EX-99.2 3 q12018cfocommentaryexhib.htm EXHIBIT 99.2
1investor.arrow.com First Quarter 2018 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 Form 10-Q for the quarterly period ended March 31, 2018, and the Annual Report on form 10-K as filed with the Securities and Exchange Commission. First-quarter 2018 diluted earnings per share increased 23% year over year; non GAAP diluted earnings per share increased 29% year over year.

First-Quarter 2018 CFO Commentary 2investor.arrow.com First-Quarter Summary Continued strong growth momentum for our business drove record first-quarter sales, gross profit, operating income, and earnings per share. First-quarter sales were above the high end of our expectation on strong demand for electronic components and IT solutions. First-quarter gross profit, operating income, and earnings per share year-over-year growth accelerated compared to the fourth quarter of 2017. Record first-quarter global components sales exceeded our expectation. First- quarter global component sales increased 21% year over year. Asia sales increased 20% year over year driven by our investments in sales and engineering resources. Europe sales increased 32% year over year and increased 16% year over year adjusted for changes in foreign currencies, the 20th straight quarter of adjusted year-over-year growth. Americas sales increased 15% year over year with digital sales the principal driver. Global components delivered healthy leverage as operating income increased 32% year over year. First-quarter enterprise computing solutions sales increased 16% year over year and were above our expectation. Europe sales increased 29% year over year and increased 9% year over year adjusted for an acquisition, a divestiture, and changes in foreign currencies. Americas sales increased 9% year over year and increased 12% adjusted for a divestiture and changes in foreign currencies. First-quarter enterprise computing solutions operating income increased 2% year over year and non-GAAP operating income increased 1% year over year. Operating income would have increased 4% year over year adjusted for the systems integration business divestiture that was not reflected in prior guidance. Please note, prior period figures have been adjusted for new accounting standards. Continued strong growth resulted in record first-quarter sales, gross profit, operating income, and earnings per share.

First-Quarter 2018 CFO Commentary 3investor.arrow.com P&L Highlights* Q1 2018 Y/Y Change Y/Y Change Adjusted for Acquisitions, Dispositions, & Currency Q/Q Change Sales $6,876 20% 14% (9)% Gross Profit Margin 12.6% -70 bps -70 bps 30 bps Operating Income $236 22% 14% (18)% Operating Margin 3.4% flat flat -40 bps Non-GAAP Operating Income $272 23% 14% (20)% Non-GAAP Operating Margin 4.0% 10 bps flat -50 bps Net Income $139 21% 14% 159% Diluted EPS $1.56 23% 15% 160% Non-GAAP Net Income $168 27% 18% (20)% Non-GAAP Diluted EPS $1.88 29% 20% (19)% Consolidated Overview First Quarter 2018 $ in millions, except per share data; may reflect rounding. Prior periods adjusted for new accounting standards. • Consolidated sales were $6.88 billion – Above the high end of our prior expectation of $6.4- $6.8 billion • Consolidated gross profit margin was 12.6% – Decreased 70 basis points points year over year due to enterprise computing solutions business mix, and global components business mix in Asia and Europe – Increased 30 basis points quarter over quarter due to higher global components margins in all regions and a larger contribution from global components relative to enterprise computing solutions • Operating income margin was 3.4% and non-GAAP operating income margin was 4.0% – Operating expenses as a percentage of sales were 8.9%, down 70 basis points year over year – Non-GAAP operating expenses as a percentage of sales were 8.7%, down 70 basis points year over year – The decline in operating expense as a percentage of sales reflects the operational efficiencies we achieved to align our costs to our business mix • Interest and other expense, net was $45 million – Increased $7 million year over year due to higher debt balances and higher interest rates on floating- rate debt

First-Quarter 2018 CFO Commentary 4investor.arrow.com • Effective tax rate for the quarter was 25.0%, and non- GAAP effective tax rate was 25.1% – Non-GAAP effective tax rate was above the midpoint of our longer term range of 23.5-25.5% • Diluted shares outstanding were 89 million – In-line with our prior expectation of 89 million • Diluted earnings per share were $1.56 – In line with our prior expectation of $1.50 - 1.62 • Non-GAAP diluted earnings per share were $1.88 – Above the high end of our prior expectation of $1.74 - 1.86 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.

