艾睿電子 (ARW) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arrow Electronics Inc. second quarter 2015 earnings conference call. My name is Lisa and I'll be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Steve O'Brien, Director of Investor Relations. Please proceed, sir.

Thanks, Lisa. This is Steve O'Brien. I'll be serving as moderator on today's call. I would like to welcome you to Arrow Electronics' second quarter 2015 conference call. 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, Chief Operating Officer Global Components and Global Enterprise Computing Solutions; Eric Schuck, President Global Components; and Sean Kerins, President Global Enterprise Computing Solutions.

As a reminder, you can access our earnings release at investor.arrow.com, along with the CFO commentary, the non-GAAP earnings reconciliation for the second quarter, and a webcast of this call. We will begin with a few minutes of prepared remarks, which will then be followed by a question and answer period.

I'll now hand the call to our Chairman, President and CEO, Mike Long.

Thank you, Steve.

Thanks to all of you for taking the time to join us today. In the second quarter, we delivered strong results that were ahead of the midpoint of our expectations. We continue to execute well, despite the unfavorable currency environment and the uneven economic conditions. Both segments delivered sales growth and expanded operating margins. Our cash flow and returns were strong and we returned substantial capital to our shareholders through our buyback program.

In the second quarter, we delivered 9% overall sales growth on a constant currency basis and 3% adjusted for both acquisitions and currency. Our growth was led by our Europe components business, which grew at a very strong 11% rate adjusted for acquisitions and changes in foreign currencies, making the ninth consecutive year-over-year growth. Our Asia components business grew 11% year over year and 4% adjusted for acquisitions. And lastly, our Americas core business grew 3% year-over-year, which we believe was ahead of the economy.

Enterprise computing solutions delivered growth in the segment as a whole, growing 9% on a constant currency basis, and 2% adjusted for acquisitions and changes in foreign currency. For those that look at our results as a reference point for IT spending, our billings for the first half of 2015 grew 5% year over year adjusted for acquisitions and changes in foreign currencies. As we've done in the past, we encourage you to measure our ECS business on a multi-quarter basis to normalize for differences between our quarter end dates and those of our suppliers.

In the second quarter, our enterprise computing solutions business experienced strong growth from our software portfolio led by security. In enterprise computing solutions, we continue to focus on selling comprehensive solutions, while enabling customers to migrate to cloud-based managed services, when and where it helps them achieve their objectives. Our solutions are flexible. We continue to evolve with the accelerating pace of change in the IT industry. We have a number of efforts underway to increase the markets we serve.

In global components, we're engaging with inventors and next generation OEMs, with a focus on enabling wireless connectivity for their products. We're pleased to report robust design activity in all three regions during the second quarter. This performance is the result of our prior investments in sales and engineering talent. In enterprise computing solutions, we've established the leading position in software, with great emphasis on security and big data, as well as hybrid cloud automation and orchestration. We continue to increase our capabilities in these areas.

Our knowledge and solutions selling are benefiting our customers, as they face increasing complexity in their own IT infrastructure. We continue to further leverage on our sales growth, while investing in our business for future growth. During the second quarter, adjusting for acquisitions and changes in foreign currencies, we grew global components operating income at over 1.5 times the rate of sales growth. We also expanded our global components operating margin for the eighth straight consecutive quarter on a year-over-year basis. And for the first half of 2015, we're on track to reach our goal of 5% components operating margin.

Our ECS operating margin expanded year over year and set another new all-time record for a second quarter. And last, but not least, for the seventh consecutive quarter, we again increased our return on invested capital compared to the prior year. At 10.8%, our ROIC was up 30 basis points year over year. Regarding the current state of demand in the electronics components industry, we expect little change in the environment heading to the back half of 2015. Conditions remain better for us in Europe than the headlines about the economies might suggest.

In the Americas, modest growth continues. While this may be a surprise for those expecting an improvement or a reacceleration, from our vantage point, the lackluster background has been persistent for two years. In Asia, we've seen a recent deceleration in the demand growth, but we expect growth to continue, albeit at more modest levels. We believe our broad base of small to mid-market customers across the regions reduces the variance in our performance compared to other industry participants who may have sizable contributions from a small group of customers.

