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Form 10-K ARROW ELECTRONICS INC For: Dec 31

February 11, 2022 11:48 AM EST

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arw-20211231
December 31December 31, 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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021

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 York11-1806155
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification Number)
9201 East Dry Creek Road80112
CentennialCO(Zip Code)
(Address of principal executive offices)
(303)824-4000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $1 par valueARWNew York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o No x
 
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 x No o

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). Yes x No o
 
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 filerAccelerated 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.                  o

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262 (b)) by the registered public accounting firm that prepared or issued its audit report.                                        

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The aggregate market value of voting stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second fiscal quarter was $8,209,051,733.

There were 67,693,074 shares of Common Stock outstanding as of February 3, 2022.



DOCUMENTS INCORPORATED BY REFERENCE

The definitive proxy statement related to the registrant's 2022 Annual Meeting of Shareholders, is incorporated by reference in Part III to the extent described therein.





TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Item 6.
[Reserved]
 
 
 
 
 
 
 

 


 
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PART I
Item 1.    Business.

Arrow Electronics, Inc. (the “company” or “Arrow”) 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 software that help industrial and commercial customers introduce innovative products, reduce their time to market, and enhance their overall competitiveness. Arrow was incorporated in New York in 1946 and serves over 220,000 customers worldwide.

Arrow's diverse worldwide customer base consists of original equipment manufacturers (“OEMs”), value-added resellers (“VARs”), managed service providers (“MSPs”), contract manufacturers (“CMs”), and other commercial customers. These customers include manufacturers of industrial equipment (such as machine tools, factory automation, and robotic equipment) and consumer products serving industries ranging from aerospace and defense, alternative energy, automotive and transportation, medical, professional services, and telecommunications, among others.

The company has two business segments, the global components business and the global enterprise computing solutions (“ECS”) business. The company distributes electronic components to OEMs and CMs through its global components business segment and provides enterprise computing solutions to VARs and MSPs through its global ECS business segment. For 2021, approximately 76% of the company's sales were from the global components business segment, and approximately 24% of the company's sales were from the global ECS business segment. The financial information about the company's business segments and geographic operations is found in Note 16 to the consolidated financial statements.

The company maintains over 245 sales facilities and 43 distribution and value-added centers, serving over 90 countries. Both business segments have operations in each of the three largest electronics markets; the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia-Pacific regions. Arrow's business strategy is to be the world's foremost technology solutions provider. The company guides innovation forward by helping its customers in the areas of industrial automation, edge computing, cloud computing, smart and connected devices, homes, cities, and transportation to deliver new technologies, new materials, new ideas, and new electronics that improve businesses' performance and consumers' lives. Arrow aggregates disparate sources of electronics components, infrastructure software, and IT hardware to increasingly provide complete solutions for customers on behalf of its suppliers. Arrow’s goal is to leave no segment of the market underserved in terms of the products offered and services provided. The company aims to accelerate its customers’ time to market, enable secure and consistent supply chains, and drive growth on behalf of its suppliers.

The company's 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.
Global Components

Global components markets and distributes electronic components enabled by a comprehensive range of value-added capabilities and services. The company provides customers with the ability to deliver the latest technologies to the market through design engineering, global marketing and integration, global logistics, and supply chain management. The company offers the convenience of accessing, from a single source, multiple technologies and products from its suppliers with rapid or scheduled deliveries. Most of the company's customers require delivery of their orders on schedules or volumes that are generally not available on direct purchases from manufacturers.

The global components business design, engineering, global marketing and integration services provide a variety of mechanisms, commonly known as ‘demand creation,’ to promote the future sale of suppliers’ products. Most notably, the company will register engineered designs and schematics showing the use of suppliers’ components in the company’s customers’ future products. Providing these services generally lead to longer and more profitable relationships that benefit the company as well as our suppliers and customers.
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Beyond the traditional source of sales and profits tied to the buying and selling of electronic components, the company has a global supply chain services business that has grown organically within the global components business. It derives services revenue from providing supply chain services such as procurement, logistics, warehousing, and insights from data analytics.

Within the global components business segment for 2021, net sales of approximately 78% consist of semiconductor products and related services; approximately 13% consist of passive, electro-mechanical, and interconnect products, such as capacitors, resistors, potentiometers, power supplies, relays, switches, and connectors; approximately 7% consist of computing and memory; and approximately 2% consist of other products and services.

Global ECS

The company's global ECS business segment is a leading value-added provider of comprehensive computing solutions and services. 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 VARs and MSPs meet the needs of their end-users. Global ECS works with VARs and MSPs to tailor complex IT solutions for their end-users. Customers have access to various services including engineering and integration support, warehousing and logistics, marketing resources, and authorized hardware and software training. Global ECS' suppliers benefit from demand creation, speed to market, and efficient supply chain management.

Global ECS further supports customers by enabling their cloud solutions businesses through ArrowSphere, a cloud marketplace and management platform. ArrowSphere helps VARs and MSPs to manage, differentiate and scale their cloud businesses. It simplifies the operational complexity of delivering hybrid multi-cloud solutions while providing the business intelligence that IT solution providers need to drive growth. By making cloud-based solutions available through ArrowSphere, suppliers benefit from greater subscription adoption, consumption, and utilization.

Within the global ECS business segment for 2021, net sales of approximately 42% consist of software, 35% consist of storage, 11% consist of industry standard servers, 5% consist of proprietary servers, and 7% consist of other products and services.

Customers and Suppliers

The company and its affiliates serve over 220,000 industrial and commercial customers. Industrial customers range from major OEMs and CMs to small engineering firms, while commercial customers primarily include VARs, MSPs, and OEMs. No single customer accounted for more than 2% of the company's 2021 consolidated sales. The company's sales teams focus on an extensive portfolio of products and services to support customers' material management and production needs, including connecting customers to the company's field application engineers that provide technical support and serve as a gateway to the company's supplier partners. The company's sales representatives generally focus on a specific customer segment, particular product lines or a specific geography, and provide end-to-end product offerings and solutions with an emphasis on helping customers introduce innovative products, reduce their time to market, and enhance their overall competitiveness. 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 visibility of material forward-looking information from its customers and suppliers beyond a few months.

One supplier accounted for approximately 17% of the company's consolidated sales in 2021. No other single supplier accounted for more than 7% of the company's consolidated sales in 2021. The company believes that many of the products it sells are available from other sources at competitive prices. However, certain parts of the company's business, such as the company's global ECS business segment, rely on a limited number of suppliers with the strategy of providing focused support, extensive product knowledge, and customized service to suppliers, MSPs, and VARs. Most of the company's purchases are pursuant to distributor agreements, which are typically non-exclusive and cancelable by either party at any time or on short notice.

Distribution Agreements

Certain agreements with suppliers protect the company against the potential write-down of inventories due to technological change or suppliers' price reductions. These contractual provisions typically provide certain protections to the company for product obsolescence and price erosion in the form of return privileges, scrap allowances, and price protection. Under the terms of the related distributor agreements and assuming the company complies with certain conditions, such suppliers are required to credit the company for reductions in suppliers' list prices. As of December 31, 2021, this type of arrangement covered approximately 50% of the company's consolidated inventories. In addition, under the terms of many such agreements, the company has the right to return to the supplier, for credit, a defined portion of those inventory items purchased within a designated period of time.
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A supplier, which elects to terminate a distribution agreement, may be required to purchase from the company the total amount of its products carried in inventory. As of December 31, 2021, this type of repurchase arrangement covered approximately 45% of the company's consolidated inventories.

While these inventory practices do not wholly protect the company from inventory losses, the company believes that they currently provide substantial protection from such losses.

Competition

The company operates in a highly competitive environment, both in the United States and internationally. The company competes with other large multinational and national electronic components and enterprise computing solutions distributors, as well as numerous other smaller, specialized competitors who generally focus on narrower markets, products, or particular sectors. The company also competes for customers with its suppliers. The size of the company's competitors vary across market sectors, as do the resources the company has allocated to the sectors in which it does business. Therefore, some of the company's competitors may have a more extensive customer and/or supplier base than the company in one or more of its market sectors. There is significant competition within each market sector and geography served that creates pricing pressure and the need to continually improve services. Other competitive factors include rapid technological changes, product availability, credit availability, speed of delivery, ability to tailor solutions to customer needs, quality and depth of product lines and training, as well as service and support provided by the distributor to the customer.

The company also faces competition from companies entering or expanding into the logistics and product fulfillment, electronic catalog distribution, and e-commerce supply chain services markets. As the company seeks to expand its business into new areas in order to stay competitive in the market, the company may encounter increased competition from its current and/or new competitors.

The company believes that it is well equipped to compete effectively with its competitors in all of these areas due to its comprehensive product and service offerings, highly-skilled work force, and global distribution network.

Government Regulation

The company is subject to and endeavors to comply with various government regulations in the United States as well as various jurisdictions where it operates. These regulations cover several diverse areas including trade compliance, anti-bribery, anti-corruption, money laundering, securities, environmental, and data and privacy protection. Regulatory or government authorities where the company operates may have enforcement powers that can subject the company to legal penalties or other measures and can impose changes or conditions in the way it conducts business. For example, local authorities may disagree with how the company classifies its products for trade and taxation purposes, and the company may be required to change its classifications, which could increase the company’s operating costs or subject it to increased taxes or fines and penalties. Increased government scrutiny of the company's actions or enforcement could materially and adversely affect its business or damage its reputation. In addition, the company may conduct, or it may be required to conduct, internal investigations or face audits or investigations by one or more domestic or foreign government or regulatory agencies, which could be costly and time-consuming, and could divert management and key personnel from the company’s business operations. See Risk Factors in Part I, Item 1A.

Human Capital

The company’s business strategy is to be the world’s foremost technology solutions provider, and the company’s talent strategy powers that business strategy through its people. The company’s talent ecosystem, with all of its multi-cultural diversity, spans 53 countries. The company and its employees around the world rally behind a common greater good: to make the benefits of technology accessible to all.

The company believes its deep capabilities and broad services are made possible by a broad group of professionals who understand their problems from numerous perspectives and curate forward-looking, comprehensive solutions. The company's employees’ diverse backgrounds have melded into rich perspectives that sharpen the company, frame how its global network of engineers, suppliers, and manufacturers work together, and enhance value for customers.

Our business results depend in part on our ability to successfully manage our human capital resources, including attracting, identifying, and retaining key talent. Factors that may affect our ability to attract and retain qualified employees include employee morale, our reputation, competition from other employers, and availability of qualified individuals.

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The company and its affiliates employed approximately 20,700 employees worldwide as of December 31, 2021. The following table shows the company's approximate headcount by region:
AmericasEMEA
Asia-Pacific
Headcount6,1006,8007,800

Gender and Racial/Ethnic Diversity

The company has a long-standing goal for gender representation share growth at all levels of the organization globally, and for race/ethnicity representation share growth at all levels of the organization in the United States. Efforts towards employee diversity share growth are reflected in the company’s talent strategy through (a) internal talent development programs that advance career opportunity for women and underrepresented employees, (b) hiring, (c) retention, and (d) training programs designed to emphasize and expand diversity and inclusion priorities that align to our business strategy.

Below are statistics related to gender and racial/ethnic diversity by employee population:

 Gender Diversity (Globally)
 (% female)
Underrepresented Race/Ethnicity (United States)
(% underrepresented race/ethnicity)
20212020Change20212020Change
Executives (a)19%20%(1)%15%8%7%
Vice Presidents24%25%(1)%15%14%1%
Directors28%26%2%16%17%(1)%
Managers30%30%—%27%27%—%
Supervisors46%46%—%43%43%—%
Individual Contributors45%45%—%37%35%2%
Total Employee Population42%42%—%35%33%2%
(a) Executives includes executive and non-executive officers who are members of the executive committee.

Talent Acquisition, Development, and Retention

The company believes in work that elevates career opportunity for all and views its employees as career investors. Employees invest in Arrow by bringing their unique talents, experiences, and perspectives to the organization through their daily work. The company is committed to helping employees receive a return on their investment, in the form of compounding knowledge, skills, abilities, and earnings opportunity as their careers grow within the company. The company supports employees through targeted curriculum and tools focused on building skills and capabilities within each workforce segment. Arrow also offers a suite of enterprise leadership training and development programs. These programs create value by growing employee capability, which in turn facilitates business growth. For example, nearly three quarters of manager-level and above positions were filled internally during 2021 and 2020.

