Welcome to the Arrow Electronics conference call to discuss their third quarter earnings. At this time, I would like to turn the call over to Greer Aviv for opening remarks and introductions.

Good afternoon everyone and welcome to the Arrow Electronics third quarter conference call. I am Greer Aviv, Manager of Arrow’s Investor Relations Program and I will be serving as a moderator on today’s call. If you would like to access today’s call via webcast, please visit our Investor Relations website at www.arrow.com/investor and click on the webcast icon. With us on the call today are Mike Long, Chief Executive Officer; Paul Reilly, Executive Vice President and Chief Financial Officer and Andy Bryant, President global ECS. Peter Kong is attending a supplier event and will not be able to join us today. 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 the website. Before we get started I would like to review Arrow’s Safe Harbor statement. Some of the comments to be made on today’s call may include forward-looking statements including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that can 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 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 any questions you may have. At this time, I would like to introduce our CEO, Mike Long.

Thank you, Greer and thanks to all of you for taking the time to join us this afternoon. Our execution this quarter was excellent with sales and earnings per share at the high end of our expectations. I would characterize the environment we are operating in as getting better but still not well which is a welcome change from what we have seen in recent quarters. We have seen some encouraging signs that the industry trends have started to stabilize on both the semiconductor and the IT spending sides of our business. The Semiconductor Industry Association recently reported that worldwide semi sales increased 5% in August and noted the year-over-year rate of decline has moderated as the year has progressed. Similarly, members of the Global Distribution Technology Council believe the IT distribution industry is preparing to capitalize on increasing sales opportunities in the U.S. and Europe as IT spending begins to rebound. However, we have a long road ahead of us. A year ago we reported to you that the beginning of the economic downturn had taken a toll on our profitability as we had seen a dramatic weakening across most of our markets. Today I can tell you we have seen the beginning of stabilization in our North American components business while the European components business has seen an improvement in the rate of sales decline. Our Asia Pac business continues to perform well and post year-over-year revenue gains. Enterprise computing solutions performed well despite this being a typically seasonally slow quarter for us. I am proud of our employees around the globe who have persevered through the challenges this past year and remain focused on our strategy to maximize our sales and market share while improving our industry leading market position. We continue to execute on our expense…

Thanks Mike. As reflected in our earnings release there are a number of items that impacted the comparability of our results to those in the trailing quarter and the third 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. For a complete reconciliation of our GAAP to non-GAAP results please refer to our earnings release and the earnings reconciliation slides at the end of the webcast presentation. Third quarter sales of $3.7 billion were at the high end of our expectations and represent a decrease of 15% year-over-year and an increase of 8% on a sequential basis. Global component sales of $2.5 billion decreased 15% year-over-year and increased 12% sequentially. That is a decline of 13% year-over-year and an increase of 10% sequentially excluding the impact of foreign exchange. As always, we are focused on improving operational efficiency and cost containment activities throughout our global components organization. We were able to decrease our operating expenses by 22% year-over-year while keeping expenses flat sequentially despite double digit sales’ increase. The revenue growth coupled with our expense reduction activities resulted in a 60 basis point improvement in our operating margin sequentially while operating profit dollars grew almost 3.5 times faster than sales, demonstrating the significant leverage in our business. Sequentially gross margin was negatively impacted by our initiative to improve the quality of our inventory by pushing hard to sell inventory at turns less than 2 times. Inventory turning less than 2 times decreased sequentially by approximately $70 million and we reinvested over half of that in better quality, faster turning inventory. That is a 5% improvement in the high…