We also believe lean inventories and short lead times will continue to moot the fluctuations and cycles we experienced in the increasingly distant past. In summary, we'll remain mindful of the industry backdrop, but believe our own data from tens of thousands of customers provides the best guideline for operating our business. Last quarter, I discussed how we operate our business to assure consistent returns to our shareholders and minimize the risks from foreign exchange fluctuations.

Again this quarter, we've shown our ability to deliver consistent results, despite the depreciation of the euro. I thought it would be helpful to you if I address how we navigate through this current period of semiconductor industry consolidation. Our suppliers value our engineering and design capabilities, which allows their products to be sold on their technical merits. Our suppliers also continue to value the variable expense sales model we deploy on their behalf in the mid-market. To date, merger activity has resulted in a net increase of the products which we can sell.

Suppliers are giving us more products to help drive their growth, which will also help drive our growth. As suppliers merge, we believe Arrow will be a constant that helps the new Company grow market share, mind share, and maintain their selling motion. We see no disruption to our business from supplier consolidation and will continue to deliver compelling value to our customers and suppliers long-term.

As we proved once again in the second quarter, we're able to produce strong results independent of the market environment and we look forward to continuing this.

Paul will now provide more details on the second quarter results and our expectations for the third quarter.

Thanks, Mike. Second quarter sales of $5.83 billion grew 9% year over year, adjusted for changes in foreign currencies, and grew 3% year over year adjusted both for acquisitions and changes in foreign currencies. Second quarter sales included an approximately $160 million contribution from two acquisitions, which were not originally factored into our guidance range. Excluding that benefit, consolidated sales were above the midpoint of our guidance range, with global components and enterprise computing solutions both approximating the midpoint of their ranges.

In global component sales of $3.7 billion grew 4% year over year and 3% year over year adjusted for acquisitions and changes in foreign currencies. In the Americas, our sales were flat year over year, but America's core sales were up 3% year over year and quarter over quarter, within traditional seasonality. Our performance in the Americas contributed -- continues to be affected by the lackluster economic environment, with first half GDP growth in the United States estimated to be below 2%.

In Europe, sales adjusted for acquisitions and changes in foreign currencies increased significantly, advancing 11% year over year; the third quarter in a row of double-digit growth. We experienced strength across the entire region. Sequentially, core sales in Europe grew 2% quarter over quarter, which is toward the high end of normal seasonality. Sales in Asia grew 11% year over year as reported and grew 4% year over year adjusted for acquisitions and changes in currencies.

Core sales in Asia grew 15% year over year and 9% quarter over quarter, toward the high end of traditional seasonality. Total second quarter book-to-bill was 1.02 and the overall components market remained stable with lead times and cancellation rates operating in normal ranges. Second quarter enterprise computing solution sales were $2.13 billion, up 1% year over year as reported and up 2% year over year adjusted for acquisitions and changes in foreign currencies.

On a six-month basis, ECS sales grew 4% year over year, adjusted for acquisitions and changes in currencies. In the Americas, sales grew 9% year over year and were down 1% adjusted for acquisitions and changes in foreign currencies. Sales for our core ECS Americas distribution business were flat year over year and grew 25% sequentially, in line with normal seasonality. During the second quarter, the strong mix of software and services relative to higher ASP hardware had a dampening effect on our reported sales and lowered the year over year growth trend in our business.

In Europe, sales in constant currency advanced 8% year over year. Europe ECS sales grew 18% quarter over quarter, adjusted for acquisitions and changes in foreign currencies, which is above traditional seasonality. The growing and evolving requirements on data centers, our strong execution, and our solutions selling efforts all drove the strong ECS revenue growth. Our consolidated gross profit margin was 13.2%. Year over year, gross margins were flat.

