Arrow Electronics - Q2 2013
July 24, 2013
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to Arrow Electronics, Inc.'s Q2 earnings Conference Call, hosted by Gregory Hanson. My name is Dai Lu and I will be your event manager today. During the presentation, all participants will be in listen-only mode. If you require any assistance, please key Star followed by zero, and a coordinator will be happy to assist you. As a reminder, ladies and gentlemen, this call is being recorded for replay purposes only. I would now like to turn the conference over to your host, Mr. Hanson. Please proceed, sir.
Gregory Hanson (VP and Treasurer)
Thank you. Good afternoon, and welcome to the Arrow Electronics Q2 Conference Call. I'm Gregory Hanson, Vice President and Treasurer of Arrow. I will be serving as the moderator for today's call. If you'd like to access today's call via webcast, please visit our website at www.arrow.com/investor and click on the Webcast icon. With us on the call today are Michael Long Chairman, President, and Chief Executive Officer, Paul Reilly, Executive Vice President, Finance and Operations, and Chief Financial Officer, Andrew Bryant, President of Global ECS, and Peter Kong, President of Global Components. By now, you should have all received a copy of our earnings release. If not, you can access the release on the Investor Relations section of our website, along with the CFO commentary and the earnings reconciliation for the Q2. Before we get started, I'd like to 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. 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'd like to introduce our Chairman, President, and CEO, Michael Long.
Michael Long (Chairman and President and CEO)
Thanks, Greg, and thanks to everybody for taking the time to join us today. Arrow had a very strong Q2, with both sales and diluted earnings per share up year-over-year. Our revenue of $5.3 billion was at the top end of our guidance, and diluted earnings per share of $1.12 were well in excess of our expectations. Both business segments contributed to the successful quarter. We continue to push forward with our long-term strategic initiatives while managing well the short-term tactical aspects of the business. Cash flow generation in the Q2 was also impressive, at more than $330 million. Solid execution in our components business led to all regions posting sales growth above normal seasonality.
Our enterprise computing solutions business continues to produce record results, with strong organic growth year-over-year and a record level of operating income for the Q2. In global components, sales of $3.4 billion were ahead of expectations. In the Americas, our core sales advanced 4% versus the prior quarter. They remained below a year-ago level, reflecting the ongoing macroeconomic challenges. In Europe, we saw a better-than-seasonal trend in sales growth.
Core sales and constant currency increased 3% in the quarter, with normal seasonality down approximately 8%. Sales in Europe are still down versus the year-ago period, although the rate of year-over-year decline has lessened. Asia-Pacific also experienced strong momentum, the core growth of 13% year-over-year, and we saw broad strength geographically. China and the ASEAN region were up significantly, driving a sequential gain in core sales of 17%.
Book-to-bill was above 1 globally for the 3rd consecutive quarter. Our enterprise computing solutions business continues to outperform the markets we serve, with our 14th consecutive quarter of organic growth. Sales of $1.9 billion were up 12% year-over-year, with strong contributions from both regions. In the Americas, sales grew 10% year-over-year and were slightly ahead of our expectations. Sequential growth in the North America value-added business was in line with normal seasonality, following a very strong Q1. In Europe, our sales grew 18% year-over-year, as we saw broad-based strength across the region. This was driven by the expansion of our Matrix strategy, which includes the Altimate acquisition. With solid improvements in both regions, our operating margin of 4.2% reached a level not achieved since the Q2 of 2008.
Over the past 12 months, we've returned nearly $400 million to investors through our stock buyback program. We have been aggressive about repurchasing our shares as we believe in the long-term value of our strategy. In summary, we executed very well in the Q2. Our markets remained stable, although the global macro environment is still seeing some challenges. We'll continue to pursue our strategy, which has served us well in the short term and positions us to accelerate our performance in the future. Paul will now provide an update of our financial results for the Q2.
Paul Reilly (EVP and Finance and Operations and CFO)
Thanks, Michael . Q2 sales of $5.3 billion was the high end of our guidance. Adjusted for the impact of acquisitions and changes in foreign currency, sales were flat year-over-year. In Global Components, sales declined 2% year-over-year, as double-digit growth in Asia was offset by revenue declines in the Americas and Europe, reflecting the broad macroeconomic trends in those regions. Adjusted for the impact of acquisitions and changes in foreign currency, sales in Global Components were down 3% year-over-year. Sales in Global ECS increased 12% year-over-year, with strong double-digit growth in both Europe and the Americas. Adjusted for the impact of acquisitions and changes in foreign currency, sales increased 7% year-over-year in Global ECS. All of our businesses performed in line with or above normal seasonality this quarter.
