TD SYNNEX (then SYNNEX Corporation) — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended August 31, 2021. The filing reports SYNNEX before its September 1, 2021 acquisition of Tech Data; the combined company is TD SYNNEX. Unless noted otherwise, amounts below are in U.S. dollars.
Business context
SYNNEX distributed technology products and provided systems design and integration solutions. Following the December 2020 spin-off of Concentrix, the company reported one continuing operating segment. Prior-year comparisons are affected by Concentrix being presented as discontinued operations.
Financial performance
| Metric | Three months ended August 31, 2021 | Year-over-year | Nine months ended August 31, 2021 | Year-over-year |
|---|---|---|---|---|
| Revenue | $5.207 billion | Down 1.9% | $16.003 billion | Up 15.5% |
| Gross profit / margin | $312.6 million / 6.00% | Up 5.1%; margin was 5.61% | $946.4 million / 5.91% | Up 14.4%; margin was 5.97% |
| Operating income / margin | $148.2 million / 2.85% | Up 12.0%; margin was 2.49% | $437.9 million / 2.74% | Up 36.4%; margin was 2.32% |
| Continuing-operations income | $94.7 million | Up from $85.7 million | $275.6 million | Up from $204.4 million |
| Diluted EPS from continuing operations | $1.81 | Up from $1.65 | $5.27 | Up from $3.95 |
| Net income | $94.7 million | Compared with $134.5 million | $275.6 million | Compared with $314.0 million |
Net income declined against prior-year totals that included Concentrix discontinued-operations income of $48.8 million for the quarter and $109.6 million for the nine-month period. Thus, net income comparisons do not reflect continuing-business performance alone.
For the quarter, revenue softness was attributed primarily to industry supply-chain constraints; improved product mix lifted gross margin and operating income. Nine-month revenue growth reflected broad-based technology demand, including commercial software, networking, security, notebooks, and design and integration services. Nine-month gross margin edged lower, which management attributed primarily to product mix. The company describes its distribution business as structurally low-margin.
Non-GAAP diluted EPS from continuing operations was $2.14 for the quarter and $6.12 for the nine months, versus $1.88 and $4.56, respectively, in the prior-year periods. These measures exclude specified transaction and integration costs, intangible amortization, and share-based compensation; they are not GAAP measures.
Cash flow, balance sheet and liquidity
- Operating cash flow: $248.8 million for the nine months, versus $1.547 billion in the prior-year period. Current-period cash generation included $571.7 million from lower accounts receivable, offset in part by a $533.9 million accounts-payable decrease and a $183.8 million inventory increase. The prior-year period included discontinued operations and different working-capital movements.
- Investing and financing cash flows: Investing used $2.9 million; financing provided $2.233 billion, primarily reflecting the $2.5 billion notes issuance for the planned Tech Data transaction, partly offset by debt repayments, dividends and cash transferred to Concentrix.
- Cash and debt at August 31: Cash and cash equivalents were $4.050 billion. Current and long-term borrowings totaled approximately $4.025 billion, before the September acquisition and associated financing and refinancing. The balance included $2.5 billion of newly issued senior notes.
- Working capital: Cash conversion cycle was 32 days, compared with 33 days a year earlier. Days sales outstanding improved to 39 from 46; days inventory outstanding rose to 54 from 52, while days payable outstanding fell to 61 from 65.
- Debt and liquidity: The company reported compliance with material credit covenants at August 31 and said existing cash, operating cash flows and liquidity sources were expected to meet working-capital and investment needs for the next 12 months. That statement predates the acquisition close.
Material changes, transaction and outlook
- On September 1, 2021, SYNNEX acquired Tech Data’s parent for $1.61 billion in cash and 44 million SYNNEX shares, valued in the filing at approximately $5.614 billion. Former Tech Data shareholders held approximately 46% of SYNNEX common stock on a fully diluted basis immediately following closing.
- The merger financing included $2.5 billion of senior notes issued in August, with coupons from 1.25% to 2.65% and maturities from 2024 to 2031, and a new $1.5 billion term loan. The new credit agreement also provides a $3.5 billion unsecured revolving facility, subject to its terms. Existing SYNNEX U.S. credit and term-loan agreements were repaid and terminated at closing; Tech Data asset-based debt was also repaid. On October 1, Tech Data redeemed approximately $197 million of senior notes.
- Purchase accounting for Tech Data was still being compiled when the 10-Q was filed, including fair values of acquired assets and assumed liabilities, intangible valuations, taxes and goodwill. The filing therefore does not provide a clear final post-acquisition balance sheet or leverage measure.
- No quantified forward revenue or earnings guidance is provided. Management said the merger was expected to create a leading global IT distributor and solutions aggregator, but cautioned that integration, cost savings and benefits were uncertain and could take longer than expected.
- COVID-19, supply-chain disruption and the resurgence of the Delta variant created uncertainty around customer demand, operations and estimates. Other cited risks include seasonality, customer and supplier concentration, pricing pressure, foreign exchange and interest-rate movements, and the transition away from LIBOR.
Risks, contingencies and unusual items
- One customer represented 23% of quarterly revenue and 29% of nine-month revenue; it also represented 25% of accounts receivable at August 31. Products from HP Inc. accounted for approximately 13% of revenue in both periods.
- Floor-plan financing arrangements leave the company contingently liable to repurchase certain repossessed customer inventory. The exposure could not be reasonably estimated; no repurchases or known pending defaults were reported, and management assessed the likelihood of a material loss as remote.
- Four stockholder lawsuits relating to the merger were filed against SYNNEX and its board between May 26 and June 22, 2021. The company warned that litigation could generate costs and divert management attention.
- The merger added substantial integration and execution risks, including potential disruption, employee losses, unanticipated costs and failure to realize expected benefits. Apollo-affiliated entities held approximately 46% of the company’s stock after closing and received board nomination rights.
- MiTAC Holdings and affiliates owned approximately 18% of SYNNEX shares and were a related-party supplier. SYNNEX purchased $136.2 million of inventory and services from them during the nine months; the relationship was generally not governed by long-term pricing or capacity commitments.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Review subsequent filings for finalized Tech Data purchase accounting, acquired goodwill and intangibles, and the combined company’s post-close debt, cash and leverage.
- Track integration costs, realized synergies and whether merger benefits offset transaction and integration expenses.
- Monitor customer concentration, supply availability, inventory levels and working-capital cash conversion.
- Assess post-merger operating margins and GAAP results alongside the company’s non-GAAP adjustments.
- Follow the merger-related lawsuits, contingent inventory repurchase exposure, debt covenant compliance and refinancing or interest-rate risks.