Arrow Electronics, Inc. (ARW) Q4 2010 Earnings Report, Transcript and Summary

Great day, ladies and gentlemen, and welcome to the Arrow Electronics, Inc. fourth quarter earnings conference call. My name is Katina, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today, Greer Aviv. Please proceed.

Good afternoon, everyone, and welcome to the Arrow Electronics fourth quarter conference call. I'm Greer Aviv, Manager of Arrow's Investor Relations program, and I will be serving as the moderator on today's call. If you would like to access today's call via webcast, please visit our Investor Relations website at www.arrow.com/investor and click on the Webcast icon. With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice President, Finance and Operations, and Chief Financial Officer; Andy Bryant, President, Global ECS; and Peter Kong, President, Global Components. By now you should have all received a copy of our earnings release. If not, you can access our release on the Investor Relations section of our website. I would also like to point out that we issued a CFO commentary that has been posted to the Investor Relations section of our website. That should be used as a complement to the earnings press release. As a result, we will no longer have slides during the earnings webcast and we have streamlined our formal comments on the financial results. You can access a copy of our earnings reconciliation for the fourth quarter and full year in our press release or on the Investor Relations section of our website. Before we get started, I would like to review Arrow's Safe Harbor statement. Some of the comments to be made on today's call may include forward-looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. Detailed information about these risks is included in Arrow's SEC filings. We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. As a reminder to members of the press, you are in a listen-only mode on this call, but please feel free to contact us after today's call with any questions you may have. At this time, I would like to introduce our Chairman, President and CEO, Mike Long.

Thank you, Greer, and thanks to all of you for taking your time to join us today. When I look back over the past year, I could not be more pleased with the tremendous progress we've made as an organization in advancing our strategic priorities and strengthening our industry-leading position. We finished 2010 with a very strong close, reporting record-level revenue and earnings per share and an extremely strong cash flow generation in a period of substantial growth. I deeply appreciated the steadfast support and dedication of all of our employees as we continue to accelerate our growth and realize the full value of Arrow. Our organic strategy is simple: gain profitable market share, optimize gross profit and increase operational efficiency. And our M&A strategy is to expand our Products and Services portfolio to increase our addressable market. We have been successful in all of these areas throughout 2010, which has reflected and enhanced shareholder value. Our successes are also reflected in our extraordinary full year results. We reached almost $19 billion in sales this year, an increase of more than $4 billion compared to last year, driven by strong organic growth in all regions as well as acquisitions. Earnings per share for 2010 reached $4.13, the highest level ever reported. We stayed focused on rebounding from macroeconomic challenges and have been gaining significant momentum throughout the year. Keep in mind that at the beginning of the recession in 2008, we said our short-term strategy was to emerge stronger than when we entered the recession. Our results clearly demonstrate that. In Global Components, our teams in every region continue to maximize our global reach and leverage our unmatched technology line card while continually improving our go-to-market and efficiency. Over the last 12 months, we saw exceptionally strong sales growth in all of our regions. During this time, we also experienced noteworthy expansion in key verticals and demonstrated good improvements in our working capital management. In our Global ECS businesses, we were faced with sluggish growth at the beginning of the year and a major change to our Sun Microsystems business model based on Oracle's acquisition. Despite these challenging conditions, the ECS team persevered and delivered above-normal seasonal growth for the remainder of the year. There is no question that the growth has returned to this business and we're well-positioned heading into 2011. By gaining share, expanding our line card and acquiring strategic businesses, ECS is transforming its business model into one of a more dynamic and diversified customer and supplier base. The strong performance in both of our business units contributed to 100% basis point increase in our 2010 gross margin compared to the year-ago level, which is a significant improvement in a macroeconomic environment that remains somewhat uncertain. We're focusing on optimizing gross profit through solution selling, demand creation activities and improve value-added content for our suppliers and customers. Over the same period of time, we’ve reduced the ratio of operating expense to sales by 60 basis points through business simplification and increased efficiency. Our financial strength has allowed us to continue to be active in pursuing acquisitions that complement our existing businesses, increase our scale in fast-growing geographies and expand our presence in attractive growth markets. In fact, CRN Magazine just ranked our acquisition of Shared Technologies as one of the top 10 game-changing acquisitions of 2010. In total, we have made 10 acquisitions over the last 12 months in order to gain a number of new strategic capabilities while also expanding our global footprint. These acquisitions will generate many opportunities for our teams and help us to better serve the evolving needs of our customers and suppliers. Most recently, we completed the acquisitions of Nu Horizons and Intechra. The addition of Nu Horizons will enhance our design capabilities in the fast-growing Asia Pacific region, as well as complement our leading technology portfolio in the Americas and Europe. Intechra expands our IT asset distribution portfolio and supports our strategy to provide comprehensive products, services and solutions across the entire product lifecycle. In summary, we've accomplished a great deal over the past year and have made excellent progress on our strategic objective of transforming Arrow into a sales-excellence organization. We have strengthened relationships with customers and suppliers, expanded our value-added service offerings, improved efficiencies in every region and outperformed our competition. Going forward, we will continue to deliver strong results as we expand in the markets we participate in, create new opportunities for Arrow and consistently increase our sales and earnings. Paul will now provide you with an update on our financial results for the fourth quarter.

