TD SYNNEX CORP 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Report. Amounts in certain tables may not add or compute due to rounding. When used in this Quarterly Report on Form 10-Q, or this “Report”, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “allows,” “can,” “may,” “could,” “designed,” “will,” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about market trends, our business model and our services, our business and market strategy, future growth, including expansion of our product and service lines, our infrastructure, our investment in our information technology, or IT, systems, our employee hiring; and retention, the ownership interest of MiTAC Holdings Corporation or MiTAC Holdings, in us and its impact, the ownership interest of Apollo Global Management, Inc., or Apollo, in us and its impact, the impact of the Merger, our integration plans, our plans with respect to the GBO 2 Program, our revenue, sources of revenue, our gross margins, our operating costs and results, timing of payment, the value of our inventory, our competition, including with Synnex Technology International Corp., our future needs for additional financing, the likely sources for such funding and the impact of such funding, concentration of customers and suppliers, customer and supplier contract terms, customer forecasts and its impact on us, relationships with our suppliers, adequacy of our facilities, ability to obtain comparable leases, ability to manage and communicate with international resources, ability to meet demand, managing inventory and our shipping costs, our legal proceedings, including the investigation by the Competition Authority, our operations and trends related thereto, our international operations, foreign currency exchange rates and hedging activities, expansion of our operations and related effects, our strategic acquisitions including anticipated cost savings and other benefits, divestitures of businesses and assets, revenue, cost of revenue and gross margin, our goodwill, seasonality of sales, changes in share price, adequacy of our cash resources to meet our capital needs, our debt and financing arrangements, including the impact of any change to our credit rating, interest rate risk and impact thereof, cash held by our international subsidiaries and repatriation, changes in fair value of derivative instruments, our tax liabilities, adequacy of our disclosure controls and procedures, dependency on personnel, pricing pressures, cybersecurity and compliance with related rules and regulations, impact of rules and regulations affecting public companies, the replacement of LIBOR, impact of our pricing policies, impact of economic and industry trends, changes to the markets in which we compete, impact of our accounting policies and recently issued accounting pronouncements, our estimates and assumptions, impact of inventory repurchase obligations and commitments and contingencies, our effective tax rates, impact of any impairment of our goodwill and intangible assets, our share repurchase and dividend program, our securitization programs, term loans and revolving credit lines, our investments in working capital, personnel, our succession planning and various environmental, social and governance initiatives and attention, our purchase accounting adjustments, plans with respect to our controls and procedures, and the impact of global economic, political and social conditions. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed herein and risks related to the risk that the legacy SYNNEX and legacy Tech Data businesses will not be integrated successfully or realize the anticipated benefits of the combined company , the COVID-19 global pandemic, the ability to retain key personnel, the seasonality of the buying patterns of our customers, concentration of sales to large customers, the loss or consolidation of one or more of our significant original equipment manufacturer, or OEM, suppliers or customers, market acceptance and product life of the products we assemble and distribute, competitive conditions in our industry and their impact on our margins, pricing and other terms with our OEM suppliers, our ability to gain market share, variations in supplier-sponsored programs, changes in our costs and operating expenses, dependence upon and trends in capital spending budgets in the IT industry, fluctuations in general economic conditions including impacts from Russia's invasion of Ukraine, change in the market for our customers' products, employee turnover, changes in tax laws, risks associated with our international operations, uncertainties and variability in demand by our reseller and integration customers, supply shortages or delays, any termination or reduction in our floor plan financing arrangements, changes in value of foreign currencies and interest rates and other risk factors contained in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended November 30, 2021 and below under Part II, Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, unless otherwise required by law. In the Management’s Discussion and Analysis of Financial Condition and Results of Operations, all references to “TD SYNNEX,” “we,” “us,” “our” or the “Company” mean TD SYNNEX Corporation and its subsidiaries for periods after the acquisition of Tech Data, except where it is made clear that the term means only the parent company or one of its segments while all references to “SYNNEX,” “we,” “us,” “our” or the “Company” mean SYNNEX Corporation and its subsidiaries for periods prior to the acquisition of Tech Data, except where it is made clear that the term means only the parent company or one of its segments. 29 Table of contents TD SYNNEX, the TD SYNNEX Logo and all other TD SYNNEX company, product and services names and slogans are trademarks or registered trademarks of TD SYNNEX Corporation. Other names and marks are the property of their respective owners. Overview We are a Fortune 200 corporation and a leading global distributor and solutions aggregator for the information technology ("IT") ecosystem. On December 1, 2020, we completed the previously announced separation of our customer experience services business (the “Separation”), which was accomplished by the distribution of one hundred percent of the outstanding common stock of Concentrix Corporation (“Concentrix”). Our stockholders received one share of Concentrix common stock for every share of our common stock held at the close of business on the record date. Concentrix is now an independent public company trading under the symbol “CNXC” on the Nasdaq Stock Market. After the Separation, we do not beneficially own any shares of Concentrix’ common stock and beginning December 1, 2020, we no longer consolidate Concentrix within our financial results or reflect the financial results