TD SYNNEX Corp. (then SYNNEX Corporation) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended August 31, 2019. The filing is by SYNNEX Corporation, before the later TD SYNNEX name. Financial amounts below are rounded to millions of U.S. dollars unless stated otherwise. Prior-year comparisons reflect the company’s retrospective adoption of ASC 606.
Business context and financial performance
The company operates Technology Solutions, an IT products distribution and integration business, and Concentrix, a customer-engagement and business-process outsourcing business. Convergys, acquired in October 2018, materially expanded Concentrix and affects year-over-year comparability.
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Revenue | $6,203.7 | $4,822.3 | $17,176.0 | $14,223.9 |
| Gross profit / margin | $726.0 / 11.70% | $430.1 / 8.92% | $2,103.4 / 12.25% | $1,272.8 / 8.95% |
| Operating income / margin | $208.9 / 3.37% | $113.8 / 2.36% | $545.5 / 3.18% | $349.3 / 2.46% |
| Net income | $123.1 | $66.9 | $324.7 | $184.8 |
| Diluted EPS | $2.40 | $1.68 | $6.32 | $4.61 |
Revenue increased 28.6% in Q3 and 20.8% year to date. Technology Solutions revenue grew 16.5% and 7.4%, respectively; Concentrix revenue rose 136.0% and 134.4%, primarily reflecting the Convergys acquisition as well as growth in certain markets. Management attributed improved Technology Solutions results to broad-based growth, product mix, larger integration projects and scale efficiencies. Concentrix operating results benefited from Convergys and integration synergies.
Reported margins increased, but the business mix and revenue-recognition presentation matter: Technology Solutions has structurally low margins, while Concentrix has higher margins. ASC 606 changed certain Technology Solutions transactions from gross to net revenue presentation; this reduced reported revenue and increased reported margins versus prior presentation. Q3 Concentrix gross margin was 36.71% versus 36.81% a year earlier, with management citing customer mix; year-to-date it was 36.91% versus 37.26%.
Cash flow, debt and liquidity
- Operating cash flow: $202.5 million provided in the first nine months, versus $40.4 million used in the comparable 2018 period. Net income and lower receivables supported cash generation; a $390.0 million inventory increase and $119.6 million decline in accounts payable were significant offsets.
- Investing and financing: Investing activities used $102.3 million, including $93.4 million of capital expenditures. Financing activities used $298.4 million, including $214.1 million of net debt repayments, $57.5 million of dividends and $15.2 million of share repurchases.
- Cash and working capital: Cash and cash equivalents were $262.3 million at August 31, 2019, down from $454.7 million at November 30, 2018. Current assets were $7,202.5 million and current liabilities $4,578.7 million (current ratio approximately 1.57). Inventory rose to $2,787.2 million from $2,392.6 million. The cash conversion cycle was 49 days, compared with 45 days a year earlier.
- Debt: Current and long-term borrowings totaled approximately $3,328.7 million, versus $3,456.0 million at November 30, 2018; cash less borrowings implies net debt of approximately $3,066.4 million. The company had $379.7 million outstanding under its U.S. receivables securitization arrangement and no borrowings under its U.S. revolving credit line. About $2.0 billion of $3.3 billion in borrowings had been economically converted to fixed-rate debt through swaps; the reported average borrowing cost was approximately 4.5% for the nine months.
- Liquidity outlook: Management said available cash, operating cash flows and existing financing sources should be sufficient for working capital and investment needs over the next 12 months, including Convergys operations. The company reported compliance with material debt covenants at quarter end.
Material changes, outlook and risks
- The October 2018 Convergys acquisition substantially increased Concentrix scale and debt and makes comparisons with 2018 less like-for-like. Acquisition-related and integration expenses were $9.2 million in Q3 and $53.6 million year to date; cumulative acquisition and integration expenses were $89.9 million.
- Year-to-date other income included a $19.0 million gain from settlement and remeasurement of Westcon-Comstor Americas contingent consideration. The company also settled substantially all acquired convertible debentures; $69.3 million principal was settled for $148.0 million in cash, and remaining debentures were redeemed after quarter end.
- No specific revenue, earnings or margin guidance is provided in the filing. Management’s stated outlook is that liquidity is adequate for the coming 12 months; it also noted possible future investments or acquisitions may require working capital and could be funded through cash, borrowings or securities issuance.
- Risks highlighted include customer concentration (one customer represented 21% of Q3 revenue and 19% year-to-date revenue, and 21% of receivables at quarter end), technology-industry spending and product pricing pressures, seasonality, foreign exchange and interest-rate exposure, and Concentrix employee turnover and customer/program performance. The company also disclosed inventory repurchase guarantees tied to customers’ floor-plan financing; the potential obligation cannot be reasonably estimated, though management considered a material loss remote and reported no known pending defaults.
- Operating lease commitments totaled $730.9 million. Management said there were no material changes to previously disclosed contractual obligations or risk factors. The filing states disclosure controls were effective and no material change in internal control over financial reporting was identified.
Most important facts for investors to verify
- Separate organic growth from the Convergys acquisition contribution, particularly in Concentrix, and assess whether integration synergies are continuing.
- Review the ASC 606 gross-versus-net presentation and distinguish reported margin gains from underlying economics.
- Track inventory, accounts payable and the 49-day cash conversion cycle to assess working-capital intensity and cash-flow sustainability.
- Monitor total debt, interest expense, refinancing needs and covenant headroom, including the maturities of receivables facilities and term loans.
- Assess dependence on the largest customer and the exposure represented by customer receivables and floor-plan repurchase guarantees.