Arrow Electronics, Inc 10-Q for FY2023 Q2
Arrow Electronics, Inc. (ARW)
10-Q
2023-08-03
For: 2023-07-01
View Original
Added on
April 08, 2026
About this 10-Q
Arrow Electronics, Inc filed this 10-Q on August 3, 2023, covering the quarter ended July 1, 2023 (FY2023 Q2).
Headline figures
Quarter ended July 1, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.51B
- down 10.0% from $9.46B a year earlier
- Net income
- $236.56M
- down 36.1% from net income of $370.33M a year earlier
- Diluted EPS
- $4.12
- down 25.6% from $5.54 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended July 1, 2023
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | ||||||||||||||||
| incorporation or organization) | Identification Number) | ||||||||||||||||
| (Zip Code) | |||||||||||||||||
| (Address of principal executive offices) | |||||||||||||||||
(Registrant’s telephone number, including area code)
No Changes
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of the exchange on which registered | ||||||||||||
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:
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
There were 55,662,614 shares of Common Stock outstanding as of July 27, 2023.
ARROW ELECTRONICS, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
| Quarter Ended | Six Months Ended | |||||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Selling, general, and administrative expenses | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Restructuring, integration, and other charges | ||||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Equity in earnings of affiliated companies | ||||||||||||||||||||||||||
| Gain (loss) on investments, net | ( | ( | ||||||||||||||||||||||||
| Employee benefit plan expense, net | ( | ( | ( | ( | ||||||||||||||||||||||
| Interest and other financing expense, net | ( | ( | ( | ( | ||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||||||||
| Consolidated net income | ||||||||||||||||||||||||||
| Noncontrolling interests | ||||||||||||||||||||||||||
| Net income attributable to shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income per share: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted-average shares outstanding: | ||||||||||||||||||||||||||
Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
See accompanying notes.
3
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| Quarter Ended | Six Months Ended | |||||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||||||
| Consolidated net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Other comprehensive (loss) income: | ||||||||||||||||||||||||||
| Foreign currency translation adjustment and other, net of taxes | ( | ( | ( | |||||||||||||||||||||||
| Unrealized (loss) gain on foreign exchange contracts designated as net investment hedges, net of taxes | ( | ( | ||||||||||||||||||||||||
| Unrealized gain on interest rate swaps designated as cash flow hedges, net of taxes | ||||||||||||||||||||||||||
| Employee benefit plan items, net of taxes | ( | ( | ||||||||||||||||||||||||
| Other comprehensive (loss) income | ( | ( | ( | |||||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||
| Less: Comprehensive (loss) income attributable to noncontrolling interests | ( | ( | ( | |||||||||||||||||||||||
| Comprehensive income attributable to shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
See accompanying notes.
4
ARROW ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
(Unaudited)
| July 1, 2023 | December 31, 2022 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable, net | ||||||||||||||
| Inventories | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant, and equipment, at cost: | ||||||||||||||
| Land | ||||||||||||||
| Buildings and improvements | ||||||||||||||
| Machinery and equipment | ||||||||||||||
| Less: Accumulated depreciation and amortization | ( | ( | ||||||||||||
| Property, plant, and equipment, net | ||||||||||||||
| Investments in affiliated companies | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued expenses | ||||||||||||||
| Short-term borrowings, including current portion of long-term debt | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Other liabilities | ||||||||||||||
| Equity: | ||||||||||||||
| Shareholders’ equity: | ||||||||||||||
Common stock, par value $ | ||||||||||||||
Authorized - | ||||||||||||||
Issued - | ||||||||||||||
Capital in excess of par value | ||||||||||||||
Treasury stock ( | ( | ( | ||||||||||||
Retained earnings | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Total shareholders’ equity | ||||||||||||||
| Noncontrolling interests | ||||||||||||||
| Total equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
See accompanying notes.
5
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six Months Ended | ||||||||||||||
| July 1, 2023 | July 2, 2022 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Consolidated net income | $ | $ | ||||||||||||
| Adjustments to reconcile consolidated net income to net cash provided by (used for) operations: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Amortization of stock-based compensation | ||||||||||||||
| Equity in earnings of affiliated companies | ( | ( | ||||||||||||
| Deferred income taxes | ( | ( | ||||||||||||
| (Gain) loss on investments, net | ( | |||||||||||||
| Other | ||||||||||||||
| Change in assets and liabilities: | ||||||||||||||
| Accounts receivable, net | ( | |||||||||||||
| Inventories | ( | ( | ||||||||||||
| Accounts payable | ( | ( | ||||||||||||
| Accrued expenses | ( | |||||||||||||
| Other assets and liabilities | ( | |||||||||||||
| Net cash provided by (used for) operating activities | ( | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Acquisition of property, plant, and equipment | ( | ( | ||||||||||||
| Proceeds from collections of notes receivable | ||||||||||||||
| Proceeds from settlement of net investment hedge | ||||||||||||||
| Net cash used for investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Change in short-term and other borrowings | ||||||||||||||
| (Repayments of) proceeds from long-term bank borrowings, net | ( | |||||||||||||
| Net proceeds from note offering | ||||||||||||||
| Redemption of notes | ( | ( | ||||||||||||
| Proceeds from exercise of stock options | ||||||||||||||
| Repurchases of common stock | ( | ( | ||||||||||||
| Settlement of forward-starting interest rate swap | ||||||||||||||
| Other | ( | ( | ||||||||||||
| Net cash (used for) provided by financing activities | ( | |||||||||||||
| Effect of exchange rate changes on cash | ( | |||||||||||||
| Net increase in cash and cash equivalents | ||||||||||||||
| Cash and cash equivalents at beginning of period | ||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||||||||
See accompanying notes.
6
ARROW ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(Unaudited)
| Common Stock at Par Value | Capital in Excess of Par Value | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Consolidated net income | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | |||||||||||||||||||||||||||||||||||||||||
| Shares issued for stock-based compensation awards | ( | ||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at April 1, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Consolidated net income | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | |||||||||||||||||||||||||||||||||||||||||
| Shares issued for stock-based compensation awards | ( | ||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Distributions | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
7
| Common Stock at Par Value | Capital in Excess of Par Value | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Consolidated net income | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | |||||||||||||||||||||||||||||||||||||||||
| Shares issued for stock-based compensation awards | ( | ||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at April 2, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Consolidated net income | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | |||||||||||||||||||||||||||||||||||||||||
| Shares issued for stock-based compensation awards | ( | ||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Distributions | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at July 2, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
See accompanying notes.
8
Note A – Basis of Presentation
The accompanying consolidated financial statements of Arrow Electronics, Inc. (the "company") were prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations at, and for the periods presented. The consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.
These consolidated financial statements do not include all of the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with the company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2022, as filed in the company’s Annual Report on Form 10-K.
Quarter End
The company operates on a quarterly calendar that closes on the Saturday closest to the end of the calendar quarter, except for the fourth quarter, which closes on December 31, 2023.
Note B – Impact of Recently Issued Accounting Standards
Note C – Goodwill and Intangible Assets
Goodwill of companies acquired, allocated to the company’s business segments, is as follows:
| (thousands) | Global Components | Global ECS | Total | |||||||||||||||||
| Balance as of December 31, 2022 (a) | $ | $ | $ | |||||||||||||||||
| Foreign currency translation adjustment | ( | |||||||||||||||||||
| Balance as of July 1, 2023 (a) | $ | $ | $ | |||||||||||||||||
(a) The total carrying value of goodwill as of July 1, 2023 and December 31, 2022 in the table above is reflected net of $1.6 1.3 301.9
Intangible assets, net, are comprised of the following as of July 1, 2023:
| (thousands) | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||||||||
| Amortizable trade name | ( | |||||||||||||||||||||||||
| $ | $ | ( | $ | |||||||||||||||||||||||
9
Intangible assets, net, are comprised of the following as of December 31, 2022:
| (thousands) | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||||||||
| Amortizable trade name | ( | |||||||||||||||||||||||||
| $ | $ | ( | $ | |||||||||||||||||||||||
During the second quarter of 2023 and 2022, the company recorded amortization expense related to identifiable intangible assets of $7.9 million and $8.8 million, respectively. During the first six months of 2023 and 2022, amortization expense related to identifiable intangible assets was $15.9 million and $17.8 million, respectively.
Note D – Investments in Affiliated Companies
The company owns a 50 % interest in two joint ventures with Marubun Corporation (collectively "Marubun/Arrow") and a 50 % interest in one other joint venture. These investments are accounted for using the equity method.