Thanks Paul. We executed very well in the third quarter hitting the high end of our guidance and exceeding our estimates for both revenue, EPS and cash flow generation. I go back to the comment I made in my opening remarks that the economy and business trends have improved but are not back to normalized levels. We are encouraged by the improvement in sales but still believe the recovery, when it occurs, is expected to be slow and steady. Our results this quarter reinforce our commitment to maximize sales and profitable market share while taking advantage of the opportunities in the market, managing our costs and our significant earnings leverage. We worked diligently over the past year to enhance our balance sheet to make sure we remained financially strong and to simplify our cost structure and continue to improve efficiency which are competitive advantages as the market recovers. More importantly, we will continue to provide best in class service to our customers and suppliers as a critical link in the supply chain by ensuring we have the right technology at the right place at the right time. We service a set of suppliers who cannot reach the small and medium customer base that we touch and we service the customer that does not have the scale and capabilities to access the broad base of suppliers. These relationships become even more important in challenging times as we continue to leverage our capabilities to drive future growth. We are confident in our growth strategy, leading market position and financial strengths. These will bode well for the long-term success of Arrow. Near-term visibility is still less than 90 days and as I said earlier the recovery will likely be protracted. Looking ahead to the fourth quarter we believe total sales will be between $3.65-4.25 billion with global component sales between $2.25-2.65 billion and global enterprise computing solution sales between $1.4-1.6 billion. As a result of this outlook we expect earnings per share on a diluted basis excluding any charges to be in a range of $0.44 to $0.56 per share. Greer?

Thank you Mike. Please open up the call to questions at this time.

(Operator instructions) The first question comes from the line of Craig Hettenbach - Goldman Sachs.

Gross margin line has been a drag on performance. You mentioned you see some signs of it abating. Can you give any color in terms of when you would expect to see actually an inflection in gross margin in terms of when it can come back up?

Sure. It is interesting because if you track past semiconductor cycles, we all recognize this is very different in the semiconductor cycle, there normally is a rebound that occurs probably 2-3 quarters as the sales reverse to trend. That is one driver. The other driver would be as lead times extend. So we see lead times in the normal range but as it gets more [heated] and extends, that is also when gross margins increase. It is something we watch very closely. As we said in our prepared remarks we feel there are data points out there that point to our expectation being the right one that margins will stabilize as the markets stabilize and eventually turn back upwards as the markets go back to more normal levels of activity.

If I could follow-up with Mike on the systems side, as you talk to customers there what are you hearing in terms of pent up demand? You mentioned with servers that the pace of decline seems to be kind of leveling out. Anything by segment within systems where customers are the most optimistic and then maybe also where there are still some concerns on systems?

Sure. We did see a good performance in our ECS business this quarter and some of the recent GTDC summits the distribution industry experts noted they believe we are preparing to capitalize on some increasing sales opportunities in the U.S. and Europe as IT spending begins to rebound. While we believe the industry estimates are calling for a return to growth in 2010, over the near-term we are still seeing visibility limited and we do believe we are going to see the typical year-end budget increases we have seen in prior fourth quarters but we have been conservative on our projections for you going out because we can’t quite see all the way through December yet.

The next question comes from the line of Brian Alexander - Raymond James.

A follow-up on gross margin in the components business specifically. You mentioned there was a negative effect of flushing out old inventory. I was wondering if there was any way to quantify that. Secondly, if I just look at the gross margin trends within the component business it seems like they are down roughly 20-30 basis points sequentially and a few hundred basis points from the peak even when we adjust for the greater mix of Asia sales. So apples-to-apples you have seen what I would call unprecedented gross margin declines in the region and it sounds like things are getting better in the Americas than in Asia. Clearly gross margins will come back from where they are today but my question is how much? How much of the decline from the peak that you have seen do you think you can recover if sales get back to where they were?

Let me try and answer the first question which was what is a broad estimate of the impact of the push for us to improve the quality of our inventory by getting inventory turns less than twice out the door. A broad estimate would be 20-30 basis points so 55-75% of the decline in GP sequentially. The question around what do I think we can go back to in peak level of gross profit or how we get back to it, that is a question that we all look at very hard and I don’t believe we have seen any type of permanent change in the marketplace. I don’t think we hear our suppliers saying that. We don’t think we hear our customers saying that. So the question for us would be, or we would think it would be just like technology downturns they will go back to normal levels of gross profit over time. It isn’t paced by the recovery on the top line, it is paced by lead times. So I look at it and I think we can get there. In my own mind that is my own thesis based upon 30 years of semiconductor downturns and this is very different but it is a matter of pace of recovery as well as extension of lead times.

