艾睿電子 (ARW) 2004 Q1 法說會逐字稿

Good afternoon and welcome to your Arrow Electronics 1st quarter conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Eileen O'Connor, Vice President of Investor Relations. Ma'am, you may begin.

Thanks, Matt. Good morning, everyone and welcome to the Arrow Electronics 1st quarter conference call. I'm Eileen O'Connor, Vice President of Investor Relations and I will be serving as the moderator on today's call. With us on the call today are Bill Mitchell, President and Chief Executive Officer, Paul Reilly, Chief Financial Officer, Jan Salsgiver, Vice President, Global Strategy and Operations, Brian McNally, President North American Components, Germano Fanelli, President of Arrow Europe, Middle East, Africa and South America. Harriet Green, President of Arrow Asia Pacific, Mike Long, President of North American Computer Products and Peter Brown, Senior Vice President and General Counsel.

By now, you should have all received a copy of our earnings release. If not, please contact me and I'll get you a copy. Alternatively, you can access our release on our web site which is www.arrow.com. Let me remind everyone that some of the comments made on today's call may contain forward-looking statements. Those statements are subject to risks and uncertainties as described in our S.E.C. filings. Rather than read the entire disclaimer contained in those filings, please remember that they do apply to this call. We will begin with several minutes of prepared remarks which will then be followed by a question and answer period. At this time, I would like to introduce Bill Mitchell, our President and CEO.

Thanks, Eileen and thanks to all of you for taking the time to hear about our quarter. First of all, let's talk about our results. Our performance during the 1st quarter was outstanding. The execution on our strategic initiatives in each of our component and computer products businesses was excellent. We delivered strong results in each of our businesses in every region around the world. Consolidated sales were $2.68 billion. Up 8% sequentially and up 35% from last year's 1st quarter.

Operating income increased 30% sequentially and over 120% from last year to $107 million and as a percentage of sales was 4%, up a healthy 70 basis points from the December quarter. Our operating income continues to outpace our growth and revenues. Net income of $50.2 million was up 54% sequentially and up nearly five-fold from last year. What this reflects is our continued focus on customers and on operational efficiencies, which when combined with even modest sales growth, enables us to deliver exceptional results. Paul will get into the numbers in greater detail.

But let me give you a sense of what we're seeing. First of all, in terms of the market. We're seeing healthy demand from our core customers globally, but each region is at a different point in the cycle. Our components business in North America posted sales and operating income at their highest level since the 1st quarter of 2001. And this is a clear indicator that the market here is in the midst of a cyclical recovery. We also posted record 1st quarter sales in profits in the Asia Pacific region. And that region continues to grow strongly.

In Europe, despite generally -- general macroeconomic weakness, we saw a strengthening of the business. And we also posted record 1st quarter levels of sales and profits in our North American computer products business and this was our 11th consecutive quarterly year-over-year increase in sales and operating income. The sales growth that we are seeing is in the small to medium size customer base. And that's good for us because that's our bread and butter. And it's across all segments. Our model of enhanced segmentation which drives intense customer focus is what has enabled us to grow faster than the market. Coupling our customer focus efforts with the cost efficiency initiatives that we have implemented over the past year, has, in turn, enabled us to grow our profits faster than our sales.

Let me turn to the leadership team and the management team that's driving this company. As I've said many times, a company the size and complexity of Arrow can't be run by one person and I do not run this company myself. It is run using a true shared leadership model. I announced our new team last quarter and I am very pleased with our results to date. Before I turn it over to the rest of my team who will walk you through our 1st quarter results in greater detail, let me introduce a few new speakers on our call.

As you may remember, Brian McNally assumed the role as President of our North America Components business. This in turn freed up Jan Salsgiver to focus with me on the big strategic issues facing Arrow. In addition, Jan runs our business that services the needs of our global customers. Harriet Green has assumed the role of President of our Asia Pacific business and Brian and Harriet will discuss the 1st quarter performance in each of those businesses. And Germano Fanelli that we introduced to you last quarter will comment on Europe. You'll have the opportunity to meet most of my executive team at our Investor Day presentation in New York on May 13th. Although Harriet and Germano, thanks to technology, will be joining us live via a video feed from Shanghai and Milan, respectively.

I really look forward to introducing you to the team I've put together to drive Arrow to be the clear number one. I hope you'll be able to join us. Let me turn to guidance. As you saw in our press release, we're going to expand our approach to giving guidance. Several years ago, the company made the decision to no longer give numerical guidance because visibility both from a supply and a demand viewpoint was extremely limited. We did say we would revisit giving numerical guidance when visibility improved.

Today, we feel that visibility while not perfect, has improved to the point where we can provide numerical guidance in addition to the guidance we have historically provided such as industry trends, lead times and average selling prices, macroeconomic forces that may impact our industry, the impact of seasonality and factors unique to Arrow such as cost efficiency initiatives, reduction in debt levels and the impact of tax-planning initiatives. In light of the factors known to us today, we expect 2nd quarter revenues to be between $2.7 and $2.825 billion with earnings-per-share, excluding charges, on a basic basis in the range of 47 to 52 cents-per- share. We intend to provide quarterly numerical guidance going forward so long as visibility into the business does not deteriorate. Let me now ask Paul to discuss the financials for the 1st quarter and then Brian, Germano, Harriet and Mike will discuss their businesses in greater detail.