The following table presents the company's investment in affiliated companies:
| (thousands) | July 1, 2023 | December 31, 2022 | |||||||||
| Marubun/Arrow | $ | $ | |||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
The equity in earnings of affiliated companies consists of the following:
| Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| (thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Marubun/Arrow | $ | $ | $ | $ | |||||||||||||||||||
| Other | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
Under the terms of various joint venture agreements, the company is required to pay its pro-rata share of the third-party debt of the joint ventures in the event that the joint ventures are unable to meet their obligations. There were no
Note E – Accounts Receivable
Accounts receivable, net, consists of the following:
| (thousands) | July 1, 2023 | December 31, 2022 | |||||||||
| Accounts receivable | $ | $ | |||||||||
| Allowances for doubtful accounts | ( | ( | |||||||||
| Accounts receivable, net | $ | $ | |||||||||
10
Changes in the allowance for doubtful accounts consists of the following:
| Six Months Ended | |||||||||||
| (thousands) | July 1, 2023 | July 2, 2022 | |||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Charged to income | |||||||||||
| Translation adjustments | ( | ||||||||||
| Writeoffs | ( | ( | |||||||||
| Balance at end of period | $ | $ | |||||||||
The company monitors the current credit condition of its customers in estimating the expected credit losses and has not experienced significant changes in customers’ payment trends or significant deterioration in customers’ credit risk as of July 1, 2023.
The company has an EMEA asset securitization program under which it continuously sells its interest in designated pools of trade accounts receivable of certain of its subsidiaries in the Europe, Middle East, and Africa ("EMEA") region, at a discount, to a special purpose entity, which in turn sells certain of the receivables to unaffiliated financial institutions and conduits administered by such unaffiliated financial institutions ("unaffiliated financial institutions") on a monthly basis. The company may sell up to €600.0 million under the EMEA asset securitization program, which matures in December 2025, subject to extension in accordance with its terms. In July 2023, the company amended a provision in the EMEA asset securitization program to update certain financial ratios. The program is conducted through Arrow EMEA Funding Corp B.V., an entity structured to be bankruptcy remote. The company is deemed the primary beneficiary of Arrow EMEA Funding Corp B.V. as the company has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive the benefits that could potentially be significant to the entity from the transfer of the trade accounts receivable into the special purpose entity. Accordingly, Arrow EMEA Funding Corp B.V. is included in the company’s consolidated financial statements.
Sales of accounts receivable to unaffiliated financial institutions under the EMEA asset securitization program:
| Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| (thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| EMEA asset securitization, sales of accounts receivable | $ | $ | $ | $ | |||||||||||||||||||
Receivables sold to unaffiliated financial institutions under the program are excluded from “Accounts receivable, net” on the company’s consolidated balance sheets, and cash receipts are reflected as cash provided by operating activities on the consolidated statements of cash flows. The purchase price is paid in cash when the receivables are sold. Certain unsold receivables held by Arrow EMEA Funding Corp B.V. are pledged as collateral to unaffiliated financial institutions. These unsold receivables are included in “Accounts receivable, net” on the company’s consolidated balance sheets.
The company continues servicing the receivables which were sold and in exchange receives a servicing fee under the program. The company does not record a servicing asset or liability on the company’s consolidated balance sheets as the company estimates that the fee it receives to service these receivables approximates the fair market compensation to provide the servicing activities.
Other amounts related to the EMEA asset securitization program:
| (thousands) | July 1, 2023 | December 31, 2022 | ||||||||||||
| Receivables sold to unaffiliated financial institutions that were uncollected | $ | $ | ||||||||||||
| Collateralized accounts receivable held by Arrow EMEA funding Corp B.V. | ||||||||||||||
11
Note F – Supplier Finance Programs
Note G – Debt
Short-term borrowings, including current portion of long-term debt, consist of the following:
| (thousands) | July 1, 2023 | December 31, 2022 | ||||||||||||
| $ | $ | |||||||||||||
| Uncommitted lines of credit | ||||||||||||||
| Commercial paper | ||||||||||||||
| Other short-term borrowings | ||||||||||||||
| $ | $ | |||||||||||||
Other short-term borrowings are primarily utilized to support working capital requirements. The weighted-average effective interest rate on these borrowings was 6.45 % and 1.98 % at July 1, 2023 and December 31, 2022, respectively.
The company has $500.0 million in uncommitted lines of credit. In May 2023, the company increased the borrowing capacity on its uncommitted lines from $200.0 million to $500.0 million. There were no outstanding borrowings under the uncommitted lines of credit at July 1, 2023 and $78.0 million in outstanding borrowings under the uncommitted lines of credit at December 31, 2022. These borrowings were provided on a short-term basis and the maturity is agreed upon between the company and the lender. The uncommitted lines of credit had a weighted-average effective interest rate of 5.62 % and 5.22 % at July 1, 2023 and December 31, 2022, respectively.
The company has a commercial paper program, and the maximum aggregate balance of commercial paper outstanding may not exceed the borrowing capacity of $1.2 billion. Amounts outstanding under the commercial paper program are backstopped by available commitments under the company’s revolving credit facility. The company had $449.2 million in outstanding borrowings under this program at July 1, 2023 and $173.4 million in outstanding borrowings at December 31, 2022. The commercial paper program had an effective interest rate of 5.78 % and 5.15 % at July 1, 2023 and December 31, 2022, respectively.
12
Long-term debt consists of the following:
| (thousands) | July 1, 2023 | December 31, 2022 | ||||||||||||
| North American asset securitization program | $ | $ | ||||||||||||
| Other obligations with various interest rates and due dates | ||||||||||||||
| $ | $ | |||||||||||||
The 7.50 % senior debentures are not redeemable prior to their maturity. The 6.125 % notes have a call option which allows for redemption at par, without penalty, on or after March 1, 2024. All other notes may be called at the option of the company subject to "make whole" clauses.
The estimated fair market value of long-term debt, using quoted market prices, is as follows:
| (thousands) | July 1, 2023 | December 31, 2022 | ||||||||||||
| $ | $ | |||||||||||||
The company has a $2.0 billion revolving credit facility maturing in September 2026. The facility may be used by the company for general corporate purposes including working capital in the ordinary course of business, letters of credit, repayment, prepayment or purchase of long-term indebtedness, acquisitions, and as support for the company's commercial paper program, as applicable. Interest on borrowings under the revolving credit facility is calculated using a base rate or a secured overnight financing rate ("SOFR"), plus a spread (1.08 % at July 1, 2023), which is based on the company's credit ratings, plus a credit spread adjustment of 0.10 % or a weighted-average interest rate of 6.09 % at July 1, 2023. The facility fee, which is based on the company’s credit ratings, was 0.175 % of the total borrowing capacity at July 1, 2023. The company had no outstanding borrowings under the revolving credit facility at July 1, 2023 and December 31, 2022.
The company has a North American asset securitization program collateralized by accounts receivable of certain of its subsidiaries. The company may borrow up to $1.5 billion under the program which matures in September 2025. The program is conducted through Arrow Electronics Funding Corporation ("AFC"), a wholly-owned, bankruptcy remote subsidiary. The North American asset securitization program does not qualify for sale treatment. Accordingly, the accounts receivable and related debt obligation remain on the company's consolidated balance sheets. Interest on borrowings is calculated using a base rate plus a spread (0.40 % at July 1, 2023) plus a credit spread adjustment of 0.10 % or an effective interest rate of 5.64 % at July 1, 2023. The facility fee is 0.40 % of the total borrowing capacity.
The company had $1.2 billion in outstanding borrowings under the North American asset securitization program at July 1, 2023 and December 31, 2022, which was included in "Long-term debt" on the company’s consolidated balance sheets. Total collateralized accounts receivable of approximately $2.8 billion and $3.1 billion were held by AFC and were included in
13
"Accounts receivable, net" on the company’s consolidated balance sheets at July 1, 2023 and December 31, 2022, respectively. Any accounts receivable held by AFC would likely not be available to other creditors of the company in the event of bankruptcy or insolvency proceedings of the company before repayment of any outstanding borrowings under the North American asset securitization program.
Both the revolving credit facility and North American asset securitization program include terms and conditions that limit the incurrence of additional borrowings and require that certain financial ratios be maintained at designated levels. As of July 1, 2023, the company was in compliance with all such financial covenants.
