SYNNEX Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended May 31, 2019. The filing identifies the registrant as SYNNEX Corporation. Unless stated otherwise, amounts below are in U.S. dollars and converted to millions from the filing’s thousands.
Business context
SYNNEX operates Technology Solutions, which distributes IT products and provides systems integration, and Concentrix, which provides customer-engagement and business outsourcing services. Results include Convergys, acquired in October 2018; therefore, Concentrix year-over-year growth is not a like-for-like comparison. Prior-period results were adjusted for adoption of ASC 606.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $5,722.9 | $4,908.3 | $10,972.3 | $9,401.6 |
| Gross profit | $698.5 | $429.2 | $1,377.4 | $842.7 |
| Gross margin | 12.20% | 8.74% | 12.55% | 8.96% |
| Operating income | $174.7 | $124.0 | $336.6 | $235.5 |
| Operating margin | 3.05% | 2.53% | 3.07% | 2.50% |
| Net income | $114.5 | $93.7 | $201.6 | $117.8 |
| Diluted EPS | $2.23 | $2.34 | $3.92 | $2.93 |
- Q2 revenue increased 16.6%; Technology Solutions revenue rose 3.3% and Concentrix revenue rose 136.3%, primarily reflecting Convergys. On a constant-currency basis, total revenue was $5,779.7 million.
- Q2 net income rose about 22%, while diluted EPS declined as weighted-average diluted shares increased to 50.9 million from 39.7 million. Six-month net income and diluted EPS increased 71% and 34%, respectively.
- Management attributed higher Technology Solutions gross profit and margin to product mix, broad-based U.S. growth, and a greater proportion of transactions reported net. Concentrix gross profit increased with the acquisition, but its GAAP operating margin declined to 5.36% from 5.64%, primarily due to customer mix and acquisition-related costs.
- Non-GAAP diluted EPS was $2.86 for Q2 and $5.70 for the six-month period, versus $2.38 and $4.51, respectively, in the prior-year periods. These measures exclude specified items and are not GAAP results.
Cash flow, debt and liquidity
- For the six months, operating cash flow was negative $47.4 million, versus positive $62.7 million a year earlier. Working-capital outflows included a $290.3 million decrease in accounts payable and a $214.3 million increase in inventory, partly offset by net income and a $176.4 million decrease in accounts receivable.
- Investing cash outflow was $65.9 million, including $60.4 million of capital expenditures. Financing cash outflow was $69.8 million, including $38.4 million of dividends, $14.3 million of share repurchases and net borrowing repayments of $17.7 million.
- Cash and cash equivalents were $271.5 million at May 31, 2019, down from $454.7 million at November 30, 2018. Cash, cash equivalents and restricted cash totaled $276.6 million. Foreign subsidiaries held $204.1 million of cash and cash equivalents.
- Current borrowings were $729.0 million and long-term borrowings were $2,792.6 million, totaling approximately $3.52 billion, compared with approximately $3.46 billion at November 30, 2018. The company reported approximately $3.5 billion of outstanding borrowings; about $2.0 billion had been economically converted to fixed-rate debt through swaps.
- The U.S. receivables securitization had $544.8 million outstanding against an $850 million commitment. No borrowings were outstanding under the U.S. revolving credit facility. The company said it was compliant with material debt covenants and believed available liquidity was sufficient for at least the next 12 months.
- The cash conversion cycle increased to 53 days from 41 days, attributed to the Convergys acquisition, revenue presentation mix, and timing of collections and payments.
Material changes, outlook and risks
- Convergys drove much of the increase in Concentrix revenue and also increased amortization, integration costs and interest expense. Q2 acquisition-related and integration expenses were $16.5 million; six-month expenses were $44.4 million. Q2 intangible amortization was $52.9 million.
- Other income included a $19.0 million gain from remeasurement and settlement of contingent consideration related to the Westcon-Comstor Americas acquisition. The filing also reports a $1.6 million loss on settlement of substantially all outstanding convertible debentures during the six months.
- Interest expense and finance charges rose to $43.1 million in Q2 and $84.8 million for six months, principally due to acquisition-related borrowing and higher benchmark rates. The company drew the remaining $250 million under its acquisition term-loan facility during the six-month period.
- The filing provides no numerical forward guidance. Management expected operating cash flows and existing liquidity sources to fund working-capital and investment needs over the next 12 months; it also cited possible future expansion and acquisitions as potential funding needs.
- Key disclosed risks include dependence on a major customer, which generated 18% of revenue in both current and comparative periods; customer and supplier concentration; working-capital requirements; variable-rate debt and foreign-exchange exposure; Concentrix employee turnover and customer mix; and contingent obligations to repurchase customer inventory under floor-plan financing. The amount of potential repurchase obligations could not be reasonably estimated, though management considered a material loss remote.
- The company reported no material changes to previously disclosed risk factors, no material change in market-risk disclosures, and effective disclosure controls and procedures.
Important facts for investors to verify
- How much of Concentrix growth and margin performance reflects the Convergys acquisition versus organic growth and integration synergies.
- Whether working-capital use and the longer cash conversion cycle improve, particularly inventory levels, receivable collections and supplier-payment timing.
- Debt repayment capacity, interest-rate exposure, covenant headroom and renewal of receivables financing arrangements approaching their stated expirations.
- The sustainability of reported margin improvement, including the effects of net revenue presentation and the substantial acquisition-related amortization and integration adjustments.
- Customer concentration, the scale of contingent floor-plan inventory repurchase exposure, and any changes in related-party transactions or governance considerations.