My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Arrow Electronics Business Update. 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. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Steve O'Brien, you may begin the conference.
Thanks, Chris. Good afternoon, and thank you for joining us on short notice to discuss our preliminary second quarter financial results, our operating expense reduction program, and the planned wind down of the personal computer and mobile asset disposition business. With us on the call today are Mike Long, Chairman, President, and Chief Executive Officer, and Chris Stansbury, Senior Vice President and Chief Financial Officer. As a reminder, some of the figures discussed on today's call are non-GAAP. You can access our business update, press release, and 8-K filing at investor.arrow.com, along with a webcast of this call. We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. I will now hand the call to our Chairman, President, and CEO, Mike Long.
Thank you, Steve, and thanks to all of you for taking the time to join us today. Let me begin by discussing our preliminary second quarter results, which are lower than we had initially expected. As we noted in our press release, we anticipate reporting sales of approximately $7.3 billion, with Global Components of approximately $5.25 billion and Global Enterprise Computing Solutions sales of approximately $2.05 billion. As a result, we expect earnings per share to be in the range of $1.50-$1.62 on a diluted basis, excluding certain items. Looking back, it has been 42 quarters or over 10 years since we last delivered earnings per share results that fell below our expected guidance range. We've taken immediate action to understand the factors that drove the results and are implementing specific actions to address the challenges.
Before I talk about our go-forward plan, I'll discuss how we got here, including some important macro trends in the quarters. First, demand conditions for our Global Components business deteriorated during the second quarter. We saw lower demand across all products, all regions, and keep in mind that our Global Components business is highly correlated with the expected future GDP growth. When our customers are bracing for deteriorating economic conditions, they reduce their inventories, order fewer parts to preserve cash for the future. Since we provided second quarter guidance on May second, escalating trade wars have resulted in expanded tariffs and a ban on doing business with a large customer of electronic components. Arrow's exposure to any one of these developments in isolation is not material. However, we believe prolonged threats to free trade, cross-border business are creating broad-based dampening effects on electronic component demand.
With that said, our business model continues to be sound. We remain confident in the long-term strategy, and our broad portfolio of technology solutions is not reliant on any one industry. Thanks to the resiliency of our portfolio provides during the second quarter, we delivered strong cash flow that our shareholders have come to expect. We generated approximately $400 million in cash flow and used that cash to buy back stock and pay down debt. As we move forward, we're proactively addressing items within our control. We have a clear plan in place to preserve and improve profits, capitalize on the opportunities available to us, and leverage our existing engineering capabilities.
As we announced today, we began a $130 million operating expense reduction program designed to improve efficiency while improving the high levels of engineering and supply chain services our customers and suppliers require. We also announced that we're winding down the personal computer and mobile asset disposition business. We believe this business is not sustainable over the long term and is no longer aligned with our strategy. We believe this will enable us to fully focus on longer term strategy to enable the next generation technologies, such as artificial intelligence, industrial automation, smart cities, and vehicles. We will provide a full second quarter results on August first, and we'll be hosting another conference call on that date. We'll provide our outlook for the third quarter at that time.
I'll now hand the call over to Chris to provide more details on preliminary second quarter results, the wind down of the personal computer and mobile asset disposition business, and our operating expense reduction program.
Thanks, Mike. Mike already walked you through our revised expectations. Keep in mind that our expectations exclude approximately $78 million of sales and $17 million of operating losses before impairment charges from the personal computer and mobility asset disposition business that were included in our prior guidance range, as well as in the results of our Global Components business. Our revised earnings per share outlook excludes charges related to the wind down of the personal computer and mobility asset disposition business, the separate and distinct operating expense reduction program and $616 million of goodwill and intangibles impairment charges related both to the business wind down and revised second quarter earnings expectations.
For the wind down, we anticipate approximately $115 million of charges that will primarily be recognized in the second quarter, with the remaining amounts recognized over the second half of 2019 and the first half of 2020. We expect approximately $75 million of non-cash charges and $40 million of cash expenditures related to personnel and other exit costs. For the operating expense reduction program, we plan to generate approximately $130 million of annualized cost savings from enhanced efficiency efforts. We intend to have implemented nearly all of the actions by the end of 2019. We expect approximately $59 million in charges related to the operating expense reduction that will mostly be recognized in the third quarter. Approximately $55 million of the charges are cash costs.
