Attached files
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| EX-99.1 - EXHIBIT 99.1 - ARROW ELECTRONICS INC | q42016pressreleaseexhibit9.htm |
| 8-K - 8-K - ARROW ELECTRONICS INC | q420168-kpressrelease.htm |
Fourth Quarter
2016
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CFO Commentary
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
prior quarter of last year. The discussion of our
results may 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 and the earnings
reconciliation found at the end of this document.
The following reported and adjusted information
included in this CFO commentary is unaudited
and should be read in conjunction with the
company’s 2016 Annual Report on form 10-K as
filed with the Securities and Exchange
Commission
Record 2016
earnings per share of
$5.68 grew 9% Y/Y;
record non-GAAP
earnings per share of
$6.63 grew 7% Y/Y.
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Fourth-Quarter 2016 CFO Commentary
2
Fourth-Quarter Summary
We completed an exceptional year in 2016 with record sales, gross profit,
earnings per share and non-GAAP earnings per share. Fourth-quarter results
were within our expectations despite unfavorable changes in foreign currencies
that understated year-over-year growth rates and were not factored into our
prior guidance ranges. We delivered record fourth-quarter earnings per share
and non-GAAP earnings per share.
Fourth-quarter 2016 global component sales grew 9% year over year and
global components achieved record fourth-quarter sales and gross profit. Our
investments in our digital platform, as well as sales and engineering resources
accelerated our growth. Asia sales grew 22% year over year. Americas sales
grew 4% year over year. Europe again delivered sales growth up 2% year over
year adjusted for changes in foreign currencies, the 15th straight quarter of
adjusted year-over-year growth. Global components operating income
increased 8% year over year.
Fourth-quarter enterprise computing solutions sales declined 21% year over
year. Compared to the fourth quarter of 2015, sales were negatively impacted
by approximately $250 million from the later start to the quarter, and $250
million from a greater mix of software and services sales accounted under a
net basis. Applying these impacts, we estimate enterprise computing solutions
sales would be down approximately 5% year over year. We believe operating
income, on a multi-quarter basis, is the best measure of our enterprise
computing solutions business. In 2016 enterprise computing solutions
operating income increased 4% year over year and increased 5% year over
year adjusted for changes in foreign currencies.
We delivered record fourth-
quarter earnings per share
and non-GAAP earnings
per share.
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Fourth-Quarter 2016 CFO Commentary
3
P&L Highlights* Q4 2016 Y/Y Change
Y/Y Change Adjusted for
Acquisitions & Currency Q/Q Change
Sales $6,443 (5)% (4)% 9%
Gross Profit Margin 12.8% +40bps +30bps -20bps
Operating Income $255 flat 1% 28%
Operating Margin 4.0% +20bps +20bps +60bps
Non-GAAP Operating
Income $281 (1)% flat 19%
Non-GAAP Operating
Margin 4.4% +20bps +20bps +40bps
Net Income $165 4% 5% 40%
Diluted EPS $1.81 7% 9% 41%
Non-GAAP Net Income $182 flat 1% 27%
Non-GAAP Diluted EPS $2.00 3% 4% 29%
Consolidated Overview
Fourth Quarter 2016
$ in millions, except per share data; may reflect rounding
• Fourth-quarter sales were $6.44 billion
– Sales decreased 5% year over year and increased
9% quarter over quarter
– Sales decreased 4% year over year adjusted for the
impact of acquisitions and changes in foreign
currencies
• Consolidated gross profit margin was 12.8%
– Gross profit margin increased 40 basis points year
over year due to a greater mix of global components
sales and higher enterprise computing solutions
gross margins
– Gross profit margin decreased 20 basis points
quarter over quarter due principally to a greater mix
of enterprise computing solutions sales
• Operating income was $255 million
– Flat year over year
– Operating income increased 1% year over year
adjusted for the impact of acquisitions and changes
in foreign currencies
– Operating expenses as a percentage of sales were
8.8%, up 10 basis points year over year
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Fourth-Quarter 2016 CFO Commentary
4
• Non-GAAP operating income was $281 million
– Decreased 1% year over year
– Flat year over year adjusted for the impact of
acquisitions and changes in foreign currencies
– Non-GAAP operating expenses as a percentage of
sales were 8.4%, up 20 basis points year over year
as we continued to invest in growth initiatives
• Effective tax rate for the quarter was 24.4%
• Non-GAAP effective tax rate was 25.3%
• Net income was $165 million
– Increased 4% year over year
– Increased 5% year over year adjusted for the
impact of acquisitions and changes in foreign
currencies
• Earnings per share were $1.81 on a diluted basis
– Increased 7% year over year
– Increased 9% year over year adjusted for the
impact of acquisitions and changes in foreign
currencies
• Non-GAAP net income was $182 million
– Flat year over year
– Increased 1% year over year adjusted for the
impact of acquisitions and changes in foreign
currencies
• Non-GAAP earnings per share were $2.00 on a
diluted basis
– Increased 3% year over year
– Increased 4% year over year adjusted for the
impact of acquisitions and changes in foreign
currencies
A reconciliation of non-GAAP adjusted financial measures,
including sales, as adjusted, operating income, as
adjusted, net income attributable to shareholders, as
adjusted, and net income per share, as adjusted, to GAAP
financial measures is presented in the reconciliation tables
included herein.