Thanks, Bill. As you have seen in our press release, there are a number of items that impact the comparability of our results with those in the trailing quarter and Q1 of last year. Let me start by reviewing our results, excluding these items. Then at the end of my comments, I will review the items affecting comparability in detail. Sales for the 1st quarter were $2.68 billion, up 8% over the 4th quarter and up 35% from Q1 of last year. Excluding the impact of foreign exchange, sales were up 6% sequentially. Excluding foreign exchange, and the estimated impact of acquisitions and divestitures, sales were up 30% over last year.

Sales in our worldwide components business were $2 billion. Up 15% over Q4 and 36% over Q1 of 2003. Each business around the world posted year-over-year sales growth of at least 20%. Operating income as a percentage of sales was 5.4%. That's 140 basis points over last quarter and 210 basis points over last year. North American component sales were $971 million. That's a 9.3% sequential increase and an increase of nearly 44% from last year's Q1.

Operating income was 12% over Q4 and up more than four-fold over the 1st quarter of last year. This was our 5th consecutive quarterly increase in operating income. European sales of $868 million were up 21% sequentially and 20% from last year and reported dollars. Excluding foreign exchange, sales were up 15% sequentially. Excluding foreign exchange and the impact of our sale of our Nordic computer products business, sales were up 10% over last year.

Our European components business was up 24% sequentially, exclude the impact of foreign exchange. Our European businesses continue to post operating margins well ahead of our European competitors. In addition, the growth and operating income dollars outpaces our sales growth. Again, validating the leverage in Harriet and our business model. Asia Pacific sales increased by nearly 8% sequentially. Keep in mind that Q1 has the extended Chinese New Year holiday, so we lose a number of selling days. Most importantly, our Q1 sales were nearly 50% ahead of last year's Q1. The business remains profitable in the 1st quarter despite it being an area of investment for us.

Worldwide computer product sales were $642 million, down 9% sequentially from the seasonably strong Q4 and up 31% year-over-year. Q4 is always the strongest quarter for this business. So, a seasonal decline in the 1st quarter is not unusual. The decline was, however, less than what we've seen historically. Operating income as a percentage of sales was 3.2%. Down 110 basis points from the record levels set in the last quarter and flat with last year.

North American computer product sales were $539 million. Down 10% sequentially from Q4, but up 41% over last year's 1st quarter. Operating income dollars up 27% over last year's 1st quarter also. Our consolidated gross profit margin of 15.8% was 28 basis points above the 4th quarter, principally due to a change in mix resulting from the traditional Q1 decline in the waiting of the computer products business. Gross profit margins in our core components customers was relatively flat with Q4.

Compared with last year, our gross profit margin was 110 basis points lower, in part because of our strong growth and sales at our Asia Pacific and North American computer products businesses, as well as the pressure on our components businesses margin that was principally seen in the 2nd and 3rd quarter of 2003. But as we've demonstrated, the improved operating leverage we have gotten more than offsets the decline in gross profit percent. Operating expenses as percentage of sales were 11.8% down 50 basis points from Q4 and down 270 basis points from last year. The decrease in operating expenses versus Q4 is a result of our continued focus on operating efficiency.

Our ability to better size up business to meet current needs and our ability to level our cost structure to meet growing sales volumes. As we've been saying for some time now, we have the ability to level our cost structure to drive significant increases in operating income with relatively small sales increases. In the 1st quarter, operating income dollars increased by 30% when compared to Q4 on a sales increase of only 8%. We continue to believe that we have considerable operating leverage that will enable us to capitalize on future increases in sales activity.

Operating income as a percentage of sales was 4%. That's up 70 basis points over Q4. Remember, Q4 was up 60 basis points over Q3. And our year-on-year comparison, we're up 160 basis points. Operating income dollars were up 30% over Q4 and up an impressive 120% from last year's 1st quarter on a sales increase of 35%. Net interest expense was $30.7 million, down from $33.6 million in the 4th quarter and $33.3 million in Q1 of last year, reflecting the prepayment of debt. Cash flow from operations for the quarter was a negative $122 million. You may recall that we also used cash in last year's 1st quarter. And in our February call, we said we would be selectively investing in inventory. We expect to be cash positive for the remainder of the year. Our working capital per sales dollar in Q1 was 19 cents for each dollar of sales. This is the second straight quarter that working capital per sales dollar was 19 cents.

If you have followed our industry in the past, you'll remember it wasn't too long ago that 25 cents was considered best in class. Our affected tax rate for the quarter was 34%. That income for the quarter was $50.2 million compared with $32.6 million last quarter and $10.1 million last year. Net income is at highest levels since the 1st quarter of 2001, it reflects solid sales growth. I will continue to focus on operational and organizational efficiencies.

Our ability to level our cost structure has increasing sales with a minimal increase in cost and the ongoing efforts to reduce our capital costs by de-leveraging our balance sheet. Earnings-per-share were 47 cents and 44 cents on a basic and diluted basis respectively, compared with 33 cents and 31 cents in Q4 and 10 cents in Q1 of last year. Depreciation and amortization for the quarter was $18.2 million and non-cash interest expense related to zero coupon convertible debentures was $5.6 million.

Lastly, the actual number of shares outstanding was $112 million, $113 thousand. As I mentioned earlier, for comparability purposes and more importantly to give you a better sense of our operating results, I've excluded a number of [inaudible] items from my remarks. The difference between our reported GAAP basis numbers and the numbers I've been discussing are due to the following items. During the 1st quarter, we announced a series of additional steps to make our organizational structure even more efficient. The net result of -- will be to reduce our cost structure by $15 million annually.