We expect to incur a $570 million non-cash goodwill impairment charge and a $46 million non-cash trade name impairment charge that will be entirely recognized in the second quarter of 2019. The goodwill impairment charge primarily relates to the decision to wind down the personal computer and mobility asset disposition business. The trade name impairment charge relates to our decision to further integrate two businesses within Global Components under our One Arrow go-to-market approach. Lastly, we are incurring a $36 million non-cash charge related to certain receivables and inventory in the Global Components business. As Mike previously mentioned, our countercyclical balance sheet and cash flow is providing ample liquidity to pursue restructuring and realignment actions, while reducing leverage and repurchasing shares at attractive valuation levels.
We expect to generate approximately $400 million of cash flow from operations during the second quarter of 2019. We are pleased to report that we returned approximately $150 million of cash to shareholders during the second quarter through our share repurchase program. In conjunction with our full second quarter results and outlook for the third quarter of 2019, on August 1st, we will be providing results from prior periods, excluding the personal computer and mobile asset disposition business.
Thank you, Chris. And Chris, could you please open the call to questions at this time?
Certainly. At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. I'll pause for just a moment to compile the Q&A roster. Your first question comes from Shawn Harrison with Longbow Research. Your line is open.
Hi. Afternoon, everyone. I guess if we could start with the components business and whether, you know, you've seen any stabilization in July here relative to the weakness that you saw in the second quarter, and was one region in the second quarter any worse off than others, let's say Europe, versus Asia, for example?
Yeah, I think. Well, let me just start there. First, Asia Pac was the region that was the most worst off compared to our guidance. That's the one where we had fully expected some growth to come in, and that it just didn't happen. Once the announcements came out, it was like a spigot for us that got turned way back. So Asia Pac first, we saw a little bit of slowing in Europe and a little bit of slowing in North America for the quarter. So, you know, the condition there really centers around if you, if you talk about the sales and, and the second quarter, Asia Pac would have been the primary reason that we would have come out. And the, and the second question again?
If things continue to decelerate here into early July, have you found a bottom, be it either, you know, for this period?
Yeah. So far, what I can tell you is, we saw the slowdown. We have not seen a pickup, and I'm gonna say it's probably too early yet. You know, give us a couple of more weeks before we come out with, you know, our third quarter guidance, to really look and assess what's happening with the bookings and billings in each marketplace to make sure that, A, there's not a bounce back, so we, you know, over forecast gloom and doom. And secondly, that, you know, things could settle down after these initial announcements, and I wanna make sure it just wasn't sort of a stop work by any region because of the increased tariffs and the ability not to do business with a single large customer.
I would say I don't see anything that is going to change between now and the end of the year as far as the slowdown for electronic components, though.
Okay. Then as a brief follow-up, Chris, the book value would have come down then by about $6 a share with these write-downs. Is there any way to parse out how much of that $575 million or $570 million is tied to the asset disposition business?
Yeah. The vast majority of it is tied to the asset disposition business and the individual companies that we acquired in the early 2000s.
... Okay. And am I right, the GAAP net loss is how much your book came down by the quarter, approximately $6 or so?
Yeah, that's gonna be by far the biggest contributor, yes.
Okay, thank you.
Your next question is from Adam Tindle with Raymond James. Your line is open.
Thanks. Good afternoon. This is Madison on for Adam. I wanted to start on the cost actions. Can you help us break, are these concentrated in components or computing? It seems like component, components operating metrics are generally pretty efficient as is. OpEx as a percent of rev is your near multi-year lows. So just help us understand the nature of the cost actions, given ratios seem pretty lean as is.
Yeah, I think what you're going to see is across both businesses that there's actions. As we know, it's been pretty well documented that the computer business was not expected to grow at a high rate this year. And so we will see some actions there. Also, the components business, even though it was efficient, if you remember, we still had some wind down on our Unity conversion for the computer where we were carrying some additional costs. Those costs will be coming out of the system. We have changed some of our systems in our warehousing and shipping organizations, so we'll be able to get some cost out of that. But all in all, we don't-- we are not going to have any huge change or material change in our go-to-market activities as a result of these costs.
Okay, that's helpful. Then just for clarity, is the 130 what you're expecting to drop to the bottom line, or is there going to be some reinvestment there?
Well, let me, let me start with that. Most of the actions that we have taken, we believe will make us extremely efficient in every market. We don't believe we've taken, you know, an over, an undue amount of costs out of the system, but possibly going into next year, if the growth accelerates at an extreme pace, that wouldn't—that wouldn't keep us from putting some salespeople and the like in certain markets. So Chris-
Yeah, so to Mike's point, that really is the net number. If we see the market correcting itself, you know, more rapidly than to his point, you could see us reinvest in additional selling capabilities. But at this point, given current market conditions, the plan is, that is the net benefit.