Attracting and retaining early career talent enables Arrow to grow employee capability from the ground up. Through the company’s university intern and graduate programs, apprenticeship programs, and management trainee programs, Arrow builds a diverse talent pipeline.

The company believes in rewards that improve performance outcomes for all and endorses a pay-for-performance philosophy via performance differentiation and rewarding employees through compensation and benefits. Arrow's compensation and benefits programs are aligned with the local external market to attract, grow, and retain talent. Arrow’s commitment to rewarding employees fairly based on skills, experience, contribution/performance, internal equity, and the external market enables us to maximize employees’ return on their career investment. The company reviews our compensation and benefits programs and practices regularly to ensure they remain competitive and equitable.

Arrow’s Response to COVID

Arrow has worked to protect its global workforce during the COVID-19 pandemic by aligning to guidance of the world's leading health authorities and state and national governments, as well as local government directives, at all locations around the globe to safely continue working in person as prudent, while also providing exemptions and tools for extended remote work, and enhanced benefits as appropriate. To protect the safety of our employees, customers, and suppliers, the company
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implemented a COVID-19 vaccine mandate for our U.S. employees, with the exception of our light industrial population in our distribution facilities and employees with approved accommodations. All employees in the distribution facilities and those with approved accommodations are required to wear masks when on site at Arrow facilities. All U.S. new hires, including light industrial, are required to be fully vaccinated.

Expanded Human Capital Disclosure

Additional human capital information will be included in the company's inaugural Environmental, Social, and Governance Report ("ESG Report"), which will be available in the near future on the Arrow.com website. Information contained in our ESG Report and website is not deemed part of, or incorporated by reference into, this Annual Report on Form 10-K.

Available Information

The company files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and other documents with the U.S. Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The company's SEC filings are available to the public on the SEC's website at www.sec.gov and through the New York Stock Exchange (“NYSE”), 11 Wall Street, New York, New York 10005, on which the company's common stock is listed.

A copy of any of the company's filings with the SEC, or any of the agreements or other documents that constitute exhibits to those filings, can be obtained by request directed to the company at the following address and telephone number:

Arrow Electronics, Inc.
9201 East Dry Creek Road
Centennial, Colorado 80112
(303) 824-4000
Attention: Corporate Secretary

The company also makes these filings available, free of charge, through its Investor Relations website (investor.arrow.com/investors) as soon as reasonably practicable after the company files such materials with the SEC. The company does not intend this internet address to be an active link or to otherwise incorporate the contents of the website into this Annual Report on Form 10-K.

Executive Officers

The following table sets forth the names, ages, and the positions held by each of the executive officers of the company as of February 11, 2022:
NameAgePosition
Michael J. Long63Chairman, President, and Chief Executive Officer
W. Victor Gao42Senior Vice President, Chief Marketing Officer
Carine L. Jean-Claude54Senior Vice President, Chief Legal Officer and Secretary
Sean J. Kerins59Chief Operating Officer
Charles F. Kostalnick II56Senior Vice President, Chief Supply Chain Officer
Vincent P. Melvin58Senior Vice President, Chief Information Officer
Kristin D. Russell51President, Arrow Global Enterprise Computing Solutions
Christopher D. Stansbury56Senior Vice President, Chief Financial Officer
David A. West61President, Arrow Global Components
Gretchen K. Zech52Senior Vice President, Chief Governance, Sustainability, and Human Resources Officer

Set forth below is a brief account of the business experience during the past five years of each executive officer of the company.

Michael J. Long has been Chairman of the Board of Directors, President, and Chief Executive Officer of the company for more than five years.
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W. Victor Gao was appointed Senior Vice President, Chief Marketing Officer effective September 2019. Prior thereto he served as Vice President, Chief Marketing Officer from April 2018 to September 2019. Prior thereto, he served as Vice President, Digital from January 2015 to April 2018.

Carine L. Jean-Claude was appointed Senior Vice President, Chief Legal Officer and Secretary in June 2021. Prior thereto, she served as Vice President, Interim Chief Legal Officer and Secretary since December 2020. Prior thereto, she served as Vice President, Legal Affairs since 2017. Prior thereto, she served in other legal and compliance roles at Arrow Electronics, Inc.

Sean J. Kerins was appointed Chief Operating Officer effective December 2020. Prior thereto, he served as President of Arrow Global Enterprise Computing Solutions for more than five years.

Charles F. Kostalnick II was appointed Senior Vice President, Chief Supply Chain Officer in July 2017. Prior thereto he served as President, Arrow Sustainable Technology Solutions from August 2016 to July 2017.

Vincent P. Melvin has been Senior Vice President and Chief Information Officer of the company for more than five years.

Kristin D. Russell was appointed President, Arrow Global Enterprise Computing Solutions in December 2020. Prior thereto she served as President, Arrow Intelligent Systems from May 2016 to December 2020.

Christopher D. Stansbury has served as Senior Vice President and Chief Financial Officer of the company for more than five years.

David A. West was appointed President of Arrow Global Components effective December 2020. Prior thereto, he served as Senior Vice President of Worldwide Supplier Marketing and Engineering for more than five years.

Gretchen K. Zech was appointed Senior Vice President, Chief Governance, Sustainability, and Human Resources Officer in February 2022. Prior thereto, she served as Senior Vice President and Chief Human Resources Officer of the company for more than five years.
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Item 1A. Risk Factors.

Described below and throughout this report are certain risks that the company’s management believes are applicable to the company’s business and the industries in which it operates. Please see Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk” for a discussion of the company's market risk. If any of the described events occur, the company’s business, results of operations, financial condition, liquidity, or access to the capital markets could be materially adversely affected. When stated below that a risk may have a material adverse effect on the company’s business, it means that such risk may have one or more of these effects. There may be additional risks that are not presently material or known. There are also risks within the economy, the industry, and the capital markets that could materially adversely affect the company, including those associated with an economic recession, inflation, a global economic slowdown, political instability, government regulation (including tax regulation), climate change, employee attraction and retention, and customers’ inability or refusal to pay for the products and services provided by the company. There are also risks associated with the occurrence of extraordinary or unforeseen events, such as terrorist attacks, military or political conflicts, epidemics or pandemics, natural disasters (such as tsunamis, hurricanes, tornadoes, and floods), or other catastrophic events. These factors affect businesses generally, including the company, its customers and suppliers, and as a result, are not discussed in detail below, but are applicable to the company.

Operational Risks

If the company is unable to maintain its relationships with its suppliers or if the suppliers materially change the terms of their existing agreements with the company, or if supply chain shortages and other disruptions occur, the company’s business could be materially adversely affected.

A substantial portion of the company’s inventory is purchased from suppliers with which the company has entered into non-exclusive distribution agreements. These agreements are typically cancellable at any time or on short notice (generally 30 to 90 days). However, the recent global semi-conductor shortages have resulted in some suppliers increasing the amount of non-cancelable orders, which limits our ability to adjust down our inventory levels in the event of market downturns, and could have a negative impact on the financial results of the company. The company seeks to limit these risks by passing non-cancellable terms on to customers, where possible.

Some of the company’s businesses rely on a limited number of suppliers to provide a high percentage of their revenues. For example, sales of products from one of the company’s suppliers accounted for approximately 17% of the company’s consolidated sales in 2021. To the extent that the company’s significant suppliers reduce the number of products they sell through distribution, experience disruptions in their supply chains, cease to continue doing business with the company, or are unable to continue to meet or significantly alter their obligations, the company’s business could be materially adversely affected. In addition, to the extent that the company’s suppliers modify the terms of their contracts to the detriment of the company, limit supplies due to capacity constraints, or other factors, there could be a material adverse effect on the company’s business. Further, the supplier landscape has continued to experience a consolidation, which could negatively impact the company if the surviving, consolidated suppliers decide to exclude the company from their supply chain efforts, and which could expose the company to increased risks, including increased pricing and dependence on a smaller number of suppliers. Increasing consolidation in the industries where the company’s suppliers operate may occur as companies combine to achieve further economies of scale and other synergies, which could result in reduced supplies, as companies seek to eliminate duplicative product lines, and increased prices, which could have a material adverse effect on the company’s business.

The global COVID-19 pandemic has created and continues to create significant shortages, disruptions, constraints, extended lead times, and unpredictability across the global supply chain. Shortages in electronics components markets and supply chain logistical issues have impacted the company's business. The extent to which supply constraints will continue to impact the company's results will depend on future developments, including the severity and duration of the COVID-19 pandemic and the impact of actions to contain or treat its impact, among others. These future developments are highly uncertain and cannot be predicted with confidence.

The company’s revenues originate primarily from the sales of semiconductor, PEMCO (passive, electro-mechanical and connector), and IT hardware and software products, the sales of which are traditionally cyclical and may be impacted by shortages and other disruptions in the global supply chain.

The semiconductor industry historically has experienced fluctuations in product supply and demand, often associated with changes in technology and manufacturing capacity and subject to significant economic market upturns and downturns. The COVID-19 pandemic has created and continues to create significant shortages, disruptions, constraints, extended lead times and unpredictability in the global supply chain and especially in the semiconductor market. Sales of semiconductor products and
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related services represented approximately 57%, 54%, and 49%, of the company’s consolidated sales in 2021, 2020, and 2019, respectively. The sale of the company’s PEMCO products closely tracks the semiconductor market. Accordingly, the company’s revenues and profitability, particularly in its global components business segment, tend to closely follow the strength or weakness of the semiconductor market. Further, economic weakness could cause a decline in spending in information technology, which could have a negative impact on the company’s ECS business. A cyclical downturn in the technology industry could have a material adverse effect on the company’s business and negatively impact its ability to maintain historical profitability levels.

The competitive pressures the company faces, such as pricing and margin reductions, could have a material adverse effect on the company’s business.

The company operates in a highly competitive international environment. The company competes with other large multinational and national electronic components and enterprise computing solutions distributors, as well as numerous other smaller, specialized competitors who generally focus on narrower market sectors, products, or industries. The company also competes for customers with its suppliers. The size of the company’s competitors varies across market sectors, as do the resources the company has allocated to the sectors in which it does business. Therefore, some of the company’s competitors may have a more extensive customer and/or supplier base than the company in one or more of its market sectors. There is significant competition within each market sector and geography that creates pricing and margin pressure and the need for constant attention to improve service and product offerings and increase market share. Other competitive factors include rapid technological changes, product availability, credit availability, speed of delivery, ability to tailor solutions to changing customer needs, and quality and depth of product lines and training, as well as service and support provided by the distributor to the customer. The company also faces competition from companies in the logistics and product fulfillment, catalog distribution, and e-commerce supply chain services markets. As the company continues to expand its business into new areas in order to stay competitive in the market, the company may encounter increased competition from its current and/or new competitors, making it difficult to retain its market share. Further, the enterprise computing distributors industry has recently experienced increased consolidation, resulting in companies with greater scale, market presence, and purchasing power than before. As a result, competition among enterprise computing distributors has increased. In addition, there is no guarantee that the company’s response to and growth in emerging technologies will be successful. Also, customers may seek commitments from the company related to sustainability and environmental impacts, and meeting these commitments may increase the company's cost of operations. The company’s failure to maintain and enhance its competitive position could have a material adverse effect on its business.

Declines in value of the company’s inventory could materially adversely affect its business.

The market for the company’s products and services is subject to rapid technological changes, evolving industry standards, changes in end-market demand, evolving customer expectations, oversupply of product, and regulatory requirements, which can contribute to the decline in value or obsolescence of inventory. Although many of the company’s suppliers provide the company with certain protections from the loss in value of inventory (such as price protection and certain rights of return), the company cannot be sure that such protections will fully compensate it for the loss in value, or that the suppliers will choose to, or be able to, honor such agreements. For example, many of the company’s suppliers will not allow products to be returned after they have been held in inventory beyond a certain amount of time, and, in most instances, the return rights are limited to a certain percentage of the amount of products the company purchased in a particular time frame. Therefore, the company is not fully protected from declines in the value of the company’s inventory, and such decline could have a material adverse effect on the company’s business.

The company’s lack of long-term sales contracts may have a material adverse effect on its business.