On a sequential basis, gross margins decreased 50 basis points due to the normal seasonally higher contribution from ECS within our mix. Total Company operating expenses decreased 4% year over year, adjusted for the impact of acquisitions and increased 2% year over year on a reported basis. Operating expenses were flat as a percentage of sales year over year. Operating income was $238 million, an 11% increase year over year adjusting for changes in foreign currencies. Operating income margins advanced year over year as well, increasing by 10 basis points to 4.1%.

Global components operating income margin of 4.8% increased 20 basis points year over year. For the first half of 2015, global components operating income margin was 4.94%. It would have been 5% excluding our Q2 acquisition activity in Asia. Global enterprise computing solutions operating income margin was 4.9%, up 10 basis points year over year.

Our effective tax rate for the quarter was 27.1%. Net income was $149 million, up 12% year over year on a constant currency bases. Earnings per share were $1.54 on a diluted basis. Diluted earnings per share advanced 7% year over year and grew 16% year over year on a constant currency basis. Excluding the [$0.05] contribution from acquisitions, earnings per share grew 12% year over year on a constant currency basis. Cash flow from operations was $461 million.

Trailing 12-month cash flow from operations was $609 million or more than 120% of our GAAP net income. For the first half of 2015, cash flow from operations was $219 million or 95% of our GAAP net income. Both the trailing 12-month and six-month performance, is well ahead of our goal of delivering 70% of our GAAP net income as cash flow from operations. Consolidated return on working capital for the second quarter was 27.7%, up 50 basis points year over year.

Overall return on invested capital was 10.8% year over year, up for the seventh consecutive quarter and significantly outpacing our long-term weighted average cost of capital. We repurchased $78 million of our own stock in the second quarter, approximately $307 million over the last 12 months and approximately $1.3 billion over the last five years. Authorization remaining under our existing share repurchase programs is $119 million. This is a high level summary of our financial results. For more detail regarding the business unit results, please refer to CFO commentary published this morning.

Now, turning to our guidance, we believe that total third quarter sales will be between $5.55 billion and $5.95 billion, with global component sales between $3.65 billion and $3.85 billion and global enterprise computing solution sales between $1.9 billion and $2.1 billion. We expect earnings per share on a diluted basis excluding any charges to be in the range of $1.40 to $1.52. Our guidance assumes an average tax rate in the range of 27% to 29%, average diluted shares outstanding are expected to be approximately 95.5 million shares, and the average US dollar to euro exchange rate for the third quarter to be $1.08 to one euro.

The US dollar to euro exchange rate we are using for forecasting purposes declined 3% from $1.11 in the second quarter and 19% from $1.33 in the third quarter of 2014. We calculate this depreciation of the euro has resulted in a 1% negative impact on sales growth compared to the second quarter and a 5% negative impact on sales growth compared to third quarter of 2014. We calculate this depreciation has resulted in a $0.01 negative impact on EPS growth compared to the second quarter and an $0.08 negative impact on EPS growth compared to the third quarter of 2014.

Thank you, Paul. Lisa, could you please open up the call to questions at this time?

(Operator Instructions)

Your first question comes from the line of Mark Delaney with Goldman Sachs.

Good afternoon and thanks very much for taking the questions. The first question I was hoping maybe you could give us some perspective, and I know you talked a little bit about this already, but what you think is enabling Arrow to do quite a bit better than a number of the other companies in the tech supply chain? It's been a few quarters in a row now that the Company has been able to do better. You talked a little bit about just the size of your customer base. Any other factors that you may be able to help us with, including maybe if you think you're taking any market share as well?

Sure, Mark. Thanks. As you know, we've been investing in sales for quite some time, sales and engineering. We started a year ago investing in increasing our sales force and our engineering force in China. We followed up and we did that in Europe and also in North America. And so what we've seen is really, this quarter, a record of design wins that are coming in, which are, as you know, pretty much future promises for designs, which gives us comfort in the outlook and also an increasing customer base as a result of that.

