SYNNEX Corporation (now TD SYNNEX) — Q1 FY2017 Form 10-Q
Reporting period: Three months ended February 28, 2017; comparative period ended February 29, 2016. The filing’s registrant name is SYNNEX Corporation. Amounts below are in U.S. dollars; financial statement figures are shown in millions unless stated otherwise.
Business context
SYNNEX operated through Technology Solutions, a technology products distributor and systems integrator, and Concentrix, a provider of outsourced business and customer-engagement services. The quarter’s results include Minacs, acquired by Concentrix in August 2016.
Financial results and changes
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $3,520.9 million | $3,125.6 million | +12.6% |
| Gross profit / margin | $341.8 million / 9.71% | $284.2 million / 9.09% | +20.3%; +0.62 percentage points |
| Operating income / margin | $101.8 million / 2.89% | $75.6 million / 2.42% | +34.6%; +0.47 percentage points |
| Net income attributable to SYNNEX | $61.8 million | $46.6 million | +32.8% |
| Diluted EPS | $1.54 | $1.17 | +$0.37 |
| Operating cash flow | $(185.6) million | $143.3 million | Changed to cash use |
Products generated $3,046.6 million of revenue and services $474.2 million. The effective tax rate was 33.7%, down from 36.5%, reflecting geographic income mix and a tax-reserve reversal following an appeal settlement. Interest expense and finance charges rose 31.6% to $8.2 million, principally due to acquisition and growth-related borrowing and interest-rate swaps. Other expense was $0.3 million, versus $4.0 million of other income a year earlier; the prior period included a $4.1 million legal-settlement benefit.
Segments: Technology Solutions revenue was $3,046.7 million (+9.4%); operating income was $80.4 million (+18.8%). Management cited demand for systems design and integration and commercial products. Concentrix revenue was $478.2 million (+38.7%) and operating income was $21.3 million, versus $7.9 million. The revenue increase primarily reflected Minacs; excluding Minacs, Concentrix revenue was flat at constant currency. Concentrix gross margin declined to 37.16% from 38.35%, mainly due to customer mix. Consolidated margin benefited from Concentrix contributing a larger share of gross profit.
Management’s non-GAAP measures included operating income of $118.9 million versus $88.3 million, adjusted EBITDA of $138.3 million versus $102.8 million, and diluted EPS of $1.82 versus $1.37. These exclude specified acquisition and integration costs and intangible amortization, among other adjustments; they supplement, not replace, GAAP results.
Cash, debt and liquidity
- Cash and cash equivalents were $210.1 million at February 28, down from $380.7 million at November 30, 2016. Cash, cash equivalents and restricted cash totaled $213.6 million.
- Operating cash use of $185.6 million reflected a $214.0 million decrease in accounts payable and a $109.1 million inventory increase, partly offset by net income, non-cash adjustments and a $36.7 million reduction in receivables. Capital expenditures were $21.6 million; financing activities provided $32.4 million.
- Total borrowings, net of debt discount and issuance costs, were $1,009.3 million, compared with $964.0 million at November 30. Current borrowings were $418.9 million and long-term borrowings $590.4 million. The company reported no U.S. revolving-credit borrowings and was in compliance with material credit covenants.
- The accounts-receivable arrangement had a $600 million commitment and $298.7 million outstanding. The U.S. credit agreement included a $275 million revolver, undrawn at quarter-end. The Canadian revolving arrangement was due to expire in May 2017.
- Cash held by foreign subsidiaries was $168.2 million; repatriation could trigger U.S. taxes and some balances were restricted by local law. Management said available liquidity and expected operating cash flows were sufficient for current and planned needs over the next 12 months.
Outlook, risks and unusual items
- The filing provides no numerical revenue, earnings or margin guidance. Management noted that quarterly results are not necessarily indicative of full-year results.
- The Minacs acquisition’s preliminary purchase price was approximately $435.6 million. A $6.5 million post-quarter refund reduced the purchase price and goodwill; $0.6 million of acquisition-related and integration expense was recorded in this quarter.
- Working-capital demands increased: the cash conversion cycle was 53 days versus 45 days a year earlier, including inventory days of 52 versus 41. Management attributed the increase primarily to inventory supporting systems design and integration growth.
- Customer concentration increased: one customer represented 17% of quarterly revenue and 14% of receivables at quarter-end. HP products accounted for approximately 14% of revenue, down from 18%.
- Risks include customer and supplier concentration, seasonality and IT-industry spending, foreign-exchange and variable-interest-rate exposure, and dependence on receivables financing. A disruption to the securitization program could reduce financing capacity or raise borrowing costs.
- The company has contingent inventory-repurchase obligations tied to customer floor-plan financing; the amount could not be reasonably estimated, though management considered a material loss remote and reported no known pending defaults. It also disclosed a $35.0 million guarantee expiring in fiscal 2018. Management reported no current material proceedings and no material changes to the risk factors in its prior Form 10-K.
Important facts for investors to verify
- Whether revenue and operating-income growth persist after separating Minacs’ contribution and currency effects, particularly in Concentrix.
- Whether working-capital investment and the longer cash-conversion cycle reverse or continue to weigh on operating cash flow and liquidity.
- Debt repayment needs and refinancing access, including the May 2017 Canadian facility expiration and the terms and availability of receivables financing.
- The effect of the 17% customer revenue concentration, customer receivables exposure, and supplier concentration on future sales and credit risk.
- The assumptions behind management’s 12-month liquidity assessment, including foreign cash availability, acquisition integration, and contingent repurchase obligations.