of Concentrix within our continuing results of operations. We distributed a total of approximately 51.6 million shares of Concentrix common stock to our stockholders. In connection with the Separation, we have entered into a separation and distribution agreement, as well as various other agreements with Concentrix that provide a framework for the relationships between the parties going forward, including among others an employee matters agreement, a tax matters agreement, and a commercial agreement, pursuant to which Concentrix will continue to provide certain limited services to us following the Separation. On March 22, 2021, SYNNEX entered into an agreement and plan of merger (the “Merger Agreement”) which provided that legacy SYNNEX Corporation would acquire legacy Tech Data Corporation, a Florida corporation (“Tech Data”) through a series of mergers, which would result in Tech Data becoming an indirect subsidiary of TD SYNNEX Corporation (collectively, the "Merger"). On September 1, 2021, pursuant to the terms of the Merger Agreement, SYNNEX acquired all the outstanding shares of common stock of Tiger Parent (AP) Corporation, the parent corporation of Tech Data, for consideration of $1.61 billion in cash ($1.11 billion in cash after giving effect to a $500 million equity contribution by Tiger Parent Holdings, L.P., Tiger Parent (AP) Corporation's sole stockholder and an affiliate of Apollo Global Management, Inc., to Tiger Parent (AP) Corporation prior to the effective time of the Merger) and 44 million shares of common stock of SYNNEX, valued at approximately $5.61 billion. See Note 3 – Acquisitions to the Consolidated Financial Statements in Part I, Item 1 of this Report for further information. We previously had two reportable segments as of November 30, 2020: Technology Solutions and Concentrix. After giving effect to the Separation on December 1, 2020, we operated in a single reportable segment. After completion of the Merger, we reviewed our reportable segments as there was a change in our chief executive officer, who is also our chief operating decision maker. Our chief operating decision maker has a leadership structure aligned with the geographic locations of the Americas, Europe and Asia-Pacific and Japan (“APJ”) and reviews and allocates resources based on these geographic locations. As a result, as of September 1, 2021 we began operating in three reportable segments based on our geographic locations: the Americas, Europe and APJ. Segment results for all prior periods have been restated for comparability to the Company’s current reportable segments. For financial information by segment, refer to Note 1 1 – Segment Information, to the Consolidated Financial Statements in Part I, Item 1 of this Report. We have presented limited information by reportable segment within the Management’s Discussion and Analysis of Financial Condition and Results of Operations due to the lack of comparability between periods resulting from the Merger on September 1, 2021. We distribute technology products from original equipment manufacturers (“OEM”), as well as suppliers of next-generation technologies and delivery models, to resellers, system integrators, and retailers. We purchase PC systems, mobile phones and accessories, printers, peripherals, IT systems, system components, software, networking, communications and security equipment, consumer electronics and complementary products from our suppliers and sell them to our reseller and retail customers. We perform a similar function for our distribution of licensed software products. Our reseller customers include value-added resellers, corporate resellers, government resellers, system integrators, direct marketers, retailers and managed service providers. We combine our core strengths in distribution with demand generation, supply chain management and design and integration solutions to help our customers achieve greater efficiencies in time to market, cost minimization, real-time linkages in the supply chain and aftermarket product support. We also provide comprehensive IT solutions in key vertical markets such as government and healthcare and we provide specialized service offerings that increase efficiencies in the areas of global computing components, logistics services and supply chain management. Additionally, we provide our customers with systems design and integration solutions for data center servers and networking solutions built specific to our customers’ workloads and data center environments. 30 Table of contents Our business is characterized by low gross profit as a percentage of revenue, or gross margin, and low income from operations as a percentage of revenue, or operating margin. The market for IT products is generally characterized by declining unit prices and short product life cycles. We set our sales price based on the market supply and demand characteristics for each particular product or bundle of products we distribute and services we provide. We are highly dependent on the end-market demand for IT products, and on our partners’ strategic initiatives and business models. This end-market demand is influenced by many factors including the introduction of new IT products and software by OEMs, replacement cycles for existing IT products, trends toward cloud computing, overall economic growth and general business activity. A difficult and challenging economic environment may also lead to consolidation or decline in the IT industries and increased price-based competition. In December 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”), which was characterized as a pandemic by the World Health Organization in March 2020. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, including our own, and created significant volatility and disruption of financial markets. The disruptions due to COVID-19 have impacted our business including logistics operations. Despite improvements in the global economy since the onset of the pandemic, the emergence of the Delta and Omicron variants and other mutations bring uncertainty to continued economic recovery. As a result, the Company cannot at this time accurately predict what effects these conditions will have on its operations and financial condition, including due to the uncertainties relating to the severity and duration of the pandemic, the effect on its customers and customer demand and the length of t he restrictions and closures imposed by various governments, including recent restrictions and closures within the Asia-Pacific region . As a result, many of the estimates and assumptions involved in the preparation of the financial statements included in this report on Form 10-Q, required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve with respect to the pandemic, our estimates may change in future periods. Critical