TD SYNNEX (filed as SYNNEX Corporation) — Q1 FY2020 Form 10-Q
Business context and period. The filing is by SYNNEX Corporation (NYSE: SNX), the historical registrant identified in the request as TD SYNNEX. It covers the three months ended February 29, 2020, with comparisons to the three months ended February 28, 2019. The company reported Technology Solutions, an IT products distribution and integration business, and Concentrix, a customer-experience and business-services business. Results for this quarter preceded most of the reported COVID-19 disruption.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $5.264 billion | $5.249 billion | +0.3% |
| Gross profit / margin | $698.3 million / 13.27% | $678.9 million / 12.93% | +2.9%; margin +0.34 percentage points |
| Operating income / margin | $188.7 million / 3.58% | $162.0 million / 3.09% | +16.5%; margin +0.49 points |
| Net income | $122.6 million | $87.1 million | +40.7% |
| Diluted EPS | $2.36 | $1.69 | +39.6% |
| Operating cash flow | $58.1 million | $(158.3) million | Improved $216.4 million |
Segments. Technology Solutions revenue was $4.081 billion, essentially flat, and operating income was $100.4 million versus $101.4 million. Concentrix revenue was $1.189 billion, up 1.3%, and operating income rose to $88.2 million from $60.6 million; its operating margin increased to 7.42% from 5.16%. Company non-GAAP diluted EPS was $3.26 versus $2.84; the filing’s non-GAAP measure excludes specified acquisition-related and integration expenses and intangible amortization.
Cash flow and investment. Operating cash flow was positive despite inventory growth and lower accounts payable; the main offsets included a $162.8 million inventory increase and a $613.8 million accounts-payable decrease. Investing cash outflow was $54.3 million, including $51.9 million of capital expenditures. Financing cash inflow was $67.6 million, including net borrowing proceeds of $88.1 million, partly offset by $20.7 million of dividends. Cash and cash equivalents were $296.2 million at quarter-end, up from $225.5 million at November 30, 2019.
Margins, debt and liquidity. Interest expense and finance charges, net, declined 12.6% to $36.4 million, attributed mainly to prior-year debt paydown and lower rates. Borrowings totaled approximately $3.106 billion ($423.6 million current and $2.682 billion long-term); cash less borrowings was approximately $2.810 billion net debt. Current assets were $6.947 billion and current liabilities $4.227 billion. The company reported compliance with material debt covenants. It said available cash, operating cash flow and existing liquidity sources were expected to meet working-capital and investment needs for the next 12 months. About $219.6 million of cash was held by foreign subsidiaries.
Material changes, outlook and risks
- COVID-19: The company said pandemic-related closures and restrictions were affecting staff availability, especially in India and the Philippines, as well as suppliers’ production and exports and logistics. Management expected a material impact on revenue, earnings and cash flows in Q2 FY2020, potentially continuing into Q3 or beyond, but could not reasonably estimate the extent. No numerical earnings or revenue guidance was provided.
- Concentrix separation: The planned separation into an independent public company, announced January 9, 2020, was delayed while the company focused on managing the pandemic.
- Capital returns: On March 24, 2020, the company announced suspension of its quarterly dividend and further share repurchases because of the unpredictable economic environment.
- Revenue mix: Management expected product revenue to decrease by approximately $1.2 billion in the second half of 2020 as a customer moved to a consignment model, with SYNNEX providing integration services on an agency basis.
- Unusual items: Other income included a $3.5 million gain from reversal of certain tax-indemnification provisions. The effective tax rate fell to 20.74% from 27.21%, primarily due to employee stock-option tax benefits and reversal of uncertain tax positions.
- Concentrations and contingencies: One customer represented 15% of quarterly revenue and 19% of receivables at February 29, 2020. HP products accounted for approximately 11% of revenue. The company had customer floor-plan inventory repurchase guarantees that it could not reasonably quantify, though it reported no repurchases or known pending defaults and considered material loss remote.
- Other risks: The filing cites supply-chain, workforce, customer-demand and liquidity uncertainty from COVID-19, as well as potential Brexit-related economic, regulatory and currency effects. Operating lease adoption added $591.1 million of right-of-use assets and $642.6 million of lease liabilities to the balance sheet.
Key facts for investors to verify
- Subsequent-quarter results and cash flows against management’s warning of a material COVID-19 impact; the filing gives no quantified estimate.
- Status and terms of the Concentrix separation, and whether the dividend and repurchase suspensions remain in effect.
- Customer transition to consignment and the timing and realized effect of the anticipated approximately $1.2 billion second-half product-revenue decline.
- Renewal or replacement of the U.S. accounts-receivable securitization arrangement, which was due to expire in May 2020, and continuing access to other borrowing facilities.
- Customer concentration, receivables quality, inventory exposure and any changes in floor-plan repurchase risk.