ARROW ELECTRONICS, INC. (ARW) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section of the Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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: the incurrence of additional charges not currently contemplated and failure to realize contemplated cost savings due to unanticipated events that may occur, including in connection with the implementation of the company’s restructuring plan; unfavorable economic conditions; disruptions, shortages, or inefficiencies in the supply chain; political instability and changes; impacts of military conflict and sanctions; industry conditions; changes in product supply, pricing and customer demand; trade protection measures, tariffs, and other restrictions, duties, and value-added taxes; competition; other vagaries in the global components and the global 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 and information system failures, including related to current or future implementations, integrations and upgrades; outbreaks, epidemics, pandemics, or public health crises; future regulatory trends and the resulting legal and reputation exposure, including but not limited to those relating to environmental, social, governance, cybersecurity, data privacy, and artificial intelligence issues; 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 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 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:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Non-GAAP sales (referred to as “sales on a constant currency basis”) exclude the impact of changes in foreign currencies by retranslating prior period results at current period foreign exchange rates. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Non-GAAP gross profit excludes inventory write downs related to the wind down of businesses within the global components reportable segment (“impact of wind down to inventory”) and impact of changes in foreign currencies. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Non-GAAP operating expenses exclude identifiable intangible asset amortization, restructuring, integration, and other, and the impact of changes in foreign currencies. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Non-GAAP operating income excludes identifiable intangible asset amortization, restructuring, integration, and other and impact of wind down to inventory. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Non-GAAP effective tax rate and non-GAAP net income attributable to shareholders exclude identifiable intangible asset amortization, restructuring, integration, and other, impact of wind down to inventory, loss on extinguishment of debt, (loss) gain on investments, net, and the impact of certain tax legislation changes. |
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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 “(Loss) gain on investments, net” refer to the similarly captioned sections of this item below.
Key Business Metrics
Management uses gross billings as an operational metric to monitor operating performance of its global ECS reportable segment, including sales performance by geographic region, as it provides meaningful supplemental information in evaluating the overall performance of the global ECS business. The company uses this key metric to develop financial forecasts, make strategic decisions, and prepare and approve annual budgets. Gross billings represent amounts invoiced to customers for goods and services during a period and do not include the impact of recording sales on a net basis or sales adjustments, such as trade discounts and other allowances. Refer to Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements for further discussion of the company’s revenue recognition policies. The use of gross billings has certain limitations as an analytical tool and should not be considered in isolation or as a substitute for revenue.
Overview
Arrow sources and engineers technology for thousands of leading manufacturers, services providers, and users of 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, the company enables its suppliers to distribute their technologies and help its industrial and commercial customers source, build, and leverage these technologies, reduce their time to market, grow their businesses, 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 OEMs and EMS providers. 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 VARs and MSPs meet the needs of their end-users. For 2024, approximately 72% and 28% 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:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Offering a variety of value-added services in the global components reportable segment, including demand creation, design, engineering, global marketing and integration services to promote the future sale of suppliers’ products, which generally lead to longer and more profitable relationships with its suppliers and customers. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Providing global supply chain service offerings such as procurement, logistics, warehousing, and insights from data analytics within the global components reportable segment. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Enabling customer cloud solutions through the global ECS reportable segments’ cloud marketplace and management platform, ArrowSphere, which helps VARs and MSPs to manage, differentiate, and scale their cloud businesses while providing the business intelligence that IT solution providers need to drive growth. |
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
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expectations, 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. The company is also committed to improving operational efficiency.
Executive Summary
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (millions except per share data) | | 2024 | | 2023 | | Change | | ||
| Consolidated sales | | $ | 27,923 | | $ | 33,107 | | (15.7) | % |
| Global components sales | | | 19,983 | | | 25,420 | | (21.4) | % |
| Global ECS sales | | | 7,940 | | | 7,687 | | 3.3 | % |
| Gross profit margin | | | 11.8 | % | | 12.5 | % | (70) | bps |
| Non-GAAP gross profit margin | | | 12.0 | % | | 12.5 | % | (50) | bps |
| Operating income | | | 769 | | | 1,471 | | (47.8) | % |
| Operating income margin | | | 2.8 | % | | 4.4 | % | (160) | bps |
| Non-GAAP operating income | | | 1,002 | | | 1,586 | | (36.9) | % |
| Non-GAAP operating income margin | | | 3.6 | % | | 4.8 | % | (120) | bps |
| Net income attributable to shareholders | | | 392 | | | 904 | | (56.6) | % |
| Earnings per share attributable to shareholders - diluted | | | 7.29 | | | 15.84 | | (54.0) | % |
| Non-GAAP net income attributable to shareholders | | | 568 | | | 977 | | (41.9) | % |
| Non-GAAP earnings per share attributable to shareholders - diluted | | $ | 10.56 | | $ | 17.12 | | (38.3) | % |
Business environment and other trends:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | During 2024, the global components reportable segment continued to experience a cyclical downturn characterized by elevated customer inventory levels, and a challenging global macroeconomic environment, contributing to lower demand for the company’s products. These trends are likely to continue in 2025 and the duration and severity of the current downturn remain uncertain. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Within the company’s global ECS reportable segment, in certain periods, changes in the mix of sales of IT solutions impact the proportion of the company’s revenue that is recorded on a net basis compared to a gross basis. These changes increase or decrease sales during a period without a corresponding change in gross profit. This is driven by the company’s responsibilities in the sale of various IT solutions, which is based on terms and conditions in place with its partners. Refer to Note 1 “Summary of Significant Accounting Policies” in this Annual Report on Form 10-K. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | On October 31, 2024, the company announced the Operating Expense Efficiency Plan to reduce costs and improve efficiencies. Refer to the “Restructuring, Integration, and Other” section below. |
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Results of Operations
Sales by reportable segment
Following is an analysis of the company’s sales by reportable segment for the years ended December 31:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (millions) | | 2024 | 2023 | Change | |||||
| Consolidated sales, as reported | | $ | 27,923 | | $ | 33,107 | (15.7) | % | |
| Impact of changes in foreign currencies | | — | | (33) | | ||||
| Consolidated sales, constant currency | | $ | 27,923 | | $ | 33,074 | (15.6) | % | |
| | | | | | | | | | |
| Global components sales, as reported | | $ | 19,983 | | $ | 25,420 | (21.4) | % | |
| Impact of changes in foreign currencies | | — | | (35) | | ||||
| Global components sales, constant currency | | $ | 19,983 | | $ | 25,385 | (21.3) | % | |
| | | | | | | | | | |
| Global ECS sales, as reported | | $ | 7,940 | | $ | 7,687 | 3.3 | % | |
| Impact of changes in foreign currencies | | — | | 2 | | ||||
| Global ECS sales, constant currency | | $ | 7,940 | | $ | 7,689 | 3.3 | % |
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.