First-Quarter 2018 CFO Commentary 5investor.arrow.com $240 $220 $200 $180 $160 $140 $120 Q1-'17 Q2-'17 Q3-'17 Q4-'17 Q1-'18 $181 $204 $220 $224 $238 Components Global • Sales increased 21% year over year – Increased 16% year over year adjusted for acquisitions and changes in foreign currencies • Lead times extended • Backlog increased significantly year over year • Book-to-bill was 1.22, up from 1.14 in the first quarter of 2017 • Cancellation rates remain within normal ranges • Operating margin of 4.7% increased 40 basis points year over year • Non-GAAP operating margin of 4.8% increased 40 basis points year over year – Margin increased in all three regions led by Europe • Return on working capital increased 110 basis points year over year due to growing returns on working capital investments Global components posted record first- quarter sales and operating income. Non-GAAP Operating Income ($ in millions)

First-Quarter 2018 CFO Commentary 6investor.arrow.com $2,200 $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 Q1-'17 Q2-'17 Q3-'17 Q4-'17 Q1-'18 $1,564 $1,700 $1,817 $1,930 $1,797 Components Americas • Sales increased 15% year over year – Sales increased 13% adjusted for acquisitions and changes in foreign currencies – Record first-quarter sales – Strong growth in digital sales – Strong growth in the aerospace & defense, consumer, data processing, and transportation verticals year over year – Growth in the alternative energy and medical devices verticals, and from large supply chain customers Americas components sales increased 15% year over year. Sales ($ in millions)

First-Quarter 2018 CFO Commentary 7investor.arrow.com $1,500 $1,400 $1,300 $1,200 $1,100 $1,000 Q1-'17 Q2-'17 Q3-'17 Q4-'17 Q1-'18 $1,118 $1,192 $1,262 $1,296 $1,478 Components Europe • Sales increased 32% year over year – Sales increased 16% year over year adjusted for changes in foreign currencies – Record first-quarter sales – Strong growth in core components distribution and increasing contribution from digital sales – Strong growth in the aerospace and defense, lighting, and transportation verticals year over year, and from large supply chain customers Europe components sales increased 32% year over year. Sales ($ in millions)

First-Quarter 2018 CFO Commentary 8investor.arrow.com $1,800 $1,700 $1,600 $1,500 $1,400 $1,300 $1,200 Q1-'17 Q2-'17 Q3-'17 Q4-'17 Q1-'18 $1,377 $1,570 $1,786 $1,719 $1,655 Components Asia • Sales increased 20% year over year – Sales increased 19% adjusted for changes in foreign currencies – Record first-quarter sales – Strong growth in core components – Strong growth in the IoT and transportation verticals year over year, and from large supply chain customers Asia components sales increased 20% year over year. Sales ($ in millions)

First-Quarter 2018 CFO Commentary 9investor.arrow.com $180 $160 $140 $120 $100 $80 $60 Q1-'17 Q2-'17 Q3-'17 Q4-'17 Q1-'18 $88 $112 $100 $167 $89 Enterprise Computing Solutions Global • Sales increased 16% year over year – Sales increased 11% year over year adjusted for changes in foreign currencies, an acquisition and two divestitures • Billings increased at a double-digit rate year over year adjusted for changes in foreign currencies • Operating margin of 4.3% decreased 60 basis points year over year • Non-GAAP operating margin of 4.6% decreased 70 basis points year over year – The decrease was due to product and customer mix in the Americas region • Return on working capital continues to excel • Prior periods adjusted for new accounting standards Enterprise computing solutions posted record first-quarter sales and operating income. Non-GAAP Operating Income ($ in millions)

First-Quarter 2018 CFO Commentary 10investor.arrow.com $1,900 $1,700 $1,500 $1,300 $1,100 $900 Q1-'17 Q2-'17 Q3-'17 Q4-'17 Q1-'18 $1,095 $1,307 $1,358 $1,629 $1,195 Enterprise Computing Solutions Americas • Sales increased 12% year over year adjusted for the divestiture of the systems integration business and changes in foreign currencies – Sales increased 9% year over year as reported – Record first-quarter sales – Strong growth in storage, and in infrastructure software across the portfolio led by virtualization – Growth in services – Proprietary servers and networking decreased year over year • Prior periods adjusted for new accounting standards ECS Americas sales increased 12% year over year adjusted for divestiture of the systems integration business and changes in foreign currencies. Sales ($ in millions)

