ARROW ELECTRONICS, INC. - Quarter Report: 2024 September (Form 10-Q)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information Relating to Forward-Looking Statements

This report includes “forward-looking statements,” as the term is defined under the federal securities laws. Forward-looking statements are those statements which are not statements of historical fact. These forward-looking statements can be identified by forward-looking words such as “expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “seeks,” “estimates,” and similar expressions. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: incurrence of additional charges not currently contemplated and failure to realize contemplated cost savings due to unanticipated events that may occur, including in connection with the implementation of our restructuring plan; unfavorable economic conditions; disruptions or inefficiencies in the supply chain; political instability and changes; impacts of military conflict and sanctions; industry conditions; changes in product supply, pricing and customer demand; competition; other vagaries in the global components and the global ECS markets; deteriorating economic conditions, including economic recession, inflation, tax rates, foreign currency exchange rates, or the availability of capital; the effects of natural or man-made catastrophic events; changes in relationships with key suppliers; increased profit margin pressure; changes in legal and regulatory matters; non-compliance with certain regulations, such as export, antitrust, and anti-corruption laws; foreign tax and other loss contingencies; breaches of security or privacy of business information and information system failures, including related to current or future implementations, integrations and upgrades; outbreaks, epidemics, pandemics, or public health crises; restructuring activities and impacts thereof; and the company’s ability to generate positive cash flow. For a further discussion of these and other factors that could cause the company’s future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q and the company’s most recent Annual Report on Form 10-K, as well as in other filings the company makes with the Securities and Exchange Commission. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any of the forward-looking statements.

Certain Non-GAAP Financial Information

In addition to disclosing financial results that are determined in accordance with GAAP, the company also discloses certain non-GAAP financial information in the sections below captioned “Sales”, “Gross Profit”, “Operating Expenses”, “Operating Income”, “Income Tax”, and “Net Income Attributable to Shareholders”. Refer to these sections below for reconciliations of non-GAAP financial measures to the most directly comparable reported GAAP financial measures. Non-GAAP financial information includes the following:

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Non-GAAP sales (referred to as “sales on a constant currency basis”) exclude the impact of changes in foreign currencies by retranslating prior period results at current period foreign exchange rates.

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Non-GAAP gross profit excludes inventory write downs (reversals) related to the wind down of a business within the global components reportable segment (“impact of wind down to inventory”) and impact of changes in foreign currencies.

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Non-GAAP operating expenses exclude identifiable intangible asset amortization, restructuring, integration, and other, and the impact of changes in foreign currencies.

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Non-GAAP operating income excludes identifiable intangible asset amortization, restructuring, integration, and other, and impact of wind down to inventory.

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Non-GAAP effective tax rate and non-GAAP net income attributable to shareholders exclude identifiable intangible asset amortization, restructuring, integration, and other, impact of wind down to inventory, loss on extinguishment of debt, gain (loss) on investments, net, and the impact of certain tax legislation changes.

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Management believes that providing this additional information is useful to the reader to better assess and understand the company’s operating performance and future prospects in the same manner as management, especially when comparing results with previous periods. Management typically monitors the business as adjusted for these items, in addition to GAAP results, to understand and compare operating results across accounting periods, for internal budgeting purposes, for short-term and long-term operating plans, and to evaluate the company’s financial performance. However, analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP. For a discussion of what is included within “Restructuring, integration, and other” and “Gain (loss) on investments, net” refer to the similarly captioned sections of this item below.

Overview

The company is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company has one of the world’s broadest portfolios of product offerings available from leading electronic components and enterprise computing solutions suppliers, coupled with a range of services, solutions and tools that enables its suppliers to distribute their technologies and help its industrial and commercial customers to source, build upon, and leverage these technologies to grow their businesses, reduce their time to market, and enhance their overall competitiveness. The company is a trusted partner in a complex value chain and is uniquely positioned through its electronics components and IT content portfolios to increase value for stakeholders. The company has two reportable segments, the global components reportable segment and the global ECS reportable segment. The company’s global components reportable segment, enabled by a comprehensive range of value-added capabilities and services, markets and distributes electronic components to OEMs and EMS providers. The company’s global ECS reportable segment is a leading value-added provider of comprehensive computing solutions and services. Its portfolio of computing solutions includes datacenter, cloud, security, and analytics solutions. Global ECS brings broad market access, extensive supplier relationships, scale, and resources to help its VARs and MSPs meet the needs of their end-users. For the third quarter of 2024, approximately 72% and 28% of the company’s sales were from the global components reportable segment and the global ECS reportable segment, respectively.

The company’s strategic initiatives include the following:

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Offering a variety of value-added services in the global components reportable segment, including demand creation, design, engineering, global marketing and integration services to promote the future sale of suppliers’ products, which generally lead to longer and more profitable relationships with its suppliers and customers.