Accounting Policies and Estimates During the three months ended February 28, 2022, there were no material changes to our critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year ended November 30, 2021. During the three months ended February 28, 2022, we adopted certain other new accounting pronouncements. The impact of adoption of these pronouncements was not material to our consolidated financial statements. See Note 2 - Summary of Significant Accounting Policies to our Consolidated Financial Statements in Part I, Item 1 of this Report for further information. Acquisitions We continually seek to augment organic growth in our business with strategic acquisitions of businesses and assets that complement and expand our existing capabilities. We also divest businesses that we deem no longer strategic to our ongoing operations. We seek to acquire new OEM relationships, enhance our supply chain and integration capabilities, the services we provide to our customers and OEM suppliers, and expand our geographic footprint. We are also strategically focused on further increasing our scale to support our customers. 31 Table of contents Results of Operations The following table sets forth, for the indicated periods, data as percentages of total revenue: Three months ended Statements of Operations Data: February 28, 2022 February 28, 2021 Revenue 100.00 % 100.00 % Cost of revenue (93.74) % (93.83) % Gross profit 6.26 % 6.17 % Acquisition, integration and restructuring costs (0.60) % — % Selling, general and administrative expenses (4.22) % (3.30) % Operating income 1.44 % 2.87 % Interest expense and finance charges, net (0.27) % (0.46) % Other income (expense), net (0.03) % (0.03) % Income before income taxes 1.14 % 2.38 % Provision for income taxes (0.28) % (0.60) % Net income 0.86 % 1.78 % Due to the ongoing impact of the COVID-19 pandemic, current results and financial condition discussed herein may not be indicative of future operating results and trends. Certain non-GAAP financial information In addition to disclosing financial results that are determined in accordance with GAAP, we also disclose certain non-GAAP financial information, including: • Non-GAAP operating income, which is operating income, adjusted to exclude acquisition, integration and restructuring costs, amortization of intangible assets, share-based compensation expense and purchase accounting adjustments. • Non-GAAP operating margin, which is non-GAAP operating income, as defined above, divided by revenue. • Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) which is net income before interest, taxes, depreciation and amortization, adjusted to exclude other income (expense), net, acquisition, integration and restructuring costs, share-based compensation expense, and purchase accounting adjustments. • Non-GAAP net income, which is net income, adjusted to exclude acquisition, integration and restructuring costs, amortization of intangible assets, share-based compensation expense, purchase accounting adjustments, income taxes related to the aforementioned items, as well as a capital loss carryback benefit. • Non-GAAP diluted earnings per common share (“EPS”), which is diluted EPS excluding the per share impact of acquisition, integration and restructuring costs, amortization of intangible assets, share-based compensation expense, purchase accounting adjustments, income taxes related to the aforementioned items, as well as a capital loss carryback benefit. Acquisition, integration and restructuring costs typically consist of acquisition, integration, restructuring and divestiture related costs and are expensed as incurred. These expenses primarily represent professional services costs for legal, banking, consulting and advisory services, severance and other personnel related costs, share-based compensation expense and debt extinguishment fees. From time to time, this category may also include transaction-related gains/losses on divestitures/spin-off of businesses, costs related to long-lived assets including impairment charges and accelerated depreciation and amortization expense due to changes in asset useful lives, as well as various other costs associated with the acquisition or divestiture. 32 Table of contents Our acquisition activities have resulted in the recognition of finite-lived intangible assets which consist primarily of customer relationships and lists and vendor lists. Finite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in our statements of operations. Although intangible assets contribute to our revenue generation, the amortization of intangible assets does not directly relate to the sale of our products. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of our acquisition activity. Accordingly, we believe excluding the amortization of intangible assets, along with the other non-GAAP adjustments which neither relate to the ordinary course of our business nor reflect our underlying business performance, enhances our and our investors’ ability to compare our past financial performance with our current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within our GAAP financial statements, and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised. Share-based compensation expense is a non-cash expense arising from the grant of equity awards to employees based on the estimated fair value of those awards. Although share-based compensation is an important aspect of the compensation of our employees, the fair value of the share-based awards may bear little resemblance to the actual value realized upon the vesting or future exercise of the related share-based awards and the expense can vary significantly between periods as a result of the timing of grants of new stock-based awards, including grants in connection with acquisitions. Given the variety and timing of awards and the subjective assumptions that are necessary when calculating share-based compensation expense, we believe this additional information allows investors to make additional comparisons between our operating results from period to period. Purchase accounting adjustments are primarily related to the impact of recognizing the acquired vendor and customer liabilities from the Merger at fair value. The Company expects the duration of these adjustments to benefit our non-GAAP operating income through fiscal 2022 and through a portion of fiscal 2023 based on historical settlement patterns with our vendors and in accordance with the timing defined in our policy for releasing vendor and customer liabilities we deem remote to be paid. We believe that providing this additional information is useful to the reader to better assess and understand our base operating performance, especially when comparing results with previous periods and for planning and forecasting in future