Q1 2020 Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until the time your lines will again be placed on music cold. Thank you for your patience.
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All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
Yes. Good question. During this time simply pressed starts in the number one on your telephone keypad.
But to your question press the pound key thank you I'll now turn the call over to Steve O'brien. Please go ahead.
Thanks, Christine Good day welcome to Arrow Electronics first quarter 2020 earnings conference call with Us on the call today or Mike Long, Chairman, President and Chief Executive Officer, Chris Stansbury, Senior Vice President and Chief Financial Officer, Andy King President Global components, and Sean Kerins, President Global Enterprise.
As computing solutions as a reminder, some of the figures discussed on todays call or non gap you can access our earnings release Investor Dod Arrow Dot com, along with the CFO commentary the non-GAAP earnings reconciliation and a webcast of this call 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 Wallace.
Thank you Steve Thanks to all of you for taking the time to join us today.
I'd like to start off by thanking my colleagues around the growth low for their tremendous efforts during the first quarter of 2020.
Deeply impressed by their dedication to arrow in to our customers many of whom rely on its is a critical supplier for their business.
Of course, the health and safety Airborne employees are always top of mind and I'm grateful to report that throughout our distribution facilities and offices. Our teams continue to do business work closely following the glass guidelines of the world's leading health authorities as well as local government.
We've also been able to leverage the early experiences and best practices adopted by our colleagues in China to maintain safe and efficient operations at our other sites around the globe.
Unfortunately, our team's hard work this quarter with not a debit ended that should be we just received the legal opinion regarding foreign tax another loss contingencies for the enterprise computing solutions business.
That's required up the book charges of 33 million were 41 cents, a chair to share to catch up for five years from 2015 2019.
Our review aided by our auditors and outside counsel is ongoing and this is about that cement rehab at this time.
On February six we reported fourth quarter results in provided an outlook for the first quarter of 2020.
At that time, we couldn't accurately quantify the potential impacts from what would become the cobot 19 pandemic.
Airport, a sales and earnings per share, we provided assumed no disruptions to our business.
The result of Cobot 19.
The report that despite facing substantial business disruptions during the first quarter our business largely performed as we expected.
My remaining nimble and flexible we were able to adapt to these changing conditions and ultimately we executed well despite adversity.
We were able to properly align our working capital and delivered strong cash flow and we also positioned our business for the future.
As we reflect on the first quarter at a high level, it's important to recognize that each month, so remarkably different business conditions and operational challenges.
Through January operations were relatively normal and on disturbed by cobot 19, although broader electronic component Nike demand were softening exiting the 2019 inventory correction and tear up driven market slowdown.
In February we saw the China business come to a halt.
While this presented a number of operational challenges you had underscored the essential role arrow plays in the supply chain.
As we continued to deliver critical sensors and other electronic arts to our Chinese customers.
In March.
Factory began returning to full capacity in China in the Americas in Europe, some production lines halted.
He's spending also significantly shifted towards enabling remote workers.
In this context, we quit quickly implemented key elements of our contingency business plan to ensure our customers and suppliers were equipped to continue their business operations.
In order to maintain our strong financial position, we reduced spending on discretionary projects an item imposed coming some investments for the time being.
Without compromising our design engineering sales and marketing capabilities as we have taken Swift action.
To adopt to support our business isn't stakeholders through this uncertain time, we have relied on our ERP per key data.
We review our global ERP as a key competitive advantage get provide the detail line of sight into the volumes prices inventories regions end markets and profits we make on the parts we sell.
Importantly, Aero remained laser focused on maximizing our longer term near term results. While we're continue to position our business for the long term.
Looking to industry needs well near term business conditions every main durable inspite of the <unk> broader market headwinds, we realize and recognize the demand can change quickly.
First quarter backlog increased from the fourth quarter.
The second quarter in a row of sequential improvement design activity increased year over year in total for the second quarter in a row.
Other indicators appeared consistent with short run stability lead times, the extended modestly from the fourth quarter buttered shorter than last year.
Overall book to Bill was 1.12 exiting the first quarter.
Book to Bill was above parity.
And prior year in all regions.
Our Americas customer sentiment survey results for similar to last quarter.
The board the portion of customers, saying, they had appropriate levels of inventory increase compared to last year.
A portion of customers, saying they had too much inventory remained higher than normal but decreased compared to last year to date, we have not face significant challenges securing the parts our customers need when they need them, nor do we see signs of hoarding or excess.
Venturi accumulation.
Turning to our enterprise computing solutions business in the first quarter sales were towards the higher end of our expectations demand for traditional ICICI solutions declined relative to last year and toward the end of the first quarter, we experienced a significant shift in demand towards.