Approximately 50% of the annual cost saving was achieved in the 1st quarter with the remaining 50% to begin late in the 2nd quarter of 2004. The estimated restructuring charges associated with these actions total approximately $4.5 million. Of which $3.4 million, that's $2.2 million net of taxes, was recorded in the 1st quarter. During the 1st quarter, we repurchased all of our 8.7% senior notes due in October of 2005. The principal amount prepaid was $250 million. The premium paid and the related deferred financing costs written off upon repurchase of the debt, net of the gain recognized by terminating the related interest rate swaps, aggregated approximately $18.9 million. That's $11.3 million net of taxes, that's 10 cents and 9 cents per share on a basic and diluted share, respectively.

During the quarter, we also repurchased nearly $92 million of accreted value of our zero coupon convertible debentures which are due in 2021 though they can be initially put to us in February of 2006. The loss on a repurchase, including the premium paid and the write-off of related deferred financing costs was approximately $4.8 million, that's $2.9 million net of taxes or 3 cents and 2 cents per share on a basic and diluted basis, respectively. The actions we took in the 1st quarter to reduce our debt levels and further strengthen our equity base have obviously reduced our balance sheet leverage. In addition, these prepayments will reduce interest expense by more than $16.5 million annually.

Throughout 2003, we implemented actions to become more effectively organized and to improve our operating efficiencies with annual savings of $75 million. The restructuring charges associated with these actions total approximately $43.4 million, of which $38 million, that's $27.1 million net of taxes or 27 cents per share was recorded in 2003. The remaining $5.4 million, $4.3 million net of tax or 4 cents per share was recorded in the 1st quarter. The 1st quarter of 2003 included charges associated with these actions also and that totaled $6.9 million, $4.7 million net of tax or 5 cents per share. Included in the 1st quarter of 2003 was a charge of $6.9 million, that's $4.8 million net of tax or 5 cents per share. Associated with the acquisition and integration of the industrial electronics distribution business of Agilysis, Inc. We acquired that business at the end of February of 2003.

During the 1st quarter of 2003, we repurchased $70.3 million of our 8.2% notes that were going to be due in the 4th quarter of 2003. The premium paid along with the write-off of related deferred issuance cost resulted in a charge of $2.6 million, that's $1.5 million net of tax or a penny per share. Our earnings release contains a reconciliation of our numbers as reported to those we are discussing on this call. That information as well as the operating information we provide to you should be used as a complement to and not a substitute for our GAAP numbers. One other issue that will impact comparability of our results in Q2, the equity rates we did in Q1 occurred at the end of February so the shares issued were included in calculating EPS for only one month in the 1st quarter.

Obviously these shares will be in our EPS calculation for the entire 2nd quarter. This will reduce our EPS by approximately 2 cents more than the impact we felt in the 1st quarter. Now, I'll ask Brian to discuss our North American components business.

Thanks, Paul. Sales in our North American components group were up more than 9% to $971 million compared to our 4th quarter. And up 44% over last year. This sales increase was driven by the strength of our broad customer base. Sales in our core businesses, those that serve small to medium size OEM's and CEM's were up between 9% and 12%. While sales to the largest OEM and CEM customers were essentially flat.

Both the bill ratios were positive in all customer segments, including the very large OEMs and CEMs. Our customers are giving us more visibility into their future needs as they placed higher levels of backlog and schedule their orders further out. Our end customer backlog grew sequentially at 37% which is clearly faster than our sales growth of 9%. The greatest growth was in the backlog that is scheduled for delivery between 60 and 90 days out, which may suggest that our customers have more visibility into their own end- markets. The percent of our business that is booked and shipped within the quarter is continuing to come down and is now at 49% versus 56% several quarters ago.

Operating income dollars were up 12% sequentially and up over four-fold from last year's levels. This increase in operating income dollars is the 5th consecutive quarterly increase. And the highest in the North American components group has seen since the 1st quarter of 2001. Our growth and operating income once again outpaced our growth and sales. On to lead times, unit and ASP trends will start with semiconductors. Our Q1 experience with similar to last quarter with most lead times in the 8 to 12 week time frame.

There are a few select product types such as flash memory and some discreet products where lead times are out over more than 20 weeks. The longer lead times we are seeing, are usually tied to packaging and testing capacity rather than fad capacity. In addition, longer lead times are often related to supplier-specific issues. So, customers are able to look to alternate sources of supply. As a result, we haven't been able to raise prices as quickly as we would like to.

ASP's are stable, but not increasing. When we do see average prices increasing in a product category, it is usually because of product mix. For example, analog ASP's were up overall in the mid-single digits. Because within analog products our sales grew faster in the higher-priced application-specific products than they did in the lower-priced commodities. For PEMCO products, we had a very strong quarter in all 3 technologies.

Passive, electromechanical and connectors. We saw the same pattern as with semiconductors. Lead times stable with 8 to 12 weeks. Except for a few select product categories such as high-speed connectors. There were increases in ASP for some PEMCO products. These resulted from a combination of product mix and absolute price increases.

Thanks, Brian. I would like to ask Germano to comment on our European business.

Thank you, Bill. [inaudible] in the 1st quarter, were $868 million, up 21% sequentially and 20% over last year. Excluding the impact of foreign exchange, sales were up 15% sequentially and 6% over last year. Our performance in the European component business was up 24% sequentially, excluding the impact of foreign exchange. We grew sequentially in every region, with the strongest growth coming from Germany, Italy and United Kingdom.

