艾睿電子 (ARW) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Arrow Electronics third quarter earnings conference call. My name is Fab and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of today's conference.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Greer Aviv. Please proceed.

Good afternoon everyone, and welcome to the Arrow Electronics third quarter conference call. I'm Greer Aviv, Manager of Arrow's Investor Relations Program, and I will be serving as moderator on today's conference call. If you would like to access today's call via website, please visit our Investor Relations website at www.arrow.com/investors, and click on the webcast icon.

With us on the call today are Mike Long, Chairman, President, and Chief Executive Officer, Paul Reilly, Executive Vice President, Finance and Operations and Chief Financial Officer; Andy Bryant, President, Global ECS; and Peter Kong, President, Global Components. By now, you all should have received a copy of our earnings release. If not, you can access our release on the Investor Relations section of our website.

Before we get started, I would like to review Arrow's Safe Harbor Statement. Some of the comments we make on today's call may include forward-looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. Detailed information about these risks is included in Arrow's SEC filings.

We will begin with several minutes of prepared remarks, which will then be followed by a question and answer session. As a reminder to members of the Press, you are in a listen-only mode on this call, but please feel free to contact us after today's call with any questions you may have.

As reflected in our earnings release, there are a number of items that impact the comparability of our results with those in the trailing quarter and the third quarter of last year. Any discussion of our results during this call will exclude these items to give you a better sense of our operating results.

As always, the operating information we provide to you should be used as a complement to GAAP numbers. For a complete reconciliation between our GAAP and non-GAAP results, please refer to our Earnings Release, or the Earnings Reconciliation slide at the end of the webcast presentation. At this time, I would like to introduce our Chairman, President, and CEO, Mike Long.

Thank you, Greer, and thanks to all of you for taking the time to join us today. The positive momentum we've seen in our business during the first half of the year has continued, with another quarter of terrific performance. Our consolidated revenue was at the high end of our expectations, driven by strong performance from both Global Components and Global ECS. Earnings per share came in well ahead of our expectations, and almost tripled year-over-year to a record third quarter level, marking the eighth consecutive quarter of exceeding Street estimates for Arrow.

Our strategy to grow sales and gain market share is paying off, and again demonstrating the significant earning power inherent in our business. Equally important to earnings growth, being well ahead of the market, our returns are advancing strongly and continue to reflect our accomplishments. With return on working capital and return on invested capital almost two times greater than the year-ago level, I'm pleased to say that we've made meaningful progress against our strategic initiative, starting with profitable market share growth.

The strategic shift to an organization of sales excellence is reaping it's just rewards. We have been investing in areas of our industry, with attractive growth rates, and in adjacent industries to expand our addressable market. We have done this organically and through recent M&A activity, which I will discuss in more detail in a few minutes.

Second, we've seen a strong rebound in growth margin, which has increased 160 basis points from the third quarter of 2009. Our teams on both sides of the business have worked hard to win back margin, and our efforts are bearing fruit. Additionally, our decision to increase our portfolio of value-added services has been accretive to gross margin, and we would expect this to continue as we achieve greater scale with our services business. In Global Components and Global ECS, this is an exciting opportunity to increase our presence in the fast-growing high margin sector and become a leading player in what is currently a very fragmented marketplace.

Third, when you look at operational excellence, our cost structure is about as lean as it ever has been, and have worked diligently to simplify the business and increase efficiency across the entire organization. In fact, if you look at our operating expense to sales ratio, it has declined 100 basis points from when we entered the downturn in Q3 2008. Our strong balance sheet and liquidity have enabled us to invest in the business, including increasing our inventory in strategic areas, such as the new, low Risk-Free for service engagements, organic growth initiatives in PEMCO, and acquisition-related increases.

Our financial strength has also allowed us to continue to be active in pursuing acquisitions to complement our existing businesses, increase our scale in fast growing geographies, and expand our presence in attractive growth markets. During the quarter, we completed the acquisitions of Shared Technology, Transom Technology Corporation, and Eshel Technology Group, and announced the signing of agreements to acquire New Horizons, and the RF Wireless and Power Division of Richardson Electronics.

Shared represents an exciting opportunity, as we add a leading player in the Unified Communication, Telephony, and Managed Services Industry to our product portfolio. They bring deep customer and supplier relationships, as well as extensive industry and technical expertise.

Transom is a leading service provider of online component design and engineering solutions for technology manufacturers, and Eshel is a leading solid state lighting distributor and value-added service provider. Transom and Eshel, while on a smaller scale, are important in building out our value-added services portfolio and addressing the needs of our customers.

When completed, New Horizons will allow us to provide a broader portfolio of offerings to customers, as well as an expanded global customer base to suppliers, while expanding our reach into the Asia-Pacific marketplace. Once close, Richardson RFPD will bring Arrow a global presence in the Wireless and Power Conversion markets, with specialized expertise in RF engineering and a highly talented team of sales professionals. All of these acquisitions will accelerate our strategy to expand our portfolio and build strategic capabilities, such as value-added services to help us meet the evolving needs of our customers and suppliers. Cumulatively, these acquisitions are expected to be accretive to earnings by $0.25 to $0.42 per share on an annual basis, in addition to the $0.15, $0.22 of annual accretion from the other recently closed acquisitions of Petsche, Converge, [Vercal], and Sphinx.

