Described below and throughout this report are certain risks that the company’s management believes are applicable to the company’s business and the industry in which it operates.  If any of the described events occur, the company’s business, results of operations, financial condition, liquidity, or access to the capital markets could be materially adversely affected.  When stated below that a risk may have a material adverse effect on the company’s business, it means that such risk may have one or more of these effects.  There may be additional risks that are not presently material or known.  There are also risks within the economy, the industry and the capital markets that could materially adversely affect the company, including those associated with an economic recession, inflation, and global economic slowdown.  These factors affect businesses generally, including the company’s customers and suppliers and, as a result, are not discussed in detail below except to the extent such conditions could materially affect the company and its customers and suppliers in particular ways.

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

A substantial portion of the company’s inventory is purchased from suppliers with which the company has entered into non-exclusive distribution agreements.  These agreements are typically cancelable on short notice (generally 30 to 90 days).  Certain parts of the company’s business, such as the company's global ECS business, rely on a limited number of suppliers.  To the extent that the company’s significant suppliers reduce the amount of products they sell through distribution, or are unwilling to continue to do business with the company, or are unable to continue to meet or significantly alter their obligations, the company’s business could be materially adversely affected.  In addition, to the extent that the company’s suppliers modify the terms of their contracts with the company, limit supplies due to capacity constraints, or other factors, there could be a material adverse effect on the company’s business.

The competitive pressures the company faces could have a material adverse effect on the company's business.

The market for the company's products and services is very competitive and subject to rapid technological change.  Not only does the company compete with other distributors, it also competes for customers with many of its own suppliers.  Additional competition has emerged from third-party logistics providers, catalogue distributors, and brokers.  The company's failure to maintain and enhance its competitive position could adversely affect its business and prospects.  Furthermore, the company's efforts to compete in the marketplace could cause deterioration of gross profit margins and, thus, overall profitability.  The sizes of the company's competitors vary across market sectors, as do the resources the company has allocated to the sectors in which it does business.  Therefore, some of the competitors may have a more extensive customer and/or supplier base than the company in one or more of its market sectors.

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

The company sells its components at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated.  As a result, the company may face claims for damages (such as consequential damages) that are disproportionate to the revenues and profits it receives from the components involved in the claims.  While the company typically has provisions in its supplier agreements that hold the supplier accountable for defective products, and the company and its suppliers generally exclude consequential damages in their standard terms and conditions, the company’s ability to avoid such liabilities may be limited as a result of differing factors, such as the inability to exclude such damages due to the laws of some of the countries where it does business.  The company’s business could be materially adversely affected as a result of a significant quality or performance issue in the

 

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products sold by the company, if it is required to pay for the associated damages.  Although the company currently has product liability insurance, such insurance is limited in coverage and amount.

Declines in value and other factors pertaining to the company’s inventory could materially adversely affect its business.

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

The company is subject to environmental laws and regulations that could materially adversely affect its business.

The European Union ("EU"), China, and other jurisdictions in which the company's products are sold have enacted or are proposing to enact laws addressing environmental and other impacts from product disposal, use of hazardous materials in products, use of chemicals in manufacturing, recycling of products at the end of their useful life, and other related matters. These laws include the EU Restriction of the Use of Certain Hazardous Substances and Waste Electrical and Electronic Equipment Directives, the EU REACH (chemical registration) Directive, the China law on Management Methods for Controlling Pollution by Electronic Information Products, and various other laws. These laws prohibit the use of certain substances in the manufacture of the company's products and directly and indirectly impose a variety of requirements for modification of manufacturing processes, registration, chemical testing, labeling, and other matters.  Failure to comply with these directives or any other applicable environmental regulations could result in fines or suspension of sales.  Additionally, these directives and regulations may result in the company having non-compliant inventory that may be less readily salable or have to be written off.  

Some environmental laws impose liability, sometimes without fault, for investigating or cleaning up contamination on or emanating from the company’s currently or formerly owned, leased, or operated property, as well as for damages to property or natural resources and for personal injury arising out of such contamination.  As the distribution business, in general, does not involve the manufacture of products, it is typically not subject to significant liability in this area.  However, there may be occasions, including through acquisitions, where environmental liability arises.  For example, the company has recently expanded into the information technology asset disposition business, or ITAD, pursuant to which, the company is responsible to its customers to dispose of certain assets in an environmentally compliant manner.  The company's or its subcontractors' failure to comply with the applicable environmental laws and regulations could result in additional liability.  Such liability may be joint and several, meaning that the company could be held responsible for more than its share of the liability involved.  The presence of environmental contamination could also interfere with ongoing operations or adversely affect the company’s ability to sell or lease its properties.  The discovery of contamination for which the company is responsible, or the enactment of new laws and regulations, or changes in how existing requirements are enforced, could require the company to incur costs for compliance or subject it to unexpected liabilities.