Operating income, as a percentage of sales, in Europe, increased by 170 basis points sequentially and 90 basis points over last year, well ahead of our competitors. The growth in operating income dollars outpaced its growth. Gainfully making leverage in [inaudible] our business model. [inaudible] We're beginning to see some price stability and in a limited number of instances, pricing has started to increase. We expect this to be more prevalent in the 2nd quarter. Lead times experienced very similar [inaudible] to what Brian described, as well. With mostly conductor lead times stable, except for the items we have mentioned before. [inaudible] lead times are generally stable as well. Though ceramic and conduit capacitors are beginning to push out.

Customers have started to move longer [inaudible] in response to the expanding lead times. [inaudible] and customers continue to rely on our capabilities and strong track records to secure their production. From microeconomic perspective, estimate for 2004 GNP [inaudible] have declined from 2.5% just a few months ago to more than 1.7%. Consumer confidence levels in the 1st quarter where we can then forecast it as well. Despite this, we continue to achieve a hefty profit, well ahead of our competitors. And expect at length to see the 1st quarters, with regard to customer [inaudible] and profitability. To continue into the 2nd quarter.

Thanks, Germano. Harriet, could you discuss our Asia Pacific business?

Thank you, Bill. 1st quarter sales were $266 million. Up 8% sequentially. And 50% over last year. We were pleased with the increase because Chinese New Year eliminates the number of selling days from several Asia-Pac countries.

The gross we experienced in the 1st quarter was predominantly driven by the local indigenous customers who are experiencing increased demand for a wide range of products to support both their home and export markets. This ensures a more stable growth pattern going forward. We have been investing in people and facilities and capabilities to ensure that we have the tools, the teams and the support mechanisms in place to sell to customers of all sizes whether they be small, medium or large. We have achieved record quarters in Taiwan, Korea, China and Australia and New Zealand.

The large, international customers both OEM and CEM also experienced a strong quarter. And the trend of business moving around the world to be manufactured continues particularly into southeast Asia and China. The situation regarding pricing and delivery is different in the Asia-Pac region than it is in North America and Europe. ASPs were up in each of the semiconductor technologies. Passive prices also increased from the 4th quarter although connector pricing remained flat. We're on allocation for a number of products core to the mobility and consumer sectors. Particularly flash memory and some analog devices. We have also seen lead times stretch in other technologies such as discreet, embedded products and programmables.

We have seen a marked increase in interest in supply chain engagements and tools such as the [indiscernible] initiatives. As customers look to [indiscernible] their products in this early shortage period with increasing efficiency and distribution support. Given Asia-Pac's growth prospects and potential, with China in particular forecast to grow at a rate in excess of 8%, we will continue to invest in this very strategic region to make sure we support our broad customer base with products, services and solutions across the region and that we do so profitably.

Thank you, Harriet. Mike Long will now discuss the computer products business.

Thanks, Bill. North American computer products set another record for 1st quarter sales at $539 million. As you know, the 4th quarter is always the strongest in this business and last quarter was the strongest quarter on record for NACP. Keep in mind HP changed how it does business with the entire distribution channel. We now report revenue on a gross basis and not on a net basis as we did in the last year. Excluding this change, sales declined 11% from the 4th quarter. Which is not surprising given Q4's strength. But they were up 34% from last year.

What is very encouraging is the progress we've made in increasing sales of our other strategic products such as storage, software and services. We recorded our 11th consecutive quarter of year-over-year earnings growth. Sales in our enterprise computing group were down 13% sequentially from the seasonably strong 4th quarter, but up over 35% from last year. Once again, excluding the impact of the change in the HP business. Our Sun business, which you know, we're one of only two authorized Sun distributors in the States, was up 37% year-on-year. Distribution has been an effective way for some to service its customer base and our channel is growing.

Our IBM business was down from our record Q4 but was up over 20% over last year's 1st quarter. Which, if you remember, was also exceptionally strong. This stems from IBM's stable channel philosophy, combined with our go to market strategy. Our HP business was down sequentially and year-over-year. While we believe that we gained share in the quarter, the available market itself appears to be smaller as a result of the changes in HP's model.

However, the business we did in storage, software and services more than compensated for the decline in HP sales. Storage sales experienced a double digit decline -- I'm sorry, a single digit decline from Q4. Less than the normal seasonal decline. But were up 60% year-over-year. We were proud to gain the number one position with EMC, Hitachi and Network Appliances for the quarter and we believe that the growth trend in storage will continue in the near future.

Software sales were down about 14% from Q4. But up by 63% from last year. Service sales declined by less than 10% from Q4. But increased by 29% over last year. Remember, we said that these 3 areas, storage, software and services, were going to be the areas of focus for us going forward.

We're pleased with their excellent 1st quarter performance following a strong Q4. Our OEM sales were flat sequentially, but up 29% from last year. Growth in this business was seen most notably in the telecom and medical sectors and came primarily from new accounts. The OEM market continues to improve with customers continuing to demand end-to-end supply chain solutions which we provide a total Arrow solution. We manage the entire supply chain from design through system integration and delivery to the OEM's customer. Market conditions continue to improve with a firming scene in all vertical segments.

In conclusion, we had a very strong quarter for what is typically a seasonably weak quarter. We saw strength in both our enterprise computing and our OEM group with pipelines improving and I.T. budgets loosening a bit. We believe that our 3 target areas of growth: storage, software and services will be the real drivers for our business going forward. And we're well-positioned in the market to capitalize on the anticipated growth in those segments. Bill?

