SYNNEX Corporation — Q1 FY2016 Form 10-Q
Business context and period: The filing is for SYNNEX Corporation, now associated with the TD SYNNEX name, for the three months ended February 29, 2016, compared with the three months ended February 28, 2015. The company operates Technology Solutions, an IT products distribution and integration business, and Concentrix, a business-process services business. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2016 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $3,125.6 | $3,202.5 | Down 2.4% |
| Gross profit / margin | $284.2 / 9.09% | $288.2 / 9.00% | Profit down 1.4%; margin up 0.09 points |
| Operating income / margin | $75.6 / 2.42% | $78.9 / 2.47% | Income down 4.2% |
| Net income attributable to SYNNEX | $46.6 | $46.3 | Up 0.5% |
| Diluted EPS | $1.17 | $1.16 | Up $0.01 |
| Operating cash flow | $143.7 | $208.2 | Down $64.4 |
- Segments: Technology Solutions revenue was $2,784.9 million, down 2.8%; operating income was $67.7 million, down 5.0%. Concentrix revenue was $344.7 million, up 0.9%; operating income was $7.9 million, up 3.7%.
- Cash and working capital: Cash and cash equivalents were $447.6 million at quarter-end, versus $336.1 million at November 30, 2015. Current assets were $3,388.4 million and current liabilities $1,630.4 million, implying working capital of about $1,757.9 million and a current ratio of about 2.1. Restricted cash was a further $35.1 million.
- Debt: Total borrowings were $704.7 million, down from $730.9 million at November 30, 2015. Cash less total borrowings was approximately $257.1 million. The main borrowing was the U.S. term loan, with $609.4 million outstanding; its maturity is May 2020. The company reported compliance with material debt covenants.
- Cash flow and investment: Operating cash flow of $143.7 million reflected collections of receivables and inventory reductions, partly offset by a $240.6 million decline in accounts payable. Investing cash flow was $18.7 million, including a $53.4 million reduction in restricted cash and $35.9 million of capital expenditures. Financing cash outflow was $51.1 million, including net credit-line repayments, debt repayments, dividends, and share repurchases.
- Other measures: Non-GAAP adjusted EBITDA was $102.8 million versus $108.7 million; non-GAAP diluted EPS was $1.37 versus $1.46. These exclude specified amortization and acquisition/integration costs and should be considered alongside GAAP results.
Material changes versus the prior-year quarter
- Reported revenue declined, mainly from weaker Technology Solutions demand in the U.S. and Japan, the loss of a significant vendor of consumer retail products, and foreign-currency translation. Constant-currency revenue was $3,196.2 million, approximately 0.2% below the prior-year reported amount. Technology Solutions revenue declined 0.7% on a constant-currency basis.
- Concentrix revenue increased 4.5% on a constant-currency basis, supported by volume, expanded services to existing customers, and new contracts. The loss of a government contract and currency effects partly offset growth.
- Gross margin increased slightly, but lower Technology Solutions sales and mix contributed to lower gross profit and operating income. Concentrix benefited from improved performance on a loss-making marketing contract, whose quarterly losses narrowed to $4.0 million from about $9.1 million.
- Net income was broadly stable despite lower operating income, partly because other income included a $4.1 million benefit from a Canadian class-action settlement. The effective tax rate rose to 36.5% from 36.2%.
- Operating cash flow was lower year over year, although management attributed the working-capital movements in both periods largely to seasonal changes in Technology Solutions business activity.
Outlook, commentary, risks, and unusual items
- The filing gives no specific revenue or earnings guidance. Management said available cash, operating cash flows, and existing liquidity sources should be sufficient for working-capital and investment needs over the next 12 months; this is management’s assessment, not a guarantee.
- Management described the business as working-capital intensive and noted potential funding needs for expansion or acquisitions. The U.S. receivables securitization facility, with a $600 million commitment, had no borrowings outstanding and matures November 4, 2016. The company said it expected its financing arrangements to be renewed, but noted that disruption or reduced capacity in securitization funding could materially affect results or financial condition.
- Foreign-exchange movements affected reported revenue and results. The company uses foreign-exchange contracts and interest-rate swaps, but stated that hedges may offset only part of the underlying exposure. A $400 million notional interest-rate swap position was used to convert part of variable-rate debt to fixed rates.
- Supplier concentration is notable: HP products represented approximately 18% of quarterly revenue, down from 24% in the prior-year quarter. One customer represented 15% of accounts receivable at February 29, 2016; no customer accounted for 10% or more of revenue in either period.
- Contingencies include customer floor-plan inventory repurchase obligations whose potential amount the company said could not be reasonably estimated; no repurchases or known pending defaults were reported. The company also disclosed a guarantee of up to $35.0 million related to a prior business sale, expiring in fiscal 2018, and said it was not involved in material proceedings.
- Other notable items: foreign-currency translation and cash-flow hedge losses contributed to a $17.4 million quarterly other comprehensive loss. The company declared a $0.20-per-share dividend after quarter-end, payable April 29, 2016, subject to the stated record date.
Most important facts for investors to verify
- Whether Technology Solutions demand, vendor relationships, and customer concentration improve or worsen in subsequent quarters.
- Whether Concentrix growth and the improved performance of the loss-making contract persist, and how contract losses, customer wins, and infrastructure costs evolve.
- Whether operating cash conversion remains adequate as receivables, inventory, and payables move seasonally, and whether capital spending continues at an elevated level.
- Renewal and availability of receivables financing, compliance with debt covenants, and the cost and repayment schedule of the U.S. term loan.
- Exposure to foreign currencies, interest rates, customer credit risk, and the contingent inventory repurchase and guarantee obligations.
- Reconciliation of GAAP results to non-GAAP measures, including the effect of acquisition/integration expenses and intangible-asset amortization.