Our consolidated gross profit margin was 13%, a decrease of 30 basis points year-over-year, due primarily to changes in geographic mix. Operating expenses increased 4% year-over-year on an absolute dollar basis. Adjusted for the impact of acquisitions and changes in foreign currency, operating expense dollars increased only 1% year-over-year and were flat as a percentage of sales. And to assist you with your analysis, acquisitions added approximately $13 million to operating expenses this quarter. We also took important steps in the Q2 towards our annualized $75 million productivity enhancement initiatives, and we remain on track to realize the targeted savings by the end of 2013. Operating income was $186.1 million.
Operating income as a percentage of sales was down 40 basis points year-over-year, as reported, and down 30 basis points as adjusted for the impact of acquisitions. In Global Components, adjusted for the impact of acquisitions, the operating margin declined 80 basis points year-over-year, due in part to geographic mix, as Asia-Pacific growth continued to outpace the other regions and accounted for a greater percentage of Global Components sales, as well as a macroeconomic environment in Q2 2013 that is weaker than last year's Q2 in the more profitable regions of Europe and the Americas. Adjusted for the impact of acquisitions, Global ECS operating income as a percentage of sales was up 60 basis points year-over-year, driven by solid increases in both the Americas and Europe.
Our effective tax rate for the quarter was 26.3%, and for the remainder of the year, we expect the effective tax rate to be between 27% and 29%. Net income was $116.9 million. Earnings per share were $1.13, and $1.12 on a basic and diluted basis, respectively. Included in the Q2 results is a pre-tax expense of $9 million. That's $7 million net of taxes, or $0.07 per share on both a basic and diluted basis, related to the amortization of intangible assets. Cash generation from operating activities in the Q2 was $334 million, and on a trailing twelve-month basis, $519 million.
We have converted more than 116% of GAAP net income to cash over the last 12 months, far exceeding our targeted level. Return on working capital for the Q1 was 23.3%, and return on invested capital was 9.5%, well ahead of our weighted average cost of capital. In the Q2, we repurchased 5.1 million shares of our stock for nearly $200 million. As of the end of the Q2, we have nearly completed our most recent share repurchase authorization, bringing the total amount returned to shareholders to $900 million since the beginning of 2010. This is a high-level summary of our financial results for the Q2. For more detail regarding the business unit results, please refer to the CFO commentary published this morning.
Now, turning to guidance. With our solid execution in the Q2 leading to strong sales, the reality is the overarching macroeconomic backdrop has not changed much. Customers remain somewhat cautious, and lead times haven't changed either. Our sales outlook therefore generally reflects the low to midpoint of normal seasonality across all of our businesses. In the Q3, we believe that total sales will be between $4.9 billion and $5.3 billion, with Global Components sales between $3.35 billion and $3.55 billion, and Global Enterprise Computing Solutions sales between $1.55 billion and $1.75 billion.
We expect earnings per share on a diluted basis, excluding amortization of intangible assets of approximately $0.07 and any charges to be in the range of $1.14-$1.26. Our guidance assumes an average tax rate in the range of 27%-29%. Average diluted shares outstanding are expected to be 101.7 million, and the average euro to US dollar exchange rate for the Q3 to be 1.3121.
Gregory Hanson (VP and Treasurer)
Thank you, Paul. Dai Lu, if you would open up the call to questions at this time? Operator, if you could open the call to questions at this time, please. Dai Lu, are you on the line?
Operator (participant)
Can you hear me now?
Paul Reilly (EVP and Finance and Operations and CFO)
Yes, I can.
Operator (participant)
Thank you, ladies.
Paul Reilly (EVP and Finance and Operations and CFO)
Please go ahead.
Operator (participant)
If you then decide to withdraw your question, simply key star two. Again, please key star, followed by one to ask a question. Thank you.
Paul Reilly (EVP and Finance and Operations and CFO)
Dai Lu, we're not hearing anything on this end of the line. Is there a first question, please?
Operator (participant)
Thank you. The first question is from. Again, ladies and gentlemen, if you wish to ask a question, please key star, followed by one on your touchtone telephone. Thank you. Okay, we do have a question from the line of. Mr. Suva, if you would please star one again, sir. Thank you. We do have a question. It's from the line of Mr. Jim Suva of Citi. Please go ahead, sir.