Most of the company’s sales are made on an order-by-order basis, rather than through long-term sales contracts. The company generally works with its customers to develop non-binding forecasts for future orders. Based on such non-binding forecasts, the company makes commitments regarding the level of business that it will seek and accept, the inventory that it purchases, and the levels of utilization of personnel and other resources. A variety of conditions over which the company has little or no control, both specific to each customer and generally affecting each customer’s industry may cause customers to cancel, reduce, or delay orders that were either previously made or anticipated, file for bankruptcy protection, or default on their payments. Significant or numerous cancellations, reductions, delays in orders by customers, loss of customers, changing in pricing driven by changing environmental laws and regulations, or the effects of climate change on pricing and sourcing, and/or customer defaults on payments could materially adversely affect the company’s business.



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The company’s non-U.S. sales represent a significant portion of its revenues, and consequently, the company is exposed to risks associated with operating internationally.

In 2021, 2020, and 2019, approximately 66%, 65%, and 60%, respectively, of the company’s sales came from its operations outside the United States. As a result of the company’s international sales and locations, its operations are subject to a variety of risks that are specific to international operations, including the following:

import and export regulations that could erode profit margins or restrict exports;
the burden and cost of compliance with international laws, treaties, and technical standards and changes in those regulations;
potential restrictions on transfers of funds;
trade protection measures, import and export tariffs and other restrictions, duties and value-added taxes;
transportation delays and interruptions;
the burden and cost of compliance with complex multi-national tax laws and regulations;
uncertainties arising from local business practices and cultural considerations;
foreign laws that potentially discriminate against companies which are headquartered outside that jurisdiction;
stringent antitrust regulations in local jurisdictions;
volatility associated with sovereign debt of certain international economies;
the uncertainty surrounding the effects of Brexit;
environmental protection laws and regulations, including those related to climate change;
potential social unrest, military conflicts, government shutdowns and disruptions, and political risks; and
currency fluctuations, which the company attempts to minimize through traditional hedging instruments.

Also, the company’s gross margins in the components business in the Asia-Pacific region tend to be lower than those in other markets in which the company sells products and services. If sales in this market increase as a percentage of overall sales, consolidated gross margins will be lower. While the company has and will continue to adopt measures to reduce the risks of doing business abroad, it cannot ensure that such measures will be adequate and, therefore, such risks could have a material adverse effect on its business.

Changes in the company’s global mix of earnings, and changes in tax law and policy, could materially adversely impact results.

The company’s effective tax rate may be adversely impacted by, among other things, changes in the mix of earnings among countries having different statutory tax rates, changes in the valuation of deferred tax assets, and certain U.S. and international tax policy and enforcement efforts, including the Organization for Economic Co-operation and Development’s (OECD”) Base Erosion and Profit Shifting Project, the European Commission’s state aid investigations, and other initiatives adversely affecting taxation of international businesses. For example, in October 2021, a substantial majority of the OECD’s participating countries and jurisdictions agreed to introduce a 15% global minimum corporate tax rate that would apply to companies with revenue over a set threshold and that could be assessed potentially as early as 2023. Furthermore, many of the countries where the company is subject to taxes are independently evaluating their corporate tax policy, which could result in tax legislation and enforcement that adversely impacts the company’s tax provision and value of deferred assets and liabilities. For instance, proposed legislation in the U.S. includes a new 15% corporate profits minimum tax on corporations that report over $1 billion of profits to shareholders, a new 1% excise tax on corporate stock repurchases, limitations on interest deductions of international financial reporting groups, and increases to the tax rate applied to profits earned outside the U.S. Additionally, tax returns are subject to periodic audits by U.S. and foreign tax authorities, and these audits may result in allocations of income and/or deductions that may result in tax assessments different from amounts that have been estimated. The company regularly assesses the likelihood of adverse outcomes resulting from these audits to determine the adequacy of the company’s provision for taxes. Such tax changes could increase the effective tax rates in many of the countries where the company has operations and ultimately could have an adverse effect on overall tax liability, along with increasing the complexity, burden and cost of tax compliance, all of which could impact the company’s operating results, cash flows, and financial condition.

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When the company makes acquisitions, it may take on additional liabilities or may not be able to successfully integrate such acquisitions.

As part of the company’s history and growth strategy, it has acquired other businesses. Acquisitions involve numerous risks, including the following:

effectively combining the acquired operations, technologies, or products;
unanticipated costs or assumed liabilities, including those associated with regulatory actions or investigations;
not realizing the anticipated financial benefit from the acquired companies;
diversion of management’s attention;
negative effects on existing customer and supplier relationships; and
potential loss of key employees of the acquired companies.

Further, the company has made, and may continue to make acquisitions of, or investments in new services, businesses or technologies to expand its current service offerings and product lines. Some of these may involve risks that may differ from those traditionally associated with the company’s core distribution business, including undertaking product or service warranty responsibilities that in its traditional core business would generally reside primarily with its suppliers. In addition, our effective tax rate for future periods could be impacted by mergers and acquisitions. If the company is not successful in mitigating or insuring against such risks, it could have a material adverse effect on the company’s business.

The company relies heavily on its internal information systems, which, if not properly functioning, could materially adversely affect the company’s business.

The company’s current global operations reside on multiple technology platforms. The size and complexity of the company’s computer systems make them potentially vulnerable to breakdown, malicious intrusion, and random attack. Failure to properly or adequately address any unaccounted for or unforeseen issues could impact the company’s ability to perform necessary business operations, which could materially adversely affect the company’s business.

Regulatory and Legal Risks

Products sold by the company may be found to be defective and, as a result, warranty and/or product liability claims may be asserted against the company, which may have a material adverse effect on the company.

The company sells its components at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated. As a result, the company may face claims for damages (such as consequential damages) that are disproportionate to the revenues and profits it receives from the components involved in the claims. While the company typically has provisions in its supplier agreements that hold the supplier accountable for defective products, and the company and its suppliers generally exclude consequential damages in their standard terms and conditions, the company’s ability to avoid such liabilities may be limited as a result of differing factors, such as the inability to exclude such damages due to the laws of some of the countries where the company does business. The company’s business could be materially adversely affected as a result of a significant quality or performance issue in the products sold by the company, if it is required to pay for the associated damages. Although the company currently has product liability insurance, such insurance is limited in coverage and amount and may not be sufficient to cover all possible claims. Further, when relying on contractual liability exclusions, the company could lose customers if their claims are not addressed to their satisfaction.

Tariffs may result in increased prices and could adversely affect the company’s business and results of operations.

In recent years, the U.S. government has imposed tariffs on certain products imported into the United States and the Chinese government has imposed tariffs on certain products imported into China, which have increased the prices of many of the products that the company purchases from its suppliers. The tariffs, along with any additional tariffs or trade restrictions that may be implemented by the U.S., China, or other countries, could result in further increased prices. While the company intends to pass price increases on to its customers, the effect of tariffs on prices may impact sales and results of operations. Retaliatory tariffs imposed by other countries on U.S. goods have not yet had a significant impact, but the company cannot predict further developments. The tariffs and the additional operational costs incurred in minimizing the number of products subject to the tariffs could adversely affect the operating profits for certain of the company’s businesses and customer demand for certain products which could have an adverse effect on its business and results of operations.

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In addition, in the event that the company pays tariffs for products it imports from China which are then re-exported to other locations outside of the United States, the company may be eligible for refunds of certain tariffs. In order to qualify for these tariff drawbacks, the company must provide data and documentation to the U.S. government that it must obtain from third-party sources, such as its suppliers. There is no guarantee the company will be able to obtain this additional data and documentation from those other sources, which could result in the U.S. government rejecting the drawback requests. Further, there are additional administrative costs expended by the company in furtherance of these efforts. Finally, due to the backlog of drawback applications, the U.S. government has been slow in issuing the associated drawback refunds. The company’s inability to obtain the drawback refunds or significant delays in receiving them could result in a material adverse effect on the company’s business.

The company is subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anti-corruption laws, anti-bribery laws, and anti-money laundering laws and regulations. In the event of non-compliance, the company can face serious consequences, which can harm its business.

The company is subject to export control and import laws and regulations, including the U.S. Export Administration Regulations (“EAR”), U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls (“OFAC”). Products the company sells which are either manufactured in the United States or based on U.S. technology (“U.S. Products”) are subject to the EAR when exported and re-exported to and from all international jurisdictions, in addition to the local jurisdiction’s export regulations applicable to individual shipments. Licenses or proper license exemptions may be required by local jurisdictions’ export regulations, including EAR, for the shipment of certain U.S. Products to certain countries, including China, India, Russia, and other countries in which the company operates. Non-compliance with the EAR, OFAC regulations, or other applicable export regulations can result in a wide range of penalties including the denial of export privileges, fines, criminal penalties, and the seizure of inventories. In the event that any export regulatory body determines that any shipments made by the company violate the applicable export regulations, the company could be fined significant sums and/or its export capabilities could be restricted, which could have a material adverse effect on the company’s business. For example, in 2019, the company determined that from 2015 to 2019 a limited number of non-executive employees, without first obtaining required authorization from the company or the United States government, had facilitated product shipments with an aggregate total invoiced value of approximately $4.8 million, to resellers for reexports to persons covered by the Iran Threat Reduction and Syria Human Rights Act of 2012 or other United States sanctions and export control laws. The company has voluntarily reported these activities to OFAC and the United States Department of Commerce’s Bureau of Industry and Security (“BIS”), conducted an internal investigation and terminated or disciplined the employees involved. BIS has closed its investigation and issued the company a warning letter without referring the matter for further proceedings. No penalties have been imposed by BIS. The company has cooperated fully and intends to continue to cooperate fully with OFAC with respect to its review, which may result in the imposition of penalties, the magnitude of which the company is currently not able to estimate. In addition, the company’s distribution process includes the use of third parties that operate outside of the company’s direct control. Although the company conducts risk based due diligence on third parties in its distribution supply chain, noncompliance with applicable import, export, and other laws and regulations by these third parties may negatively impact the company.

Further, the company is also subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. §201, and other national and sub-national anti-bribery and anti-money laundering laws in the countries in which it conducts business. Anti-corruption laws have been enforced aggressively in recent years, are interpreted broadly and prohibit companies and their employees, agents, contractors, and other affiliated parties from authorizing, promising, offering, or providing, directly or indirectly, improper payments or transfers of money or anything else of value to recipients in the public or private sector. The company engages third parties to provide services. The company can be held liable for the corrupt or other illegal activities of its employees, agents, contractors, and counterparties, even if it does not explicitly authorize or have actual knowledge of such activities. While the company has policies and procedures to foster compliance, any violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences.

The company is subject to environmental laws and regulations and sustainability initiatives, and may be impacted by climate change, in ways that could materially adversely affect its business.

A number of jurisdictions in which the company’s products are sold have enacted laws addressing environmental and other impacts from product disposal, use of hazardous materials in products, use of chemicals in manufacturing, recycling of products at the end of their useful life, and other related matters. These laws prohibit the use of certain substances in the manufacture of products sold by the company and impose a variety of requirements for modification of manufacturing processes, registration, chemical testing, labeling, and other matters. Failure to comply with these laws or any other applicable environmental
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regulations could result in fines or suspension of sales. Additionally, these directives and regulations may result in the company having non-compliant inventory that may be less readily salable or have to be written off.

Some environmental laws impose liability, sometimes without fault, for investigating or cleaning up contamination on or emanating from the company’s currently or formerly owned, leased, or operated property, as well as for damages to property or natural resources and for personal injury arising out of such contamination. Under these laws and regulations, the company may be responsible for investigating, removing, or otherwise remediating hazardous substances released at properties or facilities it owns or operates, regardless of when such substances were released. As the distribution business, in general, does not involve the manufacture of products, it is typically not subject to significant liability in this area. However, there may be occasions, including through acquisitions, where environmental liability arises. Two sites for which the company assumed responsibility as part of the Wyle Electronics (“Wyle”) acquisition are known to have environmental issues, one at Norco, California and the other at Huntsville, Alabama. The company was also named as a defendant in a private lawsuit filed in connection with alleged contamination at a small industrial building formerly leased by Wyle Laboratories in El Segundo, California. That lawsuit was ultimately settled, but the possibility remains that government entities or others may attempt to involve the company in further characterization or remediation of groundwater issues in the area. The presence of environmental contamination could also interfere with ongoing operations or adversely affect the company’s ability to sell or lease its properties. The discovery of contamination for which the company is responsible, the enactment of new laws and regulations, or changes in how existing regulations are enforced, could require the company to incur costs for compliance or subject it to unexpected liabilities.