Let me now turn to our business results. Global Component's sales of $3.4 billion were ahead of normal seasonality, as we saw a continuation of extremely strong growth in our Americas, European, and core Asia-Pacific regions, offset in part by a slowdown in our Low-End Handset business in Asia-Pac, which Paul will discuss more during his financial review.

Moving on to current trends, overall lead times are stabilizing with, semiconductor products returning to more normal levels. In PEMCO, lead times remain well above normal levels. Book to bill in Components was 1.1 on a global basis. This is down from the second quarter and in line with the year-ago period.

Cancellation rates are in line with normal historical patterns in North America and in Europe, while rates in Asia-Pac have increased modestly. Our quarterly survey of 300 customers in North America show the outlook for purchase requirements heading into the fourth quarter remain positive. As always, we'll continue to monitor the behavior of our customers and suppliers closely. With the strength of our line card, a broad technology portfolio, and a diverse customer base, we are very well positioned to continue to generate strong growth and outperform the market.

Enterprise Computing Solutions segment sales of $1.2 billion increased 8% from the same quarter a year ago. Sequentially, sales decreased 10% and were in line with normal seasonality and our expectation. Driven by a strong federal buying season in the US, storage, software, and industry standard servers grew at very strong double-digit rates on a year-over-year basis. Sequentially, we saw strong double-digit growth in industry standard servers, while the remaining products were down in line with normal seasonality.

Overall IT spending has rebounded, and it is estimated to be in the low single digits for the remainder of 2010. However, there are pockets of the IT market that are going to grow much faster than the overall IT market, and the markets we serve are expected to grow in the high single digits in 2010.

Our strategic goal is to be in those businesses that are growing at a faster rate, through organic growth with the addition and expansion of supplier relationships. As an example, we recently increased our franchise location with Oracle Sun in our European business, which speaks to the importance of the value-added distribution model in the region, as well as our role in providing best-in-class service to our supplier partners. And finally, our recent acquisition of Shared Technologies gives us the ability to bring new products to the Data Center.

In summary, this was another quarter of impressive growth and profitability for the Arrow team. We are making progress on our strategic evolutions with sales excellence organizations, with a commitment to profitable market share growth, gross profit optimization, and operational excellence. We have a number of exciting new opportunities ahead of us as we enter the markets and geographies, and expand our scale and scope as a leading global provider of products, services and solutions to our supply chain partners. Paul will now give you a more detailed review of the third quarter financials.

Thanks, Mike. Third quarter sales of $4.7 billion were at the high end of our expectations and represent an increase of 27% year-over-year, an increase of 1% on a sequential basis. We continued to see normal seasonality on a consolidated basis, and our expectation is that will continue the fourth quarter of 2010.

Operating income growth once again significantly outpaced sales growth, increasing more than five times faster than the growth in sales on a year-over-year basis. Our consolidated gross profit margin was 13.1%, an increase of 160 basis points year-over-year, driven by solid increases in almost all of our businesses and regions. On a sequential basis, gross margin increased 30 basis points.

Operating expenses, as a percentage of sales, decreased 40 basis points year-over-year, and increased 30 basis points sequentially, to 8.8%. On an absolute dollar basis, operating expenses increased 21% year-over-year, and 4% sequentially, primarily driven by the recent acquisitions. If you exclude acquisitions, operating expenses were up only 13% year-over-year, well below our sales growth, [or] flat sequentially.

Operating income was $198.9 million, an increase of 141% year-over-year, an increase of 2% sequentially. The results of this quarter again demonstrate our ability to deliver industry leading results, drive gross profit margin improvements, and a significant operating leverage we have in our model, with operating income growing more than five times faster than sales on a year over yeara basis. Operating income, as a percentage of sales, increased 200 basis points year-over-year. That's almost double the year-ago level, and increased 19 basis points sequentially.

Our effective tax rate for the quarter was 29.5%. And for modeling purposes, you should assume that our tax rate for the next few quarters will be between 30% and 32%.

Net income was $128 million, up 185% compared with last year, and up 6% sequentially. Earnings per share were $1.09 and $1.08, on a basic and diluted basis respectively. This is a record level of third quarter earnings per share for Arrow.

During the quarter, we executed on $125 million of our $200 million repurchase authorization. We now have $75 million that could be spent on future buybacks. We should also note that we retired the $70 million of our 9.15% debt due October 1st.

Our return on invested capital increased almost two times last year's level, to 13.7%, again demonstrating our commitment to generating superior returns. We used $27 million in cash from operations during the quarter, as we continued to invest in the business to support growth.

Regarding inventory, we continue to believe it is a strategic, low risk, high reward investment. Given the demand we are seeing in the market, as well as an important component of our ability to gain share, it supports our strategic initiatives to grow in accelerated verticals and to meet our customer needs in the current environment, above normal lead times. We continue to effectively manage all levels of our working capital.

