TD SYNNEX Corporation — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended August 31, 2023; fiscal year ends November 30. Amounts below are in U.S. dollars. TD SYNNEX is a global IT distributor and solutions aggregator operating in the Americas, Europe, and Asia-Pacific and Japan (APJ).
Financial performance
| Metric | Three months ended Aug. 31, 2023 | Year-over-year | Nine months ended Aug. 31, 2023 | Year-over-year |
|---|---|---|---|---|
| Revenue | $13.961 billion | Down 9.1% | $43.148 billion | Down 6.4% |
| Gross profit / margin | $971.3 million / 6.96% | Up 6.0%; margin 5.97% prior year | $2.938 billion / 6.81% | Up 3.4%; margin 6.16% prior year |
| Operating income / margin | $240.2 million / 1.72% | Down 0.5%; margin 1.57% prior year | $791.3 million / 1.83% | Up 10.4%; margin 1.55% prior year |
| Net income | $139.3 million | Down 6.4% | $439.4 million | Up 2.2% |
| Diluted EPS | $1.49 | $1.55 prior year | $4.66 | $4.47 prior year |
| Interest expense and finance charges, net | $67.7 million | Up 29.9% | $222.2 million | Up 56.0% |
Management-reported non-GAAP diluted EPS was $2.78 for the quarter versus $2.74 a year earlier, and $8.14 for nine months versus $8.50. These measures exclude specified items and are not GAAP results.
Cash flow, debt, and liquidity
- Operating cash flow: $1.197 billion provided in the first nine months, versus $351.8 million used in the comparable 2022 period. The company attributed the improvement mainly to lower sales volumes reducing inventory and receivables, partly offset by lower accounts payable.
- Investing and financing cash flows: $113.2 million used in investing, primarily reflecting higher integration-related capital expenditure; $405.6 million used in financing, including $277.8 million of share repurchases and $98.9 million of dividends.
- Cash: $1.251 billion at August 31, 2023, compared with $522.6 million at November 30, 2022.
- Borrowings: $4.079 billion on the balance sheet ($939.7 million current and $3.139 billion long-term), compared with $4.104 billion at November 30, 2022. The current portion includes $700 million of senior notes due August 2024. Term-loan effective interest rate was 6.81% at August 31, up from 5.46% at November 30, 2022.
- The $3.5 billion revolving credit facility and $1.5 billion U.S. receivables securitization arrangement had no borrowings outstanding at quarter end. Other facilities had $164.9 million outstanding. The company reported compliance with financial covenants.
- Management said available cash, operating cash flows, and borrowing capacity should cover the 2024 notes repayment and expected working-capital and investment needs for the next 12 months. Cash conversion cycle was 23 days, unchanged from November 2022 and August 2022.
Material changes and management commentary
- Revenue fell as the post-pandemic decline in demand for personal-computer ecosystem products weighed on Endpoint Solutions. Growth in Advanced Solutions and high-growth technologies partly offset the decline. A shift toward revenue reported on a net basis also reduced reported revenue; management estimated an approximately 2% impact for the quarter and 3% for the nine-month period.
- By region, Q3 revenue declined 10.3% in the Americas and 9.7% in Europe, while APJ revenue rose 10.3%. Nine-month APJ revenue rose 12.0%; Americas and Europe declined 8.8% and 4.7%, respectively.
- Gross margin improved, which management attributed to product and customer mix, Advanced Solutions growth, and margin expansion in high-growth technologies. Higher personnel costs and lower revenue increased SG&A as a percentage of revenue.
- Quarterly operating income was nearly flat: improved gross margin and lower purchase-accounting adjustments were offset by lower Endpoint Solutions revenue, higher personnel costs, and voluntary-severance costs. The nine-month operating-income increase also reflected lower merger-related purchase-accounting adjustments.
- Interest expense rose with higher average interest rates and increased fees for receivables sales. Nine-month receivables-sale discount fees were $36.2 million, versus $11.9 million a year earlier.
Outlook, risks, and unusual items
- The filing provides no specific revenue, earnings, or margin guidance. Management described liquidity as sufficient for the next 12 months and expects no material future costs under the legacy GBO 2 program.
- A voluntary severance program announced in July generated $37.2 million of Q3 costs, including $30.0 million severance and $7.2 million duplicative labor costs.
- The company had sold $834.5 million of receivables under uncommitted, without-recourse programs at August 31, versus $1.4 billion at November 30, 2022. Program availability depends on eligible receivables and financial institutions’ willingness to purchase them.
- One customer represented 11% of revenue in both the quarter and nine-month period. Apple accounted for 10% of consolidated revenue in both periods; Cisco and HP each accounted for 10% in the quarter.
- The French competition fine related to Apple distribution was reduced on appeal to €24.9 million, paid in full, and remains under further appeal. A related civil lawsuit is being evaluated; the company could not estimate the probability or amount of any potential loss. Management said the disclosed commitments and contingencies were not expected to have a material adverse effect.
- Management cited risks including weak or variable IT demand, inflation and interest rates, customer and supplier concentration, competition and margin pressure, supply disruptions, foreign exchange and interest-rate movements, and successful integration of the legacy businesses. The filing reported no material changes to previously disclosed risk factors or market risks.
Most important facts for investors to verify
- Whether the Endpoint Solutions downturn has bottomed and whether Advanced Solutions and APJ growth can continue to offset it.
- Whether improved gross margins persist as product mix and net-versus-gross revenue presentation change.
- Cash conversion, working-capital trends, and ongoing reliance on receivables-sale programs and vendor credit.
- Ability to refinance or repay the $700 million notes due August 2024, and the effect of higher borrowing costs.
- Remaining merger, severance, and integration costs; progress on expected integration benefits.
- Outcome of the French appeal and related civil lawsuit, plus credit exposure from the significant customer and vendor concentrations.