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Providing global supply chain service offerings such as procurement, logistics, warehousing, and insights from data analytics within the global components reportable segment.

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Enabling customer cloud solutions through the global ECS reportable segments’ cloud marketplace and management platform, ArrowSphere, which helps VARs and MSPs to manage, differentiate, and scale their cloud businesses while providing the business intelligence that IT solution providers need to drive growth.

The company’s long-term financial objectives are to grow sales faster than the market, increase the markets served, grow profits faster than sales, generate earnings per share growth in excess of competitors’ earnings per share growth and market 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. The company also seeks to lower operating costs to improve profitability.

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Executive Summary


	Quarter Ended								Nine Months Ended
	September 28,			September 30,					September 28,			September 30,
(millions except per share data)	2024			2023			Change		2024			2023			Change
Consolidated sales	$	6,823		$	8,007		(14.8)	%	$	20,640		$	25,258		(18.3)	%
Global components sales		4,946			6,245		(20.8)	%		15,170			19,784		(23.3)	%
Global ECS sales		1,877			1,762		6.6	%		5,471			5,474		(0.1)	%
Gross profit margin		11.5	%		12.2	%	(70)	bps		12.1	%		12.5	%	(40)	bps
Non-GAAP gross profit margin		11.5	%		12.2	%	(70)	bps		12.1	%		12.5	%	(40)	bps
Operating income		175			340		(48.5)	%		573			1,154		(50.3)	%
Operating income margin		2.6	%		4.2	%	(160)	bps		2.8	%		4.6	%	(180)	bps
Non-GAAP operating income		215			379		(43.3)	%		728			1,222		(40.5)	%
Non-GAAP operating income margin		3.2	%		4.7	%	(150)	bps		3.5	%		4.8	%	(130)	bps
Net income attributable to shareholders		101			199		(49.4)	%		293			709		(58.7)	%
Earnings per share attributable to shareholders - diluted		1.88			3.53		(46.7)	%		5.42			12.28		(55.9)	%
Non-GAAP net income attributable to shareholders		128			233		(45.3)	%		410			757		(45.9)	%
Non-GAAP earnings per share attributable to shareholders - diluted	$	2.38		$	4.14		(42.5)	%	$	7.59		$	13.12		(42.1)	%

Business environment and other trends:

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During the third quarter and the first nine months of 2024, the global components reportable segment continued to experience a cyclical downturn characterized by elevated customer inventory levels, and a challenging global macroeconomic environment, contributing to lower demand for the company’s products. These trends could continue throughout 2024 and the duration and severity of the current downturn remain uncertain.

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Within the company’s global ECS reportable segment, in certain periods, changes in the mix of sales of IT solutions can impact the proportion of the company’s revenue that is recorded on a net basis compared to a gross basis. This is driven by the company’s responsibilities in the sale of various IT solutions, which is based on terms and conditions in place with its partners. These changes can increase or decrease sales during a period without a corresponding change in gross profit. Refer to Note 1 “Summary of Significant Accounting Policies” in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.

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On October 31, 2024, the company announced a multi-year restructuring plan to reduce costs and improve efficiencies. Refer to “Restructuring, Integration, and Other” section below.

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Results of Operations

Sales by reportable segment

Following is an analysis of the company’s sales by reportable segment:


	Quarter Ended						Nine Months Ended
	September 28,		September 30,				September 28,		September 30,
(millions)	2024		2023		Change		2024		2023		Change
Consolidated sales, as reported	$	6,823	$	8,007	(14.8)	%	$	20,640	$	25,258	(18.3)	%
Impact of changes in foreign currencies		—		37				—		(6)
Consolidated sales, constant currency	$	6,823	$	8,044	(15.2)	%	$	20,640	$	25,252	(18.3)	%

Global components sales, as reported	$	4,946	$	6,245	(20.8)	%	$	15,170	$	19,784	(23.3)	%
Impact of changes in foreign currencies		—		25				—		(24)
Global components sales, constant currency	$	4,946	$	6,270	(21.1)	%	$	15,170	$	19,760	(23.2)	%

Global ECS sales, as reported	$	1,877	$	1,762	6.5	%	$	5,471	$	5,474	(0.1)	%
Impact of changes in foreign currencies		—		12				—		18
Global ECS sales, constant currency	$	1,877	$	1,774	5.8	%	$	5,471	$	5,492	(0.4)	%

The sum of the components for sales, as reported, and sales on a constant currency basis may not agree to totals, as presented, due to rounding.