Thank you, Mike. Let me provide a few closing comments and then we'll open it up to questions. Our 1st quarter was another exceptional quarter for us with strong operating performance and continued execution of our strategies. We delivered strong business results in each of our businesses in every region around the world. Our results reflected, our sales outpaced the market and we grew profits faster than sales, which in turn reflects our relentless focus on customers and our operating efficiencies. This focus which we will continue enable us to deliver strong results.

The components business in North America is in the midst of a recovery. Asia continues to be a booming market. But despite the general macroeconomic weakness in Europe, we saw growth in the 1st quarter. And as Mike just described, our computer products business is going strong with storage software and services playing a big part in the future.

Our enhanced segmentation has enabled us to focus on our customers. Especially the small to medium sized ones. And so we're growing faster than the market itself. Our culture of continuous process improvement in the operational efficiency initiatives that we've implemented will continue to allow us to drive profits faster than sales. Our fully-aligned management team is in place. We have the right people in the right places and the right resources to drive us to be the clear number one. The market fundamentals have turned, leading us to believe that sales in the 2nd quarter will be between $2.7 and $2.825 billion with earnings-per-share excluding charges on a basic basis in the range of 47 to 52 cents per share.

We continue to build deeper relationships with customers and suppliers. And they continue to look at Arrow to power the global supply chain. As a result, we expect to post strong growth. And we'll continue to demonstrate our ability to leverage our operating structure to drive growth and operating income at a faster pace than our growth and sales. As always, we remain committed to delivering premium investments to you, our shareholder.

Thanks, Bill. Matt, let's open it up to questions now.

Thank you. The floor is now open for questions. If you would like to ask a question, press star 1 on your touch phone at this time. If at any point, your question is answered, you may remove yourself from the queue by pressing the pound key. Please pick up your handset to provide optimum sound quality. Our first question is coming from Steve Fox with Merrill Lynch.

Hi, good morning. I'm not sure I know where to begin, but let me just start with the computer business. The HP impact on the margins, is there any way to quantify that? How much it hurt in the quarter and what we should be looking at in terms of going forward the next few quarters?

Hey, Steve, good question. Yeah. I can quantify that for you. It is an estimate, but we think that the net impact is that it impacts gross profit margins by about 40 to 50 basis points on reported basis. It does impact the operating income percentage by about 20 basis points for our North American computer products business. So, that's just an estimate -- it is difficult to track what it would have been based upon business conditions last year.

That's very helpful. And then Bill, can you maybe -- I know you don't want to provide an outlook beyond the June quarter but qualitatively, can you talk about whether you're expecting normal seasonal trends in the summer, how you expect it to play out roughly?

Yeah.

Steve, we would certainly expect the normal seasonal trends in the 3rd quarter and in the 4th quarter. As we said in our release and in our comments, we believe we have some pretty good visibility out 90 days. We don't have much visibility beyond that. The strengthenings that we've seen have, in fact, been in sort of that 60 to 90 day backlog until we have some good visibility there. We have no indications that sort of the normal seasonal trends and the normal industry trends that we would see in the 3rd and 4th quarter will be different this time around.

Ok. Thanks. And then one last housekeeping question. Just on the interest expense and the tax rate and the shares for the 2nd quarter, can you give us a more specific guidance there?

We would expect our tax rate could be consistent throughout the year right now at about 34% which is what we saw in the 1st quarter. Ex the charges. Interest, while we've reduced -- we took $250 million out of our H 70s. Though we did an interest rate swap-out on those so probably you could use as an average rate about 6.25 to 6.5 if you're doing the math on interest expense. We took out $90 million on the zeroes. They bear 4% interest. So you can kind of back into the number that way. So our expectation would be that interest would be in the $26 to $27 million range and the shares outstanding would be about $114.2 million shares on a basic basis.

Thank you very much.

Thank you. Our next question comes from Matt Sheerin with Thomas Weisel Partners.

Yes. Thank you. I would just like to go down a little bit on the 1st quarter and the electronics side of things. You have 15% sequential growth. 12% sequential growth in December. And your June guidance basically gets us to around mid-single digits growth. So, my question is how much of the growth that you saw in the 1st quarter was inventory refresh or kind of -- buffer building from customers. How much of it was true end-market demand?

Mark, -- Matt, as best we can tell, very little of it was in fact inventory build. We're continuing to see relatively low or average order size. We're not seeing much in the way of cancellation, order patterns seem to be quite similar. We don't see a -- any strong indication that there is a lot of inventory filling going on in the channel right now.

Ok. And then on the gross margin, in past cycles, your gross margin has tended to increase as a cycle progressed because semiconductors as a percentage of sales was higher. Then you also tend to get premium pricing but given that Asia is now a bigger factor than it's been in the past, can you give us a sense of where you expect gross margins to go if the cycle continues to play out as it is.

That's a good question. What we're seeing right now as we mentioned is that in our core customer base, we've seen gross profit margins to be relatively flat and that's kind of tracking what we saw in past upcycles. We've talked about that in the past. We saw that it was first down as the pricing vantage remained with the customers then it flattened out for a quarter or two and then it started to go up. You know a lot of that is driven by allocation. We're not quite to the stage in the cycle where we're seeing allocations broadly around the world. So, my expectation is that we continue to see firming in gross margins as we move forward but whether that's Q2, Q3, Q4 it is tough to call at this point in time. We have no indication that this cycle would be different from any other cycle in the past.

Lastly, are you seeing increases from your semi suppliers and still unable to pass those increases along to customers?

Well it's kind of interesting. As I mentioned, gross profit was relatively flat with our core customer base and components so if we are seeing pricing increases from our suppliers, we're able to pass it over to our customers at that point in time.

