SYNNEX Corporation FY2015 Form 10-K Summary
Reporting period and business context. This filing is for the fiscal year ended November 30, 2015, with unaudited fourth-quarter data for the three months ended that date. The filing is by SYNNEX Corporation, not a company identified in the filing as “TD SYNNEX Corp.” SYNNEX operated Technology Solutions, its IT and consumer-electronics distribution and integration business, and Concentrix, its customer-engagement and business-process services business. FY2015 results include the full-year contribution of the IBM CRM business acquired in 2014. No acquisitions or divestitures occurred in FY2015.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $13.338 billion | $13.840 billion | Down 3.6% |
| Gross profit / margin | $1.192 billion / 8.94% | $1.099 billion / 7.94% | Profit up 8.4%; margin up 1.00 point |
| Operating income / margin | $354.6 million / 2.66% | $308.5 million / 2.23% | Income up 14.9% |
| Net income attributable to SYNNEX | $208.5 million | $180.0 million | Up 15.8% |
| Diluted EPS | $5.24 | $4.57 | Up 14.7% |
| Operating cash flow | $643.6 million | $(234.8) million | Improved by $878.4 million |
FY2015 gross-margin improvement reflected a higher Concentrix contribution and improved Technology Solutions product margins, including lower inventory reserves and foreign-exchange benefits in integration solutions. Concentrix gross profit rose, but included $17.8 million of losses associated with one customer contract. SG&A was $837.2 million, or 6.28% of revenue, versus $790.5 million, or 5.71%, a year earlier. Interest expense and finance charges were $26.3 million; the effective tax rate was 36.2%.
Quarterly context: FY2015 fourth-quarter revenue was $3.550 billion versus $3.824 billion in FY2014 Q4. Operating income was $105.0 million versus $99.7 million; net income attributable to SYNNEX was $62.2 million versus $57.1 million, and diluted EPS was $1.56 versus $1.44.
Segments and period-over-period changes
- Technology Solutions: Revenue was $11.937 billion, down 6.4% reported and 3.7% on a constant-currency basis. The company cited the loss of a significant consumer-retail product vendor following its acquisition by a third party, weaker desktop, laptop and tablet demand, and adverse currency translation. Segment operating income was $303.0 million versus $305.5 million.
- Concentrix: Revenue was $1.417 billion, up 29.2% reported and 37.2% in constant currency. Growth reflected the full-year IBM CRM acquisition contribution, increased business with existing clients and new contracts; currency translation partially offset growth. Segment operating income rose to $51.1 million from $2.5 million, with lower IBM-related integration costs contributing to the improvement.
- Concentrix represented 11% of consolidated revenue, compared with 8% in FY2014. HP remained the largest OEM supplier at approximately 25% of FY2015 revenue, unchanged from FY2014.
Cash, liquidity and debt
At November 30, 2015, cash and cash equivalents were $336.1 million, restricted cash was $88.6 million, working capital was $1.732 billion, and total assets were $4.444 billion. Total borrowings were $730.9 million, down from $980.5 million; $92.1 million was current and $638.8 million long-term. The company amended its U.S. credit facility in May 2015, increasing the term loan commitment to $625 million, and used proceeds to repay U.S. securitization and revolver balances. The U.S. receivables securitization had no balance outstanding at year-end, versus $578 million a year earlier. Management said available cash, operating cash flow and existing liquidity were sufficient for at least the next 12 months; all material debt covenants were met at year-end.
Operating cash flow benefited from lower accounts receivable and inventory balances after substantial working-capital investment in FY2014. Investing cash outflow was $116.1 million, including $100.1 million of capital expenditures. Financing cash outflow was $355.1 million, including net debt repayments and $22.6 million of dividends paid. The company held $146.5 million of cash at foreign subsidiaries; repatriation could incur U.S. taxes and may be restricted by local law.
Outlook, risks and unusual items
The filing provides no quantified revenue, earnings or margin guidance. Management described expectations for sufficient liquidity and continued investment or expansion, potentially funded with cash, borrowings or equity, but cautioned that forward-looking results are subject to risks. The company cited modestly growing, relatively stable operating-region economies during the periods discussed, while emphasizing that IT and consumer-electronics demand is cyclical and that historical seasonal patterns may not recur.
- Technology Solutions has low margins, intense price competition, short product life cycles, inventory-obsolescence exposure and substantial working-capital needs. Supplier rebates, price protection and return rights may change or be limited.
- Supplier concentration is material: HP accounted for about one-quarter of revenue, and its distribution agreement is short-term and terminable on short notice. A significant vendor loss contributed to FY2015 distribution revenue decline.
- Concentrix faces client termination and variable-volume risks, contract penalties, employee attrition, pricing pressure and possible client insourcing. A customer contract generated $17.8 million of losses in FY2015.
- Foreign currency translation reduced reported revenue; foreign operations, particularly delivery centers in India and the Philippines, also face currency, labor, political, natural-disaster and continuity risks. The company used foreign-exchange forwards and entered into $400 million of interest-rate swaps to fix a portion of floating-rate exposure.
- Debt agreements impose financial tests and restrictions on additional debt, dividends, acquisitions and repurchases. Variable-rate debt, refinancing access and receivables-financing availability are risks. Operating leases totaled $302.7 million in future minimum payments.
- MiTAC Holdings and affiliates owned approximately 25% of the company; related-party inventory purchases were $87.1 million in FY2015. This ownership can influence stockholder matters, and affiliates may compete with SYNNEX.
- Contingencies included a parent guarantee of up to $35.0 million related to the sale of a former business, potential repurchase obligations under customer floor-plan financing, and $22.8 million of unrecognized tax benefits. Management said ordinary-course legal matters were not expected to have a material adverse effect and reported no material preference proceedings.
Other notable items: FY2015 included $10.1 million of IBM acquisition and integration expenses and $54.8 million of intangible-asset amortization. The company declared $0.58 per share in FY2015 dividends and announced a subsequent $0.20-per-share dividend in January 2016. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Confirm the issuer and period: this is SYNNEX Corporation’s FY2015 10-K, not a filing under the name TD SYNNEX Corp.
- Track whether Concentrix growth and profitability can continue, and whether losses on the cited customer contract are contained.
- Assess the effect of the lost vendor, HP’s importance and agreement terms, and continued weakness or recovery in Technology Solutions demand.
- Reconcile cash-flow improvement with working-capital movements, capital spending and the company’s reliance on receivables programs and other financing.
- Monitor debt maturities, variable-rate exposure, covenant headroom, refinancing access and the availability of foreign cash for U.S. needs.
- Review the company’s exposure to currency movements, customer and supplier concentration, related-party transactions, tax audits and contingent obligations.