ARROW ELECTRONICS, INC. (ARW) FY 2021 MD&A

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

This section of the Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Information Relating to Forward-Looking Statements

This report includes "forward-looking statements," as the term is defined under the federal securities laws. Forward-looking statements are those statements which are not statements of historical fact. These forward-looking statements can be identified by forward-looking words such as “expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “seeks,” “estimates,” and similar expressions. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which could cause actual results or facts to differ materially from such statements for a variety of reasons, including, but not limited to: potential adverse effects of the ongoing global COVID-19 pandemic, including actions taken to contain or mitigate the impact of COVID-19, industry conditions, changes in product supply, pricing and customer demand, competition, other vagaries in the global components and the global enterprise computing solutions (“ECS”) markets, changes in relationships with key suppliers, increased profit margin pressure, changes in legal and regulatory matters, non-compliance with certain regulations, such as export, antitrust, and anti-corruption laws, foreign tax and other loss contingencies, and the company's ability to generate cash flow. For a further discussion of these and other factors that could cause the company's future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in this Annual Report on Form 10-K, as well as in other filings the company makes with the Securities and Exchange Commission. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company undertakes no obligation to update publicly or revise any of the forward-looking statements.

Certain Non-GAAP Financial Information

In addition to disclosing financial results that are determined in accordance with accounting principles generally accepted in the United States (“GAAP”), the company also discloses certain non-GAAP financial information, including:

•Non-GAAP sales and non-GAAP gross profit exclude the impact of changes in foreign currencies (referred to as “changes in foreign currencies”) by re-translating prior period results at current period foreign exchange rates and the impact of the wind down of the company’s personal computer and mobility asset disposition business (referred to as “wind down”).

•Non-GAAP operating expenses excludes restructuring, integration, and other charges, AFS notes receivable recoveries related to the Arrow Financing Solutions (“AFS”) business (referred to as “AFS notes receivable recoveries”), impairments of long-lived assets, the impact of changes in foreign currencies, and the impact of wind down.

•Non-GAAP operating income excludes identifiable intangible asset amortization, restructuring, integration, and other charges, AFS notes receivable recoveries, impairments of long-lived assets, and the impact of wind down.

•Non-GAAP effective tax rate and non-GAAP net income attributable to shareholders exclude identifiable intangible asset amortization, restructuring, integration, and other charges, AFS notes receivable recoveries, net gains on investments, certain tax adjustments, impairments of long-lived assets, pension settlement gain, and the impact of wind down.

Management believes that providing this additional information is useful to the reader to better assess and understand the company’s operating performance, especially when comparing results with previous periods, primarily because management typically monitors the business adjusted for these items in addition to GAAP results. However, analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with GAAP.

Overview

The company is a global provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company has one of the world's broadest portfolios of product offerings available from leading electronic components and enterprise computing solutions suppliers, coupled with a range of services, solutions and tools that help industrial and commercial customers introduce innovative products, reduce their time to market, and enhance their overall competitiveness. The company has two business segments, the global components business segment and the global enterprise computing solutions (“ECS”) business segment. The company distributes electronic components to original equipment manufacturers (“OEMs”) and contract manufacturers (“CMs”) through its global components business segment and provides enterprise computing solutions to value-added resellers (“VARs”) and managed service providers

23

(“MSPs”) through its global ECS business segment. For 2021, approximately 76% and 24% of the company's sales were from the global components business and the global ECS business, respectively.

The company's strategic initiatives include the following:

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

•The company has a global supply chain services business that has grown organically within the global components business. It derives services revenue from providing supply chain services such as procurement, logistics, warehousing, and insights from data analytics.

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

The company's financial objectives are to grow sales faster than the market, increase the markets served, grow profits faster than sales, generate earnings per share growth in excess of competitors’ earnings per share growth and market expectations, grow earnings per share at a rate that provides the capital necessary to support the company’s business strategy, allocate and deploy capital effectively so that return on invested capital exceeds the company’s cost of capital, and increase return on invested capital. To achieve its objectives, the company seeks to capture significant opportunities to grow across products, markets, and geographies. To supplement its organic growth strategy, the company continually evaluates strategic acquisitions to broaden its product and value-added service offerings, increase its market penetration, and expand its geographic reach.

