Business context and reporting period
SYNNEX Corporation’s Form 10-K covers the fiscal year ended November 30, 2020, with fourth-quarter results for the three months ended that date. Results include both Technology Solutions, its technology distribution and systems integration business, and Concentrix, its customer experience services business. On December 1, 2020, SYNNEX distributed Concentrix to shareholders; the businesses’ reported fiscal 2020 results therefore precede the separation. Concentrix results will be reported as discontinued operations beginning fiscal 2021.
Financial results and liquidity
Amounts are in U.S. dollars. Fiscal-year comparisons are with fiscal 2019.
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Revenue | $24.676 billion | $23.757 billion | +3.9% |
| Gross profit / margin | $2.848 billion / 11.54% | $2.898 billion / 12.20% | Profit -1.7%; margin -0.66 pp |
| Operating income / margin | $830.1 million / 3.36% | $813.8 million / 3.43% | Income +2.0% |
| Net income | $529.2 million | $500.7 million | +5.7% |
| Diluted EPS | $10.21 | $9.74 | +4.8% |
| Operating cash flow | $1.834 billion | $549.9 million | Up substantially |
| Capital expenditures | $198.0 million | $137.4 million | — |
Technology Solutions revenue was $19.977 billion, up 4.8%; operating income was $521.3 million, up 0.4%, while operating margin declined to 2.61% from 2.72%. Concentrix revenue was $4.720 billion, essentially flat; operating income increased to $308.8 million from $294.3 million, and operating margin rose to 6.54% from 6.25%. Consolidated gross margin fell mainly because Concentrix’s gross profit and margin declined and the business mix shifted.
Fourth-quarter revenue was $7.414 billion versus $6.581 billion a year earlier; net income was $215.2 million versus $176.0 million, and diluted EPS was $4.14 versus $3.41. Fourth-quarter operating income was $320.6 million.
Cash and cash equivalents were $1.565 billion at year-end, compared with $225.5 million a year earlier; working capital was $3.139 billion. Operating cash flow benefited from higher accounts payable and other operating-liability movements, as well as improved Technology Solutions collections and inventory turnover; inventory increased by $128.8 million. The consolidated cash conversion cycle improved to 31 days from 44 days.
Reported borrowings at November 30, 2020 were approximately $2.767 billion, including Concentrix debt; the filing cites $2.8 billion including related obligations. Following the separation, borrowings were approximately $1.6 billion. The filing states cash and available credit were expected to support operations for at least twelve months. The company was in compliance with material debt covenants at year-end; substantially all post-separation borrowings were economically converted to fixed-rate debt through interest-rate swaps.
Material changes, outlook, and risks
- COVID-19 increased demand for remote-work, learning, and consumption technology, supporting Technology Solutions growth. It also disrupted Concentrix delivery and workforce productivity, especially in the second quarter. SYNNEX reported approximately $131 million of net incremental COVID-related costs in fiscal 2020: $45 million in Technology Solutions and $86 million in Concentrix.
- Management expects the separation to reduce future reported revenue, expenses, gross profit, operating income, and net income because Concentrix is no longer consolidated. It also expects lower gross and operating margins without Concentrix’s higher-margin services. No broader numeric earnings or revenue guidance is provided.
- In the second half of fiscal 2021, management expects product revenue to decline by approximately $1.2 billion because a customer is moving to a consignment model under which SYNNEX will provide integration services as an agent.
- Key exposures include low distribution margins and intense competition; dependence on major suppliers and customers; inventory obsolescence and supply availability; customer credit and working-capital needs; variable interest rates, foreign exchange, and reliance on shipping and technology systems. One customer generated 19% of consolidated revenue in 2020; HP products accounted for approximately 12%.
- The separation’s tax-free treatment relies on an outside opinion that is not binding on the IRS or courts. A challenge resulting in taxable treatment could create substantial tax liabilities. The companies also entered into separation, tax, employee, and commercial agreements, creating ongoing obligations and indemnification exposures.
- The quarterly dividend was suspended in March 2020 and reinstated at $0.20 per share in January 2021. The auditor issued unqualified opinions on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Assess post-separation results on a continuing-operations basis, including the allocation of assets, liabilities, cash, and costs between SYNNEX and Concentrix.
- Monitor the expected $1.2 billion fiscal 2021 revenue reduction from the customer’s consignment-model change and its effect on earnings and margins.
- Evaluate the durability of fiscal 2020 operating cash flow, particularly the contribution from payables and other operating-liability timing.
- Track customer and supplier concentration, receivable allowances, inventory protection, and the effects of COVID-related costs and demand.
- Review the separation’s tax status, shared pre-separation tax liabilities, debt maturities and covenants, and the company’s capacity to sustain dividends and investment.