Thanks, Mike. Fourth quarter sales of $5.2 billion were in line with our expectations and represent an increase of 25% year-over-year and an increase of 12% on a sequential basis. This is quite a milestone for us as we've achieved our first $5 billion revenue-based quarter. Congratulations to our global teams for their hard work, dedication and great performance. Our consolidated gross profit margin was 13%, an increase of 120 basis points year-over-year driven by solid increases in almost all of our businesses and regions. On a sequential basis, gross margin was flat, which is better than normal seasonality. Gross margin in our core customer base of small- and medium-sized customers increased 10 basis points from the third quarter. Operating expenses as a percentage of sales were flat year-over-year and decreased 30 basis points sequentially to 8.5%. On an absolute dollar basis, operating expenses increased 25% year-over-year and 9% sequentially, primarily driven by recent acquisitions. Pro forma for acquisitions, operating expenses were up only 12% year-over-year, well below our sales growth, and were up 4% sequentially. Operating income was $237.9 million, an increase of 70% year-over-year and an increase of 20% sequentially. In the fourth quarter, we continued to demonstrate a leverage inherent in our business model as operating income growth outpaced our sales growth by almost 3x year-over-year. Operating income as a percentage of sales increased 120 basis points year-over-year and increased 20 basis points sequentially. Our effective tax rate for the quarter was 30%. And for modeling purposes, you should assume that our tax rate the next few quarters will be between 30% and 31%. Net income was $151.6 million, nearly double Q4 2009 and up 19% sequentially. Earnings per share were $1.31 and $1.29 on a basic and diluted basis, respectively. This is a record level of quarterly earnings per share for Arrow. We generated more than $460 million in cash flow from operations during the quarter. And for the full year, that cash flow from operations was $221 million, quite impressive in a year of 28% revenue growth. And this marks our 10th consecutive year of positive cash flow generation. Return on working capital increased 860 basis points year-over-year and is 40% on a consolidated basis. Additionally, our return on invested capital increased 400 basis points year-over-year to 15.4%, again, demonstrating our commitment to generating superior returns for our shareholders. ROIC is above the upper end of our long-term target in the fourth quarter. For the full year 2010, sales increased 28% to $18.7 billion, as Mike said, driven primarily by strong organic growth in all regions and businesses. Pro forma for acquisitions and excluding foreign exchange, sales were up 25% year-over-year. Operating income was $784.3 million, representing an increase of 107% year-over-year. Operating income grew almost 4x faster than sales grew year-over-year. Operating income as a percentage of sales is 4.2% and increased 160 basis points compared to the prior year. As Mike mentioned, earnings per share were $4.18 and $4.13 on a basic and diluted basis, respectively. This is also a record level for Arrow and a significant accomplishment for all of our employees worldwide. This is a high-level summary of our financial results for the fourth quarter. For more detail regarding the business unit results, please refer to the CFO commentary published this morning. Looking to guidance and looking ahead to the first quarter, we believe that total sales will be between $4.75 billion and $5.15 billion, the Global Components sales between $3.55 billion and $3.75 billion, and Global Enterprise Computing Solutions sales between $1.2 billion and $1.4 billion. As a result of this outlook, we expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.06 to $1.16 per share. On an organic basis, we would expect growth in both of our business segments to track in line with normal seasonality in the first quarter. The addition of our recently-acquired businesses will result in above seasonal growth in Global Components. And our guidance does not include the pending acquisition of the RF, Wireless and Power division of Richardson Electronics.