periods, primarily because management typically monitors the business adjusted for these items in addition to GAAP results. Management also uses these non-GAAP measures to establish operational goals and, in some cases, for measuring performance for compensation purposes. As these non-GAAP financial measures are not calculated in accordance with GAAP, they may not necessarily be comparable to similarly titled measures employed by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for the comparable GAAP measures and should be used as a complement to, and in conjunction with data presented in accordance with GAAP. 33 Table of contents Non-GAAP Financial Information: The following tables provide the reconciliations of our most comparable GAAP measures to our non-GAAP measures presented: Three Months Ended February 28, 2022 February 28, 2021 Operating Income and Operating Margin - Consolidated (in thousands) Revenue $ 15,469,977 $ 4,939,014 Operating income $ 222,440 $ 141,747 Acquisition, integration and restructuring costs 93,370 — Amortization of intangibles 76,136 9,369 Share-based compensation 6,750 4,887 Purchase accounting adjustments 33,161 — Non-GAAP operating income $ 431,857 $ 156,003 Operating margin 1.44 % 2.87 % Non-GAAP operating margin 2.79 % 3.16 % Three Months Ended February 28, 2022 February 28, 2021 Operating Income and Operating Margin - Americas (in thousands) Revenue $ 9,074,273 $ 4,307,007 Operating income $ 133,537 $ 120,435 Acquisition, integration and restructuring costs 51,530 — Amortization of intangibles 43,528 9,369 Share-based compensation 6,750 4,887 Purchase accounting adjustments 17,738 — Non-GAAP operating income $ 253,083 $ 134,691 GAAP operating margin 1.47 % 2.80 % Non-GAAP operating margin 2.79 % 3.13 % Three Months Ended February 28, 2022 February 28, 2021 Operating Income and Operating Margin - Europe (in thousands) Revenue $ 5,579,788 $ 132,532 Operating income $ 65,332 $ 6,235 Acquisition, integration and restructuring costs 39,729 — Amortization of intangibles 31,970 — Purchase accounting adjustments 15,423 — Non-GAAP operating income $ 152,454 $ 6,235 GAAP operating margin 1.17 % 4.70 % Non-GAAP operating margin 2.73 % 4.70 % 34 Table of contents Three Months Ended February 28, 2022 February 28, 2021 Operating Income and Operating Margin - APJ (in thousands) Revenue $ 815,916 $ 499,475 Operating income $ 23,571 $ 15,078 Acquisition, integration and restructuring costs 2,111 — Amortization of intangibles 638 — Non-GAAP operating income $ 26,320 $ 15,078 GAAP operating margin 2.89 % 3.02 % Non-GAAP operating margin 3.23 % 3.02 % Three Months Ended February 28, 2022 February 28, 2021 Adjusted EBITDA - Consolidated (in thousands) Net income $ 132,324 $ 87,822 Interest expense and finance charges, net 42,343 22,838 Provision for income taxes 43,505 29,754 Depreciation (1) 79,365 5,499 Amortization of intangibles 76,136 9,369 EBITDA $ 373,673 $ 155,282 Other (income) expense, net 4,268 1,333 Acquisition, integration and restructuring costs 40,499 — Share-based compensation 6,750 4,887 Purchase accounting adjustments 33,161 — Adjusted EBITDA $ 458,351 $ 161,502 (1) Includes depreciation recorded in acquisition, integration and restructuring costs. 35 Table of contents Three Months Ended February 28, 2022 February 28, 2021 Net Income - Consolidated (in thousands) Net income $ 132,324 $ 87,822 Acquisition, integration and restructuring costs 95,202 — Amortization of intangibles 76,136 9,369 Share-based compensation 6,750 4,887 Purchase accounting adjustments 33,161 — Income taxes related to the above (47,883) (3,525) Income tax capital loss carryback benefit (3,246) — Non-GAAP net income $ 292,444 $ 98,553 Three Months Ended Diluted Earnings per Common Share February 28, 2022 February 28, 2021 Diluted EPS $ 1.37 $ 1.69 Acquisition, integration and restructuring costs 0.99 — Amortization of intangibles 0.79 0.18 Share-based compensation 0.07 0.09 Purchase accounting adjustments 0.34 — Income taxes related to the above (0.50) (0.07) Income tax capital loss carryback benefit (0.03) — Non-GAAP diluted EPS $ 3.03 $ 1.89 Three Months Ended February 28, 2022 Revenue Three Months Ended Percent Change February 28, 2022 February 28, 2021 (in thousands) Revenue $ 15,469,977 $ 4,939,014 213.2 % We distribute a comprehensive range of products for the technology industry and design and integrate data center equipment. The prices of our products are highly dependent on the volumes purchased within a product category. The products we sell from one period to the next are often not comparable due to changes in product models, features and customer demand requirements. Revenue increased during the three months ended February 28, 2022, as compared to the prior year period, primarily due to an increase in sales resulting from the impact of the Merger of approximately $10 billion as well as broad-based demand for technology equipment. Gross Profit Three Months Ended Percent Change February 28, 2022 February 28, 2021 (in thousands) Gross profit $ 968,661 $ 304,567 218.0 % Gross margin 6.26 % 6.17 % 36 Table of contents Our gross margin is affected by a variety of factors, including competition, selling prices, mix of products, product costs along with rebate and discount programs from our suppliers, reserves or settlement adjustments, freight costs, inventory losses and fluctuations in revenue. Our gross profit increased, during the three months ended February 28, 2022, as compared to the prior year period, primarily due to an increase in sales resulting from the impact of the Merger. The increase in gross margin during the three months ended February 28, 2022, as compared to the prior year period, is primarily due to product mix. Acquisition, Integration and Restructuring Costs Acquisition, integration and restructuring costs are primarily comprised of costs related to the Merger and costs related to the Global Business Optimization 2 Program initiated by Tech Data prior to the Merger (the “GBO 2 Program”). There were no acquisition, integration and restructuring costs incurred during the three months ended February 28, 2021. The Merger We incurred acquisition, integration and restructuring costs related to the completion of the Merger, including professional services costs, personnel and other costs, long-lived assets charges and stock-based compensation expense. Professional services costs are primarily comprised of legal expenses and tax and other consulting services. Personnel and other costs are primarily comprised of costs related to retention and other bonuses, as well as severance costs. Long-lived assets charges are comprised of accelerated depreciation and amortization expense of $52.9 million recorded due to changes in asset useful lives in conjunction with the consolidation of certain IT systems. Stock-based