Reportable segment sales by geographic region

Following is an analysis of the company’s reportable segment sales by geographic region:


	Quarter Ended										Nine Months Ended
	September 28,				September 30,						September 28,				September 30,
	2024				2023						2024				2023
(millions)	Sales		% of Sales		Sales		% of Sales		Change		Sales		% of Sales		Sales		% of Sales		Change
Americas components sales	$	1,638	24.0	%	$	1,870	23.4	%	(12.4)	%	$	4,808	23.3	%	$	6,170	24.4	%	(22.1)	%
EMEA components sales		1,290	18.9	%		1,987	24.8	%	(35.1)	%		4,386	21.3	%		6,387	25.3	%	(31.3)	%
Asia/Pacific components sales		2,018	29.6	%		2,388	29.8	%	(15.5)	%		5,976	28.9	%		7,227	28.6	%	(17.3)	%
Global components sales	$	4,946	72.5	%	$	6,245	78.0	%	(20.8)	%	$	15,170	73.5	%	$	19,784	78.3	%	(23.3)	%

Americas ECS sales	$	1,033	15.1	%	$	1,016	12.7	%	1.7	%	$	2,905	14.1	%	$	3,015	12.0	%	(3.6)	%
EMEA ECS sales		844	12.4	%		746	9.3	%	13.2	%		2,566	12.4	%		2,460	9.7	%	4.3	%
Global ECS sales	$	1,877	27.5	%	$	1,762	22.0	%	6.5	%	$	5,471	26.5	%	$	5,474	21.7	%	(0.1)	%
Consolidated sales	$	6,823	100.0	%	$	8,007	100.0	%	(14.8)	%	$	20,640	100.0	%	$	25,258	100.0	%	(18.3)	%

The sum of the components for sales by geographic region and consolidated sales may not agree to totals, as presented, due to rounding.

During the third quarter and the first nine months of 2024, the global components reportable segment continued to experience a cyclical downturn characterized by elevated customer inventory levels, and a challenging global macroeconomic environment, contributing to lower demand for the company’s products. The decrease in sales compared to the year-earlier periods was primarily due to the following impacts:

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sales declines in the Americas region primarily due to decreased demand for most major verticals, particularly industrial and communications;

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sales declines in the EMEA region primarily due to decreased demand for industrial and transportation verticals;

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sales declines in the Asia/Pacific region primarily due to decreased demand for industrial and networking & communications verticals.

Within the global ECS reportable segment, growth in the EMEA region for the third quarter and first nine months of 2024, relative to the year-earlier periods, is primarily due to increased demand for business applications, infrastructure applications, and compute. During the third quarter of 2024, sales in the Americas region were driven by relative strength in the public sector and for cloud-related solutions, largely offset by softness in data storage, cyber security and data intelligence. During the first nine months of 2024, sales in the Americas region decreased primarily due to decreased demand for storage and security.

Substantially all of the company’s sales are made on an order-by-order basis, rather than through long-term sales contracts. As such, the nature of the company’s business does not provide for the visibility of material forward-looking information from its customers and suppliers beyond a few months.

Gross Profit

Following is an analysis of the company’s consolidated gross profit:


	Quarter Ended								Nine Months Ended
	September 28,			September 30,					September 28,			September 30,
(millions)	2024			2023			Change		2024			2023			Change
Gross profit, as reported	$	785		$	980		(19.9)	%	$	2,489		$	3,159		(21.2)	%
Impact of wind down to inventory		(2)			—					10			—
Impact of changes in foreign currencies		—			4					—			(3)
Non-GAAP gross profit	$	783		$	983		(20.4)	%	$	2,499		$	3,157		(20.8)	%
Gross profit as a percentage of sales, as reported		11.5	%		12.2	%	(70)	bps		12.1	%		12.5	%	(40)	bps
Non-GAAP gross profit as a percentage of sales		11.5	%		12.2	%	(70)	bps		12.1	%		12.5	%	(40)	bps

The sum of the components for non-GAAP gross profit may not agree to totals, as presented, due to rounding.

The decrease in gross profit related primarily to declining demand and gross profit margins for the third quarter and the first nine months of 2024.

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Global components gross profit margins decreased during the third quarter and the first nine months of 2024, compared with the year-earlier periods, due to product mix shifting toward lower margin products and regional mix shifting more towards the Asia/Pacific region. Global components supply chain services offerings continued to have a positive impact on gross margins.

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Global ECS gross profit margins decreased during the third quarter and the first nine months of 2024, compared with the year-earlier periods, due to softer margins in the Americas region as the company works to optimize the customer mix and supplier line card to better serve the mid-market.