Working capital through sales remains below our long-term target range. As Mike mentioned earlier, return on working capital almost doubled year-over-year and is approximately 31% on a consolidated basis. This remains a critical aspect of our strategy, as it creates flexibility for us as we go forward.

Our balance sheet and capital structure remains strong with conservative debt levels, with net debt of $1.1 billion, and a net debt to EBITDA ratio of approximately one. This all gives us strength to participate to a greater extent in the marketplace. Our financial position remains extremely strong, and we have the flexibility to take advantage of opportunities in the marketplace.

We turn to our business units, Global Component sales of $3.4 billion increased 35% year-over-year, and 6% sequentially. That's an increase of 38% year-over-year, and 5% sequentially, excluding the impact of foreign exchange. Gross margin increased 200 basis points year-over-year and was flat sequentially. Importantly, we were able to keep gross margins flat on a sequential basis, and [a part of that] typically shows an 80 to 90 basis point seasonal decline.

The ratio of operating expense to sales hit a record low level this quarter, as we remained focused on operational excellence and managing the business at best-in-class levels. Our operating profit grew four times faster than sales on a year-over-year basis, once again demonstrating the operating leverage we have. And our operating margin increased 250 basis points year-over-year. That's almost 2x the year-ago levels, and 10 basis points sequentially. It is well within our long-term target range.

Return on working capital increased more than 50% compared to last year. Sales of $1.4 billion in the Americas increased 51% year-over-year and 8% sequentially, substantially ahead of normal seasonality. We saw broad-based strength in both the Semi and PEMCO business, which increased 42% and 37% year-over-year respectively. Our vertical markets continued to exhibit very strong year-over-year growth, with Lighting and Alternative Energy increasing in excess of 40%, and Medical and Aerospace and Defense up almost 20%.

Our operating income doubled year-over-year. That's two times faster than sales advanced year-over-year, and 13% sequentially. Operating margins in the Americas increased more than 200 basis points year-over-year, and 40 basis points sequentially. And looking ahead to the fourth quarter, we would expect to see sales to be in line with normal seasonality in the Americas.

Growth in Europe remains quite robust, with sales of $1.1 billion increasing 52% year-over-year and 9% sequentially, well ahead of normal seasonality. Excluding the impact of foreign exchange, sales were up 64% year-over-year and 6% quarter over quarter. Performance in Central Europe was particularly strong, driven by increased demand and a strengthening in Exports. Our PEMCO business in Europe increased in excess of 50% year-over-year, marking the fourth consecutive quarter of growth.

We also saw strong double-digit growth in a number of vertical markets, including Lighting, Transportation, and Medical. And we continue to see the benefits our efficiency initiatives in the region, as operating expenses to sales declined 340 basis points year-over-year. The recovery in operating income has been extraordinary in Europe, with profitability more than five times greater than year-ago levels, and while operating income grew more than eight times faster than sales, sequentially, operating profit increased 9%. Looking forward, we would expect to see sales growth to be in line with normal seasonality in the fourth quarter.

In Asia-Pacific, growth in our core business was still strong, increasing more than 40% year-over-year and 4% sequentially, with solid gains in greater China. We also saw strong performance in a number of vertical markets, including Lighting, Industrial, and Automotive, all up more than 60% year-over-year. Overall, sales of $1 billion increased 8% year-over-year, declined 2% sequentially, primarily due to a slowdown in the low-end Handset market.

Operating profit was up 82% year-over-year, and increased more than 10 times faster than sales. On a sequential basis, operating income declined 2%. Operating income margin increased 110 basis points year-over-year, and was flat sequentially. Looking ahead to the fourth quarter, we would expect sales growth to be above normal seasonality.

Global Enterprise Computing Solutions sales increased by 8% year-over-year, and decreased 10% sequentially to $1.2 billion in the third quarter, in line with our expectations and normal seasonality. Gross margin increased 20 basis points year-over-year, and was up 90 basis points sequentially, driven by a change in mix. Operating income grew 10% year-over-year, and declined 18% from the second quarter. Looking ahead to the fourth quarter, we would expect sales to be in line with normal seasonality.

Geographically, sales of $913 million in North America are in line with normal seasonality, declining 8% from the second quarter. The key drivers were strong seasonal sales for the Federal sector and very good performance again in our Storage business. The Service business is showing steady growth in North America, due both to the acquisition of Shared Technologies and continued growth in our traditional service products.

On a year-over-year basis, sales increased 7%. A combination of top line growth and improved gross profit resulted in an increase in operating income of 9% year-over-year.

In ECS in Europe, sales of $307 million increased 12% year-over-year and declined 15% sequentially. Excluding the impact of foreign exchange, sales increased 24% year-over-year, and declined 17% sequentially.

We continue to see strong performance in the UK, as well as the Nordic region. We saw substantial year-over-year growth in Services due to our continued focus on our Internal Services Model, while our Server business also experienced healthy growth. On a year-over-year basis, operating profit increased 46%. That's almost four times faster than sales growth, demonstrating the leverage we are seeing in this business, as we increase our scale and scope.