Thank you, Paul. Katina, please open up the call to questions at this time. Thank you.

[Operator Instructions] Your first question comes from the line of Amitabh Passi representing UBS.

My first question just had to do with your Components business. It looks like the December quarter probably came in towards the lower end of your expectations. Any color you can give us in terms of what you saw geographically, was this weakness predominately out of Asia Pacific? And then related to that, operating margins seemed to have declined 30 basis points sequentially, yet, revenues were comparable to the June quarter where you did better margins, so I know that's a simplistic way of looking, but just any color around some of the margin dynamics?

Sure. I'll take the -- this is Mike. I'll take the first part and I'll let Paul add a little color for that. Actually, our Global Components core business came in right about where we thought it would come in. And for most regions, it was good. The one place that was a little light was with our Ultra Source business in Taiwan, and that is primarily low-end handsets, which we've said for a couple quarters, that business has been weaker than normal. But overall, the core business, the momentum of the core business, the book-to-bill in the core business being in the one range was still fairly strong for us. Paul, would you like to add some financials around that?

Sure. The second part of your question was around comparing the Global Components business, compared Q4 and Q2, and comparability in the revenue levels and the decline in the operating income percent. And that's absolutely true. Remember though that there's a change in mix between Q2 and Q4, with our European business having something that's a more normal quarter in Q2 and Q4 being below the levels of Q2 performance, simply based upon the number of shipping days. That's also true, though to a lesser extent, in North America. So that operating income percentage swing is driven moreso by a change in mix than anything else in our business.

I guess for you Mike, in the press release you talked about your M&A strategy and wanting to expand your Services portfolio. I was hoping if you could elaborate on that. Should we expect to see more deals like the Intechras, Converges and the Vericals? And then what that means for your business model in terms of either margin targets or return on invested capital targets; would these be margin-enhancing- or return-enhancing-type acquisitions?

Well, as far as the M&A content is that we are rounding out our portfolio to build more strategic capability, if you will. We are still disciplined in how we evaluate acquisition. But we are building scale in our services arena; we are building scales by expanding new products. And our overall goal for the corporation is to provide more solutions to our customers. And if we do that correctly, yes, we will be expecting our margin to continue to increase over the year this year and that is something we are focusing on hard within the organization.

The next question comes from the line of Brian Alexander representing Raymond James. Brian Alexander - Raymond James & Associates, Inc.: Paul, can I just follow up on the answer you gave to the margin question? If I compare Q4 to Q2 within Components, it looks like Europe and Americas were up as a percentage of the total, which should have upward pressure on margins. So I just wanted to revisit your answer on the margin question as it relates to Q2 versus Q4. And it seems like maybe the gross margins within the regions dipped from Q2 to Q4 and I just want to know if that played into it all.

Yes, Brian. What we do see is also a change in mix in Asia, where we had -- as you may recall, in the Ultra Source business, we saw lower sales volumes. And while, for sure, we haven't gotten back to historical levels, we have seen a change in the growth in that, that's a little bit ahead of our core business. As you know, that's a low margin but high return on working capital business. That also impacts the returns profile from an operating income percent point of view. Brian Alexander - Raymond James & Associates, Inc.: So the primary Delta from Q2 to Q4 is lower Asia margins. Or is there something going on?

Yes, higher mix of Ultra Source and that impacts the mix also. Brian Alexander - Raymond James & Associates, Inc.: And then I guess looking back on some of the acquisitions that you’ve made over the last 12 months, some of the larger deals that were a bit more of an extension of your core business, like Petsche and Converge and Shared, can you just maybe qualitatively or quantitatively evaluate how you think you've done since you've acquired them? What's gone well? And where might you have fallen short if anywhere?

