Business context and reporting period
SYNNEX Corporation’s Form 10-K covers the fiscal year ended November 30, 2019 (including the fourth quarter); it is not a TD SYNNEX-branded filing. The company operated Technology Solutions, an IT-products distribution and integration business, and Concentrix, a customer-experience and business-process services business. The 2018 and 2017 comparisons were retrospectively adjusted for revenue-recognition guidance; adoption had no material consolidated financial-statement impact.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $23.76 billion | $19.77 billion | +20.2% |
| Gross profit / margin | $2.90 billion / 12.20% | $1.93 billion / 9.75% | Profit +50.4% |
| Operating income / margin | $813.8 million / 3.43% | $550.2 million / 2.78% | Income +47.9% |
| Net income | $500.7 million | $300.0 million | +66.9% |
| Diluted EPS | $9.74 | $7.17 | +35.8% |
| Operating cash flow | $549.9 million | $100.7 million | Increased |
Interest expense and finance charges nearly doubled to $166.4 million, largely reflecting a full year of acquisition-related borrowing and higher rates in the first half. The effective tax rate fell to 26.1% from 34.3%, including the prior-year impact of the Tax Cuts and Jobs Act.
Technology Solutions revenue was $19.07 billion (+10.1%) and operating income was $519.4 million (+28.1%); operating margin rose to 2.72% from 2.34%. Concentrix revenue was $4.71 billion (+91.1%) and operating income was $294.3 million (+103.3%); its operating margin increased to 6.25% from 5.88%. Concentrix growth primarily reflected the October 2018 Convergys acquisition, which cost approximately $2.27 billion.
Fourth-quarter revenue was $6.58 billion versus $5.54 billion a year earlier; net income was $176.0 million versus $115.2 million. The filing notes that both businesses typically have seasonal fourth-quarter strength.
Cash and cash equivalents were $225.5 million, down from $454.7 million. Total borrowings were approximately $3.02 billion ($299.0 million current and $2.72 billion long-term); total equity was $3.79 billion and working capital was $2.85 billion. The company reported $549.9 million of operating cash flow, $146.8 million of cash used in investing activities, and $631.7 million used in financing activities. Capital expenditures were $137.4 million. The cash conversion cycle improved to 44 days from 48 days. Management said cash, operating cash flow and available facilities should meet working-capital and investment needs for at least 12 months, including after the proposed separation. The company was compliant with material debt covenants at year-end; $2.0 billion of borrowings had been economically converted to fixed rates through swaps.
Material changes, outlook and risks
- Convergys drove much of Concentrix’s year-over-year growth and contributed to higher amortization and integration costs. Acquisition-related and integration expenses were $71.5 million, versus $45.1 million in FY2018; intangible amortization was $210.5 million, versus $124.3 million.
- Management announced on January 9, 2020 a planned tax-free separation of Concentrix, targeted for the second half of 2020, subject to board approval, a favorable tax opinion and an effective Form 10 registration statement. Management expects consolidated services revenue and the associated higher margins to leave SYNNEX after separation, with related reductions in costs, operating income and net income.
- Management also expects approximately $1.2 billion less product revenue in the second half of 2020 after a customer shifts to a consignment model; SYNNEX expects to provide integration services on an agency basis. This is a change in revenue presentation and business arrangement, not a quantified forecast of lost profit.
- Key exposures include low distribution margins and product obsolescence; supplier and customer concentration; variable demand and seasonal purchasing; credit and working-capital requirements; foreign-exchange and interest-rate movements; cybersecurity, data privacy and service-delivery risks; and high employee turnover in Concentrix. One customer represented 19% of FY2019 revenue and HP products approximately 12%.
- The separation could be delayed, fail to qualify as tax-free, disrupt customer or supplier relationships, incur significant costs, or affect borrowing terms and covenant compliance. The filing also discloses $755.2 million of non-cancellable operating lease payments and inventory repurchase obligations under customer floor-plan arrangements that cannot be reasonably estimated; no repurchases or known pending defaults were reported.
- Other income included a $19.0 million gain on settlement of Westcon-Comstor Americas contingent consideration and an $11.1 million gain from realizing contingent sales-tax assets. The auditor issued unqualified opinions on the financial statements and internal controls, and identified revenue evidence and recognition as a critical audit matter.
Most important facts for investors to verify
- Track the proposed Concentrix separation’s completion conditions, tax treatment, costs, standalone financing and resulting allocation of debt and cash.
- Assess whether reported earnings and margins remain strong after separating out acquisition-related costs, intangible amortization and the one-time gains; the company’s non-GAAP diluted EPS was $13.26 versus GAAP diluted EPS of $9.74.
- Monitor the customer’s consignment transition, including the expected $1.2 billion product-revenue presentation change and its effect on integration economics.
- Review debt maturities, variable-rate exposure, refinancing of receivables facilities expiring in 2020, and covenant headroom following any separation.
- Watch working-capital needs, customer collections and credit-loss reserves; the allowance for doubtful accounts rose to $29.9 million from $8.5 million.