During the first quarter of 2023, the company completed the sale of $500.0 million principal amount of 6.125 % notes due in March 2026. The notes have a call option which allows for redemption at par, without penalty, on or after March 1, 2024. The net proceeds of the offering of $496.3 million were used to repay the $300.0 million principal amount of its 4.50 % notes due March 2023 and for general corporate purposes. On the issuance date, the company entered into an interest rate swap, which effectively converts the 6.125 % notes to a floating rate based on daily compounding SOFR + 0.508 %. Refer to Note H for additional information.
During February 2022, the company repaid $350.0 million principal amount of its 3.50 % notes due April 2022.
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.
Interest and dividend income of $16.4 million and $30.7 million for the second quarter and first six months of 2023, respectively, and $6.0 million and $10.5 million for the second quarter and first six months of 2022, respectively were recorded in "Interest and other financing expense, net" within the company's consolidated statements of operations.
Note H – Financial Instruments Measured at Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
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The following table presents assets measured at fair value on a recurring basis at July 1, 2023:
| (thousands) | Balance Sheet Location | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||
| Cash equivalents (a) | Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Equity investments (b) | Other assets | |||||||||||||||||||||||||||||||
| Interest rate swap designated as fair value hedge | Other liabilities | ( | ( | |||||||||||||||||||||||||||||
| Foreign exchange contracts designated as net investment hedges | Other assets | |||||||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||||||||
The following table presents assets measured at fair value on a recurring basis at December 31, 2022:
| (thousands) | Balance Sheet Location | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||
| Cash equivalents (a) | Cash and cash equivalents/ other assets | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Equity investments (b) | Other assets | |||||||||||||||||||||||||||||||
| Interest rate swaps designated as cash flow hedges | Other assets | |||||||||||||||||||||||||||||||
| Foreign exchange contracts designated as net investment hedges | Other assets /other current assets | |||||||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||||||||
(a) Cash equivalents include highly liquid investments with an original maturity of less than three months.
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to goodwill and identifiable intangible assets (refer to Note C). The company tests these assets for impairment if indicators of potential impairment exist or at least annually if indefinite-lived.
Derivative Instruments
The company uses various financial instruments, including derivative instruments, for purposes other than trading. Certain derivative instruments are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. Derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings.
Interest Rate Swaps
The company manages the risk of variability in interest rates of future expected debt issuances by entering into various forward-starting interest rate swaps, designated as cash flow hedges. Changes in fair value of interest rate swaps designated as cash flow hedges are recorded in the shareholders’ equity section on the company’s consolidated balance sheets in “Accumulated other comprehensive loss” and will be reclassified into income over the life of the anticipated debt issuance or in the period the hedged forecasted cash flows are deemed no longer probable to occur. Reclassified gains and losses are recorded within the line item “Interest and other financing expense, net” in the consolidated statements of operations. The fair value of interest rate swaps is estimated using a discounted cash flow analysis on the expected cash flows of each derivative based on observable inputs, including interest rate curves and credit spreads.
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In June 2023, the company terminated its outstanding forward-starting interest rate swaps and received a cash payment of $56.7 million, which is reported in the “Cash flows from financing activities” section of the consolidated statements of cash flows. The forecasted transactions related to the swaps continue to be probable to occur by December 31, 2025 and the $56.7 million gain on the termination of the interest rate swaps will remain in "Accumulated other comprehensive loss" on the company's consolidated balance sheets.
At December 31, 2022, the company had the following outstanding interest rate swaps designated as cash flow hedges:
| Trade Date | Maturity Date | Notional Amount (thousands) | Weighted-Average Interest Rate | Date Range of Forecasted Transaction | ||||||||||||||||||||||
| April 2020 | December 2024 | $ | Jan 2023 - Dec 2025 | |||||||||||||||||||||||
The company occasionally enters into interest rate swap transactions that convert certain fixed-rate debt to variable-rate debt in order to manage its targeted mix of fixed- and floating-rate debt. For qualifying interest rate fair value hedges, gains or losses on derivatives are included in “Interest and other financing expense, net” in the consolidated statements of operations. The change in fair value of the hedged item attributable to the risk being hedged is reported as an adjustment to its carrying value and is also included in “Interest and other financing expense, net”. When a derivative is no longer designated as a hedge, any remaining difference between the carrying value and par value of the hedged item is amortized in “Interest and other financing expense, net” over the remaining life of the hedged item using the effective interest method.
As of July 1, 2023, the company had one outstanding interest rate swap designated as a fair value hedge, the terms of which are as follows:
| Trade Date | Maturity Date | Notional Amount (thousands) | Interest Rate due from Counterparty | Interest Rate due to Counterparty | ||||||||||||||||||||||
| February 2023 | March 2026 | $ | SOFR + | |||||||||||||||||||||||
The counterparty to the interest rate swap has the option to cancel the swaps after one year, without penalty.
Foreign Exchange Contracts
The company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. The company’s primary exposures to such transactions are denominated in the following currencies: Euro, Indian Rupee, and Chinese Renminbi. The company enters into foreign exchange forward, option, or swap contracts (collectively, the “foreign exchange contracts”) to facilitate the hedging of foreign currency exposures resulting from inventory purchases and sales and mitigate the impact of changes in foreign currency exchange rates related to these transactions. Foreign exchange contracts generally have terms of no more than six months. The company does not enter into foreign exchange contracts for trading purposes. The risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the company minimizes by limiting its counterparties to major financial institutions. The fair value of the foreign exchange contracts is estimated using foreign currency spot rates and forward rates quotes by third-party financial institutions. The notional amount of the foreign exchange contracts inclusive of foreign exchange contracts designated as a net investment hedge at July 1, 2023 and December 31, 2022 was $1.2 billion and $1.3 billion, respectively.
Gains and losses related to non-designated foreign currency exchange contracts are recorded in "Cost of sales" on the company’s consolidated statements of operations. Gains and losses related to foreign currency exchange contracts designated as cash flow hedges are recorded in "Cost of sales," "Selling, general, and administrative expenses," and "Interest and other financing expense, net" based upon the nature of the underlying hedged transaction, on the company’s consolidated statements of operations. Gains or losses on these contracts are deferred and recognized when the underlying future purchase or sale is recognized or when the corresponding asset or liability is revalued, and were not material to the financial statements for the periods presented.
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The following foreign exchange contracts were designated as net investment hedges to hedge a portion of the company's net investments in subsidiaries with Euro-denominated assets:
| Notional Amount (thousands) | ||||||||||||||
| Maturity Date | July 1, 2023 | December 31, 2022 | ||||||||||||
| March 2023 | EUR | EUR | ||||||||||||
| September 2024 | EUR | EUR | ||||||||||||
| April 2025 | EUR | EUR | ||||||||||||
| January 2028 | EUR | EUR | ||||||||||||
| Total | EUR | EUR | ||||||||||||
The change in the fair value of derivatives designated as net investment hedges are recorded in “foreign currency translation adjustment” (“CTA”) within “Accumulated other comprehensive loss” on the company’s consolidated balance sheets. Amounts excluded from the assessment of hedge effectiveness are included in “Interest and other financing expense, net” on the company’s consolidated statements of operations.
During the first quarter of 2023, a foreign exchange contract designated as a net investment hedge matured and the company received $10.7 million, which is reported in the “Cash flows from investing activities” section of the consolidated statements of cash flows.
The effects of derivative instruments on the company’s consolidated statements of operations and other comprehensive income are as follows:
| Income Statement Line | Quarter Ended | Six Months Ended | ||||||||||||||||||||||||||||||
| (thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||||||||
| Gain (Loss) Recognized in Income | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts, net investment hedge (a) | Interest Expense | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Interest rate swaps, cash flow hedge | Interest Expense | ( | ( | ( | ( | |||||||||||||||||||||||||||
| Interest rate swap, fair value hedge (b) | Interest Expense | ( | ( | |||||||||||||||||||||||||||||
| Total | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||
| Gain (Loss) Recognized in Other Comprehensive Income (Loss) before reclassifications, net of tax | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts, net investment hedge (c) | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Interest rate swaps, cash flow hedge | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
(a)Represents derivative amounts excluded from the assessment of effectiveness for the net investment hedges reclassified from CTA to “Interest and other financing expenses, net”.
(b)The amount of fair value hedging adjustments to the carrying value of hedged debt instruments totaled a gain of $3.4 million and $0.9 million for the second quarter and first six months of 2023, respectively.