The software required to enable remote workers.
Sales of virtual desktop emphasis structure virtual machines and the associated infrastructure in security software were strong.
Taking a step back.
I want to emphasize that is the company. We have long believed that doing good is also good for business to that end, we focused on leveraging our unique technology and supply chain capabilities to help communities through the Calvin 19 prices.
To highlight just a few initiatives, we're supporting the ventilator challenge UK consortium on their goal to produce 10000 rapidly manufactured ventilators system units.
We also have helped develop and provide the artificial intelligence software for an AD home monitoring system that allows covet 19 patients.
To avoid hospital or leave hospital sooner this solution as being sold on a not for profit basis to caregivers.
In closing, we're continuing to support our stakeholders in communities and we're committed to providing our customers with the products and solutions they need when they need them.
We remain disciplined and focused as we operate our facilities and business.
Three significant ongoing challenges today, we've managed to avoid disruptions and expect to continue to do so as a critical divider provider of the global technology and industrial ecosystems.
It's worth noting that we have built a resilient business at arrow, we're a debt debt that navigating through adverse financial conditions. In fact, we've always emerge from these challenges stronger and we intend to do just that.
We will not stop looking for opportunities to expand our business drive innovation and improve the performance of our end customers everywhere. We look forward on updating you on our performance in the coming quarters I'll now hand, the call over to Chris to provide more details on our first quarter results and our expectations for this.
Second quarter.
Thanks, Mike.
This quarter based on feedback from investors and analysts im going to keep the review of our results relatively brief to allow more time for questions.
First quarter sales were $6.38 billion sales decreased 9% year over year adjusted for the wind down a divestiture and changes in foreign currencies global components sales were $4.55 billion. This is at the lower end of our prior guidance and represents a 10% year over year decrease as adjusted.
It's worth noting that industry Destocking has been going on for more than one year global components sales have declined sequentially five over the last six quarters.
Global components operating margin was 3.8%. This is the fourth consecutive quarter of year over year margin decline for global components during past market corrections, we've typically seen five consecutive quarters of margin decline.
Were it not for Cobot 19, we should be reaching a margin inflection point.
First quarter operating margin increased compared to the fourth quarter. Despite lower sales. This was due to the normal seasonality and this first quarter also benefited benefited from our cost containment efforts, including last year's cost optimization program.
Enterprise computing solutions sales of $1.83 billion decreased 6% year over year as adjusted and were near the higher end of our prior expected range. As we previously outlined first quarter Enterprise computing solutions sales were negatively impacted by the earlier March 20, Eightth closing date compared to March Thirtyth two.
Sales in 19.
Billings were approximately flat year over year adjusted for changes in foreign currencies, we experienced growth in virtualization and compute infrastructure software security and storage demand for servers networking and services declined.
Global Enterprise computing solutions operating income decreased by approximately $45 million year over year, including a charge of $30 million related to foreign tax and other loss contingencies related to five prior years.
We previously estimated operating income would be approximately $11 million lower compared to the prior year due to the timing of the quarter end. The rest of the decline of approximately $4 million was due to less favorable sales mix and what we originally expected as spending priorities shifted during the quarter.
Returning to consolidated results for the quarter interest and other expense of $43 million was below our prior expectation due to lower borrowings and to a lesser extent lower interest rates.
The effective tax rate was 29.5% well above our prior expectation of 24.5%.
This was due both to the foreign tax contingencies from prior years and to the timing of discrete items, we expect to 24% effective tax rate tax rate for the second quarter at the midpoint of our mid our long term target range.
Earnings per share were 97 cents on a diluted basis, including 41 cents of charges from foreign tax another loss contingencies, we estimate the stronger dollar negatively impacted earnings per share by approximately two cents compared to the first quarter 2019.
Turning to cash flow, we reported strong operating cash flow of $467 million first quarter cash flow is normally negative, but we tightly managed working capital investments to drive significant year over year improvements.
In addition, cash flow benefited from our new European accounts receivable securitization program that commenced in January.
During the first quarter, we reduced borrowings by approximately $372 million our balance sheet is in great shape and our liquidity position is strong current committed an undrawn liquidity stands at over $3.1 billion not counting our 200 million dollar cash balance.
We also closely monitoring credit receivables collections remain healthy the DSO increase in line with the PEO and this was due to an increase in our services business during the quarter that is neutral to working capital.
As we've said in the past it is fair to measure our performance by the cash conversion cycle not by any one metric in isolation. The cash conversion cycle was 11 days shorter than Q1 of 2019.