Jim Suva (Managing Director)
Hi, guys. This is Nicholas Jones on behalf of Jim Suva. I was hoping you could give an update on some of the pricing pressures you're seeing, and then also just kind of the operating margin targets you have and what sales levels you expect to kind of get in those, especially for the components business?
Michael Long (Chairman and President and CEO)
Sure. I think that, on a year-over-year basis, gross margins are negatively impacted by a few factors. One is the ongoing pricing pressure competition, as well as some of the changes in product and geographic mix. And the other one is Asia-Pac, components grew significantly faster than the Americas or EMEA, and accounted for a greater proportion of our sales versus a year ago. What we have seen is a strengthening in the backlog coming off of three quarters of positive book-to-bill. So it's our belief that, the margins, decline will abate, and we'll start seeing margin growth, from this point out. Paul, you wanna talk about the cost reductions?
Paul Reilly (EVP and Finance and Operations and CFO)
Yeah, sure. So, we're really tracking very nicely to our cost reduction efforts at this point in time, and you can see some of that in the operating income % in Global Components. Interestingly, if you look on a historical basis, operating income % normally trends down sequentially in Q2 in Global Components. And in fact, this quarter, we trended up in operating income by 20-plus basis points. So when we looked at it, we're starting to see traction there. And remember also, we're still investing in our business, as we do believe we want to be best prepared to capture our fair share of future growth in the marketplace.
Jim Suva (Managing Director)
Okay, thanks a lot, guys.
Michael Long (Chairman and President and CEO)
Thanks.
Operator (participant)
Next question is from the line of Mark Delaney of Goldman Sachs. Please go ahead.
Mark Delaney (Managing Director and Senior Equity Analyst)
Great, thanks very much for taking the question, and Michael and Paul, congratulations on the good quarter.
Michael Long (Chairman and President and CEO)
Thank you.
Mark Delaney (Managing Director and Senior Equity Analyst)
I was hoping you could help me understand a little bit more on the Q3 guidance, since I understand you're assuming growth that's at the low end to midpoint of typical seasonality, even though in the Q2, you had results that were above your previous guidance. So, is that just general conservatism that you're picking up at your customers, or is there anything that you're actually seeing in terms of order patterns that would make you give guidance a little bit below seasonal?
Michael Long (Chairman and President and CEO)
Well, we actually have a couple of factors that we're really wrestling with. We have an increased backlog over the last three quarters because of a positive book-to-bill level that we've had, so that would suggest the growth. We also are a little unclear in our computer business around sequestration and what that's going to do in the Q3.
Then we're also augmented by something not as big, but this quarter, there's two days less than normal for us in the entire quarter. And as you know, those last couple of days can be a couple hundred million dollars of sales. What's interesting is, I think, if we're talking about maybe $60 million of sales in the guidance, that would sort of make the question go completely away. But we're not sure right now whether those sales actually pull ahead into the Q3 or whether they stay in the Q4. And that's really the conservatism around our guidance to give you, you know, obviously, the best number that we can at this point in time with what we see.
Mark Delaney (Managing Director and Senior Equity Analyst)
That's helpful. Thank you. For my follow-up, I was hoping to dig a little bit deeper into the margins. Based on your Q3 guidance, it seems that you're expecting some additional margin improvement, and I understand there's some cost savings that are starting to flow through the model. I'm wondering if there are other factors that are starting to benefit you as well in terms of product mix or maybe better pricing.
Michael Long (Chairman and President and CEO)
Well, we are, as we said, seeing an increased book-to-bill, which is always possible. Typically, when you get down toward the bottom, the margin will follow the sales back up because you still have that period of time where there's more of a competitive nature versus when the business gets healthier. We are expecting an uplift in our components business in the Q3 and an uplift in margin in the computer products business for the Q3, too. And that's a result of what we see as more normal day-to-day bookings and really more consistent view of bookings going forward. So we do expect the margin to improve for us. You know, we also took, on the expense side, we really did take some important steps toward that annualized $75 million productivity enhancement program.
We do remain on track with that by the end of 2013. We did have kind of a number of items related really to the warehouse transition in Europe as we closed the warehouse and consolidated some operations that we could do after the computer system being turned on. And so there may be some fluctuations in sort of the quarterly breakdown as we're restructuring right behind that computer conversion to bring us additional savings. And as I said, I believe we're gonna be on track with the $75 million, but that's probably the noise that you're seeing.
