SYNNEX Corporation Form 10-Q — Quarter ended May 31, 2016
Reporting context: The filing is for SYNNEX Corporation, the company’s name in 2016 (not the later TD SYNNEX name). It covers the three and six months ended May 31, 2016; financial statements are unaudited. Amounts below are in U.S. dollars.
Business context
SYNNEX operated Technology Solutions, an IT products distribution and integration business, and Concentrix, a global business-process outsourcing business. The company reported approximately 75,000 full-time and temporary employees worldwide. Technology Solutions accounted for most revenue.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $3.379 billion | $3.254 billion | $6.505 billion | $6.456 billion |
| Gross profit / margin | $294.0 million / 8.70% | $300.1 million / 9.22% | $578.2 million / 8.89% | $588.3 million / 9.11% |
| Operating income / margin | $75.3 million / 2.23% | $89.4 million / 2.75% | $150.9 million / 2.32% | $168.3 million / 2.61% |
| Net income attributable to SYNNEX | $44.4 million | $51.9 million | $90.9 million | $98.2 million |
| Diluted EPS | $1.11 | $1.30 | $2.28 | $2.47 |
- Q2 revenue increased 3.9% year over year; six-month revenue increased 0.8%. Products revenue rose, while services revenue declined slightly.
- Q2 operating income fell 15.7%; six-month operating income fell 10.3%. GAAP diluted EPS decreased 14.6% in Q2 and 7.7% for the first half.
- Management’s non-GAAP diluted EPS, excluding specified acquisition/integration costs, restructuring charges and intangible amortization, was $1.37 for Q2 and $2.74 for six months, versus $1.55 and $3.01, respectively, a year earlier.
- Six-month operating cash flow was $284.9 million, down from $335.6 million. Investing activities provided $18.2 million, including an $86.5 million release of restricted cash, and financing activities used $47.7 million. Capital expenditures were $67.5 million.
- Cash and cash equivalents were $589.0 million at May 31, 2016, versus $336.1 million at November 30, 2015. Total borrowings were $716.0 million, including $91.4 million current and $624.5 million long-term; the U.S. term loan balance was $601.6 million. No borrowings were outstanding under the U.S. revolver or U.S. receivables securitization arrangement.
- Current assets were $3.637 billion and current liabilities $1.842 billion. Foreign subsidiaries held $155.3 million of cash; repatriation could incur U.S. taxes and some balances are subject to local restrictions.
Material changes and management commentary
- Technology Solutions revenue grew 4.5% in Q2, supported by systems design and integration, networking equipment and IT systems; consumer sales and system-component demand were weaker. Concentrix revenue declined 1.7% in Q2, partly due to the planned lapse of a government contract, which reduced year-over-year revenue by approximately $27 million in Q2 and $50 million in the first half.
- Gross margin declined, which management attributed primarily to changes in product and service mix and prior-year foreign-exchange benefits in Technology Solutions. Concentrix also faced higher depreciation and facility costs as it supported growth.
- Concentrix Q2 operating loss was $0.6 million, versus $9.0 million operating income a year earlier. Results reflected the lapsed government contract, higher costs and $4.0 million in restructuring charges, partly offset by improvement in a previously loss-making contract. That contract still incurred a $7.2 million loss in the first half, compared with $15.3 million a year earlier.
- Other income included a $4.1 million Canadian class-action settlement benefit in the six-month period. Q2 foreign-currency forward contracts recorded losses, largely offset by changes in underlying exposures. Foreign-currency translation also affected reported results.
- Management stated that cash, expected operating cash flows and available liquidity were sufficient for current and planned needs over the next 12 months. No specific revenue or earnings guidance was provided in the supplied filing text.
- The company was in compliance with material debt covenants. The U.S. receivables securitization facility, with up to $600 million capacity, matures November 4, 2016; management said it expected renewal, while warning that loss of financing capacity could adversely affect the business.
Risks, contingencies and other items
- Working-capital needs are significant and depend on receivables, inventory, term loans, securitization and revolving credit facilities. A customer represented 11% of Q2 revenue and 13% of receivables at quarter-end; HP products represented 17% of Q2 revenue and 18% for the first half.
- SYNNEX had contingent obligations to repurchase certain customer inventory repossessed under floor-plan financing. The exposure could not be reasonably estimated; management reported no repurchases or known pending defaults and considered a material loss remote.
- Other disclosed items include a $35.0 million parent guarantee related to the sale of a former business, expiring in fiscal 2018, and a $4.1 million contingent indemnification liability. Management did not expect commitments and contingencies to have a material adverse effect.
- MiTAC Holdings and affiliates beneficially owned approximately 25% of shares and supplied inventory worth $56.4 million in the first half. The filing notes potential influence over shareholder matters and that an affiliated entity may compete with SYNNEX.
- The board declared a $0.20-per-share dividend payable July 29, 2016. The company repurchased 24,857 shares during May at an average $79.42 per share; $84.3 million remained under the authorized program.
Important facts for investors to verify
- Whether Technology Solutions can sustain growth and recover margins, given lower gross profit and operating income.
- Concentrix performance after the government contract lapse, progress on the loss-making contract, and the effects of restructuring and elevated facility costs.
- Renewal and availability terms for the U.S. receivables securitization facility before its November 2016 maturity, and continued compliance with debt covenants.
- Working-capital movements and cash-flow sustainability, particularly the extent to which receivables collections and the restricted-cash release drove first-half cash generation.
- Customer and supplier concentration, foreign-exchange exposure, contingent inventory repurchase obligations, related-party transactions, and the impact of non-GAAP adjustments relative to GAAP results.