(c)Includes derivative (losses) gains of $(1.6 ) million and $2.5 million for the second quarter of 2023 and 2022, respectively, and $(3.4 ) million and $(2.5 ) million for the first six months of 2023 and 2022, respectively, which were excluded from the assessment of effectiveness for the net investment hedges and recognized in other comprehensive income (loss), net of tax.
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Other
The carrying amount of “cash and cash equivalents”, “accounts receivable, net”, and “accounts payable” approximate their fair value due to the short maturities of these financial instruments.
Note I – Net Income per Share
The following table presents the computation of net income per share on a basic and diluted basis:
| Quarter Ended | Six Months Ended | |||||||||||||||||||||||||
| (thousands except per share data) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| Net income attributable to shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted-average shares outstanding - basic | ||||||||||||||||||||||||||
| Net effect of various dilutive stock-based compensation awards | ||||||||||||||||||||||||||
| Weighted-average shares outstanding - diluted | ||||||||||||||||||||||||||
| Net income per share: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted (a) | $ | $ | $ | $ | ||||||||||||||||||||||
(a)For the second quarter of 2023 no stock-based compensation awards were excluded from computation of net income per share on a diluted basis. For the first six months of 2023 stock-based compensation awards of 1.6 thousand shares were excluded from computation of net income per share on a diluted basis as their effect was anti-dilutive. Stock-based compensation awards for the issuance of 176.8 thousand shares and 48.5 thousand shares for the second quarter and first six months of 2022, respectively, were excluded from the computation of net income per share on a diluted basis as their effect was anti-dilutive.
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Note J – Shareholders’ Equity
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in Accumulated other comprehensive income (loss), excluding noncontrolling interests:
| Quarter Ended | Six Months Ended | |||||||||||||||||||||||||
| (thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| Foreign Currency Translation Adjustment and Other: | ||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications (a) | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Amounts reclassified into income | ( | ( | ||||||||||||||||||||||||
| Unrealized Gain on Foreign Exchange Contracts Designated as Net Investment Hedges, Net: | ||||||||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications (b) | ( | ( | ||||||||||||||||||||||||
| Amounts reclassified into income | ( | ( | ( | ( | ||||||||||||||||||||||
| Unrealized Gain on Interest Rate Swaps Designated as Cash Flow Hedges, Net: | ||||||||||||||||||||||||||
| Other comprehensive income before reclassifications (b) | ||||||||||||||||||||||||||
| Amounts reclassified into income | ||||||||||||||||||||||||||
| Employee Benefit Plan Items, Net: | ||||||||||||||||||||||||||
| Amounts reclassified into income | ( | ( | ||||||||||||||||||||||||
| Net change in Accumulated other comprehensive income (loss) | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
(a) Foreign currency translation adjustment includes intra-entity foreign currency transactions that are of a long-term investment nature of $(22.5 ) million and $(16.8 ) million for the second quarter and first six months of 2023, and $36.6 million and $28.4 million for the second quarter and first six months of 2022, respectively.
Common Stock Outstanding Activity
The following table sets forth the activity in the number of shares outstanding:
| (thousands) | Common Stock Issued | Treasury Stock | Common Stock Outstanding | |||||||||||||||||
| Common stock outstanding at December 31, 2022 | ||||||||||||||||||||
| Shares issued for stock-based compensation awards | ( | |||||||||||||||||||
| Repurchases of common stock | ( | |||||||||||||||||||
| Common stock outstanding at April 1, 2023 | ||||||||||||||||||||
| Shares issued for stock-based compensation awards | ( | |||||||||||||||||||
| Repurchases of common stock | ( | |||||||||||||||||||
| Common stock outstanding at July 1, 2023 | ||||||||||||||||||||
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| (thousands) | Common Stock Issued | Treasury Stock | Common Stock Outstanding | |||||||||||||||||
| Common stock outstanding at December 31, 2021 | ||||||||||||||||||||
| Shares issued for stock-based compensation awards | ( | |||||||||||||||||||
| Repurchases of common stock | ( | |||||||||||||||||||
| Common stock outstanding at April 2, 2022 | ||||||||||||||||||||
| Shares issued for stock-based compensation awards | ( | |||||||||||||||||||
| Repurchases of common stock | ( | |||||||||||||||||||
| Common stock outstanding at July 2, 2022 | ||||||||||||||||||||
Share-Repurchase Program
The following table shows the company’s share-repurchase program as of July 1, 2023:
| Share-Repurchase Details by Month of Board Approval (thousands) | Dollar Value Approved for Repurchase | Dollar Value of Shares Repurchased | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program | |||||||||||||||||
| July 2021 | $ | $ | $ | |||||||||||||||||
| December 2021 | ||||||||||||||||||||
| September 2022 | ||||||||||||||||||||
| January 2023 | ||||||||||||||||||||
| Total (a) | $ | $ | $ | |||||||||||||||||
(a) The dollar value of shares repurchased includes an accrual of $4.3 million for excise taxes during the first six months of 2023 which is recorded within "Treasury stock" on the company's consolidated balance sheets.
Note K – Contingencies
Environmental Matters
In connection with the purchase of Wyle Electronics ("Wyle") in August 2000, the company entered into a settlement agreement under which, the company accepted responsibility for any potential subsequent costs incurred for environmental clean-up costs associated with any then existing contamination or violation of environmental regulations. The company is aware of two facilities (in Huntsville, Alabama (the "Huntsville Site") and Norco, California (the "Norco Site")) at which contaminated soil and groundwater was identified and required environmental remediation.
As successor-in-interest to Wyle, the company is the beneficiary of various Wyle insurance policies that covered liabilities arising out of operations at Norco and Huntsville. To date, the company has recovered approximately $47.2 million from certain insurance carriers relating to environmental clean-up matters at the Norco and Huntsville sites. The company has not recorded a receivable for any potential future insurance recoveries related to the Norco and Huntsville environmental matters, as the realization of the claims for recovery are not deemed probable at this time.
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Costs are recorded for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accruals for environmental liabilities are included in “Accrued expenses” and “Other liabilities” on the company’s consolidated balance sheets. The company has determined that there is no amount within the environmental liability ranges discussed below, that is a better estimate than any other amount, and therefore has recorded the accruals at the minimum amount of the ranges. The costs related to these environmental matters (referred to as “environmental costs”) include remediation, project management, regulatory oversight, and investigative and feasibility study activities.
The company expects the liabilities associated with such ongoing remediation to be resolved over an extended period of time and the accruals for environmental liabilities are adjusted periodically as facts and circumstances change, assessment and remediation efforts progress, or as additional technical or legal information becomes available. Environmental liabilities are difficult to assess and estimate due to various unknown factors such as the timing and extent of remediation, improvements in remediation technologies, orders by administrative agencies, and the extent to which environmental laws and regulations may change in the future. Accordingly, the company cannot presently estimate the ultimate potential costs related to the Huntsville and Norco sites.
It is reasonably possible that the company will need to adjust the liabilities noted above to reflect the effects of new or additional information, to the extent that such information impacts the costs, timing or duration of the required actions. Future changes in estimates of the costs, timing or duration of the required actions could have a material adverse effect on the company's consolidated financial position, results of operations or cash flows.
During the second quarter of 2023 the company received updated information related to testing and operational unit costs related to both the Norco and Huntsville sites. If the data is confirmed, an increase to the environmental obligation would be required. Any such revision will be recorded during the second half of 2023.
Environmental Matters - Huntsville
In February 2015, the company and the Alabama Department of Environmental Management (“ADEM”) finalized and executed a consent decree in connection with the Huntsville Site. Characterization of the extent of contaminated soil and groundwater is complete and has been approved by ADEM. Health-risk evaluations and a Corrective Action Development Plan were approved by ADEM in 2018, opening the way for pilot testing of on-site remediation in late 2019. Due to the effectiveness of the pilot testing, the pilot testing process has been expanded and remains underway with annual application of bioremediation reagents, semi-annual groundwater monitoring, as well as data collection to direct future bioremediation injections. Approximately $8.3 million has been spent to date, and the company currently anticipates no additional investigative-related expenditures. The subsequent environmental costs at the site are estimated to be between $2.3 million and $17.8 million.
Environmental Matters - Norco
In October 2003, the company entered into a consent decree with Wyle Laboratories and the California Department of Toxic Substance Control (“DTSC”) in connection with the Norco Site. In September 2013, the DTSC approved the final Remedial Action Plan (“RAP”) for actions in five on-site areas and one off-site area. As of 2018, the remediation measures described in the RAP had been implemented. Routine progress monitoring of groundwater and soil gas continue on-site and off-site. Approximately $81.6 million has been spent to date, and the company currently anticipates no additional investigative-related expenditures. The subsequent environmental costs at the site are estimated to be between $6.5 million and $39.9 million.