Mark Delaney (Managing Director and Senior Equity Analyst)
Thank you.
Michael Long (Chairman and President and CEO)
Mm-hmm.
Operator (participant)
Thank you. The next question is from the line of Shawn Harrison, Longbow Research. Thank you.
Shawn Harrison (Senior Research Analyst and Director of Research)
Hi. I guess just a couple follow-ups on the earlier questions. When thinking about the global components EBIT margin target of 5.3%, is there anything other than kind of the Asia dynamics and that mix headwind that would not allow you to get back to, you know, that 5.3% margin if we were to see something like a $2 million-$250 million increase in the quarterly sales run rate in North America and Europe?
Michael Long (Chairman and President and CEO)
Paul, you wanna take that?
Paul Reilly (EVP and Finance and Operations and CFO)
Sure. So, first off, we don't see that there's anything that's changed, both in the short term, last couple of quarters, over the last couple of years, that would cause us to move away from our targeted levels of profitability in any of our businesses. And you know, as we've talked about, some are further along the path than others. So we don't think there would be any real dynamics changes, that type of thing, that would change the targets. You know, $200 million of sales would, I'm just trying to do the math in my head, really push us much closer to the target over the long term. So don't have any real concerns around that at this point in time.
Shawn Harrison (Senior Research Analyst and Director of Research)
Okay. And then two brief follow-ups. Just on the restructuring savings, how much has hit the P&L so far? And then the amortization that's being backed out, how was that split between electronic components and computer products?
Paul Reilly (EVP and Finance and Operations and CFO)
Okay, I'll take them in reverse order and admit that you have me stumped. I don't have the information in front of me. I looked at it yesterday, but sadly, there was a lot of acquisitions. I don't remember. We'll come back to you with that one. You know, there's a lot of action going on around expense, you know? So if I look at it, the way we're tracking it, we've actually got $17 million of expenses out through Q2, so Q2 versus Q4. But because that puts us ahead of the pace that we thought we were gonna be at, we've chosen to also make some investments in the business so that we think that, you know, you know how investments work, right? They're front-end loaded, and they trail off. So, you know, it's maybe hard to see it in the, you know, going from Q4 to Q2, but the way we keep track, we've selectively chosen to invest in the business because we're ahead of our, our productivity enhancement targets.
Shawn Harrison (Senior Research Analyst and Director of Research)
I guess to that, Paul, then what would be kind of, you know, you have the restructuring savings, net out the investments, what should be the final number that we see on an annualized basis exiting the year?
Paul Reilly (EVP and Finance and Operations and CFO)
Yeah, well, we're already at $68 million annualized expense action savings. So to get to our $75 million number, it's not, not that far away, and we have a clear line of sight about what's happening in Q3 and Q4. You know, the other issue, though, is that some of this front-end loaded spending that we're going through today in some investments will absolutely tail off also. So you'll really see the whole impact, really starting in the whole impact of the $75 million in probably the Q4.
Shawn Harrison (Senior Research Analyst and Director of Research)
Okay, that's helpful. Thanks a lot, and congrats on the quarter.
Paul Reilly (EVP and Finance and Operations and CFO)
Thanks.
Operator (participant)
Thank you. Next question is from the line of Sherri Scribner, Deutsche Bank. Please go ahead.
Sherri Scribner (Analyst)
Hi, thank you. Just wanted to ask a little bit, Paul, on the model and thinking about the SG&A and the cost savings. Would you expect the SG&A to be relatively flat in September, and is there any chance that it goes down in December, or is it gonna tick up like it normally does in December?
Paul Reilly (EVP and Finance and Operations and CFO)
We think that, as we look to the Q3, we'll see expenses trend downward from Q2 levels, when you look at it. And then if you look at it, you know, year-over-year, you know, you're kind of looking at, actually flattish, and that's really where you see some of the investments not falling out of the mix yet. But we'll definitely be down in the expenses on a sequential basis, probably, I'm gonna put a round number on it, somewhere between $10 million and $15 million.
Sherri Scribner (Analyst)
Okay. And then thinking about the depreciation, it sounds like you're gonna start stripping out amortization from your numbers starting in the September quarter, at least that's the way the press release sounded. So should we assume that the depreciation number in September is roughly $7 million lower than the $33 million that it was in the June quarter?