Reportable segment sales by geographic region
Following is an analysis of the company’s reportable segment sales by geographic region for the years ended December 31:
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2024 | | 2023 | | | | ||||||||
| (millions) | | Sales | | % of Sales | | Sales | | % of Sales | | % Change | |||||
| Americas components sales | | $ | 6,412 | | 23.0 | % | | $ | 7,955 | | 24.0 | % | | (19.4) | % |
| EMEA components sales | | | 5,648 | | 20.2 | % | | | 8,075 | | 24.4 | % | | (30.1) | % |
| Asia/Pacific components sales | | | 7,923 | | 28.4 | % | | | 9,390 | | 28.4 | % | | (15.6) | % |
| Global components sales | | $ | 19,983 | | 71.6 | % | | $ | 25,420 | | 76.8 | % | | (21.4) | % |
| | | | | | | | | | | | | | | | |
| Americas ECS sales | | $ | 4,067 | | 14.6 | % | | $ | 4,160 | | 12.6 | % | | (2.2) | % |
| EMEA ECS sales | | | 3,873 | | 13.8 | % | | | 3,527 | | 10.6 | % | | 9.8 | % |
| Global ECS sales | | $ | 7,940 | | 28.4 | % | | $ | 7,687 | | 23.2 | % | | 3.3 | % |
| Consolidated sales | | $ | 27,923 | | 100.0 | % | | $ | 33,107 | | 100.0 | % | | (15.7) | % |
The sum of the components for sales by geographic region and consolidated sales may not agree to totals, as presented, due to rounding.
During 2024, the global components reportable segment continued to experience a cyclical downturn characterized by elevated customer inventory levels, and a challenging global macroeconomic environment, contributing to lower demand for the company’s products. The decrease in sales compared to the year-earlier period was primarily due to the following impacts:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | sales declined in the Americas region primarily due to decreases in the industrial, networking and communications verticals; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | sales declined in the EMEA region primarily due to decreased demand for industrial and transportation verticals; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | sales declined in the Asia/Pacific region primarily due to softer demand across most verticals. |
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During 2024, the global ECS reportable segment sales increased compared to the year-earlier period primarily due to the following impacts:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | growth in the EMEA region primarily due to healthy demand for infrastructure applications, hybrid-cloud solutions, and AI related solutions; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | partially offset by decreased sales in the Americas region primarily due to lower demand for storage and security as well as continued efforts by the company to reshape its Americas ECS business for greater mid-market scale and more infrastructure software and cloud adoption, as the company continues to adopt a go-to-market model in this region that better approximates the company’s selling motion in EMEA ECS. |
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 Billings
The following table summarizes gross billings by geographic region for the global ECS reportable segment for the years ended December 31:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (millions) | | 2024 | 2023 | 2022 | |||||
| Americas ECS gross billings | | $ | 10,323 | | $ | 10,542 | $ | 11,198 | |
| EMEA ECS gross billings | | 9,205 | | 8,474 | 7,779 | ||||
| Global ECS gross billings | | $ | 19,528 | | $ | 19,016 | $ | 18,976 |
The sum of the components for global ECS gross billings may not agree to totals, as presented, due to rounding.
Gross Profit
Following is an analysis of the company’s consolidated gross profit for the years ended December 31:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (millions) | | 2024 | 2023 | Change | |||||
| Consolidated gross profit, as reported | | $ | 3,292 | | $ | 4,149 | (20.6) | % | |
| Impact of wind down to inventory | | | 61 | | | — | | | |
| Impact of changes in foreign currencies | | — | | (9) | |||||
| Non-GAAP consolidated gross profit | | $ | 3,353 | | $ | 4,140 | (19.0) | % | |
| Consolidated gross profit as a percentage of sales, as reported | | 11.8 | % | 12.5 | % | (70) | bps | ||
| Non-GAAP consolidated gross profit as a percentage of sales | | 12.0 | % | 12.5 | % | (50) | bps | ||
| | | | | | | | | | |
| Global components gross profit, as reported | | $ | 2,332 | | $ | 3,199 | (27.1) | % | |
| Impact of wind down to inventory | | | 61 | | | — | | | |
| Impact of changes in foreign currencies | | — | | (8) | |||||
| Non-GAAP global components gross profit | | $ | 2,393 | | $ | 3,191 | (25.0) | % | |
| Global components gross profit as a percentage of sales, as reported | | 11.7 | % | 12.6 | % | (90) | bps | ||
| Non-GAAP global components gross profit as a percentage of sales | | 12.0 | % | 12.6 | % | (60) | bps | ||
| | | | | | | | | | |
| Global ECS gross profit, as reported | | $ | 960 | | $ | 950 | 1.1 | % | |
| Impact of changes in foreign currencies | | — | | (1) | |||||
| Non-GAAP global ECS gross profit | | $ | 960 | | $ | 949 | 1.2 | % | |
| Global ECS gross profit as a percentage of sales, as reported | | 12.1 | % | 12.4 | % | (30) | bps | ||
| Non-GAAP global ECS gross profit as a percentage of sales | | 12.1 | % | 12.3 | % | (20) | bps |
The sum of the components for non-GAAP gross profit may not agree to totals, as presented, due to rounding.