The foregoing matters could materially adversely affect the company’s business.

 

 

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The company is currently involved in the investigation and remediation of environmental matters at two sites as a result of its Wyle Electronics acquisition, and the company is in litigation related to those sites.

In 2000, the company acquired Wyle Electronics ("Wyle") and assumed its outstanding liabilities, including responsibility for environmental problems at sites Wyle had previously owned.  The Wyle purchase agreement includes an indemnification from the seller, now known as E.ON AG, in favor of the company, covering virtually all costs arising out of or in connection with those environmental obligations.  Two sites are known to have environmental issues, one at Norco, California and the other at Huntsville, Alabama.  The company has thus far borne most of the cost of the investigation and remediation of the Norco and Huntsville sites, under the direction of the cognizant state agencies.  The company has spent approximately $41 million to date in connection with these sites.  In addition, the company was named as a defendant in a private lawsuit filed in connection with alleged contamination at a small industrial building formerly leased by Wyle Laboratories in El Segundo, California.  The lawsuit was settled, but the possibility remains that government entities or others may attempt to involve the company in further characterization or remediation of groundwater issues in the area.

E.ON AG acknowledged liability under the contractual indemnities with respect to the Norco and Huntsville sites and made a small initial payment, but has subsequently refused to make further payments.  As a result, the company is suing E.ON AG in the Regional Court in Frankfurt, Germany.  The litigation is currently suspended while the company engages in a court-facilitated mediation with E.ON AG.  The mediation commenced in December 2009 and is ongoing.

As successor-in-interest to Wyle, the company is the beneficiary of the various Wyle insurance policies that covered liabilities arising out of operations at the two contaminated sites.  Certain of the insurance carriers implicated in actions, which were brought in Riverside, California, County Court by landowners and residents alleging personal injury and property damage caused by contaminated groundwater and related soil-vapor found in certain residential areas adjacent to the Norco site, have undertaken substantial portions of the defense of the company, and the company has recovered approximately $13 million from them to date.  The company has sued certain of the umbrella liability policy carriers, however, they have yet to make payment on the tendered losses.

The company believes strongly in the merits of its positions regarding the E.ON AG indemnity and the liabilities of the insurance carriers, but there can be no guarantee of the outcome of litigation.  Should and to the extent some or all of the insurance policies at issue prove insufficient or unavailable, and E.ON AG prevails in the litigation pending in Germany, the company would be responsible for the costs.  The total costs of 1) the investigation and remediation of the two sites, 2) the defense of the company and the defense and indemnity of Wyle Laboratories in the Riverside County cases, 3) the settlement amount in those cases, and 4) the amount of any shortfall in the availability of the E.ON AG indemnity and/or the insurance coverage are all as yet undetermined.  Any or all of those costs could have a material adverse effect on the company's business. 

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

The company requires cash or committed liquidity facilities for general corporate purposes, such as funding its ongoing working capital, acquisition, and capital expenditure needs, as well as to refinance indebtedness.  At December 31, 2010, the company had cash and cash equivalents of $926.3 million.  In addition, the company currently has access to committed credit lines of $1.4 billion.  The company’s ability to satisfy its cash needs depends on its ability to generate cash from operations and to access the financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond its control.

The company may, in the future, need to access the financial markets to satisfy its cash needs.  The company’s ability to obtain external financing is affected by various factors including general financial market conditions and the company’s debt ratings.  While, thus far, uncertainties in global credit markets have not significantly affected the company’s access to capital, future financing could be difficult or more

 

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expensive.  Further, any increase in the company’s level of debt, change in status of its debt from unsecured to secured debt, or deterioration of its operating results may cause a reduction in its current debt ratings. Any downgrade in the company’s current debt rating or tightening of credit availability could impair the company’s ability to obtain additional financing or renew existing credit facilities on acceptable terms.  Under the terms of any external financing, the company may incur higher financing expenses and become subject to additional restrictions and covenants. For example, the company’s existing debt agreements contain restrictive covenants, including covenants requiring compliance with specified financial ratios, and a failure to comply with these or any other covenants may result in an event of default.  The company’s lack of access to cost-effective capital resources, an increase in the company’s financing costs, or a breach of debt instrument covenants could have a material adverse effect on the company's business.