Ok. Thank you.

Our next question comes from Patrick Parr with UBS.

Good morning, guys. Following up on that last question, do you sense in your components business that any of the strength in the March quarter was people prebuying in anticipation of price increases?

Pat, no, we don't. We just don't have any indication of that at this time.

So there wasn't a big --well, I guess asked another way- was the trends through the quarter, January, February, March, relatively linear or with a bit of a spike in March?

Well, relatively linear. Relatively linear.

What we do see seasonably, we've talked a bit about this Pat, is that when people come out of the December holiday period, you see a little bit of a surge in the January period, but once again as Bill mentioned, we don't see a change in order size, ordering patents, shipments, you know, type of freight. That type of thing. So there's no real indication right now that we see that people are trying to build inventory either because of perceived shortages or because of perceived price increases down the road generally speaking.

Second, you made a couple of references to investments in the Asia-Pac region. I'm kind of curious exactly what those investments are. I mean obviously, it's people, is it facilities. I would like to hear more about what's going on over there.

There are a couple of those. Obviously there's people. We are going to be adding people as needed as the business is growing and as you noticed for the 2nd straight quarter, we grew it about 50% year over year. We're having strong growth and that takes more people. We've also opened some additional sales offices in China. So, we're adding to our coverage there. We think we have about the right amount in terms of our distribution capacity. We're not adding extensively to our distribution capacity. We are selectively investing in inventory. To make sure that we have the right inventory on hand and we are also investing in tools. What we're finding is that many of the tools that supply chain tools that, in fact, we've introduced in North America and Europe are very applicable to the growing needs of our small and medium size customer base in Asia and in fact, we're investing to make those tools readily available and applicable to the Asian markets.

Ok. Final question on the cost savings that you're implementing. Kind of surprised to hear you're still able to scare costs out of the model this late in the cycle. Or this early in the upturn of the cycle. What kinds of things are still going on? Is it continued head count reduction and what sort of opportunities do you see beyond what you just announced?

Pat, let me take a shot at that. And then I'll let Paul talk in a little more detail. First of all, what we're doing now is we're really focusing on continuous process improvement. What do we do as we walk through the company, process by process, region by region. How do we make it more efficient. How do we make it better and how do we bring it up to world-class. No magic bullets in there but just something we're continuing to do. Continuing to drive and so we're going to be focusing on that whether it is an upcycle or a downcycle. That's just how we're running the business right now. Paul?

Sure. That's a good question, Pat. Really what we've talked about in this particular round of cost saving efforts, really are greater rationalization of our distribution centers. So, you may recall that we have a facility in Long Island and what we've done is we've moved forward and we've closed that facility just in the last couple of weeks. And moved the bulk of our inventory into a more efficient warehouse and distribution center in North America. So, we've also talked about doing something very similar in the U.K. where we took two facilities and moved them into the Netherlands where we had a really state-of-the-art facility. And even though we're now separating the product from the U.K. customers by the English Channel, the distribution center is very effective and very efficient. We were able to get the product there overnight because of delivery capabilities that exist. So no real disruption there. Those are the types of things we're doing in addition to the items that Bill is talking about where we have a continuous process improvement focus. We're squeezing, you know, nickels and dimes out of every place that we can.

Great, thanks.

Our next question comes from Carter Shoop with Deutsche Bank.

Hi, great, thanks. I had a quick question about the inventory, overall working capital management looks pretty solid in the quarter. I wanted to better understand the composition of your inventory. Listening to of some your suppliers, it sounds like some of the people on the high-end analog are being restrictive in regards to letting guys build inventory. While at the same time, it sounds like you guys are being pretty aggressive on the PEMCO side. Can you talk about how the inventory on the balance sheet has changed kind of quarter-over-quarter?

I would like to ask Jan Salsgiver who runs our worldwide supply marketing to comment on that one.

First of all, you're right. We're working very hard to effectively use our inventory and to have it profiled so we can drive sales increases like you've seen. PEMCO is an area for us that's in an area of focus for a long time, across every single region and so yes, we are selectively increasing our PEMCO inventories. But in fact, we're actually keeping our turns rate and our velocity on PEMCO as solid as we've seen. So, in fact, the [inaudible] are up, but our sales on PEMCO are actually growing faster than they were on semiconductors because we're clearly gaining share. When you talk about a few of the technologies where the suppliers are managing those pipelines very tightly, you're right. The analog suppliers are very expert at that. And I think it is their own experience in prior upturns of finding they found themselves out of mix. That they're using the vantage point that they have around the globe of making sure that they're building the right products. So, analog products for us are one of our high-growth segment. And we're able to continue to drive growth in sales. You heard us say we're growing even faster in differentiated products than commodity products on analog. And so we do not find that they're trying to be prudent by inventory management in restricting our sales in any way.

Ok. Great. Thanks. Just so I understand you correctly, it sounds like the overall inventory turns in PEMCO maybe declined a little bit while semis increased a little bit due to the constraints, et cetera?

No, we kept our turns in both PEMCO and semi -- up. We are investing in PEMCO because the sales are growing faster.

Ok. That makes sense. Great. And then also I want to talk about the product side of the business. I was a little bit surprised how strong that end-market was. I think it was a 13% decline in the enterprise systems business. If you look at Sun and IBM's midrange servers, those are both relatively disappointing. I was curious if you can kind of talk about how much of that is -- that performance there for you guys is gaining share in the channel. I wonder if you can quantify how you guys are doing in the channel on a quarter-over-quarter basis. Have you seen both those companies become incrementally more supportive of the channel since 4Q?