Thanks, Paul. In summary, the third quarter once again demonstrated our ability to deliver exceptional earnings per share growth, industry leading margins, and very strong returns on capital, while still investing in the business for future growth. Our Components business experienced its fifth consecutive quarter of better than normal seasonality, while both gross and operating margins have seen sequential improvement over the past year. In ECS, we saw very strong growth in some of our newer initiatives, including Security and Networking. The team remains focused on exceptional working capital management. Our global strategy for both business units capitalizes on the strength of our financial base and our proven ability to drive execution with best in class operational efficiency.

We have greatly simplified our business and streamlined our processes and organizations. All of which allow us to generate premium returns and earnings for all of our shareholders. We have a very effective go-to-market model, where we provide cost effective and efficient solutions to support our customers and suppliers. As we increase and also strengthen our value-added services portfolio, and combine that with our extensive expertise in core components in the ECS business, we will be providing our suppliers and customers with a differentiated value proposition and specialized solutions that will set us apart from the competition.

Looking ahead to the fourth quarter, we believe total sales will be between $5 billion and $5.4 billion, with Global Components sales between $3.325 billion and $3.525 billion, and Global Enterprise Computing Solutions sales between $1.675 billion, and $1.875 billion. As a result of this outlook, we expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.22 to $1.32 per share.

Thank you, Mike. Please open up the call to questions at this time.

(Operator Instructions) Our first question will come from the line of Craig Hettenbach from Goldman Sachs.

Yes, thank you. Mike, if I can follow up on the comment of, for the ECS business, Arrow expected to grow high single digits first, industry growth of mid single digits. Anything you're doing within the channel, or any customer relationships or technology that is helping you to drive that above-average growth?

Sure. Where we're seeing the above industry growth and where we believe it will continue is in the Storage area in, our Software area, and we do expect our services to continue to grow. Each of those markets year-over-year have been in the high single-digit growth rates and we don't expect those to slow down.

Okay, and If I could have a follow-up poll, just on the M&A, on A.E. Pesche, just how integration is going versus original plan.

Yes, so what we're seeing is good traction on the integration. Remember now that we were not going to really integrate them heavily into our shared service centers. We were going to be selective there to learn from their business. Where we really wanted to drive the integration was around sales and marketing, and moreso on an international basis.

Our strategy was to really say they wanted to go international, it was a market they hadn't penetrated both in Asia and Europe. We had a platform there for that, and in fact, it's going very well right now. We do need to accelerate that obviously, because you can never have enough of that type of thing. And in fact, we have a business review tomorrow with the team from A.E. Pesche, so it will be exactly around that, how can we help accelerate their growth. But I would say it's going very well right now on the sales side.

Okay, and maybe just to follow up on that, just the share gains that you're seeing in components, perhaps some in the connector or PEMCO side, any other area that you had highlighted for opportunity in terms of where you're driving above average growth in components?

Sure, I'll take that. We've seen a increase in our Lighting business, and as you know, we've been focusing on that technology for quite sometime. The growth rates there continue to exceed our expectation and we continue to put more and more investment into solid state lighting and believe that will be a large growth engine for us in the future.

Great. Thanks a lot, guys.

Your next question will come from the line of Brian Alexander from Raymond James.

Thanks. I'll ask the obligatory inventory question. Second straight quarter where growth outpaced sales sequentially by meaningful amount, so just talk a little bit more about, what you built, where, and I'm just wondering at what level of inventory days do you think we should see more balance between growth in sales and growth in inventory? And to be fair, your inventory days are 45, which is similar to levels of two years ago, despite a higher components mix. So it's not alarming to me, but I just want a better understanding of what your intentions are going forward.

Sure, Brian. We really view our increases in inventory at this point as strategic investments, and we've really been taking advantage of some opportunities to add to our inventory in areas of - - one is our Fee for Service engagements, which are low risk. There's really no risk to Arrow [and those] as we hold inventory for others and ship those on a fee basis.

The other ones would be, our organize growth initiatives in PEMCO. We've had high growth rates, in our Passive Electro-Mechanical and Connector business this year, and what I would remind you of, those lead times are stretched out significantly compared to Semiconductor, so we've seen a little bit of change in mix there. And then we've had some acquisition-related increases.

And I would share the comment you made, that it's not an issue. If you take a look at our fourth quarter guidance, it should indicate to you that we are going to need that inventory going into the fourth quarter. Paul, would you like to add anything?

Yes, thanks Mike, and Brian, you're right on about your comment about 45 inventory days. Two of the data points for everyone to consider, if you go back to the third quarter of 2008, our inventory is up about 22%, yet the midpoint of our fourth quarter guidance calls for sales to be 40 plus percent ahead of the fourth quarter of 2008. So we are driving sales growth well ahead of what we are seeing in inventory growth.

The other data point is that quite a bit of the inventory growth was in our European business. As we all know, the European marketplace came out of the recession two to three quarters later than North America, so there's an expectation that even if there was to be a slowdown or pause in North America, expectation would be that it would go still strong for a couple extra quarters in Europe. And that's where we have the inventory profiled right now, to be able to meet that demand.