Additionally, long-term climate change impacts, including the frequency and magnitude of severe weather events, and natural disasters, may significantly impact the company’s operations and business, either directly or indirectly, by adversely affecting the price and availability of energy, and the supply of other services or materials throughout the company’s supply chain, any of which could have a material adverse effect on the company’s business.

Proposed and existing efforts to address concerns over climate change by reducing greenhouse gas emissions could directly or indirectly affect the company’s costs of energy and other operating costs. Investors are placing a greater emphasis on environmental factors, and the company may be unable to meet investor expectations in this regard. In addition, a number of the company’s customers have adopted, or may adopt, procurement policies that may impose sustainability standards on suppliers. The perceptions held by the company’s shareholders, potential investors, suppliers, customers, other stakeholders, or the communities in which the company does business may depend, in part, on whether the company meets on a timely basis or at all the sustainability standards imposed on the company or that the company chooses or aspires to achieve. The subjective nature and wide variety of methods and processes used by various stakeholders, including investors, to assess sustainability criteria could result in a negative perception or misrepresentation of the company’s sustainability policies and practices. Also, by electing to establish and publicly share the company’s sustainability standards, the company’s business may face increased scrutiny related to sustainability activities, and the company’s reputation could be harmed. In addition, sustainability laws, regulations, requirements, and initiatives may increase compliance costs.

The company may be subject to intellectual property rights claims, which are costly to defend, could require payment of damages or licensing fees and could limit the company’s ability to use certain technologies in the future.

Certain of the company’s products and services include intellectual property owned primarily by the company’s third party suppliers and, to a lesser extent, the company itself. Substantial litigation and threats of litigation regarding intellectual property rights exist in the semiconductor/integrated circuit, software and some service industries. From time to time, third parties (including certain companies in the business of acquiring patents not for the purpose of developing technology but with the intention of aggressively seeking licensing revenue from purported infringers) may assert patent, copyright and/or other intellectual property rights to technologies that are important to the company’s business. Depending on the nature of the claim, the company may be able to seek indemnification from its suppliers for itself and its customers against such claims, but there is no assurance that it will be successful in obtaining such indemnification or that the company is fully protected against such claims. In addition, the company is exposed to potential liability for technology that it develops itself or when it combines multiple technologies of its suppliers for which it may have limited or no indemnification protections. In any dispute involving products or services that incorporate intellectual property from multiple sources or is developed, licensed by the company, or obtained through acquisition, the company’s customers could also become the targets of litigation. The company may be obligated to indemnify and defend its customers if the products or services the company sells are alleged to infringe any third party’s intellectual property rights. Any infringement or indemnification claim brought against the company, regardless of the duration, outcome, or size of damage award, could:

result in substantial cost to the company;
divert management’s attention and resources;
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be time consuming to defend;
result in substantial damage awards; or
cause product shipment delays.

Additionally, if an infringement claim against the company or its customers is successful, the company may be required to pay damages or seek royalty or license arrangements, which may not be available on commercially reasonable terms. The payment of any such damages or royalties may significantly increase the company’s operating expenses and materially harm the company’s operating results and financial condition. Further, royalty or license arrangements may not be available at all, which would then require the company to stop selling certain products or using certain technologies, which could negatively affect the company’s ability to compete effectively.

Restrictions on immigration or changes in immigration laws could limit the company’s access to qualified and skilled professionals, increase the cost of doing business, or otherwise disrupt operations.

Restrictions on immigration or changes in immigration laws could limit the company’s access to qualified and skilled professionals, increase the cost of doing business, or otherwise disrupt operations. The success of portions of the company’s business is dependent on its ability to recruit engineers and other professionals. Immigration laws in the United States and other countries in which the company operates are subject to legislative changes, as well as variations in the standards of application and enforcement due to political forces and economic conditions. It is difficult to predict the political and economic events that could affect immigration laws, or the restrictive impact they could have on obtaining or renewing work visas. If immigration laws change or if more restrictive government regulations are enacted, the company’s access to qualified and skilled professionals may be limited, the costs of doing business may increase, operations may be disrupted, and the company’s business may be materially negatively impacted.

The company may not be able to adequately anticipate, prevent, or mitigate damage resulting from criminal and other illegal or fraudulent activities committed against it or as a result of misconduct or other improper activities by its employees or contractors.

Global businesses are facing increasing risks of criminal, illegal, and other fraudulent acts. The evolving nature of such threats, considering new and sophisticated methods used by criminals, including phishing, misrepresentation, social engineering and forgery, is making it increasingly difficult for the company to anticipate and adequately mitigate these risks. In addition, designing and implementing measures to defend against, prevent, and detect these types of activities are increasingly costly and invasive to the operations of the business. Misconduct or failure of its employees or contractors to adhere to company policy may further heighten such risks. As a result, the company could experience a material loss to the extent that controls and other measures implemented to address these threats fail to prevent or detect such acts.

In addition, misconduct by its employees or contractors may include intentional failures to comply with the applicable laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to the company. Such misconduct could result in legal or regulatory sanctions and cause serious harm to the company, including to it's reputation.

It is not always possible to identify and deter employee misconduct, and any other precautions the company takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses, or in protecting the company from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against the company, and it is not successful in defending itself or asserting its rights, those actions could result in the imposition of significant civil, criminal and administrative penalties, which could have a significant impact on the company’s business. Whether or not the company is successful in defending against such actions or investigations, it could incur substantial costs, including legal fees, and divert the attention of management in defending itself against any of these claims or investigations.

Cyber security and privacy incidents and also ransomware may hurt the company’s business, damage its reputation, increase its costs, and cause losses.

The company’s information technology systems could be subject to cyber security and privacy incidents, including invasion, cyber-attacks, ransom demands, or data privacy breaches by employees and others with authorized access, and unauthorized persons. Such attacks could result in disruption to the company’s operations and/or loss or compromise of, or damage to, the company’s or any of its customers’ or suppliers’ data, confidential information, or reputation. The company’s information
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technology systems security measures may also be compromised due to employee error, malfeasance, or otherwise. Additionally, outside parties may attempt to fraudulently induce employees, customers, or suppliers to disclose sensitive information in order to compromise the company’s data, assets and information technology systems. Any such incident could result in significant legal and financial exposure, damage to the company’s reputation, loss of competitive advantage, and a loss of confidence in the security of the company’s information technology systems that could potentially have an adverse impact on the company’s business. Because the techniques used to obtain unauthorized access, disable or degrade, or sabotage the company’s information technology systems and data and information stored on those systems change frequently and often are not recognized until launched, the company may be unable to anticipate these techniques or to implement adequate preventive or protective measures. Further, third parties, such as hosted solution providers, that provide services for the company’s operations, could be a source of risk in the event of a failure of their own systems and infrastructure or could experience their own privacy or security event which could create risks similar to those described above.

The company makes investments seeking to address these risks and vulnerabilities, including ongoing monitoring, updating networks and systems, and personnel awareness training of potential cyber security and privacy threats to help ensure employees remain diligent in identifying potential risks. In addition, the company has deployed monitoring capabilities to support early detection, internal and external escalation, and effective responses to potential anomalies. As part of the company’s regular review of potential risks, the company analyzes emerging cyber security and privacy threats as well as the company’s plan and strategies to address them and presents them to senior management. Although the company has developed systems and processes that are designed to protect information and information systems and to prevent data loss and other security and privacy incidents, including systems and processes designed to reduce the impact of a security or privacy incident, such measures cannot provide absolute security. Such incidents, whether successful or unsuccessful, could result in the company incurring costs related to, for example, rebuilding internal systems, managing its brand and reputation, defending against litigation, responding to regulatory inquiries or actions, paying damages, or taking other remedial steps.

Also, global privacy legislation, enforcement, and policy activity are rapidly expanding and creating a complex compliance environment. The company’s actual or perceived failure to comply with federal, state, or international privacy related or data protection laws and regulations could result in proceedings against the company by governmental entities or others, as well as impact to its brand and reputation, as a result of which the company may suffer losses that could have a material adverse effect on its business.

Financial Risks

The company may not have adequate or cost-effective liquidity or capital resources.

The company requires cash or committed liquidity facilities for general corporate purposes, such as funding its ongoing working capital, acquisitions, and capital expenditure needs, as well as to refinance indebtedness. At December 31, 2021, the company had cash and cash equivalents of $222.2 million. In addition, the company currently has access to committed credit lines of $2.0 billion and a committed North America asset securitization program of $1.3 billion, of which the company had no outstanding borrowings at December 31, 2021. The company’s ability to satisfy its cash needs depends on its ability to generate cash from operations and to access the financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond its control.

The company may, in the future, need to access the financial markets to satisfy its cash needs. The company’s ability to obtain external financing is affected by various factors, including general financial market conditions and the company’s debt ratings. Further, any increase in the company’s level of debt or deterioration of its operating results may cause a reduction in its current debt ratings. Any downgrade in the company’s current debt rating or tightening of credit availability could impair the company’s ability to obtain additional financing or renew existing credit facilities on acceptable terms, if at all, negatively impact the price of the company’s common stock, increase its interest payments under existing debt agreements and have other negative implications on its business, many of which are beyond the company’s control. Under the terms of any additional external financing, the company may incur higher financing expenses and become subject to additional restrictions and covenants. For example, the company’s existing debt agreements contain restrictive covenants, including covenants requiring compliance with specified financial ratios, and a failure to comply with these or any other covenants may result in an event of default. An increase in the company’s financing costs or loss of access to cost-effective capital resources could have a material adverse effect on the company’s business.

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The agreements governing some of the company’s financing arrangements contain various covenants and restrictions that limit some of management’s discretion in operating the business and could prevent the company from engaging in some activities that may be beneficial to its business.

The agreements governing some of the company’s financings contain various covenants and restrictions that, in certain circumstances, could limit its ability to:

grant liens on assets;
make investments or certain acquisitions;
merge, consolidate, or transfer all or substantially all of its assets;
incur additional debt; or
engage in certain transactions with affiliates.

As a result of these covenants and restrictions, the company may be limited in how it conducts its business and may be unable to raise additional debt, compete effectively, or make investments.

Further, if an event of default under any of the company’s existing debt agreements occurred or became imminent, while the company could explore alternative sources of capital, whether debt or equity, such alternative sources may be more expensive than the costs it incurred under the company's existing credit facility. Further, the company may be unable to borrow additional amounts under the existing credit facility, and as a result may be unable to make acquisitions or fund share repurchases, and the lenders thereunder may be able to accelerate the company’s obligations under the debt agreement. This circumstance would have a material adverse effect on the company’s financial position and results of operations.

The company’s goodwill and identifiable intangible assets could become impaired, which could reduce the value of its assets and reduce its net income in the year in which the write-off occurs.

Goodwill represents the excess of the cost of an acquisition over the fair value of the assets acquired. The company also ascribes value to certain identifiable intangible assets, which consist primarily of customer relationships and trade names, among others, as a result of acquisitions. The company may incur impairment charges on goodwill or identifiable intangible assets if it determines that the fair values of the goodwill or identifiable intangible assets are less than their current carrying values. The company evaluates, on a regular basis, whether events or circumstances have occurred that indicate all, or a portion, of the carrying amount of goodwill or identifiable intangible assets may no longer be recoverable, in which case an impairment charge to earnings would become necessary.

Refer to Notes 1 and 3 of the Notes to the Consolidated Financial Statements and “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the impairment testing of goodwill and identifiable intangible assets.

A decline in general economic conditions, a substantial increase in market interest rates, and increase in income tax rates, or the company’s inability to meet long-term working capital or operating income projections could impact future valuations of the company’s reporting units, 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 were 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 America asset securitization program, and other outstanding borrowings.

General Risks

The company’s success depends upon its ability to attract, retain, motivate and develop key executive and employee talent and the strategies they develop and implement.