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Operating Expenses

Following is an analysis of the company’s consolidated operating expenses:


	Quarter Ended								Nine Months Ended
	September 28,			September 30,					September 28,			September 30,
(millions)	2024			2023			Change		2024			2023			Change
Operating expenses, as reported	$	610		$	640		(4.7)	%	$	1,916		$	2,005		(4.5)	%
Identifiable intangible asset amortization		(7)			(8)					(22)			(24)
Restructuring, integration, and other		(34)			(31)					(122)			(44)
Impact of changes in foreign currencies		—			2					—			(1)
Non-GAAP operating expenses	$	568		$	602		(5.7)	%	$	1,771		$	1,936		(8.5)	%
Operating expenses as a percentage of sales		8.9	%		8.0	%	90	bps		9.3	%		7.9	%	140	bps
Non-GAAP operating expenses as a percentage of sales, constant currency		8.3	%		7.5	%	80	bps		8.6	%		7.7	%	90	bps

The sum of the components for non-GAAP operating expenses may not agree to totals, as presented, due to rounding.

Operating expenses decreased by $29.9 million for the third quarter of 2024 compared to the year-earlier period primarily due to the following:

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a decrease of $50.5 million in charges taken for allowance for credit losses;

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a decrease of $26.4 million in employee related costs, primarily due to cost reduction initiatives and lower sales incentives; partially offset by

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an increase of $62.2 million due to a legal settlement benefit recognized in connection with certain legal matters in 2023 with no similar items recorded in 2024.

Operating expenses decreased by $89.3 million for the first nine months of 2024 compared to the year-earlier period primarily due to the following:

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a decrease of $93.0 million in employee related costs, primarily due to cost reduction initiatives and lower sales incentives;

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a decrease of $86.8 million in charges taken for allowance for credit losses; partially offset by

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an increase of $77.6 million due to higher restructuring, integration and other charges (see discussion below); and

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an increase of $62.2 million due to a legal settlement benefit recognized in connection with certain legal matters in 2023 with no similar items recorded in 2024.

The changes discussed above related to the allowance for credit losses include charges of $21.9 million and $25.4 million recorded during the third quarter and first nine months of 2023, respectively, related to one customer in the global ECS reportable segment, of which $20.0 million was subsequently reversed upon recovery during the second quarter of 2024.

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Restructuring, Integration, and Other

Restructuring initiatives and integration costs are due to the company’s continued efforts to lower costs, drive operational efficiency, integrate acquired businesses, and consolidate certain operations, as necessary. The company recorded restructuring, integration, and other charges as follows:


	Quarter Ended				Nine Months Ended
	September 28,		September 30,		September 28,		September 30,
(millions)	2024		2023		2024		2023
Restructuring and integration charges	$	1	$	2	$	1	$	10
Other charges		34		30		121		34
Total	$	35	$	31	$	122	$	44

The sum of the components for restructuring, integration, and other may not agree to totals, as presented, due to rounding.

On October 31, 2024, in response to evolving business needs and as part of an initiative to optimize operating expenses, the company announced a multi-year restructuring plan (the “Operating Expense Efficiency Plan” or “the Plan”). The Plan is designed to improve operational efficiency through the following measures: (i) reorganizing and consolidating certain areas of the company’s operations to centralize functions and streamline resources, with a focus on more cost-efficient regions; (ii) enhancing warehouse and logistics operations; (iii) investing in information technology to support automation and process improvements; (iv) consolidating the company’s global real estate footprint; (v) reducing third-party spending; and (vi) winding down certain non-core businesses that are not aligned with the company’s strategic objectives. Under the Plan, the company expects to incur pre-tax restructuring charges of approximately $185.0 million, consisting of approximately $110.0 million of employee severance and other personnel cash expenditures; approximately $50.0 million of non-cash asset impairments, accelerated depreciation and inventory write-downs related to the wind-down of certain business operations; and approximately $25.0 million of other related cash expenditures. The company expects to substantially complete the Plan by the end of fiscal year 2026, subject to, among other things, local legal and consultation requirements.

As a result of the Plan, the company expects to reduce annual operating expenses by approximately $90.0 million to $100.0 million by the end of fiscal year 2026.

The estimate of the charges that the company expects to incur in connection with the Plan, and the timing thereof, are subject to a number of assumptions, including local legal requirements in various jurisdictions, and actual amounts may differ materially from estimates. In addition, the company may incur other charges not currently contemplated due to unanticipated events that may occur, including in connection with the implementation of the Plan.

Other Charges

For the third quarter and the first nine months of 2024, other charges included the following:

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charges of $20.3 million and $80.8 million for the third quarter and the first nine months of 2024, respectively, related to the termination of personnel as a part of operating expense reduction initiatives not related to exit or disposal activities;

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consulting costs of $11.2 million and $25.3 million for the third quarter and the first nine months of 2024, respectively, related to ongoing cost reduction initiatives; and

●

charges of $0.3 million and $6.8 million related to early lease terminations and related asset impairments.

For the third quarter and first nine months of 2023, other charges include $20.9 million and $23.3 million, respectively, related to an increase in environmental liabilities (refer to the heading “Environmental Matters” in Note L “Contingencies” of the Notes to Consolidated Financial Statements).

