TD SYNNEX Corp. (then SYNNEX Corporation) — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter and six months ended May 31, 2020; comparisons are with the corresponding 2019 periods. The company operated two segments: Technology Solutions, a technology distributor and solutions provider, and Concentrix, a business-process services provider. Unless noted otherwise, figures below are U.S. dollars; financial statement amounts are in millions.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $5,532.6m | $5,722.9m | $10,796.8m | $10,972.3m |
| Gross profit / margin | $617.8m / 11.17% | $698.5m / 12.20% | $1,316.2m / 12.19% | $1,377.4m / 12.55% |
| Operating income / margin | $111.7m / 2.02% | $174.7m / 3.05% | $300.4m / 2.78% | $336.6m / 3.07% |
| Net income | $57.0m | $114.5m | $179.5m | $201.6m |
| Diluted EPS | $1.10 | $2.23 | $3.47 | $3.92 |
| Operating cash flow | Not separately presented | Not separately presented | $1,226.5m | $(47.4)m |
- Q2 revenue decreased 3.3% year over year; constant-currency revenue was $5,601.0m, down approximately 2.1%. Q2 operating income declined 36.0% and net income declined 50.2%.
- Q2 segment revenue was $4,470.9m for Technology Solutions, down 2.1%, and $1,066.4m for Concentrix, down 8.1%. Operating income was $88.1m and $23.6m, respectively. Concentrix operating margin fell to 2.21% from 5.36%.
- At May 31, cash and cash equivalents were $1,112.6m; current and long-term borrowings totaled $2,804.9m. Total assets were $12,639.2m and current liabilities were $5,229.3m. The company reported compliance with material debt covenants.
- Six-month operating cash flow benefited from lower accounts receivable ($621.7m cash inflow), higher accounts payable ($227.2m inflow), and other operating asset and liability changes; inventory growth used $495.6m. Investing cash outflow was $92.0m and financing cash outflow was $237.6m.
Material changes and management commentary
- Management attributed weaker results principally to COVID-19 disruptions, including restricted workforce availability at Concentrix, reduced client demand in travel and related sectors, and Technology Solutions logistics and supply-chain disruption. Work-at-home and learn-at-home demand partly supported Technology Solutions.
- Q2 net incremental COVID-19 costs were approximately $89m: $52m at Concentrix and $37m at Technology Solutions. Concentrix also incurred approximately $46m of COVID-related non-productive workforce costs, with productivity affected during the shift to remote work.
- Management said the planned Concentrix separation, announced in January 2020 and delayed due to COVID-19, was then expected in calendar Q4 2020, subject to economic and capital-market conditions and customary approvals. Completion was not assured.
- The company expected a roughly $600m-per-quarter reduction in reported product revenue when a Technology Solutions customer moved to a consignment model, potentially in late fiscal Q4 2020 or fiscal Q1 2021. This was expected to involve integration services on an agency basis.
- Management provided no specific earnings or revenue guidance in the supplied filing text. It stated cash, operating cash flow, and available facilities were expected to support working-capital and investment needs for the next 12 months.
Outlook, risks and unusual items
- The COVID-19 outlook remained highly uncertain; management warned estimates could change materially. Risks include continued supply-chain disruption, reduced workforce productivity, client demand and payment risk, and possible effects on goodwill, liquidity, the proposed separation, and share price.
- One customer represented 19% of Q2 revenue and 17% of six-month revenue; one customer accounted for 20% of receivables at May 31. This creates meaningful customer concentration risk.
- Foreign-currency translation and cash-flow hedge losses contributed to a $128.2m six-month other comprehensive loss. Approximately 57% of borrowings were economically converted to fixed-rate debt through swaps.
- The company suspended quarterly dividends and share repurchases in March 2020. A new three-year $400m repurchase authorization was approved in June, effective July 1, with management describing an initially measured, primarily anti-dilutive approach.
- Contingent inventory repurchase obligations under customer floor-plan financing could not be reasonably quantified; the company reported no repurchases or known pending defaults and considered material losses remote. Other ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the Concentrix separation proceeds, its timing and tax treatment, and the resulting stand-alone financial and debt allocation.
- Whether COVID-19 costs, workforce productivity, supply availability, and customer demand recover or worsen; assess the assumptions behind the reported $89m incremental Q2 costs.
- The timing and revenue-accounting impact of the customer’s consignment-model change and the expected $600m quarterly product-revenue reduction.
- Cash-flow sustainability: distinguish working-capital timing benefits from recurring cash generation, and monitor inventory, receivables allowances, and customer prepayments.
- Debt maturities, borrowing capacity and covenant headroom, alongside the suspended dividend and new repurchase authorization.
- Customer concentration, the unquantified floor-plan repurchase exposure, and the effects of foreign exchange and interest-rate hedges.