I think on the enterprise computing side, much of the cloud work we've done to be available to our customers either on-premise, off-premise, or some sort of hybrid with SKUs and services has also helped us. Frankly I think, you know, to a lesser extent so far, but maybe to a little bit more extent in the future, some of the consolidation of the semiconductor industry will allow us to have new lines to sell that maybe we didn't have before. So when you put those things together, what I would have to say is there's no home run in that. There are singles, doubles, and triples, but they've allowed us to stabilize our performance, I would say, over the last year, in a good way.

That's helpful. And then if you could just help to frame up what's needed to achieve the guidance in the third quarter? Maybe you could just help us with backlog coverage as you look into 3Q. Related to that on the bookings trends, given Arrow is doing a lot better than many other companies in the supply chain, but given the weakness that some of those other peers have reported, have you seen anything at all on the monthly orders that you think maybe explained some of the weakness that others have reported?

Sure. Paul?

Thanks, Mike. Mark, you know that the third quarter always comes down to the month of September. That's traditionally what we see in our ECS business and we see it especially in components because of the summer holiday period in Europe. With that said, book to bill at 1.02, we don't see any meaningful change in lead times. Cancellation rate is pretty consistent with what we see in the past. When we look at that 90-day backlog, pretty consistent also with what we've seen in the past. When we look at those factors, we feel that -- pretty solid about our guidance going forward.

Thank you very much.

Your next question comes from the line of Brian Alexander with Raymond James.

Okay, thanks. Good afternoon, guys. Wanted to ask about inventory, Paul, up 10% year on year, 12% sequentially. I think days of inventory were up maybe three days year-over-year. So given your outlook is seasonal, particularly in the components business, what's driving the inventory increase and to what extent is Arrow using its balance sheet to drive market share gains, particularly in Europe, where performance has been really strong? Thanks.

Brian, I'll take the first part of that and let Paul take the second part and hopefully not step on each other. As far as using the balance sheet for the inventory, for sure we want to make sure that we've got the products that are going to ship for those new designs that our sales force has been getting. So what we're seeing is a little bit of uplift of sort of registered-type components in here, which you know are higher margin, and we think that will serve us well going into the second half.

And by the way, if you go back and I think look at 2009, you saw us do the same type of things that allowed us to weather that economic downturn in a better way, also. So we're trying to continue with some of those inventory strategies and there's a lot more underneath this that Paul can get into.

Right, Brian. Remember that we have two acquisitions that -- we have all their inventory at the end of the quarter, but we don't have a full quarter of sales in ATM and Data Modul. That added about $120 million of inventory alone and that, obviously, has a bit of a distortion on the calculation of the days inventory that we have on hand. So the days change isn't really that -- a little bit different than the number that you quoted because you don't have all the facts, but we have them. But that actually is impacting the calculation also.

And if we compare to 2009, if I go back and look at gross margins in the components back then, it looks like the next couple years, you gained about a couple hundred basis points in gross margin. Is that the right kind of frame of reference for the strategies that you're putting in place now? Do you expect it to have meaningful impact on gross margins for global components?

Well, we believe so. I'm not sure we're banking on that extent that we got the last time, but we certainly believe that as electronics do start to get tighter over a period of time, that you will see some pricing increase, but I do believe right now that's a little bit of a ways off. That is, in essence, getting ourselves ready for the next upturn. Remember, we've been in this, what we consider the cycle we're in now, we believe we've almost been in it for two years. So we aren't really too worried about what we're seeing coming because we're viewing it as more of the same.

Your next question comes from the line of Jim Suva with CitiGroup.

Great. Thank you very much. I have two questions. The first is your outlook is very encouraging. It looks quite normal. A lot of the other chip companies and OEMs have noted softness. So can you just kind of help us bridge the gap of your understanding of the strength of what you're seeing there at Arrow versus kind of the rest of the world? Or maybe I'm just going to [cup my ear] that the negative of some of the other companies out there.

And then my follow-up is, can you help us better understand the SG&A or OpEx outlook? Arrow's done a good job of making several acquisitions recently and so for either a run rate or percent or dollar amount, are we at a level now or should we be building in some additional increase in SG&A or OpEx just to make sure we fully account for the integration of all of these acquisitions? Thank you and again, congratulations.

