Business context and reporting period
SYNNEX Corporation’s Form 10-K covers the fiscal year ended November 30, 2018; it is an annual report, not a standalone fourth-quarter filing. The company operated Technology Solutions, a technology products distributor and systems integrator, and Concentrix, a customer-engagement and business-process services provider. Convergys was acquired on October 5, 2018 and contributed results only from that date. The filing identifies the registrant as SYNNEX Corporation.
Financial performance and liquidity
Unless otherwise noted, amounts are U.S. dollars. Fiscal 2018 comparisons are with fiscal 2017.
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $20.054 billion | $17.046 billion | +17.6% |
| Gross profit / margin | $1.928 billion / 9.61% | $1.551 billion / 9.10% | +24.3%; margin +0.51 percentage points |
| Operating income / margin | $551.0 million / 2.75% | $509.0 million / 2.99% | +8.3%; margin -0.24 percentage points |
| Net income | $300.6 million | $301.2 million | -0.2% |
| Diluted EPS | $7.19 | $7.51 | -4.3% |
| Operating cash flow | $100.7 million | $176.8 million | -43.0% |
| Cash and cash equivalents at year-end | $454.7 million | $550.7 million | -$96.0 million |
| Working capital at year-end | $2.205 billion | $1.699 billion | +$506.7 million |
| Current and long-term borrowings | $3.456 billion | $1.942 billion | +$1.514 billion |
| Cash conversion cycle | 52 days | 40 days | +12 days |
Technology Solutions revenue was $17.609 billion (+16.8%), with operating income of $406.3 million and a 2.31% operating margin (down from 2.62%). Concentrix revenue was $2.463 billion (+23.8%), with operating income of $144.8 million and a 5.88% operating margin (up from 5.76%). Excluding Convergys and currency effects, Concentrix revenue grew 1.4%.
Fiscal 2018 fourth-quarter revenue was $5.622 billion versus $5.312 billion in the prior-year quarter; operating income was $198.3 million versus $159.9 million, and net income was $113.2 million versus $91.1 million. Fourth-quarter services revenue was $967.6 million, reflecting the inclusion of Convergys after the acquisition.
Capital expenditure was $125.3 million. Investing cash outflow was $1.180 billion, mainly acquisition-related, while financing cash inflow was $1.001 billion. The company reported $3.5 billion of outstanding borrowings in its risk disclosures, including term loans, credit lines, receivables financing and leases; the balance-sheet current and long-term borrowing totals are shown above. It had $615 million drawn on its U.S. receivables arrangement. Management said available cash, operating cash flow and existing liquidity sources should cover working capital and planned needs for at least the next 12 months. The company was in compliance with material debt covenants at year-end.
Material changes versus the prior period
- Revenue growth reflected acquisitions and business demand: Technology Solutions benefited from a full year of Westcon-Comstor Americas, acquired in September 2017; Concentrix included $439.4 million of Convergys revenue.
- Convergys was acquired for approximately $2.270 billion of consideration, including $1.208 billion cash, $1.017 billion stock and assumed awards. The company issued 11.511 million shares, and recorded $1.361 billion of preliminary goodwill and $927 million of acquired intangible assets.
- Gross margin improved, but operating margin declined as selling, general and administrative costs grew 32.1%, faster than revenue. Acquisition and integration expenses rose to $45.1 million from $4.8 million, and amortization of intangibles increased to $124.3 million from $79.2 million.
- Interest expense and finance charges, net rose to $84.7 million from $45.4 million, reflecting acquisition borrowings, growth funding and higher benchmark rates. Approximately $2.0 billion of borrowings had been economically converted to fixed rates through swaps.
- Operating cash flow fell as working capital absorbed cash: accounts receivable increased $513.0 million and inventory increased $367.9 million, partly offset by a $382.0 million increase in accounts payable. Days sales outstanding rose to 62 from 49.
- Fiscal 2018 GAAP effective tax rate was 34.3%, including a $33.1 million net expense from U.S. tax reform. Excluding the TCJA adjustment, management reported an effective rate of 27.04%. Non-GAAP diluted EPS was $10.89 versus $8.86; this measure excludes specified acquisition, amortization and tax-reform items.
Outlook, commentary, risks and unusual items
- Management expected Convergys to increase the services share of revenue and raise gross and operating margins because Concentrix has higher margins than Technology Solutions. It also expected Concentrix SG&A as a percentage of revenue to decline after integration. The filing provides no specific forward revenue or EPS guidance.
- Management cited stable economic conditions over the preceding three years, while warning that results remain sensitive to IT and consumer electronics demand, seasonality, pricing pressure, customer and supplier concentration, inventory obsolescence, and acquisition execution.
- Key risks include Convergys integration and realization of expected benefits; high debt and variable-rate exposure; working-capital and customer collection needs; foreign-exchange movements; cybersecurity, data privacy and service continuity; and high employee turnover in Concentrix. HP represented 12% of fiscal 2018 revenue, and one customer represented 17%.
- Convergys-related shareholder litigation included one action dismissed in December 2018, with a possible mootness-fee request still under discussion, and a second action the company said it would defend. The filing said ordinary-course legal matters were not expected to have a material adverse effect. Inventory repurchase guarantees tied to customer floor-plan financing were not reasonably estimable; no repurchases or known pending defaults had occurred at year-end.
- The acquisition’s preliminary purchase-price allocation remained subject to adjustment. The audit opinion on the financial statements was unqualified. Management and the auditor found internal control over financial reporting effective, but Convergys’ controls were excluded from the 2018 assessment.
Important facts for investors to verify
- How much of reported growth and earnings improvement is sustainable organically, apart from acquisitions and revenue-presentation changes?
- Whether Convergys integration, synergies, customer retention and margin expectations are being achieved, and whether integration costs continue.
- Debt repayment capacity, interest expense, covenant headroom and liquidity after the subsequent $250 million term-loan draw disclosed in the filing.
- Whether receivables, inventory, days sales outstanding and the 52-day cash conversion cycle normalize, supporting stronger operating cash conversion.
- Customer and supplier concentration, including the 17% customer exposure and HP’s 12% revenue share, and any change in those relationships.
- Resolution of the remaining merger-related litigation and tax uncertainties, including the $54.0 million reserve for unrecognized tax benefits.