Before we turn it over to Mike, let me just make sure we get some clarity on it. We were not surprised by the drop-off in sales compared to Q4. In fact, we were at the lower end of historical range. It was only two years ago, that we saw the drop-off between Q4 and Q1 near 20%. A lot of that is driven by seasonality in the business. So we were at the lower end of the range. I'll let Mike talk about specifically what's happening around market share.

Sure, Paul, just to clarify on my side here. I was referring to IBM and Sun's reported quarters, not necessarily your results. I was saying I think your results were better than I was expecting personally. I was curious why that is given weakness at Sun and IBM according to those two companies.

Mike, maybe you could comment on that one.

Sure, I would be happy to. I'll address Sun first. As you probably know, Sun has stated their strategy statement to allow the channel to participate at a higher level with the end-user customers. And what is happening is the channel itself is coming up with new customers as well as helping to efficiently service some of Sun's current customer base. Allowing their sales reps to go out and work harder at the top-end accounts. And create more demand. That program has been under way for a couple of quarters. So, we are seeing benefit. We are seeing growth. And I think over time, Sun will be benefited by that also. But a lot of it is percentage of shift of what might have been direct business in the past now being serviced by the channel. And that's helping the growth in that product line.

Ok.

IBM is one where we do believe we have gained some share. Their programs remain stable. They have remained committed to the partnership with the channel. Their ancillary products, like software and services are growing very fast within the channel so we're happy with that. And overall, they're sticking to their strategy which, as you know, has embraced a channel for a couple of years. And we still expect them to do very, very well over the year.

Great. Thanks a lot.

Thank you. Our next question comes from the Scott Craig with Morgan Stanley.

Hi. Good morning. Just a couple of questions on the pricing. Can you describe the type of pricing you're seeing in the backlog that you're building. Are prices increasing there and then secondly over in Asia on prices, you described them as increasing. If we look outside of the parts that are being allocated, are we seeing increases there and is it more from mix or is it just from general ASP increases? Thanks.

Hi, Scott. It is Jan. Let me try to give you more flavor on the ASP's and lead times. First, it is interesting. You did clearly pick up that the lead times and ASP trends are not the same in every region. And we believe that's primarily because the end-markets that drive the demand aren't the same. In Asia, Harriet described a situation as firm on -- firm allocation on flash and some power products as well as -- those are the products that are really core to the growing consumer products markets. There, in Asia, we are seeing that the allocation in longer lead times are driving a relatively broad-based increase in ASP's in both semiconductor and PEMCO products. Absolute prices are going up. In contrast, Germano and Brian described lead times as being on the high end of normal, closer to the 12 weeks. But they don't see as many products on formal allocation. And therefore, in Europe and in North America, ASP's are firming but they're not increasing broadly. If we look a little closer at specific technologies, both ASP's and units were up sequentially in the mid to high single digits for logic, analog, embedded processors and all 3 of our PEMCO technologies: passive, connector and electromechanical. But it's interesting, for semiconductors, the ASP increases are primarily driven by product mix. As Brian described, our sales growth in high-end, higher-priced products are out-pacing our sales growth in lower ASP commodity products. That's what's driving the increase in ASP's more than absolute price increases for like products. In contrast on the PEMCO product side, we're seeing a combination of that and we're seeing some absolute ASP increases in all 3 of the major technologies. So, those trends are what we would be seeing reflected in our backlog as well.

Ok. Thanks.

Thank you. Our next question comes from Brian Alexander with Raymond James.

Thanks. I think you said earlier that you're expecting normal seasonality in the component side going forward. Could you just help us understand in the June quarter, whether normal seasonality would imply that you would see a sequential increase given that Europe's probably down in currency starting to work against you. In other words, should we expect all of the sequential growth that you guided to come out of the computer products business. Then I have a couple of follow-ups.

Brian, one of the things we've done in doing our forecast is not try to call what's going to happen with the dollar going up or down. So, we've used a pretty steady state exchange rate. What we expect to see is the some of the traditional seasonality that you would see in Europe. As you know, there is a pretty big drop-off in the number of shipping days in Europe because of religious holidays and national holidays wrapped around a few bank holidays. So, we would expect to see that on a gross basis, the potential for decline in sales and components in Europe though on a run-rate basis, a daily run-rate basis, we see an increase which we see as potentially a very good sign for the business. We would expect to see growth also in Asia-Pac, as well as growth in the run- rate basis on the North American components business. So when we look at what we're looking for here, we'll see some growth in the components business though the majority of the growth will come, at least at this point in time, from our computer products business which you are right in remembering that Q2 is traditionally a very strong quarter for us with the Sun business.

Thanks, Paul. Very helpful. You talked about your turns percentage. I think you said 49% in North America in the components business during the quarter. How does that percentage normally trend throughout a cycle and when we get to the peak of the cycle, what does that percentage look like?

Brian, what we normally see is that that will continue to go down as we get more and more scheduled orders obviously. And what we normally see at the hottest point of the cycle, it really could be as much as 1/3, 2/3 split. We're a little bit more than 50% right now. But as Brian mentioned, this is a trend we've been seeing for several quarters now and we see no indication that that would change. But we can't call it the pace of change at this point in time.

Brian, one thing also to remember as we look at the business, the businesses have different dynamics in different parts of the world. Asia is primarily a turns business just the way it is run. Europe is primarily a scheduled business and North America tends to be somewhere in-between them. So we monitor that very carefully. But they do have different dynamics on those parts of the business.