I will add to that a little bit. If you remember from the past two calls we have had, visibility is an impact on margins and we have seen some of that abate this quarter by getting a little better visibility at certain customers. It is not widespread yet. So as long as customers can continue to call in with relative low visibility and able to get their products, that continues to put margin pressure on us. As the supply chain starts to expand and people start placing their orders further out that is when we believe we will see the margin trends reverse and a more strengthening level. That is really the question. We haven’t seen a downturn like this in the past where visibility has been so hard to react to or even the last couple of downturns. So this is really unprecedented but we are seeing some signs of it abating at this point.

To follow-up, several of your suppliers have called out extended lead times with some cases about 20 weeks and some of the EMS companies you have talked about shortages impacting their ability to manufacture and sell product. It doesn’t sound like you are seeing that? I just wanted to clarify that.

That is really not true. We do see some shortages but overall in the business the lead times are operating within normal. The shortages we are talking about is exactly where we are starting to see some of the margin abate, if you will. But it is not widespread. It has principally been in the more complex type products we design in where customers don’t get that visibility and you are right there are a few getting caught there but it is not widespread enough to give us the margin uplift that we are looking for. Hopefully that gives you a little flavor on the shortages you are hearing about.

The next question comes from the line of Matt Sheerin - Thomas Weisel Partners.

I am sorry to ask another gross margin question but looking out sequentially and sort of backing into your guidance should we assume that gross margin will be down again because of the mix because of the higher computing business?

That is traditionally what we have seen from a seasonality standpoint where we have really a very strong quarter in the business and ECS had a very strong quarter, it does change the mix a bit so that does have a negative impact on Arrow Inc.’s consolidated GP but we are in the components business assuming we will see some abatement in GP pressure in the fourth quarter.

Mike, your comment on Asia looking like it is less than seasonal, and of course it has been better than seasonal since early this year. The restocking event seems to have happened earlier in Asia. There are two parts to the question. One is could you elaborate more on why you are seeing a less than seasonal and your comment about the 3G deferment into Q1? Also, is your sense this whole restocking event supply chain adjustment has sort of played out in Asia?

No, I wouldn’t really suggest that but as you have said we have seen above seasonal in Asia virtually all year. It has been a very good market for us going into the fourth quarter and we actually believe there is future growth in Asia but we do believe that 3G will play a part of that. We believe that until that happens we won’t be seeing the sales uplift we have been enjoying all year long. It is interesting in that we have seen gains in mainland China through our customer base. We have seen gains in Southeast Asia and we have seen gains in Taiwan but we are still looking for more customer base expansion there and we are looking for a little market help around the 3G.

Lastly, on your computing guidance you talked about it being on the lower end of seasonality but you are talking of 25-40%, obviously a very big range because it is back end loaded. What gives you any confidence that we are going to see seasonality in spending either both in Europe and North America?

We have seen what I believe is the IT business for us responding fairly well given what this economy has done to it. We have started to see more typical ranges in our ordering patterns albeit they are less than what we have seen in the past and the amount of work that we have inside the house right now to ship by end of the year would suggest we are on track. There is some conservatism in our thoughts around how far the back-end loading will be and as you know you get to that last week of the month and that is the week that tells the story. We don’t have quite enough visibility to call that either way yet.

Is that in both regions?

Yes it is.

The next question comes from the line of William Stein - Credit Suisse.

I am wondering if you can talk a bit about inventory. Typically you are going to hear from the analyst community are going to hear about driving that down. It looks to be at a level now where perhaps some of the shortages might have affected you in the quarter. Is that right? Might you have done better in components revenue had you had more inventory available in the quarter?

No, I don’t think that is what we said. What we did do over the quarter is we declined our slow moving inventory by roughly $70 million as Paul had suggested earlier. We also had reinvested another $35 million of inventory throughout the quarter and that is a snapshot in a moment of time, as you know the last day of the quarter the last minute that everything happens. Throughout the quarter we did build our inventory and we built our inventories with more sellable product and actually increased what we will call our moving product by 5%. We think that helped us with our sales throughout the quarter. I guess you could sit and argue could we have gotten another $5-15 million with a bigger investment. I would argue that is always the case in any quarter in any cycle at any time. I think overall we did increase our sellable inventory and that did help us.