We returned approximately $150 million to shareholders during the quarter for our share repurchase plan.
Remaining authorization is approximately $188 million.
Please keep in mind at the information I shared during this call is a high level summary of our financial results for more detail regarding the business segment results. Please refer to the CFO commentary published on our website. This morning.
Now turning to guidance, we felt it was important to provide you with our best estimates based on orders and demand from our nearly 200000 customers and early indications from the month of April while many companies have chosen to forego guidance due to market uncertainty, we want to be as transparent as possible, but our expectations for the business.
You may have noticed that the ranges we provided in our earnings release for the second quarter are wider than normal which reflects the higher than normal potential for variants due to our forecast given the market conditions.
With that said, we're forecasting sales to remain relatively fast flat compared to the first quarter for both the global components and the global Enterprise computing solutions businesses.
It is modestly below normal second quarter results.
Four components and significantly below.
For enterprise computing solutions. Despite are forecast to flat sales, we expect profits to be higher on a sequential basis. As a result of improved sales mix for global enterprise computing solutions and our overall cost containment efforts that will be most visible in corporate expense.
With that I'll turn the call over to the operator for today.
Thank you and at this time is he would like to ask a question Press Star then the number one on your telephone keypad.
And your first question is from Matt Sheerin of Stifel.
Okay.
Yes, Thank you and thanks for.
Taking my question.
Just Mike regarding the component business.
Flat guide seems to be.
Better if not significantly better than most of the suppliers that you represent that have reported so far in addition to.
Chief competitor.
Obviously your book to Bill was strong and we've seen that from others as well what kind of confidence. So you have in terms of that outlook and related to that are you gaining share at all specifically that the tea business, which we know at some point shift over to you it to some.
Degree.
What does your outlook, there and what can you tell us about the share shifts.
Yes.
First off Matt Thanks, but.
We wouldn't have put the guidance out if we weren't serious about it or I Didnt think we could hit it and you.
You have to kind of remember that we've been in a five quarter decline already.
With what was the market slowdown prior to co bid hitting.
And so customers were reducing their inventory now, albeit.
Are they still reducing their inventory, possibly I think there's.
A lot of of question for everybody.
First off we've seen a significant uptick in China.
And China has made a pretty strong come back compared to where they were when they shut down and we are expecting that to continue through.
The second quarter now by no means that we projecting out the year by no means are we saying you know the market is stable and it's going to take off.
We just know what we have the ship plus were 30 day then too.
The second quarter and the results so far looking pretty strong.
Right now we don't have the supplier that is more than 9% of our sale.
We're not seeing any unusual activity to date.
With anything that would.
Suggest that one supplier or other suppliers are making a difference we aren't seeing in China, it's sort of broad based.
Increase.
When do you add we're seeing a little bit less of a decrease than we had.
Expected and we're seeing Europe sort of hold its own now, saying that also looking at the second quarter, you're saying a reduced.
Number or reduce percentage versus the year. Prior also that is sort of in line with the first quarter and.
As you know for some time we've been.
Increasing our sales to non traditional type customers. We continued to see that happening we continue to see an uptick in our services business.
And design wins in a downturn being up is usually good news because that means the customers didn't shutdown everything.
And we've seen some positive.
Put there so hopefully all of that mix together, Sean or.
Matt gives you a little.
A little bit better insight to what we're saying.
Okay and regarding.
Any incremental wins on the semiconductor side, there's been talk about that shifting over at some point.
You have that in your horizon in terms of bookings or what you're seeing.
I think you know as we said before.
You know the the other.
Competitors you don't have through the ended the year to book their business and get their their companies in order and you know I don't expect anything to be overly material and until we get through the end of year.
And remember this was any this wasn't a huge windfall for us if we go back to the original piece, so don't don't sort of oversell, it or make it you know a big reason.
Because otherwise we'd have to disclose it with massive.
Got it and regarding the computing business and you talked about a negative Miss Mitt.
Mix, rather hurting your your margins was that also related to lower rebates because of.
Not hitting him certain thresholds on the hardware side and you talked about unfavorable mix going into next quarter could you be more specific about what you're seeing there.
Yes, Sean Yes, sure back actually it was less about the the rebate thresholds in the back end that we enjoy with our mix of suppliers and more about the kind of software that we we booked not billed as the market kind of shifted to remote work and distributed technologies all of that software is departmental in nature.
So we tend to treated as a gross sale versus through agency accounting.
It does create some gross margin pressure, but if you look forward I do think the mix.
The strength and work from home and probably headwinds related to traditional datacenter spend.
