Fourth Quarter 2019

[Pages:17]Fourth Quarter

2019

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 2019 Annual Report on form 10-K as filed with the Securities and Exchange Commission.

Full-year 2019 cash provided by operating activities of $858 million.

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Fourth-Quarter 2019 CFO Commentary

Fourth-Quarter Summary

Fourth-quarter earnings per share on a diluted basis exceeded the midpoint of our expectations, and sales were in line with our expectations. Global components increased scale in Asia resulting in record fourth-quarter and full-year sales for the region. Enterprise computing solutions delivered operating income growth, year over year, adjusted for changes in foreign currencies. Actions were largely completed under the previously disclosed cost optimization program that is designed to produce $130 million in annual cost savings. The cost optimization program, combined with the wind down of the PC and mobility asset disposition business, position the company for rapid profit growth when demand conditions improve.

Conditions for the global components business did not improve during the fourth quarter. Demand from smaller customers who utilize more engineering and design services remained weak, particularly in the Americas and Europe.

For the enterprise computing solutions business, the demand environment during the fourth quarter was largely consistent with our expectations. In aggregate, billings increased at a low single-digit rate year over year. Our portfolio approach is designed to deliver consistent results.

The first quarter will be negatively impacted by our Mar. 28, 2020 closing date, two days earlier than 2019 and three days before the end of the calendar quarter. We estimate the earlier close will negatively impact sales by $225 million and earnings per share by $.11, but full-year results will not be affected.

Fourth-quarter earnings per share on a diluted basis were $2.20 and compared to our prior guidance of $2.10 to $2.26.

We are experiencing delays and extended lead times of products manufactured in China related to business and transportation shutdowns. The situation remains uncertain, and we cannot quantify potential impacts to our outlook at this time.

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Fourth-Quarter 2019 CFO Commentary

Consolidated Overview

Fourth Quarter 2019

P&L Highlights*

Q4 2019

Y/Y Change Adjusted for Acquisitions,

Y/Y Change Dispositions & Currency

Sales

$7,338

(7)%

(5)%

Sales adjusted for wind down

$7,319

(6)%

(5)%

Gross Profit Margin

11.2%

(110) bps

(90) bps

Non-GAAP Gross Profit Margin

11.3%

(100) bps

(90) bps

Operating Income

$238

(29)%

(25)%

Operating Margin

3.2%

(100) bps

(90) bps

Non-GAAP Operating Income

$285

(21)%

(20)%

Non-GAAP Operating Margin

3.9%

(70) bps

(70) bps

Net Income

$112

(51)%

(38)%

Diluted EPS

$1.36

(48)%

(35)%

Non-GAAP Net Income

$181

(20)%

(18)%

Non-GAAP Diluted EPS

$2.20

(15)%

(13)%

$ in millions, except per share data; may reflect rounding. Prior periods adjusted for new accounting standards.

Q/Q Change 4% 4%

(10) bps flat 37%

80 bps 13%

30 bps 22% 23% 17% 18%

? Consolidated sales were $7.34 billion; sales were $7.32 billion adjusted for the wind down of the PC and mobility asset disposition business

? Adjusted sales were in line with the midpoint of our prior expectation of $7.125 billion to $7.525 billion

? Changes in foreign currencies negatively impacted sales growth by $65 million or 1 percentage point year over year

? Operating income margin was 3.2% and non-GAAP operating income margin was 3.9%

? Operating expenses as a percentage of sales were 7.7%, down 30 basis points year over year

? Non-GAAP operating expenses as a percentage of sales were 7.4%, down 30 basis points year over year

? Interest and other expense, net was $50 million

? Consolidated gross profit margin was 11.2%; gross profit margin was 11.3% adjusted for the wind down

? Slightly below our prior expectation of $52 million

? Down 100 basis points year over year due to lower sales of higher value products and solutions in all regions for global components and a higher mix of Asia components sales

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Fourth-Quarter 2019 CFO Commentary

? Effective tax rate was 33.9%, and non-GAAP effective tax rate was 22.1% ? Non-GAAP effective tax rate was near the lower end of our long-term target range of 23% - 25%

? Diluted shares outstanding were 82.5 million ? In line with our prior expectation of 83 million

? Diluted earnings per share were $1.36 ? Below our prior expectation of $1.82 - $1.98

? Non-GAAP diluted earnings per share were $2.20 ? Above the midpoint of our prior expectation of $2.10 - $2.26 ? Changes in foreign currencies negatively impacted earnings per share by approximately $.04 compared to the fourth quarter of 2018

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A reconciliation of non-GAAP adjusted financial measures, including sales, as adjusted, operating income, as adjusted, net income attributable to shareholders, as adjusted, and net income per share, as adjusted, to GAAP financial measures is presented in the reconciliation tables included herein.

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Fourth-Quarter 2019 CFO Commentary

Components

Global

$260 $240 $220 $200 $180 $160 $140 $120

$265 $250

$217 $203

$172

Q4-'18 Q1-'19 Q2-'19 Q3-'19 Q4-'19

Non-GAAP Operating Income ($ in millions) (as adjusted)

? Sales decreased 8% year over year adjusted for the wind down of the PC and mobility asset disposition business and for changes in foreign currencies

? Sales decreased 10% year over year as reported

? Lead times contracted year over year and were largely unchanged compared to the third quarter

? Backlog decreased year over year but increased compared to the third quarter

? Book-to-bill was 0.99, up from 0.95 in the fourth quarter of 2018

? Operating margin of 3.2% decreased 160 basis points year over year

? Non-GAAP operating margin of 3.6% decreased 150 basis points year over year

? Margin unchanged in Asia and decreased in the Americas and Europe year over year

? Return on working capital decreased year over year

Global components fourth-quarter sales decreased 8% year over year as adjusted.

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Fourth-Quarter 2019 CFO Commentary

Components

Americas

$2,000 $1,900 $1,800 $1,700 $1,600 $1,500 $1,400 $1,300

$1,943 $1,844 $1,816 $1,692 $1,626

Q4-'18 Q1-'19 Q2-'19 Q3-'19 Q4-'19 Sales ($ in millions) (as adjusted)

? Sales decreased 16% year over year adjusted for the wind down of the PC and mobility asset disposition business

? Sales decreased 19% year over year as reported

? Key verticals such as aerospace and defense, communications, industrial, and transportation decreased year over year

Americas components sales decreased 16% year over year as adjusted.

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Fourth-Quarter 2019 CFO Commentary

Components

Europe

$1,500 $1,400 $1,300 $1,200

$1,483

$1,383

$1,399

$1,291

$1,189

$1,100

$1,000

$900

Q4-'18 Q1-'19 Q2-'19 Q3-'19 Q4-'19

Sales ($ in millions) (as adjusted)

? Sales decreased 12% year over year adjusted for the wind down of the PC and mobility asset disposition business and for changes in foreign currencies

? Sales decreased 16% year over year as reported

? The aerospace and defense, lighting and transportation verticals decreased year over year

Europe components sales decreased 12% year over year as adjusted.

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Fourth-Quarter 2019 CFO Commentary

Components

Asia

$2,100 $2,000 $1,900 $1,800 $1,700 $1,600 $1,500

$1,978 $2,006 $1,905

$1,833 $1,782

Q4-'18 Q1-'19 Q2-'19 Q3-'19 Q4-'19 Sales ($ in millions)

? Sales increased 4% year over year

? Record fourth-quarter sales

? Key tracked verticals including transportation, wireless, and lighting decreased year over year

Asia components sales increased 4% year over year.

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