Global components gross profit margins decreased during 2024, compared with the year-earlier period, due to the inventory write downs related to the wind down of non-core businesses, product mix shifting toward lower margin
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products, and regional mix shifting more towards the Asia/Pacific region. Global components supply chain services offerings continued to have a positive impact on gross margins.
Global ECS gross profit margins decreased during 2024, compared with the year-earlier period, due to softer margins in the Americas region as the company works to optimize the customer mix and supplier line card to better serve the mid-market, and a shift in sales mix towards more sales recognized on a gross basis in both the Americas and EMEA regions, relative to 2023. Refer to Note 1 “Summary of Significant Accounting Policies” in this Annual Report on Form 10-K.
Following is an analysis of the company’s consolidated gross profit for the years ended December 31:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (millions) | | 2023 | 2022 | Change | |||||
| Consolidated gross profit, as reported | | $ | 4,149 | | $ | 4,837 | (14.2) | % | |
| Impact of changes in foreign currencies | | — | | 8 | | ||||
| Non-GAAP consolidated gross profit | | $ | 4,149 | | $ | 4,844 | (14.4) | % | |
| Consolidated gross profit as a percentage of sales, as reported | | 12.5 | % | 13.0 | % | (50) | bps | ||
| Non-GAAP consolidated gross profit as a percentage of sales | | 12.5 | % | 13.0 | % | (50) | bps | ||
| | | | | | | | | | |
| Global components gross profit, as reported | | $ | 3,199 | | $ | 3,905 | (18.1) | % | |
| Non-GAAP global components gross profit | | $ | 3,199 | | $ | 3,905 | (18.1) | % | |
| Global components gross profit as a percentage of sales, as reported | | 12.6 | % | 13.6 | % | (100) | bps | ||
| Non-GAAP global components gross profit as a percentage of sales | | 12.6 | % | 13.6 | % | (100) | bps | ||
| | | | | | | | | | |
| Global ECS gross profit, as reported | | $ | 950 | | $ | 932 | 2.0 | % | |
| Impact of changes in foreign currencies | | — | | 8 | | ||||
| Non-GAAP global ECS gross profit | | $ | 950 | | $ | 939 | 1.1 | % | |
| Global ECS gross profit as a percentage of sales, as reported | | 12.4 | % | 11.2 | % | 120 | bps | ||
| Non-GAAP global ECS gross profit as a percentage of sales | | 12.4 | % | 11.2 | % | 120 | bps |
The sum of the components for non-GAAP gross profit may not agree to totals, as presented, due to rounding.
Global components gross profit margins decreased during 2023, compared with the year-earlier period, due to declines in shortage market activity in the Americas region and product mix shifting toward lower margin products within the Asia/Pacific region. Global components supply chain services offerings continued to have a positive impact on gross margins.
Global ECS gross profit margins increased during 2023, compared with the year-earlier period, due to product mix shifting towards a higher proportion of revenue recognized on a net basis. Refer to Note 1 “Summary of Significant Accounting Policies” in this Annual Report on Form 10-K.
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Operating Expenses
Following is an analysis of the company’s consolidated operating expenses for the years ended December 31:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| (millions) | | 2024 | 2023 | | Change | |||||
| Consolidated operating expenses, as reported | | $ | 2,524 | | $ | 2,678 | | (5.8) | % | |
| Identifiable intangible asset amortization | | (30) | | (31) | | |||||
| Restructuring, integration, and other | | (143) | | (84) | | |||||
| Impact of changes in foreign currencies | | — | | (3) | | |||||
| Non-GAAP consolidated operating expenses | | $ | 2,351 | | $ | 2,560 | | (8.2) | % | |
| Consolidated operating expenses as a percentage of sales, as reported | | 9.0 | % | 8.1 | % | | 90 | bps | ||
| Non-GAAP consolidated operating expenses as a percentage of sales | | 8.4 | % | 7.7 | % | | 70 | bps | ||
| | | | | | | | | | | |
| Global components operating expenses, as reported | | $ | 1,591 | | $ | 1,740 | | (8.6) | % | |
| Identifiable intangible asset amortization | | (26) | | (27) | | |||||
| Impact of changes in foreign currencies | | — | | (4) | | |||||
| Non-GAAP global components operating expenses | | $ | 1,566 | | $ | 1,710 | | (8.4) | % | |
| Global components operating expenses as a percentage of sales | | 8.0 | % | 6.8 | % | | 120 | bps | ||
| Non-GAAP global components operating expenses as a percentage of sales | | 7.8 | % | 6.7 | % | | 110 | bps | ||
| | | | | | | | | | | |
| Global ECS operating expenses, as reported | | $ | 550 | | $ | 583 | | (5.7) | % | |
| Identifiable intangible asset amortization | | (4) | | (5) | | |||||
| Impact of changes in foreign currencies | | — | | 1 | | |||||
| Non-GAAP global ECS operating expenses | | $ | 546 | | $ | 580 | | (5.8) | % | |
| Global ECS operating expenses as a percentage of sales | | 6.9 | % | 7.6 | % | | (70) | bps | ||
| Non-GAAP global ECS operating expenses as a percentage of sales | | 6.9 | % | 7.5 | % | | (60) | bps | ||
| | | | | | | | | | | |
| Corporate operating expenses, as reported | | $ | 383 | | $ | 355 | | | 7.8 | % |
| Restructuring, integration, and other | | (143) | | (84) | | | | |||
| Non-GAAP corporate operating expenses | | $ | 240 | | $ | 271 | | | (11.5) | % |
The sum of the components of consolidated operating expenses may not agree to totals, as presented, due to rounding.