Other
From time to time, in the normal course of business, the company may become liable with respect to other pending and threatened litigation, environmental, regulatory, labor, product, and tax matters. While such matters are subject to inherent uncertainties, it is not currently anticipated that any such matters will materially impact the company’s consolidated financial position, liquidity, or results of operations.
Note L – Segment and Geographic Information
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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 business segments, the global components business segment and the global enterprise computing solutions (“ECS”) business segment. The company's global components business segment, enabled by a comprehensive range of value-added capabilities and services, markets and distributes electronic components to original equipment manufacturers ("OEMs") and contract manufacturers ("CMs"). The company's global ECS 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 value-added resellers ("VARs") and managed service providers ("MSPs") meet the needs of their end-users.
As a result of the company's philosophy of maximizing operating efficiencies through the centralization of certain functions, operating income for the segments excludes unallocated corporate overhead costs, depreciation on corporate fixed assets, and restructuring, integration and other costs, as they are not attributable to the individual operating segments and are included in the corporate line item.
Sales, by segment by geographic area, are as follows:
| Quarter Ended | Six Months Ended | |||||||||||||||||||||||||
| (thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| Components: | ||||||||||||||||||||||||||
| Americas | $ | $ | $ | $ | ||||||||||||||||||||||
| EMEA | ||||||||||||||||||||||||||
| Asia/Pacific | ||||||||||||||||||||||||||
| Global components | $ | $ | $ | $ | ||||||||||||||||||||||
| ECS: | ||||||||||||||||||||||||||
| Americas | $ | $ | $ | $ | ||||||||||||||||||||||
| EMEA | ||||||||||||||||||||||||||
| Global ECS | $ | $ | $ | $ | ||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||||||||||||
Operating income (loss), by segment, are as follows:
| Quarter Ended | Six Months Ended | |||||||||||||||||||||||||
| (thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| Operating income (loss): | ||||||||||||||||||||||||||
| Global components | $ | $ | $ | $ | ||||||||||||||||||||||
| Global ECS | ||||||||||||||||||||||||||
| Corporate (a) | ( | ( | ( | ( | ||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||||||||||||
(a)Corporate operating loss includes restructuring, integration, and other charges of $10.3 million and $12.9 million for the second quarter and first six months of 2023, respectively, and $2.5 million and $7.4 million for the second quarter and first six months of 2022, respectively.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Information Relating to Forward-Looking Statements
This report includes "forward-looking statements," as the term is defined under the federal securities laws. Forward-looking statements are those statements which are not statements of historical fact. These forward-looking statements can be identified by forward-looking words such as “expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “seeks,” “estimates,” and similar expressions. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: unfavorable economic conditions; disruptions or inefficiencies in the supply chain; political instability; impacts of military conflict and sanctions, industry conditions; changes in product supply, pricing and customer demand; competition; other vagaries in the global components and the global enterprise computing solutions (“ECS”) markets; deteriorating economic conditions, including economic recession, inflation, tax rates, foreign currency exchange rates, or the availability of capital; the effects of natural or man-made catastrophic events; changes in relationships with key suppliers; increased profit margin pressure; changes in legal and regulatory matters; non-compliance with certain regulations, such as export, antitrust, and anti-corruption laws; foreign tax and other loss contingencies; outbreaks, epidemics, pandemics, or public health crises; 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 Quarterly Report on Form 10-Q and the company's most recent Annual Report on Form 10-K, as well as in other filings the company makes with the Securities and Exchange Commission. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any of the forward-looking statements.
Certain Non-GAAP Financial Information
In addition to disclosing financial results that are determined in accordance with accounting principles generally accepted in the United States (“GAAP”), the company also discloses certain non-GAAP financial information, including:
•Non-GAAP sales and non-GAAP gross profit (referred to as "sales on a constant currency basis" and "gross profit on a constant currency basis") excludes the impact of changes in foreign currencies by retranslating prior period results at current period foreign exchange rates.
•Non-GAAP operating expenses excludes identifiable intangible asset amortization, restructuring, integration, and other charges, and the impact of changes in foreign currencies.
•Non-GAAP operating income excludes identifiable intangible asset amortization, restructuring, integration, and other charges.
•Non-GAAP effective tax rate and non-GAAP net income attributable to shareholders exclude identifiable intangible asset amortization, restructuring, integration, and other charges, gain (loss) on investments, net, and the impact of tax legislation changes.
For a discussion of what is included within "Restructuring, integration, and other charges" and "Gains (loss) on investments, net" refer to the similarly captioned sections of this item below. 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. Reconciliations of non-GAAP financial measures to the most directly comparable reported GAAP financial measures are included within this MD&A.
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 business segments, the global components business segment and the global ECS business segment. The company's global components business segment, enabled by a comprehensive
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range of value-added capabilities and services, markets and distributes electronic components to original equipment manufacturers ("OEMs") and contract manufacturers ("CMs"). The company's global ECS business 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 value-added resellers ("VARs") and managed service providers ("MSPs") meet the needs of their end-users. For the second quarter of 2023, approximately 78% and 22% 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, and 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.
•Continuing to develop global supply chain service offerings 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 the second quarter and the first six months of 2023 decreased by 10.0% and 6.9%, respectively, compared with the year-earlier periods. The decrease for the second quarter of 2023 was driven by a 10.4% decrease in the global components business segment sales compared with the year-earlier period. The global ECS business segment sales for the second quarter of 2023 decreased 8.4% compared with the year-earlier period. The decrease for the first six months of 2023 was driven by a 7.7% decrease in the global components business segment sales and a 4.2% decrease in global ECS business segment sales, compared to the year-earlier periods. Consolidated sales on a constant currency basis decreased 9.8% and 5.8% for the second quarter and the first six months of 2023, respectively, compared with the year-earlier periods.
The company reported net income attributable to shareholders of $236.6 million and $510.3 million in the second quarter and the first six months of 2023, respectively, compared with $370.3 million and $735.1 million in the year-earlier periods. Non-GAAP net income attributable to shareholders for the second quarter and the first six months of 2023 was $250.6 million and $524.2 million, respectively, compared with $386.3 million and $759.8 million in the year-earlier periods. Non-GAAP net income attributable to shareholders is adjusted for the following items:
Second quarters of 2023 and 2022:
•restructuring, integration, and other charges of $10.3 million in 2023 and $2.5 million in 2022;
•identifiable intangible asset amortization of $7.9 million in 2023 and $8.8 million in 2022;
•net gain on investments of $0.5 million in 2023 and net loss on investment of $9.7 million in 2022; and
•impact of tax legislation changes of $0.9 million in 2023.
First six months of 2023 and 2022:
•restructuring, integration, and other charges of $12.9 million in 2023 and $7.4 million in 2022;
•identifiable intangible asset amortization of $15.9 million in 2023 and $17.8 million in 2022;
•net gain on investments of $10.8 million in 2023 and net loss on investments of $7.7 million in 2022; and
•impact of tax legislation changes of $0.9 million in 2023.
During the second quarter and the first six months of 2023, changes in foreign currencies reduced sales by approximately $17.6 million and $220.3 million, respectively, operating income by $2.6 million and $14.3 million, respectively, and earnings per share
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on a diluted basis by $0.03 and $0.15, respectively, compared to the year-earlier periods.
Significant trends impacting the business:
Below is a discussion of significant trends impacting the business. See discussion regarding the impacts of these and other risks included in Item 1A, Risk Factors, within the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Supply chain constraints and components shortages
Shortage market conditions impacting the company's global components business began normalizing during the third quarter of 2022 and have largely resolved as of the second quarter of 2023. While prices for many products have remained elevated, prices for products that were most severely impacted by shortage market conditions have decreased, bringing profit margins on these products more in line with historic norms as supply improves. Due to the evolving nature and uncertainty of the impacts discussed below, the company believes the results and financial condition discussed for the periods presented herein may not be indicative of future operating results and trends.
During the second quarter and the first six months of 2023, operating margins in the global components business decreased 130 bps and 110 bps, respectively, relative to the year-earlier periods, and decreased 40 bps relative to the first quarter of 2023. During 2022, the company’s global components business segment reported record sales and profitability primarily due to rising prices and growth in value-added services.
