Good day and welcome to Arrow Electronics Conference Call to discuss their Second Quarter Earnings. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Sabrina Weaver for opening remarks and introductions. Please go ahead.

Thank you, Joshua. Good morning everyone and welcome to the Arrow Electronics second quarter conference call. I am Sabrina Weaver, Arrow's Director of Investor Relations and I will be serving as the moderator on this morning's call. Today's call is also available via webcast. To access this webcast or future webcasts, please visit our Investor Relations website and click on the Webcast icon. With us on the call today are Bill Mitchell, Chairman, President and Chief Executive Officer; Paul Reilly, Senior Vice President and Chief Financial Officer; Kevin Gilroy and Cathy Morris, Presidents of Arrow Global Enterprise Computing Solutions and Mike Long, President of 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. Before we get started, I would like to review Arrow's Safe Harbor statement. Some of the comments to be made in this morning's call may include forward-looking statements, including statements addressing future financial results that are subject to a number of risks and uncertainties that could cause actual results and 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 several 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, Bill Mitchell.

Thanks Sabrina and thanks to all of you for taking the time to join us this morning. In the second quarter, we again demonstrated strong execution on our strategic objectives and we posted record results. We achieved record sales. We generated an impressive level of cash flow and managed our asset base to a record level of working capital to sales. Our acquisitions have been successfully integrated and are performing ahead of plan. We've made strong geographic moves over the last 18 months and strong strategic moves over the last 18 months that have resulted in a more diverse revenue stream, a broader geographic footprint and increased opportunities in fast growing product segments. We continue to manage our business to consistently deliver strong financial program performance independent of market conditions. In our enterprise computing solutions group, our strategy is producing impressive results. In the second quarter, sales pro forma for acquisitions increased almost four times the rate at which the overall market is expected to grow. With the KeyLink acquisition, ECS now represents approximately one-third of our business, further diversifying and reducing the volatility of our revenue stream while increasing the consistency of our profit strength. With increased scale, scope and flexibility, our strategy is proving out every day with our business partners. On the component side of the business, we continue to execute well in the midst of a cautious market. Our European business achieved great results and North America and Asia Pacific, not surprisingly, were impacted by the continued and well known weakness in the large EMS segment again this quarter. Let's now review some of the second quarter's key financial highlights. Consolidated sales increased 17% year-over-year to a record level of $4 billion. Earnings per share of $0.81 also reached the highest level for a second quarter…

Thanks Bill. As reflected in our earnings release, there are a number of items that impact the comparability of our results with those in a trailing quarter and the second quarter of last year. I will review our results excluding these items to give you a better sense of our operating performance. As always, the operating information we provide to you should be used as a complement to our GAAP numbers. And for a complete reconciliation between our GAAP and non-GAAP results, please refer to our earnings release, the earnings reconciliation slide at the end of the webcast presentation. For analysis purposes, please note that as of the second quarter of this year, we realigned our business segment as a part of our continued efforts to better serve customers and suppliers and leverage cost synergies globally. As a result, our computer products business in Europe serving OEMs, which were previously included in the worldwide computer products business segment, will transition into our worldwide component business segment. Prior periods have been adjusted to reflect this change. Sales for the second quarter were $4.0 billion. That's an increase of 17% year-over-year and 15% sequentially. Pro forma for the impact of the acquisitions of KeyLink, Alternative Technology and InTechnology, we grew sales by 5% over last year. Global enterprise computing solution sales, representing approximately one-third of total sales were at $1.3 billion. We achieved our 14th consecutive quarter of year-over-year growth, an increase of 78% sequentially and a 103% year-over-year. Sales increased a strong 22% over last year pro forma for the acquisitions of KeyLink, Alternative Technology and InTechnology, significantly outgrowing the market which is expected to grow mid single digits. Operating income as a percentage of sales pro forma for recent acquisitions decreased 10 basis points sequentially, yet returns improved significantly with…

