TD SYNNEX (then SYNNEX Corporation) — Q1 FY2021 Form 10-Q
Reporting period: Three months ended February 28, 2021. The filing was made under the name SYNNEX Corporation (ticker SNX). Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and reporting period
SYNNEX distributed technology products and provided systems design and integration services. On December 1, 2020, it completed the separation of Concentrix, its customer experience services business. Accordingly, Q1 FY2021 results reflect continuing SYNNEX operations only; the prior-year income statement presents Concentrix as discontinued operations. Comparisons of consolidated net income and balance-sheet totals are therefore affected by the separation.
Key financial metrics
| Metric | Q1 FY2021 | Comparable prior period | Change / context |
|---|---|---|---|
| Revenue | $4,939 million | $4,081 million | Up 21.0%; continuing-business comparison |
| Gross profit / margin | $305 million / 6.17% | $255 million / 6.25% | Profit up 19.4%; margin down 0.08 percentage points |
| Operating income / margin | $142 million / 2.87% | $100 million / 2.46% | Income up 41.1% |
| Income from continuing operations | $88 million | $69 million | Diluted EPS was $1.69 versus $1.32 |
| Net income | $88 million | $123 million | Prior period included $54 million of after-tax Concentrix income |
| Operating cash flow | $25 million | $58 million | Lower year over year; working-capital movements were significant |
| Cash and cash equivalents | $1,444 million | $1,412 million at November 30, 2020 | Includes $470 million held by international subsidiaries |
| Total borrowings | $1,633 million | $1,622 million at November 30, 2020 | Current $136 million; long-term $1,497 million |
Adjusted EBITDA, a non-GAAP measure, was $162 million versus $121 million; non-GAAP diluted EPS was $1.89 versus $1.42. These measures exclude specified items and should be considered alongside, not instead of, GAAP results.
Cash used in investing was $4 million, chiefly for capital expenditures. Cash used in financing was $147 million, including a $150 million net cash transfer to Concentrix and $10 million of dividends, partly offset by net borrowings. The cash conversion cycle was 32 days, compared with 57 days a year earlier. Current assets were $6,805 million and current liabilities $3,968 million at quarter-end (a derived current ratio of about 1.71).
Material changes versus the prior comparable period
- Revenue growth reflected broad-based demand for technology products and solutions, including demand associated with remote work, learning and consumer needs during the pandemic.
- Gross margin eased, primarily because of product mix. Operating margin improved as higher volumes supported scale efficiencies and SG&A declined as a percentage of revenue.
- Continuing-operations income increased, while reported net income declined because the prior-year quarter included Concentrix results.
- Reported assets and equity fell substantially from November 30, 2020, principally reflecting the transfer of Concentrix assets and liabilities and the separation-related reduction in retained earnings. The company transferred net assets of approximately $2,323 million.
Outlook, management commentary, risks and unusual items
- Revenue outlook: Management expected revenue to decline by up to approximately $600 million per quarter in the second half of 2021 as a customer moved to a consignment model. The filing does not provide a broader numerical earnings or revenue forecast.
- Proposed Tech Data acquisition: Announced March 22, 2021, after quarter-end. Consideration was $1.61 billion in cash plus 44 million SYNNEX shares; the seller would own about 45% of SYNNEX on a fully diluted basis. Closing was expected in the second half of calendar 2021, subject to shareholder, regulatory and other conditions. The filing described Tech Data’s revenue of about $37 billion and net income of about $375 million for the 12 months ended January 31, 2020.
- Acquisition financing and exposure: A commitment letter provided for a $4.0 billion 364-day bridge term facility and a $3.5 billion revolving facility, subject to conditions. Management expected post-acquisition debt of approximately $4 billion and warned that financing costs, integration challenges, transaction expenses, lost employees or customers, and failure to achieve anticipated benefits could adversely affect results. Certain failed-deal scenarios could trigger a termination fee of about $41 million to $132 million.
- COVID-19 and operations: The pandemic continued to disrupt supply chains and workforce participation, and increased uncertainty in management estimates. Management cautioned that current results might not indicate future performance.
- Concentration and working capital: One customer represented 18% of quarterly revenue and 17% of receivables at February 28, 2021. HP products represented about 14% of revenue. The distribution business is working-capital intensive and exposed to demand, pricing, inventory and supplier conditions.
- Debt, covenants and rates: The company reported compliance with material debt covenants. Existing debt maturities included $500 million in fiscal 2022 and $1.0 billion in fiscal 2023. The filing also identified uncertainty from the expected discontinuance of LIBOR and its possible effect on variable-rate debt.
- Contingencies: SYNNEX had contingent inventory repurchase obligations under customer floor-plan financing arrangements; potential losses could not be reasonably estimated, though management considered material loss remote and reported no known pending defaults. Management did not expect disclosed commitments and contingencies to have a material adverse effect.
- Other items: The effective tax rate on continuing operations was 25.31%, compared with 15.20%, reflecting higher income and prior-year tax benefits. A $0.20 per-share dividend was announced for payment in April 2021. The $400 million share repurchase program had not been used as of the filing’s stated date.
Important facts for investors to verify
- Whether Tech Data’s acquisition closed, its final financing structure and leverage, and the resulting dilution, costs and integration performance.
- The timing and actual financial effect of the customer’s transition to consignment, including the indicated potential revenue reduction.
- Whether demand, gross margin, customer concentration and product availability remain favorable as pandemic-related conditions change.
- Working-capital cash conversion, receivables quality and the availability or renewal of receivables financing and credit facilities.
- Debt repayment capacity, covenant headroom, interest-rate exposure and any transition from LIBOR-based borrowing terms.
- Any changes in separation-related obligations, floor-plan repurchase exposure, litigation or other contingencies.