Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4482
ARROW ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
New York
11-1806155
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
9151 East Panorama Circle
80112
Centennial CO
(Zip Code)
(Address of principal executive offices)
(303) 824-4000
(Registrant’s telephone number, including area code)
No Changes
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of the exchange on which registered
Common Stock, $1 par value
ARW
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
There were 53,229,856 shares of Common Stock outstanding as of April 25, 2024.
Part I.
Financial Information
Item 1.
Financial Statements
Consolidated Statements of Operations
3
Consolidated Statements of Comprehensive Income
4
Consolidated Balance Sheets
5
Consolidated Statements of Cash Flows
6
Consolidated Statements of Equity
7
Notes to Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
34
Item 4.
Controls and Procedures
Part II.
Other Information
Legal Proceedings
35
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Item 6.
Exhibits
36
Signature
37
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Quarter Ended
March 30,
April 1,
2024
2023
Sales
$
6,924,260
8,736,428
Cost of sales
6,066,434
7,622,606
Gross profit
857,826
1,113,822
Operating expenses:
Selling, general, and administrative
583,326
642,431
Depreciation and amortization
41,727
46,679
Restructuring, integration, and other
46,856
2,560
671,909
691,670
Operating income
185,917
422,152
Equity in losses of affiliated companies
(344)
(80)
Gain on investments, net
98
10,311
Employee benefit plan expense, net
(933)
(853)
Interest and other financing expense, net
(79,604)
(79,658)
Income before income taxes
105,134
351,872
Provision for income taxes
22,036
76,547
Consolidated net income
83,098
275,325
Noncontrolling interests
(503)
1,575
Net income attributable to shareholders
83,601
273,750
Net income per share:
Basic
1.54
4.66
Diluted
1.53
4.60
Weighted-average shares outstanding:
54,251
58,731
54,815
59,479
See accompanying notes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income (loss):
Foreign currency translation adjustment and other, net of taxes
(99,275)
11,285
Gain (loss) on foreign exchange contracts designated as net investment hedges, net of taxes
3,598
(433)
Gain (loss) on interest rate swaps designated as cash flow hedges, net of taxes
529
(3,709)
Employee benefit plan items, net of taxes
(91)
(272)
Other comprehensive (loss) income
(95,239)
6,871
Comprehensive (loss) income
(12,141)
282,196
Less: Comprehensive (loss) income attributable to noncontrolling interests
(1,651)
4,652
Comprehensive (loss) income attributable to shareholders
(10,490)
277,544
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
December 31,
ASSETS
Current assets:
Cash and cash equivalents
242,810
218,053
Accounts receivable, net
11,062,608
12,238,073
Inventories
4,797,053
5,187,225
Other current assets
798,591
684,126
Total current assets
16,901,062
18,327,477
Property, plant, and equipment, at cost:
Land
5,691
Buildings and improvements
196,291
195,579
Machinery and equipment
1,624,409
1,632,606
1,826,391
1,833,876
Less: Accumulated depreciation and amortization
(1,309,303)
(1,303,136)
Property, plant, and equipment, net
517,088
530,740
Investments in affiliated companies
58,868
62,741
Intangible assets, net
119,274
127,440
Goodwill
2,054,536
2,050,426
Other assets
612,048
627,344
Total assets
20,262,876
21,726,168
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
8,940,313
10,070,015
Accrued expenses
1,474,605
1,463,915
Short-term borrowings, including current portion of long-term debt
945,698
1,653,954
Total current liabilities
11,360,616
13,187,884
Long-term debt
2,632,250
2,153,553
Other liabilities
500,672
507,424
Contingencies (Note L)
Equity:
Shareholders’ equity:
Common stock, par value $1:
Authorized - 160,000 shares in both 2024 and 2023
Issued - 57,955 and 57,691 shares in 2024 and 2023
57,955
57,691
Capital in excess of par value
565,166
553,340
Treasury stock (4,725 and 3,880 shares in 2024 and 2023, respectively), at cost
(405,663)
(297,745)
Retained earnings
5,873,818
5,790,217
Accumulated other comprehensive loss
(392,130)
(298,039)
Total shareholders’ equity
5,699,146
5,805,464
70,192
71,843
Total equity
5,769,338
5,877,307
Total liabilities and equity
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile consolidated net income to net cash provided by operations:
Amortization of stock-based compensation
13,447
19,497
344
80
Deferred income taxes
(2,801)
(7,530)
Loss (gain) on investments, net
13
(10,311)
Other
1,189
1,321
Change in assets and liabilities, net of effects of acquired businesses:
1,057,676
1,701,889
362,813
(199,521)
(1,077,786)
(1,504,701)
21,053
(132,316)
Other assets and liabilities
(97,563)
33,392
Net cash provided by operating activities
403,210
223,804
Cash flows from investing activities:
Acquisition of property, plant, and equipment
(29,535)
(20,114)
5,139
10,867
Net cash used for investing activities
(24,396)
(9,247)
Cash flows from financing activities:
Change in short-term and other borrowings
(709,675)
(146,050)
Proceeds from long-term bank borrowings, net
477,032
34,360
Net proceeds from note offering
—
498,600
Redemption of notes
(300,000)
Proceeds from exercise of stock options
2,929
5,934
Repurchases of common stock
(87,948)
(303,801)
Net cash used for financing activities
(317,662)
(210,957)
Effect of exchange rate changes on cash
(36,395)
25,039
Net increase in cash and cash equivalents
24,757
28,639
Cash and cash equivalents at beginning of period
176,915
Cash and cash equivalents at end of period
205,554
CONSOLIDATED STATEMENTS OF EQUITY
Accumulated
Common
Capital in
Stock at Par
Excess of Par
Treasury
Retained
Comprehensive
Noncontrolling
Value
Stock
Earnings
Loss
Interests
Total
Balance at December 31, 2023
Consolidated net income (loss)
Other comprehensive loss
(94,091)
(1,148)
Shares issued for stock-based compensation awards
264
(1,621)
4,286
(112,204)
Balance at March 30, 2024
Balance at December 31, 2022
125,424
1,208,708
(4,637,345)
9,214,832
(365,262)
64,996
5,611,353
Other comprehensive income
3,794
3,077
(25,071)
31,005
(318,800)
Balance at April 1, 2023
1,203,134
(4,925,140)
9,488,582
(361,468)
69,648
5,600,180
Index to Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Note A. Basis of Presentation
Note B. Impact of Recently Issued Accounting Standards
Note C. Goodwill and Intangible Assets
10
Note D. Investments in Affiliated Companies
11
Note E. Accounts Receivable
Note F. Supplier Finance Programs
Note G. Debt
14
Note H. Financial Instruments Measured at Fair Value
16
Note I. Restructuring, Integration, and Other
19
Note J. Net Income per Share
Note K. Shareholders’ Equity
20
Note L. Contingencies
21
Note M. Segment and Geographic Information
22
8
Note A – Basis of Presentation
The accompanying consolidated financial statements of Arrow Electronics, Inc. (the “company”) were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations at, and for the periods presented. The consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.