Thank you, Paul. With the close of the KeyLink Systems Group acquisition at the end of last quarter, our strategy is paying off. Global enterprise computing solutions had a very strong performance, driven by double-digit increases in industry standard servers, storage, software and services. We showed significant strength on our North American business which was offset by some weakness in Europe as we build out our geographic footprint and line card there. Our focus on enabling our vendors and reseller partners to deliver complex solutions to the fast growing mid market and enterprise customer space is yielding results that are growing faster than the market. Our expanded portfolio of total solutions in rapidly growing product categories including security and infrastructure, software capabilities, which are unique to Arrow, will allow us to continue to outperform. ATI has had another excellent quarter as sales increased by 75% year-over-year. KeyLink also posted impressive sales growth of 37% year-over-year. With the achievement of scale and increased opportunities in faster growing product segments, we are seeing the effects of our strategy play out every day with our customers and our vendors. As demonstrated by our recent ranking as the number one value-added resource by the VAR community and VARBusiness and Computer Reseller News surveys, our strategy is resonating with our customer base and we are excited about the significant opportunities that lie ahead. Over to you, Bill.

Thanks Kevin and thanks to you, to Cathy and to all of your teams for a really terrific quarter in the midst of lots of moving parts. We have made lots of moves in the ECS world. They have been successful and all congratulations go to the team that has pulled it off. With that, I would like to turn it over to Mike Long who will comment on our enterprise computing solutions... or on our global components business. Mike?

Thanks Bill. In the second quarter, we performed well as the market showed more modest levels of growth. In Europe, our business performed in line with normal seasonality as growth in the region returns to more normal levels. Our investments in sales and marketing in the region continue to pay off as we achieved strong performance in Germany and the Nordic region where we continue to leverage our leading market position. We will continue to drive results by expanding our existing account base and investing in new markets and customer segments. In the North America front, we continue to move ahead with strategic initiatives to further penetrate the small and medium-sized customer segment. And we continue to grow sales in new marketplaces such as lighting, industrial and transportation Aas the amount of electronic content designed in by manufacturers is steadily increasing. We did continue to experience weakness in our large EMS customers, yet our disciplined focus around asset management and initiatives to ensure we align inventory levels with market conditions enabled sequential improvements in working capital and return performance. In our Asia Pac region, our business in Taiwan and India showed strong performance while softness in Greater China, the ASEAN region and Korea was due to the continued well publicized weakness in our large EMS customer base. We continue to improve the level of profitability as we focus on the small and medium-sized customer segment and efficiency initiatives in the region. Combined with lower tax rates and higher asset velocity, the Asia Pac region will be accretive to our ROIC and provide positive momentum towards achieving our financial targets. We are excited about the opportunities that lie ahead for us in this region as we make progress to our goal of being the clear number one in Asia. If we look at global trends, book-to-bill on a global basis was at parity for the quarter and lead times are still within normal ranges. Pricing from suppliers continued to be stable and we saw no notable increases in cancellation rates. The well publicized weakness in the large EMS segment continued to impact our results in North America and in Asia and our quarterly customer survey in North America indicated that the majority of our surveyed customer base continue to fell the inventory levels are well positioned as they look ahead into the third quarter. Looking forward, we see normal seasonality for our components business through this point in the third quarter.

Thanks Mike and nice job to you and your whole team for this quarter. Let me wrap up just for a second. Overall, we had another good quarter as we continued to execute for consistent results regardless of market conditions. And we continue to post those strong results as we run the company in a disciplined and focused manner to achieve better than market growth and profits. And that's what you can depend on from this team. We reached our highest level of quarterly sales and our second highest earnings per share for a second quarter in our company history. Our industry leading enterprise computing solutions group continues to outperform. We are generating strong double-digit growth in a market that grows in the mid single digits and our expanded set of total solutions will ensure that we continue to outgrow the market. We achieved solid performance in global components despite a more cautious marketplace and have gained global market share year-over-year for over three years; again, that consistent performance. We effectively managed our asset base to reach a record level of working capital to sales. We have generated positive cash flow for six years and have put our cash to work funding acquisitions and investments to profitably grow our business. Finally, we have generated a return on our invested capital in excess of our cost of capital for 3.5 years, something unprecedented in the industry. Again, I would like to thank the entire Arrow team. It's a terrific team. Their continued dedication and commitment to our strategic vision helps us to have this focus and discipline to achieve better than market growth and profits. Let's look forward and talk about guidance for the next quarter. Looking ahead into the third quarter, we expect normal seasonality in both of our businesses…

Thank you, Bill. Joshua, can you please open up the call to questions at this time? Question And Answer

The question and answer session will be conducted electronically. [Operator Instructions]. Our first question is from the line of Matt Sheerin with Thomas Weisel Partners.