Global components operating expenses decreased during 2024 compared to the year-earlier period primarily due to the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | a decrease of $123.2 million in employee-related costs primarily due to cost reduction initiatives and lower sales incentives; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | a decrease of $25.4 million in charges taken for allowance for credit losses; partially offset by; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | an increase of $62.2 million due to legal settlement benefits recognized in connection with certain legal matters in 2023 with no similar items recorded in 2024. |
Global ECS operating expenses decreased during 2024 compared to the year-earlier period primarily due to the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | a decrease of $45.8 million in charges taken for allowance for credit losses. This decrease relates to 2023 charges of $25.4 million related to one customer, of which $20.0 million was subsequently reversed upon recovery during 2024. |
Corporate operating expenses increased during 2024 compared to the year-earlier period primarily due to the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | an increase of $59.0 million due to higher restructuring, integration and other charges (see discussion below). |
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Following is an analysis of the company’s consolidated operating expenses for the years ended December 31:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| (millions) | | 2023 | 2022 | | Change | |||||
| Consolidated operating expenses, as reported | | $ | 2,678 | | $ | 2,768 | | (3.3) | % | |
| Identifiable intangible asset amortization | | (31) | | (35) | | |||||
| Restructuring, integration, and other | | (84) | | (14) | | |||||
| Impact of changes in foreign currencies | | — | | 6 | | |||||
| Non-GAAP consolidated operating expenses | | $ | 2,563 | | $ | 2,726 | | (6.0) | % | |
| Consolidated operating expenses as a percentage of sales, as reported | | 8.1 | % | 7.5 | % | | 60 | bps | ||
| Non-GAAP consolidated operating expenses as a percentage of sales | | 7.7 | % | 7.3 | % | | 40 | bps | ||
| | | | | | | | | | | |
| Global components operating expenses, as reported | | $ | 1,740 | | $ | 1,944 | | (10.5) | % | |
| Identifiable intangible asset amortization | | (27) | | (27) | | |||||
| Impact of changes in foreign currencies | | — | | 2 | | |||||
| Non-GAAP global components operating expenses | | $ | 1,713 | | $ | 1,919 | | (10.7) | % | |
| Global components operating expenses as a percentage of sales | | 6.8 | % | 6.8 | % | | 10 | bps | ||
| Non-GAAP global components operating expenses as a percentage of sales | | 6.7 | % | 6.7 | % | | — | bps | ||
| | | | | | | | | | | |
| Global ECS operating expenses, as reported | | $ | 583 | | $ | 523 | | 11.4 | % | |
| Identifiable intangible asset amortization | | (5) | | (8) | | |||||
| Impact of changes in foreign currencies | | — | | 4 | | |||||
| Non-GAAP global ECS operating expenses | | $ | 578 | | $ | 520 | | 11.3 | % | |
| Global ECS operating expenses as a percentage of sales | | 7.6 | % | 6.3 | % | | 130 | bps | ||
| Non-GAAP global ECS operating expenses as a percentage of sales | | 7.5 | % | 6.2 | % | | 130 | bps | ||
| | | | | | | | | | | |
| Corporate operating expenses, as reported | | $ | 355 | | $ | 301 | | | 17.9 | % |
| Restructuring, integration, and other | | (84) | | (14) | | | | |||
| Non-GAAP corporate operating expenses | | $ | 271 | | $ | 287 | | | (5.6) | % |
The sum of the components of consolidated operating expenses may not agree to totals, as presented, due to rounding.
Global components operating expenses decreased during 2023 compared to the year-earlier period primarily due to the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | a decrease of $125.6 million in employee-related costs primarily due to cost reduction initiatives and lower sales incentives; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | a decrease of $62.2 million due to legal settlement benefits recognized in connection with certain legal matters in 2023. |
Global ECS operating expenses increased during 2023 compared to the year-earlier period primarily due to the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | an increase of $25.4 million in charges taken for allowance for credit losses related to one customer; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | an increase of $32.0 million in employee-related costs. |
Corporate operating expenses increased during 2023 compared to the year-earlier period primarily due to the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | an increase of $70.2 million due to higher restructuring, integration and other charges related to cost reduction initiatives. |
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Restructuring, Integration, and Other
The following table presents the components of the restructuring, integration, and other charges for the years ended December 31:
| | | | | | | |
|---|---|---|---|---|---|---|
| (millions) | | 2024 | | 2023 | ||
| Restructuring, integration and related costs | | | | | | |
| Operating Expense Efficiency Plan costs (a) | | $ | 10 | | $ | — |
| Other plans | | | 4 | | | 9 |
| Other expenses | | | | | | |
| Operating expense reduction costs not related to restructuring initiatives (b) | | 85 | | | 19 | |
| Increases to environmental remediation liabilities (c) | | | 1 | | | 23 |
| Early lease termination costs | | | 7 | | | 29 |
| Consulting costs (d) | | | 25 | | | — |
| Other charges | | | 11 | | | 3 |
| Total | | $ | 143 | | $ | 84 |
The sum of the components for restructuring, integration, and other may not agree to totals, as presented, due to rounding.