Sure, Brian. This is Mike. The Petsche business was really to expand our product offering around PEMCO products with high-reliability wire and cable. And the goal of that was to increase our presence, if you will, in the aerospace and defense vertical. That would also give us some more cross-selling opportunities with the core business. And Petsche has a done a good job in those defense verticals. We have yet, in my opinion, Brian, to realize the cross-selling that we were looking for, but we did have good financial, a good year and a good financial year end to that strategy and to that business. And we believe there is actually more opportunity for us going forward there. When we purchased Converge, that was really an entrance for us into the fast-growing, what we call, reverse distribution market. And it was a platform for future growth for us and it allowed us to provide some additional opportunity, if you will, provide extra services to the customer across the entire product lifecycle and to also handle some of the shortage market. And Shared Technologies, if you will, was really a business that had a technical skill set that's focused on unified communication, installation and services. And it really services Nortel, which is now Avaya in North America. And it really focuses on customers that outsource voice and UC [Unified communications]. It's about a $30 billion worldwide addressable market in that arena. And Shared Tech also helps us within the data center as Unified communications are moving closer to the data center. If I were to add one more to that, Brian, the Intechra acquisition really goes well with Converge because they do some of the same things together, although there is a unique aftermarket trading capability that is also involved with Intechra and adds some more services that Converge didn't have. So it widens our presence, if you will, a little bit in the reverse logistics market. And what I'd have to say all in all, these businesses have come into the Arrow family very well. The pieces that we're integrating of these businesses are integrating. We have very good cooperation from the businesses and we believe the strategy was laid out correctly. And most important, our management teams are working well together to make this happen and we're really looking for a wider market for us to go after as a result of this. So I'm fairly pleased over our progress with all of these during the course of the year.

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

Just wanted to follow up on Asia, more looking forward. I believe, in the commentary, it suggested that Asia would be towards the upper end of normal seasonality in the quarter, a positive commentary. Is it that you're seeing a reversal of some of these drags on the low-end handset side? Or are there other opportunities of growth that you're seeing now in Asia? Maybe if you could also just comment on the inventory environment out there as well?

Sure. I'll start off with Asia and then I'll leave the inventory to Paul to answer. Really in Asia/Pac, the growth in our core business was strong, and it increased almost 29% year-over-year. The team had really good performance in Greater China and South Asia. The reason, again, that the sales were below normal seasonality was 100% due to the low-end handset market, and that's been the case for a few quarters now. We do see very strong performance in a number of the vertical markets, including the lighting market and the automotive market, and those increased 55% and 65% year-over-year, respectively. In fact, our lighting sales in the region, for us, reached $100 million in the fourth quarter for the year. So we expect sales to be in line going forward and we do have a little bit of the normal first quarter visibility issues given the impact of the Chinese New Year. But all in all, we're still bullish on Asia. More importantly, I'm still bullish on my management team in Asia. Paul, maybe the inventory?

Sure. Thanks, Mike. Shawn, we talked about making strategic investments in Q2 and Q3 in inventory with the intention of driving sales growth and we saw that. Then as lead times came in and they’re back down to about normal right now, we also made the decision then to get our inventory back in line with more historical perspective. And in fact, we were talking about a 5% decrease from Q3 to Q4. And in fact, I think we delivered 5.3%. With that said, all the channel checks that we do and what I mean by that, both our informal surveys in North America, discussions with customers in Europe and Asia, as well as our discussions with our supplier partners, all say the lead times shouldn't change dramatically, so near normal as we go forward. Nor is there an imbalance in the supply chain or as I like to think about it, there’s no bump in that snake, if you will. So we think that we're in a good position right now, both supplier, customer and us, at the right level of inventories. So we would not expect to see a significant change as we move through Q1.

And then maybe just as a brief follow-up, interest expense and maybe the SG&A dollar target for the March quarter?

I think our interest expense target is around $24 million to $25 million. And as we look to the first quarter expense percentage, we would expect to see a similar type trend that we've seen in the past from seasonality. So what I mean by that is we'll see a lot of the computer product sales exit the business. Our variable costs are about 2% to 3%. In fact, I think in Q4, we were at the low end of that 2% to 3% range. So that’ll give you an idea where we're going.

The next question comes from the line of Jim Suva representing Citi.

As we look ahead, just a follow-up question, first of all on the SG&A line, then on the gross margin line. On SG&A, can you help us -- I know you gave us a little bit of parameters, but more detailed, because the folding in of the acquisition makes it a little bit difficult for us to kind of model SG&A because we don't have the visibility of the exact closing, the costs that are duplicative and running in and out of the company and SG&A. Are we talking like an additional $20 million or $40 million or $5 million? Or how much are we looking at incremental from the December-March quarter? And then I think we'd be at a run rate excluding additional acquisitions. So that's on the SG&A side. On the gross margin side, correct me if I'm wrong, I think the best way to look at gross margins is year-over-year given your seasonality of the business and the March quarter will have less computing. So it seems like both year-over-year and quarter-over-quarter gross margins should also go up materially, also in the March quarter. Can you give us a little bit of help and if that logic is correct?