Thank you. Good morning. Just a question regarding your commentary about the EMS business being weak. Could you give us a sense of what it was directionally? Was down quarter-to-quarter again or have you seen it stabilize and when do you think or are you seeing any signs that the EMS inventories are in check and they are going to start coming back and ordering?

Mike, why don't you take that one?

All right, thanks Matt. Well, what we saw was a slight improvement in our sales to large customers in the second quarter. That business has not really increased significantly in the segment, if you will. But despite that weakness, I think we are executing well and showing solid performance. We are going to continue to run the business, Matt, regardless of what happens in that segment. But again, we did see a slight improvement for the quarter

And your book-to-bill within EMS, is that in line with what you are seeing globally one to one [ph], or is it a little bit better?

Yes, we are seeing it in line.

Okay. And then I know, Bill, you mentioned directionally what the gross margin in North America was in components. I believe you said it was down subsequently, is that correct?

Paul, you want to catch that one?

Yes, absolutely. What we said, Matt, was that in our core customer base around the world at the small and medium-sized customers, year-over-year, we actually saw an increase and sequentially we saw an increase in gross profit percent. Specifically, as it relates to North American gross profit percent, it was flat sequentially in North America.

That's the core business or the whole business?

That's the whole North American business, but the core business, the small and medium-sized customers was actually up sequentially and year-over-year.

Okay. Thank you on that. And then my last question, just regarding your guidance. It looks like you're looking at seasonality in Europe. There have been some commentary from some suppliers that Europe is looking a little bit less than seasonal, a little bit worse than seasonal. Could you comment on that? And then my second question regarding your expenses, it looks like you did a good job of keeping expenses in check given the big ramp up of that new computing business. Are there more costs to take out there and where do you see the SG&A percent going in the next couple of quarters?

Let me answer the first one, Matt, on Europe and again, what I've reemphasized is we see normal seasonality in Europe. This is something we have been watching very carefully and we see normal seasonality. I know there has been lots of pluses and minuses going out around in the industry and we are seeing normal seasonality.

And by that we mean, what? In the low single digits down?

Yes.

Okay.

And Paul, maybe you can answer the answer the question about the operating expenses.

Certainly. Matt, we are constantly focused on being more efficient and more effective in each and every process that we have. In fact, we've talked about our CPI initiatives that we have underway using the Lean Sigma technique. So we think we'll be able to continue to drive operating expenses as a percentage of sales down as we get more efficient and more effective. Keep in mind also we've talked about evaluating each of the businesses we are in, none on such a large scale as North American components, but individual part of that business or in Asia Pac or in Europe to understand whether they are really profitable and generating returns. And we'll continue to do that and if this malaise continues in EMS, we might consider changing the way we have the cost structure set up, so that we could build it for a low level of business activity; not there yet, haven't made a decision on that; but those are type of the activity that we will take going forward.

Okay. Great, thank you.

We will take our next question from the line of Brian Alexander with Raymond James.

Thanks. Paul, if I tie the midpoint of your revenue guidance to the EPS guidance, it implies that operating margins are going to at least hold sequentially, and most likely improve, just using the midpoint of your guidance. So, I am trying to reconcile that with ... assuming my math is right ... reconcile that with the fact that you are guiding revenue down in both segments. I guess the question is where you are getting the operating leverage from on a sequential basis ... either in terms of what segments or what geographies; if you can help us think about that?