| Column 1 | Column 2 |
|---|---|
| (a) | See details related to the Operating Expense Efficiency Plan discussed below. |
| Column 1 | Column 2 |
|---|---|
| (b) | These costs are primarily related to the termination of personnel. As of December 31, 2024, the accrued liabilities related to these costs totaled $6.6 million and substantially all accrued amounts are expected to be spent in cash within one year. |
| Column 1 | Column 2 |
|---|---|
| (c) | Refer to Note 15, “Contingencies” of the Notes to the Consolidated Financial Statements for further discussion of environmental liabilities. |
| Column 1 | Column 2 |
|---|---|
| (d) | Consulting costs are related to operating expense reduction costs not related to the restructuring initiative. |
Operating Expense Efficiency Plan
On October 31, 2024, in response to evolving business needs and as part of an initiative to optimize operating expenses, the company announced a multi-year restructuring plan (the “Operating Expense Efficiency Plan” or “the Plan”). The Plan is designed to improve operational efficiency through the following measures: (i) reorganizing and consolidating certain areas of the company’s operations to centralize functions and streamline resources, with a focus on more cost-efficient regions; (ii) enhancing warehouse and logistics operations; (iii) investing in information technology to support automation and process improvements; (iv) consolidating the company’s global real estate footprint; (v) reducing third-party spending; and (vi) winding down certain non-core businesses that are not aligned with the company’s strategic objectives. The company expects to substantially complete the Plan by the end of fiscal year 2026, subject to, among other things, local legal and consultation requirements.
Under the Plan, the company expects to incur pre-tax restructuring charges of approximately $185.0 million, consisting of approximately $110.0 million of employee severance and other personnel cash expenditures; approximately $50.0 million of non-cash asset impairments, accelerated depreciation and inventory write-downs related to the wind-down of certain business operations; and approximately $25.0 million of other related cash expenditures.
As a result of the Plan, the company expects to reduce annual operating expenses by approximately $90.0 million to $100.0 million by the end of fiscal year 2026. The estimates of charges or savings related to the Plan could differ materially from actual charges or savings recognized.
Refer to Note 9, “Restructuring, Integration, and Other” of the Notes to the Consolidated Financial Statements for further discussion of the company’s restructuring and integration activities.
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Operating Income
Following is an analysis of the company’s consolidated operating income, and operating income for the company’s two reportable segments for the years ended December 31:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (millions) | | 2024 | 2023 | Change | |||||
| Consolidated operating income, as reported | | $ | 769 | | $ | 1,471 | (47.8) | % | |
| Identifiable intangible asset amortization | | 30 | | 31 | |||||
| Restructuring, integration, and other | | 143 | | 84 | |||||
| Impact of wind down to inventory | | 61 | | — | |||||
| Non-GAAP consolidated operating income | | $ | 1,002 | | $ | 1,586 | (36.9) | % | |
| Consolidated operating income as a percentage of sales, as reported | | 2.8 | % | 4.4 | % | (160) | bps | ||
| Non-GAAP consolidated operating income, as a percentage of sales | | 3.6 | % | 4.8 | % | (120) | bps | ||
| | | | | | | | | | |
| Global components operating income, as reported | | $ | 741 | | $ | 1,459 | (49.2) | % | |
| Identifiable intangible asset amortization | | 25 | | 27 | |||||
| Impact of wind down to inventory | | 61 | | — | |||||
| Non-GAAP global components operating income | | $ | 827 | | $ | 1,486 | (44.3) | % | |
| Global components operating income as a percentage of sales | | 3.7 | % | 5.7 | % | (200) | bps | ||
| Non-GAAP global components operating income as a percentage of sales | | 4.1 | % | 5.8 | % | (170) | bps | ||
| | | | | | | | | | |
| Global ECS operating income, as reported | | $ | 410 | | $ | 367 | 11.7 | % | |
| Identifiable intangible asset amortization | | 4 | | 5 | |||||
| Non-GAAP global ECS operating income | | $ | 414 | | $ | 372 | 11.4 | % | |
| Global ECS operating income as a percentage of sales | | 5.2 | % | 4.8 | % | 40 | bps | ||
| Non-GAAP global ECS operating income as a percentage of sales | | 5.2 | % | 4.8 | % | 40 | bps |
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 16 “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 during 2024 relates primarily to the changes in sales, gross profit margins and operating expenses discussed above.
(Loss) Gain on Investments, Net
| | | | | | | |
|---|---|---|---|---|---|---|
| (millions) | | 2024 | | 2023 | ||
| (Loss) gain on investments, net | | $ | (5) | | $ | 19 |
(Loss) 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 7 “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:
| | | | | | | |
|---|---|---|---|---|---|---|
| (millions) | | 2024 | | 2023 | ||
| Interest and other financing expense, net | | $ | (270) | | $ | (329) |
The decreases in interest and other financing expenses, net for 2024 primarily related to lower interest rates and lower average daily borrowings on floating rate credit facilities. Refer to the section below titled “Liquidity and Capital Resources” for more information on changes in borrowings.