So you don’t think the inventory is too low in any sense right now?

No it is not too low but if I had better visibility on some of the more complex parts as the suppliers are suggesting, that would be helpful to us. Until our customers are ready to provide that visibility that will remain a sore spot in the supply chain.

Two other data points for you. One is, in North America components our inventory turns improved by 5% in Q3 compared to the third quarter of last year. It is only a 5% increase in inventory turns. By the way that is still lower than inventory turns in the third quarter of 2007 and 2006 in North American components. So we are not even at regular level of turns. The other data point would be in Europe where we have seen a bigger decline. So it is still trending down. We saw a 10% improvement in inventory turns, still trails though Q3 2007 and 2006 levels of inventory. That data point, we are not at record levels. The other thing I would point out is we continually track service levels. In fact you have heard us talk about service levels have gone up over the last five years in the face of increasing our inventory turns and we did not see any meaningful change in service levels downward which would indicate that we are missing out on sales.

I am going to touch on gross margin as well. It seems a big part of that change is the mix shift in geography to Asia in the components business. Is there anything the company can do to change what it does in Asia to get the margins come closer to what they are in North America and Europe? As I am asking the question I am thinking is this why we see the inventory performance look very good? Is there less inventory required to support revenue in Asia?

Yes, you did hit it on the head. When we increase our mix in Asia it does put a negative drag on our margin but it does also help us on the inventory side of things because our working capital flow there is much faster than it is in any other region. I would also remind you that Asia continues to be competitive and the market is still very fragmented. It provides a lot of opportunity for us as this market starts to roll up and customers go from more of a spot buy activity to real supply chain type work. That is not something that happens in a year and in fact if you go back and take several years that it took North America to roll up before you started to see people purchase based on supply chain activity by reducing their internal working capital; that being our customers. I think this is more of a journey in Asia than it is an event that will change over the next year.

The next question comes from the line of Stephen Fox – No Company Listed. Stephen Fox – No Company Listed: First of all, how much over the next couple of quarters do you see some of the non-permanent cost reductions rolling back onto the income statement?

When we talked about the $275 million target we had to deliver on and cost reduction it has been round numbers $50 million that are temporary. Those are Arrow employee give backs. Give backs they gave voluntarily to ensure we could maintain our strength both from an earnings and cash flow point of view and $225 million that was permanent in nature. Stephen Fox – No Company Listed: But I guess what I am getting at is there any update in terms of the $50 million in terms of when you will see that come back or is it still further out into next year before that comes back on the income statement.

It is a question that we debate internally just about every week or every other week because when we look at it the employee base has sacrificed greatly for our success. The challenge we have in making a decision is the visibility that Mike referenced. So we only have 90 days round numbers of visibility so it is difficult to say if and when those give backs will go back to the employees until we get closer to year-end and have a better view into the first quarter of next year as well as some more data points on what next year might look like in total from the economic experts. Stephen Fox – No Company Listed: Secondly, I think you mentioned gross margins were also pressured by some competition within the distribution channel. Can you just talk through and describe where that was most fierce and the prospects for it abating? I think you said it was starting to abate but I’m not sure what that means.

Let me give this one a shot. I don’t think we indicated it was necessarily distributors fighting each other for the orders. I think it is the readily available inventory that has been out there for our customers with low visibility. Meaning they have been able to shop and put pressure on the day to day type ordering that exists out there because that is how we have largely been living for the last year. The supply chain activities have reduced with the visibility and we have seen more ordering on a day-to-day basis. Until we see that abate fully and we have seen that some this quarter. We have started to get some longer term orders from a few customers. That will cause the reversal. I don’t think the distributors have done anything different this quarter than has happened over the year.

The next question comes from the line of Jim Suva – Citigroup.

I have a question not regarding gross margins but more specifically on the SG&A. Can you discuss SG&A where you expect that to be for the December quarter? It did creep up here in the September quarter but what should we look for in December and how should we expect it trend in 2010? Anything going on with salaries or hiring? How should we think about SG&A?

