TD SYNNEX (filed as SYNNEX Corporation) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended May 31, 2021. Amounts below are U.S. dollars; financial statement figures have been converted from thousands to millions or billions where appropriate. The filing predates the Tech Data merger and reports SYNNEX’s continuing technology distribution business.
Business context and reporting period
SYNNEX distributes technology products and provides systems design and integration services. On December 1, 2020, it separated Concentrix, its customer experience services business. Concentrix is reported as discontinued operations in prior-period income statements; the separation also affects balance sheet and cash flow comparisons. SYNNEX now reports one operating segment.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $5.857B | $4.471B | $10.796B | $8.552B |
| Gross profit / margin | $329.2M / 5.62% | $274.6M / 6.14% | $633.7M / 5.87% | $529.7M / 6.19% |
| Operating income / margin | $147.9M / 2.53% | $88.1M / 1.97% | $289.6M / 2.68% | $188.6M / 2.21% |
| Income from continuing operations | $93.1M | $50.2M | $180.9M | $118.7M |
| Diluted EPS from continuing operations | $1.78 | $0.97 | $3.46 | $2.29 |
| Net income, including discontinued operations where applicable | $93.1M | $57.0M | $180.9M | $179.5M |
Q2 revenue increased 31.0% year over year and operating income rose 67.8%. Six-month revenue grew 26.2% and operating income rose 53.6%. Gross margin declined in both comparisons. Q2 non-GAAP diluted EPS from continuing operations was $2.09, versus $1.26; this measure excludes specified transaction and integration costs, intangible amortization, share-based compensation, and related tax effects.
Cash flow and liquidity: Six-month operating cash flow was $304.3M, compared with $1.226B in 2020; investing cash outflow was $7.5M versus $92.0M, and financing cash outflow was $222.0M versus $237.6M. Operating cash generation included a $376.5M reduction in accounts receivable, partly offset by a $268.5M reduction in accounts payable. Cash and cash equivalents were $1.657B at May 31, 2021. Current assets were $7.240B and current liabilities $4.270B. Management said it expected available cash, operating cash flow and liquidity sources to meet needs for the next 12 months, including the proposed acquisition.
Debt: Reported current borrowings were $66.0M and long-term borrowings $1.497B, approximately $1.563B in carrying value combined. The company was in compliance with material credit-facility covenants at quarter-end. Existing U.S. term loans mature in 2022 and 2023; the filing also describes merger-related financing commitments that were subject to customary conditions and had not funded at quarter-end.
Material changes and management commentary
- Management attributed revenue growth to demand for remote-work capability and digital transformation, as well as return-to-office and data-center purchasing as businesses reopened. Notebook, Chromebook, cloud and collaboration products and integration projects contributed to growth.
- Gross profit increased with sales, but gross margin fell mainly because of product mix, particularly higher notebook and Chromebook volumes. SG&A declined as a share of revenue, reflecting scale; lower incremental COVID-related costs were partly offset by employee and transaction-related costs.
- The cash conversion cycle was 26 days, versus 43 days in the comparable prior-year period, primarily reflecting faster inventory turnover and improved collections; payment timing partly offset the improvement.
- Prior-year total net income includes Concentrix discontinued-operations income of $6.8M for Q2 and $60.8M for the six-month period. Prior-year cash flow statements were not revised for the separation, limiting direct comparability.
Outlook, risks, contingencies and unusual items
- Proposed Tech Data merger: Consideration was $1.61B in cash and 44M SYNNEX shares; the Tech Data shareholder would own approximately 45.9% of SYNNEX on a fully diluted basis based on May 31 shares. The company expected closing in the second half of calendar 2021, subject to remaining foreign regulatory approvals. The U.S. antitrust waiting period had expired and SYNNEX stockholders approved the share issuance on June 30, after quarter-end.
- If the merger is not completed, a termination fee of approximately $40.9M to $131.7M may be payable in certain circumstances. Four stockholder suits relating to the merger had been filed between May 26 and June 22, 2021. The filing identifies integration, transaction-cost, financing, employee-retention and approval risks.
- SYNNEX expected total debt to increase from approximately $1.6B at May 31 to approximately $4B after the proposed acquisition and related financing. The filing notes potential higher borrowing costs and added restrictions if anticipated permanent financing is unavailable on acceptable terms.
- One customer represented 25% of Q2 revenue and 22% of six-month revenue. HP Inc. products accounted for approximately 13% and 14%, respectively. The company also cited COVID-19-related uncertainty, supply-chain disruption, customer and supplier concentration, foreign-exchange exposure, and possible effects of LIBOR transition.
- Flooring arrangements create contingent inventory repurchase obligations if customers default. The amount could not be reasonably estimated; SYNNEX reported no repurchases or known pending defaults and considered the likelihood of a material loss remote. Management did not expect disclosed commitments and contingencies to materially adversely affect results, financial position or cash flows.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management cautioned that pandemic-related uncertainty and estimates could change in future periods.
Important facts for investors to verify
- Progress and final terms of the Tech Data merger, including remaining regulatory approvals, financing, expected dilution, termination-fee exposure and integration costs.
- Whether revenue growth and operating-margin improvement are sustainable, given lower gross margins and the product mix shift.
- Customer and supplier concentration, and the effects of inventory, collections and payment timing on cash flow.
- Post-merger debt levels, financing costs, covenant headroom and the company’s ability to maintain liquidity.
- Developments in the merger-related lawsuits, COVID-19 and supply-chain conditions, and LIBOR transition.