Thanks. And then one last question. On the HP changes, I understand it affects the way that you account for that business. Where now you're going to have higher revenue, lower margins. I wasn't sure if you were implying that's a business that you're de-emphasizing as a result of these changes or if these changes are strictly an accounting change.

We're not de-emphasizing the business.

Thank you.

Our next question is coming from Mark Altherr with Credit Suisse First Boston.

Good morning. Just a clarification, Paul, on your cash flow for the rest of the year. Did you say you would be cash flow for the rest of the year or the whole year would end up being cash flow positive?

We expect to be cash flow positive for the remaining 9 months and our targets are to be cash flow positive throughout the year entire .

Okay. Thanks. What was capital spending during the quarter? Is the number for the rest of the year unchanged?

Generally unchanged. We ran during the quarter about $6 million in capital spending.

Ok. Great. Thank you.

Thank you. Our next question comes from Joseph Wolf with Banc of America Securities.

This is LeeAnn Sue (ph) -- in for Joseph. I just had a question about the S & G expenses. The company has been growing revenues faster than expenses. Can you just comment on the absolute [inaudible] levels of SG&A going forward? And how long can you continue to generate revenues without increasing the SG&A as a percentage of sales?

That's a good question and one of the things we've been doing for some time now is trying to live by this continuous process improvement philosophy. In fact, for the last year. So, we're looking to always take costs out of the business. In addition, what we're very focused on is trying to change our cost structure from a fixed cost basis to a variable cost basis - so that the business goes up or down, we can obviously better manage our expenses. The other thing to keep in mind is that historically, what we've seen is that our variable costs in North American components run about 6% of incremental sales. In fact, during this cycle, we've been running at about 4%. We think we can continue to do that and level our cost structure. We've talked a bit about it in Europe also. Historically, we've seen that our variable expenses are probably 3.5 cents to 4 cents. We're probably now around 2, to 2.5 cents for every dollar of sales. Asia-Pac's tough to call because we are investing that region. So that our variable costs there are traditionally 3%. Then in our computer products business, which has traditionally been 4% for every incremental dollar sales or running around 2.5 to 3 cents. So, you know, that's an important aspect for us. The thing that I just want to make sure everybody understands is we're very much focused on customers and servicing our customers and suppliers so we're able to make these types of more limited investments around variable costs without sacrificing any type of service to customers or suppliers.

Ok, thank you.

Thank you. Our next question is coming from Wayne Klein with AIG.

Thanks. Most of my questions have already been answered. Just -- can you remind us what the Cap Ex guidance for the year is?

Sure. We talked about that our Cap Ex would be between $30 and $35 million for the year.

Great. And you bought back $92 million of the zeroes this quarter. According to my math, that brings the total to about $260 million. Is that correct?

No. For our zeroes, the total would be right now at the end of the quarter, I'd say around $515 million. What we had outstanding at the end of the year.

No, I'm sorry. What you repurchased so far.

I think we repurchased a little bit more than that. I don't have that total number handy. We can get back to you if you would like to give Eileen O'Connor a call.

Okay. But there is about $515 million remaining outstanding?

Yes.

Okay. Great. Thanks very much.

Thank you. Our next question comes from Steve Savas from Goldman Sachs.

Thanks very much. I'll just ask one question to hopefully start a new trend for the next call. I guess on a medium to long-range basis, a lot of manufacturers particularly the EMS companies, have talked about working with their customers to kind of shorten the order fulfillment time frame. Selectron's talked about it as, you know, their lean manufacturing version. Everybody is talking about it one way, shape or form which suggests increasing pressures on you folks potentially for vendor managed inventory. I was wondering kind of what you're seeing in that regard and again, this is medium to long-term. Not short term. And is that some pressure on you that could end up impacting velocity and what you would like to do there over the next 12 months or so.

Steve, we look at that as an opportunity. This is what we do. We've been investing in supply chain tools. We've been investing in the kinds of tools and capabilities so as the EMS companies begin to move in that direction, they look for partners and the partners that they find, we think have our name on it. We look at that as a very, very nice opportunity. Faster velocity in the supply chain is what we're trying to do and what we're investing in. So, that's good for us, we think.

Ok. Thanks.

Thank you. Our next question is coming from Jason Girsky with J.P. Morgan & Chase.

Hey, there. Just a quick question for Mike. I was wondering if you couldn't speak a little bit on the competitive landscape and the enterprise and storage space given that some competitors like Tech Data and Ingram Micro over the last couple of quarters have announced that they will begin servicing those markets as well.

Mike, if you want to take a shot at that. My overall sense of it is that we're not seeing a whole lot of that right now. What we're seeing is some real strength in what we're doing and we focus on what we're doing and we're growing our share and growing our business. Mike, what is your view?

Yeah, the business that they're in right now tends to be a couple of levels down. A lot of our storage and software work is done in mission critical environments versus more of the commodity-type environment that they participate in. So, there is typically a total solution provided with each system that goes out the door. I don't expect for them to infringe upon that space because of the amount of money it takes for engineering and infrastructure to support that kind of business. And there has been and continues to be a gap in the types of products they sell versus us. So, wouldn't expect much change over the course of the year there.

Ok. Great. Thank you.

Once again, if you would like to ask a question, please press star 1 on your touch tone phone at this time. There appear to be no further questions at this time.

Ok, great. Thanks, everybody, for participating in our call. If you have any questions, please feel free to get in touch with me or Paul later on today. We'll be here. Thanks, Matt.