Paul Reilly (EVP and Finance and Operations and CFO)
Yeah, just to be as a point, thanks for asking that question, Sherri. It really what we're looking at is only the amortization of intangibles. So, you know, we've put a lot of a big investment into our Unity, our ERP rollout, and that will still, you know, that will still hit the P&L. We won't carve that out. We've done a lot of research around this and saw that many high-tech companies, tech-related companies, were in fact pulling out amortization of intangibles. We don't see much of a change, so it's about $9 million pre-tax, $7 million after tax. And yeah, you're right, that will be pulled out pretty consistently going forward.
Sherri Scribner (Analyst)
That'll be in the D&A line?
Paul Reilly (EVP and Finance and Operations and CFO)
Uh, yes.
Sherri Scribner (Analyst)
Okay. And then just thinking about the semiconductor business, it sounded like you had a good quarter, and you're expecting going forward in line or slightly lower. Have you seen an inventory refresh in the semi business? It sounds like things are still cautious out there, but just want to get your thoughts. Thanks.
Michael Long (Chairman and President and CEO)
Sure, Sherri. I think that the supply chain today is pretty lean. There's a lot of hand-to-mouth, and lead times are in that 11-week range, where historical average, as you know, has been somewhere around 12. So everything right now is still flowing at a very lean rate. So an uptick will make quite a difference for everybody, and it shouldn't - it should be more than marginal as that uptick does take place.
Sherri Scribner (Analyst)
Okay, great. We haven't seen it yet. Okay, thank you.
Michael Long (Chairman and President and CEO)
Yep.
Operator (participant)
Thank you. The next question is from Matthew Sheerin of Stifel. Please go ahead.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Yes, good afternoon. So a question on your commentary about the fewer selling days in the quarter. Would that also have a positive impact then on your expenses, or is it just the timing of, you know, when the days fall, where it's, it impacts sales more than it does actual operations or expenses?
Paul Reilly (EVP and Finance and Operations and CFO)
Yeah, Matt, as you know, we're not losing the days at the front of the quarter, we're losing the days in the back of the quarter, and those usually have the most volume. So that's why it has more of an impact on sales and GP dollars than it might have on the expense structure.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Okay, so when you talk about that sequential decrease in OpEx, that's sort of a clean number?
Paul Reilly (EVP and Finance and Operations and CFO)
We like to think so.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Okay. And then, Michael , just another question on the component cycle, because it looks like we've sort of been stuck at a 1.0, 1.04 kind of book-to-bill for three quarters now. And as these cycles tend to shift fairly quickly, and we've been sort of stuck in this malaise, if you will, which is not a bad thing because it's not going down. But if you sort of had a guess of where the cycle's headed here, given some signs of the rebound in markets like telecom and networking, offset by some weakness in mobility, so lots of puts and takes. But is your sense that, you know, we're sort of stuck in this mode for a while, or are you more optimistic that the semi cycle will continue to recover, and then beyond that, you'll see lead time stretch and better pricing and firmer orders?
Michael Long (Chairman and President and CEO)
Yeah. For where we are right now, as you can tell by our guidance, we see it hanging here for another quarter. The book-to-bill, the good news about it is we've had three quarters of positive book-to-bill in that business. We do see some of the new business, the margins increasing, and the real trick here is to have the manufacturers start to pick up their sales, and as they do, we'll not only get that sales increase, but then inventory safety will be important to them, and the supply channel, you know, will kind of flow. We have not seen the signs of that yet.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Okay.
Michael Long (Chairman and President and CEO)
And-
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
I'm sorry. Go ahead.
Michael Long (Chairman and President and CEO)
Oh, and really until we do, you know, our view is that the Q3 will fall about as we see it, and we're hopeful, you know, hopeful, for an uptick towards the Q4, but we don't have enough in here to call it yet.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Okay. And, you're seeing last quarter, you talked about a pickup in design activity. Could you give us any numbers around that? That tends to be a good leading indicator.
Michael Long (Chairman and President and CEO)
Yeah, I sure can. What we've seen is that our approved design registrations increased about 11% year-over-year in the Q2, and we did see stronger trends in Europe, which was good news. The other news that is decent news is that sequentially, those registrations also increased 6%. So if we take the last 12 months, there's really been a 12% increase in those design registrations. That's the part, as you know, the higher that number, sort of the greater the rebound will be, and that's one of the reasons that that's giving us a little bit of that holdback at this point, because they're not in that, you know, 15%-20% range yet, where we really see things starting to take off.