As of the second quarter of 2023, constraints in supply impacting the company's global ECS business have mostly resolved and hardware backlog has normalized. Constraints in supply were a headwind for growth throughout 2022, particularly for hardware sales and large, complex IT projects that rely on hardware.
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 consolidated net sales, and net sales for the company's two business segments:
| Quarter Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| (millions) | July 1, 2023 | July 2, 2022 | % Change | July 1, 2023 | July 2, 2022 | % Change | |||||||||||||||||||||||||||||
| Consolidated sales, as reported | $ | 8,515 | $ | 9,461 | (10.0)% | $ | 17,251 | $ | 18,535 | (6.9) | % | ||||||||||||||||||||||||
| Impact of changes in foreign currencies | — | (18) | — | (220) | |||||||||||||||||||||||||||||||
| Consolidated sales, constant currency | $ | 8,515 | $ | 9,443 | (9.8)% | $ | 17,251 | $ | 18,315 | (5.8) | % | ||||||||||||||||||||||||
| Global components sales, as reported | $ | 6,683 | $ | 7,462 | (10.4)% | $ | 13,539 | $ | 14,661 | (7.7) | % | ||||||||||||||||||||||||
| Impact of changes in foreign currencies | — | (19) | — | (165) | |||||||||||||||||||||||||||||||
| Global components sales, constant currency | $ | 6,683 | $ | 7,443 | (10.2)% | $ | 13,539 | $ | 14,496 | (6.6) | % | ||||||||||||||||||||||||
| Global ECS sales, as reported | $ | 1,832 | $ | 1,999 | (8.4)% | $ | 3,712 | $ | 3,874 | (4.2) | % | ||||||||||||||||||||||||
| Impact of changes in foreign currencies | — | 1 | — | (56) | |||||||||||||||||||||||||||||||
| Global ECS sales, constant currency | $ | 1,832 | $ | 2,000 | (8.4)% | $ | 3,712 | $ | 3,819 | (2.8) | % | ||||||||||||||||||||||||
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.
During the second quarter and first six months of 2023, global components sales decreased compared to the year-earlier period primarily due to the following impacts:
•sales declines in the Asia/Pacific region of 22.4% and 20.7%, respectively, primarily due to softer demand and lower volumes in most verticals;
•sales declines in the Americas region of 16.6% and 10.8%, respectively, primarily due to normalization of shortage market conditions, partially offset by growth in sales of interconnects, passives and electromechanical devices;
•partially offset by growth in the EMEA region of 19.1% and 17.8%, respectively, primarily due to an increase in most major verticals, particularly industrial, automotive, and defense.
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Sales from the global ECS business decreased 8.4% and 4.2% in the second quarter and the first six months of 2023, respectively, relative to the year-earlier periods, primarily due to decreased demand for hardware offset partially by increased demand for software and cloud solutions. In the EMEA region, demand for cyber-security solutions and other software remained strong, and growth in sales of cloud based solutions was strong, enabled by the company's ArrowSphere platform. In the Americas regions, sales growth was strong in the public sector with software for security, storage, and infrastructure solutions.
Gross Profit
Following is an analysis of the company's consolidated gross profit:
| Quarter Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| (millions) | July 1, 2023 | July 2, 2022 | % Change | July 1, 2023 | July 2, 2022 | % Change | |||||||||||||||||||||||||||||
| Gross profit, as reported | $ | 1,066 | $ | 1,236 | (13.8)% | $ | 2,180 | $ | 2,444 | (10.8)% | |||||||||||||||||||||||||
| Impact of changes in foreign currencies | — | (2) | — | (29) | |||||||||||||||||||||||||||||||
| Gross profit, constant currency | $ | 1,066 | $ | 1,234 | (13.6)% | $ | 2,180 | $ | 2,415 | (9.7)% | |||||||||||||||||||||||||
| Gross profit as a percentage of sales, as reported | 12.5 | % | 13.1 | % | (60) bps | 12.6 | % | 13.2 | % | (60) bps | |||||||||||||||||||||||||
| Gross profit as a percentage of sales, constant currency | 12.5 | % | 13.1 | % | (60) bps | 12.6 | % | 13.2 | % | (60) bps | |||||||||||||||||||||||||
The sum of the components for gross profit on a constant currency basis may not agree to totals, as presented, due to rounding.
The decrease in gross profit margins during the second quarter and the first six months of 2023, compared with the year-earlier periods, related primarily to normalization of shortage market conditions in the Americas region of the global components business and softer demand in the Asia/Pacific region compared to the year-earlier period. The decrease was partially offset by higher margins in the EMEA region of both the global components and global ECS businesses due to product mix shifting towards higher margin products. Global components supply chain services offerings continued to have a positive impact on gross margins.
Operating Expenses
Following is an analysis of the company's consolidated operating expenses:
| Quarter Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| (millions) | July 1, 2023 | July 2, 2022 | % Change | July 1, 2023 | July 2, 2022 | % Change | |||||||||||||||||||||||||||||
| Operating expenses, as reported | $ | 674 | $ | 703 | (4.2)% | $ | 1,365 | $ | 1,401 | (2.5) | % | ||||||||||||||||||||||||
| Identifiable intangible asset amortization | (8) | (9) | (16) | (18) | |||||||||||||||||||||||||||||||
| Restructuring, integration, and other charges | (10) | (2) | (13) | (7) | |||||||||||||||||||||||||||||||
| Impact of changes in foreign currencies | — | — | — | (15) | |||||||||||||||||||||||||||||||
| Non-GAAP operating expenses | $ | 656 | $ | 692 | (5.3)% | $ | 1,336 | $ | 1,361 | (1.8)% | |||||||||||||||||||||||||
| Operating expenses as a percentage of sales | 7.9 | % | 7.4 | % | 50 bps | 7.9 | % | 7.6 | % | 30 bps | |||||||||||||||||||||||||
| Non-GAAP operating expenses as a percentage of sales, constant currency | 7.7 | % | 7.3 | % | 40 bps | 7.7 | % | 7.4 | % | 30 bps | |||||||||||||||||||||||||
The sum of the components for non-GAAP operating expenses may not agree to totals, as presented, due to rounding.
The increase in operating expense as a percentage of sales in the second quarter and the first six months of 2023, relative to the year-earlier periods, relates primarily to lower operating leverage when sales are lower. The company is closely monitoring business and economic conditions and will continue to align costs to achieve operational efficiencies.
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 acquired businesses, and consolidate certain operations, as necessary. The company recorded restructuring, integration, and other charges of $10.3 million and $2.5 million for the second quarter of 2023 and 2022, respectively. The company recorded restructuring, integration, and other charges of $12.9 million and $7.4 million for the first six months of 2023 and 2022, respectively. As of July 1, 2023, the company does not anticipate there will be any material adjustments relating to the aforementioned restructuring and integration plans.
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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 business segments:
| Quarter Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| (millions) | July 1, 2023 | July 2, 2022 | % Change | July 1, 2023 | July 2, 2022 | % Change | |||||||||||||||||||||||||||||
| Consolidated operating income, as reported | $ | 392 | $ | 533 | (26.4) | % | $ | 814 | $ | 1,043 | (21.9) | % | |||||||||||||||||||||||
| Identifiable intangible asset amortization | 8 | 9 | 16 | 18 | |||||||||||||||||||||||||||||||
| Restructuring, integration, and other charges | 10 | 2 | 13 | 7 | |||||||||||||||||||||||||||||||
| Non-GAAP consolidated operating income | $ | 410 | $ | 544 | (24.6) | % | $ | 843 | $ | 1,068 | (21.1) | % | |||||||||||||||||||||||
| Consolidated operating income as a percentage of sales | 4.6 | % | 5.6 | % | (100) bps | 4.7 | % | 5.6 | % | (90) bps | |||||||||||||||||||||||||
| Non-GAAP consolidated operating income as a percentage of sales | 4.8 | % | 5.8 | % | (100) bps | 4.9 | % | 5.8 | % | (90) bps | |||||||||||||||||||||||||
| Global components operating income, as reported | $ | 381 | $ | 524 | (27.3) | % | $ | 799 | $ | 1,024 | (22.0) | % | |||||||||||||||||||||||
| Identifiable intangible asset amortization | 7 | 7 | 13 | 14 | |||||||||||||||||||||||||||||||
| Non-GAAP global components operating income | $ | 388 | $ | 531 | (27.0) | % | $ | 812 | $ | 1,037 | (21.7) | % | |||||||||||||||||||||||
| Global components operating income as a percentage of sales | 5.7 | % | 7.0 | % | (130) bps | 5.9 | % | 7.0 | % | (110) bps | |||||||||||||||||||||||||
| Non-GAAP global components operating income as a percentage of sales | 5.8 | % | 7.1 | % | (130) bps | 6.0 | % | 7.1 | % | (110) bps | |||||||||||||||||||||||||
| Global ECS operating income, as reported | $ | 86 | $ | 84 | 2.7 | % | $ | 167 | $ | 170 | (1.4) | % | |||||||||||||||||||||||
| Identifiable intangible asset amortization | 1 | 2 | 2 | 4 | |||||||||||||||||||||||||||||||
| Non-GAAP global ECS operating income | $ | 87 | $ | 86 | 1.6 | % | $ | 170 | $ | 174 | (2.4) | % | |||||||||||||||||||||||
| Global ECS operating income as a percentage of sales | 4.7 | % | 4.2 | % | 50 bps | 4.5 | % | 4.4 | % | 10 bps | |||||||||||||||||||||||||
| Non-GAAP global ECS operating income as a percentage of sales | 4.8 | % | 4.3 | % | 50 bps | 4.6 | % | 4.5 | % | 10 bps | |||||||||||||||||||||||||
The sum of the components of consolidated operating income do not agree to totals, as presented, because operating income for the corporate segment is not included in the table above. Refer to Note L "Segment and Geographic Information” of the Notes to the Consolidated Financial Statements for further discussion.