We think thats going to continue so the mix will shift dramatically but.
We're also managing Opex very carefully in this environment given what we know now so we do see an opportunity for sequential.
Improvement in operating margin.
Okay. Thanks very much.
Thank you. Your next question is from Shawn Harrison of loop capital.
Hi afternoon, everybody.
What did it just dig more into the big free cash flow number this quarter and just I guess, a how much the the receivable or the securitization dynamic in Europe help.
The what type of kind of free cash flow is should we anticipate for the second quarter and see.
Will you still be buying stock here in the market and look to maybe up that authorization.
Yes, Sean so.
The cash flow that was delivered in the quarter about 380 million of that came from the securitization program. We did in Europe.
That's it a very very attractive rates and the cash that we receive their we basically used to pay down debt and also buy back stock this quarter as you look.
Add Q2, and frankly for for the year, we have said, obviously historically that somewhere between 70 and 100% a GAAP net income as a good target for cash flow.
Didnt work last year, given the wind down, but we were at about a 135% of non-GAAP income. So I think you'll see us moved back to typical patterns given.
Where volumes are so we still see this as an opportunity to generate cash flow.
We do have.
188 million remaining under authorization and as we've said in the past will have a balanced approach between managing debt and buybacks as we move through this time.
Okay. That's helpful. Chris.
Then.
I guess going back to.
The Dcs margin dynamics, you were on pace for it to where you are seeing kind of margin expansion on your five year basis. Please can you saw that for the third.
Fourth quarters of last year, you had the issues first quarter do you anticipate you'll start to see or get back toward the margins you saw last year in that business with the mix shifting more favorably here in the June quarter is theres still some some of the software dynamic mix that maybe pressuring margins year over year.
Well as they said.
Sean we are seeing.
A similar mix as we we delivered in Q1.
So we do have some opportunities to drive some improvement at the gross margin line, but we're also going to have to complement that with.
Cost containment actions we are taking.
And again, if we do see an opportunity for sequential improvement, it's really tough to called out beyond the June quarter, given what's happening in the in the external environment.
But what we saw the.
Kind of the latter part of March is kind of consistent with what we see so far in Q2 and.
What we expected lease for the quarter, but beyond that it took a little bit tougher to call.
Okay. Thank you.
Thank you. Your next question is from Steven Fox Fox Advisors.
Thanks, Good morning, everyone.
Good afternoon, rather.
Couple of questions. Please on the side so there's been.
A number of your OEM partners.
Offered up vendor rebates into the channel marketing dollars and favorable credit terms can you just sort of talk broadly how that impacts your business and within that context.
How do you find the general health of the bar that you are dealing with.
[music].
Sure. So when we look at the reseller community, obviously were pan really close attention to.
Credit risk.
We have a a larger exposure to what I would call large companies and large resellers that serve them.
Then we do the SMB market in total.
Nevertheless, we have really ramped up the process for scrutiny of our a our portfolio and a really really robust way.
We pay particular attention to the part as we know that or may be less well capitalized and certainly those that serve the SMB space.
So far we really haven't seen any disruption or defaults, but.
But I would say with respect to supplier offerings and programs.
Potentially extend terms, we're always able to do that in the way that we pass on those offerings such that it does not negatively impact. So most of those programs turned out to be working capital neutral for us and our suppliers are really good at partnering with us.
As opposed to rolling those things independently in the way that hurts us. So we're not concerned about those programs, we will take advantage of them.
If it helps us close business, but we will step into unnecessary risk as we do so.
Thanks for that that's really helpful. And then just as a follow up on the components side of the business.
Mike you talked about I guess, a little bit better environment than I would've expected and some other people might have expected can you just sort of dig into little bit on the verticals, which end markets youre seeing holding up, especially given the risk that you have all these auto plant shutdowns that have some knock on effects on some industrial customers. Thank you.
Yes, the first thing I'll say avnet turn it over to Andy but first thing I would say theres not a vertical in the world right now that I can see that is.
So the thing to remember is there was a slow down going on but for coated.
So there was already.
And economic decline in place.
We're just saying and possibly being exacerbated now because of certain markets like automotive that you see in some of the other markets that are at the early stages of a shutdown.
Or a big slowdown.
So we're obviously very cautious about the market in general, but we remain committed and and.
Pleased by our performance within those markets. So I'll give it to Andy to give you some more specific to the market.
Vertical themselves, but there's not a lot of brightness up there.
Yeah. Thanks, Mike Your Bang on I'd, rather answer that question by saying, which are the ones that are down the most of the ones that are most exposed because every vertical is being impacted.