Matthew Sheerin (Managing Director and Senior Equity Research Analyst)
Okay. Thanks a lot, Michael .
Michael Long (Chairman and President and CEO)
You bet.
Operator (participant)
Thank you. The next question is from Louis Miscioscia from CLSA. Please go ahead.
Louis Miscoscia (Analyst)
Okay, thank you. Maybe you could just go into a little bit more detail into the strength in ECS in both, I guess, America and Europe, just mostly organic demand. I know you broke out in Europe, the acquisition difference, that was helpful. And then in the Americas, again, you commented it would be below normal seasonality, quarter to quarter. Just curious, why? Does that go back to the just being a few days short on the quarter?
Andrew Bryant (President of Enterprise Computing Solutions)
Sure.
Michael Long (Chairman and President and CEO)
Yeah, go ahead, Andrew.
Andrew Bryant (President of Enterprise Computing Solutions)
So Lou, thanks, Michael . You know, first part of your question, I think, you know, our strategy is really the reason that we continue to produce organic sales growth. We've had this Matrix strategy in Europe in place for quite some time, but we've also had it in North America. So new product lines, our ability to gain share and out execute our competition, is producing the results. And of course, storage, as you probably have read in the CFO report, was strong again. Software was strong. And even though the server market is kind of unremarkable right now, we're producing record results, even without the server market participating. So, good results in North America and Europe. And as you mentioned, we're coming off of two great quarters.
So when you look at seasonality, you know, the bar has been set pretty high for us. And, I think Michael mentioned, we're watching the sequester. We have a very good presence in the federal space. So, you know, if there's an upside to be had there, you know, we'll participate. The fact is that September thirtieth falls on a Monday, so that'll be the end of the government's year, that'll be outside our quarter. So that's a little bit of color as to why we're seeing it the way we're seeing it on the go forward.
Michael Long (Chairman and President and CEO)
Yeah, Lou, let me let me add a little bit to this, is that if you take a look at how the ECS business is transformed, you know, today, well over half of our sales come from software services, storage, and security. Something that really didn't exist here, five years ago. So there's been a very good path towards diversifying this business into higher value spaces that require more than just shipping the product. And by doing that, we've actually, you know, helped ourselves. If you really think of the industry standard servers, you know, a long time ago, we were primarily proprietary servers. And the truth is, even with the competition that's out there, our our worldwide growth in industry standard is around 16%, and, you know, 15% in Europe and 19% in North America. Given that extra value-added content, that's really allowed us to move this business into a new place.
Louis Miscoscia (Analyst)
Okay, great. And then, maybe, Andrew, if you could just, your comment was helpful, maybe pull out, your strength in comparison to maybe just what you're seeing organically, a lot more tepid, I guess, in comparison.
Andrew Bryant (President of Enterprise Computing Solutions)
In Europe?
Louis Miscoscia (Analyst)
Europe and the U.S.
Andrew Bryant (President of Enterprise Computing Solutions)
Well, the organic growth, you know, actually is well above market growth, right? So you strip out foreign exchange and acquisition, and I think we still lose 7 or 8%. So we're pretty much, you know, pacing three times the market growth. And, again, I think looking ahead, we feel pretty comfortable that, that our strategy that Michael just talked about is gonna pay off, so.
Louis Miscoscia (Analyst)
Okay, great. Last two housekeeping questions. When does your quarter actually end? What's the last date?
Michael Long (Chairman and President and CEO)
September twenty-eight.
Louis Miscoscia (Analyst)
And then you had mentioned the amortization. Is that about $0.07, and is that actually already in your EPS guidance of $1.14-$1.26?
Michael Long (Chairman and President and CEO)
The exclusion of the $0.07 is in that... those numbers you just quoted.
Louis Miscoscia (Analyst)
Okay, great. Thank you.
Operator (participant)
Thank you. And the next question is from Brian Alexander, Raymond James. Please go ahead, sir.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Okay, thanks, Paul. What was the book-to-bill on a global basis as you exited the quarter? And how does that compare to the end of last quarter? Was there much variability by region? And then just help me understand why backlog is increasing, with lead time still pretty short, and then I have a follow-up.
Michael Long (Chairman and President and CEO)
Okay. So, each of the major regions and Global Components had a book-to-bill between 1.01 and 1.05, and I'll tell you, the one that was at 1.01 is Europe, and that was well ahead of normal seasonality. So, we see it as very positive. When we looked at it, rolled up, remember, those are our core businesses, it was above 1.03. So, feel good about that as we exited the quarter, as we move forward. So I think that's a very positive sign for us.