First-Quarter 2018 CFO Commentary 11investor.arrow.com $1,000 $900 $800 $700 $600 $500 $400 Q1-'17 Q2-'17 Q3-'17 Q4-'17 Q1-'18 $583 $653 $634 $965 $750 Enterprise Computing Solutions Europe • Sales increased 29% year over year – Sales increased 9% year over year adjusted for changes in foreign currencies, a small acquisition, and a small divestiture – Record first-quarter sales – Strong growth in industry standard servers, storage, and services – Strong growth in infrastructure software across the portfolio led by virtualization – Proprietary servers and networking decreased year over year • Prior periods adjusted for new accounting standards ECS Europe sales increased 29% year over year. Sales ($ in millions)

First-Quarter 2018 CFO Commentary 12investor.arrow.com Cash Flow from Operations Cash flow from operating activities was negative $75 million in the quarter. Working Capital Working capital to sales was 17.6% in the quarter, up 40 basis points year over year. Return on working capital was 22.5% in the quarter, flat year over year. Return on Invested Capital Return on invested capital was 10.1% in the quarter, up 100 basis points year over year, and ahead of our weighted average cost of capital. Share Buyback We repurchased approximately 0.5 million shares of our stock for $40 million. Total cash returned to shareholders over the last 12 months was approximately $145 million. Debt and Liquidity Net-debt-to-last-12-months EBITDA ratio is approximately 2.4x. Total liquidity of $2.2 billion when including cash of $549 million. We repurchased approximately $40 million of our stock in the first quarter.

First-Quarter 2018 CFO Commentary 13investor.arrow.com Arrow Electronics Outlook Guidance We are expecting the average USD-to-Euro exchange rate for the second quarter of 2018 to be $1.23 to €1 compared with $1.10 to €1 in the second quarter of 2017. We are expecting interest expense will total approximately $48 million. Second-Quarter 2018 Guidance Consolidated Sales $7 billion to $7.4 billion Global Components $5 billion to $5.2 billion Global ECS $2 billion to $2.2 billion Diluted Earnings Per Share1 $1.78 to 1.90 Non-GAAP Diluted Earnings Per Share1 $2.08 to 2.20 1 Assumes average diluted shares outstanding of 89 million, an average tax rate of 23.5 to 25.5%.

First-Quarter 2018 CFO Commentary 14investor.arrow.com 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 2017 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, 2017.

First-Quarter 2018 CFO Commentary 15investor.arrow.com 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. 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, income, or expense on a non-GAAP basis adjusted for the impact of changes in foreign currencies and the impact of acquisitions/ dispositions by adjusting the company’s operating results for businesses acquired/disposed, including the amortization expense related to intangible assets, as if the acquisitions/dispositions had occurred at the beginning of the earliest period presented (referred to as “impact of acquisitions” and "impact of dispositions"). Operating income, net income attributable to shareholders, and net income per basic and diluted share are adjusted to exclude identifiable intangible amortization, restructuring, integration, and other charges, and 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/ dispositions (including intangible assets amortization expense), and financing activities. A reconciliation of the company’s non-GAAP financial information to GAAP is set forth in the tables herein. 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.