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Income Tax
The company records a provision for income taxes for the anticipated tax consequences of the reported financial results of operations using the asset and liability method. The following table presents the company's effective income tax rate and non-GAAP effective tax rate for the years ended December 31:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | | 2024 | | 2023 | | |
| Effective income tax rate | | | 19.6 | % | | 21.9 | % |
| Identifiable intangible asset amortization | | | 0.3 | | | 0.1 | |
| Restructuring, integration, and other | | | 1.2 | | | 0.1 | |
| Impact of wind down to inventory | | | 0.7 | | | — | |
| Impact of tax legislation changes | | | — | | | (0.1) | |
| Non-GAAP effective income tax rate | | | 21.8 | % | | 22.0 | % |
The sum of the components for non-GAAP effective income tax rate may not agree to totals, as presented, due to rounding.
The company’s effective tax rate deviates from the statutory U.S. federal income tax rate predominantly due to the variety of foreign taxing jurisdictions where it operates, and its foreign subsidiaries generate taxable income. The fluctuation in the effective tax rate for 2024, compared to the previous year, is mainly attributed to changes in uncertain tax positions, including favorable tax audit settlements. Additionally, the mix of tax jurisdictions where income was generated was influenced by higher restructuring, integration, and other charges, as well as inventory write-downs taken during 2024.
Net Income Attributable to Shareholders
Following is an analysis of the company’s consolidated net income attributable to shareholders for the years ended December 31:
| | | | | | | |
|---|---|---|---|---|---|---|
| (millions) | | 2024 | 2023 | |||
| Net income attributable to shareholders, as reported | | $ | 392 | | $ | 904 |
| Identifiable intangible asset amortization * | | 29 | | 30 | ||
| Restructuring, integration, and other | | 143 | | 84 | ||
| Loss (gain) on investment | | 5 | | (19) | ||
| Impact of wind down to inventory | | | 61 | | | — |
| Loss on extinguishment of debt | | | 2 | | | — |
| Tax effect of adjustments above | | (63) | | (23) | ||
| Impact of tax legislation changes | | | — | | | 1 |
| Non-GAAP net income attributable to shareholders | | $ | 568 | | $ | 977 |
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 2024 compared to the year-earlier period relates primarily to changes in sales, gross margins, operating expenses, interest and other financing expenses, net, and income tax 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 committed and undrawn liquidity stands at over $2.8 billion in addition to $188.8 million of cash on hand at December 31, 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
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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 at December 31:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (millions) | | 2024 | 2023 | Change | |||||
| Working capital | | $ | 6,693 | | $ | 7,355 | | $ | (662) |
| Cash and cash equivalents | | 189 | | 218 | | (29) | |||
| Short-term debt | | 350 | | 1,654 | | (1,304) | |||
| Long-term debt | | 2,774 | | 2,154 | | 620 |
Working Capital
The company maintains a significant investment in working capital which the company defines as accounts receivable, net, plus inventories less accounts payable.
Working capital, as a percentage of sales, which is defined as working capital divided by annualized quarterly sales, decreased to 23.0% at December 31, 2024 compared to 23.4% at December 31, 2023. The decrease was primarily due to lower inventory. Sales for the fourth quarter of 2024 and 2023 were $7.3 billion and $7.8 billion, respectively.
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 December 31, 2024 and 2023, the company had cash and cash equivalents of $188.8 million and $218.1 million, respectively, of which $164.0 million and $160.0 million, respectively, were held outside the United States.
As of December 31, 2024, the company has $5.4 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 has $2.0 billion of foreign earnings that are not deemed permanently reinvested and are available for distribution in future periods as of December 31, 2024.
Revolving Credit Facilities and Debt
The following table summarizes the company’s credit facilities by category at December 31:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Borrowing | | Outstanding borrowings | |||||
| (millions) | capacity | 2024 | 2023 | ||||||
| North American asset securitization program | | $ | 1,500 | | $ | 633 | | $ | 198 |
| Revolving credit facility | | 2,000 | | 30 | | — | |||
| Commercial paper program (a) | | 1,200 | | — | | 1,122 | |||
| Uncommitted lines of credit | | 500 | | — | | — |
| Column 1 | Column 2 |
|---|---|
| (a) | Amounts outstanding under the commercial paper program are backstopped by available commitments under the company’s revolving credit facility. |
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Average Daily Balance Outstanding | | | | | | | ||||
| | | Year Ended | | | Effective Interest Rate | | ||||||
| | | December 31, | | December 31, | | | December 31, | | December 31, | | ||
| (millions) | 2024 | 2023 | | 2024 | | 2023 | | |||||
| North American asset securitization program | | $ | 567 | | $ | 1,092 | | | 4.83 | % | 5.85 | % |
| Revolving credit facility | | 3 | | 131 | | | 5.48 | % | 6.42 | % | ||
| Commercial paper program | | 435 | | 774 | | | 5.21 | % | 5.90 | % | ||
| Uncommitted lines of credit | | 280 | | 178 | | | 5.18 | % | 5.83 | % |
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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 2024 and 2023, the average daily balance outstanding under the EMEA asset securitization program was $394.8 million and $626.4 million, respectively. During November 2024, the company amended the program to extend the maturity and correct an administrative error and regain compliance with certain operational covenants. Refer to Note 4 “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:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| (millions) | Activity | Date | Notional amount | ||||
| 3.25% notes, due September 2024 | | Repaid | | September 2024 | | $ | 500 |
| 5.15% notes, due August 2029 | | Issued | | August 2024 | | $ | 500 |
| 5.875% notes, due April 2034 | | Issued | | April 2024 | | $ | 500 |
| 6.125% notes, due March 2026 | | Repaid | | April 2024 | | $ | 500 |
| Uncommitted lines of credit | | Increase in Capacity | | May 2023 | | $ | 300 |
| 4.50% notes, due March 2023 | | Repaid | | March 2023 | | $ | 300 |
| 6.125% notes, due March 2026 | | Issued | | March 2023 | | $ | 500 |
Refer to Note 6, “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:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (millions) | | 2024 | 2023 | Change | |||||
| Net cash provided by operating activities | | $ | 1,130 | | $ | 705 | | $ | 425 |
| Net cash used for investing activities | | (94) | | (72) | | (22) | |||
| Net cash used for financing activities | | (957) | | (666) | | (291) |
Cash Flows from Operating Activities
The net amount of cash provided by the company’s operating activities during 2024 and 2023 was $1.1 billion and $705.4 million, respectively. The change in cash provided by operating activities during 2024, compared to the year-earlier period, relates primarily to the company’s historical counter-cyclical cash flow as the company generates cash flow in periods of decreased demand growth due to lower investment in working capital primarily due to lower inventory.