compensation expense primarily relates to costs associated with the conversion of certain Tech Data performance-based equity awards issued prior to the Merger into restricted shares of TD SYNNEX (refer to Note 5 – Share-Based Compensation to the Consolidated Financial Statements in Part I, Item 1 of this Report for further information) and expenses for certain restricted stock awards issued in conjunction with the Merger. During the three months ended February 28, 2022, acquisition and integration expenses related to the Merger were composed of the following: Three Months Ended February 28, 2022 (in thousands) Professional services costs $ 8,148 Personnel and other costs 10,944 Long-lived assets charges 52,871 Stock-based compensation 13,576 Total $ 85,539 GBO 2 Program Prior to the Merger, Tech Data implemented its GBO 2 Program, that includes investments to optimize and standardize processes and apply data and analytics to be more agile in a rapidly evolving environment, increasing productivity, profitability and optimizing net-working capital. TD SYNNEX plans to continue this program in conjunction with the Company’s integration activities. Acquisition, integration and restructuring expenses related to the GBO 2 Program are primarily comprised of restructuring costs and other professional services costs. Restructuring costs are comprised of severance costs and other associated exit costs, including certain consulting costs. Other professional services 37 Table of contents costs are primarily comprised of professional services fees not related to restructuring activities, including costs related to improving profitability and optimizing net-working capital. Acquisition, integration and restructuring costs under the GBO 2 Program for the three months ended February 28, 2022 included the following: Three Months Ended February 28, 2022 (in thousands) Restructuring costs $ 6,046 Other professional services costs 1,785 Total $ 7,831 Restructuring costs under the GBO 2 Program for the three months ended February 28, 2022 were composed of the following: Three Months Ended February 28, 2022 (in thousands) Severance $ 359 Other exit costs 5,687 Total $ 6,046 During the three months ended February 28, 2022, we recorded restructuring costs related to GBO 2 of $1.8 million, $3.9 million and $0.3 million, for the Americas, Europe and APJ regions, respectively. Selling, General and Administrative Expenses Three Months Ended Percent Change February 28, 2022 February 28, 2021 (in thousands) Selling, general and administrative expenses $ 652,851 $ 162,820 301.0 % Percentage of revenue 4.22 % 3.30 % Our selling, general and administrative expenses consist primarily of personnel costs such as salaries, commissions, bonuses, share-based compensation and temporary personnel costs. Selling, general and administrative expenses also include cost of warehouses, delivery centers and other non-integration facilities, utility expenses, legal and professional fees, depreciation on certain of our capital equipment, bad debt expense, amortization of our intangible assets, and marketing expenses, offset in part by reimbursements from our OEM suppliers. During the three months ended February 28, 2022, selling, general and administrative expenses increased, compared to the prior year period, primarily due to an increase in employee related expenses resulting from the Merger and an increase in amortization of intangible assets acquired in connection with the Merger. Selling, general and administrative expenses increased as a percentage of revenue, compared to the prior year period, primarily due to the impact of the Merger including an increase in amortization of intangible assets. 38 Table of contents Operating Income Three Months Ended Percent Change February 28, 2022 February 28, 2021 (in thousands) Operating income $ 222,440 $ 141,748 56.9 % Operating margin 1.44 % 2.87 % Operating income increased during the three months ended February 28, 2022 compared to the prior year period, primarily due to increased sales as a result of the Merger, partially offset by an increase in employee related expenses resulting from the Merger, an increase in acquisition, integration and restructuring costs and an increase in amortization of intangible assets acquired in connection with the Merger. Operating margin decreased during the three months ended February 28, 2022, compared to the prior year period, primarily due to an increase in employee related expenses resulting from the Merger, an increase in acquisition, integration and restructuring costs and an increase in amortization of intangible assets acquired in connection with the Merger. Interest Expense and Finance Charges, Net Three Months Ended Percent Change February 28, 2022 February 28, 2021 (in thousands) Interest expense and finance charges, net $ 42,343 $ 22,838 85.4 % Percentage of revenue 0.27 % 0.46 % Amounts recorded in interest expense and finance charges, net, consist primarily of interest expense paid on our Senior Notes (as defined below), our lines of credit and term loans and fees associated with the sale or pledge of accounts receivable through our securitization facilities, offset by income earned on our cash investments. The increase in our interest expense and finance charges, net during the three months ended February 28, 2022, compared to the prior year, was due to an increase in interest expense related to the Senior Notes and higher average outstanding borrowings. Other Income (Expense), Net Three Months Ended Percent Change February 28, 2022 February 28, 2021 (in thousands) Other income (expense), net $ (4,268) $ (1,333) 220.2 % Percentage of revenue (0.03) % (0.03) % Amounts recorded as other income (expense), net include foreign currency transaction gains and losses on certain financing transactions and the related derivative instruments used to hedge such financing transactions, the cost of hedging, investment gains and losses, and other non-operating gains and losses, such as settlements received from class actions lawsuits. The increase in other income (expense), net during the three months ended February 28, 2022, as compared to the prior year period, was primarily due to higher costs of hedging. 