Okay, thanks. And last one, if I could. How can we think about the $400 million of operating cash flow that you generated in the quarter? Is this the right type of run rate that we should expect over the next few quarters? And then if you could just touch on capital allocation priority in light of the improved cash flow. Thanks.
Yeah. I'd like to see us continue the trend. We're still in the process right now of looking at Q3, so it's really gonna depend, obviously, on where, you know, volume levels go, given the broader market. That said, even if you adjust for that, we should have strong back half cash flow. The priorities are, as they have been, you know, more recently, which is to really focus on buybacks when we're at such low levels of valuation. At the same time, bring our debt down a little bit, if for no other reason than when we do exit the correction, we're in a good position to be able to support working capital expansion.
Okay, thanks for the color, guys.
Mm-hmm.
Your next question is from Joe Quattrocchi with Wells Fargo. Your line is open.
Yeah, thanks for taking the question. I was wondering if you could help us understand where your book-to-bill was exiting the quarter relative to, I think it was at parity last quarter.
Yeah, we'll get into all the book-to-bill metrics as you know, as well as how we think that impacts guidance when we do the call on August 1st. We'd like to stay away from that today because we're still in the middle of our close process here.
Okay, fair enough. And then I just wanted to better understand the $36 million charge on through receivables and inventory. Is that related to the business that you're winding down?
No, those two numbers were really part of an overall strategy that we had done over the last several years, where we had been expanding our account base, and it had to do traditionally with our online business, where we expanded inventory and also generated some loans for startup companies and new companies in here to help them grow. We've decided that going forward, that doesn't strategically fit, or we need to do that for our type of business and that there's other people that do that better, so we're basically exiting those programs.
Okay, perfect. Thanks.
Mm-hmm.
Your next question is from Steven Fox with Cross Research. Your line is open.
Thank you. Two questions, please. First, looking at the discontinued asset disposition business, the figures you gave Chris, in terms of the sales and operating losses in the quarter, is that a typical run rate quarter for that business that we should think about excluding it if we're gonna take a stab at go forward estimates? And then I have a follow-up.
No. We'll get you, you know, when we effectively restate a history, excluding that business to get better color. I think we commented earlier in the year that the business that we were discussing had fallen into a loss in Q1, and then in Q2, it got worse. So we were pretty close to what we thought we'd be, which is about a $17 million pretax operating loss in Q2, excluding, you know, all the charges that we're obviously taking right now. But that was definitely a much bigger loss than what we'd experienced last year. Last year, the business was closer to a break even, but again, you'll get quarterly splits on all that when we do our filing.
Okay, that's helpful. And then just in terms of a bigger picture question. If I think about your comments from the top last couple of quarters around inventories, there was a shift last quarter that you hadn't seen, where customers were suddenly seeing that they were holding more inventories. There's been other evidence of that piling up in terms of across the supply chain now. So when you exit the quarter just completely, can you talk about whether you still see excess levels, what your customers were saying coming into the quarter? Give us a sense of maybe how bad the inventory situation is out there. Thanks.
Yeah, I think what you'll see is that we are probably all in the heart of this right now with the initial slowing, and that question will be answered by, you know, really how fast or if we've already sort of hit bottom. But I would expect that you would have an inventory correction going on for at least the next quarter, and that what you would see is that correction start to slow over time, and that's when we would come out of it. Right now, what I'm going to tell you is this goes back, and you remember the playbook, Steve, you were around, you know, 10 years ago when this happened, and we all went through this downturn before.
You know, we get very limited visibility because we can't really see what customers are thinking about their inventory before they start to pull the trigger on it. So 12 weeks is about as far out as we can see, and I'm gonna say for at least the next 12 weeks, we're gonna be seeing some inventory correction around the globe.
Okay, that's very helpful. Thank you.
Mm-hmm.
Your next question is from Param Singh with Merrill Lynch. Your line is open.
Hi, thanks for taking my question. I just wanted to dive into the profitability metrics here. You know, giving a non-GAAP net income where you're stripping out all of these, you know, one-time charges, would imply a sharp decline in both your component and IT margins year-over-year, and even sequentially. So maybe you could help me reconcile what's really driving the sharp decline? Because on a year-over-year basis, your revenue isn't too different on the top line. So why is margin, you know, close to 100 basis points lower?
Yeah, so again, we'll get into more details on the call, Param, but really, when you go into a downturn, margin pressures in the short run are the norm. It's not really common to go into a downturn and not have that. And keep in mind, we did talk about some of the color around this on the last earnings call, which is you do see customers slow down design activity, so you can have business mix issues as well as some amount of market pressure. But those are the larger drivers, and we're still peeling it back, but we'll give you some more detail on the call.