Let me first give you an idea of what actually happened Q2 to Q3 in 2009. What we saw was over $6.5 million impact for foreign exchange so when you look at our Q2 number in our 10-Q you would see that we started with $315 million, add $6.5 million to that on a pro forma starting basis it would be $321.5 million. We also saw an increase in spending on ERP. That kind of logically makes sense because as you do the rollout we had quite a bit of activity which Mike referenced earlier to the completion of our ECS project in North America as well as our test rollout in ANZ in components have also increased expenses. Those two items are the major drivers, in fact all the drivers for the increase of expenses. So foreign exchange as well as ERP. As we look into the fourth quarter what we will see is also a negative foreign exchange impact. That is going to be probably around the same level we saw from Q2 to Q3, $6.5-7 million so that will take our $338 million up to about let’s call it $345 million in round numbers, and then we would expect to see a bit of an uptick in variable expenses tied to the almost $250 million increase in sales offset by continued expense reductions we have from wave one and wave two of our plans that we rolled out. The net impact is the variable costs will be slightly ahead of the cost savings for the fourth quarter to operating expense dollars will trend up; basically foreign exchange driving it up, variable costs driving it up offset by a certain amount of cost savings in the fourth quarter.

Right but when we get to the actual dollar amount what is something reasonable we should expect there?

I got you to 345. So it will be north of 345. I think if you want to put a stake in the ground it will be in that $350 million range. The variable costs will outweigh the cost savings by about $5 million.

I guess more importantly, looking ahead I know you don’t give guidance for 2010 but how should we be thinking about the methodology about how we should be looking at SG&A for 2010? FX I guess we almost have to assume they will remain at current rates but how should we think about SG&A for 2010?

It is interesting. We have really demonstrated an ability to drive a lot of leverage to our business this quarter. Most of the sales uplift went right to the bottom line so we still think variable costs will be 2-3% on increased sales. Foreign exchange while it obviously an uplift. I think our ERP spending should approximately be flat with 2009. Then we get some incremental savings off of the wave two and definitely wave one expense savings. It is tough for me to put a stake in the ground to be perfectly honest. We are having our 2010 planning meetings next week. Andy Bryant is on the phone so we are looking right at him on the video screen here next Monday. Peter Kong is not on the call but we will have a better feel after we have our meeting and we work on the budgets over the next couple of weeks.

A quick comment on the Cisco RFI. Any update there?

What I can tell you with that is right now our position with them is increasing our level of activity around the OEM space. That is the business we do with Cisco right now. Cisco is investing with us to improve our position with the IBM and Hewlett Packard business that is private branded. We believe that is a good way to go and we are starting the year prior to any announcement with working on that end of our business.

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

I was hoping to get a little more color on the segment guidance. I think in terms of the enterprise computing segment you commented you expect to see below seasonality but if I look at the midpoint of the guidance it suggests somewhere around 33% sequentially which if I look back historically seems a bit higher than typical seasonality. So I am trying to understand that comment and what you would expect to be normal seasonality in that business. Then on the component segment guidance at the midpoint somewhere around down 4%, again looking back it seems like that business generally is down a bit but not quite down that much. What do you generally consider to be normal seasonality in that piece?

On the computer products side, what we normally see and normal is tough for us to define because we added the Logix piece last year which really changed the mix of our business. So we really only have one year to look at and the low end of normal seasonality with Logix in this business is about 35% so our 33-34% is right at the low end of what we saw last year. It is because we are coming off of such a boomer in the third quarter. You may recall when we talked about guidance for Q3 last time we had the call we were going to be up in Q3 versus being down which is traditional. So Andy and his team delivered. We make a comparison at the low end of around 35%. It is off a boomer. So if we didn’t have such a good Q3 we might be looking at the upper end which is closer to 35-45%. So that is on the computer products side. On the components side, normally what we see is minus 2 to minus 5%. We think we will be closer to that minus 5% because we think we will see less than normal seasonality in Asia Pac as there are some delays in ordering as folks are waiting for new product introductions in our customers which should occur in Q1.

What new products are they waiting for in Asia?