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Operating Income

Following is an analysis of the company’s consolidated operating income, and operating income for the company’s two reportable segments:


	Quarter Ended								Nine Months Ended
	September 28,			September 30,					September 28,			September 30,
(millions)	2024			2023			Change		2024			2023			Change
Consolidated operating income, as reported	$	175		$	340		(48.5)	%	$	573		$	1,154		(50.3)	%
Identifiable intangible asset amortization		7			8					22			24
Restructuring, integration, and other		34			31					122			44
Impact of wind down to inventory		(2)			—					10			—
Non-GAAP consolidated operating income	$	215		$	379		(43.3)	%	$	728		$	1,222		(40.5)	%
Consolidated operating income as a percentage of sales		2.6	%		4.2	%	(160)	bps		2.8	%		4.6	%	(180)	bps
Non-GAAP consolidated operating income as a percentage of sales		3.2	%		4.7	%	(150)	bps		3.5	%		4.8	%	(130)	bps

Global components operating income, as reported	$	189		$	379		(50.2)	%	$	624		$	1,178		(47.0)	%
Identifiable intangible asset amortization		6			7					19			20
Impact of wind down to inventory		(2)			—					10			—
Non-GAAP global components operating income	$	193		$	386		(50.0)	%	$	654		$	1,198		(45.4)	%
Global components operating income as a percentage of sales		3.8	%		6.1	%	(230)	bps		4.1	%		6.0	%	(190)	bps
Non-GAAP global components operating income as a percentage of sales		3.9	%		6.2	%	(230)	bps		4.3	%		6.1	%	(180)	bps

Global ECS operating income, as reported	$	76		$	55		38.4	%	$	250		$	222		12.5	%
Identifiable intangible asset amortization		1			1					3			4
Non-GAAP global ECS operating income	$	77		$	56		37.3	%	$	253		$	226		12.1	%
Global ECS operating income as a percentage of sales		4.0	%		3.1	%	90	bps		4.6	%		4.1	%	50	bps
Non-GAAP global ECS operating income as a percentage of sales		4.1	%		3.2	%	90	bps		4.6	%		4.1	%	50	bps

The sum of the components of consolidated operating income do not agree to totals, as presented, because unallocated corporate amounts are not included in the table above. Refer to Note M “Segment and Geographic Information” of the Notes to the Consolidated Financial Statements for further discussion.

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The decrease in consolidated operating income as a percentage of sales for the third quarter and the first nine months of 2024 relates primarily to the changes in sales, gross profit margins and operating expenses discussed above.

The decrease in operating income as a percentage of sales in the global components reportable segment for the third quarter and first nine months of 2024 relates primarily to lower sales, lower gross margins, and higher operating expenses as a percentage of sales. Higher operating expenses as a percentage of sales, when compared to the year earlier period, were partially due to $62.2 million in legal settlements recorded as a decrease to operating expense in third quarter of 2023 with no similar items recorded in 2024.

The increase in operating income as a percentage of sales in the global ECS reportable segment related primarily to a decrease in charges taken for the allowance for credit losses of $20.4 million and $48.1 million, respectively, primarily related to charges of $21.9 million and $25.4 million, recorded during the third quarter and first nine months of 2023, respectively, related to one customer, of which $20.0 million was subsequently reversed upon recovery for aged receivables that were collected during the second quarter of 2024.

Gain (Loss) on Investments, Net


	Quarter Ended				Nine Months Ended
	September 28,		September 30,		September 28,		September 30,
(millions)	2024		2023		2024		2023
Gain (loss) on investments, net	$	4	$	(6)	$	(1)	$	5

Gain (loss) on investments, net is primarily related to the changes in fair value of assets related to the Arrow SERP pension plan, which consist primarily of life insurance policies and mutual fund assets, as well as changes in the fair value of the company’s investment in Marubun Corporation, refer to Note H “Financial Instruments Measured at Fair Value” of the Notes to the Consolidated Financial Statements.

Interest and Other Financing Expense, Net

The company recorded net interest and other financing expense as follows:


	Quarter Ended				Nine Months Ended
	September 28,		September 30,		September 28,		September 30,
(millions)	2024		2023		2024		2023
Interest and other financing expense, net	$	(63)	$	(82)	$	(209)	$	(247)

The decreases in interest and other financing expenses, net for the third quarter and first nine months of 2024 compared to the year-earlier periods were primarily related to lower average daily borrowings on floating rate credit facilities. Refer to the section below titled “Liquidity and Capital Resources” for more information on changes in borrowings.