39 Table of contents Provision for Income Taxes Three Months Ended Percent Change February 28, 2022 February 28, 2021 (in thousands) Provision for income taxes $ 43,505 $ 29,754 46.2 % Percentage of income before income taxes 24.74 % 25.31 % Income taxes consist of our current and deferred tax expense resulting from our income earned in domestic and foreign jurisdictions. Income taxes for the interim periods presented have been included in the accompanying Consolidated Financial Statements on the basis of an estimated annual effective tax rate. During the three months ended February 28, 2022, our income tax expense increased compared to the prior year period, primarily due to higher income during the three months ended February 28, 2022, including the impacts of the Merger. The effective tax rate was slightly lower during the three months ended February 28, 2022 as compared to the three months ended February 28, 2021, primarily due to the relative mix of earnings and losses within the taxing jurisdictions in which we operate. Liquidity and Capital Resources Cash Conversion Cycle Three Months Ended February 28, 2022 November 30, 2021 February 28, 2021 (Amounts in thousands) Days sales outstanding ("DSO") Revenue (a) $ 15,469,977 $ 15,611,266 $ 4,939,014 Accounts receivable, net (b) 8,732,024 8,310,032 2,381,064 Days sales outstanding (c) = ((b)/(a))*the number of days during the period 51 48 43 Days inventory outstanding ("DIO") Cost of revenue (d) $ 14,501,316 $ 14,668,096 $ 4,634,447 Inventories (e) 7,883,265 6,642,915 2,556,716 Days inventory outstanding (f) = ((e)/(d))*the number of days during the period 49 41 50 Days payable outstanding ("DPO") Cost of revenue (g) $ 14,501,316 $ 14,668,096 $ 4,634,447 Accounts payable (h) 12,193,263 12,034,946 3,116,095 Days payable outstanding (i) = ((h)/(g))*the number of days during the period 76 75 61 Cash conversion cycle ("CCC") (j) = (c)+(f)-(i) 24 14 32 40 Table of contents Cash Flows Our business is working capital intensive. Our working capital needs are primarily to finance accounts receivable and inventory. We rely heavily on term loans, accounts receivable arrangements, our securitization programs, our revolver programs and trade credit from vendors for our working capital needs. We have financed our growth and cash needs to date primarily through cash generated from operations and financing activities. As a general rule, when sales volumes are increasing, our net investment in working capital dollars typically increases, which generally results in decreased cash flow generated from operating activities. Conversely, when sales volumes decrease, our net investment in working capital dollars typically decreases, which generally results in increases in cash flows generated from operating activities. We calculate CCC as days of the last fiscal quarter’s revenue outstanding in accounts receivable plus days of supply on hand in inventory, less days of the last fiscal quarter’s cost of revenue outstanding in accounts payable. Our CCC was 24 days and 32 days as of February 28, 2022 and February 28, 2021, respectively. The decrease was primarily due to our DPO, which was impacted by the increase in the payment timing of accounts payable in our business primarily due to the impact of the Merger. Our CCC was 24 days and 14 days as of February 28, 2022 and November 30, 2021, respectively. The increase was primarily due to our DIO, which was impacted by a temporary increase to support revenue growth and strategic inventory purchases that are expected to sell through in the next 3 to 5 months. To increase our market share and better serve our customers, we may further expand our operations through investments or acquisitions. We expect that any such expansions would require an initial investment in working capital, personnel, facilities and operations. These investments or acquisitions would likely be funded primarily by our existing cash and cash equivalents, additional borrowings, or the issuance of securities. Operating Activities Net cash used in operating activities was $1.3 billion during the three months ended February 28, 2022, primarily due to a temporary increase in net working capital to support revenue growth and strategic inventory purchases that are expected to sell through in the next 3 to 5 months. Net cash provided by operating activities was $25.0 million during the three months ended February 28, 2021, primarily due to decreases in accounts receivable and inventories, which were largely offset by a decrease in accounts payable. The decreases in accounts receivable and inventories were primarily due to lower revenue during the three months ended February 28, 2021 compared to a seasonally high fourth quarter of fiscal year 2020. The decrease in accounts payable was primarily due to timing of payments. Investing Activities Net cash used in investing activities during the three months ended February 28, 2022 was $25.2 million, primarily due to capital expenditures related to infrastructure investments to support growth in our business. Net cash used in investing activities during the three months ended February 28, 2021 was $4.0 million, primarily due to capital expenditures related to infrastructure investments to support growth in our business. Financing Activities Net cash provided by financing activities during the three months ended February 28, 2022 was $854.5 million, representing primarily short-term borrowings to fund working capital requirements. In addition, we paid stockholders dividends of $28.8 million and we paid $23.8 million to repurchase common stock under our share repurchase program. Net cash used in financing activities during the three months ended February 28, 2021 was $147.2 million, representing primarily the net transfer of cash and cash equivalents of $149.9 million to Concentrix in connection with the Separation and a return of cash to stockholders in the form of dividends of $10.3 million. This was partially offset by net proceeds of $13.0 million from our borrowing arrangements in certain international locations to fund working capital requirements. Capital Resources Our cash and cash equivalents totaled $510.2 million and $994.0 million as of February 28, 2022 and November 30, 2021, respectively. Our cash and cash equivalents held by international subsidiaries are no longer subject to U.S. federal tax on repatriation into the United States. Repatriation of some foreign balances is restricted by local laws. Historically, we have fully utilized and reinvested all foreign cash to fund our foreign operations and expansion. If in the future our intentions change, and we repatriate the cash back to the United States, we will report in our Consolidated 41 Table of contents Financial Statements the impact of state and withholding taxes depending upon the planned timing and manner of such repatriation. Presently, we believe we have sufficient resources, cash flow and liquidity within the United States to fund current and expected future working capital, investment and other general corporate funding requirements. We believe that our available cash and cash equivalents balances, cash flows from operations and our existing sources of liquidity will be sufficient to satisfy our current and planned working capital and investment needs for the next twelve months in all geographies. We also believe that our longer-term working capital, planned