Executive Summary

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

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

•restructuring, integration, and other charges of $10.9 million in 2021 and $13.3 million in 2020;

•identifiable intangible asset amortization of $36.9 million in 2021 and $38.4 million in 2020;

•impairments of long-lived assets of $4.5 million in 2021 and $7.2 million in 2020;

•gains from wind down of business of $14.7 million in 2020;

•AFS notes receivable recoveries of $1.8 million in 2020;

•net gain on investments of $13.0 million in 2021 and $5.3 million in 2020;

•tax benefit of $1.3 million in 2020 related to legislation changes and other non-recurring tax adjustments; and

•pension settlement gain of $1.8 million in 2020.

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

Impact of the COVID-19 Pandemic

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

Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. The extent to which COVID-19 and related supply constraints will continue to impact the company’s results will depend primarily on future developments, including the severity and duration of the crisis, and the impact of actions

24

taken and that will be taken to contain COVID-19 or treat its impact, among others. These future developments are highly uncertain and cannot be predicted with confidence, however, the company currently expects component supply to remain well below demand through the better part of 2022. The global economic impact from COVID-19 may adversely affect the company's results of operations in the future and may affect the credit condition of some customers, which could increase delays in customer payments and credit losses.

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

Impact on the first quarter of 2022

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

Sales

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

Following is an analysis of net sales by reportable segment for the years ended December 31 (in millions):

* The sum of the components for sales, as reported, and non-GAAP sales may not agree to totals, as presented, due to rounding.

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

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

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

25

Gross Profit

Following is an analysis of gross profit for the years ended December 31 (in millions):

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

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

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

Selling, General, and Administrative Expenses and Depreciation and Amortization

Following is an analysis of operating expenses for the years ended December 31 (in millions):

+Operating expenses discussed here are presented before restructuring, integration, and other charges, and impairments of long-lived assets.

* The sum of the components for selling, general, and administrative expenses and depreciation and amortization, as reported, and non-GAAP operating expenses may not agree to totals, as presented, due to rounding.

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

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

26

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

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

Restructuring, Integration, and Other Charges

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

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

Operating Income

Following is an analysis of operating income for the years ended December 31 (in millions):

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

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

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

Interest and Other Financing Expense, Net

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

27

Income Tax

The company records a provision for income taxes for the anticipated tax consequences of the reported financial results of operations using the asset and liability method. The following table presents the company's effective income tax rate deviation from the non-GAAP effective tax rate for the years ended December 31:

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

The change in the effective tax rate to 22.7% for 2021 from 22.8% for 2020 was primarily driven by changes in the mix of tax jurisdictions where taxable income is generated.

Net Income Attributable to Shareholders

Following is an analysis of net income attributable to shareholders for the years ended December 31 (in millions):

* Identifiable intangible asset amortization also excludes amortization related to the noncontrolling interest.

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

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

Liquidity and Capital Resources

Management believes that the company’s current cash availability, its current borrowing capacity under its revolving credit facility and asset securitization programs, and its expected ability to generate future operating cash flows are sufficient to meet its projected cash flow needs for the next 12 months and the foreseeable future. The company's current committed and undrawn liquidity stands at over $3.3 billion in addition to $222.2 million of cash on hand at December 31, 2021. The company also may issue debt or equity securities in the future and management believes the company will have adequate access to the capital markets, if needed. The company continually evaluates its liquidity requirements and would seek to amend its existing borrowing capacity or access the financial markets as deemed necessary.

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

28

The following table presents selected financial information related to liquidity at December 31 (in millions):

Working Capital

The company maintains a significant investment in working capital which the company defines as accounts receivable, net, plus inventories less accounts payable. Working capital, as a percentage of sales was 15.8% and 13.5% in 2021 and 2020, respectively. The change in working capital during 2021, compared to the year-earlier period, was primarily attributable to increases in inventory and increases in trade and accounts receivable as a result of significantly increased sales compared to 2020.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments, which are readily convertible into cash, with original maturities of three months or less. At December 31, 2021 and 2020, the company had cash and cash equivalents of $222.2 million and $373.6 million, respectively, of which $211.6 million and $140.1 million, respectively, were held outside the United States. Liquidity is affected by many factors, some of which are based on normal ongoing operations of the company's business and some of which arise from fluctuations related to global economics and markets.