Just as a follow-up Paul, if I think about the commentary around gross margins in the Components business, I think you said flat sequentially, which is better than the historical Q3 pattern, I think you said down 90 basis points. But this quarter you had relative strength in the higher margin parts of the business; i.e., North America and Europe, and you had weakness in Ultra Source, which is the lowest margin segment of your business. So if we adjust for that, wouldn't that imply you actually saw some sequential gross margin erosion within the geographies, and just going forward, what are your thoughts around gross margin as lead times normalize? Thanks.

Right. So if I tear it down by region, and you're right, we had less Ultra Source, but don't forget, we also see some change in Europe. When we look at it, our North American core business, and what I mean by that, is really the small to medium-sized customer, is virtually flat with the second quarter, so no real change there. When you look at the individual components that we have in Europe, we saw some growth also in some lower margin business.

So when I look at it, Brian, and I look at it sequentially, generally we're tracking to where we were in the second quarter. And I would expect we would continue to see that going up. As we've talked about, we're really focused in getting back to 2008 levels of gross profit, we're above that in North America, and we're above that even adjusted for mix in Asia core business, as we invest in higher margin verticals or higher margin product sets like PEMCO. So, we're there and we're making good progress there. We still are lagging a bit behind in Europe, but conversely, we also think that that ended the recovery a little bit later, so we're probably behind that also.

Okay, thank you very much.

Thank you.

Your next question will come from the line of Matt Sheerin from Stifel Nicolaus.

Yes, thank you. Just a question regarding your guidance for the various Component sections, segments in the fourth quarter, looking at the normal seasonality in North America and Europe. So is that to imply, Mike and Paul, that you're going to be down a little bit seasonally? And if so, I guess I would mark the first quarter in probably six or more quarters that you're going to see back to seasonal patterns and is that because of lead times, what are you seeing there?

And then also on Asia, why would it be better than seasonal? A lot of Semi and Components suppliers, it looks like they are guiding to seasonal, if not less than seasonal trends for Asia in the fourth quarter.

Sure, Matt. I'll take it. And I think I'll try to break it down for you. As you know, sales in North America were again substantially ahead of normal seasonality, and we had strength in both the Semiconductor business and in the PEMCO business, and they, by the way, increased 42% and 37% year-over-year respectively. The vertical markets continue to exhibit strong year-over-year growth, and as I had mentioned before, Lighting increased, Alternative Energy, and the Medical and Aerospace businesses were way up.

We do expect sales in the Americas to be in line with normal seasonality in the fourth quarter. And as you go to Europe, it remains quite robust for us, with sales, again, well ahead of normal seasonality. Performance in Central Europe, primarily Germany, was particularly strong, and there was an increased demand in strengthening in exports. Our PEMCO business there also increased in excess of 50% year-over-year, and that was the fourth consecutive quarter of growth for that European business.

I think if you look at the strong double-digit growth in a number of the verticals, we're expecting to see growth to be in line in Europe also with normal seasonality in the fourth quarter. And in Asia-Pac, our core business is still strong. It increased almost 40 years year-over-year, and we believe in the fourth quarter we will have a pickup in the Low-End Handset that will bring us in line in Asia-Pac also, actually maybe a little better than seasonal in Asia-Pac, with the pickup on the Low-End Handsets there. So our expectation and our forecast going forward, we think matches or is a little ahead of the market.

Well, yes. I mean, I guess the point is that you're typically down in the low to mid single-digits sequentially, and you're basically guiding flat, right?

Right, exactly.

Okay. And then on the Computing segment, looks like your guidance was pretty robust there, but I know that there's an acquisition or two that added some incremental revenue. Could you tell us what that is and sort of what the revenue growth range would be without that, without those acquisitions?

Paul?

Yes Matt, so in looking to the fourth quarter, I would say round numbers about $50 million of the sequential growth will be driven by the acquisition of Shared Technologies. We've had them in for three weeks in the third quarter, and we'll have them now obviously for the full quarter, so round numbers of that growth, about $50 million, that we're calling for for the change in revenues contributed by share.

Okay, and just lastly, just in terms of the acquisitions, I know you plan to close on New Horizons and Richards sometime in the fourth quarter. I also know that it's not in your guidance, but when you do close those acquisitions, might you update us on guidance with those companies in place?

Sure. We'll be happy to give an update as we close those acquisitions, when we get further along with them. There's nothing eminent, and again, our guidance does not include any of those acquisitions. So as soon as we get those, we'll get you the information.

Got it. Okay. Thanks a lot.

Your next question will come from the line of Amitabh Passi from UBS.

Hi, thank you. Mike, last quarter you gave us quite a bit of color just on the health of the supply chain, lead times across various categories. I was hoping you could update us on that, and just wondering from your perspective, any concerns as lead times come in potentially [if] cancellation rates trend up, that we see some sort of a revenue pullback and possibly some below normal seasonal trends as we go into 2011?

Right now, we're seeing lead times on the Semiconductor side, if you will, returning to what we say more normal levels. There are still products that have extended lead times, and customers are starting to give a little longer visibility into their needs. And while the lead times have come in a little bit, the supply chain is becoming a little more fluid. But there's still push and pull in the inventory levels and, as you know, we purchased requirements out and we're seeing some adjustments that happen on a daily basis.