Thanks, Jim. I'll take the first part of that. I actually believe that what you're seeing in some of the reported suppliers that are out there today, probably had more to do with the wireless business than it does with the overall broad market. In fact, I would say that a vast majority of what I've seen have been few very large customers that tend to put a little bit of pressure on those suppliers which give us the negative outlook. So far, we've seen pretty good strength in aerospace and defense.

We've seen it in automotive, we've seen it in lighting and we've also seen it somewhat in medical devices, sort of the decline slowing there. So overall for us, we're still seeing sort of business as usual with the bend that China has slowed somewhat and hopefully, that gives you what we see as some of the differences. Plus, we're dealing with a whole lot more customer base than many of the suppliers that did report. That does help us. Paul, would you take the expense piece?

Sure. Jim, my expectation is we'll see expenses flattish in the third quarter. We'll see a trend upward. That's just variable cost tied to the surge you'll see in the ECS business. Some of these acquisitions that we've done recently, whether it's immix as an example or ATM or even Data Modul, we're looking at those as opportunities to accelerate growth in markets and less so around changing the cost structure, if you will.

But you're right, if we are not able to accelerate the growth, bringing product lines to them, bringing them to new geographies, then we'll have the opportunity to take a step back and integrate them, really, throughout the support systems. We don't want to touch sales and engineering, but through support systems to get some of those synergies. But in the short-term, I'd say we're not going to see a meaningful change downward or upward in our expense structure.

Your next question comes from the line of Steve Fox with Cross Research.

Thanks. Good afternoon. A couple questions for me on components. First of all, in terms of the deceleration you're seeing in Asia, I assume a lot of that's tied to China. Can you just talk through how that came about in the quarter and what kind of inventory levels you think are in that region and how you're attacking it? And then secondly, you highlighted some continued design success and you also mentioned the wireless focus. I was hoping you could sort of quantify the design win growth and also talk about the wireless strategy into some of these industrial customers in a little bit more detail? Thanks.

Sure. The first piece around Asia-Pac, what we've seen is really a growth rate in lighting, industrial power, and transportation year over year. All but one of those has been double-digit growth. What we have seen is a decrease in the wireless numbers there and because of the percentage, that's where we see a little bit of the slowing in Asia-Pac so far. Eric, would you like to add anything else to that?

I would just add one thing, Mike, to that point. That is with the investments that we've made in the sales and engineering, the strong focus that we have on the small and midsize account base, it's really enabled us to leverage the broad portfolio of products that we have in our line card. Steve, you brought out one of them, wireless connectivity. That's certainly a technology that we see taking off in Asia, as well as the other regions. And certainly, we're using not just our position in semiconductors, but also passive electromechanical and connector products to continue to drive growth into that small and midsize customer base.

The second piece of your question was around the design win activity and what we've seen is a very robust activity in the second quarter. Approved registrations were up strong double-digits year over year and that accelerated from about 3% in the first quarter. We saw growth in all three regions with design activity and as you know, the growth isn't always linear because there's some lag between the design itself and the actual production of the product. But as we have said before and has really panned out, when the design activity happens, then you're one or two quarters away from that stuff starting to ship and it ends up being a good deal for us. We continue to focus on that number and we're seeing pretty strong results right now.

Your next question comes from the line of William Stein with SunTrust.

Great. A couple questions. First, I'm wondering if you can remind us what is not in core components in the Americas. I think there's something in there that's helping the growth and can you just remind us what that is?

Sure. Well, I think we're talking about some of the specialty businesses and those are the ones that actually, when we look at it, are small, don't have as big of an impact. We're trying to get you all the color on the big parts of our business that drive it. That might be in the RF space. It might be aerospace and defense, those types of businesses.

