TD SYNNEX Corporation — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended May 31, 2023; balance-sheet comparisons are with November 30, 2022. TD SYNNEX is a global IT distributor and solutions aggregator operating in the Americas, Europe, and Asia-Pacific and Japan (APJ). Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 FY2023 | Q2 FY2022 | Change |
|---|---|---|---|
| Revenue | $14.06 billion | $15.27 billion | Down 7.9% reported; down 7.0% in constant currency |
| Gross profit / margin | $963 million / 6.85% | $956 million / 6.26% | Gross profit up 0.8% |
| Operating income / margin | $253 million / 1.80% | $253 million / 1.66% | Essentially flat income |
| Net income | $133 million | $149 million | Down 10.6% |
| Diluted EPS | $1.41 | $1.55 | Down 9.0% |
For the six months, revenue was $29.19 billion, down 5.0%; operating income was $551 million, up 16.0%; net income was $300 million, up 6.7%; and diluted EPS was $3.17 versus $2.92. Six-month operating cash flow was $605 million, compared with cash used of $284 million in the prior-year period. The improvement primarily reflected lower accounts receivable and inventory as sales volumes declined, partly offset by lower accounts payable. Investing activities used $65 million; financing activities used $247 million, including $175 million of share repurchases and $66 million of dividends.
At May 31, cash and cash equivalents were $852 million, versus $523 million at November 30, 2022. Total borrowings were approximately $4.1 billion, including $300 million current and $3.8 billion long-term; cash less borrowings was approximately negative $3.3 billion. The $3.5 billion revolving credit facility and $1.5 billion U.S. receivables securitization facility had no borrowings outstanding. The company reported compliance with its financial covenants. Management said available cash, operating cash flow, and borrowing capacity should meet working-capital and investment needs for at least the next 12 months.
Current assets were $18.72 billion and current liabilities $14.41 billion. Accounts receivable declined to $8.38 billion and inventory to $7.80 billion from November 30; the cash conversion cycle increased to 24 days from 23 days. The company’s term-loan effective interest rate rose to 6.63% from 5.46%; six-month net interest expense and finance charges increased 71.1% to $154 million.
Material changes and management commentary
- Lower demand for post-pandemic PC and other Endpoint Solutions products was the principal driver of revenue declines. Growth in Advanced Solutions and high-growth technologies partly offset the decline. A shift toward net revenue presentation reduced reported revenue by approximately 3% in the quarter.
- Q2 revenue fell in the Americas (11.0%) and Europe (4.1%) but grew in APJ (7.3%). APJ operating income increased 31.9%; Americas and Europe operating income were down 2.9% and 1.2%, respectively. For the six months, operating income increased in all three segments.
- Gross margin improved with product and customer mix, including greater contributions from Advanced Solutions and high-growth technologies. Lower merger-related purchase-accounting adjustments also supported GAAP results. However, non-GAAP operating income declined 5.6% in Q2 and 1.4% for the six months.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It said the GBO 2 optimization program is winding down and is not expected to incur material costs in future periods. Management expects purchase-accounting adjustments to benefit non-GAAP operating income through part of FY2023.
Risks, contingencies, and unusual items
- Results are exposed to IT demand, customer purchasing patterns, competition and margin pressure, inflation and interest rates, supplier or customer concentration, supply disruptions, foreign exchange movements, and successful integration of the legacy SYNNEX and Tech Data businesses. The filing reported no material changes to previously disclosed risk factors.
- One customer represented 12% of Q2 revenue and 11% of six-month revenue. No customer exceeded 10% of accounts receivable at period-end. Certain OEM vendors each accounted for at least 10% of revenue in some reported periods.
- Interest expense rose partly because fees on receivables sold to financial institutions increased: $12.0 million for Q2 and $23.7 million for the six months, versus $3.9 million and $6.9 million, respectively, a year earlier. Receivables sold and held by those institutions were $1.1 billion at May 31.
- The company terminated its remaining $1.0 billion interest-rate swaps in May 2023. The term loan is therefore no longer hedged by those swaps; the company reported a 6.63% effective term-loan rate at quarter-end. The credit agreement was amended to replace LIBOR with SOFR.
- A French competition fine was reduced on appeal to €24.9 million (about $26.7 million) and paid; the company continues to appeal. A related civil lawsuit remains under evaluation, and the company cannot estimate the probability or amount of potential loss. Management said the disclosed commitments and contingencies are not expected to have a material adverse effect.
- The company estimates that approximately $2 billion to $3 billion of accounts payable may fall within the scope of a new supplier-finance disclosure standard. Management does not expect adoption to affect financial condition, results, or cash flows.
Important facts for investors to verify
- Whether Endpoint Solutions demand stabilizes and growth in Advanced Solutions and high-growth technologies can offset continued weakness.
- Whether improved gross margin and operating margin persist despite lower revenue, mix changes, and elevated SG&A as a percentage of sales.
- How higher borrowing costs and receivables-sale fees affect earnings, and the impact of having terminated the interest-rate swaps.
- Whether operating cash generation remains strong as working-capital balances and the cash conversion cycle change.
- Developments in the French competition appeal and related civil litigation, as well as the scale and disclosure treatment of supplier-finance obligations.
- Capital returns: the company repurchased $175 million of shares in the first six months, had $842 million available under its buyback authorization at May 31, and declared a $0.35 quarterly dividend after quarter-end.