These consolidated financial statements do not include all of the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with the company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2023, as filed in the company’s Annual Report on Form 10-K.
Quarter End
The company operates on a quarterly calendar that closes on the Saturday closest to the end of the calendar quarter, except for the fourth quarter, which closes on December 31, 2024.
Reclassification
Certain prior period amounts were reclassified to conform to the current period presentation. These reclassifications did not have a material impact on previously reported amounts.
Note B – Impact of Recently Issued Accounting Standards
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). Upon adoption of ASU 2023-09, the company will disclose specific new categories in its income tax rate reconciliation and provide additional information for reconciling items above a quantitative threshold. The company will also disclose the amount of income taxes paid disaggregated by federal, state, and foreign taxes, and also disaggregated by individual jurisdictions in which income taxes paid were above a threshold. The company expects these amendments will first be applied in the company’s annual report on form 10-K for the fiscal year ending December 31, 2025, on a prospective basis.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). Upon adoption of ASU 2023-07, the company will disclose significant segment expenses, the title and position of the chief operating decision maker (“CODM”), and an explanation of how the reported measure of segment profit or loss is used by the CODM to assess segment performance and make resource allocation decisions. These amendments will first be applied in the company’s annual report on form 10-K for the fiscal year ending December 31, 2024, and will be applied retrospectively for all prior periods presented in the financial statements.
Note C – Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The company tests goodwill and other indefinite-lived intangible assets for impairment annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist.
Goodwill of companies acquired, allocated to the company’s reportable segments, is as follows:
Global
(thousands)
Components
Global ECS
Balance as of December 31, 2023 (a)
875,194
1,175,232
Acquisitions
17,275
Foreign currency translation adjustment
(3,959)
(9,206)
(13,165)
Balance as of March 30, 2024 (a)
888,510
1,166,026
Intangible assets, net, are comprised of the following as of March 30, 2024:
Gross
Carrying
Amount
Amortization
Net
Customer relationships
257,263
(160,240)
97,023
Amortizable trade name
73,359
(51,108)
22,251
330,622
(211,348)
Intangible assets, net, are comprised of the following as of December 31, 2023:
258,337
(156,141)
102,196
73,811
(48,567)
25,244
332,148
(204,708)
During the first quarter of 2024 and 2023, the company recorded amortization expense related to identifiable intangible assets of $7.5 million and $8.0 million, respectively.
Note D – Investments in Affiliated Companies
The company owns a 50% interest in two joint ventures with Marubun Corporation (collectively “Marubun/Arrow”) and a 50% interest in one other joint venture. These investments are accounted for using the equity method.
The following table presents the company’s investment in affiliated companies:
Marubun/Arrow
46,810
50,779
12,058
11,962
The equity in losses of affiliated companies consists of the following:
(534)
(397)
190
317
Under the terms of various joint venture agreements, the company is required to pay its pro-rata share of the third-party debt of the joint ventures in the event that the joint ventures are unable to meet their obligations. There were no outstanding borrowings under the third-party debt agreements of the joint ventures as of March 30, 2024, and December 31, 2023.
Note E – Accounts Receivable
Accounts receivable, net, consists of the following:
Accounts receivable
11,207,057
12,384,553
Allowance for credit losses
(144,449)
(146,480)
The following table is a rollforward for the company’s allowance for credit losses:
Balance at beginning of period
146,480
93,397
Charged to income
2,879
14,991
Translation adjustments
(861)
388
Write-offs
(4,049)
(5,083)
Balance at end of period
144,449
103,693
The company monitors the current credit condition of its customers in estimating the expected credit losses and has not experienced significant changes in customers’ payment trends or significant deterioration in customers’ credit risk as of March 30, 2024.
EMEA Asset Securitization
The company has an EMEA asset securitization program under which it continuously sells its interest in designated pools of trade accounts receivable of certain of its subsidiaries in the EMEA region at a discount to a special purpose entity, which in turn sells certain of the receivables to unaffiliated financial institutions and conduits administered by such unaffiliated financial institutions (“unaffiliated financial institutions”) on a monthly basis. The company may sell up to €600.0 million under the EMEA asset securitization program, which matures in December 2025, subject to extension in accordance with its terms. In February 2024, the company amended provisions in the EMEA asset securitization program to update certain financial ratios. The program is conducted through Arrow EMEA Funding Corp B.V., an entity structured to be bankruptcy remote. The company is deemed the primary beneficiary of Arrow EMEA Funding Corp B.V. as the company has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive the benefits that could potentially be significant to the entity from the transfer of the trade accounts receivable into the special purpose entity. Accordingly, Arrow EMEA Funding Corp B.V. is included in the company’s consolidated financial statements.
Sales of accounts receivable to unaffiliated financial institutions under the EMEA asset securitization program:
EMEA asset securitization, sales of accounts receivable
539,880
817,833
Receivables sold to unaffiliated financial institutions under the program are excluded from “Accounts receivable, net” on the company’s consolidated balance sheets, and cash receipts are reflected in the “Cash provided by operating activities” section of the consolidated statements of cash flows. The purchase price is paid in cash when the receivables are sold. Certain unsold receivables held by Arrow EMEA Funding Corp B.V. are pledged as collateral to unaffiliated financial institutions. These unsold receivables are included in “Accounts receivable, net” on the company’s consolidated balance sheets.
The company continues servicing the receivables which were sold and in exchange receives a servicing fee under the program. The company does not record a servicing asset or liability on the company’s consolidated balance sheets as the company estimates that the fee it receives to service these receivables approximates the fair market compensation to provide the servicing activities.
Other amounts related to the EMEA asset securitization program:
Receivables sold to unaffiliated financial institutions that were uncollected
425,240
529,266
Collateralized accounts receivable held by Arrow EMEA funding Corp B.V.
911,615
805,788
Any accounts receivable held by Arrow EMEA Funding Corp B.V. would likely not be available to other creditors of the company in the event of bankruptcy or insolvency proceedings if there are outstanding balances under the EMEA asset securitization program. The assets of the special purpose entity cannot be used by the company for general corporate purposes. Additionally, the financial obligations of Arrow EMEA Funding Corp B.V. to the unaffiliated financial institutions under the program are limited to the assets it owns and there is no recourse to Arrow Electronics, Inc. for receivables that are uncollectible as a result of an account debtor’s insolvency or inability to pay.
12
The EMEA asset securitization program includes terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels. As of March 30, 2024, the company was in compliance with all such financial covenants.
Factoring
In the normal course of business, certain of the company’s subsidiaries have factoring agreements to sell, with limited or no recourse, selected trade accounts receivable to financial institutions and accounts for these transactions as sales of the related receivables. The receivables are excluded from “Accounts receivable, net” on the company’s consolidated balance sheets and cash receipts are reflected as “Cash provided by operating activities” on the consolidated statements of cash flows. The company typically does not retain financial or legal interests in these receivables. Factoring fees for the sales of accounts receivables are included in “Interest and other financing expense, net” in the consolidated statements of operations. The company continues servicing the receivables which were sold.