The decrease in operating income as a percentage of sales for the second quarter and the first six months of 2023 relates primarily to decreases in gross profit margins discussed above. During the second quarter and the first six months of 2023, changes in foreign currencies reduced operating income by $2.6 million and $14.3 million when compared to the year-earlier periods.
Gain (Loss) on Investments, Net
During the second quarter of 2023 and 2022, the company recorded a gain (loss) of $0.5 million and $(9.7) million, respectively; during the first six months of 2023 and 2022, the company recorded a gain (loss) of $10.8 million, and $(7.7) million, respectively, which are primarily related to 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".
Interest and Other Financing Expense, Net
The company recorded net interest and other financing expense of $84.8 million and $164.5 million for the second quarter and the first six months of 2023, respectively, compared with $38.5 million and $72.5 million, respectively, in the year-earlier periods. The increase for the second quarter and the first six months of 2023 primarily relates to higher interest rates on outstanding borrowings and floating rate credit facilities, and higher average daily borrowings. Refer to the section below titled "Liquidity and Capital Resources" for more information on changes in borrowings.
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Income Tax
Income taxes for the interim periods presented have been included in the accompanying consolidated financial statements on the basis of an estimated annual effective tax rate. The determination of the consolidated provision for income taxes requires management to make certain judgments and estimates. Changes in the estimated level of annual pre-tax earnings, tax laws, and changes resulting from tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the company’s projections and assumptions are inherently uncertain, therefore, actual results could differ from projections.
Following is an analysis of the company's consolidated effective income tax rate:
| Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||
| Effective income tax rate | 23.3 | % | 23.5 | % | 22.5 | % | 23.5 | % | |||||||||||||||
| Identifiable intangible asset amortization | — | % | 0.1 | % | — | % | 0.1 | % | |||||||||||||||
| Restructuring, integration, and other charges | 0.1 | % | — | % | 0.1 | % | — | % | |||||||||||||||
| Gain (loss) on investments, net | — | % | — | % | — | % | — | % | |||||||||||||||
| Impact of tax legislation changes | (0.3) | % | — | % | (0.1) | % | — | % | |||||||||||||||
| Non-GAAP effective income tax rate | 23.1 | % | 23.6 | % | 22.5 | % | 23.5 | % | |||||||||||||||
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 change in the effective tax rate from 23.5% for both the second quarter and the first six months of 2022, respectively, to 23.3% and 22.5% for the second quarter and the first six months of 2023, respectively, is primarily driven by changes in the mix of tax jurisdictions where taxable income is generated and discrete items, such as stock-based compensation, changes in valuation allowances, and liabilities for uncertain tax positions.
Net Income Attributable to Shareholders
Following is an analysis of the company's consolidated net income attributable to shareholders:
| Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| (millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Net income attributable to shareholders, as reported | $ | 237 | $ | 370 | $ | 510 | $ | 735 | |||||||||||||||
| Identifiable intangible asset amortization* | 8 | 9 | 16 | 17 | |||||||||||||||||||
| Restructuring, integration, and other charges | 10 | 2 | 13 | 7 | |||||||||||||||||||
| (Gain) loss on investments, net | — | 10 | (11) | 8 | |||||||||||||||||||
Tax effect of adjustments above | (4) | (5) | (5) | (8) | |||||||||||||||||||
Impact of tax legislation changes | 1 | — | 1 | — | |||||||||||||||||||
| Non-GAAP net income attributable to shareholders | $ | 251 | $ | 386 | $ | 524 | $ | 760 | |||||||||||||||
* 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 decrease in net income attributable to shareholders in the second quarter and the first six months of 2023 compared to the year-earlier period, relates primarily to decreased sales, gross margins, and higher interest expense, as discussed above. In the second quarter and the first six months of 2023, changes in foreign currencies reduced net income by approximately $2.1 million and $10.5 million, respectively, when compared to the year-earlier period.
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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 $1.8 billion in addition to $240.4 million of cash on hand at July 1, 2023. The company also may issue debt or equity securities in the future and management believes the company will have adequate access to the capital markets, if needed. The company continually evaluates its liquidity requirements and would seek to amend its existing borrowing capacity or access the financial markets as deemed necessary.
The company’s principal sources of liquidity are existing cash and cash equivalents, cash generated from operations and cash provided by its revolving credit facilities and debt. The company's principal uses of liquidity include cash used in operations, investments to grow working capital, scheduled interest and principal payments on its borrowings, and the return of cash to shareholders through share repurchases.
The following table presents selected financial information related to liquidity:
| (millions) | July 1, 2023 | December 31, 2022 | Change | |||||||||||||||||
| Working capital | $ | 7,507 | $ | 7,182 | $ | 325 | ||||||||||||||
| Cash and cash equivalents | 240 | 177 | 63 | |||||||||||||||||
| Short-term debt | 488 | 590 | (102) | |||||||||||||||||
| Long-term debt | 3,673 | 3,183 | 490 | |||||||||||||||||
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 six months of 2023, was primarily attributable to decreases in accounts payable offset partially by lower accounts receivable.
Working capital as a percentage of sales, which is defined as working capital divided by annualized quarterly sales, increased to 22.0% for the second quarter of 2023, compared to 17.4% in the year-earlier period. The increase was primarily due to lower sales and higher inventory as well as timing of payments and collections.
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 July 1, 2023 and December 31, 2022, the company had cash and cash equivalents of $240.4 million and $176.9 million, respectively, of which $146.5 million and $160.8 million, respectively, were held outside the United States.
The company has $3.9 billion of undistributed earnings of its foreign subsidiaries which it deems indefinitely reinvested, and recognizes that it may be subject to additional foreign taxes and U.S. state income taxes, if it reverses its indefinite reinvestment assertion on these foreign earnings. The company has $2.1 billion of foreign earnings that are not deemed permanently reinvested and are available for distribution in future periods as of July 1, 2023.
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Revolving Credit Facilities and Debt
The following tables summarize the company’s credit facilities by category:
| Borrowing Capacity | Outstanding Borrowings | |||||||||||||||||||||||||||||||
| (millions) | July 1, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||
| North American asset securitization program | $ | 1,500 | $ | 1,220 | $ | 1,235 | ||||||||||||||||||||||||||
| Revolving credit facility | 2,000 | — | — | |||||||||||||||||||||||||||||
| Commercial paper program (a) | 1,200 | 449 | 173 | |||||||||||||||||||||||||||||
| Uncommitted lines of credit | 500 | — | 78 | |||||||||||||||||||||||||||||
| Average Daily Balance Outstanding | Effective Interest Rate | |||||||||||||||||||||||||
| Six Months Ended | ||||||||||||||||||||||||||
| (millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| North American asset securitization program | $ | 1,239 | $ | 806 | 5.64 | % | 2.25 | % | ||||||||||||||||||
| Revolving credit facility | 256 | 140 | 6.09 | % | 1.99 | % | ||||||||||||||||||||
| Commercial paper program | 691 | 392 | 5.78 | % | 2.24 | % | ||||||||||||||||||||
| Uncommitted lines of credit | 77 | 5 | 5.62 | % | 1.70 | % | ||||||||||||||||||||
The company also has an EMEA asset securitization program under which it continuously sells 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. During the first six months of 2023 and 2022, the average daily balance outstanding under the EMEA asset securitization program was $644.8 million and $439.3 million, respectively. Refer to Note E “Accounts Receivable” of the Notes to the Consolidated Financial Statements for further discussion.
