SYNNEX Corporation — Q2 FY2017 Form 10-Q
Reporting period: Three and six months ended May 31, 2017. The filing issuer is SYNNEX Corporation. Figures below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Business context
SYNNEX operates Technology Solutions, which distributes and integrates technology products, and Concentrix, which provides outsourced business services. Results include the Minacs acquisition, completed in August 2016.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $3,936 | $3,379 | $7,457 | $6,505 |
| Gross profit / margin | $372 / 9.46% | $294 / 8.70% | $714 / 9.58% | $578 / 8.89% |
| Operating income / margin | $125 / 3.18% | $75 / 2.23% | $227 / 3.04% | $151 / 2.32% |
| Net income attributable to SYNNEX | $73 | $44 | $135 | $91 |
| Diluted EPS | $1.83 | $1.11 | $3.37 | $2.28 |
- Q2 revenue increased 16.5%, gross profit 26.6%, and operating income 66.2% year over year. Six-month revenue increased 14.6% and operating income 50.3%.
- Technology Solutions Q2 revenue rose 13.5% and operating income 34.1%, supported by systems design and integration solutions and commercial products. Concentrix revenue rose 43.4%, principally reflecting Minacs and improvement in automotive; its operating income was $23.4 million versus a $0.6 million loss.
- Concentrix’s gross margin declined year over year, mainly due to customer mix. Consolidated gross margin improved as Concentrix contributed a larger share of gross profit.
- Non-GAAP diluted EPS was $2.08 for Q2 and $3.90 for six months, versus $1.37 and $2.74, respectively. These company-defined measures exclude specified acquisition, restructuring, and intangible-amortization items and are not GAAP measures.
Cash flow, debt, and liquidity
- Six-month operating cash flow was a use of $145.6 million, compared with $283.9 million provided in the prior-year period. The main use was a $368.2 million inventory increase, tied primarily to growth in systems design and integration.
- Investing cash outflow was $40.1 million, including $45.3 million of capital expenditures. Financing provided $101.6 million, including $122.8 million of net borrowing proceeds; dividends paid were $19.9 million.
- At May 31, cash and cash equivalents were $305.6 million, restricted cash was $4.1 million, and total borrowings net of unamortized costs were $1,089.7 million. Borrowings were $964.0 million at November 30, 2016. Accounts payable and inventory were $1,687.0 million and $2,112.6 million, respectively.
- The cash conversion cycle increased to 53 days from 41 days a year earlier; inventory days rose to 55 from 41. Management said higher inventories supported systems design and integration growth.
- The company reported compliance with all material debt covenants and said available liquidity was expected to cover working capital, investment needs, and the proposed Westcon acquisition for the next 12 months. Approximately $199.1 million of cash was held by foreign subsidiaries; repatriation could incur U.S. tax and some balances are subject to local restrictions.
Material developments, outlook, and risks
- On June 5, 2017, after quarter-end, SYNNEX agreed to acquire Datatec’s North and Latin America distribution businesses for $600 million, with a possible cash earnout of up to $200 million. It also agreed to buy 10% interests in Datatec’s EMEA and APAC businesses for $30 million. The stated closing consideration includes $100 million cash and $500 million in SYNNEX shares, subject to specified terms and approvals. Completion and integration are not assured.
- Management cited demand in Technology Solutions and the Minacs acquisition and automotive strength in Concentrix. The filing does not provide specific earnings or revenue guidance.
- Customer concentration increased: one customer represented 21% of Q2 revenue and 20% of receivables at May 31. The largest OEM supplier, HP Inc., represented 13% of Q2 revenue. The filing also identifies seasonality, IT-sector spending, pricing pressure, currency movements, and acquisition execution as risks.
- Other contingencies include customer floor-plan inventory repurchase obligations, for which potential exposure could not be reasonably estimated; management considered a material loss remote. The company disclosed no material proceedings and said it was unaware of pending customer defaults or repossessions.
- The board authorized a new $300 million, three-year share repurchase program effective July 1, 2017. A $0.25-per-share dividend was announced for payment in July 2017.
Investor verification points
- Track whether the Westcon transaction closed, its final stock-versus-cash consideration, earnout exposure, approvals, and integration performance.
- Assess inventory growth, cash conversion cycle, and whether operating cash flow recovers as working-capital needs normalize.
- Monitor customer and receivables concentration, including the major customer’s credit quality and the effect of its increased revenue share.
- Review debt levels, borrowing costs, covenant headroom, and the availability and renewal of receivables financing arrangements.
- Reconcile reported GAAP results with company-defined non-GAAP measures, especially intangible amortization and acquisition-related adjustments.