Sales of trade accounts receivable under the company’s factoring programs:
Sales of accounts receivable under the factoring programs
208,560
382,278
Other amounts under the company’s factoring programs:
Receivables sold under the factoring programs that were uncollected
259,236
375,940
Note F – Supplier Finance Programs
At the request of certain of the company’s suppliers, the company has entered into agreements (“supplier finance programs”) with third-party finance providers, which facilitate the participating suppliers’ ability to sell their receivables from the company to the third-party financial institutions, at the sole discretion of the suppliers. For agreeing to participate in these programs, the company seeks to secure improved standard payment terms with its suppliers. The company is not involved in negotiating terms of the arrangements between its suppliers and the financial institutions and has no economic interest in a supplier’s decision to enter into these agreements, or sell receivables from the company. The company’s rights and obligations to its suppliers, including amounts due, are not impacted by suppliers’ decisions to sell amounts under the arrangements. However, the company agrees to make all payments to the third-party financial institutions, and the company’s right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers. As of March 30, 2024, and December 31, 2023, the company had $899.4 million and $1.1 billion, respectively, in obligations outstanding under these programs included in “Accounts payable” on the company’s consolidated balance sheets and all activity related to the obligations is presented within operating activities on the consolidated statements of cash flows.
Note G – Debt
Short-term borrowings, including current portion of long-term debt, consist of the following:
3.25% notes, due September 2024
499,505
499,224
Commercial paper
427,763
1,121,882
Other short-term borrowings
18,430
32,848
The company has $500.0 million in uncommitted lines of credit. There were no outstanding borrowings under the uncommitted lines of credit at March 30, 2024 and December 31, 2023. These borrowings were provided on a short-term basis and their maturity was agreed upon between the company and the lender. The uncommitted lines of credit had a weighted-average effective interest rate of 5.82% and 5.83% at March 30, 2024 and December 31, 2023, respectively.
The company has a commercial paper program, and the maximum aggregate balance of commercial paper outstanding may not exceed the borrowing capacity of $1.2 billion. Amounts outstanding under the commercial paper program are backstopped by available commitments under the company’s revolving credit facility. There were $427.8 million in outstanding borrowings under this program at March 30, 2024 and $1.1 billion in outstanding borrowings at December 31, 2023. The commercial paper program had an effective interest rate of 5.80% and 5.90% at March 30, 2024 and December 31, 2023, respectively.
Long-term debt consists of the following:
Revolving Credit Facility
50,000
North American asset securitization program
625,000
198,000
4.00% notes, due 2025
349,245
349,061
6.125% notes, due 2026 (a) (b)
498,343
497,661
7.50% senior debentures, due 2027
110,205
110,184
3.875% notes, due 2028
497,264
497,098
2.95% notes, due 2032
495,172
495,039
Other obligations with various interest rates and due dates
7,021
6,510
The 7.50% senior debentures are not redeemable prior to their maturity. All other notes may be called at the option of the company subject to “make whole” clauses with the exception of the 6.125% notes which were called at par in April 2024.
The estimated fair market value of long-term debt, using quoted market prices, is as follows:
344,500
343,500
6.125% notes, due 2026
499,500
502,000
116,000
117,000
475,000
420,000
425,000
The carrying amount of the company’s other short-term borrowings, uncommitted lines of credit, revolving credit facility, 3.25% notes due in 2024, North American asset securitization program, commercial paper, and other obligations approximate their fair value.
The company has a $2.0 billion revolving credit facility maturing in September 2026. The facility may be used by the company for general corporate purposes including working capital in the ordinary course of business, letters of credit, repayment, prepayment or purchase of long-term indebtedness, acquisitions, and as support for the company’s commercial paper program, as applicable. Interest on borrowings under the revolving credit facility is calculated using a base rate or SOFR, plus a spread (1.08% at March 30, 2024), which is based on the company’s credit ratings, plus a credit spread adjustment of 0.10% or an effective interest rate of 6.44% at March 30, 2024. The facility fee, which is based on the company’s credit ratings, was 0.175% of the total borrowing capacity at March 30, 2024. The company had $50.0 million in outstanding borrowings under the revolving credit facility at March 30, 2024 and no outstanding borrowings under the revolving credit facility at December 31, 2023.
The company has a North American asset securitization program collateralized by accounts receivable of certain of its subsidiaries. The company may borrow up to $1.5 billion under the program which matures in September 2025. The program is conducted through Arrow Electronics Funding Corporation (“AFC”), a wholly-owned, bankruptcy remote subsidiary. The North American asset securitization program does not qualify for sale treatment. Accordingly, the accounts receivable and related debt obligation remain on the company’s consolidated balance sheets. Interest on borrowings is calculated using a base rate plus a spread (0.40% at March 30, 2024) plus a credit spread adjustment of 0.10% or an effective interest rate of 6.44% at March 30, 2024. The facility fee is 0.40% of the total borrowing capacity.
The company had $625.0 million and $198.0 million in outstanding borrowings under the North American asset securitization program at March 30, 2024 and December 31, 2023, respectively, which was included in “Long-term debt” on the company’s consolidated balance sheets. Total collateralized accounts receivable of approximately $2.3 billion and $2.7 billion were held by AFC and were included in “Accounts receivable, net” on the company’s consolidated balance sheets at March 30, 2024 and December 31, 2023, respectively. Any accounts receivable held by AFC would likely not be available to other creditors of the company in the event of bankruptcy or insolvency proceedings of the company before repayment of any outstanding borrowings under the North American asset securitization program.
Both the revolving credit facility and North American asset securitization program include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels. As of March 30, 2024, the company was in compliance with all such financial covenants.
Interest and dividend income of $19.5 million and $14.3 million for the first quarter of 2024 and 2023, respectively, were recorded in “Interest and other financing expense, net” within the company’s consolidated statements of operations.
15
Note H – Financial Instruments Measured at Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2
Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
The following table presents assets (liabilities) measured at fair value on a recurring basis at March 30, 2024:
Balance Sheet Location
Cash equivalents (a)
10,689
Equity investments (b)
53,211
Foreign exchange contracts designated as net investment hedges
Other assets / other current assets
53,778
63,900
117,678
The following table presents assets (liabilities) measured at fair value on a recurring basis at December 31, 2023:
8,729
57,625
Interest rate swap designated as fair value hedge
(454)
47,245
66,354
46,791
113,145
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to goodwill and identifiable intangible assets (refer to Note C). The company tests these assets for impairment if indicators of potential impairment exist or at least annually if indefinite-lived.
Derivative Instruments
The company uses various financial instruments, including derivative instruments, for purposes other than trading. Certain derivative instruments are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. Derivative instruments not designated as hedges are carried at fair value on the consolidated balance sheets with changes in fair value recognized in earnings.