On the PEMCO side, we are not seeing lead times coming in at all yet. The manufacturing process for those products, still causing lead times to be extended, and we still see customer orders coming in. You couple that with the forecast that we get from around 300 customers in North America, it's still showing the purchase requirement outlook as remaining positive, and, if you take a look at that and the average lead times were 10 to 20 weeks, 15 weeks on average, and, we're coming into somewhere just below that 15 weeks, I think we still have some legs in this business before we see any kind of tremendous pullback, or any kind of pullback at all. Does that help you?

Yes. And then just any color on what proportion of your backlog extends beyond 90 days?

Amitabh, we'll get back to you on that one. I just don't have the data with me.

Okay, and maybe I can ask you one last one. This is just more of a clarification. Your cash use towards acquisitions is about $288 million in the quarter. Was that primarily for Shared,Transom and Eshel, or was there something else here? I'm just wondering if New Horizon or Richardson in any way were included.

No payments on New Horizons or on the RF Division of Richardson in third quarter. So you have it correct.

Okay, thanks.

Your next question will come from the line of Jim Suva from Citi.

Yes, thank you. This is actually Unidentified Participant on behalf of Jim Suva. I know you've provided guidance for cumulative EPS accretion from M&A in the range of $0.25 to $0.42. Can you provide an update on how these are progressing, are we closer to one end or the other?

Samuel, can you just speak up a little bit? I'm sorry. We're having trouble hearing you.

Sorry. I apologize. I know you've provided guidance for cumulative EPS accretion from M&A in the range of $0.25 to $0.42. Can you provided an update on how these are progressing? Are we closer to one end or the other? Is there upside from here?

Well, I think there's two pieces, right? There's this one piece that's still to come, and that's principally tied around New Horizons, the RF Division of Richardson, and Shared. Shared as we say, we closed in the quarter. We had three weeks. We have no reason to believe it won't be delivering what we thought it would in the fourth quarter.

As you look at the other acquisitions, so that would be A.E. Pesche, Converge, we are definitely tracking to what our expectations were on that. So I would say the midpoint is probably the right place to be at this point in time for those that we think are going to happen in the future, and we're probably midpoint to a little bit ahead of that on the other ones.

Very helpful, thank you.

Your next question will come from the line of William Stein from Credit Suisse.

Thanks. I'm hoping you can tell us a little bit about the trend in the book to bill ratio throughout the quarter. Can we assume it improved in September, going to a maybe seasonally weak August, or was it different from that?

Bear with me for a moment, Will. So, yes, when we look at it, in our Global Components business, what we saw was for sure normal seasonality in the book to bill trend for all of our businesses in Components. Our book to bill is lower than where it was at this point in the second quarter, and flat with where it was in the third quarter of 2009.

Okay, great. And someone asked about inventory levels already. I would acknowledge, along with him, that these don't look like troubling levels relative to historical levels. But can you talk to us about where you expect these to go in the future? They had dipped as low as the low 30s for a couple of quarters there. Should we expect that to go back down there, or is that not something that you view as good or sustainable for your business?

Will, on that point, you're right, and I think those very low inventory days are driven by inflection points and recoveries. So I think that's a little bit out of the norm, and that's why we try to go back to what we thought we saw as the last year of normalcy, first of a of 2008. So obviously, as you make investments in different product sets, you may see a change.

I'll use as an example the PEMCO inventory that we're investing in. It carries a higher gross profit margin, but the fact of the matter is, it has slower inventory turns, so then our return on working capital basis is very similar to what you see in Semi. So, if there's a mix change around that, that could have an impact. Ultra Source, as an example, if that was to pick up meaningfully, that would also have a positive impact on inventory days, because it's a [low active requirement] business.

So lot of it depends on mix. I would say probably what we should be shooting for is first half of 2008 is more of the norm as we go forward. And as you know, we generated a significant amount of cash in the first half of 2008, with just the way we managed inventory then, in the last year of normalcy.

Great, I appreciate that. And then, just one other thing if I can tack onto that last comment about cash. Can you comment on priorities here? You've done a couple deals recently. You have a couple, modest sized, maybe bigger sized ones that are in the queue, and you're also doing a buyback. What's the priority heading into next year?

Well, we'll continue to organically invest in our business in high growth areas. We'll continue to invest in our value-added service arrangements. We will continue to look and participate in M&A where it makes sense for us, and if we accomplish all of those, we'll again put our cash to good use.

Okay, thank you.

Your next question will come from the line of Steven Fox from CLSA.

Hi. Good afternoon. Just two questions. First of all, on the strength in the PEMCO business on a year-over-year basis, obviously that includes some acquisitions in the case of Europe, it includes some currencies, and you're saying you're gaining share. Can you sort of talk to us about organic growth so we can understand roughly how much share you think you're gaining in PEMCO?

And then secondly, Paul, if you just look at the total business, okay, you backed out currencies. Can we back out acquisitions then talk about growth rates and the outlook ex-acquisitions?

Let me take the second question first, which is if you were to exclude the impact of acquisitions in the third quarter, so year-over-year we were up nearly 20%, so that's the impact of acquisitions. Going into the fourth quarter, as we mentioned, Shared is going to contribute about $50 million on a sequential basis. There's no other meaningful acquisitions that we had for part of Q2. For part of Q3, that would impact Q4.