Income Tax

Income taxes for the interim periods presented have been included in the accompanying consolidated financial statements on the basis of an estimated annual effective tax rate. The determination of the consolidated provision for income taxes requires management to make certain judgments and estimates. Changes in the estimated level of annual pre-tax earnings, tax laws, and changes resulting from tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the company’s projections and assumptions are inherently uncertain, therefore, actual results could differ from projections.

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Following is an analysis of the company’s consolidated effective income tax rate:


	Quarter Ended				Nine Months Ended
	September 28,		September 30,		September 28,		September 30,
	2024		2023		2024		2023
Effective income tax rate	13.1	%	20.7	%	18.6	%	22.0	%
Identifiable intangible asset amortization	0.6	%	0.1	%	0.3	%	0.1	%
Restructuring, integration, and other	2.7	%	0.3	%	1.6	%	0.1	%
(Gain) loss on investments, net	(0.3)	%	0.1	%	—	%	—	%
Impact of wind down to inventory	(0.1)	%	—	%	0.1	%	—	%
Impact of tax legislation changes	—	%	—	%	—	%	(0.1)	%
Non-GAAP effective income tax rate	15.9	%	21.2	%	20.6	%	22.1	%

The sum of the components for non-GAAP effective income tax rate may not agree to totals, as presented, due to rounding.

The company’s effective tax rate deviates from the statutory U.S. federal income tax rate mainly due to the mix of foreign taxing jurisdictions in which the company operates and where its foreign subsidiaries generate taxable income, among other things. The decrease in the effective tax rate for the third quarter and the first nine months of 2024, compared to the year-earlier periods, is primarily driven by the level of taxable income and mix of tax jurisdictions where earnings are generated, decreases to uncertain tax positions, including a favorable tax audit settlement, taxation of stock-based compensation, and tax law changes.

Net Income Attributable to Shareholders

Following is an analysis of the company’s consolidated net income attributable to shareholders:


	Quarter Ended				Nine Months Ended
	September 28,		September 30,		September 28,		September 30,
(millions)	2024		2023		2024		2023
Net income attributable to shareholders, as reported	$	101	$	199	$	293	$	709
Identifiable intangible asset amortization*		7		8		22		23
Restructuring, integration, and other		34		31		122		44
(Gain) loss on investments, net		(4)		6		1		(5)
Impact of wind down to inventory		(2)		—		10		—
Loss on extinguishment of debt		—		—		2		—
Tax effect of adjustments above		(9)		(11)		(39)		(15)
Impact of tax legislation changes		—		—		—		1
Non-GAAP net income attributable to shareholders	$	128	$	233	$	410	$	757

The sum of the components for non-GAAP net income attributable to shareholders may not agree to totals, as presented, due to rounding.

* Identifiable intangible asset amortization excludes amortization attributable to the noncontrolling interest.

The decrease in net income attributable to shareholders in the third quarter and the first nine months of 2024 compared to the year-earlier periods, relates primarily to changes in sales, gross margins, interest and other financing expenses, net and income tax as discussed above.

Liquidity and Capital Resources

Management believes that the company’s current cash availability, its current borrowing capacity under its revolving credit facility and asset securitization programs, and its expected ability to generate future operating cash flows are sufficient to meet its projected cash flow needs for the next 12 months and the foreseeable future. The company’s current committed and undrawn liquidity stands at over $2.7 billion in addition to $248.0 million of cash on hand at September 28, 2024. The company also may issue debt or equity securities in the future and management believes the company will have adequate access to the capital markets, if needed. The company continually evaluates its liquidity requirements and would seek to amend its existing borrowing capacity or access the financial markets as deemed necessary.

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The company’s principal sources of liquidity are existing cash and cash equivalents, cash generated from operations and cash provided by its revolving credit facilities and debt. The company’s principal uses of liquidity include cash used in operations, investments to grow working capital, scheduled interest and principal payments on its borrowings, and the return of cash to shareholders through share repurchases.

The following table presents selected financial information related to liquidity:



	September 28,		December 31,
(millions)	2024		2023		Change
Working capital	$	6,864	$	7,355	$	(491)
Cash and cash equivalents		248		218		30
Short-term debt		910		1,654		744
Long-term debt		2,363		2,154		(209)

Working Capital

The company maintains a significant investment in working capital which the company defines as accounts receivable, net, plus inventories less accounts payable. The change in working capital during the first nine months of 2024 was primarily attributable to decreases in inventory.

Working capital as a percentage of sales, which is defined as working capital divided by annualized quarterly sales, increased to 25.1% for the third quarter of 2024, compared to 23.0% in the year-earlier period. The increase was primarily due to lower sales.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments, which are readily convertible into cash, with original maturities of three months or less. At September 28, 2024 and December 31, 2023, the company had cash and cash equivalents of $248.0 million and $218.1 million, respectively, of which $200.1 million and $160.0 million, respectively, were held outside the United States.