Okay. And then following up on the last question and maybe dovetailing with a couple of others, it sounds like you believe that consolidation among your suppliers may be helping and you talked about accelerating design wins. There's also been some change with regard to at least one of your microcontroller suppliers where they eliminated a third distributor, maybe a year and a half ago. And I'm wondering if you're seeing an effect from that specifically or maybe to ask it more generally, are you seeing a share shift among your suppliers? Is any of the new design acceleration, is any of that sort of concentrated among a smaller number of your suppliers? Thank you.

I would say that whenever you've seen a distribution network shrink from three to two, yes, we have had benefit. Yes, we have had benefit from those things specifically. We manage them very close. They -- you have to remember, they make up a microcosm of our total sales because we have so many suppliers. So that alone does not drive our performance, but when you look at it across the multitude of product lines, right now, we think we're positioned very well for even more of that to take place over the next year.

Great. Thank you.

Your next question comes from the line of Ananda Baruah with Brean Capital.

Hi, thank you, guys for taking the questions. Congrats on the results and on the guide. I guess one for each side of the house, if I could. The first is with regard to electronic components. You guys made commentary during prepared remarks that you see an increase in the products on your portfolio that you were able to go to market with. And I was just hoping to get a little bit more broader context on that, particularly in the context of you talking about ongoing consolidation from your suppliers. And is it fair to take this as a share gain on your part or is it more of a broader industry dynamic? Thanks. Then I have a follow-up.

Eric, would you like to take that one?

Sure, Mike. So we've certainly seen a tremendous amount of consolidation announced so far in calendar year 2015. As Mike pointed out in his commentary, it's really contributed a net benefit to the products that we have in our portfolio. Not surprisingly, many of those supplier moves have been part and parcel around rounding out their own technology portfolios to take advantage of growth markets.

So some specific areas where we've seen the benefit in expanding our own portfolio through that consolidation process are in the areas of wireless connectivity, sensors, networking products and the like; many of the essential building blocks that are a requirement to participate in the growing Internet of Things marketplace. In terms of share gain, Mike, again, referenced the investments that we've made in both sales and engineering resources over the past 18 months and we truly believe by further execution and getting leverage with those incremental resources, that with the expanded portfolio of products, it'll have a net benefit in our ability to grow moving forward.

Got it. Very helpful. I guess my follow-up is can you just talk about how your server business did during the quarter relative to your expectations and I guess any thoughts on server refresh going into the second half of the year, [other than] mixed data points on the server front? I would love to get your context. Thanks.

Sure. I can tell you that, in Q3, our server business came in as expected. We grew in the low single-digits. We continue to see customers take some time to evaluate hardware purchases, especially in light of newer architectures as they emerge, things like conversion infrastructure, hyper converge, even flash. But I think we're well positioned in the server space going forward and again, as we pointed out, we see guidance within normal seasonality for the third quarter and our server business will be part of that for sure.

Thanks a lot, guys.

Your next question comes from the line of Lou Miscioscia with CLSA.

Okay. Two questions on similar lines, when you mentioned that you're winning business, consolidation, could you mention if you're winning for very large competitors on the component side or from more smaller ones? And I have a follow-up.

I would say that when you go from three to two and two people get it, you're probably winning it from the person that ended up opting out and that's the business that people end up focusing on. It's funny, but if you take a typical year, it's probably less than 1% that swings between the two big guys in the marketplace, back and forth one way or another. So that's never really been our focus. Our focus has been to expand the account base, expand the product line, and increase our sales and increase our services. So that's -- I could die at retirement and not have a huge swing of market share, if that was the only way to do it. So it's got to be the market. It's got to be customers. It's got to be new products.

Okay. My follow-up on ECS, it looks like you had very different results in Europe and the Americas, both from -- overall from a revenue growth standpoint, but also from a products standpoint, obviously when you take out currency and acquisition. Maybe if you could just go into why there was very good strength proprietary, regular service, storage software services, so on in Europe, but then not seeing really that same type of strength in the Americas.

Sure. I'll have Sean go ahead and address that one. He's got it right in front of him.