Paul Reilly (EVP and Finance and Operations and CFO)
... I guess the other question was on backlog?
Brian Alexander (Senior Managing Director and Director of Equity Research)
Yeah, just maybe clarify why that's rising as lead times still remain pretty short.
Michael Long (Chairman and President and CEO)
Well, your backlog, Brian, is not necessarily what you have in inventory. Your backlog is what customers have placed on you that will ship in the future. So as the book-to-bill increases the sales, your backlog starts to build. And as that backlog starts to build, you start to get better visibility into your numbers going forward. And that's really what is going on right now. So the customer demands on us for the future are higher than they were last quarter and higher than they were the quarter before that.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Are you seeing a further out in bookings in terms of, is the window moving out, you know, from 30 to 60, to 60 to 90?
Michael Long (Chairman and President and CEO)
Right. We have not seen anything abnormal in our bookings. Our cancellation rates are remaining the same. The backlog tends to be building on a more steady basis, which we like to see. And as I said, the hardest part right now is, as that backlog starts to build, which pieces will ship in the Q3 versus which pieces will ship in the Q4? That's what's giving us a little bit of a headache right now.
Brian Alexander (Senior Managing Director and Director of Equity Research)
Paul, just on cash flow, you mentioned, you know, you had $300 million plus in operating cash flow, very good performance, and that you're overachieving in terms of your net income conversion to cash flow. How are you thinking about that over the next few quarters? Is that gonna normalize? How should we be thinking about working capital? And then on the buyback, very active here in the first half, how should we think about the buyback going forward? Thank you.
Paul Reilly (EVP and Finance and Operations and CFO)
Sure. Thanks, Brian. So on the working capital management, we made good progress year-over-year when we look at it, really in the inventory area, though we did slip a little bit in managing our payables. But net-net, when you look at it year-over-year, we improved, and working capital for billings went down. And when we look at it on a on a sequential basis, we really made good progress in DSOs, which were 2 days better, inventory turns, which improved also with the payables management flat. So we think we can continue to push hard on managing well by doing the basics around working capital. So we expect to be cash flow positive in Q3, not at the same level as Q2, but still at a good level.
Probably more in line with our target of about 70% conversion at this point in time. We think we'll be fine also in Q4. So, you know, our target is a long-term target, and as we all know, sometimes we have quarters where we have really strong performance and other times where we kind of looks like we slip, but we gotta really look at the long term, and I still think we'll be able to do better than the 70% over the long term. Oh, and the buyback. Yeah, we got a board meeting coming up, and as always, we review our capital structure with our board.
Yeah, look, we were aggressive in Q2. We thought we do believe at that point in time that we were executing what we told you all we would be doing, which would be buying aggressively around book value. So that's what we did. We've used up our authorization, and we'll continue to have the dialogue with our board.
Brian Alexander (Senior Managing Director and Director of Equity Research)
All right, great. Thank you very much.
Operator (participant)
Thank you. May I remind you again, ladies and gentlemen, if you wish to ask a question, to please key star one. The next question is from the line of Amitabh Passi of UBS. Please go ahead.
Amitabh Passi (Analyst)
Hi, thank you. It's Amitabh here. Michael , I'm just trying to reconcile the, the trends in your Americas components business. I think we've had almost six quarters of negative year-over-year growth with sort of the macro commentary about things getting marginally better. Just trying to understand what exactly do you think is going on in that segment, and why have trends been so weak for so long?
Michael Long (Chairman and President and CEO)
Well, I think there's been some fundamental market changes. You know, we did have the 4% increase versus the prior quarter. Things are showing a sign of life. The lighting industry continues to be robust, and we've seen that increase about 21% year-over-year and 15% sequentially. The PEMCO, the passive electromechanical and connector initiatives continue to gain momentum. And what we've seen is, you know, aerospace and defense having around a year-over-year growth of 3%. Lighting is up in the 15%-21% range, quarter-over-quarter to year-over-year. We've actually seen... You've got some offsetting factors that are having an impact. You know, the medical industry, medical devices, quarter-over-quarter, was down about 2%, but on the year, it's flat.
