SYNNEX Corporation — Q1 FY2019 Form 10-Q
Reporting period: Three months ended February 28, 2019. The filing is by SYNNEX Corporation (now associated with TD SYNNEX); comparative 2018 figures were adjusted retrospectively for ASC 606 revenue recognition. Dollar amounts below are in millions unless noted.
Business context and results
SYNNEX operates Technology Solutions, an IT products distribution and integration business, and Concentrix, a business-process and customer-engagement services business. Results include Convergys, acquired in October 2018, for the full current quarter; the prior-year comparison does not include Convergys.
| Metric | Q1 FY2019 | Q1 FY2018 | Change / context |
|---|---|---|---|
| Revenue | $5,249.5 | $4,493.4 | Up 16.8% |
| Gross profit / margin | $678.9 / 12.93% | $413.5 / 9.20% | Margin expanded 3.73 percentage points |
| Operating income / margin | $162.0 / 3.09% | $111.5 / 2.48% | Up 45.3%; margin expanded 0.61 points |
| Income before taxes | $119.7 | $92.9 | |
| Net income | $87.1 | $24.1 | |
| Diluted EPS | $1.69 | $0.60 | Prior period included significant TCJA tax expense |
| Interest expense and finance charges, net | $41.6 | $17.5 | Up 138.4%, principally from acquisition-related debt and higher benchmark rates |
| Operating cash flow | $(158.3) | $(5.7) | Current-period outflow principally reflected an $875.8 decrease in accounts payable |
| Investing / financing cash flow | $(29.5) / $(27.1) | $(27.9) / $(146.4) | Current investing outflow mainly capital spending; financing included dividends and net debt repayments |
Material changes and segment performance
- Technology Solutions: Revenue was $4,080.7, up 2.3%; operating income was $101.4, up 23.9%. Management cited broad-based sales growth, improved product mix, and a higher proportion of revenue recognized net under principal-versus-agent guidance.
- Concentrix: Revenue was $1,173.3, up 131.1%, mainly reflecting the Convergys acquisition. Operating income was $60.6, up 104.3%; reported operating margin declined to 5.16% from 5.84%, while management said margin improved excluding amortization and acquisition/integration expenses.
- Acquisition and integration expenses were $27.8 in the quarter, including $27.5 in Concentrix. Amortization of intangibles was $52.9, versus $26.7 a year earlier.
- Reported net income benefited from a much lower tax provision: the effective rate was 27.21%, compared with 74.05%. The prior-year rate included a $41.7 net TCJA adjustment; excluding TCJA effects, the prior-year rate was 29.1%.
- ASC 606 changed the presentation of certain Technology Solutions transactions from gross to net and moved revenue recognition earlier for some arrangements. The filing says the prior-period presentation was adjusted; reported revenue growth should therefore be assessed with these presentation effects in mind.
Financial position, liquidity and debt
- At February 28, 2019, cash and cash equivalents were $249.3, down from $461.8 at November 30, 2018; total assets were $10,761.3 and stockholders’ equity was $3,510.4.
- Current assets were $6,429.2 and current liabilities $3,880.5. Current borrowings were $701.1; long-term borrowings were $2,827.6. Total reported borrowings were approximately $3,528.7, compared with cash of $249.3.
- The company drew the remaining $250.0 under its U.S. term-loan facility during the quarter, partly to settle Convergys convertible debentures. It paid $148.0 in cash to settle $69.3 of debenture principal and related conversion obligation; substantially all debentures were settled.
- Management stated that available cash, operating cash flows and existing liquidity sources should be sufficient for working capital and investment needs over the next 12 months, including Convergys operations. The company was in compliance with material credit covenants at quarter-end.
- Cash conversion cycle was 59 days versus 44 days a year earlier, reflecting payment timing, acquisition impact and revenue-recognition presentation changes. The company describes Technology Solutions as working-capital intensive.
Outlook, commentary and risks
- The filing provides no specific numerical revenue, earnings or margin guidance. Management discusses potential continued investment and acquisitions, funded through cash, borrowing or securities, and expresses confidence in liquidity for the coming 12 months.
- Key stated business exposures include customer demand and seasonality, competition and pricing pressure, customer and supplier concentration, foreign currency movements, variable-rate debt, Concentrix employee turnover and execution of Convergys integration and synergies.
- One customer accounted for 17% of quarterly revenue and 13% of receivables at February 28. HP products represented approximately 11% of revenue. Management said a material risk-factor change from the 2018 Form 10-K had not occurred.
- Floor-plan financing agreements create contingent inventory repurchase obligations if customers default. The amount cannot be reasonably estimated; there had been no repurchases or known pending defaults, and management considered material loss remote. The company also reported ordinary-course claims and contingencies, none material in its view.
- Quarterly dividend declared was $0.375 per share. Future dividends remain subject to board declaration, capital availability and debt covenants.
Important facts for investors to verify
- How much of revenue and earnings growth reflects Convergys, organic performance, foreign exchange and ASC 606 gross-versus-net presentation.
- Whether integration costs, amortization and expected synergies develop as management anticipates, and how segment margins perform excluding those items.
- Debt, interest-rate exposure, repayment schedule and continued compliance with covenants; also the refinancing or renewal of receivables facilities as they approach expiry.
- Working-capital trends, especially the cash conversion cycle and the causes and sustainability of operating cash outflows.
- Customer concentration, supplier dependence, and any developments in contingent flooring obligations or other claims.