Interest Rate Swaps
The company manages the risk of variability in interest rates of future expected debt issuances by entering into various forward-starting interest rate swaps, designated as cash flow hedges. Changes in fair value of interest rate swaps designated as cash flow hedges are recorded in the shareholders’ equity section in the company’s consolidated balance sheets in “Accumulated other comprehensive loss” and will be reclassified into income over the life of the anticipated debt issuance or in the period the hedged forecasted cash flows are deemed no longer probable to occur. Reclassified gains and losses are recorded within the line item “Interest and other financing expense, net” in the consolidated statements of operations. The fair value of interest rate swaps are estimated using a discounted cash flow analysis on the expected cash flows of each derivative using observable inputs, including interest rate curves and credit spreads.
In June 2023, the company terminated its outstanding forward-starting interest rate swaps and received a cash payment of $56.7 million, which was reported in the “Cash flows from financing activities” section of the consolidated statements of cash flows. The forecasted transactions related to the swaps continued to be probable to occur by December 31, 2025, and the $56.7 million gain on the termination of the interest rate swaps remained in “Accumulated other comprehensive loss” on the company’s consolidated balance sheets at March 30, 2024. In April 2024, the forecasted bond issuance occurred, and the $56.7 million gain will be amortized to "Interest and other financing expense, net" in the company's consolidated statement of operations over the 10-year life of the bond.
The company occasionally enters into interest rate swap transactions, designated as fair value hedges, that convert certain fixed-rate debt to variable-rate debt in order to manage its targeted mix of fixed- and floating-rate debt. For qualifying interest rate fair value hedges, gains or losses on derivatives are included in “Interest and other financing expense, net” in the consolidated statements of operations. The change in fair value of the hedged item attributable to the risk being hedged is reported as an adjustment to its carrying value and is also included in “Interest and other financing expense, net”.
As of December 31, 2023, the company had one outstanding interest rate swap designated as a fair value hedge of its 6.125% notes due in March 2026, the terms of which were as follows:
Notional Amount
Interest Rate due
Interest Rate due to
Trade Date
Maturity Date
from Counterparty
Counterparty
February 2023
March 2026
500,000
6.125%
SOFR+0.508%
The counterparty to the interest rate swap had the option to cancel the swaps after one year, without penalty. In March 2024, the counterparty cancelled the swap and the company de-designated the fair value hedging relationship.
Foreign Exchange Contracts
The company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. The company’s primary exposures to such transactions are denominated primarily in the following currencies: Euro, Indian Rupee, and Chinese Renminbi. The company enters into foreign exchange forward, option, or swap contracts (collectively, the “foreign exchange contracts”) to facilitate the hedging of foreign currency exposures resulting from inventory purchases and sales and mitigate the impact of changes in foreign currency exchange rates related to these transactions. Foreign exchange contracts generally have terms of no more than six months. The company does not enter into foreign exchange contracts for trading purposes. The risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the company minimizes by limiting its counterparties to major financial institutions. The fair value of the foreign exchange contracts is estimated using foreign currency spot rates and forward rates quotes by third-party financial institutions. The notional amount of the foreign exchange contracts inclusive of foreign exchange contracts designated as a net investment hedge at March 30, 2024 and December 31, 2023 was $1.1 billion and $1.0 billion, respectively.
17
Gains and losses related to non-designated foreign currency exchange contracts are recorded in “Cost of sales” on the company’s consolidated statements of operations. Gains and losses related to foreign currency exchange contracts designated as cash flow hedges are recorded in “Cost of sales,” “Selling, general, and administrative,” and “Interest and other financing expense, net” based upon the nature of the underlying hedged transaction, on the company’s consolidated statements of operations. Gains or losses on these contracts are deferred and recognized when the underlying future purchase or sale is recognized or when the corresponding asset or liability is revalued, and were not material to the financial statements for the periods presented.
At March 30, 2024 and December 31, 2023, the following foreign exchange contracts were designated as net investment hedges, hedging a portion of the company’s net investments in subsidiaries with Euro-denominated net assets:
Notional Amount (thousands)
September 2024
EUR
April 2025
100,000
January 2028
250,000
The change in the fair value of derivatives designated as net investment hedges are recorded in “foreign currency translation adjustment” (“CTA”) within “Accumulated other comprehensive loss” on the company’s consolidated balance sheets. Amounts excluded from the assessment of hedge effectiveness are included in “Interest and other financing expense, net” on the company’s consolidated statements of operations.
During the first quarter of 2023, a foreign exchange contract designated as a net investment hedge matured and the company received $10.7 million, which is reported in the “Cash flows from investing activities” section of the consolidated statements of cash flows.
The effects of derivative instruments on the company’s consolidated statements of operations and other comprehensive income are as follows:
Income Statement Line
Gain (Loss) Recognized in Income
Foreign exchange contracts, net investment hedge (a)
Interest Expense
1,804
2,048
Interest rate swaps, cash flow hedge
(695)
(839)
Interest rate swap, fair value hedge (b)
454
2,742
1,563
3,951
Gain (Loss) Recognized in Other Comprehensive Income (Loss) before reclassifications, net of tax
Foreign exchange contracts, net investment hedge (c)
4,970
1,125
(4,347)
(3,222)
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The carrying amount of “cash and cash equivalents”, “accounts receivable, net”, and “accounts payable” approximate their fair value due to the short maturities of these financial instruments.
Note I – Restructuring, Integration, and Other
Restructuring initiatives and integration costs are due to the company's continued efforts to lower costs, drive operational efficiency, integrate acquired businesses, and the consolidation of certain operations, as necessary. The following table presents the components of the restructuring, integration, and other:
Restructuring and integration (credits) charges
(364)
1,141
Other charges
47,220
1,419
Other Charges
Other charges include $42.8 million related to termination of personnel as a part of operating expense reduction initiatives not related to exit or disposal activities. As of March 30, 2024, the accrued liabilities related to the operating expense reduction initiatives totaled $32.1 million and substantially all accrued amounts are expected to be spent in cash within one year.
Note J – Net Income per Share
Basic net income per share is computed by dividing net income attributable to shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive effect of equity awards is calculated using the treasury stock method.