Through this through this cycle.
And the backdrop is the on so we gave earlier as it were not over exposed to any one particular vertical or any one particular segments. So we're able to pivot.
Our resources in our focus from segments that are have relative and I used the word relative.
Health quite quickly and nimbly, but really automotive is the area that is really well documented being problematic right now with holds and manufacture shutdowns in tier ones and twos follow suit commercial aviation within the same place.
As I say loss, we sell it does marketplace, we're not overexposed and the general industrial base relative to that is is better void by medical.
But to be honest by honest with you, Steve and it's pretty a pretty much down across the board has and look at those individual verticals and we pay the portfolio again.
Great. Thank you for all that very helpful.
No problem.
Thank you. Your next question is from William Stein of Suntrust.
Great. Thanks for taking my questions.
Mike I Wonder when you look at this.
They did backlog that you have today, which is little bit counter intuitive relative to.
Sort of what's going on I wouldn't even say in the macro just sort of look out the window and I.
I think does it make sense for for backlog to be up in this environment I Wonder if.
You have.
Any comments about your relative confidence in the backlog stability and maybe more specifically are you seeing.
Any increased volatility of customer pushes and pulls and adjustments to their backlog to respond to.
Either shortages or not getting parts are getting parts faster than they expected any clarification there would be helpful. Thank you.
Yes, certainly first off you know.
Backlog I would say steady as she goes I wouldn't put the term as aggressive as up as you do that Kid.
Looking pretty good.
And part of that reason as Dan consistent or the past five quarters where customers.
If you look at the customer base that we service have been getting their inventory then orders. So I'll start with we've seen that the second thing is we have not seen an up tick in cancellations from customers.
So it's sort of an interesting dilemma, what we have seen as customers.
Giving us the orders to make sure they're going to get the product when they want it.
And.
So far they have been.
Which is why I'm not sure that.
Everybody is on the over ordering a pattern.
The market, we've already and decline co that pushed it down.
So the real question in my mind, the I believe needs to be answered it how much of the impact to co bid over an economy that was already weak we were five quarters into what has traditionally been at six quarter downturn historically and you can go back to the lab to that pretty much has held true.
True.
And the fact that were just sort of taking a pause here and holding for one quarter. I think is good news and we'll see how the quarter materializes out from there, but so far everything has been steady here.
Our backlogs are steady we're not seeing a huge.
Ramp of those and obviously you have a decline at 12%.
Year over year in your numbers.
And of course book to Bill is going to look better.
Because the book to Bill indicates the future it doesn't indicate the path so.
When you when you have a drop like that have year over year sale.
You know just be cautious the book to Bill is less meaningful because customers are positioning.
Their inventories.
To match, what they're very marquee requirements are so hopefully that gives you a little bit about how we're thinking of it and now it's looking right now.
I appreciate that thank you one other if I can like you mentioned in the prepared remarks, you intend to emerge from this.
Current situation as a stronger business, we know that where we think that you're gaining some share it.
What does I think your largest supplier.
It seems pretty clear.
But I wonder if there and you're also going through this.
Divestiture of the asset disposal business.
Any other things that were maybe stimulated by the by the current situation that could cause the change in the business either.
One that you're.
One of your practically taking or whether you're sort of pushed into.
By the environment that would make a company stronger either in sort of an absolute weighing on a relative.
Way versus your competitors.
Well as far as.
It goes towards the competitors that.
Hard to see exactly what they're doing in this downturn, but for US remember we spoke a little bit early on about the increase of our services business, which were saying and type customers closer to what makes us more sticky added more involved in their business.
More involved with their products going in and out more involved from the design point of view. So we're seeing a number of those customers.
Going up and we think that that is great for the business because that really.
Was the vision.
Remember that was our strategy that engineering becomes a bigger and bigger piece of our business.
And it's interesting that we're seeing that despite co but despite the downturn in most of our engineering dynamics are still going up so customers are viewing us as a trusted source for their future design.
So that is one area that I do believe will come out much stronger as this.
Turns around.
We have been able to gain some efficiencies through our ERP system and the downturn has really shown a valuable that is in helping you data to our benefit is information before some of the data because we had multiple system.
We could never asked the same question everywhere in the World and then come up with the same answer or use the same metric to have those answers help us around efficiency of our business. So the ERP system now.
Is becoming a tool that we believe is important and I told you why before because we can see what products are increasing like for example, sensors and allows us to go in and take a position on sensors early on that will support not only to customers.
We have that the new customers asking.
For those products and that would really important when everybody figured out they wanted to build ventilators in that.