To achieve greater cash management agility and to further advance business objectives, during the fourth quarter of 2019, the company reversed its assertion to indefinitely reinvest a certain portion of its foreign earnings, of which approximately $2.2 billion are still available for distribution in future periods as of December 31, 2021, after distributions of $53.6 million and $349.0 million during 2021 and 2020, respectively. The company has not reversed its assertion to indefinitely reinvest the residual $2.5 billion of undistributed earnings of its foreign subsidiaries and recognizes that it may be subject to additional foreign taxes and U.S. state income taxes, if it reverses its indefinite reinvestment assertion on these foreign earnings.

Revolving Credit Facilities and Debt

The following table summarizes the company’s credit facilities by category at December 31 (in millions):

(a) In March 2021, the company amended its asset securitization program and, among other things, increased its borrowing capacity from $1.20 billion to $1.25 billion and extended its term to mature in March 2024.

(b) In September 2021, the company amended its revolving credit facility and, among other things, extended its term to mature in September 2026.

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

(d) The facility limit is €400 million and has been converted to U.S. dollars for the table above. Under the EMEA asset securitization program the company will continuously sell its interest in designated pools of trade accounts receivables of certain of its subsidiaries in the EMEA region. Receivables sold under the program are excluded from “Accounts receivable, net” and no corresponding liability is recorded on the company’s consolidated balance sheets. Refer to Note 5 “Accounts Receivables” of the Notes to the Consolidated Financial Statements for further discussion.

29

The following table summarizes recent events impacting the company's capital resources (in millions):

*During February 2022, prior to the issuance of this Form 10-K, the company repaid $349.8 million principal amount of its 3.50% notes, due April 2022.

Refer to Note 6, “Debt” of the Notes to the Consolidated Financial Statements for further discussion of the company's short-term and long-term debt and available financing.

Cash Flows

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

Cash Flows from Operating Activities

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

Cash Flows from Investing Activities

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

Cash Flows from Financing Activities

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

Capital Expenditures

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

Share Repurchase Program

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

30

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

Contractual Obligations

The company has contractual obligations for short-term and long-term debt, interest on short-term and long-term debt, purchase obligations, and operating leases.

•At December 31, 2021, the company had $2.6 billion of notes outstanding, $349.8 million of which mature in the next twelve months. The remaining debt has maturity dates in 2023 through 2032. During February 2022, prior to the issuance of this Form 10-K, the company repaid the $349.8 million principal amount of its 3.50% notes due April 2022. Refer to Note 6.

•Amounts related to total interest on long-term debt at December 31, 2021 totaled $442.4 million, with $95.7 million expected to be paid within the next 12 months. Refer to Note 6.

•Purchase obligations of $13.9 billion represent an estimate of non-cancelable inventory purchase orders and other contractual obligations related to information technology and facilities as of December 31, 2021 with $12.1 billion expected to be paid within the next 12 months and $1.6 billion in 2023. Many of these orders are backed by customer purchase orders with Arrow, that are also non-cancelable. Non-cancelable purchase orders increased over $8 billion compared with the year-earlier period primarily due to increased inventory purchase orders outstanding as a result of supply chain constraints and current market conditions and were entered into in the ordinary course of business. Both prices and lead times for orders have increased significantly and many vendors are limiting cancellations. Some of the inventory purchases above relate to sales where the company assumes an agency relationship in the transaction. Refer to discussion of the company's revenue recognition policy in Note 1.

•Amounts related to future lease payments for operating lease obligations at December 31, 2021 totaled $330.4 million, with $76.8 million expected to be paid within the next 12 months. Refer to Note 14.

Additional Capital Requirements and Sources

Recent and expected other capital requirements and sources, in addition to the above matters, also include the items described below:

•Employee Benefit Plans: The company maintains an unfunded executive pension plan under which the company will pay supplemental pension benefits to certain employees upon retirement. The company has funded $116.7 million of the Arrow SERP obligation for the former corporate officers in a rabbi trust comprised primarily of life insurance policies and mutual fund assets. Projected benefit obligation at December 31, 2021 and 2020, was $105.5 million and $109.6 million, respectively. Refer to Note 13.

•Environmental liabilities: The company is involved in certain ongoing environmental cleanup activities and legal proceedings, which are inherently uncertain with respect to outcomes, estimates and assumptions that it makes as of each reporting period, are inherently unpredictable. Refer to Note 15.