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

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

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grant liens on assets;

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make restricted payments (including paying dividends on capital stock or redeeming or repurchasing capital stock);

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make investments;

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merge, consolidate, or transfer all or substantially all of its assets;

·

incur additional debt; or

·

engage in certain transactions with affiliates.

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

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

Most of the company’s sales are made on an order-by-order basis, rather than through long-term sales contracts.  The company generally works with its customers to develop non-binding forecasts for future volume of orders.  Based on such non-binding forecasts, the company makes commitments regarding the level of business that it will seek and accept, the inventory that it purchases, and the levels of utilization of personnel and other resources.  A variety of conditions, both specific to each customer and generally affecting each customer’s industry may cause customers to cancel, reduce, or delay orders that were either previously made or anticipated, go bankrupt or fail, or default on their payments.  Generally, customers cancel, reduce, or delay purchase orders and commitments without penalty.  The company seeks to mitigate these risks, in some cases, by entering into noncancelable/nonreturnable sales agreements, but there is no guarantee that such agreements will adequately protect the company.  Significant or numerous cancellations, reductions, delays in orders by customers, losses of customers, and/or customer defaults on payments could materially adversely affect the company’s business.

The company’s revenues originate primarily from the sales of semiconductor, PEMCO (passive, electro-mechanical and interconnect), IT hardware and software products, the sales of which are traditionally cyclical.

The semiconductor industry historically has experienced fluctuations in product supply and demand, often associated with changes in technology and manufacturing capacity and subject to significant economic market upturns and downturns.  Sales of semiconductor products and related services represented approximately 49%, 46%, and 46% of the company’s consolidated sales in 2010, 2009, and 2008,

 

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respectively.  The sale of the company's PEMCO products closely tracks the semiconductor market.  Accordingly, the company’s revenues and profitability, particularly in its global components business segment, tend to closely follow the strength or weakness of the semiconductor market.  Further, economic weakness of the financial and credit markets during 2008 and 2009 had a negative impact on the company’s financial results.  The company’s operating results for 2010 suggest that the company’s business has experienced a recovery.  However, there can be no assurance that the recovery to date will continue at the current pace or at all.  Another downturn in the technology industry could have a material adverse effect on the company’s business and negatively impact its ability to maintain historical profitability levels.

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

In 2010, 2009, and 2008, approximately 56%, 57%, and 54%, respectively, of the company’s sales came from its operations outside the United States.  As a result of the company’s international sales and locations, its operations are subject to a variety of risks that are specific to international operations, including the following:

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import and export regulations that could erode profit margins or restrict exports;

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the burden and cost of compliance with international laws, treaties, and technical standards and changes in those regulations;

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potential restrictions on transfers of funds;

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import and export duties and value-added taxes;

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transportation delays and interruptions;

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uncertainties arising from local business practices and cultural considerations;

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enforcement of the Foreign Corrupt Practices Act, or similar laws of other jurisdictions;

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foreign laws that potentially discriminate against companies which are headquartered outside that jurisdiction;

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recent volatility associated with sovereign debt of certain international economies;

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potential military conflicts and political risks; and

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currency fluctuations, which the company attempts to minimize through traditional hedging instruments.

Furthermore, products the company sells which are either manufactured in the United States or based on U.S. technology ("U.S. Products") are subject to the Export Administration Regulations ("EAR") when exported and re-exported to and from all international jurisdictions, in addition to the local jurisdiction’s export regulations applicable to individual shipments.  Licenses or proper license exemptions may be required by local jurisdictions’ export regulations, including EAR, for the shipment of certain U.S. Products to certain countries, including China, India, Russia, and other countries in which the company operates.  Non-compliance with the EAR or other applicable export regulations can result in a wide range of penalties including the denial of export privileges, fines, criminal penalties, and the seizure of inventories.  In the event that any export regulatory body determines that any shipments made by the company violate the applicable export regulations, the company could be fined significant sums and/or its export capabilities could be restricted, which could have a material adverse effect on the company’s business.

