TD SYNNEX Corporation — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended August 31, 2022. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. TD SYNNEX distributes IT products and provides related supply-chain, integration and solutions services.
Business context and comparability
TD SYNNEX acquired Tech Data on September 1, 2021. The prior-year quarter therefore excludes Tech Data, while the current period includes it; reported growth primarily reflects the acquisition and should not be read as organic growth. Management reports three geographic segments: Americas, Europe and Asia-Pacific and Japan (APJ).
Financial performance and liquidity
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $15,356 | $5,207 | $46,096 | $16,003 |
| Gross profit | $916 | $313 | $2,840 | $946 |
| Gross margin | 5.97% | 6.00% | 6.16% | 5.91% |
| Operating income | $242 | $148 | $717 | $438 |
| Operating margin | 1.57% | 2.85% | 1.55% | 2.74% |
| Net income | $149 | $95 | $430 | $276 |
| Diluted EPS | $1.55 | $1.81 | $4.47 | $5.27 |
Q3 revenue rose 194.9% and nine-month revenue rose 188.0%, largely due to Tech Data. Q3 gross margin was nearly flat year over year; nine-month gross margin increased. Operating margin declined in both comparisons as higher personnel, acquired-intangible amortization and merger integration costs weighed on results. Diluted EPS fell despite higher net income, with weighted-average diluted shares increasing to 95.4 million from 51.8 million in the quarter, principally reflecting merger-related shares.
Non-GAAP measures also rose: Q3 adjusted EBITDA was $422 million versus $177 million, and non-GAAP diluted EPS was $2.74 versus $2.14. These measures exclude specified costs and adjustments and are not substitutes for GAAP results.
- Cash flow: Nine-month operating cash flow was negative $352 million, compared with positive $249 million a year earlier. The principal use was a $3.354 billion increase in inventory, partly offset by higher accounts payable. Investing cash outflow was $77 million; financing cash outflow was $159 million.
- Working capital: Inventory was $9.755 billion at August 31, up from $6.643 billion at November 30, 2021. Cash conversion cycle was 23 days, versus 14 days at November 30; days inventory outstanding increased to 62 from 41.
- Balance sheet and liquidity: Cash was $351 million, total assets $29.092 billion and stockholders’ equity $7.772 billion. Current assets of $19.882 billion exceeded current liabilities of $15.931 billion. Borrowings totaled approximately $4.134 billion, implying net borrowings of about $3.784 billion after cash. The $3.5 billion revolving facility and $1.5 billion U.S. receivables facility had no amounts outstanding; the company reported compliance with financial covenants.
- Capital returns: Nine-month dividends declared were $86 million and share repurchases were $83 million. A quarterly dividend of $0.30 per share was declared for payment in October 2022.
Segments and material changes
Q3 revenue and operating income were: Americas $9.901 billion and $180 million; Europe $4.682 billion and $44 million; APJ $774 million and $17 million. Comparisons by region are also affected by the inclusion of Tech Data in the current period. Management attributed gross-margin movements mainly to product and customer mix. Merger-related acquisition, integration and restructuring costs were $39.8 million for the quarter and $148.4 million for nine months; nine-month merger costs included $57.3 million of accelerated depreciation and amortization associated with IT-system consolidation.
Outlook, commentary and risks
The filing provides no specific numerical revenue or earnings guidance. Management said cash, operating cash flow and available borrowing capacity should be sufficient for working capital and planned investment needs over the next 12 months. It expects purchase-accounting adjustments to benefit non-GAAP operating income through FY2022 and part of FY2023. Management also described the business as working-capital intensive and noted historical seasonal patterns, including typically higher sales in the first and fourth fiscal quarters.
Risks highlighted include successful integration of Tech Data and realization of anticipated benefits; inflation, geopolitical disruption including Russia’s invasion of Ukraine, and economic uncertainty; COVID-related supply-chain and demand uncertainty; product supply delays; competitive and pricing pressure; and dependence on major customers and OEM suppliers. In Q3, one customer represented 12% of revenue; Apple and HP each represented at least 10% of revenue. The company also disclosed foreign-exchange and interest-rate exposure, including variable-rate debt.
Contingency: TD SYNNEX is appealing a French competition-authority fine related to Apple product distribution. The company estimated probable loss at €36 million and had accrued €16 million after installment payments; further payments could be required before the appeal is resolved. A related civil lawsuit’s potential loss could not be estimated. Management stated it did not believe disclosed commitments and contingencies would materially adversely affect results, financial position or cash flows.
Important facts for investors to verify
- Separate acquisition-driven revenue growth from underlying organic growth and assess post-merger integration progress and costs.
- Track inventory levels, cash conversion cycle, operating cash flow and the risk of inventory obsolescence or weaker demand.
- Monitor GAAP margins and EPS alongside non-GAAP measures, including the nature and duration of adjustments.
- Review debt, interest-rate exposure, facility availability and covenant compliance as financing costs and working-capital needs change.
- Follow the French fine appeal and related civil litigation, as well as customer and supplier concentration.