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Fourth-Quarter 2016 CFO Commentary
5
Components
Global
• Sales increased 9% year over year
• Lead times are in line with historical norms
• Backlog increased year over year
• Book-to-bill was 1.09, up from 1.05 in the fourth
quarter of 2015
• Gross profit dollars increased 2% year over year
• Gross margin decreased 100 basis points year over
year
– The decline was principally attributable to a higher
relative contribution from the Asia region
• Operating margin of 4% decreased 10 basis points
year over year
• Non-GAAP operating margin of 4.2% decreased 10
basis points year over year
• Return on working capital declined 240 basis points
year over year, due to investments in inventory for new
supplier engagements and a successful deployment of
part of our new ERP system in the Americas.
Global components
posted record fourth-
quarter sales and gross
profit.
Non-GAAP Operating Income
($ in millions)
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Fourth-Quarter 2016 CFO Commentary
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Components
Americas
• Sales increased 4% year over year
– Growth driven by our digital platform and reverse
logistics
– Growth in the lighting and aerospace & defense
verticals year over year
Americas components
sales increased 4%
year over year.
Sales ($ in millions)
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Fourth-Quarter 2016 CFO Commentary
7
Components
Europe
• Sales increased 2% year over year adjusted for the
impact of changes in foreign currencies
– Sales decreased 1% year over year as reported
– Growth in the aerospace & defense,
transportation, and lighting verticals year over
year
Europe components
sales increased 2%
year over year adjusted
for changes in foreign
currencies.
Sales ($ in millions)
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Fourth-Quarter 2016 CFO Commentary
8
Components
Asia
• Sales increased 22% year over year
– Strong growth in the industrial power, wireless,
and transportation verticals year over year
Asia components sales
increased 22% year
over year.
Sales ($ in millions)
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Fourth-Quarter 2016 CFO Commentary
9
Enterprise Computing Solutions
Global
• Sales decreased 21% year over year
– Sales growth was negatively impacted by
approximately $250 million due to the later start
of the fourth quarter of 2016 compared to the
fourth quarter of 2015
– Sales growth was negatively impacted by
approximately $250 million year over year due to
the recognition of software and services sales on
a net basis
• Gross profit dollars decreased 7% year over year
– Gross margin increased 180 basis points year
over year
• Operating margin of 6.5% increased 90 basis points
year over year
• Non-GAAP operating margin of 6.7% increased 90
basis points year over year
• Return on working capital increased year over year
for the 13th consecutive quarter
Enterprise computing
solutions posted record
fourth-quarter operating
margin.
Non-GAAP Operating Income
($ in millions)
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Fourth-Quarter 2016 CFO Commentary
10
Enterprise Computing Solutions
Americas
• Sales decreased 20% year over year
– Sales decreased 22% year over year adjusted for
acquisitions and changes in foreign currencies
– Hardware sales, including servers, networking
and storage declined year over year
– Full-year 2016 operating income increased year
over year
ECS Americas
operating income
increased year over
year in 2016.
Sales ($ in millions)
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Fourth-Quarter 2016 CFO Commentary
11
Enterprise Computing Solutions
Europe
• Sales decreased 17% year over year adjusted for
the impact of acquisitions and changes in foreign
currencies
– Sales decreased 22% year over year as reported
– Growth in security and virtualization software,
and services year over year adjusted for the
impact of acquisitions and changes in foreign
currencies
– Full-year 2016 operating income increased year
over year
ECS Europe operating
income increased year
over year in 2016.
