Business context and reporting period
SYNNEX Corporation’s unaudited Form 10-Q covers the quarter and six months ended May 31, 2018; comparisons are with the periods ended May 31, 2017. The company reported two segments: Technology Solutions, which distributes and integrates technology products, and Concentrix, which provides business-process and customer-engagement services. Unless otherwise noted, amounts are in U.S. dollars.
Key financial metrics
| Metric | Three months ended May 31, 2018 | Six months ended May 31, 2018 |
|---|---|---|
| Revenue | $4.973 billion, up 26.3% | $9.525 billion, up 27.7% |
| Gross profit / margin | $429.1 million / 8.63% | $843.0 million / 8.85% |
| Operating income / margin | $123.9 million / 2.49% | $235.9 million / 2.48% |
| Net income | $93.7 million, versus $73.1 million | $118.1 million, versus $134.9 million |
| Diluted EPS | $2.34, versus $1.83 | $2.94, versus $3.37 |
| Operating cash flow | $62.7 million for the six months, versus cash used of $145.6 million |
Technology Solutions revenue rose 29.7% in the quarter and 31.2% in the half, primarily reflecting the Westcon-Comstor Americas acquisition and strength in several U.S. product categories. Concentrix revenue rose 2.0% and 4.1%, respectively; growth included Tigerspike and currency benefits, partly offset by expired contracts and a short-term project ending.
Quarterly gross margin declined from 9.46% to 8.63%; operating margin declined from 3.18% to 2.49%. For the six months, gross margin declined from 9.58% to 8.85%, while operating margin declined from 3.04% to 2.48%. SG&A increased 23.5% in the quarter and 24.6% for the half, mainly due to the Westcon acquisition. Non-GAAP operating income was $152.3 million for the quarter and $292.7 million for the half; non-GAAP diluted EPS was $2.38 and $4.52, respectively. These are company-defined non-GAAP measures, not substitutes for GAAP results.
Liquidity, debt, and cash flow
At May 31, 2018, cash and cash equivalents were $354.2 million, total current assets $5.427 billion, and current liabilities $3.640 billion. Current and long-term borrowings totaled approximately $1.812 billion, compared with $1.942 billion at November 30, 2017. The U.S. receivables facility balance increased to $546.2 million from $288.4 million; the company amended and expanded that facility to $850 million, plus a $150 million accordion, and extended maturity to May 2020. It reported compliance with material debt covenants.
Six-month operating cash flow was $62.7 million, with lower receivables and inventory contributing cash, partly offset by a $342.1 million reduction in accounts payable. Investing cash outflow was $50.5 million, including $50.0 million of capital expenditures. Financing cash outflow was $206.2 million, including $128.3 million of net debt repayments, $46.0 million of share repurchases, and $27.9 million of dividends. Cash, cash equivalents, and restricted cash declined by $196.2 million to $360.6 million.
Material changes, outlook, and risks
- Interest expense and finance charges, net, increased 82.7% in the quarter and 97.3% for the half, largely because of acquisition-related borrowing and higher benchmark rates. Variable borrowing rates ranged up to 11.38% in the quarter.
- The quarterly tax provision fell to $12.4 million, including a $17.0 million benefit from updating the provisional Tax Cuts and Jobs Act transition-tax estimate. For the six months, the TCJA-related net provisional charge was $24.7 million; the six-month effective tax rate was 40.76%, or 28.38% excluding TCJA adjustments. Tax estimates remained subject to refinement.
- On June 28, 2018, after quarter-end, SYNNEX announced a proposed 50%-cash, 50%-stock acquisition of Convergys for approximately $2.426 billion in equity consideration and approximately $2.742 billion including Convergys net debt. Closing was expected by year-end 2018, subject to approvals and other conditions. A committed 364-day secured bridge facility of up to $3.570 billion was arranged; the company estimated total debt could reach approximately $3.2 billion after the transaction and related financing.
- Management said existing liquidity and expected operating cash flow should meet needs over the next 12 months, including for the proposed acquisition. The filing gives no specific revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key exposures include customer concentration (one customer represented 18% of quarterly and six-month revenue), technology distribution’s low margins and working-capital needs, foreign-exchange and variable-rate debt exposure, and acquisition integration and financing risks. Westcon contingent consideration could be up to $200 million; the amount payable was still being finalized. Customer-flooring repurchase obligations could not be reasonably estimated, although no repurchases or known pending defaults were reported.
- MiTAC Holdings and affiliates owned approximately 22% of shares and are related-party suppliers; the company purchased $49.9 million of inventory from them in the quarter. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Track the final Westcon earn-out determination and integration costs, and distinguish acquisition-related growth from organic segment performance.
- Review the drivers of margin compression, especially Technology Solutions operating margin and Concentrix customer mix and labor costs.
- Assess working-capital trends, receivables-facility usage, cash generation, variable-rate debt exposure, and covenant capacity.
- Verify final TCJA tax adjustments and their effect on reported earnings versus adjusted EPS.
- For the proposed Convergys deal, confirm approvals, final financing and leverage, transaction and integration costs, and whether anticipated benefits are realized.
- Monitor major-customer concentration, related-party transactions, and the scale and potential exposure of flooring-related repurchase obligations.