In the first quarter and I don't know, how many ventilated actually got off the engineering.
Hey, just to get built but.
There were lot of products that we now for that.
And it allows the capture current trend.
So those are going to be things that are going to be very important in the future that we stick with and.
Continually improve our situation continually improve where people go we think the company will get much more efficient because of it and allow us to grow faster and preserve working capital in a way that were not investing in things that maybe aren't so good anymore.
That helps thank you Mike.
Okay.
Thank you. Your next question is from Joe Quattrochi of Wells Fargo.
Yes, thanks for taking the question.
Kind of building on on your last answer there on the ERP system. That's really interesting do you think that.
Given kind of where your book to Bill sitting today.
You need to make some working capital investments this quarter, just trying to think about how to think about inventory.
No I think you look at the inventory the inventory relatively.
Stable, where it is it could end up going down a little bit.
I think is our plan so we do plan on.
Generating.
Cash flow and.
Add working capital for our benefit.
You know these inventories that we hold for customers presume that they take a minute certain period of time.
And if they don't take them then they lose that inventory and I think.
Customers right now are trying to figure out how to gear their factories back up and make a living so I'm not so sure they're willing to.
You know get out of place when it comes to getting their product.
So all in all right now I think were stable and steady as she goes we don't have any.
Working capital requirements for the second quarter.
As I said, we have things that are button down.
We still do have the investments and a couple of our logistic centers, which will make them.
Better for the future and more efficient and we'll continue with both but pretty much everything else.
You know if its move and it's getting to shutdown.
Okay.
Thanks, that's helpful and then on on the East side I was wondering is there any update you could give us on the saudis size of your cloud business.
I would think that would have accelerated this quarter and I think the past couple of years ago, you said that was around $1 billion.
Yes, sure thing Joe I think the last time, we talked about it we we probably mentioned that we were we were on a run rate approaching $1 billion. I can say is now well north of 1 billion.
And more importantly, if you get underneath that you look at the annualized recurring revenue piece of that.
Well, it's a little bit too early for us to call a number I can tell you that thats growing by.
Double digits pretty consistently in a grew again by double digits in Q1 so.
We continue to build that portfolio both in terms of.
Cloud offerings across the supplier base, but also in terms of our go to market capabilities with our aerospace your platform, which is really helping us changed the way, we sell and change the kind of selling partners, we engage and in turn.
Make us more and more sticky as we as we help our partners managed cloud subscriptions. So we're we're happy with the progress so far but we certainly have more to do.
Thank you.
Thank you. Your next question is from Adam Tindle of Raymond James.
Thanks, Good afternoon.
Circle back to some of the commentary that seem to have boots.
Mike mentioned not expecting some windfall, we'd have to disclose it if it was material I think some of the things that you were saying.
But if we looked at the some of the competitor revenue.
Cereal so.
Just a question.
Where do those billions in revenue go is that to say that that revenues potentially not coming arrow and secondly that.
Competitor actually grew sequentially with them in an environment, where everything is declining so I'm just.
That confused as Brian.
Want to go with them at this point and I, just any color around that would be helpful.
Yes, I mean, you're asking quite the same question we have.
You know I I don't know the answer to that last question you answered.
But what I can tell you is.
Yes, there are some customers coming.
I think there was re look at.
Exactly what you said they were going to do if you go back to the original letter.
T I said, that's exactly what they're doing and.
We have no reason to believe that that would.
Be a negative impact on us and would there be some benefit or some customers that.
Want to come to us yes.
That's true but.
The program hasn't changed so all I'm cautioning, you guys don't make us into something it's not.
The question, just keep coming and.
Got I wish I could tell you with $10 billion that we're going to have a rig and windfall that'd be great wouldn't that but if not that.
And I think it's everybody has been a little over exuberant about it and if not the reason for our performance.
Okay, that's fair.
And then also I wanted to dig into the approximately $30 million in charge is is it could you maybe break that down further into what portion is foreign tax versus loss on investments what did loss on investments mean and are there what are the gating factors to see that come back into operating profit dollars for SCS or should we be thinking about just a permanent.
The million dollar reduction to the run rate.
Yes, no it's definitely not a 30 million dollar reduction to the run rates, let's start there as Mike mentioned and I mentioned this took place over five years, the bulk of it really surrounds.
You know taxes that impact ROI, so sales taxes, VAT taxes, those kinds of things.
When we say other contingencies there was a few things that.
We caught from a reconciliation standpoint that we felt needs to be cleaned up but from an ongoing run rate standpoint, I would argue that.