The following table summarizes recent events impacting the company's capital resources:
| (millions) | Activity | Date | Notional Amount | |||||||||||||||||
| 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 (a) | Issued | March 2023 | $ | 500 | ||||||||||||||||
| 3.50% notes, due April 2022 | Repaid | February 2022 | $ | 350 | ||||||||||||||||
| North American asset securitization program | Increase in Capacity | September 2022 | $ | 250 | ||||||||||||||||
EMEA asset securitization program | Increase in Capacity | September 2022 | € | 200 | ||||||||||||||||
(a) Upon issuance of the 6.125% notes due March 2026, the company entered into an interest rate swap, which effectively converts the 6.125% notes to floating rate notes based on SOFR + 0.508%.
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.
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Cash Flows
The following table summarizes the company’s cash flows by category for the periods presented:
| (millions) | July 1, 2023 | July 2, 2022 | Change | |||||||||||||||||
| Net cash provided by (used for) operating activities | $ | 97 | $ | (283) | $ | 380 | ||||||||||||||
| Net cash used for investing activities | (26) | (16) | (10) | |||||||||||||||||
| Net cash (used for) provided by financing activities | (58) | 388 | (446) | |||||||||||||||||
Cash Flows from Operating Activities
The net amount of cash provided by the company’s operating activities during the first six months of 2023 was $97.0 million and the net amount of cash used for the company's operating activities during the first six months of 2022 was $282.8 million. The change in cash provided by operating activities during 2023, compared to the year-earlier period, related primarily to the company's historical counter-cyclical cash flow as the company generates cash flow in periods of decreased demand growth.
Cash Flows from Investing Activities
The net amount of cash used for investing activities during the first six months of 2023 and 2022 was $26.1 million and $15.7 million, respectively. The change in cash used for investing activities related primarily to a decrease in proceeds from notes receivable, offset partially by settlement proceeds from derivative contracts.
Cash Flows from Financing Activities
The net amount of cash used for financing activities was $58.1 million during the first six months of 2023 compared to $387.6 million provided by financing activities in the year-earlier period. The change in cash used for financing activities related primarily to a decrease in proceeds from long-term bank borrowings offset by proceeds from notes issued in the first quarter of 2023 and the settlement of interest rate swaps in the second quarter of 2023.
Capital Expenditures
Capital expenditures for the first six months of 2023 and 2022 were $37.1 million and $36.2 million, respectively. The company expects capital expenditures to be approximately $80.0 million for fiscal year 2023.
Share-Repurchase Program
The company repurchased 4.2 million shares of common stock for $500.9 million and 3.9 million shares of common stock for $475.0 million in the first six months of 2023 and 2022, respectively, under the share-repurchase program, excluding excise taxes. During the first six months of 2023, the company accrued $4.3 million of excise tax, which is recorded within "Treasury stock" on the company's consolidated balance sheets and reduces the share-repurchase authorization. On January 31, 2023, the company's Board of Directors approved a $1.0 billion increase to the company's share-repurchase program. As of July 1, 2023, approximately $823.5 million remained available for repurchase. 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, 2022.
Refer to the section above titled “Revolving Credit Facilities and Debt” for updates to the company's short-term and long-term debt obligations. Refer to Note H, "Financial Instruments Measured at Fair Value" of the Notes to Consolidated Financial
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Statements for further discussion on hedging activities. As of July 1, 2023, there were no other material changes to the contractual obligations of the company.
Critical Accounting Estimates
The company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. The company evaluates its estimates on an ongoing basis. The company bases its estimates on historical experience and on various other assumptions that are believed reasonable under the circumstances; the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes to the company's critical accounting estimates during the first six months of 2023. Refer to the section titled “Critical Accounting Estimates” in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation's, in the company’s Annual Report on Form 10-K for the year ended December 31, 2022.
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 from the information provided in 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, 2022.
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 July 1, 2023 (the “Evaluation”). Based upon the Evaluation, the company’s Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) were effective as of July 1, 2023.
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 in Note K "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 Item 1A - Risk Factors in the company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows the share-repurchase activity for the quarter ended July 1, 2023:
| (thousands except share and per share data) | Total Number of Shares Purchased | Average Price Paid per Share (a) | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs (b) | ||||||||||||||||||||||
| April 2 through April 29, 2023 | 539,117 | $ | 116.30 | 539,117 | $ | 965,798 | ||||||||||||||||||||
| April 30 through May 27, 2023 | 280,508 | 117.64 | 280,508 | 932,798 | ||||||||||||||||||||||
| May 28 through July 1, 2023 | 780,537 | 134.52 | 780,537 | 823,520 | ||||||||||||||||||||||
| Total | 1,600,162 | 1,600,162 | ||||||||||||||||||||||||
(a)Average price paid per share excludes 1% excise tax on stock repurchases.
(b)On January 31, 2023, the company's Board of Directors approved a $1.0 billion increase to the company's share-repurchase program. The company's share-repurchase program does not have an expiration date. As of July 1, 2023, the total authorized dollar value of shares available for repurchase was $2.8 billion of which $2.0 billion has been utilized, while the $823.5 million in the table represents the remaining amount available for repurchase under the program.
Item 5. Other Information
Trading Arrangements
During the quarter ended July 1, 2023, none of the company's directors or officers adopted, amended, or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement", as those terms are defined in Regulation S-K, Item 408.
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Item 6. Exhibits
| Exhibit Number | Exhibit | |||||||
| 101* | Inline XBRL Document Set for the condensed 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: | August 3, 2023 | By: | /s/ Rajesh K. Agrawal | |||||||||||
| Rajesh K. Agrawal | ||||||||||||||
| Senior Vice President and Chief Financial Officer | ||||||||||||||
| (Duly Authorized Officer and Principal Financial Officer) | ||||||||||||||
| /s/ Richard A. Seidlitz | ||||||||||||||
| Richard A. Seidlitz | ||||||||||||||
| Vice President, Corporate Controller, and Principal Accounting Officer | ||||||||||||||
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Exhibit 31(i)(A)
Arrow Electronics, Inc.
Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Sean J. Kerins, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Arrow Electronics, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: | August 3, 2023 | By: | /s/ Sean J. Kerins | |||||||||||
| Sean J. Kerins | ||||||||||||||
| President and Chief Executive Officer | ||||||||||||||
Exhibit 31(i)(B)
Arrow Electronics, Inc.
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Rajesh K. Agrawal, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Arrow Electronics, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: | August 3, 2023 | By: | /s/ Rajesh K. Agrawal | |||||||||||
| Rajesh K. Agrawal | ||||||||||||||
| Senior Vice President and Chief Financial Officer | ||||||||||||||
Exhibit 32(i)
Arrow Electronics, Inc.
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 (“Section 906”)
In connection with the Quarterly Report on Form 10-Q of Arrow Electronics, Inc. (the "company") for the quarter ended July 1, 2023 (the "Report"), I, Sean J. Kerins, President and Chief Executive Officer of the company, certify, pursuant to the requirements of Section 906, that, to the best of my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
| Date: | August 3, 2023 | By: | /s/ Sean J. Kerins | |||||||||||
| Sean J. Kerins | ||||||||||||||
| President and Chief Executive Officer | ||||||||||||||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the company and will be retained by the company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32(ii)
Arrow Electronics, Inc.
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 (“Section 906”)
In connection with the Quarterly Report on Form 10-Q of Arrow Electronics, Inc. (the "company") for the quarter ended July 1, 2023 (the "Report"), I, Rajesh K. Agrawal, Senior Vice President and Chief Financial Officer of the company, certify, pursuant to the requirements of Section 906, that, to the best of my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
| Date: | August 3, 2023 | By: | /s/ Rajesh K. Agrawal | |||||||||||
| Rajesh K. Agrawal | ||||||||||||||
| Senior Vice President and Chief Financial Officer | ||||||||||||||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the company and will be retained by the company and furnished to the Securities and Exchange Commission or its staff upon request.