Thanks, Jim. Let me try to walk you forward on both comments and questions. First off, let me start with Q3 to Q4, just to put some color around it in numerics. When you go from Q3 to Q4, expenses went up, round numbers, by about $7 million because the change in exchange rate. Acquisitions added approximately another, round numbers, $20 million. So that left us with an expense increase, I'm using round numbers of, I'm going to call it, organic expense increase, of about $10 million, which was about 2.2% of the organic sales increase, excluding acquisitions and foreign exchange. So hopefully, that gives you an idea of how we got to Q4. You're right. What we should see is an increase in both gross profit and operating expense as a percentage of sales in the first quarter. As a result of, as I mentioned, some of those computer product sales going out the door and some of the Components sales coming in, as well as from acquisitions. So we'd expect that variable piece to probably be closer to 3-plus percent versus the 2.2%. Exchange rate will also increase it by $5-plus million and then we have the acquisition impact. So when I look at the first quarter and compared to the fourth quarter, I'm just doing the math real quick so I apologize for hesitating for a moment, but that's two, that's nine, I'll do it for you live here, nine. We’re looking at about $30-plus million increase in expense dollars, round numbers I'm using now, in the first quarter. But that will net drive our operating expense percentage up. It will drive our GP percentage up and we'll have an improvement year-over-year in operating income percent. Hope that helps.

The Richardson acquisition, is the EPS accretion kind of range $0.10 to $0.20 on a full year basis?

That is correct. On a full year basis, our estimate is 10% to 20%. We’ll have a better feel, when it closes, obviously impact to our Q1 and obviously the rest of the year.

The next question comes from the line of Steven Fox representing CLSA. Steven Fox - Credit Agricole Securities (USA) Inc.: Can we talk a little bit about the potential leverage this year? I know you’ve set long-term operating margin targets of about 4.5% to 5.8%. You're exiting the year at the low end. Is there a way to sort of talk about the volume benefits as we go through the year as we were going to model out beyond Q1? And then also the acquisition benefits in dollars so we can sort of get a better fix on how much leverage you could get this year, relative to your long-term targets?

Steve, it's Paul. So I’ll try to hit that at a high-level. As we work through the coming year, our expectation, as Mike said earlier, was we'd see margin expansion at the operating income level. So when we think about our organic business, if you will, not impacted by acquisitions, we still would say our contribution margin, on average round numbers, is about 10%. So for every incremental dollar of sales, we would get about $0.10 of operating income which would drive obviously margin expansion. We'll have a higher margin business that will come in with the RF business, not willing to quantify that right now because we don't know when it's going to come in. Offsetting that to a certain extent, will be the Nu Horizons business, which has a lower operating income percent for this year than our -- the rest of our business. Obviously, as we spoke about, there’s a great opportunity there for growth as well as our ability to be able to drive some duplicate costs out of the business. So that will take some time to get that out. We'll still hit our accretion targets from an earnings per share point of view but from a op income percent point of view, that will be a bit of a drag. Steven Fox - Credit Agricole Securities (USA) Inc.: And I guess that's what I was getting at, Paul, I just wanted to make sure I understand what the accretion dollar opportunity that's left this year is with the acquisitions that have closed so far.

Yes. So what we thought we would get is $0.05 to $0.10 on Nu Horizons. Don't see any reason why expectations wouldn't be to deliver that this year. We also said on the RF division of Richardson that it would be $0.10 to $0.20. Intechra, which we closed in the middle of December, so we’d have virtually no uplift in 2010, was $0.03 to $0.05, we'd see that, our expectations haven't changed. We said $0.10 to $0.12 in Shared. We have 3 1/2 months and that's tracking to our plans. So we probably should get, round numbers, 3/4 of that as uplift in 2011. Converge, we said, was $0.05 to $0.10. We had that for half a year, so you can put, round numbers, half of that into next year.