Sure, absolutely. Well, our expectations are that there'll be a little bit change in the mix with more components. So that always has a higher operating income percent historically. We also think that we will see a rebound in the business in Asia Pac, as we see no more seasonality there, to build out year-end holiday that gives them a chance to leverage their cost structure and drive it up. And as I mentioned before, Brian, when we were talking to Matt, we're always looking to tweak our cost structure and we think we will be able to continue to do that. We've been effective in the second quarter in taking some cost out on an ongoing basis and we will continue to do that going forward.

Brian this is Bill. Another sort of addition to that, just addition to Paul's comments about Asia. One of the things we've talked about for some period time is that Asia would start having good positive results on. So, we've really been working hard to increase the profitability in Asia, and you can see it. We announced 74% increase quarter-over-quarter. We announced a big increase in our first quarter. That started to have some positive moves on us, as we worked really hard on getting that business profitable; as we said we would. Again, we've been talking about that for some period of time. We are beginning to see that kick in. And that has ... that's good news for us. It's one of the things we've been questioned about a lot is, what would be the impact on Asia. We've said over some period of time that Asia would be accretive to us. We've continued to think it is and it's starting to happen and we're seeing the very positive results because of our focus on profitability in Asia.

Just to follow-up on that Bill and Paul. Are we to assume that you can hold the margins in the components business? I think you just said 5.5% this quarter. You can hold that on a sequential basis. Because of the leverage in Asia and despite the negative seasonality that you're going to see in Europe and North America; and just tying into that, you're still confident that you can get the 5.7% by the end of this year?

The answer is we are very confident we will get to 5.7% by the end of this year. And I'll let Paul answer the more detail ....

Brian, one of the points to your first question was, don't forget also, as we mentioned we had a negative impact from the tender offer for Ultra Source which costs us about $0.01 per share. So, if you work away that that ends up being a couple of million dollars of expense that we incurred that we wouldn't have in the next quarter. So that will help us maintain the operating income percent. And we'll be within that range for the next quarter as we are in this quarter also.

And then my final question maybe for Kevin. Talk a little bit about the cross-selling success that you're having in all the acquisitions that you've done on the computing side. I think you mentioned KeyLink was up 37% year-on-year, which is well above what they were doing before the acquisition, if I heard you correctly. And I think you said Alternative was up 75%, so I'm just trying to better understand, to what extent are you getting success cross-selling between the customer base since you didn't have a lot of overlap when you bought these companies?

Yeah Brian, that's right. We have major cross-selling initiatives in place, they're starting to pay off. We piloted with one of our groups and it went well, we had a lot of learnings from it. And our Alternative Tech group now is working with all our different server businesses to optimize their sales, and their sales have just been superb. We have the platforms, we have a huge installed base on the platforms side. They have a unique install base on the ... pretty much focused on the small medium or the medium segment. Again, they're unique. So, the cross-selling opportunities are going well. But we believe we've only scratched the surface, we think there's a lot more there. So, Alternative Tech with security solutions, with virtualization solutions, continues to just knock it right out of the park; and of course they have a whole new set of customers to go after now.

Great. And nice job with cash flow this quarter. Thanks.

We'll take our next question from the line of Jim Suva with Citi.

Great. Thank you very much. You're very clear about your outlook as far as seasonality goes in the different regions and such, can you tell us a little bit about your outlook as it relates to EMS. Are you expecting that EMS return to normal kind of subdued inventory headwinds that we experienced recently or what type of outlook is incorporated for your outlook with regards to EMS?

Mike, why don't you have that ... have a hand at that one.

I think what we've said, and what we continue to say, it's pretty much what we've seen. Our book-to-bills were at parity. We had a slight up-tick; we're not expecting EMS to get any worse at this point. But I would be very cautious to go our path the next 90 days on that.

Okay. And as a follow-up to that. What would your company look like if EMS were kind of "more normal" as far be a sales, or margins, or EPS. What type of I guess kicker could we see kick in, some day when that comes back?

Paul, why don't you take that?