Got it even if you took a number of new divided up by five years, that's not the concern because theres penalties and interest in that that we're having to deal with as well so we're on it and.
And we're addressing the issues and will move forward from here.
Okay, I guess I clarify one thing.
I could add on the 16 million law loss on investment you see an income statement as a mark to market on.
Some other investments due to the stock market performance during the quarter and had nothing to do with the charges.
Okay. Thank you.
Thank you. Your next question is from Ruplu Butter Korea Bank of America.
Hi, Thanks for taking my questions and congrats on the quarter.
Chris I, just wanted to talk a little bit about the book value per share. It's about $57. One of your competitors to the goodwill and intangible asset write off how should investors think about the goodwill on your balance sheet have you guys, taking a look at that and any any danger of any write offs in the near term.
And we look at that on our on a regular basis.
And now pretty much quarterly.
And we are good for now.
The way you have to evaluate that.
In terms of weather is an impairment is in part anyways based off of how the market views Arrow and currently with the stock.
Above book right now we're in good shape. So the bulk of the goodwill that exists obviously relates to acquisitions that were done years ago, but we did do a rigorous test as we close Q1 and we are good.
Okay. Thanks for that.
Just on inorganic growth I mean valuations for a company that pulled back I know you need to conserve cash at this point, but at some point are you going to start.
Looking at M&A, and how should we think about that going forward.
Yeah, I think the again.
Remember, we told you to uses of our cash obviously internal growth was.
The most important and then we look at sort of M&A and then.
Returned to the shareholders.
You know there's.
Right now.
There's probably another one that you would put in there that you would never have had to put in there had not been for go but in that was the make sure. Your preserve for my enough liquidity to run your business engage of a catastrophe.
And I think at this point.
We've demonstrated we have the liquidity.
To run the business and.
At this point our main concern is that the business emerge stronger than it did before.
So that would be our first use of cash whatever that means.
And at this point in time.
Not looking at any any big acquisitions that are going to make changes here I think we just want to see the market get back stable get back a little more normal we've got enough to do to keep our business is healthy and efficient than delay something else on top of its not efficient or.
As a bunch of problems that.
Frankly, I don't want to deal with I don't know problems right now and I think we're doing a pretty good job managing them I, just don't want to add to the stack of problems if that helps you.
Yes that makes sense and from my last question Chris.
Can you talk about strong book to Bill one done one tool as we stand here April Thirtyth can you talk about the relative strength across in components across all three regions, which one is trending.
Longer which when a user.
And looking at that Andy Yes, we've seen the positive trends continue through April as Mike pointed out and we're seeing our businesses play out pretty much as we expected.
And most noticeable was the expected bounce back in China and that is indeed, what we're seeing so nothing abnormal to the way we guided in the regional makeup so far.
Okay. Thanks for taking my questions and the guys. Congrats again on the strong quarter and also we're giving guidance which is impressive in this environment. Thank you.
And I do believe.
Thank you. Your next question is from Tim Yang with Citi.
Hi, Thanks for taking the question you mentioned this thought design activity. This activity is actually increased the overall year over year basis can you talk about which end markets are driving that design activity.
Thanks.
Ventilators and also a home monitoring devices in the major driver.
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Yes.
Thanks.
I think what we're going to do is.
As far as a design goes we're going to have Andy talked to you about it because it's been a good.
It's actually been a good investment by us over the years that as we think is going to pay off and there is lot going on now so Andy why don't you go ahead.
Talk about it yes, Tim we're seeing design activity out up pretty well firstly recently across the world. So thats encouragement, we put a lot of investment into Asia and on demand creation facilities and Thats playing out well in terms of end market segments as I said earlier on we're pretty well diversified across those segments.
Broad industrial base is obviously, a big part of our Heartland and Thats really the Heartland Novara engineering efforts.
We're seeing that continue to play out but don't forget we continue to do design work in automotive segments in.
Aerospace and defense et cetera et cetera. So.
It's the kind of breadth of customers that we touch the engineering investments, we've made which is really enabling us to continue to do this.
Andrew This current market cycles. So hopefully that gives you a little color about where we're seeing it.
Sure, Yes, that's very helpful.
And then if I use the midpoint of your guidance and I think it implies operating margins at roughly 3.1% and I assume that you'll Q2 SDMA will be.
Similar to Q1 level, given that theres actual cost to run the warehouse.
Leases virus, so that means your gross margin will be roughly.
Which means less than 40 basis points year over year gross.
I mean 40 basis point increase on your with your basis. So can you maybe just talk about it doesn't right way to think about your gross margin for June quarter. So.