The next question comes from the line of Matt Sheerin representing Stifel, Nicolaus. Matthew Sheerin - Stifel, Nicolaus & Co., Inc.: So a couple questions on the guidance for North America. Paul, in your prepared statement, you talked about a little bit less than seasonal. So if I assume that Nu Horizons contributes for North America, I think it was what, $70-something million? I’m not sure what else is coming in from acquisitions there. So that looks like it's going to be kind of low-single digits and it's normally mid-single digits sequentially. Is that about right?

Matt, the information that we gave did not factor in Nu Horizons. In fact, it was an organic estimate of our forecast compared to sequential increase for all of our businesses. Matthew Sheerin - Stifel, Nicolaus & Co., Inc.: That's right. So now typically, correct me if I'm wrong, but you're normally up kind of mid-single digits primarily on more selling days in the quarter. So by less than seasonal, you're talking about sort of flat quarter-to-quarter or low-single digits on an organic basis.

Yes, what our records show is that historically, on a sequential basis, we're flat to 2%, 3% in North America Components from Q4 to Q1. And we’ll be at that flattish range as we move through this quarter. To be perfectly frank, we just had such a strong Q4. In fact, we had a very strong run by Vinnie Vellucci, Peter Kong and their teams that we're looking for it to be a little slower pace as we enter the first half of 2011. Matthew Sheerin - Stifel, Nicolaus & Co., Inc.: And then on Nu Horizons, I know part of their business is not -- it’s semiconductors, you have NIC Components, which is capacitors and other passives then you’d have a small Systems business. Do you expect to keep those businesses? And what do you plan to do with NIC Components? And is that in your guidance for the March quarter?

This is Mike. We do not plan to exit any of the businesses that came with Nu Horizons, and everything with Nu Horizons is built into our forecast. Matthew Sheerin - Stifel, Nicolaus & Co., Inc.: And just lastly, on Europe, it looks like you're guiding in line with seasonality. And you've had probably four quarters of better than seasonal, including the last quarter, which was up sequentially when it's normally down sequentially. It looks like Europe has been lagging the cycle or Asia recovered first, had a little bit of a correction. It looks look a little bit of a pause in North America. What are your folks in, and Brian and other guys running Europe, telling you about seasonal patterns there? Do you expect a pause or correction? Or are there end markets or market share reasons why you think that might not happen?

Well, we believe, right now, we're within normal seasonality for the first quarter. What we are seeing is an uptick in automotive and lighting. And sales in both of those, we're more than 40% year-over-year. We still see those segments as operating strong for us. And medical sales there were also up around the 35% range. We see that continuing. I think we're all dealing with the same thing when it comes to Europe. I am very bullish on the management team that we have there. They did have a strong December. Their book-to-bills were just inline and their forecast is inline with seasonal. How Europe ends up operating from an economic point of view, that piece, I can't really forecast out other than to say, I believe we are operating right now about as well as we have in Europe. And I'm pretty confident that the team will pull out everything we've said we'd do.

The next question comes from the line of Scott Craig representing Bank of America Merrill Lynch.

Paul, can you just revisit the operating margin when you look at it in the first quarter, because I would think that with the acquisitions in the Components business driving the Components as a greater percentage of sales than what you would normally see, and then just sort of normal seasonality in the mid-range Computing segment, that your operating margin could possibly be more flattish as opposed to down quarter-to-quarter in the first quarter. And then the second question is around long-term operating margins. You've obviously done a number of acquisitions even since the Analyst Day but -- and I realize they're not huge acquisitions, but how do you look at the long-term operating margin ranges in Components and the mid-range computing business, do you see those changing at all?

So we definitely see an increase year-over-year in our operating income percent for Arrow Inc. We see the same -- that's also our expectations when you look at year-over-year increase in Q1 in the Components business. And the pace of the increase, when you look at it, will be probably a double-digit improvement in operating income percent. So not going to go up to double digits with a percentage increase over the first quarter for both, will approach double digits as a percentage. When you look at it over the long term, we always update our long-term targets at our Investor Day and we would expect to give you an update then also. With that said the acquisitions we're making in reverse logistics as an example really focus around ITAD or the acquisitions we're making around the RF division of Richardson, all, even for that matter, A. E. Petsche, all have and carry operating income margins that are ahead of what we've been carrying in our Components business. Now we do have to keep in mind also, though, that our Components business is $12 billion plus in revenues. It takes a lot of acquisitions to have a significant or material change on operating income percent. So there will be an uplift from our acquisitions. But as they accelerate growth, as they growth faster than the core business potentially, then we'll see, longer-term, an impact on our operating income percent to a greater extent.