Sure, Lou. So you're right. There was a little bit of a difference. In Europe, we saw a good balance across the whole portfolio and I think they grew very nicely. We saw pretty good balance in North America, as well. Probably a slightly greater mix to software and services than we would have expected as compared to hardware. Your question or the question earlier about the server business, again, hardware -- there's a lot happening in the hardware segment at this point in time. Customers are evaluating these new technologies I described.

And even though our hardware pipelines continue to be healthy, sometimes those evaluation cycles take a bit longer than we might expect. So we didn't see quite the close rate in hardware in the second quarter in the Americas that we had hoped for. But we certainly see that the hardware business will be important to us going forward and again, it is part of what we project in Q3 and beyond. We're well-positioned with the traditional technologies, as well as the newer architectures that are emerging fairly quickly.

Sure. Let me ask it in a little bit different way, does it seem like here in the US that customers are pausing as they're evaluating these new technology, whether it's converged, hyper converge, the (inaudible) system storage, flash and so on, and maybe that in Europe, they're just sticking with the standard and they've held off for so long given their poor economy that they're just updating older stuff in comparison? And maybe, as folks generally think the US is six months or a year ahead of Europe, that's what we're seeing now.

Lou, there might be some of that. We probably have a slightly larger exposure to some of the newer technologies here in North America than we do in Europe. I'm not sure the buying patterns are dramatically different. I think each customer makes this evaluation cycle in a very different way. Some stay with the current architecture, some evaluate and it takes some time, some test and convert more quickly than others. So I don't think that there's a line in the sand that you might draw between Europe and North America in that regard.

Lou, you're also dealing with sort of a different law of bigger numbers in the US than you are in Europe, too, because there's still plenty of room to gain share in rotating for our business in Europe, which is helping them versus the very, very strong market share that we have in the US. So there's a little bit of that play that would go in there. So those percentages, even though skewed, would have an impact on that.

Your next question comes from the line of Shawn Harrison with Longbow Research.

Hi, everyone. Congrats on the results. Wanted to dig in a little bit on the comment on just the building of inventory versus the tremendous free cash generation you had this quarter. Should we expect similar cash generation in the back half of the year, if you built inventory to support some near-term demand and you would see that roll off into the back half of the year? Or should we expect kind of a different dynamic with inventory?

Sure. I think we'll see the same amount of cash flow in the back half of 2015 that we generally saw in the back half of 2014. Just remind you, if you go back and look at our transcript, we had a couple of items go our way in the fourth quarter. So it's not a direct compare, but we'll be positive in the second half of the year, also. We expect to have very good performance for the full year.

Okay. And then there is a follow-up, your largest competitor here in I guess North America and globally cited -- I don't know if the term self help -- but a cost reduction program. I'm looking at their M&A over the past five years that they completed. Do you see something similar of having to go back and look at the M&A that you completed in lean-out costs? Is there an opportunity there? Do you think you've integrated it fully enough that you're already seeing the benefits?

Well, I would say that we have a few that we've just purchased. As you know, you can go back from March, we bought some businesses and we're working constantly on that type of thing and not letting the costs get out of control. So we have to go back and sort of reintegrate or rethink it. Right now, our focus has been on growth. We've been pretty successful with that. We will be touching up on the cost side over the course of the year. I'll let Paul highlight that to you a little bit. But for the most part, we're more comfortable on the growth side right now. Wouldn't be expecting to launch any massive cost cuts.

Right. Shawn, as I mentioned, we think our expenses will be flat in Q3 compared to Q2, generally speaking. We'll see a bit of an uptick, seasonal uptick in the fourth quarter. But, kind of the way I think of this, you haven't seen any meaningful negative impact on expenses in our investments we've talked about because we're always working on efficiency. Really what we're doing is we're self-funding many of these investments in sales and engineering talent by being able to be more efficient in other functions.

Your next question comes from the line of Amitabh Passi with UBS.