What's driving this gross margin improvement I think its design activity definitely was.
But I think you have lower volume, but a gross margin true comps and how sustainable do some margin performance could be thank you.
Yes, you got an awful lot in there and I'm going to answer kind of yes all of it.
Because as you know margin as an up.
You know a one quarter windfall. The other thing is keep in mind is the relative mix of our sales right now is changing very quickly.
And that's something that we have not had to deal with or where you have in China was shut down.
And then a month later, a China coming back up.
And so completely shut down of sales with changes your mix a little bit so don't don't underestimate that impact on margin or on growth margins.
Same thing you have in the warehouses with freight.
No.
Depending on where we have to shift from because you might have something down in one portion of the world that is a more efficient warehouse to ship to that region of a world all of sudden comes from somewhere else.
And you know our big goal is to service our customers with what they need when they need it.
And then the third thing as are the third in the fourth thing is our engineering business has stayed stable, which helps the margins and our services business has increase which increases the margin. So.
You know, it's really very hard to bring that down to one item, but this has been our strategy all along and so our strategy is playing out that a we can operate anywhere in the world at any time under any circumstance I think first quarter has shown that we can do that by the way at the same time, we said.
More than 10000 people to work from home.
Don't don't take that number out of your mind Thats a ton of people that were in the office one day and then in one day they were home.
And there is cost to that but they have been maintaining.
Their sales organism the profits on those sales orders so that has been beneficial to so I want to give you a little color before Chris.
Added to it just well what we were dealing with in this quarter. So is it last thing it's hard to say, yes and Tim.
Couple of quick point, we are expecting SGN added go down so in spite of headwinds on transportation and some of the warehousing challenges that we face we gone on lockdown on anything discretionary we're protecting our key strategic.
Areas as Mike mentioned like around design, that's critical to us that's going to serve us well in the future I think the other thing is just kind of moving away from operating income margin relates to the question. It was asked a little bit earlier, we did have some some other operating losses of about $16 million in Q1 that relate to mark to market adjustments.
In some pensions and then also in some other stock investments that we hold in joint ventures and so.
That is not expected to.
Re occur again in Q2, and so thats, a tailwind to EPS as well.
Super helpful. Thank you.
Okay.
Thank you. Your next question is from Nick tighter off of Longbow Research.
Thanks, Good afternoon guys.
Can you talk.
If you have seen a supply chain disruptions and changes tend to lead times for the hardware portion of your sense business and if so have you seen an impact on demand from that and just related I think I occurred as you noticed strength and orders for storage I just want to make sure thats for the software part of.
Storage and not to the typical hardware portion.
Yes, John yet.
So sure Nick let me start with your.
Your second question for so my comments about storage was once the hardware storage in the first quarter.
We do understand that traditional on Prem infrastructure is somewhat challenged in this environment, Although I would say over the long term.
Highly doubtful that it goes away and it's still remains a significant piece of our business in terms of the supply chain. Overall, we did exit the March quarter with a very significant backlog, we have seen that drain somewhat in the month of April that certainly gives us.
Some confidence relative to our our two two outlook I would say the supply chain challenges have not completely abated.
Since the Chinese capacity has opened up to some degree we've seen some of the component level.
Challenges moderate on the other hand, there are still bottlenecks at different points in the process.
To be at Assembly integration and test et cetera.
And we just continue to work with each of our suppliers case by case basis to make sure. We can meet customer expectations, but in general lead times have an extended much further than where they were before this all started.
With the exception of some things that are prioritized for healthcare and government agencies, we seem to be making progress on it at the moment.
Okay, and if I can just follow up on I think just took some.
Restructuring and cost so last year is there any savings that are left to roll into this year and do you do you see the need for additional cost cuts out and then just discretionary that you're taking near term.
So.
We're in Q2, we will lap effectively will have a full year impact.
From last year's actions under our belt.
The in terms of what we're doing right now it really is cutting discretionary.
Our goal is to make sure that we maintain our strategy because that strategy served us very well over the last couple of years and that will be what differentiates us coming out of this so we're doing everything we can to protect that and we think the actions that we've taken today.
Our our serving as well.
Thank you we have no further questions at this time I will turn the call back over to Steve O'brien for any additional or closing remarks.
Thank you in closing I will review Arrow's Safe Harbor statement. Some of the comments made on today's call have included forward looking statements, including statements dressing future financial results. These statements are subject to a number of risk risk and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons and the company.
Undertakes no obligation to update publicly or revise any of the forward looking statements 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.
Thank you. This does conclude today's conference call you may now disconnect.