The following table presents the computation of net income per share on a basic and diluted basis:
(thousands except per share data)
Weighted-average shares outstanding - basic
Net effect of various dilutive stock-based compensation awards
564
748
Weighted-average shares outstanding - diluted
Diluted (a)
(a) Equity awards excluded from diluted net income per share as their effect would have been anti-dilutive
128
Note K – Shareholders’ Equity
Accumulated Other Comprehensive (Loss) Income
The following table presents the changes in Accumulated other comprehensive (loss) income, excluding noncontrolling interests:
Foreign Currency Translation Adjustment and Other:
Other comprehensive (loss) income before reclassifications (a)
(98,172)
8,008
Amounts reclassified into income
45
200
Unrealized Gain on Foreign Exchange Contracts Designated as Net Investment Hedges, Net:
Other comprehensive income before reclassifications (b)
(1,372)
(1,558)
Unrealized Gain on Interest Rate Swaps Designated as Cash Flow Hedges, Net:
Other comprehensive loss before reclassifications (b)
638
Employee Benefit Plan Items, Net:
Net change in Accumulated other comprehensive (loss) income
Common Stock Outstanding Activity
The following tables set forth the activity in the number of shares outstanding:
Issued
Outstanding
Common stock outstanding at December 31, 2023
3,880
53,811
(57)
321
902
(902)
Common stock outstanding at March 30, 2024
4,725
53,230
Common stock outstanding at December 31, 2022
66,175
59,249
(313)
313
2,564
(2,564)
Common stock outstanding at April 1, 2023
68,426
56,998
During the year ended December 31, 2023, the company retired 67.7 million shares of treasury stock. Refer to Note 10 “Shareholders’ Equity” in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Share-Repurchase Program
The following table shows the company’s share-repurchase program as of March 30, 2024:
Approximate
Dollar Value of
Dollar Value
Shares that May
Approved for
Shares
Yet be Purchased
Share-Repurchase Details by Month of Board Approval (thousands)
Repurchase
Repurchased
Under the Program
September 2022
600,000
January 2023
1,000,000
524,590
475,410
Total (a)
1,600,000
1,124,590
The company repurchased 0.8 million shares of its common stock for $100.0 million and 2.6 million shares of its common stock for $300.2 million in the first quarter of 2024 and 2023, respectively, under the company’s share-repurchase program, excluding excise taxes. As of March 30, 2024, approximately $475.4 million remained available for repurchase under the share-repurchase program. The company’s share-repurchase program does not have an expiration date.
Note L – Contingencies
Environmental Matters
In connection with the purchase of Wyle Electronics (“Wyle”) in August 2000, the company entered into a settlement agreement under which, the company accepted responsibility for any potential subsequent costs incurred for environmental clean-up associated with any then-existing contamination or violation of environmental regulations. The company is aware of two facilities (in Huntsville, Alabama (the “Huntsville Site”) and Norco, California (the “Norco Site”)) at which contaminated soil and groundwater was identified and required environmental remediation.
As successor-in-interest to Wyle, the company is the beneficiary of various Wyle insurance policies that covered liabilities arising out of operations at Norco and Huntsville. To date, the company has recovered approximately $47.3 million from certain insurance carriers relating to environmental clean-up matters at the Norco and Huntsville sites, and continues to pursue additional recoveries from one insurer related solely to the Huntsville site. The company has not recorded a receivable for any potential future insurance recoveries related to the Norco and Huntsville environmental matters, as the realization of the claims for recovery are not deemed probable at this time.
Costs are recorded for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Environmental liabilities are included in “Accrued expenses” and “Other liabilities” on the company’s consolidated balance sheets. The company has determined that there is no amount within the environmental liability ranges discussed below that is a better estimate than any other amount, and therefore has recorded the accruals at the minimum amount of the ranges. The liabilities were estimated based on current costs and are not discounted. The costs related to these environmental matters (referred to as “environmental costs”) include remediation, project management, regulatory oversight, and investigative and feasibility study activities.
The company expects the liabilities associated with such ongoing remediation to be resolved over an extended period of time and the accruals for environmental liabilities are adjusted periodically as facts and circumstances change, assessment and remediation efforts progress, or as additional technical or legal information becomes available. Environmental liabilities are difficult to assess and estimate due to various unknown factors such as the timing and extent of remediation,
improvements in remediation technologies, orders by administrative agencies, and the extent to which environmental laws and regulations may change in the future. Accordingly, the company cannot presently estimate the ultimate potential costs related to the Huntsville and Norco sites.
Environmental Matters - Huntsville
In February 2015, the company and the Alabama Department of Environmental Management (“ADEM”) finalized and executed a consent decree in connection with the Huntsville Site. Characterization of the extent of contaminated soil and groundwater is complete and has been approved by ADEM. Health-risk evaluations and a Corrective Action Development Plan were approved by ADEM in 2018, opening the way for pilot testing of on-site remediation in late 2019. Due to the effectiveness of the pilot testing, the pilot testing process has been expanded and remains underway with annual application of bioremediation reagents, semi-annual groundwater monitoring, as well as data collection to direct future bioremediation injections. Approximately $8.8 million has been spent to date. The subsequent environmental costs at the site are estimated to be between $5.6 million and $17.3 million.
Environmental Matters - Norco
In October 2003, the company entered into a consent decree with Wyle Laboratories and the California Department of Toxic Substance Control (“DTSC”) in connection with the Norco Site. In September 2013, the DTSC approved the final Remedial Action Plan (“RAP”) for actions in five on-site areas and one off-site area. As of 2018, the remediation measures described in the RAP had been implemented. Routine progress monitoring of groundwater and soil gas continue on-site and off-site. Approximately $83.8 million has been spent to date. The subsequent environmental costs at the site are estimated to be between $21.5 million and $37.7 million.
It is reasonably possible that the company will need to adjust the liabilities noted above for the Norco and Huntsville sites to reflect the effects of new or additional information, to the extent that such information impacts the costs, timing or duration of the required actions. Future changes in estimates of the costs, timing or duration of the required actions could have a material adverse effect on the company’s consolidated financial position, results of operations or cash flows.
From time to time, in the normal course of business, the company may become liable with respect to other pending and threatened litigation, environmental, regulatory, labor, product, and tax matters. While such matters are subject to inherent uncertainties, it is not currently anticipated that any such matters will materially impact the company’s consolidated financial position, liquidity, or results of operations.
Note M – Segment and Geographic Information
The company is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company has one of the world’s broadest portfolios of product offerings available from leading electronic components and enterprise computing solutions suppliers, coupled with a range of services, solutions and tools that enables its suppliers to distribute their technologies and help its industrial and commercial customers to source, build upon, and leverage these technologies to grow their businesses, reduce their time to market, and enhance their overall competitiveness. The company is a trusted partner in a complex value chain and is uniquely positioned through its electronics components and IT content portfolios to increase value for stakeholders.
The company has two reportable segments, the global components business and the global enterprise computing solutions (“ECS”) business. The company’s global components business, enabled by a comprehensive range of value-added capabilities and services, markets, and distributes electronic components to original equipment manufacturers (“OEMs”) and contract manufacturers (“CMs”). The company’s global ECS business is a leading value-added provider of
comprehensive computing solutions and services. The global ECS portfolio of computing solutions includes datacenter, cloud, security, and analytics solutions. Global ECS brings broad market access, extensive supplier relationships, scale, and resources to help its value-added resellers (“VARs”) and managed service providers (“MSPs”) meet the needs of their end-users.
As a result of the company’s philosophy of maximizing operating efficiencies through the centralization of certain functions, operating income for the reportable segments excludes unallocated corporate overhead costs, depreciation on corporate fixed assets, and restructuring, integration, and other costs, as they are not attributable to the individual reportable segments and are included in the corporate line item.