Your next question will come from the line of William Stein representing Crédit Suisse. William Stein - Crédit Suisse AG: More of kind of an Analyst Day-type question. Can you remind us what the management's view is of the organic growth in each of the segments today?

Well, our view if, it -- let's start with the Computer business itself. And most of the research we've done, most of the IT spending reports have the growth as being somewhere in the 5% range going forward here. We fully believe that we are positioned well with products that will not only grow that but will also drive us higher. And we believe there are several products, whether it's storage, software or services business, we'll grow faster than that. So we fully expect to outgrow that market. As far as semiconductors, we've seen, all over the place, the growth patterns that do exist. We believe, however, that the market is going to grow this year but do not have a percentage for you other than the expectation we have also ranges above that 5% range for the year, as far as organic. And then our services businesses right now are growing, albeit small, and while they’ll have a positive effect this year, also on our gross margin and bottom line, we'll have a better look as we get through the first quarter as those start to develop out for the year for us. William Stein - Crédit Suisse AG: An inventory question, if you don't mind a follow-up. I recall perhaps sometime in the middle or later part of 2010, I think the company did a strategic buy on the passive side. Is that what is driving the inventory reduction that we saw in the December quarter? And maybe even more important, I think the company, historically, tries to shy away from kind of strategic buys because you're price-protected on the downside only when you're not doing that and so I wonder how this turned out for the company? Was that margin-accretive activity for the company? Or was it neutral or negative?

Well, let me bring you up a level. First off, yes, we did do strategic buys. And yes, we believe we had several quarters last year that were above seasonal as a result of that inventory. We also knew last year that the inventory was tougher to get, and therefore, we needed to have inventory to support our current customer base. You get into the expectations also for lead times, and while the supply chain really did operate efficient last year, and lead times have been working back to their more normal levels, there's still some extended lead time primarily in the PEMCO and electromechanical segments of our business. The average lead times were in a range of 10 to 20 weeks, so 15 weeks on average. And now, we see them in the nine- to 16-week lead time. So there's a little bit of a driver, if you will, on the inventory. There were improvements made for us in discretes, logic and analog, which by the way, were some of the areas that we did invest in to raise our inventory. We've also seen electromechanical and embedded product lead times continue to remain extended. So really over the next three months, I'd say, the outlook for those product categories is stable or stable to down with the exception of embedded products and electromechanical. So we believe we did make investments in the right areas for income growth and for our sales growth over the course of the year. And we also believe that we are able to tailor the inventory in a way that takes lead time into account as well as our backlog into account, and that's really why you saw the reduction. So we firmly believe it paid off, I think it shows up in the results, and would not hesitate to make another strategic, buy when the opportunity presents itself.

The next question comes from the line of Brendan Furlong representing Miller Tabak.

On the acquisitions, I don't know if you care to give us a rough estimate of the recent closing of acquisitions, what that is in terms of revenues in Q1?

Just give me a second. I'll give you a round number. If you're talking about incremental revenue dollars in Q1 versus Q4 for closed acquisitions, it would be round numbers, give or take, $145 million to $155 million.

And then there's a lot of discussion on the operating margins on Components, and forgive me if I missed this one, but the operating margins on the ECS were quite up nicely. Any color you could offer around that, in terms of where that upside came from?

Yes, Brendan. From my viewpoint, we did an exceptional job in Q4. Andy Bryant and his team really hit the ball out of the park and did a great job. That's always seasonally our best quarter. But as we look forward, we would expect on an annual basis to be able to expand our margins in that business, both from geographic expansion, from product expansion, as well as our ability to take the same type of leverage that we have in our Components business and build upon that also in our Computer Products business. So they did a great job this year and we’d expect to see the margin expand as we move into 2011 and beyond.

So with the margin expansion in Q4, was that primarily geographic or was it particular product related?

Well, I would say. . .

The business itself, as you know, was up quite a bit. And we have the advantage of incremental dollars flowing to the bottom line. Really, quarter-over-quarter, proprietary servers made a strong comeback for us. Industry-standard servers were strong, storage was strong and services were strong. So all of that mix really did help the bottom line for us, as well as we're starting to see some benefit now from our acquisition of Shared Technologies, which does have a service plan to it. So given the product portfolio and the IT spend recommendations for the year, as well as our growth in services to help add more solutions to our customer base in the data center, we do see the ability for margins to expand in this business over the year.

