SYNNEX Corporation — Form 10-Q Summary
Period: Fiscal third quarter ended August 31, 2017; comparisons are with the three and nine months ended August 31, 2016. Unless stated otherwise, dollar amounts below are in millions and rounded. The filing reports unaudited results.
Business context and results
SYNNEX operated two reportable segments: Technology Solutions, distributing IT and related products and providing systems integration, and Concentrix, providing business-process outsourcing and customer-engagement services.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4,276.7 (+16.5%) | $3,669.8 | $11,733.8 (+15.3%) | $10,174.9 |
| Gross profit / margin | $374.9 / 8.77% | $326.0 / 8.88% | $1,089.0 / 9.28% | $904.2 / 8.89% |
| Operating income / margin | $122.2 / 2.86% | $98.0 / 2.67% | $349.1 / 2.98% | $249.0 / 2.45% |
| Net income attributable to SYNNEX | $75.2 | $58.7 | $210.1 | $149.6 |
| Diluted EPS | $1.87 | $1.47 | $5.24 | $3.75 |
| Operating cash flow | Not separately presented for the quarter | $(80.2) | $273.6 |
Financial position and liquidity
- At August 31, cash and cash equivalents were $243.3, versus $380.7 at November 30, 2016; cash, cash equivalents and restricted cash totaled $247.2.
- Total borrowings were $1,056.2 before $2.2 of unamortized discounts and issuance costs; reported net borrowings were $1,054.0, compared with $964.0 at November 30, 2016. Current borrowings were $489.9 and long-term borrowings $564.1.
- Operating cash use of $80.2 for the first nine months principally reflected a $484.7 inventory increase and a $76.9 increase in receivables, partly offset by net income, noncash items and higher payables. Investing cash use was $124.2; financing provided $55.1.
- The cash conversion cycle increased to 50 days from 42 days a year earlier, primarily because of higher inventory supporting systems design and integration growth.
- Management said available cash, operating cash flows and existing liquidity were expected to cover current and planned needs for the next 12 months. Of cash and equivalents, $191.4 was held by foreign subsidiaries; repatriation could incur U.S. taxes and some balances are subject to local restrictions.
Changes and management commentary
- Technology Solutions revenue rose 15.8% in Q3 and 13.1% year to date, attributed mainly to strong systems design and integration demand and higher sales across most product lines. Segment operating income increased 25.9% and 26.6%, respectively. Q3 gross margin declined to 5.14% from 5.23%, which management attributed to business mix and higher inventory costs.
- Concentrix revenue grew 21.9% in Q3 and 33.9% year to date, mainly reflecting the Minacs acquisition. Segment operating income increased to $22.2 in Q3 and $67.0 year to date. Q3 operating margin eased to 4.49% from 4.56%, with management citing ramping clients and new country openings; year-to-date margin improved.
- Consolidated Q3 gross margin declined 0.11 percentage point, while operating margin improved 0.19 point. Interest expense and finance charges rose 29.8% in Q3 and 32.9% year to date, primarily due to acquisition and working-capital borrowings and step-up interest-rate swaps.
- The effective tax rate was 34.2% for Q3 and 35.1% year to date, down from 34.9% and 35.8%. Management cited income mix by jurisdiction, expired tax statutes and a favorable appeal settlement.
Acquisitions, outlook and risks
- SYNNEX acquired Tigerspike on July 31 for a preliminary $68.5 cash purchase price, integrating it into Concentrix. The purchase-price allocation included $43.7 of goodwill and $25.4 of intangible assets; the valuation was preliminary.
- After quarter-end, on September 1, SYNNEX acquired Datatec’s Westcon-Comstor Americas distribution businesses for approximately $600.0 cash, with a potential earnout of up to $200.0 subject to gross-profit targets. It also purchased 10% stakes in Datatec’s EMEA and APAC distribution businesses for $30.0, with options to acquire additional stakes. Westcon-Comstor Americas reported approximately $2.2 billion of revenue for its fiscal year ended February 28, 2017.
- To fund the acquisition, the U.S. credit agreement was amended September 1: the revolving commitment increased to $600.0 and the term loan to $1.2 billion, which was fully drawn. Maturity was extended to September 2022. These are post-quarter events and are not reflected in August 31 borrowings.
- The filing provides no specific forward revenue or earnings guidance. Management identified integration, customer concentration, IT-industry spending, seasonality, pricing pressure, foreign exchange, working-capital needs and acquisition execution as risks. It cautioned that Westcon integration could divert management attention and entail unexpected costs or customer and employee losses.
- One customer represented 22% of Q3 revenue and 20% of nine-month revenue, versus 12% and 10% in the comparable 2016 periods. The largest OEM supplier, HP Inc., represented about 14% of revenue in both 2017 periods.
- Inventory repurchase obligations tied to customer floor-plan financing cannot be reasonably estimated; no repurchases or known pending defaults were reported. The company said material loss was remote based on experience. It reported compliance with material debt covenants and no material proceedings.
Important facts for investors to verify
- How Westcon’s acquired operations, earnout and subsequent $1.2 billion term loan affect leverage, interest costs, covenants and cash generation.
- Whether the longer cash conversion cycle and inventory build normalize, and whether operating cash flow recovers from the nine-month outflow.
- Whether elevated customer concentration persists and how it affects revenue, receivables and credit exposure.
- Whether acquisition integration delivers expected growth and synergies without further margin pressure or material one-time costs.
- How Concentrix customer mix, ramping programs and new-country openings affect segment margins.