capital expenditures, anticipated stock repurchases, dividend payments and other general corporate funding requirements will be satisfied through cash flows from operations and, to the extent necessary, from our borrowing facilities and future financial market activities. Historically, we have renewed our accounts receivable securitization program and our parent company credit facilities on, or prior to, their respective expiration dates. We have no reason to believe that these and other arrangements will not be renewed or replaced as we continue to be in good credit standing with the participating financial institutions. We have had similar borrowing arrangements with various financial institutions throughout our years as a public company. TD SYNNEX United States accounts receivable securitization agreement In the United States, we have an accounts receivable securitization program to provide additional capital for our operations (the “U.S. AR Arrangement”). Under the terms of the U.S. AR Arrangement, as amended in December 2021, we and our subsidiaries that are party to the U.S. AR Arrangement can borrow up to a maximum of $1.5 billion based upon eligible trade accounts receivable. The U.S. AR Arrangement has a maturity date of December 2024. The effective borrowing cost under the U.S. AR Arrangement is a blended rate based upon the composition of the lenders, that includes prevailing dealer commercial paper rates and a rate based upon LIBOR. In addition, a program fee payable on the used portion of the lenders’ commitment, accrues at 0.75% per annum. A facility fee is payable on the adjusted commitment of the lenders, to accrue at different tiers ranging between 0.30% per annum and 0.40% per annum depending on the amount of outstanding advances from time to time. There was $749.0 million outstanding under the U.S. AR Arrangement at February 28, 2022 at an interest rate of 1.18%. There were no amounts outstanding under the U.S. AR Arrangement at November 30, 2021. Under the terms of the U.S. AR Arrangement, we and certain of our U.S. subsidiaries sell, on a revolving basis, our receivables (other than certain excluded receivables) to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in the receivables acquired by our bankruptcy-remote subsidiary as security. Any amounts received under the U.S. AR Arrangement are recorded as debt on our Consolidated Balance Sheets. TD SYNNEX credit agreement The Company is party to a credit agreement, dated as of April 16, 2021 (the “TD SYNNEX Credit Agreement”) with the lenders party thereto and Citibank, N.A., as agent, pursuant to which we received commitments for the extension of a senior unsecured revolving credit facility not to exceed an aggregate principal amount of $3.5 billion, which revolving credit facility (the “TD SYNNEX revolving credit facility”) may, at our request but subject to the lenders’ discretion, potentially be increased by up to an aggregate amount of $500 million. There were no amounts outstanding under the TD SYNNEX revolving credit facility at February 28, 2022 or November 30, 2021. The TD SYNNEX Credit Agreement also includes a fully funded senior unsecured term loan (the “TD SYNNEX term loan” and, together with the TD SYNNEX revolving credit facility, the “TD SYNNEX credit facilities”) that had an original aggregate principal amount of $1.5 billion and has begun amortizing as described below. The borrower under the TD SYNNEX credit facilities is the Company. There are no guarantors of the TD SYNNEX credit facilities. The maturity of the TD SYNNEX credit facilities is on the fifth anniversary of the September 2021 closing date, to occur in September 2026, subject in the case of the revolving credit facility, to two one-year extensions upon our prior notice to the lenders and the agreement of the lenders to extend such maturity date. The outstanding principal amount of the TD SYNNEX term loan is payable in quarterly installments in an amount equal to 1.25% of the original $1.5 billion principal balance, with the outstanding principal amount of the term loans due in full on the maturity date. Loans borrowed under the TD SYNNEX Credit Agreement bear interest, in the case of LIBOR (or successor) rate loans, at a per annum rate equal to the applicable LIBOR (or successor) rate, plus the applicable margin, which may range from 1.125% to 1.75%, based on our public debt rating (as defined in the TD SYNNEX Credit Agreement). The applicable margin on base rate loans is 1.00% less than the corresponding margin on LIBOR (or successor rate) based loans. In addition to these borrowing rates, there is a commitment fee that ranges from 0.125% to 0.300% on any unused commitment under the TD SYNNEX revolving credit facility based on our public debt rating. The 42 Table of contents effective interest rate for the TD SYNNEX term loan was 1.59% and 1.49% as of February 28, 2022 and November 30, 2021, respectively. The TD SYNNEX Credit Agreement contains various loan covenants that are customary for similar facilities for similarly rated borrowers that restrict our ability to take certain actions. The TD SYNNEX Credit Agreement also contains financial covenants that require compliance with a maximum debt to EBITDA ratio and a minimum interest coverage ratio, in each case tested on the last day of each fiscal quarter commencing with the first full fiscal quarter to occur after the closing date of the TD SYNNEX credit facilities. The TD SYNNEX Credit Agreement also contains various customary events of default, including with respect to a change of control of the Company. TD SYNNEX Senior Notes On August 9, 2021, we completed our offering of $2.5 billion aggregate principal amount of senior unsecured notes, consisting of $700.0 million of 1.25% senior notes due 2024, $700.0 million of 1.75% senior notes due 2026, $600.0 million of 2.375% senior notes due 2028, and $500.0 million of 2.65% senior notes due 2031 (collectively, the “Senior Notes,” and such offering, the “Senior Notes Offering”). We incurred $19.6 million towards issuance costs for the Senior Notes. We pay interest semi-annually on the notes on each of February 9 and August 9. The net proceeds from this offering were used to fund a portion of the aggregate cash consideration payable in connection with the Merger, refinance certain of our existing indebtedness and pay related fees and expenses and for general corporate purposes. The interest rate payable on each series of the Senior Notes will be subject to adjustment from time to time if the credit rating assigned to such series of Senior Notes is downgraded (or downgraded and subsequently upgraded). We may redeem the Senior Notes, at any time in whole or from time to time in part, prior to (i) August 9, 2022 (the “2024 Par Call Date”) in the case of the 2024 Senior