Hey, Jim, good morning. When you look at it year-over-year our decrease in sales, the large EMS is somewhere between $75 million and $100 million. So, if you just take the traditional profile on our expenses. Saying that we're about 3% variable and we do say that has a lower gross profit percent, you probably could be comfortable in assuming that would have about 10% incremental operating income contribution. So you could do the math that way, that it will range on a pretax basis from $7.5 million to $10 million. So, work your down the taxes; you could see that it would easily be $0.04 to $0.06 a share impact on a positive side, if it was to go up. We've been dragging along this bottom level for quite some time. And Mike, was right in that it was up a bit but if you are talking about extremely low single-digits sequentially in that 1% to 2% range; so, not really getting any juice this quarter. So, I think you could safely assume that, no, if we would go back to the levels we've seen in the first half of 2006 it could contribute $0.04 to $0.06 net earnings per share.

Great. And a quick housekeeping question; for SG&A are we now at a level with all the acquisitions added in, of no more like step-up functions, assuming no future acquisitions meaning the base right now is where we can look at kind of going forward?

Jim, if your question is that we need to make any investments in SG&A of a fixed nature to be able to support higher level of sales, the answer would be "no, we don't need to." We look at our logistics distribution centers, as an example, and feel we have plenty of capacity to put more sales through that as an example. Our IT platforms are pretty robust as far as the systems we have in place today. So, we really wouldn't have to make any fixed investment to grow the business.

But going forward a run rate of about $3.80 or just under 10% of sales is somewhat comfortable, like no big step-up for acquisitions that were like partial months or things like that?

No, no absolutely not, we think it's going to go down.

Great. Thank you, gentlemen.

We will take our next question from the line of Tom Dinges with JP Morgan.

Good morning. This is Jason Gursky stepping in for Tom. Maybe just first a bookkeeping question for Paul. On the interest expense line and the other, was there anything one-time in nature this quarter and perhaps just your outlook on where we go from here?

There was nothing of a one-time nature in interest expense. Our interest expense came in, really, in good shape, because we are able to be very strong cash flow positive for the quarter. So, our expectation that would be cash flow positive for each of Q3 and Q4, so, we think that interests costs will trend down absent any type of change in the overall rate environment but we think it would trend down.

Okay and then maybe just a follow-up question for Kevin related to the computer business. You talked about the cross-selling opportunities and how you are able to drive better growth at KeyLink, maybe you can just speak a bit more broadly to product trends out there and which ones you are seeing strengthen, and which ones are perhaps performing a little bit weaker.

So, I think we see tremendous strength across all markets, and I think it's important to look at it by product end market with industry standard servers. We are seeing an insatiable apatite in the storage community, particularly, with the Source product line particularly in the mid-market. Security software, virtualization software is growing by leaps and bounds. So, what we are seeing and what is very interesting is we're seeing more solutions being sold in just point product. And when we analyze our trends, again, we are seeing total solutions being sold into mid market. On the software side, we did see a little bit of software business in Europe. Whether that's an anomaly or not is not clear but it's ... we are taking a look at that deeply. And on the product side proprietary architecture, we saw a similar strength in proprietary and our IBM product set. We saw a little bit of weakness in some of our others. So, again pretty predictable forecast of where proprietary architecture is going. Still strong but now at the growth rates, I believe, industry standard service, but again tremendous strength in storage virtualization software, security software, and just overall solutions.

Okay. And then, Paul, last one. Can you just give us on the Oracle rollout and the expenses that you might have incurred this quarter and how it is tracking to plan?

Yeah. I can tell you ... Bill, do you want to give an update on how we are making then I can talk a bit about tracking the cash and expenses?

In general, we are really pleased with how the program is rolling out. We are well into it, we have dedicated teams, they're making good progress. We are on track, we are on budget. We are hitting the milestones and that's going to be a terrific event as we move forward with this. As you know, this rolls out over four years, we have completed the rollout of the financial part of it. That's done, and in, and running and it is successful. So, we have that behind it. We are now doing our two big programs in our ECS group, our global components groups, as I said, those are on track and rolling out, first in ECS then in Europe, Asia and North America. So, we're pleased with the progress that we've made to-date and we're hitting the targets as we said. And Paul, why don't you give some detail about those?