Sales, by reportable segment by geographic area, are as follows:
Sales:
Components:
Americas
1,596,692
2,233,453
EMEA
1,656,507
2,246,145
Asia/Pacific
1,938,218
2,376,195
Global components
5,191,417
6,855,793
ECS:
907,748
998,114
825,095
882,521
1,732,843
1,880,635
Consolidated
Operating income (loss), by reportable segment, are as follows:
Operating income (loss):
Global components (a)
225,562
417,539
71,459
81,099
Corporate (b)
(111,104)
(76,486)
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Information Relating to Forward-Looking Statements
This report includes “forward-looking statements,” as the term is defined under the federal securities laws. Forward-looking statements are those statements which are not statements of historical fact. These forward-looking statements can be identified by forward-looking words such as “expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “seeks,” “estimates,” and similar expressions. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: unfavorable economic conditions; disruptions or inefficiencies in the supply chain; political instability; impacts of military conflict and sanctions; industry conditions; changes in product supply, pricing and customer demand; competition; other vagaries in the global components and the global enterprise computing solutions (“ECS”) markets; deteriorating economic conditions, including economic recession, inflation, tax rates, foreign currency exchange rates, or the availability of capital; the effects of natural or man-made catastrophic events; changes in relationships with key suppliers; increased profit margin pressure; changes in legal and regulatory matters; non-compliance with certain regulations, such as export, antitrust, and anti-corruption laws; foreign tax and other loss contingencies; breaches of security or privacy of business information; outbreaks, epidemics, pandemics, or public health crises; and the company’s ability to generate positive cash flow. For a further discussion of these and other factors that could cause the company’s future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q and the company’s most recent Annual Report on Form 10-K, as well as in other filings the company makes with the Securities and Exchange Commission. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any of the forward-looking statements.
Certain Non-GAAP Financial Information
In addition to disclosing financial results that are determined in accordance with accounting principles generally accepted in the United States (“GAAP”), the company also discloses certain non-GAAP financial information in the sections below captioned “Sales”, “Gross Profit”, “Operating Expenses”, “Operating Income”, “Income Tax”, and “Net Income Attributable to Shareholders”. Refer to these sections below for reconciliations of non-GAAP financial measures to the most directly comparable reported GAAP financial measures. Non-GAAP financial information includes the following:
Management believes that providing this additional information is useful to the reader to better assess and understand the company’s operating performance and future prospects in the same manner as management, especially when comparing results with previous periods. Management typically monitors the business as adjusted for these items, in addition to GAAP results, to understand and compare operating results across accounting periods, for internal budgeting purposes, for short-term and long-term operating plans, and to evaluate the company’s financial performance. However, analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP. For a discussion of what is included within “Restructuring, integration, and other” and “Gain on investments, net” refer to the similarly captioned sections of this item below.
Overview
The company is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company has one of the world’s broadest portfolios of product offerings available from leading electronic components and enterprise computing solutions suppliers, coupled with a range of services, solutions and tools that enables its suppliers to distribute their technologies and help its industrial and commercial customers to source, build upon, and leverage these technologies to grow their businesses, reduce their time to market, and enhance their overall competitiveness. The company is a trusted partner in a complex value chain and is uniquely positioned through its electronics components and IT content portfolios to increase value for stakeholders. The company has two reportable segments, the global components reportable segment and the global ECS reportable segment. The company’s global components reportable segment, enabled by a comprehensive range of value-added capabilities and services, markets and distributes electronic components to original equipment manufacturers (“OEMs”) and contract manufacturers (“CMs”). The company’s global ECS reportable segment is a leading value-added provider of comprehensive computing solutions and services. Its portfolio of computing solutions includes datacenter, cloud, security, and analytics solutions. Global ECS brings broad market access, extensive supplier relationships, scale, and resources to help its value-added resellers (“VARs”) and managed service providers (“MSPs”) meet the needs of their end-users. For the first quarter of 2024, approximately 75% and 25% of the company’s sales were from the global components reportable segment and the global ECS reportable segment, respectively.
The company’s strategic initiatives include the following:
The company’s long-term financial objectives are to grow sales faster than the market, increase the markets served, grow profits faster than sales, generate earnings per share growth in excess of competitors’ earnings per share growth and market expectations, grow earnings per share at a rate that provides the capital necessary to support the company’s business strategy, allocate and deploy capital effectively so that return on invested capital exceeds the company’s cost of capital, and increase return on invested capital. To achieve its objectives, the company seeks to capture significant opportunities to grow across products, markets, and geographies. To supplement its organic growth strategy, the company continually evaluates strategic acquisitions to broaden its product and value-added service offerings, increase its market penetration, and expand its geographic reach.
25
Executive Summary
(millions except per share data)
Change
Consolidated sales
6,924
8,736
(20.7)
%
Global components sales
5,191
6,856
(24.3)
Global ECS sales
1,733
1,881
(7.9)
Gross profit margin
12.4
12.7
(30)
bps
Non-GAAP gross profit margin
12.5
(20)
186
422
(56.0)
Operating income margin
2.7
4.8
(210)
Non-GAAP operating income
251
433
(42.0)
Non-GAAP operating income margin
3.6
5.0
(140)
84
274
(69.5)
Earnings per share attributable to shareholders - diluted
(66.7)
Non-GAAP net income attributable to shareholders
132
(51.8)
Non-GAAP earnings per share attributable to shareholders - diluted
2.41
(47.6)
Business environment and other trends:
Results of Operations
Sales by reportable segment
Following is an analysis of the company’s sales by reportable segment:
(millions)
Consolidated sales, as reported
Impact of changes in foreign currencies
Consolidated sales, constant currency
8,746
(20.8)
Global components sales, as reported
(4)
Global components sales, constant currency
6,852
(24.2)
Global ECS sales, as reported
Global ECS sales, constant currency
1,894
(8.5)
The sum of the components for sales, as reported, and sales on a constant currency basis may not agree to totals, as presented, due to rounding.
26
Reportable segment sales by geographic region
Following is an analysis of the company’s reportable segment sales by geographic region:
% of Sales
Americas components sales
1,597
23.1
2,233
25.6
(28.5)
EMEA components sales
1,657
23.9
2,246
25.7
(26.3)
Asia/Pacific components sales
1,938
28.0
2,376
27.2
(18.4)
75.0
78.5
Americas ECS sales
908
13.1
998
11.4
(9.1)
EMEA ECS sales
825
11.8
883
10.1
(6.5)
25.0
21.5
100.0
The sum of the components for sales by geographic region and consolidated sales may not agree to totals, as presented, due to rounding.
During the first quarter of 2024, global components sales decreased compared to the year-earlier period primarily due to the following impacts:
During the first quarter of 2024, global ECS sales decreased in both regions compared to the year-earlier period primarily due to a shift in sales mix towards products such as software as-a-service and cloud-based solutions where sales are recorded on a net basis and somewhat softer demand in the Americas region.
Substantially all of the company’s sales are made on an order-by-order basis, rather than through long-term sales contracts. As such, the nature of the company’s business does not provide for the visibility of material forward-looking information from its customers and suppliers beyond a few months.