Okay. So I'm sorry, 20% year-over-year ex-acquisitions and ex-currencies, or just ex-acquisitions?

I did it just as ex-acquisitions before we came in here, Steve, because I figured you would ask me that question, but I didn't factor into the foreign exchange, so I'll have to come back to you on that.

Okay, I think I can back into it. Thank you. And then just on the PEMCO.

On PEMCO, as you know, we did acquire Pesche. That had some impact. However, we've had high growth rates in PEMCO all year long organically in the core business regions.

So we have seen high growth rates in Europe. We've seen high growth rates in Asia-Pac, and as well as the Pesche business in North America. We see that business continue to grow as we really started to tailor the value-add services we provide in PEMCO and back those services up with the inventory that allows us to service orders, and not only quicker for the customer, but have a better selection for them when they do call, and that's allowed us to capture a bigger portion of the share of market.

Okay, thank you very much.

Your next question will come from the line of Brendan Furlong from Miller Tabak.

Thank you. Good afternoon, everybody. Just a quick question. I know there has been kind of people talking about these aspects earlier on, but a lot of the Semi guys are noting that the industrial end markets are rolling over, which tends to be where you guys play most, but you're kind of saying you're not seeing it. Do you think it's just going to be a one quarter lag potentially, or what's the change there between what the Semi guys are saying and what you're seeing?

Typically as you know, the Semiconductor people direct, their direct business tends to be with fewer companies, more segment oriented, very large. So when they will see a trend, they will see it in the segments that they are strong in on a direct basis.

When you look at distribution, we're dealing with some 120,000 customers all over the world in many different industries, and we've gone through several of those verticals before, so a more expansive view of the vertical. And almost every time historically you've seen the Semiconductor suppliers take a pause first prior to distribution, and many times you will see them come out of that pause faster than distribution.

So typically it's timing. But the timing is totally dependent on the economy and how much the overall market changes, versus just one segment within that market. And that's typically why we're behind them as they take their pause, and we're also generally just behind them as they come out.

Understood, okay. The second question I have, when you look at the New Horizons and Richardson acquisitions, Richardson I guess in particular, pretty lack luster top line growth over the last four years. Is the strategic rationale for buying both of those companies just to leverage your scale and your current historical highs and how it effects the sales ratios?

No. I wouldn't, I wouldn't say that at all. I would say, remember, we're purchasing a division out of the Richardson Corporation, and what we're purchasing is primarily the RF and the Power business. The RF business has had over the last several years itself higher than normal growth rates for that business, and even during the decline, had less of a decline in RF products than the overall market did.

So we view that as a growth business for us, and we think it will continue to grow. Plus, we get very high level engineering expertise, not only in RF, but also in large power products. So that for us is a segment that we haven't participated fully in and Richardson helps us round that out.

If you take a look at New Horizons, there's a high proportion of those sales that do go into Asia-Pac, and they have done a very good job in the Asia-Pac market with growing and developing products and helping suppliers get to market, and that's a benefit for our Asia-Pac business, as well as having what I would say a high level of engineering expertise per dollar sale when you compare to many other distributors. And given the high level of design activity that's going on in the US, they will help us get to more designs and help us design in more product, which you know is higher margin for us overall. So we're excited about both of those opportunities.

Okay, excellent. Thank you very much.

Your next question will come from the line of Sherri Scribner from Deutsche Bank.

Hi, thank you. I was just trying to get a sense, the inventory was up about 12% sequentially, how much of that was related to the acquisitions?

Sherri, it's very small because the companies we closed during the third quarter are not heavily inventoried. So probably round numbers, about $20 million.

Okay. And then, Paul, you had mentioned, or maybe Mike had mentioned that you would talk about more detail on the Handset business. You noticed some weakness in Handsets, you think that's going to recover. Can you give us more detail on what you were seeing there? Was that one customer, was that one segment? Maybe a little more detail.

Sure, so on the Low-End Handset, really that's our Ultra Source business in Asia, which is predominantly focused around Media Tech, and what we've seen there is a couple quarters of disruption in their business, in which they are able to service their customer. So not an issue from us, but more of an issue around getting product, that type of thing. So that's been going on now for probably two to three quarters. Our expectation is we'll see that recover in the fourth quarter, as they begin now to work through to the factories, [and fabs] up to speed, as they get any potential quality problems they have behind them. We think you'll see reengagement from their customer base, and that will be a way for our Asia-Pac business in total, to outperform normal seasonality in the fourth quarter and grow over Q3, normally when it actually shrinks.

Okay. So it sounds like that's not an overall statement about Low-End Handsets. It's more a specific customer where they are seeing some disruptions.

Yes, absolutely, Sherry.

Okay, great. Thank you.

Your next question will come from the line of Shawn Harrison from Longbow Research.

Hi. Good afternoon. Just wanted to get back to the earlier question on the difference between direct Semi sales and going through distribution. Was the point that you have a broader base of business and therefore the weakness they are seeing on a direct basis shouldn't be correlated to impending weakness for Arrow, or was it that that weakness that they are seeing eventually could turn into weakness for Arrow? I wasn't exactly sure of the takeaway.