The company has $5.3 billion of undistributed earnings of its foreign subsidiaries which it deems indefinitely reinvested, and recognizes that it may be subject to additional foreign taxes and U.S. state income taxes, if it reverses its indefinite reinvestment assertion on these foreign earnings. The company also has $2.2 billion of foreign earnings that are not deemed permanently reinvested and are available for distribution in future periods as of September 28, 2024.

Revolving Credit Facilities and Debt

The following tables summarize the company’s credit facilities:


			Outstanding Borrowings
	Borrowing		September 28,		December 31,
(millions)	Capacity		2024		2023
North American asset securitization program	$	1,500	$	251	$	198
Revolving credit facility		2,000		—		—
Commercial paper program (a)		1,200		539		1,122
Uncommitted lines of credit		500		—		—

(a)	Amounts outstanding under the commercial paper program are backstopped by available commitments under the company’s revolving credit facility.

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	Average Daily Balance Outstanding
	Nine Months Ended				Effective Interest Rate
	September 28,		September 30,		September 28,		September 30,
(millions)	2024		2023		2024		2023
North American asset securitization program	$	603	$	1,161	5.34	%	5.82	%
Revolving credit facility		4		173	6.45	%	6.42	%
Commercial paper program		526		717	5.25	%	5.95	%
Uncommitted lines of credit		282		144	5.77	%	6.42	%

The company also has an EMEA asset securitization program under which it continuously sells its interest in designated pools of trade accounts receivable of certain of its subsidiaries in the EMEA region. Receivables sold under the program are excluded from “Accounts receivable, net” and no corresponding liability is recorded on the company’s consolidated balance sheets. During the first nine months of 2024 and 2023, the average daily balance outstanding under the EMEA asset securitization program was $408.9 million and $644.6 million, respectively.

As of September 28, 2024, and the date of issuance of the financial statements in this Quarterly Report on Form 10-Q, the company was out of compliance with certain operational covenants in its EMEA asset securitization program due to an administrative error. As a result, the participating banks have the right to declare the occurrence of an early amortization event, which would result in the cessation of further amounts being sold under the program. All participating banks have agreed to waivers and the parties are in the process of formalizing an amendment to the program which would return the company to compliance. Refer to Note E “Accounts Receivable” of the Notes to the Consolidated Financial Statements for further discussion.

The following table summarizes recent events impacting the company’s capital resources:


(millions)	Activity	Date	Notional Amount
3.25% notes, due September 2024	Repaid	September 2024	$	500
5.15% notes, due August 2029	Issued	August 2024	$	500
5.875% notes, due April 2034	Issued	April 2024	$	500
6.125% notes, due March 2026	Repaid	April 2024	$	500
Uncommitted lines of credit	Increase in Capacity	May 2023	$	300
4.50% notes, due March 2023	Repaid	March 2023	$	300
6.125% notes, due March 2026	Issued	March 2023	$	500

Refer to Note G “Debt” of the Notes to the Consolidated Financial Statements for further discussion of the company’s short-term and long-term debt and available financing.

Cash Flows

The following table summarizes the company’s cash flows by category for the periods presented:


	Nine Months Ended
	September 28,		September 30,
(millions)	2024		2023		Change
Net cash provided by operating activities	$	804	$	419	$	385
Net cash used for investing activities		(53)		(47)		(6)
Net cash used for financing activities		(755)		(215)		(541)

Cash Flows from Operating Activities

The net amount of cash provided by the company’s operating activities during the first nine months of 2024 and 2023 was $803.9 million and $418.7 million, respectively. The change in cash provided by operating activities during 2024, compared to the year-earlier period, relates primarily to the company’s historical counter-cyclical cash flow as the company generates cash flow in periods of lower demand due to reduced investments in working capital.

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Cash Flows from Investing Activities

The net amount of cash used for investing activities during the first nine months of 2024 and 2023 was $53.0 million and $46.8 million, respectively.

Cash Flows from Financing Activities

The net amount of cash used for financing activities was $755.4 million during the first nine months of 2024 compared to $214.7 million used for financing activities in the year-earlier period. The change in cash used for financing activities relates primarily to the repayment of debt and lower share repurchases during 2024.

Capital Expenditures

Capital expenditures for the third quarter of 2024 and 2023 were $70.2 million and $57.8 million, respectively. The company expects capital expenditures to be approximately $100.0 million for the fiscal year 2024.

Share-Repurchase Program

The company repurchased 1.6 million shares of its common stock for $200.0 million and 5.7 million shares of its common stock for $700.9 million in the first nine months of 2024 and 2023, respectively, under its share-repurchase program, excluding excise taxes. As of September 28, 2024, approximately $374.6 million remained available for repurchase under the share-repurchase program. The share-repurchase authorization does not have an expiration date and the pace of the repurchase activity will depend on factors such as the company’s working capital needs, cash requirements for acquisitions, debt repayment obligations or repurchases of debt, share price, and economic and market conditions. The share-repurchase program may be accelerated, suspended, delayed, or discontinued at any time subject to the approval of the company’s Board of Directors.