Cash Flows from Investing Activities
The net amount of cash used for investing activities during 2024 and 2023 was $94.4 million and $72.3 million, respectively. The change in cash used for investing activities related primarily to amounts paid for businesses acquired in 2024.
Cash Flows from Financing Activities
The net amount of cash used for financing activities was $956.8 million during 2024 compared to $666.2 million used for financing activities in 2023. The change in cash used for financing activities was primarily due to higher redemption of notes partially offset by lower share repurchases in 2024.
Capital Expenditures
Capital expenditures were $92.7 million and $83.3 million in 2024 and 2023, respectively. The company expects capital expenditures to be approximately $100.0 million for fiscal year 2025.
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Share-Repurchase Program
The company repurchased 2.0 million shares of common stock for $250.0 million and 6.1 million shares of common stock for $745.9 million in 2024 and 2023, respectively, under its share-repurchase program, excluding excise taxes. As of December 31, 2024, approximately $324.1 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, and operating leases.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | At December 31, 2024, the company had $3.1 billion of total debt outstanding, $350.0 million of which matures in the next twelve months. The remaining debt has maturity dates in 2026 through 2034. During April 2024, the company repaid $500.0 million principal amount of its 6.125% notes due March 2026. During September 2024, the company repaid $500.0 million principal amount of its 3.25% notes which were redeemed at maturity. Refer to Note 6, “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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Amounts related to total interest on long-term debt at December 31, 2024 totaled $598.4 million, with $110.5 million expected to be paid within the next 12 months. Refer to Note 6, “Debt” of the Notes to the Consolidated Financial Statements for further discussion of the company’s interest on short-term and long-term debt and available financing. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Purchase obligations of $8.3 billion represent an estimate of non-cancellable inventory purchase orders, future payments under IT distribution arrangements, and other contractual obligations related to information technology and facilities as of December 31, 2024 with $5.7 billion expected to be paid within the next 12 months, $1.2 billion in 2026, $642.2 million in 2027, and $487.2 million in 2028. In January 2025, the company entered into new multi-year distribution agreements which increased its non-cancellable purchase obligations by $2.8 billion with payments of $288.7 million in 2025, $495.7 million in 2026, $563.0 million in 2027, $598.6 million in 2028, $639.1 million in 2029, and $228.2 million in 2030. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Amounts related to future lease payments for operating lease obligations at December 31, 2024 totaled $301.0 million, with $77.6 million expected to be paid within the next 12 months. Refer to Note 14, “Lease Commitments” of the Notes to the Consolidated Financial Statements for further discussion of the company’s operating leases. |
Additional Capital Requirements and Sources
Recent and expected other capital requirements and sources, in addition to the above matters, also include the items described below:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Employee Benefit Plans: The company maintains an unfunded executive pension plan under which the company will pay supplemental pension benefits to certain employees upon retirement. As of December 31, 2024, the company had designated $115.7 million in assets to cover the ongoing costs of SERP payouts for both current and former executives. The projected benefit obligation at December 31, 2024 and 2023, was $83.0 million and $88.1 million, respectively. Refer to Note 13, “Employee Benefit Plans” of the Notes to the Consolidated Financial Statements for further discussion of the company’s executive pension plan. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Environmental liabilities: The company is involved in certain ongoing environmental cleanup activities and legal proceedings, which are inherently uncertain with respect to outcomes. Refer to Note 15, “Contingencies” of the Notes to the Consolidated Financial Statements for further discussion of the company’s environmental liabilities. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Hedging activities: The company has entered into certain foreign exchange forward contracts designated as net investment hedges. As of December 31, 2024, all such contracts were in an asset position in the amount of $53.7 |
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| Column 1 | Column 2 | Column 3 |
|---|---|---|
| million. Refer to Note 7, “Financial Instruments Measured at Fair Value” of the Notes to the Consolidated Financial Statements for further discussion of the company’s hedging activities. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Restructuring activities: In an effort to address evolving business needs and optimize operating expenses, the company initiated the Operating Expense Efficiency Plan which is expected to incur pre-tax restructuring charges of approximately $185.0 million in total costs of which $60.6 million has been incurred as of December 31, 2024. Refer to Note 9, “Restructuring, Integration, and Other” of the Notes to the Consolidated Financial Statements for further discussion of the company’s restructuring activities. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Sales of trade receivables: In the normal course of business, certain of the company’s subsidiaries have agreements to sell, without recourse, selected trade receivables to financial institutions. The company does not retain financial or legal interests in these receivables, and, accordingly, they are accounted for as sales of the related receivables and the receivables are removed from the company’s consolidated balance sheets. Refer to Note 4, “Accounts Receivable” of the Notes to the Consolidated Financial Statements for further discussion of the company’s factoring arrangements. |
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 consolidated financial statements requires the company to make significant estimates and judgments that have had or are reasonably likely to have a material impact on the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. The company has established detailed policies and control procedures intended to ensure the appropriateness of such estimates and assumptions and their consistent application from period to period. 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.