Any failure to attract, retain, motivate and develop key executive and employee talent may materially and adversely affect the company’s business, prospects, financial condition, and results of operations. The company’s success depends, to a significant extent, on the capability, expertise, and continued services of its key executives. The company relies on the expertise and experience of certain key executives in developing business strategies, business operations, and maintaining relationships with customers and suppliers. If the company were to lose any of its key executives, it may not be able to find a suitable replacement with comparable knowledge and experience in a timely manner, or if at all, at similar level of remuneration and other benefits.
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If the company fails to maintain an effective system of internal controls or discovers material weaknesses in its internal controls over financial reporting, it may not be able to report its financial results accurately or timely or detect fraud, which could have a material adverse effect on its business.

An effective internal control environment is necessary for the company to produce reliable financial reports, safeguard assets, and is an important part of its effort to prevent financial fraud. The company is required to annually evaluate the effectiveness of the design and operation of its internal controls over financial reporting. Based on these evaluations, the company may conclude that enhancements, modifications, or changes to internal controls are necessary or desirable. While management evaluates the effectiveness of the company’s internal controls on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure in human judgment. In addition, control procedures are designed to reduce rather than eliminate financial statement risk. If the company fails to maintain an effective system of internal controls, or if management or the company’s independent registered public accounting firm discovers material weaknesses in the company’s internal controls, it may be unable to produce reliable financial reports or prevent fraud, which could have a material adverse effect on the company’s business. In addition, the company may be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NYSE. Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the company’s consolidated financial statements, which could cause the market price of its common stock to decline or limit the company’s access to capital.

General business conditions are vulnerable to the effects of epidemics and pandemics, such as the COVID-19 pandemic, which could materially disrupt the company’s business and have a negative impact on the company’s financial results and financial condition.

The company is vulnerable to the general economic effects of epidemics, pandemics and other public health crises, such as the COVID-19 pandemic. The global COVID-19 pandemic continues to create significant macroeconomic uncertainty, volatility and disruption, including supply constraints, extended lead times, and unpredictability across many markets. Supply chain constraints are being caused by shortages in electronics components markets and supply chain logistical issues resulting in extended lead times and unpredictability. Also, there has been a substantial curtailment of travel and business activities due to COVID-19, which has caused and may continue to cause significant disruptions to the U.S. and global economy. The extent to which COVID-19 and ensuing challenges such as supply chain constraints will continue to impact the company’s results will depend primarily on future developments, which are highly uncertain and cannot be predicted with confidence, including the severity and duration of the crisis, the speed and effectiveness of vaccine and treatment developments and deployment, the impact of vaccine and other mandates, potential mutations of COVID-19, and the impact of actions taken and that will be taken to contain COVID-19 or treat its impact, among others. For example, COVID-19 or other epidemics or pandemics may result in the company having to limit operations, rely on personnel working from home, or implement additional restrictions as a result of widespread government restrictions, any of which may negatively impact productivity or disrupt, delay or otherwise adversely impact the company's business. Remote working could increase the company’s cyber security risk. In addition, a U.S. or global recession or a banking crisis triggered by the COVID-19 pandemic could have a material adverse effect on the company’s business, financial results and financial condition, including by reducing the demand for its products and services, reducing the access to its supplies, increasing customer defaults, reducing its access to capital, and reducing the value of its common stock.

Item 1B. Unresolved Staff Comments.

None.

Item 2.    Properties.

The company has executive offices located in Centennial, Colorado under a long-term lease expiring in 2033. The company leases eight major warehouses and logistics centers with approximately 2.7 million square feet of space located in Reno, Nevada, Phoenix, Arizona, Hong Kong, Shenzhen, China, and two warehouses in Venlo, Netherlands. The company has 35 smaller distribution centers with approximately 904 thousand square feet of space located throughout the Americas, EMEA, and Asia-Pacific regions. The company believes its facilities are well maintained and suitable for company operations, and does not anticipate significant difficulty in renewing its leases as they expire or securing replacement facilities.

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Item 3.    Legal Proceedings.

See Note 15, Contingencies, to the consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding certain legal proceedings in which the company is involved.

Item 4.    Mine Safety Disclosures.

Not applicable.
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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

The company's common stock is listed on the NYSE (trading symbol: “ARW”).

Record Holders

On February 3, 2022, there were approximately 1,306 shareholders of record of the company's common stock.

Equity Compensation Plan Information

The following table summarizes information, as of December 31, 2021, relating to the Omnibus Incentive Plan, which was approved by the company's shareholders and under which cash-based awards, non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units, covered employee annual incentive awards, and other stock-based awards may be granted.
Plan CategoryNumber of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and RightsWeighted-Average Exercise Price of Outstanding Options, Warrants and RightsNumber of Securities Remaining Available for Future Issuance
Equity compensation plans approved by security holders2,034,571 $80.50 6,209,975 
Total2,034,571 $80.50 6,209,975 

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Performance Graph

The following graph compares the performance of the company's common stock for the periods indicated with the performance of the Standard & Poor's MidCap 400 Index (“S&P 400 Stock Index”) and the average performance of a group consisting of the company's peer companies (“Peer Group”) on a line-of-business basis. During 2021, the companies included in the Peer Group are Avnet, Inc., CDW Corp., Celestica Inc., Flex Ltd., HP Enterprise Co., HP Inc., Jabil Inc., TD Synnex, and WESCO International, Inc. During 2021, in order to diversify the company's Peer Group and better measure our relative financial performance, CDW Corp., HP Enterprises Co., HP Inc., and TD Synnex were added to the Peer Group. In the year of change, the company is also showing the Peer Group used in the 2020 Form 10-K before the changes in 2021 (“2020 Peer Group”) for comparative purposes. The graph assumes $100 invested on December 31, 2016 in the company, the S&P 400 MidCap Stock Index, the Peer Group, and the 2020 Peer Group. Total return indicies reflect reinvestment of dividends and are weighted on the basis of market capitalization at the time of each reported data point.

arw-20211231_g1.jpg
201620172018201920202021
Arrow Electronics10011397119136188
Peer Group100120115155170260
S&P 400 Midcap Stock Index100116103130148185
2020 Peer Group10010673111130181



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Issuer Purchases of Equity Securities

The following table shows the share-repurchase activity for the quarter ended December 31, 2021 (in thousands except share and per share data):
MonthTotal
Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Program
Approximate
Dollar Value of
Shares that May
Yet be
Purchased
Under the
Program (a)
October 3 through October 30, 2021424,409 $117.81 424,409 $363,468 
October 31 through November 27, 2021666,822 125.93 666,822 279,494 
November 28 through December 31, 2021923,308 125.66 923,308 763,468 
Total2,014,539  2,014,539  
(a)During 2021, the company was authorized to purchase up to $1,200,000 of its common stock under the share-repurchase program announced in July and December in amounts of $600,000. Of the newly authorized shares available for repurchase, $436,532 has been utilized, while the $763,468 in the table represents the remaining amount available for repurchase under the program as of December 31, 2021.

Item 6.    [Reserved].

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This section of the Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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, 2020.

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: potential adverse effects of the ongoing global COVID-19 pandemic, including actions taken to contain or mitigate the impact of COVID-19, 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, 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, and the company's ability to generate 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 accounting principles generally accepted in the United States (“GAAP”), the company also discloses certain non-GAAP financial information, including:

Non-GAAP sales and non-GAAP gross profit exclude the impact of changes in foreign currencies (referred to as “changes in foreign currencies”) by re-translating prior period results at current period foreign exchange rates and the impact of the wind down of the company’s personal computer and mobility asset disposition business (referred to as “wind down”).
Non-GAAP operating expenses excludes restructuring, integration, and other charges, AFS notes receivable recoveries related to the Arrow Financing Solutions (“AFS”) business (referred to as “AFS notes receivable recoveries”), impairments of long-lived assets, the impact of changes in foreign currencies, and the impact of wind down.
Non-GAAP operating income excludes identifiable intangible asset amortization, restructuring, integration, and other charges, AFS notes receivable recoveries, impairments of long-lived assets, and the impact of wind down.
Non-GAAP effective tax rate and non-GAAP net income attributable to shareholders exclude identifiable intangible asset amortization, restructuring, integration, and other charges, AFS notes receivable recoveries, net gains on investments, certain tax adjustments, impairments of long-lived assets, pension settlement gain, and the impact of wind down.

Management believes that providing this additional information is useful to the reader to better assess and understand the company’s operating performance, especially when comparing results with previous periods, primarily because management typically monitors the business adjusted for these items in addition to GAAP results. 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.

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 help industrial and commercial customers introduce innovative products, reduce their time to market, and enhance their overall competitiveness. The company has two business segments, the global components business segment and the global enterprise computing solutions (“ECS”) business segment. The company distributes electronic components to original equipment manufacturers (“OEMs”) and contract manufacturers (“CMs”) through its global components business segment and provides enterprise computing solutions to value-added resellers (“VARs”) and managed service providers
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(“MSPs”) through its global ECS business segment. For 2021, approximately 76% and 24% of the company's sales were from the global components business and the global ECS business, respectively.

The company's strategic initiatives include the following:

Offering a variety of value added demand creation services in the global components business, including 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 our suppliers and customers.
The company has a global supply chain services business that has grown organically within the global components business. It derives services revenue from providing supply chain services such as procurement, logistics, warehousing, and insights from data analytics.
Enabling customer cloud solutions through the global ECS business' 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 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.

Executive Summary

Consolidated sales for 2021 increased by 20.2% compared with the year-earlier period. The increase for 2021 was driven by a 28.6% increase in the global components business segment sales offset by a 0.6% decrease in global ECS business segment sales. Adjusted for the change in foreign currencies, non-GAAP consolidated sales increased 18.6% in 2021 compared with the year-earlier period.

The company reported net income attributable to shareholders of $1.1 billion in 2021 compared with a net income of $584.4 million in the year-earlier period. The following items impacted the comparability of the company's results for the years ended December 31, 2021 and 2020 (all amounts are before tax except for amounts related to the effects of tax changes):

restructuring, integration, and other charges of $10.9 million in 2021 and $13.3 million in 2020;
identifiable intangible asset amortization of $36.9 million in 2021 and $38.4 million in 2020;
impairments of long-lived assets of $4.5 million in 2021 and $7.2 million in 2020;
gains from wind down of business of $14.7 million in 2020;
AFS notes receivable recoveries of $1.8 million in 2020;
net gain on investments of $13.0 million in 2021 and $5.3 million in 2020;
tax benefit of $1.3 million in 2020 related to legislation changes and other non-recurring tax adjustments; and
pension settlement gain of $1.8 million in 2020.

Excluding the aforementioned items, non-GAAP net income attributable to shareholders increased to $1.1 billion in 2021 compared with $609.7 million in the year-earlier period. Net income in 2020 also included charges of approximately $32.7 million, net of tax, primarily related to foreign tax and other loss contingencies within the global ECS business.

Impact of the COVID-19 Pandemic

The global COVID-19 pandemic continues to create significant macroeconomic uncertainty, volatility and disruption, including supply constraints, extended lead times, and unpredictability across many markets. Supply chain constraints are being caused by shortages in electronics components markets and supply chain logistical issues resulting in extended lead times and unpredictability, which has impacted the business. Despite these challenges, to date the company has efficiently managed the global supply chain requirements of customers and suppliers, and as a result, during 2021 the company's global components business benefited from rising demand and higher prices for certain products leading to improved profit margins globally.

Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. The extent to which COVID-19 and related supply constraints will continue to impact the company’s results will depend primarily on future developments, including the severity and duration of the crisis, and the impact of actions
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taken and that will be taken to contain COVID-19 or treat its impact, among others. These future developments are highly uncertain and cannot be predicted with confidence, however, the company currently expects component supply to remain well below demand through the better part of 2022. The global economic impact from COVID-19 may adversely affect the company's results of operations in the future and may affect the credit condition of some customers, which could increase delays in customer payments and credit losses.

Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends. See discussion regarding the impacts of the COVID-19 pandemic included in Item 1A, Risk Factors, within this Form 10-K.

Impact on the first quarter of 2022

As a result of the timing of seasonal builds of electronic devices, and factoring our current estimation of supply chain constraints, we expect global components sales in the first quarter of 2022 to be slightly above fourth quarter 2021 sales.

Sales

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.