Thanks Bill. Jason, Bill is right on target, saying that we're tracking to plan for all three projects. One thing though that has changed just a little bit is the timing of some of our expenditures on the capital expenditure side, in fact if you look at our statement in cash flow, you'll see that we will probably about $5 million higher in spending around the program then what we had given you last quarter. That's because we took the opportunity to purchase earlier in the process some software licenses at a very attractive price for us. So, when we look at the IRR it made sense for us to buy them now, a little bit earlier in the process to get a better return for us. So, from a cash flow point of view we moved some things around, move some updates but no change to the overall spending as we go forward.

Okay. Great. Thank you, guys.

We'll move next to Bernie Mahon with Morgan Stanley.

Hi, good morning. Question for you on the inventory side. So, looks like you work inventory down about $100 million in the quarter. Was that on the component side or on the computer side? And then also how much inventory did the KeyLink acquisition add, if that was in the June quarter?

Hey Bernie. Good morning. The KeyLink acquisition we closed, let's say, the first quarter. So, that was in our inventory numbers then. Just from a modeling point of view, keep in mind that the KeyLink business is substantially a drop shift business. So, it doesn't really require a big investment in inventory. When you look at the inventory change from the first quarter to the second quarter; inventory turns in our Global Component business went from 6 to 6.2. So, that accounted for much of the change in the dollar amount that we saw a decrease in inventory.

Okay. That's helpful. And then just going forward; I mean, you guys are at all time lows in terms of inventory days. Would you expect ... or do you expect to build inventory in the component side in any of the different regions, or where does that stand?

Well, Bernie, it is Bill. A couple of answers to that. First of all, we are always trying to profile the inventory for the business that we see, and we are going into a seasonably ... in some seasonality and we are trying to make sure that we've got the right inventory. Some good news that's in there, our fill rates and our on-time deliveries have been rising, and rising quite substantially. So, we are learning how to manage the business to increase the service levels to our customers while running at lower inventory levels within our own operation and not increasing the volatility on our suppliers. So, we've just learned how to manage it better and that's all good news for us, as we think we can run the overall supply chain at high rates of service, good visibility at the supplier and a lower overall inventory count throughout. And that's good news for us in our cash flow. So, we will continue to do that. In terms of the direction of our inventory; it always depends on how the markets turn. Clearly, we are profiling it for the business that we see in the weeks and months ahead. And if the market strengthens, which we hope it does, we will be prepared for that ... that's what we do, and that's a real core competency to us. I don't know, Paul, you want to add anything to that.

The only other observation is that, Bernie, obviously we're moving into a seasonally slower period on those, since having inventory now for our European business, as an example, when the people in the Nordic area and in Central Europe have already started this as a holiday period, and we know that Southern Europe: between France, Spain, and Italy, will be within about a weak or now ... so now also exiting the business. We really been very focused on ensuring that we're not holding inventory for longer than we have to. You know, it's interesting at this time, last year we actually had more inventory in Europe because we wanted to support the RoHS transition for our customer base, and we help some more, then we normally would have. So, I kind of look at the way we are managing inventory this year around Europe specifically to be more keen to what we've done in previous years around normal seasonality.

Okay. So I guess ... I mean with lead times kind of stable and demand seasonally slow in North America and Europe, it sounds like we could see turns increase a little bit in the September quarter, if there is no change to that, but what about in Asia just because we are going into a seasonally stronger time period. Do you think that you'll be able to increase turns there as well or?

The short answer is "yes, we do." As we move into a period of higher growth rate in Asia, we see the ability to continue to increase our turns in Asia and increase the turns everywhere in the world. We are getting better and better. As you know, this is not a silver bullet exercise. This is an exercise where you have to do a thousand things a little bit better everyday, and that's what we are doing. And we are showing that progress. And if you look at the progress we've made over the past years in terms of increasing our inventory turns, it's been steady, it's been consistent and it will continue to be so. I'm very convinced of that as we move forward into the future because that's the way of running the Company.

