

Hi, guys. Thanks. I had a couple quick ones, sort clarification stuff. On the inventory side, did you say inventories would have been flat if you exclude the impact of the acquisition sequentially?

They would have been virtually flat on a sequential basis.

Okay , the second one, you talked a little bit about lead times. I know they're still pretty tight. Can you quantify where lead times are right now and whether you saw any move in those throughout the course of the quarter?

This is Jan. In general on the components, when we say they're short and stable, they're usually in the four to eight-week time frame, and no, it was not really, we have not really seen any change to that.

Even in the month of March, where you had that kind of rush of business in that band?

No, we had product to support it.

Okay. The third one is, can you remind us, what are your businesses, I guess more on the PC side, what does that generally do seasonally or historically and sequentially versus what you said was a little better than what you've seen in the past?

Let me correct you before Mike answers more fully. We're not really in the PC business. Our computer products business even in North America is focused on the mid range offerings of IBM and HP and Sun. So that's the seasonality the people attribute to the PC world that are going into the back to school cycle, back to the Christmas gift giving. That really doesn't apply to us. We're in the wrong end of the market for that, but Mike, you want to talk about your fourth quarter, which is seasonally the strongest?

Yes. The fourth quarter is typically the biggest quarter for all mid range businesses. Q1 usually drops off to be the worst quarter, and then the two middle quarters are essentially flat, with the third quarter being just a hair below that in a typical basis. The market has not fluctuated over prior years, and this has been the same thing we've talked about year after year, when everybody typically panics in the first quarter because servers sales are down, but it's something that's been going on year after year. If you model it, there's been no change in the business.

Okay , so I'm sorry , just for clarification, is it usually down kind of 20% sequentially , which is where you're getting, it was a little better than what we usually see comment?

It's usually down 20% plus.

Usually down 20% plus, okay. Sorry, the last one. I understand you're not giving guidance. Would you for both of your segments describe the trends you've seen thus far in the current quarter and within that, if you could speak as to whether or not you thought there was inventory stocking ahead of the war in the late weeks of March, that would be helpful. Thank you.

I'll ask Jan to take the latter part of that question. In our business patterns, it's hard for us to draw any conclusions from early in the quarter as to what a quarter is going to wind up looking like. And therefore, we haven't and don't like to talk about, you know, the first ten days of this or the second two weeks of that. So we're going to not give you any real flavor on that, because I don't know if it would be meaningful for any reason. Jan, you want to talk about this issue of people building inventories in advance of the war?

Yes. Let me answer it in two ways. One, we didn't take action internally to do that with our own inventories and I have not seen indications from customer's buying patterns that they've changed in any way that would lead me believe that's happening. You know, product is available enough that I haven't seen a change in buying patterns that would lead me to believe that.

Okay, and I can appreciate your concern on the first part of my question. Just generally, have you seen business -- has there been a deviation in the business since March 31st, such that maybe you're thinking that March was an anomaly for some reason?

I don't think we're going to go there. You know, we'll just have to wait and see how the quarter winds up. As you know, we got a big push at the end of this quarter. We'll wait and see what happens in the June quarter.

Okay, thanks very much.

Thank you. Our next question, is from Ambras Sristava with GKM. Sir, your line is live.

Thank you. Actually, all of my questions have been answered. Thank you.

Our next question is from Scott Craig with Morgan Stanley.

Good afternoon. Just a quick question on the working capital side, Paul. What sort of growth do you think you'd have to have before we start to see, a, usage of working capital on a more consistent basis? What sort of growth on the revenue side would you have to see?

I'm not sure I can peg the growth. I would tell you historically we continue to believe that on average, every incremental sales dollar requires 25 cents of working capital. We haven't seen anything to indicate a change in that.

Okay. Secondly, with regards to restructuring , you alluded to the fact that perhaps there could be more restructuring perhaps under a given scenario. Can you maybe point out with -- if we saw flattish revenue trends over the next few quarters, would we have to see more restructuring? Have you looked at the different scenarios where you'd perhaps consider more restructuring?

This is Bill. As we stated in previous calls and we'll continue to state, we will continue to look at our business to see if there are additional areas where we can gather cost savings and to make the business more efficient, and we'll continue to do that, as we move forward. That's just part of the ongoing way that we run the business and that we'll continue to run the business.

Thank you.

Thank you. Once again, ladies and gentlemen if you do have a question or comment at this time, please press the numbers one followed by four on your telephone keypad. Our next question is coming from Derek Winger with Jeffreys Incorporated. Sir, your line is live.

Good afternoon. Two questions. One, iff you could review the status of your bank lines, the amount you're on, the total size and the availability, and secondly, just of

major categories and other assets of the $272 million.

Let me start with our status with the banks. We have two different facilities one is a revolver, one is an asset securitization program. The revolver is sized at $450 million. Securitization is at $550 million. We have zero borrowings under both of those items.

Okay.

The principal items that you'll find in other assets include deferred taxes, deferred financing fees, some of our investments in various companies as an example, we acquired the shares of can say World Peace Inc., WPI, a Taiwanese Distributor, as part of a Pioneer IED acquisition.

Just two quick follow-ups. The $450 million revolver is totally available?

Correct.

Secondly , can you at all break out in that other assets category any hard assets, so to speak that would include that investments in other companies, do you have that kind of any kind of granularity there?

Let me suggest Paul talk to you off line about that. Give him a call back after the call.

Okay.

Thanks.

Once again , ladies and gentlemen, if you do have a question or comment at this time , please press the numbers one followed by four on your telephone keypad. Our next question is from Douglas Ormond with Aristia Capital. Sir, your line is live.

Thanks. My question was answered.

Thank you. At this time, there appears to be no further questions in queue. I will turn it back to [the speaker] -- you for closing comments.

Thank you J.T., and thank you everyone for taking the time to participate in this call. Obviously, should you have any questions after the call, please feel free to call us.

Call Eileen O'Connor and she'll put you in touch with whichever one of us is most appropriate to answer your questions. We look forward to talking to you again next quarter.

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