Following is an analysis of net sales by reportable segment for the years ended December 31 (in millions):
20212020Change
Consolidated sales, as reported*$34,477$28,67320.2 %
Impact of changes in foreign currencies
403
Non-GAAP consolidated sales$34,477$29,07618.6 %
Global components sales, as reported
$26,358$20,50328.6 %
Impact of changes in foreign currencies
261
Non-GAAP global components sales$26,358$20,76426.9 %
Global ECS sales, as reported
$8,120$8,171(0.6)%
Impact of changes in foreign currencies
142
Non-GAAP global ECS sales$8,120$8,313(2.3)%
* The sum of the components for sales, as reported, and non-GAAP sales may not agree to totals, as presented, due to rounding.

Consolidated sales for 2021 increased by $5.8 billion, or 20.2%, compared with the year-earlier period. The increase in 2021 was driven by an increase in global components business segment sales of $5.9 billion, or 28.6%, partially offset by a decrease in global ECS business segment sales of $51.2 million, or 0.6%, compared with the year-earlier period. Non-GAAP consolidated sales increased 18.6% in 2021, compared with the year-earlier period.

Compared with the year-earlier period, global components business segment sales for 2021 increased $5.9 billion, or 28.6%, as reported. The global components business capitalized on strong demand in all regions from higher sales volumes and favorable pricing in all regions. Sales in the Americas, EMEA, and Asia/Pacific regions increased 26.6%, 25.3%, and 31.6%, respectively. Increases during 2021 related to many product lines, however the company noted particularly strong demand in the industrial, communications, and data networking verticals. Changes in foreign exchange rates contributed favorably to results in the EMEA and Asia/Pacific regions during 2021. Non-GAAP global components sales increased 26.9% in 2021, compared with the year-earlier period.

Compared with the year-earlier period, global ECS business segment sales for 2020 decreased $51.2 million, or 0.6%, as reported. Decreases were primarily due to lower sales of IT solutions, including data center and hybrid cloud, in the Americas region, offset primarily by strengthening demand in the EMEA region for infrastructure software across the portfolio. Non-GAAP global components sales decreased 2.3% in 2021, compared with the year-earlier period.
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Gross Profit

Following is an analysis of gross profit for the years ended December 31 (in millions):
20212020
Change
Consolidated gross profit, as reported$4,202$3,19131.7 %
Impact of changes in foreign currencies
52
Impact of wind down(11)
Non-GAAP consolidated gross profit$4,202$3,23230.0 %
Consolidated gross profit as a percentage of sales, as reported12.2 %11.1 %110 bps
Non-GAAP consolidated gross profit as a percentage of non-GAAP sales12.2 %11.1 %110 bps

The company recorded gross profit of $4.2 billion for 2021 compared with $3.2 billion in the year-earlier period. Non-GAAP gross profit increased 30.0% in 2021 compared with the year-earlier period. Non-GAAP gross profit margins in 2021 increased by approximately 110 bps compared with the year-earlier period.

The increases in gross profit margins during 2021 related primarily to significant improvements in pricing and margins in the Americas and APAC regions, due in part to the current market conditions, product mix, and the global supply chain issues discussed above, as well as the company's ability to secure inventory to meet the strong demand. Growing demand in our global supply chain services offerings continued to have a positive impact on gross margins during 2021 compared with the year-earlier period.

The company is currently experiencing benefits to gross margins in the global components business due to the factors discussed above, which may not be representative of future trends or conditions. As such, the current gross margins may not be sustainable.

Selling, General, and Administrative Expenses and Depreciation and Amortization

Following is an analysis of operating expenses for the years ended December 31 (in millions):
20212020Change
Selling, general, and administrative expenses, as reported$2,435$2,08716.7 %
Depreciation and amortization, as reported1951893.2 %
Operating expenses+
$2,630$2,27615.6 %
Impact of changes in foreign currencies37
Impact of wind down4
AFS notes receivable recoveries2
Non-GAAP operating expenses*$2,630$2,31813.5%
Operating expenses as a percentage of sales7.6 %7.9 %(30)bps
Non-GAAP operating expenses as a percentage of non-GAAP sales7.6 %8.0 %(40)bps
+Operating expenses discussed here are presented before restructuring, integration, and other charges, and impairments of long-lived assets.
* The sum of the components for selling, general, and administrative expenses and depreciation and amortization, as reported, and non-GAAP operating expenses may not agree to totals, as presented, due to rounding.

Selling, general, and administrative expenses increased by $348.0 million, or 16.7%, in 2021, on a sales increase of 20.2%, compared with the year-earlier period. Selling, general, and administrative expenses, as a percentage of sales, was 7.1% and 7.3% for 2021 and 2020, respectively. Depreciation and amortization expense as a percentage of operating expenses was 7.4% for 2021 compared with 8.3% in the year-earlier period. Included in depreciation and amortization expense is identifiable intangible asset amortization of $36.9 million for 2021 compared to $38.4 million for the year-earlier period.

During 2021 and 2020, the company received $12.5 million and $2.4 million, respectively, in settlement funds in connection with certain class action claims (Refer to Note 15), which were recorded as a reduction of selling, general, and administrative expenses.

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Operating expenses as a percentage of sales during 2021 was 7.6% compared to 7.9% in the year-earlier period. The decline related primarily to operational efficiencies the company achieved to align costs to the business mix and the settlement funds discussed above. This was partially offset by investments to grow the company's sales, higher variable costs related to higher margin product and services sold during the year, and increased costs related to the global supply chain environment. Higher variable costs primarily related to increased incentive compensation tied to sales and other personnel costs, as well as costs related to warehousing and shipping product.

Non-GAAP operating expenses increased 13.5% compared with the year-earlier period. Non-GAAP operating expenses, as a percentage of non-GAAP sales, decreased 40 bps for 2021 compared with the year-earlier periods.

Restructuring, Integration, and Other Charges

Restructuring initiatives and integration costs are due to the company's continued efforts to lower costs, drive operational efficiency, integrate any acquired businesses, and the consolidation of certain operations, as necessary. The company recorded restructuring, integration, and other charges of $10.9 million and $13.3 million for 2021 and 2020, respectively.

As of December 31, 2021, the company does not anticipate there will be any material adjustments relating to the aforementioned restructuring and integration plans. Refer to Note 9, “Restructuring, Integration, and Other Charges” of the Notes to the Consolidated Financial Statements for further discussion of the company's restructuring and integration activities.

Operating Income

Following is an analysis of operating income for the years ended December 31 (in millions):
20212020Change
Consolidated operating income, as reported$1,557$89574.0 %
Identifiable intangible asset amortization3738
Restructuring, integration, and other charges1113
AFS notes receivable recoveries(2)
Impairments47
Impact of wind down(15)
Non-GAAP consolidated operating income*$1,609$93771.7 %
Consolidated operating income as a percentage of sales, as reported4.5 %3.1 %140 bps
Non-GAAP consolidated operating income, as a percentage of sales4.7 %3.3 %140 bps
* The sum of the components for non-GAAP consolidated operating income may not agree to totals, as presented, due to rounding.

The company recorded operating income of $1.6 billion, or 4.5% of sales, in 2021 compared with operating income of $894.5 million, or 3.1% of sales, in the year-earlier period. Non-GAAP operating income was $1.6 billion, or 4.7% of sales, in 2021 compared with non-GAAP operating income of $936.9 million, or 3.3% of sales, in the year-earlier period. Non-GAAP operating income increased 71.7% compared with the year-earlier period, on a sales increase of 20.2%.

Operating income, as a percentage of sales, increased 140 bps for 2021 primarily due to increases in sales volumes and prices from the global components business. The increase in operating margins are also impacted by the reserves and other adjustments related to foreign tax and other loss contingencies recorded within the global ECS business during the first quarter of 2020 (Refer to Note 15). These reserves are principally associated with transactional taxes on activity from several prior years, not significant to any one year. During 2021, changes in foreign currencies had a positive impact on operating income of $14.6 million when compared to the year-earlier period.

Interest and Other Financing Expense, Net

The company recorded net interest and other financing expense of $131.7 million for 2021, compared with $137.2 million in the year-earlier period. The decrease for 2021 primarily related to lower borrowings and interest rates on short term credit facilities, offset partially by decreased interest income. The decrease in interest income was primarily attributable to lower average cash balances and lower interest rates within the company's cash pooling arrangements.

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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 deviation from the non-GAAP effective tax rate for the years ended December 31:
20212020
Effective income tax rate 22.7 %22.8 %
Identifiable intangible asset amortization0.1 %0.1 %
Restructuring, integration, and other charges— %(0.3)%
Impairments— %0.1 %
Impact of tax legislation changes— %0.1 %
Non-GAAP effective income tax rate*22.7 %22.9 %
* 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 to 22.7% for 2021 from 22.8% for 2020 was primarily driven by changes in the mix of tax jurisdictions where taxable income is generated.

Net Income Attributable to Shareholders

Following is an analysis of net income attributable to shareholders for the years ended December 31 (in millions):
20212020
Net income attributable to shareholders, as reported$1,108$584
Identifiable intangible asset amortization*3638
Restructuring, integration, and other charges1113
Gain on investments, net(13)(5)
AFS notes receivable recoveries(2)
Impairments47
Impact of wind down(15)
Pension settlement gain(2)
Tax effect of adjustments above(10)(8)
Impact of tax legislation changes(1)
Non-GAAP net income attributable to shareholders**$1,137$610
* Identifiable intangible asset amortization also excludes amortization related to the noncontrolling interest.
** The sum of the components for non-GAAP net income attributable to shareholders may not agree to totals, as presented, due to rounding.

The company recorded net income attributable to shareholders of $1.1 billion for 2021, compared with $584.4 million in the year-earlier period. Non-GAAP net income attributable to shareholders was $1.1 billion for 2021, compared with $609.7 million in the year-earlier period.

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 and undrawn liquidity stands at over $3.3 billion in addition to $222.2 million of cash on hand at December 31, 2021. 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 our borrowings, and the return of cash to shareholders through share repurchases.
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The following table presents selected financial information related to liquidity at December 31 (in millions):
20212020Change
Working capital$5,709 $4,555 $1,154 
Cash and cash equivalents222 374 (152)
Short-term debt383 159 224 
Long-term debt2,244 2,098 146 

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 was 15.8% and 13.5% in 2021 and 2020, respectively. The change in working capital during 2021, compared to the year-earlier period, was primarily attributable to increases in inventory and increases in trade and accounts receivable as a result of significantly increased sales compared to 2020.

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, 2021 and 2020, the company had cash and cash equivalents of $222.2 million and $373.6 million, respectively, of which $211.6 million and $140.1 million, respectively, were held outside the United States. Liquidity is affected by many factors, some of which are based on normal ongoing operations of the company's business and some of which arise from fluctuations related to global economics and markets.

To achieve greater cash management agility and to further advance business objectives, during the fourth quarter of 2019, the company reversed its assertion to indefinitely reinvest a certain portion of its foreign earnings, of which approximately $2.2 billion are still available for distribution in future periods as of December 31, 2021, after distributions of $53.6 million and $349.0 million during 2021 and 2020, respectively. The company has not reversed its assertion to indefinitely reinvest the residual $2.5 billion of undistributed earnings of its foreign subsidiaries 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.

Revolving Credit Facilities and Debt

The following table summarizes the company’s credit facilities by category at December 31 (in millions):
Borrowing capacityOutstanding borrowingsAverage daily balance outstanding
2021202020212020
North American asset securitization program (a)$1,250 $— $— $516 $430 
Revolving credit facility (b)2,000 — — 10 21 
Commercial paper program (c)1,200 — — 316 48 
Uncommitted lines of credit200 — — — 
EMEA asset securitization program (d)453453 398 459 310 
(a) In March 2021, the company amended its asset securitization program and, among other things, increased its borrowing capacity from $1.20 billion to $1.25 billion and extended its term to mature in March 2024.
(b) In September 2021, the company amended its revolving credit facility and, among other things, extended its term to mature in September 2026.
(c) Amounts outstanding under the commercial paper program are backstopped by available commitments under the company’s revolving credit facility.
(d) The facility limit is €400 million and has been converted to U.S. dollars for the table above. Under the EMEA asset securitization program the company will continuously sell its interest in designated pools of trade accounts receivables 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. Refer to Note 5 “Accounts Receivables” of the Notes to the Consolidated Financial Statements for further discussion.