Contractual Obligations

The company has contractual obligations for short-term and long-term debt, interest on short-term and long-term debt, purchase obligations, operating leases, and other sources and uses of capital that are summarized in the sections titled “Contractual Obligations” and “Additional Capital Requirements and Sources” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Refer to the section above titled “Revolving Credit Facilities and Debt” for updates to the company’s short-term and long-term debt obligations. Refer to the section above titled “Restructuring, Integration, and Other” for updates related to discussion of planned restructuring costs. Refer to Note H “Financial Instruments Measured at Fair Value” of the Notes to Consolidated Financial Statements for further discussion on hedging activities. As of September 28, 2024, there were no other material changes to the contractual obligations of the company.

Critical Accounting Estimates

The company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. The company evaluates its estimates on an ongoing basis. The company bases its estimates on historical experience and on various other assumptions that are believed reasonable under the circumstances; the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes to the company’s critical accounting estimates for the first nine months of 2024. Refer to the section titled “Critical Accounting Estimates” in Part II, Item 7, Management’s Discussion and Analysis of

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Financial Condition and Results of Operations, in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Impact of Recently Issued Accounting Standards

See Note B “Impact of Recently Issued Accounting Standards” of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on the company’s consolidated financial position and results of operations.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in market risk for changes in foreign currency exchange rates and interest rates for the first nine months of 2024, from the information provided in Part II, Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The company’s management, under the supervision and with the participation of the company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the company’s disclosure controls and procedures as of September 28, 2024 (the “Evaluation”). Based upon the Evaluation, the company’s Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) were effective as of September 28, 2024.

Changes in Internal Control over Financial Reporting

There were no changes in the company’s internal control over financial reporting during the company’s most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

The information set forth under the heading “Environmental Matters” in Note L “Contingencies” in Notes to Consolidated Financial Statements in Item 1 Part I of this Report, is incorporated herein by reference.

Item 1A.Risk Factors

There have been no material changes to the company’s risk factors from those discussed in Part I, Item 1A - Risk Factors in the company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following table shows the share-repurchase activity for the quarter ended September 28, 2024:


					Approximate
				Total Number of	Dollar Value of
				Shares	Shares that May
	Total			Purchased as	Yet be
	Number of	Average		Part of Publicly	Purchased
	Shares	Price Paid		Announced	Under the
(thousands except share and per share data)	Purchased	per Share (a)		Program	Programs (b)
June 30 through July 27, 2024	—	$	—	—	$	425,032
July 28 through August 24, 2024	107,394		132.02	107,394		410,854
August 25 through September 28, 2024	269,234		133.05	269,234		374,557
Total	376,628			376,628

(a)	Average price paid per share excludes 1% excise tax on stock repurchases.

(b)

The company’s share-repurchase program does not have an expiration date. As of September 28, 2024, the total authorized dollar value of shares available for repurchase was $1.6 billion of which $1.2 billion has been utilized, and the $374.6 million in the table represents the remaining amount available for repurchase under the program.

Item 5.Other Information

Trading Arrangements

During the quarter ended September 28, 2024, none of the company’s directors or officers , , or a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408.

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Item 6.Exhibits



Exhibit Number		Exhibit

4(a)		Second Supplemental Indenture, dated as of August 21, 2024, by and between the Company and U.S. Bank Trust Company, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the company’s Current Report on Form 8-K dated August 21, 2024, Commission file no. 1-4482).

10(a)		Amendment No. 35, dated as of September 10, 2024, to the transfer and Administration Agreement dated March 21, 2001 (incorporated by reference to Exhibit 10.1 to the company’s Current Report on Form 8-K dated September 10, 2024, Commission file no. 1-4482).

31(i)(A)*		Certification of Chief Executive Officer pursuant to Rule 13A-14(a)/15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(i)(B)*		Certification of Chief Financial Officer pursuant to Rule 13A-14(a)/15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32(i)**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32(ii)**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*		Inline XBRL Document Set for the consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.

104*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*	: Filed herewith.

**	: Furnished herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ARROW ELECTRONICS, INC.

Date:	October 31, 2024	By:	/s/ Rajesh K. Agrawal
			Rajesh K. Agrawal
			Senior Vice President and Chief Financial Officer
			(Duly Authorized Officer and Principal Financial Officer)

			/s/ Yun Cho
			Yun Cho
			Vice President, Corporate Controller, and Chief Accounting Officer
			(Principal Accounting Officer)

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ARROW ELECTRONICS, INC. - Quarter Report: 2024 September (Form 10-Q)

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