Business context and reporting period
SYNNEX Corporation’s Form 10-K covers the fiscal year ended November 30, 2017, including the fourth quarter. The company operated two segments: Technology Solutions, distributing IT and consumer-electronics products and providing systems integration, and Concentrix, providing outsourced customer-engagement and business-process services. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $17.046 billion | $14.062 billion | +21.2% |
| Gross profit / margin | $1.551 billion / 9.10% | $1.283 billion / 9.12% | Profit +20.9%; margin down 0.02 percentage points |
| Operating income / margin | $509.0 million / 2.99% | $379.6 million / 2.70% | Income +34.1% |
| Net income attributable to SYNNEX | $301.2 million | $234.9 million | +28.2% |
| Diluted EPS | $7.51 | $5.88 | +27.7% |
| Operating cash flow | $176.8 million | $324.7 million | Down $147.9 million |
| Cash and cash equivalents | $550.7 million | $380.7 million | Up $170.0 million |
| Total borrowings | $1.941 billion | $964.0 million | Up approximately $977 million |
| Working capital | $1.699 billion | $1.518 billion | Up $180.1 million |
Fourth-quarter revenue was $5.312 billion, versus $3.887 billion a year earlier; net income attributable to SYNNEX was $91.1 million, versus $85.3 million, and diluted EPS was $2.26, versus $2.13. Fourth-quarter operating income was $159.9 million.
Segment revenue was $15.071 billion for Technology Solutions (+20.7%) and $1.990 billion for Concentrix (+25.3%). Segment operating income was $394.3 million and $114.6 million, respectively. Consolidated operating cash flow fell as accounts receivable increased $478.3 million and inventory rose $243.3 million, partly offset by a $342.0 million increase in accounts payable. Investing cash outflow was $654.3 million, primarily for acquisitions and capital expenditures; financing cash inflow was $638.7 million.
Material changes versus the prior year
- Revenue growth reflected strong systems-design and integration demand, broad-based Technology Solutions growth, and acquisitions. Westcon-Comstor Americas, acquired September 1, contributed approximately $634.8 million of FY 2017 revenue. Concentrix growth also reflected the full-year contribution from Minacs, acquired in 2016, and expansion with existing and new customers.
- SYNNEX acquired Westcon-Comstor Americas for stated purchase consideration of $633.6 million, including estimated contingent consideration, and acquired Tigerspike for a preliminary purchase price of $68.5 million. It also invested $30.0 million for 10% interests in Datatec’s EMEA and APAC distribution businesses.
- Operating margin improved to 2.99% from 2.70%, while gross margin was nearly unchanged. Interest expense and finance charges increased 56.4% to $45.4 million, primarily due to acquisition-related and growth borrowings and higher benchmark rates.
- Technology Solutions gross margin edged down to 5.37% from 5.41%; Concentrix gross margin declined to 37.64% from 38.76%, while its operating income increased to $114.6 million from $63.9 million.
- HP-related products and services represented approximately 13% of consolidated revenue, down from 17% in FY 2016 and 25% in FY 2015. One customer accounted for 21% of FY 2017 revenue, compared with 12% in FY 2016.
Outlook, risks and notable items
- Management said cash, expected operating cash flows and existing liquidity sources should meet current and planned needs for at least the next 12 months. No specific revenue or earnings guidance was provided in the supplied filing text.
- Following enactment of the Tax Cuts and Jobs Act on December 22, 2017, management estimated a FY 2018 effective tax rate of 28%–30%, excluding the law’s one-time effects. The company had not yet estimated a reasonable range for the one-time impact, including deferred-tax remeasurement and mandatory repatriation tax.
- Total debt was $1.946 billion at year-end, including $805.5 million classified as current. The U.S. credit agreement was amended to include a $1.2 billion term loan and a $600 million revolving facility, with maturity extended to September 2022. The company reported compliance with material debt covenants.
- Key risks include working-capital and customer-credit exposure, variable-rate debt, low Technology Solutions margins, supplier dependence and inventory obsolescence, customer concentration, foreign-exchange exposure, and competition and employee attrition in Concentrix. Westcon integration and acquisition execution are additional risks.
- The Westcon acquisition’s purchase-price allocation remained preliminary. Management excluded Westcon’s internal controls from its FY 2017 internal-control assessment; management and the auditor reported effective controls for the assessed scope. The financial-statement audit opinion was unqualified.
- CEO Kevin Murai announced he would retire effective March 1, 2018, with COO Dennis Polk set to become President and CEO. The company increased its quarterly dividend from $0.30 to $0.35 per share in January 2018, citing anticipated TCJA benefits.
- The company disclosed a $38.3 million reserve for unrecognized tax benefits, a $35.0 million guarantee relating to a prior business sale, and contingent inventory repurchase obligations under customer floor-plan financing; it reported no known pending repurchases or material legal proceedings.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects acquired businesses versus organic growth, and what margins and cash generation Westcon contributes after integration.
- Whether receivables, inventory and collections—particularly in Latin America—normalize, given the decline in operating cash flow and the year-end 49-day sales-outstanding measure.
- Debt repayment, interest-rate sensitivity, refinancing availability and covenant headroom, especially with $805.5 million of borrowings classified as current.
- The eventual TCJA tax provision, including the one-time foreign-earnings tax and deferred-tax remeasurement, and its effect on FY 2018 earnings and cash.
- Customer and supplier concentration: the 21% customer revenue exposure, 12% of receivables represented by one customer, and the continuing importance and contractual terms of HP.
- Final Westcon and Tigerspike purchase accounting, acquisition-related costs, contingent consideration outcomes, and progress integrating systems and controls.