Sales ($ in millions)
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Fourth-Quarter 2016 CFO Commentary
12
P&L Highlights* 2016 Y/Y Change
Y/Y Change Adjusted for
Acquisitions & Currency
Sales $23,825 2% 0.5%
Gross Profit Margin 13.2% +20bps +10bps
Operating Income $859 4% 2%
Operating Margin 3.6% +10bps +10bps
Non-GAAP Operating
Income $987 5% 3%
Non-GAAP Operating
Margin 4.1% flat +10bps
Net Income $523 5% 4%
Diluted EPS $5.68 9% 8%
Non-GAAP Net Income $610 3% 2%
Non-GAAP Diluted EPS $6.63 7% 6%
Consolidated Overview
Full- Year 2016
$ in millions, except per share data; may reflect rounding
• 2016 sales were $23.8 billion
– Sales increased 2% year over year
– Adjusted for the impact of acquisitions and changes
in foreign currencies, sales increased 0.5% year
over year
• Consolidated gross profit margin was 13.2%
– Increased 20 basis points year over year principally
due to higher enterprise computing solutions
margins and an increased in global components
within our mix
• Operating income margin was 3.6%, up 10 basis points
year over year
– Operating expenses as a percentage of sales were
9.6%, up 10 basis points year over year
• Non-GAAP operating income margin was 4.1%, flat
year over year
– Non-GAAP operating expenses as a percentage of
sales were 9.1%, up 10 basis points year over year
• Effective tax rate was 26.7%
• Non-GAAP effective tax rate was 27.4%
• Earnings per share on a diluted basis were $5.68
– Increased 9% year over year
– Increased 8% year over year adjusted for
acquisitions and changes in foreign currencies
• Non-GAAP earnings per share on a diluted basis were
$6.63
– Increased 7% year over year
– Increased 6% year over year adjusted for
acquisitions and changes in foreign currencies
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Fourth-Quarter 2016 CFO Commentary
13
Cash Flow from Operations
Cash flow from operating activities was $220 million in
the quarter and was $356 million in 2016.
Working Capital
Working capital to sales was 14.9% in the quarter, up
210 basis points year over year. Working capital to
sales was 15.4% in 2016, up 30 basis points year over
year. Return on working capital was 29.4% in the
quarter, down 370 basis points year over year. Return
on working capital was 26.9% in 2016, up 10 basis
points year over year.
Return on Invested Capital
Return on invested capital was 12.1% in the quarter and
10.5% for the full year, ahead of our weighted average
cost of capital.
Share Buyback
We repurchased approximately $49 million of our stock.
Total cash returned to shareholders over the last 12
months of approximately $200 million.
Debt and Liquidity
Net-debt-to-last-12-months EBITDA ratio is
approximately 2.1x. Total liquidity of $2.8 billion when
including cash of $534 million.
We repurchased
approximately $49 million
of our stock in the fourth
quarter, bringing total
cash returned to
shareholders in 2016 to
approximately $200
million.
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Fourth-Quarter 2016 CFO Commentary
14
Arrow Electronics Outlook
Guidance
We are expecting the average USD-to-Euro exchange rate for the first quarter of 2017 to be $1.07 to €1
compared to $1.10 to €1 in the first quarter of 2016. Assuming exchange rates remain unchanged for the
remainder of the quarter, we expect changes in foreign currencies will negatively impact year-over-year sales
growth by approximately $70 million, and year-over-year earnings per share growth by $.03.
First-Quarter 2017 Guidance
Consolidated Sales $5.375 billion to $5.775 billion
Global Components $3.775 billion to $3.975 billion
Global ECS $1.6 billion to $1.8 billion
Diluted Earnings Per Share $1.18 to 1.30
Non-GAAP Diluted Earnings Per Share $1.37 to 1.49
* Assumes average diluted shares outstanding of 91 million and an average tax rate of 27 to 29 %.
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Fourth-Quarter 2016 CFO Commentary
15
Risk Factors
The discussion of the company’s
business and operations should be
read together with the risk factors
contained in Item 1A of its 2016
Annual Report on Form 10-K, filed
with the Securities and Exchange
Commission, which describe various
risks and uncertainties to which the
company is or may become subject.
If any of the described events occur,
the company’s business, results of
operations, financial condition,
liquidity, or access to the capital
markets could be materially adversely
affected.
Information Relating
to Forward-Looking
Statements
This press release includes forward-looking
statements that are subject to numerous assumptions,
risks, and uncertainties, which could cause actual
results or facts to differ materially from such
statements for a variety of reasons, including, but not
limited to: industry conditions, company’s
implementation of its new enterprise resource
planning system, changes in product supply, pricing
and customer demand, competition, other vagaries in
the global components and global enterprise
computing solutions markets, changes in relationships
with key suppliers, increased profit margin pressure,
effects of additional actions taken to become more
efficient or lower costs, risks related to the integration
of acquired businesses, changes in legal and
regulatory matters, and the company’s ability to
generate additional cash flow. Forward-looking
statements are those statements which are not
statements of historical fact. These forward-looking
statements can be identified by forward-looking words
such as “expects,” “anticipates,” “intends,” “plans,”
“may,” “will,” “believes,” “seeks,” “estimates,” and
similar expressions. Shareholders and other readers
are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of
the date on which they are made. The company
undertakes no obligation to update publicly or revise
any of the forward-looking statements.