The next question comes from the line of Sherri Scribner representing Deutsche Bank.

In terms of the seasonality of the Components business, I think in the past you've said it's up about 3% to 5%. Is that essentially the same? Is that what you're seeing now? And obviously, we're seeing some acquisitions on top of that in the guidance.

Yes, Sherri. If you exclude FX, it's about 3.9%. And we're seeing that actually a little bit over the midpoint for normal seasonality. So we actually believe things are in line.

And then in terms of the number of shares you bought back, can you just tell us how many shares you bought back in the quarter?

Paul, why don't you go ahead and give her the share counts?

We have about $33 million left on our buyback. So that's how much we have left. We've done $167 million. During the fourth quarter, we did $42 million of buybacks.

Do you know how many shares you bought back? Or the average price?

Fourth quarter, I think it was about -- fourth quarter was about 1.1 million shares, if I'm not mistaken. The average price that we purchased the shares back this year on the first $167 million is right around $27.50, give or take.

The next question comes from the line of Ananda Baruah representing Brean Murray. Ananda Baruah - Brean Murray, Carret & Co., LLC: I guess, Mike, could you give us a sense of kind of what stage we are, I guess, sort of in the expansion maybe sort of expansion and share gain part of the story as we come out of this stage in the cycle? I guess when you look at the last five years or so, you've actually been able to double the size of the company, almost. And just trying to get a sense of how to appropriately framework what the opportunity really is over the next five years given the acquisitions that you've made over the last couple of years, and then seemingly are still willing to make. And then some of the emerging market opportunities you guys see? And then maybe even some of the market consolidation opportunities, even that don't involve acquisition?

Sure. I'll try to take it at a relatively high level given our time. But we are bullish on both the Components side and the Computer Products side. I think the long-term outlook for IT spending and demand going forward, for all the productivity gains that need to happen out there are immense. And we're adding on to that business, if you will, to expand the capability for those customers that will buy so we can get a bigger share of their spend. So in two ways, in that business, we believe the market itself will continue to expand. And we believe we'll be able to widen the market, giving us a bigger market to go after that will also help us to grow much faster than what the industry will grow. We also believe we'll enhance our profits by adding more services to the sale, therefore, being a real solution provider for our customers. In Global Components, we are seeing components, again, proliferate areas that we never saw happen before. You look at alternative energy and what's going on there, the use of electronics. The medical industry continues to use electronics. Electronics inside of automobiles has been expanding at a very good clip and I gave you some of the numbers earlier today around what we're seeing there. There is much more demand generation, much more design activity than we have ever said. And if you go back several quarters, even when we were in the downturn, I think I told you then that we were seeing 25% to 28% more designs than we had ever had, and we were not going to touch our design team or our engineering team. In fact, we were going to enhance it during the downturn so we would catch that growth going forward. The reverse logistics piece offers us a very large market to be attractive. It's a higher gross margin market. It's a higher profitability-wide market. And it allows our customers to continue using us even after the sale for their need with their product, as they're disposing of those and need them to be wiped clean. All in all, we believe we've increased our addressable market by almost 25% this year given the acquisitions we've gone after. And the relative low share that we have in those new markets creates just a real viable opportunity for growth for us. So we really couldn't be anything less than very bullish over the next five years. Ananda Baruah - Brean Murray, Carret & Co., LLC: Is there anything that you have -- the visibility that you guys have today into those new market opportunities, is there anyway to tell if, I guess, just the operating margin profile of the new business is, I guess -- if the mix is net positive for the current operating margin's structure?

I've got a question for you first. My answer is yes. But if I do that, do you do see PE expansion for me? I just want to know, if I give you a basis of argue it, would you argue it? And if the answer is, yes, then we'll both be happy.

With no further questions in queue, I would now like to turn the call back to Greer Aviv for closing remarks.

Thank you, Katina. If you have any questions about the information presented today, please feel free to contact Paul, Mike Taunton or myself. Thank you, and have a nice day.

Ladies and gentlemen, thank you for participation in today's conference. This concludes the presentation. You may now disconnect. Good day.