All right, that's helpful. And then just a quick follow-up on the gross margins. So they were down sequentially 90 basis points. So, that all because of the mix-shift to computers or is there kind of anything ... it doesn't seem like there is much of a geographic mix-shift, was there anything pricing related in there or could you just kind of break that down a little bit?

Well, Bernie it was generally driven by the change in mix with computer products being a much larger component of total sale because of the addition of the KeyLink acquisition as well as ... but obviously the strong sales growth we saw in most of the ECS business, whether it's in North America or Alternative Technology, or in the KeyLink acquisition, though you did here Kevin mention there was some limited softness in Europe; not a broad softness, but limited to couple of product sets. So, that's really what changed the gross profit percent.

Okay. Thanks a lot.

We will take our next question from the line of Harry Blount with Lehman Brothers.

Hi guys. Quick question, back on the inventory turns. I was wondering if you could maybe give us a sense of how much the improvement was related to like-for-like improvement versus how much was related to more of a mix issue because of the addition of KeyLink. That's question number one. And then, question number two, could you remind us again, as Asia does grow as a percentage revenue, some of the longer term impact on margins, it's my recollection, I think that the tax rate might blend down a little bit as you grow your Asia business broadly, but some of the margins may, also you touch a little bit. I understand you are improving margins within Asia, but I think as you blend it on a more mature basis, there might be a blend back down.

Harry, I'll address the inventory question first which is that, when you look at it on a sequential basis, inventory turns went from 7 to 8.2. In fact, if we were to strip out the impact of the KeyLink acquisition, inventory turns would have gone from 7 to 7.7 times. So, when you look at it about a 120 basis point improvement, little bit more than half from the way we just run our organic business and another half of that coming from the addition of KeyLink.

Thank you.

On the Asia Pac side, you are right, over the longer term our expectation is that, as that business growth accelerates we would see a potentially negative impact on our GP percent because it does have an inherently lower, not low but lower gross profit percent in certain product sets, but it's our expectation that has a lower cost per serve. We know absolutely that there's a much lower tax rate in Asia Pac as well as less requirement to working capital, so that, once we get to a more mature level, our expectation is that return on invested capital there will be very similar to the return on invested capital we see in the other parts of the world and other businesses.

And Harry just to reemphasize that we're making strong progress towards that. And so what we've said and what we're beginning to demonstrate is in the short term it's strengthens, in the longer term it's absolutely consistent with the other operating margins, return on working capital targets that we have in other parts of the world and is ... that's strongly accretive to our earnings. So, this is a business that we have to win in Asia, we're making good success in Asia and we're making strong progress towards our stated financial targets in Asia.

Great. One last question on the cash flow. You guys put up, obviously, good ... very good numbers on the cash flow side the ... in fact the whole industry structure appears to be improving there with all companies generating better cash flow yields out of their business. Can you maybe run us through some of the opportunities to accelerate to some of the goals you set out at your Analyst Day, an opportunity to upside that free cash flow beyond where you currently at.

Yes, sure, Harry, I can ... I'll give you a couple of ideas of what we are looking at. When we look at each of the three components of working capital, receivables, inventory and payables, we think we can do better in each example or each area. As examples, in the inventory area, we've talked quite a bit about the fact that we really would like to reduce what we'll broadly define as slow moving inventory. So that to us is inventory that's not turning as fast as our average. So we don't want to turn to fast movers; we want to turn to slower movers, and that's something we are very focused on and Mike's got people focused on that as well as Kevin and Cathy to try to drag that up. That will automatically push up our inventory turns, free up cash and not really impact service levels negatively, which is a good thing for us. In receivables, we are managing very closely right now. Payment to terms, I know it's probably a very mundane thing, but much like everybody in business, customers are sometimes looking to stretch their payments to us. So we have teams in place that are very active in sharing that when they deal with customers and set terms that the customers pay at the terms. Now sometimes you get down to the minutia of was it a quantity dispute on an invoice, was it a pricing dispute, sales tax charge when it wasn't supposed to be charged, freight, not freight type of thing. So it's a very minute management of lots of different things. And if I mean payables, we want to make sure that our suppliers understand that we are willing to invest in an inventory if it's good for them. But we need help either from a profitability standpoint, i.e., more gross profit or extend the payment terms. So we are working each of those levers to ensure that we are able to have a sustainable business model. It is interesting to note that if we look at our cash flow, I mean we are in an extended period of time now where the industry historically has had negative cash flow in periods of growth. We are in our 4, 5 year growth period right now, we have generated cash in each of those years. And if you really exclude last year for the first three quarters, we have been pretty consistent in being cash flow positive during each of those quarters. So we think we continue to be cash flow positive and we'll always have ups and downs and exactly how much, but we think that we have got a model right now that's changed the way we manage the balance sheet and will consistently generate cash no matter where we are in the business cycle.