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The following table summarizes recent events impacting the company's capital resources (in millions):
ActivityDateNotional amount
3.50% notes, due April 2022*RepaidFebruary 2022$350 
2.95% notes, due February 2032IssuedDecember 2021500 
5.125% notes, due March 2021RepaidMarch 2021131 
6.00% notes, due April 2020RepaidApril 2020209 
*During February 2022, prior to the issuance of this Form 10-K, the company repaid $349.8 million principal amount of its 3.50% notes, due April 2022.

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 (in millions):
20212020Change
Net cash provided by operating activities$419 $1,360 $(941)
Net cash used for investing activities(60)(139)79 
Net cash used for financing activities(463)(1,227)764 

Cash Flows from Operating Activities

The net amount of cash provided by the company's operating activities during 2021 and 2020 was $419.0 million and $1.4 billion, respectively. The change in cash provided by operating activities during 2021, compared to the year-earlier period, related primarily to the timing of payments, increasing growth in customer demand in certain regions and a corresponding increase in working capital, including inventory, which is consistent with the company's historical counter-cyclical cash flow in which the company generates less cash flow in periods of increased demand.

Cash Flows from Investing Activities

The net amount of cash used for investing activities during 2021 and 2020 was $60.1 million and $138.8 million, respectively. The change in cash used for investing activities during 2021, compared to the year-earlier period, related primarily to proceeds from the sale of property plant and equipment, and the timing of capital expenditures related to the build out of distribution centers.

Cash Flows from Financing Activities

The net amount of cash used for financing activities during 2021 and 2020 was $463.3 million and $1.2 billion, respectively. The primary uses of cash were $911.5 million of repurchases of common stock, and $130.9 million of repayments of the principal amount of the company's 5.125% notes due March 2021. The primary sources of cash from financing activities during 2021 were $495.1 million of net proceeds related to the issuances of 2.95% notes during the fourth quarter of 2021, $47.0 million of proceeds from the exercise of stock options, and $24.9 million of payments upon the settlement of forward-starting interest rate swaps.

Capital Expenditures

Capital expenditures were $83.1 million and $123.6 million in 2021 and 2020, respectively. The company expects capital expenditures to be approximately $100 million for fiscal year 2022.

Share Repurchase Program

The company repurchased 7.7 million shares for $900 million and 6.4 million shares for $475 million in 2021 and 2020, respectively. As of December 31, 2021, approximately $763 million remained available for repurchase under the program. In July and December 2021, the company's Board of Directors approved a total of $1.2 billion additional share-repurchase programs. In July 2020, the company’s Board of Directors approved $600 million of additional share-repurchase programs. The stock-repurchase authorization does not have an expiration date and the pace of the repurchase activity will depend on factors
30


such as the company’s working capital needs, cash requirements for acquisitions and dividend payments, debt repayment obligations or repurchases of debt, stock price, and economic and market conditions. The stock-repurchase program may be accelerated, suspended, delayed or discontinued at any time subject to the approval by 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.

At December 31, 2021, the company had $2.6 billion of notes outstanding, $349.8 million of which mature in the next twelve months. The remaining debt has maturity dates in 2023 through 2032. During February 2022, prior to the issuance of this Form 10-K, the company repaid the $349.8 million principal amount of its 3.50% notes due April 2022. Refer to Note 6.
Amounts related to total interest on long-term debt at December 31, 2021 totaled $442.4 million, with $95.7 million expected to be paid within the next 12 months. Refer to Note 6.
Purchase obligations of $13.9 billion represent an estimate of non-cancelable inventory purchase orders and other contractual obligations related to information technology and facilities as of December 31, 2021 with $12.1 billion expected to be paid within the next 12 months and $1.6 billion in 2023. Many of these orders are backed by customer purchase orders with Arrow, that are also non-cancelable. Non-cancelable purchase orders increased over $8 billion compared with the year-earlier period primarily due to increased inventory purchase orders outstanding as a result of supply chain constraints and current market conditions and were entered into in the ordinary course of business. Both prices and lead times for orders have increased significantly and many vendors are limiting cancellations. Some of the inventory purchases above relate to sales where the company assumes an agency relationship in the transaction. Refer to discussion of the company's revenue recognition policy in Note 1.
Amounts related to future lease payments for operating lease obligations at December 31, 2021 totaled $330.4 million, with $76.8 million expected to be paid within the next 12 months. Refer to Note 14.

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:

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. The company has funded $116.7 million of the Arrow SERP obligation for the former corporate officers in a rabbi trust comprised primarily of life insurance policies and mutual fund assets. Projected benefit obligation at December 31, 2021 and 2020, was $105.5 million and $109.6 million, respectively. Refer to Note 13.
Environmental liabilities: The company is involved in certain ongoing environmental cleanup activities and legal proceedings, which are inherently uncertain with respect to outcomes, estimates and assumptions that it makes as of each reporting period, are inherently unpredictable. Refer to Note 15.
Hedging activities: The company has entered into certain forward-starting interest rate swaps derivatives which are designated hedges of future debt issuances as well as certain foreign exchange forward contracts designated as net investment hedges. As of December 31, 2021 and 2020, all such contracts were in an asset position in the amount of $62.4 million and $33.7 million, respectively. Refer to Note 7.
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.

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 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.

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The company believes the following critical accounting policies involve the more significant judgments and estimates used in the preparation of its consolidated financial statements:

Revenue Recognition

The company recognizes revenue as control of products is transferred to customers, which generally happens at the point of shipment. Sales are recorded net of discounts, rebates, and returns, which historically have not been material. The company allows its customers to return product for exchange or credit in limited circumstances. A liability is recorded at the time of sale for estimated product returns based upon historical experience. The company also provides volume rebates and other discounts to certain customers which are considered a variable consideration. A provision for customer rebates and other discounts is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience. Tariffs are included in sales as the company has enforceable rights to additional consideration to cover the cost of tariffs. Other taxes imposed by governmental authorities on the company's revenue producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.

Products sold by the company are generally delivered via shipment from the company's facilities, drop shipment directly from the vendor, or by electronic delivery of keys for software products. A portion of the company’s business involves shipments directly from its suppliers to its customers, in these transactions, the company is generally responsible for negotiating price both with the supplier and customer, payment to the supplier, establishing payment terms with the customer, product returns, and has risk of loss if the customer does not make payment. As the principal with the customer, the company recognizes revenue upon receiving notification from the supplier that the product was shipped.

The company has contracts with certain customers where the company’s performance obligation is to arrange for the products or services to be provided by another party. In these arrangements, as the company assumes an agency relationship in the transaction, revenue is recognized in the amount of the net fee associated with serving as an agent. These arrangements relate to the sale of supplier service contracts to customers where the company has no future obligation to perform under these contracts or the rendering of supply chain services including the delivery of inventory for which the company does not assume the risks and rewards of ownership.

No single customer accounted for more than 2% of the company’s 2021 consolidated sales. One supplier accounted for approximately 17% of the company's consolidated sales in 2021. No other single supplier accounted for more than 7% of the company's consolidated sales in 2021. The company believes that many of the products it sells are available from other sources at competitive prices. However, certain parts of the company's business, such as the company's global ECS business segment, rely on a limited number of suppliers with the strategy of providing focused support, extensive product knowledge, and customized service to suppliers, MSPs, and VARs. Most of the company's purchases are pursuant to distributor agreements, which are typically non-exclusive and cancelable by either party at any time or on short notice.

Trade Accounts and Notes Receivable

Trade accounts and notes receivable are reported at amortized cost, net of the allowance for credit losses in the consolidated balance sheets. The allowance for credit losses is a valuation account that is deducted from the receivables’ amortized cost basis to present the net amount expected to be collected. Receivables are written off against the allowance when management believes the receivable balance is confirmed to be uncollectible. Refer to Notes 1 and 5.

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.

Expected credit losses are estimated on a collective (pool) basis, when similar risk characteristics exist, based on customer credit ratings, which include both externally acquired as well as internally determined credit ratings. Receivables that do not share risk characteristics are evaluated on an individual basis.

Inventories

Inventories are stated at the lower of cost or net realizable value. Write-downs of inventories to market value are based upon contractual provisions governing price protection, stock rotation rights, and obsolescence, as well as assumptions about future demand and market conditions. If assumptions about future demand change and/or actual market conditions are less favorable
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than those projected by the company, additional write-downs of inventories may be required. Due to the large number of transactions and the complexity of managing the process around price protections and stock rotations, estimates are made regarding adjustments to the book cost of inventories. Actual amounts could be different from those estimated.

Income Taxes

Income taxes are accounted for under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the tax bases of assets and liabilities and their financial reporting amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The carrying value of the company’s deferred tax assets is dependent upon the company's ability to generate sufficient future taxable income in certain tax jurisdictions. Should the company determine that it is more likely than not that some portion or all of its deferred tax assets will not be realized, a valuation allowance to reduce the deferred tax assets is established in the period such determination is made. The assessment of the need for a valuation allowance requires considerable 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.

Contingencies and Litigation

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. The 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.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The company tests goodwill for impairment annually as of the first day of the fourth quarter and/or when an event occurs or circumstances change such that it is more likely than not that an impairment may exist. Examples of such events and circumstances that the company would consider include the following:

macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets;
industry and market considerations such as a deterioration in the environment in which the company operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for the company’s products or services, or a regulatory or political development;
cost factors such as increases in inventory, labor, or other costs that have a negative effect on earnings and cash flows;
overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;
other relevant entity-specific events such as changes in management, key personnel, strategy, or customers, contemplation of bankruptcy, or litigation;
events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more likely than not expectation of selling or disposing all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit; and
a sustained decrease in share price (considered in both absolute terms and relative to peers).

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Goodwill is tested at a level of reporting referred to as “the reporting unit.” The company’s reporting units are defined as each of the three regional businesses within the global components business segment, which are the Americas, EMEA, and Asia/Pacific, each of the two regional businesses within the global ECS business segment, which are North America and EMEA, and eInfochips, which is part of the global components business segment. Within the global components business segment, the Asia/Pacific reporting unit's goodwill was previously fully impaired.

An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary. The company has elected not to perform the qualitative assessment and performed the quantitative goodwill impairment test. The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. 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 shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

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 cash flow, perpetual growth rates, income tax rates, and long-term discount rates, among others, all of which require significant judgments by management. Actual results may differ from those assumed in the company’s forecasts. 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 2021, and 2020, the company’s annual impairment testing did not indicate impairment at any of the company’s reporting units.

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.

As of December 31, 2021, the company has $2.1 billion of goodwill, of which approximately $602.6 million and $83.3 million was allocated to the Americas and EMEA reporting units within the global components business segment, respectively, $784.4 million and $413.0 million was allocated to the North America and EMEA reporting units within the global ECS business segment, respectively, and $197.1 million was allocated to the eInfochips reporting unit. As of the date of the company's 2021 annual impairment test, the fair value of all reporting units exceeded their carrying values by more than 30%. (See Note 3).

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The company is exposed to market risk from changes in foreign currency exchange rates and interest rates.

Foreign Currency Exchange Rate Risk

The company, as a large global organization, faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could materially impact the company’s financial results in the future. The company’s primary exposure relates to transactions in which the currency collected from customers is different from the currency utilized to purchase the product sold in Europe, the Asia-Pacific region, Canada, and Latin America. The company’s policy is to hedge substantially all such currency exposures for which natural hedges do not exist. Natural hedges exist when purchases and sales within a specific country are both denominated in the same currency and, therefore, no exposure exists to hedge with foreign exchange forward, option, or swap contracts (collectively, the “foreign exchange contracts”). In many regions in Asia, for example, sales and purchases are primarily denominated in U.S. dollars, resulting in a “natural hedge.” Natural hedges exist in most countries in which the company operates, although the percentage of natural offsets, as compared with offsets that need to be hedged by foreign exchange contracts, will vary from country to country. 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 are 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
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contracts designated as a net investment hedge at December 31, 2021 and 2020, was $1.1 billion and $914.9 million, respectively.