Notes, (ii) July 9, 2026 (the “2026 Par Call Date”) in the case of the 2026 Senior Notes, (iii) June 9, 2028 (the “2028 Par Call Date”) in the case of the 2028 Senior Notes, and (iv) May 9, 2031 in the case of the 2031 Senior Notes (the “2031 Par Call Date” and, together with the 2024 Par Call Date, the 2026 Par Call Date and the 2028 Par Call Date, each, a “Par Call Date” and together, the “Par Call Dates”), at a redemption price equal to the greater of (x) 100% of the aggregate principal amount of the applicable Senior Notes to be redeemed and (y) the sum of the present values of the remaining scheduled payments of the principal and interest on the Senior Notes, discounted to the date of redemption on a semi-annual basis at a rate equal to the sum of the applicable treasury rate plus 15 basis points for the 2024 Senior Notes, 20 basis points for the 2026 Senior Notes and 25 basis points for the 2028 Senior Notes and 2031 Senior Notes, plus in each case, accrued and unpaid interest thereon to, but excluding, the redemption date. We may also redeem the Senior Notes of any series at our option, at any time in whole or from time to time in part, on or after the applicable Par Call Date, at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed. Other borrowings and term debt The Company has various other committed and uncommitted lines of credit with financial institutions, accounts receivable securitization arrangements, factoring of accounts receivable with recourse provisions, finance leases, short-term loans, term loans, credit facilities and book overdraft facilities, totaling approximately $618.8 million as of February 28, 2022. Interest rates and other terms of borrowing under these lines of credit vary by country, depending on local market conditions. There was $287.4 million outstanding on these facilities at February 28, 2022, at a weighted average interest rate of 2.98%, and there was $106.3 million outstanding at November 30, 2021, at a weighted average interest rate of 4.59%. Borrowings under certain of these lines of credit facilities are guaranteed by the Company or secured by eligible accounts receivable. At February 28, 2022, we were also contingently liable for reimbursement obligations with respect to issued standby letters of credit in the aggregate outstanding amount of $102.0 million. These letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The maximum commitment amounts for local currency credit facilities have been translated into United States Dollars at February 28, 2022 exchange rates. Accounts Receivable Purchase Agreements We have uncommitted supply-chain financing programs with global financial institutions under which trade accounts receivable owed by certain customers may be acquired, without recourse, by the financial institutions. Available capacity under these programs is dependent upon the level of our trade accounts receivable eligible to be sold into these programs and the financial institutions’ willingness to purchase such receivables. In addition, certain of these programs also require that we continue to service, administer and collect the sold accounts receivable. At February 28, 2022 and November 30, 2021, we had a total of $966.0 million and $759.9 million, respectively, of trade accounts receivable sold to 43 Table of contents and held by the financial institutions under these programs. Discount fees for these programs in the three months ended February 28, 2022 and February 28, 2021 tota led $3.0 million an d $0.6 million, r espectively. Covenant Compliance Our credit facilities have a number of covenants and restrictions that require us to maintain specified financial ratios. They also limit our ability to incur additional debt, create liens, enter into agreements with affiliates, modify the nature of our business, and merge or consolida te. As of February 28, 2022, we were in compliance with all current and material covenants for the above arrangements. Related Party Transactions We have a business relationship with MiTAC Holdings Corporation ("MiTAC Holdings"), a publicly-traded company in Taiwan, which began in 1992 when MiTAC Holdings became our primary investor through its affiliates. As of both February 28, 2022 and November 30, 2021, MiTAC Holdings and its affiliates beneficially owned approximately 9.5% of our outstanding common stock. Mr. Matthew Miau, the Chairman Emeritus of our Board of Directors and a director, is the Chairman of MiTAC Holdings' and a director or officer of MiTAC Holdings' affiliates. The shares owned by MiTAC Holdings are held by the following entities: As of February 28, 2022 (in thousands) MiTAC Holdings (1) 5,300 Synnex Technology International Corp. (2) 3,860 Total 9,160 _______________ (1) Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC Holdings. Excludes 192 thousand shares held directly by Mr. Miau, 217 thousand shares indirectly held by Mr. Miau through a charitable remainder trust, and 190 thousand shares held by his spouse. (2) Synnex Technology International Corp. (“Synnex Technology International”) is a separate entity from us and is a publicly-traded corporation in Taiwan. Shares are held via Peer Development Ltd., a wholly-owned subsidiary of Synnex Technology International. MiTAC Holdings owns a noncontrolling interest of 14.1% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a noncontrolling interest of 15.7% in Synnex Technology International. Neither MiTAC Holdings nor Mr. Miau is affiliated with any person(s), entity, or entities that hold a majority interest in MiTAC Incorporated. The following table presents the Company's transactions with MiTAC Holdings and its affiliates for the periods indicated: Three Months Ended February 28, 2022 February 28, 2021 (in thousands) Purchases of inventories and services $ 46,576 $ 41,157 Sale of products to MiTAC Holdings and affiliates 60 218 Payments made for rent and overhead costs for use of facilities of MiTAC Holdings and affiliates, net 36 32 The following table presents the Company’s receivable from and payable to MiTAC Holdings and its affiliates for the periods presented: February 28, 2022 November 30, 2021 (in thousands) Receivable from related parties (included in Accounts receivable, net) $ 40,197 $ 21,841 Payable to related parties (included in Accounts payable) 35,825 32,802 44 Table of contents Recently Issued Accounting Pronouncements For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements, see Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements, which can be found under Item 1 of this Report. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk For a description of the Company’s market risks, see “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended November 30, 2021. No material changes have occurred in our market risks since November 30, 2021.