The thing will be an upgrade on 3G in Q1. That is really what we think is folk’s kind of holding off saying why invest in Q4 when they can make their product in Q1.

I might just add a little bit to this. Our fourth quarter this year because we haven’t seen historical numbers really hold is based upon our backlog going into the quarter and the order pattern we are seeing both on components and on the IT end of our business. We are using that data as we believe it is a little bit more reliable than historical figures. I think what we don’t want to do is really draw a conclusion about what normal is in a down market. But if you took the markets going forward I think we are seeing what is a little better visibility than we have seen in the past based on our current order patterns and our current backlog as a figure used to forecast than historical right now.

The next question comes from the line of Unidentified Analyst.

Should we expect working capital to be a use of cash in the fourth quarter and would we expect to see inventories starting to build a bit on your end?

We expect to be cash flow positive in the fourth quarter though not at the same robust level we have been posting now for probably 12 quarters. I would expect there could be a slight reduction in working capital for sales dollar. That is really more seasonally driven or segment driven. If you go back and look at what happened in the fourth quarter last year because we had such a big business in the month of December and much of it is drop ship it is almost as if we offset the receivable increase with an increase in payables. We think we will be cash flow positive. We don’t expect any significant change in our components business but you would see a bit of a change driven by our ECS business and that is just the nature of the business.

I was curious about the commentary with respect to Asia being below normal seasonality and you talked about some deferrals related to 3G. I am wondering does that then imply better than normal seasonality going into the March quarter to the extent some of the Asia business resumes particularly around the 3G build?

As you know, you come upon the Chinese New Year every year and the forecast in Asia don’t really get hard until after that. Your suggesting that you make, if all things fell perfectly, would be a correct thought process but we do have to remember we have the Chinese new year and right after that is when we start to see the firm orders come in. So the visibility wouldn’t be able to take us out there with any current specs to validate your thought.

You talked about lower margins in Asia. I am curious, can you remind us what the return on invested capital profile is across your regions? It seems like you have got higher asset velocity in Asia but lower margin. I’m just wondering how it compares to North America and Europe?

We really haven’t discussed that in great detail with exactness in numbers. We like to keep that as something that is competitive. We have talked though quite a bit about the fact that the velocity is greater there which is a good thing to support the lower operating income margin. But our return on invested capital, we really measure it at the business unit level that return on working capital. It has increased in Asia Pac by the lower tax rate also. So if we were to do a, and this is the way we do it, an after-tax return on working capital, we would see that the Asia Pac marketplace increases and approaches the corporate average.

The next question comes from the line of Shawn Harrison – Longbow Research. Shawn Harrison – Longbow Research : A clarification first. When you speak of 3G in China you are speaking to infrastructure, not handsets, correct?

That is correct. Shawn Harrison – Longbow Research : As we get into early 2010 how much on a sequential basis in incremental savings are there left to be had from the restructuring program? My second question is do you think you can in 2010 hold the cash cycle below 40 days on a consistent basis throughout the year?

Let me take the second one first. When you look at it, it is going to be dependent really on the pace of recovery by business and by region. So there is even a different working capital profile in Andy Bryant’s computer products business between North America and Europe, interestingly North America is measurably better than Europe. When you look at then components, the working capital profile is very different in components whether you go by region or in total compared to ECS. So we have to look at how the mix changes or what the growth rate will be by business and by region. If you were to say that every business and every region would grow at the same rate we would not expect to see a dramatic change in working capital velocity, if you will. We do think there is opportunity to make improvement but it would be incremental improvement, not in big leaps and bounds. Then to your first question, I am going to take a little bit of a caveat here. The reason I say that is we are still waiting to execute on two headcount actions in Europe one of which has been approved by the Trade Unions and one of which is running down on the deadline for the Trade Unions to object, but I believe the number we talked about for Europe next year is something round numbers about 40 million Euros more next year versus what we achieved this year. So about 40 million Euros more that we could get in expense for next year. Most of North America and we haven’t really pushed hard in Asia because it is in a growing region is behind us.

That concludes our conference Q&A for today. I would like to turn the program back over to our host.

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

This does conclude our conference. You may now disconnect your lines. Everyone have a great day.