SYNNEX Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended November 30, 2014. The filing is an annual report, not a standalone fourth-quarter filing. SYNNEX operated Technology Solutions, its IT distribution and integration business, and Concentrix, its business-process and customer-relationship-management services business.
Financial performance
| Metric | FY2014 | FY2013 | Change / context |
|---|---|---|---|
| Revenue | $13.840 billion | $10.845 billion | Up 27.6% |
| Gross profit / margin | $1.099 billion / 7.94% | $655.0 million / 6.04% | Margin expanded, mainly from the higher-margin Concentrix mix after the IBM CRM acquisition |
| Operating income / margin | $308.5 million / 2.23% | $240.8 million / 2.22% | Operating margin was essentially flat |
| Net income attributable to SYNNEX | $180.0 million | $152.2 million | Up about 18% |
| Diluted EPS | $4.57 | $3.02 | FY2013 was reduced by the convertible-debt conversion-premium accounting adjustment |
| Cash from operations | $(234.8) million | $35.7 million | Turned negative as receivables and inventory increased |
| Cash and cash equivalents | $180.1 million | $151.6 million | At fiscal year-end |
| Total borrowings | $980.5 million | $317.9 million | Increased largely to finance the IBM acquisition and working capital |
| Working capital | $1.178 billion | $1.142 billion | At fiscal year-end |
Quarterly data show Q4 FY2014 revenue of $3.824 billion and net income attributable to SYNNEX of $57.1 million, versus $3.059 billion and $41.5 million, respectively, in Q4 FY2013. Q4 diluted EPS was $1.44 versus $1.09.
Segments and material changes
- Technology Solutions revenue rose 19.6% to $12.756 billion. Management cited U.S. commercial and consumer-electronics growth and stronger systems design and integration demand. Foreign exchange reduced reported growth by 2.2 percentage points.
- Concentrix revenue increased to $1.096 billion from $189.5 million, primarily because of the IBM CRM business acquisition, which contributed approximately $900 million of FY2014 revenue. Concentrix operating income was $2.5 million, with a 0.22% margin, affected by acquisition and integration costs and acquired-intangible amortization.
- SYNNEX acquired IBM’s CRM business for a preliminary purchase price of $418.3 million, including $71.1 million in stock consideration. At year-end, $40.0 million was payable and an $85.1 million receivable from IBM related to working-capital and other post-closing adjustments remained recorded. The purchase-price allocation was preliminary.
- Reported SG&A rose 90.9% to $790.5 million, including $43.0 million of IBM acquisition and integration expenses and increased intangible amortization.
Cash, debt, liquidity, and capital allocation
- Operating cash use was driven by increases of $527.9 million in accounts receivable and $330.2 million in inventory, partly offset by growth in payables and accrued liabilities. Investing cash use was $441.7 million, including $384.9 million for acquisitions and $57.4 million in capital expenditures. Financing provided $701.9 million.
- Current borrowings were $716.3 million and long-term borrowings were $264.2 million. The U.S. receivables securitization balance was $578.0 million; the facility commitment was increased to $600 million and extended to November 2016. The U.S. credit agreement had $279.4 million outstanding at year-end.
- Management said available cash and credit were sufficient for operating needs for at least the next 12 months. It reported compliance with material debt covenants at year-end. The company had $174.8 million of cash held by foreign subsidiaries; repatriation could trigger U.S. taxes and may be restricted by local law.
- SYNNEX initiated a quarterly dividend of $0.125 per share in FY2014. A new three-year, $100 million share-repurchase authorization was approved; no shares were repurchased under it during FY2014.
Outlook, risks, and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management described economic conditions as stable with modest growth, while emphasizing that IT distribution is seasonal and historically has stronger fourth-quarter sales.
- Key risks include low distribution margins and pricing pressure; dependence on major suppliers, especially HP, which represented approximately 25% of FY2014 revenue; short-term supplier agreements; inventory obsolescence; customer credit and collection exposure; and dependence on receivables financing.
- IBM CRM integration, retention of customers and employees, service delivery, and international operating risks are significant uncertainties. Concentrix also faces high employee turnover, contract termination and performance-penalty risks, and data-security and service-continuity risks.
- Variable-rate debt, foreign-currency movements, and concentrated operations in regions including India, the Philippines, China, and Japan may affect costs and results. Debt agreements impose financial tests and restrictions on borrowing, dividends, acquisitions, and repurchases.
- The company received an FTC Civil Investigative Demand concerning an industry sales-data program and completed its response in July 2014. The filing says the demand sought information, no proceedings had been instituted, and the potential impact was not predictable. Management did not expect ordinary-course legal matters to have a material adverse effect.
- Management and the auditor concluded internal control over financial reporting was effective; however, the assessment excluded the acquired IBM CRM business, which contributed approximately $900 million of revenue and represented $762 million of assets at year-end. The financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether IBM CRM integration delivers sustainable revenue, margins, and cash generation after the substantial acquisition-related costs and amortization.
- Whether receivables and inventory growth normalizes, given FY2014 negative operating cash flow and increased reliance on financing facilities.
- Debt maturity, covenant headroom, renewal and availability of receivables securitization, and the effect of variable rates on financing costs.
- Whether HP’s declining share of revenue reduces supplier concentration risk, and how supplier terms and rebates affect distribution margins.
- Final IBM purchase-price and working-capital adjustments, and any subsequent resolution of the FTC inquiry or material tax matters.
- The filing revised prior EPS calculations under the two-class method; investors should use the restated comparative figures and review the FY2013 convertible-debt adjustment when assessing earnings trends.