Yeah, Param, I think I can add to it a little bit, in that we did talk about it in the first quarter. You know, our margin profiles by type of products are remaining largely the same as they were. You know, for example, our design win margins are about the same as they were. However, when customers are reconciling inventory, they start at their highest price inventory and work their way down to commodities because that's how they can get their cash flow generated the fastest for themselves. We always see this has been not only historical, but we see it every time there's a downturn, that design win products are the ones that get shut down the fastest. That almost immediately alters your margin, and that's why you see it come down so fast.
You'll probably see more of a balance now over the next couple of quarters, but that will probably be one of the larger answers to your question when we do come out in two weeks.
So, to be sure, it was mainly on the component side, and then were there any margin pressures on the IT side outside of maybe slightly harder hardware mix that could have pressured in the quarter?
No, we have not seen any unorthodox change in the IT business or the margins of that generated by this. As you know, that business is just sort of the demand and the growth is not gonna be as much as everybody had hoped, but that was sort of put out there, you know, a quarter ago, two quarters ago. So we have not seen any further slowing than what we already know about in IT.
Okay. And then, and then maybe one last one. You know, there, there was commentary around maybe a couple of suppliers out in Asia moving away from Arrow. Is that true? And, and, have you seen any supplier engagements that have changed hands over the past quarter that could have possibly added to the pressure?
... Oh, as far as anything material adding to the pressure in Asia, there's absolutely nothing that has any materiality to it as far as suppliers moving away from us. In fact, we have a good relationship with our supplier base, and the only thing that I know of is that Infineon is, you know, purchasing Cypress, and what happens with that channel, I don't know what will happen with that channel longer term, but again, not a material fact to Asia Pac or our business in Asia Pac. And remember, Asia Pac, we had expected Asia Pac to grow faster, and that growth didn't come.
So, you know, Asia Pac is still, if you took a year-over-year, you know, hanging in there, but when you have one expectation and you don't meet it, that's one of the reasons we're on this call with you right now, is saying we didn't meet our expectations in Asia Pac, and it was largely for the reasons that we gave. There was nothing else in there.
Great. Great. And sorry, one last one really quickly. On the $78 million for the asset disposition business, how is it split geographically?
We aren't providing details on that today, but I would say that business is largely in Americas, and in EMEA business. There's really no APAC presence.
Okay, great. Thank you so much, guys.
Mm-hmm.
Your next question comes from Tim Yang with Citi. Your line is open.
Hi, thanks for taking my question. During last earnings call, you mentioned three items for component business margin headwind. That was, mixed pricing and ancillary business loss. So does the disposition business fall into any of those three categories?
Well, the disposition business did roll up in Global Components. The disposition business, as far as a gross margin business, had a higher gross margin, but it also had a higher cost and a loss. So yes, that would have an impact in there and, you know, we can give you the exact amount or something close to that amount. Chris, do you have it right with you, or?
I don't have it in front of me now, no, but we can follow up, do that on the follow-up.
Yeah, I would add that, our 10-Q filing, as we've mentioned here before, will have a lot of detail around our historical results, excluding that business.
Gotcha. Thanks. And then, sorry if I missed that. You lowered your Q2 guidance for component business by roughly $50 million. How much is it related to the wind down of the business?
That's the 78.
Yeah, the $78 million that I quoted earlier is really the key driver, that's in the number there.
Gotcha. Okay. So there are another portion that is not related to this, the wind down of the business. So in the past few years, you have been very good in terms of gaining market share in your component business. And right now, it seems like you are calling some weakness in the end market. How should we think about the broader market condition? Because I would assume that you still have the good market share. You're not losing market share to your competitor, but just the overall demand trend is not getting... It's getting a little bit worse than what you expected. Is that the right way to think about it?
Exactly how to think about it. That's what we called out. We think it's an overall market issue. We've seen some preliminary share. We're not indicating any share loss for the quarter. We fully expect, and we've heard, that this is much broader. And what we do know is that we've had suppliers talking about this at least for the last three months, and having an impact on them, and we're now seeing it. So I think all we're doing is confirming what has been happening at the highest level of customers now moving down into the broad market.
Gotcha. Thank you. Thanks for the call.
Mm-hmm.
This concludes the Q&A period. I'll now turn it back over to Steve O’Brien for any closing remarks.
Thank you, Chris. In closing, I will review Arrow's Safe Harbor statement. Some of the comments made on today's call may include forward-looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. 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.
This concludes today's conference call. You may now disconnect.