Also, the company's operating income margins are lower in certain geographic markets.  Operating income in the components business in Asia/Pacific and the global ECS business in Europe tends to be lower than operating income in the Americas and EMEA.  As sales in those markets increased as a percentage of overall sales, consolidated operating income margins have fallen.  The financial impact of lower operating income on returns on working capital was offset, in part, by lower working capital requirements.  While the company has and will continue to adopt measures to reduce the potential impact of losses resulting from the risks of doing business abroad, it cannot ensure that such measures will be adequate and, therefore, could have a material adverse effect on its business.

 

 

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

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

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problems combining the acquired operations, technologies, or products;

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unanticipated costs or assumed liabilities, including those associated with regulatory actions or investigations;

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diversion of management’s attention;

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negative effects on existing customer and supplier relationships; and

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potential loss of key employees, especially those of the acquired companies.

Further, the company has made, and may continue to make acquisitions of, or investments in new services, businesses or technologies to expand our current service offerings and product lines.  Some of these may involve risks that may differ from those traditionally associated with our core distribution business, including undertaking product or service warranty responsibilities that in our traditional core business would generally reside primarily with our suppliers.  If we are not successful in mitigating or insuring against such risks, they could have a material adverse effect on the company’s business.

 

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

 

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

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

A decline in general economic conditions 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 impairment charges on its goodwill or other identifiable intangible assets in the future, which could impact the company’s consolidated balance sheet, as well as the company’s consolidated statement 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, asset securitization program, and other outstanding borrowings.

If the company fails to maintain an effective system of internal controls or discovers material weaknesses in its internal controls over financial reporting, it may not be able to report its financial results accurately or timely or detect fraud, which could have a material adverse effect on its business.

An effective internal control environment is necessary for the company to produce reliable financial reports and is an important part of its effort to prevent financial fraud.  The company is required to periodically evaluate the effectiveness of the design and operation of its internal controls over financial reporting.  Based on these evaluations, the company may conclude that enhancements, modifications or changes to internal controls are necessary or desirable.  While management evaluates the effectiveness

 

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of the company’s internal controls on a regular basis, these controls may not always be effective.  There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure in human judgment.  In addition, control procedures are designed to reduce rather than eliminate financial statement risk.  If the company fails to maintain an effective system of internal controls, or if management or the company’s independent registered public accounting firm discovers material weaknesses in the company’s internal controls, it may be unable to produce reliable financial reports or prevent fraud, which could have a material adverse effect on the company’s business.  In addition, the company may be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NYSE.  Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the company’s financial statements, which could cause the market price of its common stock to decline or limit the company’s access to capital.

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

The company's current global operations reside on multiple technology platforms.  These platforms are subject to electrical or telecommunications outages, computer hacking, or other general system failure, which could have a material adverse effect on the company's business.  Because most of the company's systems consist of a number of legacy, internally developed applications, it can be harder to upgrade and may be more difficult to adapt to commercially available software.  

 

The company is in the process of converting its various business information systems worldwide to a single Enterprise Resource Planning system.  The company has committed significant resources to this conversion, and is expected to be phased in over several years.  This conversion is extremely complex, in part, because of the wide range of processes and the multiple legacy systems that must be integrated globally.  The company is using a controlled project plan that it believes will provide for the adequate allocation of resources.  However, such a plan, or a divergence from it, may result in cost overruns, project delays, or business interruptions.  During the conversion process, the company may be limited in its ability to integrate any business that it may want to acquire.  Failure to properly or adequately address these issues could impact the company's ability to perform necessary business operations, which could materially adversely affect the company’s business.

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

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

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result in substantial cost to the company;

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divert management’s attention and resources;

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be time consuming to defend;

 

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·

result in substantial damage awards;

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cause product shipment delays; or

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require the company to seek to enter into royalty or other licensing agreements.

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

Item 1B.  Unresolved Staff Comments.

None.

Item 2.   Properties.

The company owns and leases sales offices, distribution centers, and administrative facilities worldwide.  Its executive office is located in Melville, New York and occupies a 163,000 square foot facility under a long-term lease expiring in 2013.  The company owns 12 locations throughout the Americas, EMEA, and the Asia Pacific region and occupies approximately 330 additional locations under leases due to expire on various dates through 2022.  The company believes its facilities are well maintained and suitable for company operations.