For a description of the company’s significant accounting policies, see Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements of this Form 10-K. The following components of the consolidated financial statements contain critical accounting estimates:
Trade Accounts Receivable
Management estimates the allowance for credit losses using relevant available information about expected credit losses and an age-based reserve model. Inputs to the model include information about historical credit losses, customer credit ratings, past events, current conditions, and reasonable and supportable forecasts. Adjustments to historical loss information are made for differences in current receivable-specific risk characteristics such as changes in the economic and industry environment, or other relevant factors. These adjustments as well as other inputs such as the identification of credit risk pools, and age-based allowances require significant judgment and are inherently uncertain. This uncertainty can produce volatility in the company’s allowance for credit losses. In addition, the allowance for credit losses could be insufficient to cover actual losses, which would negatively impact net income.
Inventories
Inventories are stated at the lower of cost or net realizable value. Write-downs of inventories to net realizable value for excess or obsolete inventories are based upon contractual provisions governing supplier price protections and stock rotation rights, the age of inventories, inventory turnover, as well as assumptions about future demand and market conditions. Due to the large number of products, markets, and transactions, and the complexity of managing the process around price protections and stock rotations, there is a high degree of judgment required for estimates made regarding demand for age-based inventory and future market conditions, after considering supplier protection provisions.
Income Taxes
The company is subject to income taxes in the U.S. and numerous foreign jurisdictions. The evaluation of the company's valuation allowance on deferred tax assets and uncertain tax positions involves significant judgment in the interpretation
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and application of GAAP and complex domestic and international tax laws. The assessment of the need for a valuation allowance requires judgment on the part of management with respect to the benefits that could be realized from future taxable income, as well as other positive and negative factors. It is also the company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the company prevails in matters for which a liability for an unrecognized tax benefit is established, or is required to pay amounts in excess of the liability, or when other facts and circumstances change, the company’s effective tax rate in a given financial statement period may be materially affected. Refer to Note 8 “Income Taxes” of the Notes to Consolidated Financial Statements for further discussion.
Contingencies and Litigation
From time to time, the company is subject to proceedings, lawsuits, and other claims related to environmental, regulatory, labor, product, tax, and other matters and assesses the likelihood of an adverse judgment or outcome for these matters, as well as the range of potential losses. A determination of the reserves required, if any, is made after careful analysis. Significant judgments are made when determining if these reserves may change in the future due to new developments impacting the probability of a loss, the estimate of such loss, and the probability of recovery of such loss from third parties. These matters are reviewed at least on a quarterly basis. Refer to Note 15 “Contingencies” of the Notes to Consolidated Financial Statements for further discussion.
Goodwill
The company performs a quantitative goodwill impairment test annually and this test is used to both identify and measure impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. Goodwill is tested at a level referred to as a reporting unit. If the carrying amount of the reporting unit is less than its fair value, no impairment exists. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Refer to the table below for a list of the company’s reporting units and the respective allocation of goodwill at December 31:
| | | | |
|---|---|---|---|
| (millions) | | 2024 | |
| Americas Components | | $ | 563 |
| EMEA Components | | 116 | |
| Asia/Pacific Components (a) | | | — |
| eInfochips | | | 224 |
| | | | |
| Americas ECS | | | 777 |
| EMEA ECS | | | 376 |
| Consolidated | | $ | 2,055 |
The sum of the components for goodwill by reporting unit may not agree to the total, as presented, due to rounding.
(a) Within the global components reportable segment, the Asia/Pacific reporting unit’s goodwill was previously fully impaired.
The company estimates the fair value of a reporting unit using the income approach. For the purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The assumptions included in the income approach include forecasted revenues, gross profit margins, operating income margins, working capital, perpetual growth rates, income tax rates, and long-term discount rates, among others, all of which require significant judgments by management. The company also reconciles its discounted cash flow analysis to its current market capitalization allowing for a reasonable control premium. As of the first day of the fourth quarters of 2024, 2023, and 2022, the company’s annual impairment testing did not indicate impairment at any of the company’s reporting units.
As of the date of the company’s 2024 annual impairment test, the fair value of all reporting units exceeded their carrying values by more than 38%. Discount rates are one of the more significant assumptions used in the income approach. If the company increased the discount rates used by 100 basis points, the fair value of all reporting units would still exceed their carrying values by more than 24%.
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Actual results may differ from those assumed in the company’s forecasts. A decline in general economic conditions or global equity valuations could impact the judgments and assumptions about the fair value of the company’s businesses, and the company could be required to record an impairment charge in the future, which could impact the company’s consolidated balance sheets, as well as the company’s consolidated statements of operations. If the company was required to recognize an impairment charge in the future, the charge would not impact the company’s consolidated cash flows, current liquidity, capital resources, and covenants under its existing revolving credit facility, North American asset securitization program, other outstanding borrowings, and EMEA asset securitization program.
Impact of Recently Issued Accounting Standards
For a summary of recent accounting pronouncements applicable to the company’s consolidated financial statements, see Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements, which is incorporated herein by reference.