For me, it's more of the first. Right now, our diverse customer base, we're still seeing as we told you going into this quarter, a 1.1 book to bill, so we are still seeing strength in the industry. Our backlogs remain to be strong and we put out good guidance, so we are not seeing the decline that you may be seeing from some of the direct companies at this point.

Okay. That was very helpful. And two brief follow-ups. Maybe if you could talk about the declining lead times you're seeing in the Semi environment, if that's resulting in pricing reverting a little bit more negative, and kind of the potential drag on top line growth from that. And the second question would just be as we move into 2011, just any incremental increases in SG&A that would be for salaries, et cetera, just thinking of trying to model that a little bit early.

I'll try to take the first one and I'll give Paul the second piece of this. We take a look at customers starting to place longer term orders. As you know, that's a benefit for us, because we can go out then and negotiate higher quantities with the manufacturers and maintain the margin. So a stable environment is good.

When we see the most pressure on gross margin is in a shrinking environment when you are trying to also get rid of your inventory at a high rate, if you will, and throw off cash. That typically means you have every product a customer will need; when you're in the supply chain mode, you have to plan to have the right inventory and they have to forecast o you what they think their demand will be, and then you get that balance going. That's always good.

So I don't see a problem at this point in time with lead times becoming more standardized, because at that point in time, we can start getting some balance back in the supply chain, and where there's balance, there is obviously complexity with many parts that come from the customers and things start to stabilized. So again, unless you have a big pullback in the business, we don't expect the margin to decline.

And on the SG&A side, Shawn, let's talk about people costs, because that's the biggest part of our business, and if you go around the globe, we gave raises on January 1, 2010 to our team in Asia-Pac. That's been in our results for nine months. For the other two regions, North America and Europe, we gave raises as of July 1, 2010, so our third quarter results reflect the impact of our salary increases. Does that help?

Yes, I guess the point is, don't expect any salary increase changes of a significant basis moving into 2011?

I would say the first half for sure, because we're normally going to wait a year before we give raises in Europe and North America, and we'll see the normal type of uplift in Asia-Pac.

Okay, and then one final clarification. What is typical seasonality at least now in both Global Components and ECS that you view for the March quarter?

For which quarter?

The March quarter.

Oh, okay. So in the March quarter, normal seasonality is excluding foreign currency changes, plus three to plus five. And then in Global ECS, excluding foreign exchange, minus 25 to minus 35.

Okay, thank you very much.

Thanks, Shawn.

Your next question will come from the line of Ananda Baruah from Brean Murray.

Hi thanks, guys for taking the question. I guess just another one about OpEx. The leverage has been working really nice for a few quarters here, and it sounds like based on the guidance you're expecting to get more really good OpEx leverage. Just wondering, I guess as we go looking forward into the future, just any general thoughts about what to expect in terms of OpEx dollar growth relative to revenue growth as we enter the new world, whatever that looks like. Thanks.

So generally what we think is for every incremental dollar of sales, we would have $0.03 to $0.04 of incremental expenses.

Okay, great. And then I guess, just lead times, still relatively extended, does that impact over the intermediate term, whether that's two quarters or four quarters or whatever, how does it impact your thinking around OpEx spending, until those come into more normalized levels?

I'll answer first and then Mike can comment on that also, is that we've worked very hard to - - and you may recall from conversations during the recession that we took action to get temporary costs out and to get permanent costs out, and our objective was to make sure that those permanent costs didn't come back in. And we're wrestling very hard to make sure they don't come back in. And our results today prove they haven't. When you look at it, we [did give these] temporary [givebacks] to the employees, and we appreciate their sacrifice last year. We gave at the beginning of this year back to them, and yet our expenses continue to trend down as a percentage of sales, and as a percentage of GP dollars, because it's a critical mission for us.

So we continue to be able to work hard on that. We have built our business around operational excellence. We've built it around continuous process improvement. That's something we're really trying to push for. We should also get some more acceleration in that, as we roll out more of the unity project, because that's really where we're going to get some of the payback.

Absolutely, and if you take a look at the work we did last year, we have gotten more pointed with our investments in the core business, and when you think of the increases that we've had in Lighting, we've made investments in Lighting over the course of the year while we've been able to reduce the overall expense for the Company. We've also made expenses in value add capabilities within the business, at the same time we've been able to lower our overall expense, and we've been able to increase the number of engineers working inside of Arrow at the same time. So we have become extremely focused in our business on where the cost is going in, and we're tying those costs to revenue in-house to make sure we don't get out of balance.

Great, thanks a lot. Congrats on a good quarter. Thanks a lot.

Thank you. Before ending today's call, for those participating on the webcast, we will quickly scroll through the revised reference in our webcast that contain a reconciliation between GAAP and adjusted results. This reconciliation is also included in our earnings release and both the release and this presentation will be available on our website.

I would like to thank you all for taking the time to participate in our call this afternoon. If you have any questions about the information presented today, please feel free to contact Paul, Mike Taunton, or myself. Thank you, and have a nice day.

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.