For a further discussion of factors to consider in
connection with these forward-looking statements,
investors should refer to Item 1A Risk Factors of the
company’s Annual Report on Form 10-K for the year
ended December 31, 2016.
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Fourth-Quarter 2016 CFO Commentary
16
In addition to disclosing financial results that are
determined in accordance with accounting
principles generally accepted in the United States
(“GAAP”), the company also provides certain non-
GAAP financial information relating to sales,
operating income, net income attributable to
shareholders, and net income per basic and
diluted share. The company provides sales on a
non-GAAP basis adjusted for the impact of
changes in foreign currencies and the impact of
acquisitions by adjusting the company’s operating
results for businesses acquired, including the
amortization expense related to acquired
intangible assets, as if the acquisitions had
occurred at the beginning of the earliest period
presented (referred to as “impact of acquisitions”).
Operating income, net income attributable to
shareholders, and net income per basic and
diluted share are adjusted for certain charges,
credits, gains, and losses that the company
believes impact the comparability of its results of
operations. These charges, credits, gains, and
losses arise out of the company’s efficiency
enhancement initiatives, acquisitions (including
intangible assets amortization expense), loss on
prepayment of debt, and (gain)/loss on
investments. A reconciliation of the company’s
non-GAAP financial information to GAAP is set
forth in the tables below.
The company believes that such non-GAAP
financial information is useful to investors to assist
in assessing and understanding the company’s
operating performance and underlying trends in
the company’s business because management
considers these items referred to above to be
outside the company’s core operating results. This
non-GAAP financial information is among the
primary indicators management uses as a basis for
evaluating the company’s financial and operating
performance. In addition, the company’s Board of
Directors may use this non-GAAP financial
information in evaluating management
performance and setting management
compensation.
The presentation of this additional non-GAAP
financial information is not meant to be considered
in isolation or as a substitute for, or alternative to,
operating income, net income attributable to
shareholders and net income per basic and diluted
share determined in accordance with GAAP.
Analysis of results and outlook on a non-GAAP
basis should be used as a complement to, and in
conjunction with, data presented in accordance
with GAAP.
Certain Non-GAAP Financial Information
The company believes that
such non-GAAP financial
information is useful to
investors to assist in
assessing and understanding
the company’s operating
performance.
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Fourth-Quarter 2016 CFO Commentary
17
Three months ended December 31, 2016
Reported
GAAP
measure
Intangible
amortization
expense
Restructuring
& Integration
charges Other*
Non-GAAP
measure
Operating income $ 254,899 $ 13,634 $ 12,441 $ — $ 280,974
Income before income taxes 218,191 13,634 12,441 — 244,266
Provision for income taxes 53,233 4,870 3,733 — 61,836
Consolidated net income 164,958 8,764 8,708 — 182,430
Noncontrolling interests 440 336 — — 776
Net income attributable to shareholders $ 164,518 $ 8,428 $ 8,708 $ — $ 181,654
Net income per diluted share 1.81 0.09 0.10 — 2.00
Effective tax rate 24.4 % 25.3 %
Three months ended December 31, 2015
Reported
GAAP
measure
Intangible
amortization
expense
Restructuring
& Integration
charges Other*
Non-GAAP
measure
Operating income $ 254,311 11,743 17,666 — 283,720
Income before income taxes 220,516 11,743 17,666 1,500 251,425
Provision for income taxes 61,108 2,206 4,467 579 68,360
Consolidated net income 159,408 9,537 13,199 921 183,065
Noncontrolling interests 916 — — — 916
Net income attributable to shareholders $ 158,492 9,537 13,199 921 182,149
Net income per diluted share 1.69 0.10 0.14 0.01 1.94
Effective tax rate 27.7 % 27.2 %
Three months ended October 1, 2016
Reported
GAAP
measure
Intangible
amortization
expense
Restructuring
& Integration
charges Other*
Non-GAAP
measure
Operating income $ 198,684 13,893 24,267 — 236,844
Income before income taxes 162,766 13,893 24,267 — 200,926
Provision for income taxes 44,931 4,959 7,439 — 57,329
Consolidated net income 117,835 8,934 16,828 — 143,597
Noncontrolling interests 108 347 — — 455
Net income attributable to shareholders $ 117,727 8,587 16,828 — 143,142
Net income per diluted share 1.28 0.09 0.18 — 1.56
Effective tax rate 27.6 % 28.5 %
*Other includes gain/loss on sale of investments and loss on prepayment of debt.
**The sum of the components for diluted EPS, as adjusted may not agree to totals, as presented, due to rounding.
Earnings Reconciliation
($ in thousands, except per share data)