Hi, guys. I only had a couple questions. Mike, I guess the first one for you was I think one I probably ask you every quarter. Just in your components business, the difference between the Americas and Europe, you cited sluggish GDP growth in the Americas. Europe hasn't been that robust as well, yet we continue to see this divergence. I think in the past, you've explained it as part of the business, part of the demand being export-oriented, but with APAC decelerating, is that an incremental concern? Just wanted to get your thoughts again on sort of the disparity between the Americas and Europe on the components side.

Sure. I would say that, in Europe, we have a couple of things that have been going with -- for us. We had our computer conversion that you were aware we did and after that, subsequent to that, we were able to add more sales and engineering and have more design wins. The European team has done a good job of being externally focused and adding accounts. Their design activity was one of the higher that we have seen, given that they've had the longest run with sales people and frankly, they've had some help from the aerospace and defense market and the automotive market, which are two very good markets and good growth rates for us, as well as lighting over the course of the year.

The US has been a little more sluggish and a little more choppy. I think there's still been a constant that we've had going on for years. There's still a transference of business going to Asia-Pac out of the US. So the US fights that piece of it constantly, but really the sluggish economy, to me, would be to blame. We've seen pretty good growth in aerospace this year, but when you start going down quarter on quarter between the verticals, you've got some up, some down and they just play off of each other and that's been the struggle for the last year or so in that marketplace.

I'm not overly concerned with Asia-Pac because most of the slowdown has been that wireless infrastructure and we play in so many more markets other than that, that I still think we'll be able to grow through that. Maybe it'll be a little less, but needless to say, we will still see the growth. So we're not down on the economy. We just think that we could stand to have a little better backdrop in North America. The European economy is better than what we see printed in the press and Asia is a general slowdown, primarily where we're not participating.

And then just as a quick follow-up, you've obviously -- we've seen healthy levels of M&A activity of late. Just curious, is this a pace you think you can sustain? Any update on pipeline opportunity set looking forward?

We're always looking. We just, we just finished a couple so, we're digesting those now. One in Asia-Pac and as you know, we've sort of increased the numbers in Asia-Pac as the Asians get better at doing these acquisitions and managing them and making sure that they are successful for us and then we finished another one. But as far as acquisitions go, I wish I could tell you, but there's no rhyme or reason what the pipeline manages, what we end up doing.

It's all based on valuations. It's based off of returns and can we bring benefit to the shareholders. So that really doesn't have anything to do with pipeline other than we're constantly talking to a lot of people.

Your last question comes from the line of Sherri Scribner with Deutsche Bank.

I squeaked in under the wire. I just wanted to ask a little bit about the ECS business. The midpoint of your guidance for the third quarter suggests that revenue's up 6% year over year, which is pretty strong considering the lack of growth over the past couple of quarters. Just wanted to get a better sense of what you're seeing there, is that, that shift back to more hardware, which has more revenue away from software and security? Just wanted to get some more detail on that. Then I have a follow-up question.

Yes, Sherri, Sean Kerins here. I think what you're probably seeing in our guide is the immix acquisition, which would not have been in our numbers in the third quarter of last year. As you know, immix is a specialist in the federal marketplace, so Q3 is, along with Q4 now, certainly part of the big buying season in the federal sector.

Okay. That makes sense. And then just thinking about that shift you were talking about for this quarter where hardware has been relatively softer, the buying pattern is longer, do you think that impacts your fourth quarter, the typical sort of budget flush that we see in the fourth quarter? What are your expectations for 4Q, given the sort of slower demand environment and the shift to software and security? Thanks.

I wouldn't overemphasize that comment. I think we still saw billings growth in hardware, both from server and storage, so we're encouraged by that. Again, our pipelines are generally healthy. Some of the sales cycles and some of the evaluation decisions take longer than we might like, but I don't think it will introduce any material impact on our Q4 at all.

I would now like to turn the presentation back over to Mr. Steve O'Brien for closing remarks.

Thank you, Lisa. In closing, I will review Arrow's Safe Harbor Statement. Some of the comments made on today's call may include forward-looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. Detailed information about these risks is included in Arrow's SEC filings. If you have any questions about the information presented today, please feel free to contact me. Thank you for your interest in Arrow Electronics and have a nice day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.