First-Quarter 2018 CFO Commentary 16investor.arrow.com Three months ended March 31, 2018 Reported GAAP measure Intangible amortization expense Restructuring & Integration charges Impact of the Tax Act Other* Non-GAAP measure Operating income $ 235,995 $ 13,520 $ 21,171 $ — $ 1,562 $ 272,248 Income before income taxes 186,460 13,520 21,171 — 4,014 225,165 Provision for income taxes 46,590 3,604 5,535 — 782 56,511 Consolidated net income 139,870 9,916 15,636 — 3,232 168,654 Noncontrolling interests 776 153 — — — 929 Net income attributable to shareholders $ 139,094 $ 9,763 $ 15,636 $ — $ 3,232 $ 167,725 Net income per diluted share**** $ 1.56 $ 0.11 $ 0.18 $ — $ 0.04 $ 1.88 Effective tax rate 25.0% 25.1% Three months ended April 1, 2017 (adjusted) Reported GAAP measure Intangible amortization expense Restructuring & Integration charges Impact of the Tax Act Other ** Non-GAAP measure Operating income $ 193,025 $ 12,900 $ 15,505 $ — $ — $ 221,430 Income before income taxes 155,883 12,900 15,505 — (1,982) 182,306 Provision for income taxes 39,564 4,561 4,997 — (765) 48,357 Consolidated net income 116,319 8,339 10,508 — (1,217) 133,949 Noncontrolling interests 1,582 251 — — — 1,833 Net income attributable to shareholders $ 114,737 $ 8,088 $ 10,508 $ — $ (1,217) $ 132,116 Net income per diluted share**** $ 1.27 $ 0.09 $ 0.12 $ — $ (0.01) $ 1.46 Effective tax rate 25.4% 26.5% Three months ended December 31, 2017 (adjusted) Reported GAAP measure Intangible amortization expense Restructuring & Integration charges Impact of the Tax Act Other*** Non-GAAP measure Operating income $ 286,824 $ 12,162 $ 18,771 $ — $ 21,000 $ 338,757 Income before income taxes 226,914 12,162 18,771 — 35,499 293,346 Provision for income taxes 171,413 4,321 4,509 (124,748) 13,713 69,208 Consolidated net income 55,501 7,841 14,262 124,748 21,786 224,138 Noncontrolling interests 1,848 147 — — — 1,995 Net income attributable to shareholders $ 53,653 $ 7,694 $ 14,262 $ 124,748 $ 21,786 $ 222,143 Net income per diluted share $ 0.60 $ 0.09 $ 0.16 $ 1.40 $ 0.24 $ 2.49 Effective tax rate 75.5% 23.6% *Other includes loss on disposition of businesses and gain (loss) on investments. **Other includes gain (loss) on investments. ***Other includes gain (loss) on investments, impairment of assets held for sale, and loss on extinguishment 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)

First-Quarter 2018 CFO Commentary 17investor.arrow.com Effect of Adopted Accounting Standards ($ in thousands, except per share data) Fiscal Year 2017 First Quarter Second Quarter Third Quarter Fourth Quarter ** As Reported Adjusted for New Standards As Reported Adjusted for New Standards As Reported Adjusted for New Standards As Reported Adjusted for New Standards Sales $ 5,759,552 $ 5,736,780 $ 6,465,346 $ 6,422,226 $ 6,953,740 $ 6,856,108 $ 7,633,870 $ 7,539,449 Cost of sales 4,999,665 4,975,583 5,641,380 5,598,202 6,110,382 6,013,541 6,703,742 6,610,269 Operating income 191,722 193,025 229,822 230,446 235,992 235,441 270,914 286,824 Net income attributable to shareholders 113,768 114,737 99,679 99,722 134,630 134,064 53,885 53,653 Diluted EPS* $ 1.26 $ 1.27 $ 1.11 $ 1.11 $ 1.50 $ 1.50 $ 0.60 $ 0.60 Non-GAAP operating income $ 220,127 $ 221,430 $ 266,602 $ 267,226 $ 264,533 $ 263,982 $ 339,553 $ 338,757 Non-GAAP net income 132,364 132,116 159,970 159,083 162,929 161,153 223,719 222,143 Non-GAAP diluted EPS $ 1.46 $ 1.46 $ 1.78 $ 1.77 $ 1.82 $ 1.80 $ 2.51 $ 2.49 Year to Date 2017 Year to Date 2016 As Reported Adjusted for New Standards As Reported Adjusted for New Standards Sales $ 26,812,508 $ 26,554,563 $ 23,825,261 $ 23,487,872 Cost of sales 23,455,169 23,197,595 20,681,062 20,343,550 Operating income 928,450 945,736 858,539 876,826 Net income attributable to shareholders 401,962 402,176 522,750 522,815 Diluted EPS $ 4.48 $ 4.48 $ 5.68 $ 5.68 Non-GAAP operating income $ 1,090,815 $ 1,091,395 $ 987,027 $ 993,103 Non-GAAP net income 678,982 674,495 609,760 608,046 Non-GAAP diluted EPS $ 7.56 $ 7.51 $ 6.63 $ 6.61 * Quarterly net income per share is calculated using the weighted-average shares outstanding during each quarterly period, while net income per share for the full year is calculated using the weighted-average shares outstanding during the year. Therefore, the sum of the net income per share for each of the four quarters may not equal the net income per share for the full year. ** Operating income for the fourth quarter of 2017 was impacted by a reclassification of pension settlement expense for $16,706 due to the implementation of 2017-07. The settlement expense was moved to "post-retirement expense", which is classified as non-operating on the statement of operations.