The translation of the financial statements of the non-United States operations is impacted by fluctuations in foreign currency exchange rates. The change in consolidated sales and operating income was impacted by the translation of the company's international financial statements into U.S. dollars. This resulted in increased sales and operating income of $403.0 million and $14.6 million, respectively, for 2021, compared with the year-earlier period, based on 2020 sales and operating income at the average rate for 2021. Sales and operating income would decrease by approximately $681.4 million and $30.5 million, respectively, if average foreign exchange rates had declined by 10% against the U.S. dollar in 2021. These amounts were determined by considering the impact of a hypothetical foreign exchange rate on the sales and operating income of the company's international operations.

Interest Rate Risk

The company's interest expense, in part, is sensitive to the general level of interest rates in North America, Europe, and the Asia-Pacific region. The company historically has managed its exposure to interest rate risk through the proportion of fixed-rate and floating-rate debt in its total debt portfolio. Additionally, the company utilizes interest rate swaps in order to manage its targeted mix of fixed- and floating-rate debt.

At December 31, 2021, substantially all of the company's debt was subject to fixed rates. During 2021, the average outstanding balance on the company’s floating rate debt was $1.3 billion, and a one percentage point change in average interest rates would have caused net interest and other financing expense during 2021 to increase by $13.0 million. This was determined by considering the impact of a hypothetical interest rate on the company’s average floating rate outstanding variable debt. This analysis does not consider the effect of the level of overall economic activity that could exist. In the event of a change in the level of economic activity, which may adversely impact interest rates, the company could likely take actions to further mitigate any potential negative exposure to the change. However, due to the uncertainty of the specific actions that might be taken and their possible effects, the sensitivity analysis assumes no changes in the company’s financial structure.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. In January 2021, the ICE Benchmark Administration extended the cessation date for most LIBOR tenors to June 30, 2023. The company has a North American asset securitization program, revolving credit facility, certain lines of credit, and interest rate swaps that are indexed to USD-LIBOR. At the time LIBOR is discontinued, the interest rates in these contracts will be based on a fallback reference rate specified in the applicable documentation governing such debt or swaps or as otherwise agreed upon. Such an event would not affect the company's ability to borrow or maintain already outstanding borrowings or swaps, but the alternative reference rate could be higher and more volatile than LIBOR. The company continues to monitor developments by the ARRC and the potential impact of LIBOR changes on our business.

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Item 8.    Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Arrow Electronics, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Arrow Electronics, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 11, 2022 expressed an unqualified opinion thereon.

Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of net realizable value adjustments to inventories for excess or obsolescence
Description of the Matter
At December 31, 2021, the Company’s inventories were $4.2 billion. As discussed in Note 1 to the consolidated financial statements, 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 forecasted sales, contractual supplier protection and stock rotation privileges, and the age of inventories.
Auditing management’s lower of cost or net realizable value determination for excess or obsolete inventories was especially challenging and highly judgmental because of the estimation uncertainty in determining demand for aging inventory and future market conditions, after considering supplier protection provisions. Inventories not supported by forecasted sales orders or stock rotation privileges are written down to lower of cost or net realizable value based on the age of the inventories and inventory turnover.
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How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s determination of the lower of cost or net realizable value for excess and obsolete inventories. For example, we tested controls over management’s review of excess and obsolete inventories which includes their review of the assumptions supporting current product demand, supplier protections, evaluation of aging of inventories and consideration of inventory turnover.

Our audit procedures to test the net realizable value adjustments to inventories for excess or obsolescence included, among others, testing the completeness and accuracy of the underlying data used in management’s assessment. We evaluated the reasonableness of management’s assumptions by performing a retrospective review of the prior year assumptions to actual activity, including write-off history. We evaluated the appropriateness and consistency of management’s methods and assumptions used in developing their estimates around forecasted sales and expected stock rotation privileges. We tested the aging of inventories. We held discussions with senior financial and operating management to determine whether any strategic or operational changes in the business would impact expected demand or related carrying value of inventory. We assessed the reasonableness of management’s excess and obsolescence assumptions by comparing those assumptions to historical data and trends, as well as reviewing such assumptions for management bias. We considered macroeconomic trends within the industry, including trends that could impact the movement of the products provided by the Company. We performed procedures to compare recent sales transactions or market data to cost of inventories to assess that the carrying value of inventories was the lower of cost or net realizable value.
Evaluation of Americas Components and eInfochips Goodwill for Impairment
Description of the Matter
At December 31, 2021, the Company’s consolidated goodwill was $2.1 billion. As discussed in Note 3 to the consolidated financial statements, goodwill is tested for impairment annually as of the first day of the fourth quarter, or more frequently if indicators of potential impairment exist. As of the first day of the fourth quarter, the Company performed its annual impairment test which did not result in any impairment of goodwill.

Auditing management’s annual impairment tests related to the Americas Components and eInfochips reporting units was especially challenging due to the complexity of forecasting the long-term cash flows of these businesses and the significant estimation uncertainty of the assumptions included within such forecasts. The significant estimation uncertainty was primarily due to the sensitivity of the reporting units’ fair value to changes in the underlying assumptions used in the income approach which include, among others, forecasted revenue, gross profit margins, operating income margins, forecasted working capital levels, and long-term growth and discount rates. These significant assumptions are inherently uncertain and require a high degree of estimation and judgment based on an evaluation of historical performance, current industry and global economic and geo-political conditions, and the timing and success of the Company’s ability to implement strategic initiatives.
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How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above and controls over management’s review of its annual financial forecasts.

To test the estimated fair value of the Americas Components and eInfochips reporting units, we performed audit procedures that included, among others, involving a specialist to assist in assessing the Company’s fair value methodologies and its development and calculation of the long-term growth and discount rates. We assessed the reasonableness of the Company’s assumptions around forecasted revenue, gross profit margins, operating income margins, forecasted working capital levels, long-term growth and discount rates, and tax rates by comparing those assumptions to recent historical performance, current economic and industry trends, and annual financial forecasts presented to the Board of Directors and communicated to external analysts. We also assessed the reasonableness of estimates included in the Company’s annual financial forecast by evaluating how such assumptions compared to economic, industry, and peer expectations. We evaluated management’s historical accuracy of forecasting revenues, gross profit margin, operating income margins, and capital expenditures by comparing past forecasts to subsequent actual activity. We performed various sensitivity analyses around these significant assumptions to understand the impact on the fair value calculation and focused our testing accordingly. We evaluated the Company’s determination of its reporting units and tested the allocation of net assets to each of its reporting units. We also tested the company’s reconciliation of the fair value of its reporting units to the Company’s market value as of the impairment test dates.

/s/ Ernst & Young LLP

We have served as the Company's auditor since 1975.
Denver, Colorado
February 11, 2022


38


ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Years Ended December 31,
  202120202019
Sales$34,477,018 $28,673,363 $28,916,847 
Cost of sales30,274,653 25,482,233 25,618,466 
Gross profit4,202,365 3,191,130 3,298,381 
Operating expenses:
Selling, general, and administrative expenses
2,435,030 2,087,050 2,191,612 
Depreciation and amortization
195,120 189,058 189,790 
Loss on disposition of businesses, net (Note 2)  21,252 
Impairments (Notes 2 and 3)4,482 7,223 698,246 
Restructuring, integration, and other charges
10,911 13,288 89,785 
 2,645,543 2,296,619 3,190,685 
Operating income1,556,822 894,511 107,696 
Equity in earnings (losses) of affiliated companies3,508 (531)(2,765)
Gain on investments, net12,951 5,348 11,831 
Employee benefit plan expense, net(5,180)(2,859)(24,849)
Interest and other financing expense, net(131,727)(137,210)(203,743)
Income (loss) before income taxes1,436,374 759,259 (111,830)
Provision for income taxes325,906 172,795 88,338 
Consolidated net income (loss)1,110,468 586,464 (200,168)
Noncontrolling interests2,271 2,026 3,919 
Net income (loss) attributable to shareholders$1,108,197 $584,438 $(204,087)
Net income (loss) per share:   
Basic
$15.29 $7.49 $(2.44)
Diluted
$15.10 $7.43 $(2.44)
Weighted-average shares outstanding: 
Basic
72,472 77,992 83,568 
Diluted
73,385 78,635 83,568 

See accompanying notes.
 
 
39


ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Years Ended December 31,
202120202019
Consolidated net income (loss)$1,110,468 $586,464 $(200,168)
Other comprehensive income (loss):
Foreign currency translation adjustment and other, net of taxes(133,106)185,952 19,948 
Unrealized gain (loss) on foreign exchange contracts designated as net investment hedges, net of taxes14,452 (13,488)10,368 
Unrealized gain (loss) on interest rate swaps designated as cash flow hedges, net of taxes21,538 (9,000)(7,787)
Employee benefit plan items, net of taxes7,150 (2,864)14,035 
Other comprehensive income (loss)(89,966)160,600 36,564 
Comprehensive income (loss)1,020,502 747,064 (163,604)
Less: Comprehensive income (loss) attributable to noncontrolling interests(923)5,300 3,245 
Comprehensive income (loss) attributable to shareholders$1,021,425 $741,764 $(166,849)

See accompanying notes.

40


ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
December 31,
 20212020
ASSETS 
Current assets: 
Cash and cash equivalents$222,194 $373,615 
Accounts receivable, net11,123,946 9,205,343 
Inventories4,201,965 3,287,308 
Other current assets345,218 286,633 
Total current assets15,893,323 13,152,899 
Property, plant, and equipment, at cost:  
Land5,736 7,940 
Buildings and improvements186,097 207,614 
Machinery and equipment1,523,919 1,553,371 
 1,715,752 1,768,925 
Less: Accumulated depreciation and amortization(1,032,941)(969,320)
Property, plant, and equipment, net682,811 799,605 
Investments in affiliated companies63,695 76,358 
Intangible assets, net195,029 233,819 
Goodwill2,080,371 2,115,469 
Other assets620,311 675,761 
Total assets$19,535,540 $17,053,911 
LIABILITIES AND EQUITY  
Current liabilities:  
Accounts payable$9,617,084 $7,937,889 
Accrued expenses1,326,386 1,034,361 
Short-term borrowings, including current portion of long-term debt382,619 158,633 
Total current liabilities11,326,089 9,130,883 
Long-term debt2,244,443 2,097,940 
Other liabilities624,162 676,136 
Commitments and contingencies (Notes 14 and 15)
Equity:  
Shareholders’ equity:  
Common stock, par value $1:
  
Authorized - 160,000 shares in both 2021 and 2020
  
Issued - 125,424 shares in both 2021 and 2020
125,424 125,424 
Capital in excess of par value
1,189,845 1,165,850 
Treasury stock (57,358 and 50,581 shares in 2021 and 2020, respectively), at cost
(3,629,265)(2,776,821)
Retained earnings
7,787,948 6,679,751 
    Accumulated other comprehensive loss(191,657)(104,885)
Total shareholders’ equity5,282,295 5,089,319 
Noncontrolling interests58,551 59,633 
Total equity5,340,846 5,148,952 
Total liabilities and equity$19,535,540 $17,053,911 
 
See accompanying notes. 
41


ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Years Ended December 31,
  202120202019
Cash flows from operating activities:
Consolidated net income (loss)$1,110,468 $586,464 $(200,168)
Adjustments to reconcile consolidated net income (loss) to net cash provided by operations:
Depreciation and amortization
195,120 189,058 189,790 
Amortization of stock-based compensation
36,117 35,288 41,070 
Equity in (earnings) losses of affiliated companies(3,508)531 2,765 
Deferred income taxes
24,749 29,713 (50,288)
Impairments4,482 7,223 698,246 
Gain on investments, net(12,833)(5,333)(11,462)
Loss on disposition of businesses, net  21,252 
Pension settlement loss  20,111 
Other
3,947 5,059 10,659 
Change in assets and liabilities, net of effects of acquired and disposed businesses:
Accounts receivable, net(2,109,159)(541,427)338,849 
Inventories
(960,605)244,325 383,058 
Accounts payable
1,766,912 760,883 (521,575)
Accrued expenses
391,941 86,484 (27,475)
Other assets and liabilities
(28,648)(38,425)(36,837)
Net cash provided by operating activities418,983 1,359,843 857,995 
Cash flows from investing activities:
Cash paid on disposition of businesses  (13,094)
Acquisition of property, plant, and equipment(83,051)(123,585)(143,191)
Proceeds from sale of property, plant, and equipment22,171