Gross Profit
Following is an analysis of the company’s consolidated gross profit:
Gross profit, as reported
858
1,114
(23.0)
Impact of wind down to inventory
1
Non-GAAP gross profit
868
1,115
(22.1)
Gross profit as a percentage of sales, as reported
Non-GAAP gross profit as a percentage of sales
12.8
The sum of the components for non-GAAP gross profit may not agree to totals, as presented, due to rounding.
27
The decrease in gross profit related primarily to declining demand and gross profit margins for the first quarter of 2024.
Operating Expenses
Following is an analysis of the company’s consolidated operating expenses:
Operating expenses, as reported
672
692
(2.9)
Identifiable intangible asset amortization
(8)
(47)
(3)
Non-GAAP operating expenses
618
682
(9.5)
Operating expenses as a percentage of sales
9.7
7.9
180
Non-GAAP operating expenses as a percentage of sales, constant currency
8.9
7.8
110
The sum of the components for non-GAAP operating expenses may not agree to totals, as presented, due to rounding.
The declines in operating expenses for the first quarter of 2024, relative to the year-earlier period, were primarily related to lower variable costs, primarily sales incentives, in line with the decrease in sales discussed above, partially offset by a $44.3 million increase in restructuring, integration and other (see discussion below).
Restructuring, Integration, and Other
Restructuring initiatives and integration costs are due to the company’s continued efforts to lower costs, drive operational efficiency, integrate acquired businesses, and consolidate certain operations, as necessary. The company recorded restructuring, integration, and other charges as follows:
Restructuring and integration charges
-
47
Other charges for the first quarter of 2024, include $42.8 million in charges related to the termination of personnel as a part of the operating expense reduction initiatives.
28
Operating Income
Following is an analysis of the company’s consolidated operating income, and operating income for the company’s two reportable segments:
Consolidated operating income, as reported
Non-GAAP consolidated operating income
Consolidated operating income as a percentage of sales
Non-GAAP consolidated operating income as a percentage of sales
Global components operating income, as reported
226
418
(46.0)
Non-GAAP global components operating income
243
424
(42.8)
Global components operating income as a percentage of sales
4.3
6.1
(180)
Non-GAAP global components operating income as a percentage of sales
4.7
6.2
(150)
Global ECS operating income, as reported
71
81
(11.9)
Non-GAAP global ECS operating income
73
82
Global ECS operating income as a percentage of sales
4.1
Non-GAAP global ECS operating income as a percentage of sales
4.2
4.4
The sum of the components of consolidated operating income do not agree to totals, as presented, because unallocated corporate amounts are not included in the table above. Refer to Note M “Segment and Geographic Information” of the Notes to the Consolidated Financial Statements for further discussion.
The decrease in consolidated operating income as a percentage of sales for the first quarter of 2024 relates primarily to the changes in sales and gross profit margins discussed above.
Gain on Investments, Net
Gain on investments, net is primarily related to the changes in fair value of assets related to the Arrow SERP pension plan, which consist primarily of life insurance policies and mutual fund assets, as well as changes in the fair value of the company’s investment in Marubun Corporation, refer to Note H “Financial Instruments Measured at Fair Value” of the Notes to the Consolidated Financial Statements.
Interest and Other Financing Expense, Net
The company recorded net interest and other financing expense as follows:
29
Interest expenses were mostly flat compared to the year-earlier period. Refer to the section below titled “Liquidity and Capital Resources” for more information on changes in borrowings.
Income Tax
Income taxes for the interim periods presented have been included in the accompanying consolidated financial statements on the basis of an estimated annual effective tax rate. The determination of the consolidated provision for income taxes requires management to make certain judgments and estimates. Changes in the estimated level of annual pre-tax earnings, tax laws, and changes resulting from tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the company’s projections and assumptions are inherently uncertain, therefore, actual results could differ from projections.
Following is an analysis of the company’s consolidated effective income tax rate:
Effective income tax rate
21.0
21.8
0.2
0.1
1.2
0.3
(0.1)
Non-GAAP effective income tax rate
22.6
The sum of the components for non-GAAP effective income tax rate may not agree to totals, as presented, due to rounding.
The change in the effective tax rate for the first quarter of 2024, compared to the year-earlier period, is primarily due to the changes in the mix of tax jurisdictions where taxable income is generated, tax law changes, utilization of tax credits in certain jurisdictions, and liabilities for uncertain tax positions.
Net Income Attributable to Shareholders
Following is an analysis of the company’s consolidated net income attributable to shareholders:
Net income attributable to shareholders, as reported
Identifiable intangible asset amortization*
(10)
Tax effect of adjustments above
(16)
The sum of the components for non-GAAP net income attributable to shareholders may not agree to totals, as presented, due to rounding.
* Identifiable intangible asset amortization excludes amortization attributable to the noncontrolling interest.
The decrease in net income attributable to shareholders in the first quarter of 2024 compared to the year-earlier period, relates primarily to changes in sales and gross margins as discussed above.
Liquidity and Capital Resources
Management believes that the company’s current cash availability, its current borrowing capacity under its revolving credit facility and asset securitization programs, and its expected ability to generate future operating cash flows are sufficient to meet its projected cash flow needs for the next 12 months and the foreseeable future. The company’s current committed
30
and undrawn liquidity stands at over $2.4 billion in addition to $242.8 million of cash on hand at March 30, 2024. The company also may issue debt or equity securities in the future and management believes the company will have adequate access to the capital markets, if needed. The company continually evaluates its liquidity requirements and would seek to amend its existing borrowing capacity or access the financial markets as deemed necessary.
The company’s principal sources of liquidity are existing cash and cash equivalents, cash generated from operations and cash provided by its revolving credit facilities and debt. The company’s principal uses of liquidity include cash used in operations, investments to grow working capital, scheduled interest and principal payments on its borrowings, and the return of cash to shareholders through share repurchases.
The following table presents selected financial information related to liquidity:
Working capital
6,919
7,355
(436)
218
Short-term debt
946
1,654
(708)
2,632
2,154
478
Working Capital
The company maintains a significant investment in working capital which the company defines as accounts receivable, net, plus inventories less accounts payable. The change in working capital during the first quarter of 2024, was primarily attributable to decreases in inventory.
Working capital as a percentage of sales, which is defined as working capital divided by annualized quarterly sales, increased to 25.0% for the first three months of 2024, compared to 20.6% in the year-earlier period. The increase was primarily due to lower sales.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, which are readily convertible into cash, with original maturities of three months or less. At March 30, 2024 and December 31, 2023, the company had cash and cash equivalents of $242.8 million and $218.1 million, respectively, of which $231.0 million and $160.0 million, respectively, were held outside the United States.
The company has $4.9 billion of undistributed earnings of its foreign subsidiaries which it deems indefinitely reinvested, and recognizes that it may be subject to additional foreign taxes and U.S. state income taxes, if it reverses its indefinite reinvestment assertion on these foreign earnings. The company also has $2.1 billion of foreign earnings that are not deemed permanently reinvested and are available for distribution in future periods as of March 30, 2024.