•Hedging activities: The company has entered into certain forward-starting interest rate swaps derivatives which are designated hedges of future debt issuances as well as certain foreign exchange forward contracts designated as net investment hedges. As of December 31, 2021 and 2020, all such contracts were in an asset position in the amount of $62.4 million and $33.7 million, respectively. Refer to Note 7.

•Sales of trade receivables: In the normal course of business, certain of the company’s subsidiaries have agreements to sell, without recourse, selected trade receivables to financial institutions. The company does not retain financial or legal interests in these receivables, and, accordingly, they are accounted for as sales of the related receivables and the receivables are removed from the company’s consolidated balance sheets.

Critical Accounting Estimates

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

31

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

Revenue Recognition

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

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

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

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

Trade Accounts and Notes Receivable

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

Management estimates the allowance for credit losses using relevant available information about expected credit losses and an age-based reserve model. Inputs to the model include information about historical credit losses, customer credit ratings, past events, current conditions, and reasonable and supportable forecasts. Adjustments to historical loss information are made for differences in current receivable-specific risk characteristics such as changes in the economic and industry environment, or other relevant factors.

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

Inventories

Inventories are stated at the lower of cost or net realizable value. Write-downs of inventories to market value are based upon contractual provisions governing price protection, stock rotation rights, and obsolescence, as well as assumptions about future demand and market conditions. If assumptions about future demand change and/or actual market conditions are less favorable

32

than those projected by the company, additional write-downs of inventories may be required. Due to the large number of transactions and the complexity of managing the process around price protections and stock rotations, estimates are made regarding adjustments to the book cost of inventories. Actual amounts could be different from those estimated.

Income Taxes

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

The carrying value of the company’s deferred tax assets is dependent upon the company's ability to generate sufficient future taxable income in certain tax jurisdictions. Should the company determine that it is more likely than not that some portion or all of its deferred tax assets will not be realized, a valuation allowance to reduce the deferred tax assets is established in the period such determination is made. The assessment of the need for a valuation allowance requires considerable judgment on the part of management with respect to the benefits that could be realized from future taxable income, as well as other positive and negative factors.

It is also the company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the company prevails in matters for which a liability for an unrecognized tax benefit is established, or is required to pay amounts in excess of the liability, or when other facts and circumstances change, the company's effective tax rate in a given financial statement period may be materially affected.

Contingencies and Litigation

The company is subject to proceedings, lawsuits, and other claims related to environmental, regulatory, labor, product, tax, and other matters and assesses the likelihood of an adverse judgment or outcome for these matters, as well as the range of potential losses. A determination of the reserves required, if any, is made after careful analysis. The reserves may change in the future due to new developments impacting the probability of a loss, the estimate of such loss, and the probability of recovery of such loss from third parties.

Goodwill

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

•macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets;

•industry and market considerations such as a deterioration in the environment in which the company operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for the company’s products or services, or a regulatory or political development;

•cost factors such as increases in inventory, labor, or other costs that have a negative effect on earnings and cash flows;

•overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;

•other relevant entity-specific events such as changes in management, key personnel, strategy, or customers, contemplation of bankruptcy, or litigation;

•events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more likely than not expectation of selling or disposing all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit; and

•a sustained decrease in share price (considered in both absolute terms and relative to peers).

33

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

An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary. The company has elected not to perform the qualitative assessment and performed the quantitative goodwill impairment test. The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit is less than its fair value, no impairment exists. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

The company estimates the fair value of a reporting unit using the income approach. For the purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The assumptions included in the income approach include forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, income tax rates, and long-term discount rates, among others, all of which require significant judgments by management. Actual results may differ from those assumed in the company’s forecasts. The company also reconciles its discounted cash flow analysis to its current market capitalization allowing for a reasonable control premium. As of the first day of the fourth quarters of 2021, and 2020, the company’s annual impairment testing did not indicate impairment at any of the company’s reporting units.

A decline in general economic conditions or global equity valuations could impact the judgments and assumptions about the fair value of the company’s businesses, and the company could be required to record an impairment charge in the future, which could impact the company’s consolidated balance sheets, as well as the company’s consolidated statements of operations. If the company was required to recognize an impairment charge in the future, the charge would not impact the company’s consolidated cash flows, current liquidity, capital resources, and covenants under its existing revolving credit facility, North American asset securitization program, other outstanding borrowings, and EMEA asset securitization program.

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