Great, thanks.

And we'll take our next question form Steven Fox with Merrill Lynch.

Hi, good morning. First of all, you mentioned the expansion in the Asian margins. Where does that leave you versus, say, competition in the region and also versus your other regions, Europe and the U.S. in terms of relative margins?

Steve, I'll take a shot at that and then I'll ask Mike to give some additional comments. In terms of how we stack up versus other players in the region, it's a little hard to tell because many of the other players in the region have large DRAM and CPU businesses. And those are traders markets that we fundamentally do not participate in by choice. And so it's a little hard to say. We have all gotten much more disciplined about focusing on profitable growth, and what you can see is steady profitability improvements with our Asian competitors. We think that's positive because we think that it's leading to a more rationale, disciplined marketplace and we play well in that space. So we are pleased with the industry trends. We are very competitive in terms of our cost structure, our profitability structure versus our Asian competitors to the extent that we can disaggregate their results and like for like comparison. Littler harder to figure out what's going on with some of the other companies that are operating there because we don't break out those results. We are absolutely convinced that we are as good as and probably best-in-class in terms of our profitability of our Asian operations. We are certainly making good progress towards the stated goals of profitability in the area and we are pleased with how we are positioned. Mike, do you want to add some things to that?

Sure. I'd say that we still see the Asian market competitive, but I think there are still plenty of opportunities for us to use our financial strength, if you will, and the line card capabilities. As we expand, I would expect that our operating margins will expand right along with that, and in fact we are seeing many of the other competitors put a greater emphasis on profitability too as opposed to just growing sales at any cost in that region, which is how it was for a long time being a traders market. So in my view, we will see expanded margins, but that market in general will continue to grow plus the fact that as customers start to need more supply chain services, that market will then again take another leap in profitability. But we could be talking about a couple of years as you know for that market to be less fragmented and start to go more towards supply chain services. But it appears to be following some of the same paths that we saw in North America over the last several years

But in the near term, if you look just the next couple of quarters, is there... as volumes pick up, should we anticipate some more improvements like you just got in this quarter in Asia?

I would expect our profitability to improve. That is our goal. That's how we are going to run this business and we believe our profitability will improve past what it is right now.

Okay, that's helpful. Thanks. And then just Paul, on the D&A, it looks like your EBITDA was ahead of what most people are looking for, but there is some confusion around the D&A expense. So what kind of D&A should we look for quarterly for Q3 and Q4?

Yes, it should be of about $4.5 million for each of those quarters as we move forward.

Just A?

Well, amortization, yes... the appreciation did tick up a little bit as we turned the global financial system on. That shouldn't really change as we go forward, too dramatic, I would suggest it would probably be another $500,000 up in each of those quarters.

So the total number is looking like what? D plus A?

18 million to $20 million.

Great, thank you.

We have no further questions registered at this time. I would like to turn the call back over to Sabrina Weaver for any additional or closing remarks.

Thank you, Josh. Before ending today's call, for those participating in today's webcast, we will quickly scroll through the slides referenced in our webcast that contain a reconciliation between GAAP and adjusted results. This reconciliation is also included in our earnings release. Both the release and this presentation will be available on our website. I would like to thank you all for taking the time to participate in our call this morning. If you have any questions about the information presented today, please feel free to contact Paul or myself. Thank you and have a nice day.

That does conclude today's conference. You may now disconnect your lines and thank you for participating.