So that's typically been an industry where there's been some wind at our back, and we haven't had that for quite some time, is that medical devices have not been that strong. The other thing you have to remember is that there's been a pretty good hit in the alternative energy sector. Solar, wind, those types of things, are not growing at the pace that they used to. In fact, we've seen a decline in both of those, and that's pulled us the other way. So I think there's some industry rationalization that's going on. Of course, automotive is ticking up, and that's good. But until that stuff sort of sorts itself out that's what's really causing the problems.
Amitabh Passi (Analyst)
Got it. Very helpful. And then, Paul, just one for you. Operating margins in your computing solutions segment up 30 basis points year-over-year. They were up 10 basis points in your first calendar quarter. Should we expect, on a year-over-year basis, ongoing improvement over the next couple of quarters, maybe 10, 20 basis points?
Paul Reilly (EVP and Finance and Operations and CFO)
Andrew's sitting right here, so yes. So I would expect that we continue to see improvement there. As Andrew's mentioned, look, we're probably running at a top line three times the growth in the overall market that he's serving in, around the data center. And, you know, we think that's still a rich opportunity, so we wanna make sure we get the right balance between, obviously maximizing our profitability, but also we wanna invest in the business. So, it, you know, it may not be as linear every quarter, because there is a bit of a lag between investment and payoff, but we would expect over the long term that we continue to see the trend strengthen in an operating income percent.
Amitabh Passi (Analyst)
Got it. And, Andrew, can I just ask one for you quickly? I'm just curious, why, how is it that in most of your key categories in computing solutions, servers, networking, security, storage, you continue to outgrow your suppliers by quite a great extent? I'm just wondering, what explains that dynamic?
Andrew Bryant (President of Enterprise Computing Solutions)
Most of the organic growth is coming from the matrix expansion strategy, which means we take a new line, and we're enjoying revenue from dollar zero up, and so that's why you see the growth, or we're expanding into a new country where we had no revenue in that vendor line previously. And so that strategy is driving the faster than market growth.
Amitabh Passi (Analyst)
How far are we into that? Is there still quite a bit of headway?
Andrew Bryant (President of Enterprise Computing Solutions)
I think we're in just the middle innings. There's more to come. More to come.
Amitabh Passi (Analyst)
Okay. Thank you.
Operator (participant)
Thank you. The next question is from the line of Steven Fox of Cross Research. Please go ahead, sir.
Jim Suva (Managing Director)
Thanks. Good afternoon. Just one question and one comment. Just from a comment standpoint, I totally understand why you're making the change on the amortization line, but it would be helpful if we just got an 8-K filing, sort of breaking out the change from a margin standpoint, by your business segments. I think you can only get to a couple of the quarters from your 10-Q filing. So, it just makes it hard on an apples to apples basis. And then from a question standpoint, just looking at the enterprise spending line, and enterprise spending demand, rather, for the rest of the year.
Steven Fox (Founder and CEO)
I know that you've mentioned some calendar issues, some, some government issues as well, but if you look at just your core set of, small and medium-sized customers, can you sort of describe what's been going on there from a big picture standpoint, whether the product trends you described so far apply, fully to those markets? And also how you feel, you know, I know it's early summer about, but how do you feel about year-end spending around, those, that group of customers? Thanks.
Andrew Bryant (President of Enterprise Computing Solutions)
Okay. So, I'll take the part about the medium business versus maybe large enterprise. So let's take the quarter closeout and when the fiscal year ends for the federal government. And I would say that business and our pipelines continue to show steady growth, and you know, there's no change, really, in our outlook.
We're actually seeing some of our bigger customers driving back into the IT spending arena. So when you look at the markets we serve, financial, healthcare, government, and so on, some of the spending is large accounts getting back in the game and spending on IT, and the mid-market has been consistent and pretty good for us. So to wrap it up, I think heading into year-end, I don't wanna go out on a limb and talk about growth ahead of what the industry's calling for, but I do think the data center spend is a little bit stronger than the general IT spend. And so I think we're in a good position as we head into year-end.
Steven Fox (Founder and CEO)
Great. Thank you very much.
Operator (participant)
Thank you. We have no further questions in the queue. I will now turn the call back to Mr. Gregory Hanson for any closing remarks.
Gregory Hanson (VP and Treasurer)
Okay. Thank you. As a reminder, if you have any questions about the information presented today, please feel free to contact me. Thank you. Have a nice day.
Operator (participant)
Thank you, ladies and gentlemen, for your participation in today's Conference Call. You may now disconnect. Have a great day. Thank you.