Revolving Credit Facilities and Debt
The following tables summarize the company’s credit facilities by category:
Outstanding Borrowings
Borrowing
Capacity
1,500
625
198
Revolving credit facility
2,000
50
Commercial paper program (a)
1,200
428
1,122
Uncommitted lines of credit
500
31
Average Daily Balance Outstanding
Three Months Ended
Effective Interest Rate
724
1,291
6.44
5.30
5.88
Commercial paper program
657
762
5.80
5.90
287
5.82
5.41
The company also has an EMEA asset securitization program under which it continuously sells its interest in designated pools of trade accounts receivable of certain of its subsidiaries in the EMEA region. Receivables sold under the program are excluded from “Accounts receivable, net” and no corresponding liability is recorded on the company’s consolidated balance sheets. During the first three months of 2024 and 2023, the average daily balance outstanding under the EMEA asset securitization program was $457.1 million and $636.4 million, respectively. Refer to Note E “Accounts Receivable” of the Notes to the Consolidated Financial Statements for further discussion.
The following table summarizes recent events impacting the company’s capital resources:
Activity
Date
5.875% notes, due April 2034
April 2024
6.125% notes, due March 2026
Repaid
Increase in Capacity
May 2023
300
4.50% notes, due March 2023
March 2023
6.125% notes, due March 2026 (a)
Refer to Note G “Debt” of the Notes to the Consolidated Financial Statements for further discussion of the company’s short-term and long-term debt and available financing.
Cash Flows
The following table summarizes the company’s cash flows by category for the periods presented:
403
224
179
(24)
(9)
(15)
(318)
(211)
(107)
Cash Flows from Operating Activities
The net amount of cash provided by the company’s operating activities during the first three months of 2024 and 2023 was $403.2 million and $223.8 million, respectively. The change in cash provided by operating activities during 2024, compared to the year-earlier period, related primarily to the company’s historical counter-cyclical cash flow as the company generates cash flow in periods of lower demand due to reduced investments in working capital.
Cash Flows from Investing Activities
The net amount of cash used for investing activities during the first three months of 2024 and 2023 was $24.4 million and $9.2 million, respectively.
32
Cash Flows from Financing Activities
The net amount of cash used for financing activities was $317.7 million during the first three months of 2024 compared to $211.0 million used for financing activities in the year-earlier period. The change in cash used for financing activities related primarily to more repayment of debt offset partially by lower share repurchases.
Capital Expenditures
Capital expenditures for the first quarter of 2024 and 2023 were $29.5 million and $20.1 million, respectively. The company expects capital expenditures to be approximately $90.0 million for fiscal year 2024.
The company repurchased 0.8 million shares of its common stock for $100.0 million and 2.6 million shares of its common stock for $300.2 million in the first quarter of 2024 and 2023, respectively, under its share-repurchase program, excluding excise taxes. During the first three months of 2024, the company accrued $0.7 million of excise tax, which is recorded within “Treasury stock” on the company’s consolidated balance sheets and reduces the share-repurchase authorization. As of March 30, 2024, approximately $475.4 million remained available for repurchase under the share-repurchase program. The share-repurchase authorization does not have an expiration date and the pace of the repurchase activity will depend on factors such as the company’s working capital needs, cash requirements for acquisitions, debt repayment obligations or repurchases of debt, share price, and economic and market conditions. The share-repurchase program may be accelerated, suspended, delayed, or discontinued at any time subject to the approval of the company’s Board of Directors.
Contractual Obligations
The company has contractual obligations for short-term and long-term debt, interest on short-term and long-term debt, purchase obligations, operating leases, and other sources and uses of capital that are summarized in the sections titled “Contractual Obligations” and “Additional Capital Requirements and Sources” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Refer to the section above titled “Revolving Credit Facilities and Debt” for updates to the company’s short-term and long-term debt obligations. Refer to Note H “Financial Instruments Measured at Fair Value” of the Notes to Consolidated Financial Statements for further discussion on hedging activities. As of March 30, 2024, there were no other material changes to the contractual obligations of the company.
Critical Accounting Estimates
The company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. The company evaluates its estimates on an ongoing basis. The company bases its estimates on historical experience and on various other assumptions that are believed reasonable under the circumstances; the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes to the company’s critical accounting estimates during the three months ended March 30, 2024. Refer to the section titled “Critical Accounting Estimates” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.
33
Impact of Recently Issued Accounting Standards
See Note B “Impact of Recently Issued Accounting Standards” of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on the company’s consolidated financial position and results of operations.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
During the three months ended March 30, 2024, there were no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Part II, Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The company’s management, under the supervision and with the participation of the company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the company’s disclosure controls and procedures as of March 30, 2024 (the “Evaluation”). Based upon the Evaluation, the company’s Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) were effective as of March 30, 2024.
Changes in Internal Control over Financial Reporting
There were no changes in the company’s internal control over financial reporting during the company’s most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
The information set forth in Note L “Contingencies” in Notes to Consolidated Financial Statements in Item 1 Part I of this Report, is incorporated herein by reference.
Item 1A.Risk Factors
There have been no material changes to the company’s risk factors from those discussed in Part I, Item 1A - Risk Factors in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows the share-repurchase activity for the quarter ended March 30, 2024:
Total Number of
Purchased as
Yet be
Number of
Average
Part of Publicly
Purchased
Price Paid
Announced
Under the
(thousands except share and per share data)
per Share (a)
Program
Programs (b)
January 1 through January 27, 2024
576,154
January 28 through February 24, 2024
February 25 through March 30, 2024
802,225
124.65
Item 5.Other Information
Trading Arrangements
During the quarter ended March 30, 2024, none of the company’s directors or officers adopted, amended, or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement”, as those terms are defined in Regulation S-K, Item 408.
Item 6.Exhibits
Exhibit
Number
10(a)*
Amendment No. 6 to Receivables Transfer Agreement, dated as of February 08, 2024, and made among Arrow EMEA Funding Corp B.V., as the SPV, BNP Paribas, as administrative agent and a purchaser agent, ING Belgium S.A./N.V., as a purchaser agent, U.S. Bank Trustees Limited, as the security trustee, Elavon Financial Services DAC, as paying agent, and Arrow Electronics, Inc.
4(a)
Indenture, dated as of March 1, 2024, between Arrow Electronics, Inc. and U.S. Bank Trust Company, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the company’s Registration Statement under the Securities Act of 1933 on Form S-3 dated March 1, 2024, Commission File No. 1-4482).
31(i)(A)*
Certification of Chief Executive Officer pursuant to Rule 13A-14(a)/15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(i)(B)*
Certification of Chief Financial Officer pursuant to Rule 13A-14(a)/15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(i)**
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(ii)**
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
Inline XBRL Document Set for the consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
: Filed herewith.
**
: Furnished herewith.
+
: Indicates a management contract or compensatory plan or arrangement.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
May 2, 2024
By:
/s/ Rajesh K. Agrawal
Rajesh K. Agrawal
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
/s/ Yun Cho
Yun Cho
Vice President, Corporate Controller, and Chief Accounting Officer
(Principal Accounting Officer)