Business context and reporting period
SYNNEX Corporation’s unaudited Form 10-Q covers the fiscal third quarter and nine months ended August 31, 2020, compared with the corresponding 2019 periods. The company operated two reportable segments: Technology Solutions, a technology products distribution and integration business, and Concentrix, a business-process and customer-experience services provider. This is the 2020 filing of SYNNEX Corporation, before the later TD SYNNEX name.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions. Percentages are year-over-year.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $6,464.8m (+4.2%) | $6,203.7m | $17,261.6m (+0.5%) | $17,176.0m |
| Gross profit / margin | $708.1m / 10.95% | $726.0m / 11.70% | $2,024.2m / 11.73% | $2,103.4m / 12.25% |
| Operating income / margin | $209.1m / 3.24% | $208.9m / 3.37% | $509.5m / 2.95% | $545.5m / 3.18% |
| Net income | $134.5m (+9.2%) | $123.1m | $314.0m (-3.3%) | $324.7m |
| Diluted EPS | $2.60 | $2.40 | $6.07 | $6.32 |
| Operating cash flow | Not separately presented for the quarter | $1,547.1m | $202.5m | |
| Capital expenditures | Not separately presented for the quarter | $127.3m | $93.4m |
- Technology Solutions revenue rose 5.1% in Q3 and 1.2% year to date; segment operating income fell 4.7% and 9.0%, respectively. Concentrix revenue was nearly flat in Q3 (+0.2%) but down 2.2% year to date; operating income rose 9.6% in Q3 and declined 2.2% year to date.
- Q3 non-GAAP operating income was $260.1m (4.02% margin), versus $270.5m (4.36%); nine-month non-GAAP operating income was $672.5m (3.90%), versus $757.2m (4.41%). Non-GAAP diluted EPS was $3.33 in Q3 and $8.43 year to date. These company-defined measures exclude specified items, including intangible amortization; they are not GAAP measures.
- Operating cash flow was boosted by working-capital movements, including $454.3m of cash from increased accounts payable and $415.4m from other operating assets and liabilities; inventory growth used $282.7m. The filing attributes cash generation in part to collections, customer prepayments and working-capital management.
Financial position and liquidity
- At August 31, 2020, cash and cash equivalents were $1,452.3m, versus $225.5m at November 30, 2019. Current assets were $8,564.2m and current liabilities $5,632.1m.
- Total borrowings were approximately $2,853.9m ($244.1m current and $2,609.8m long-term), down from approximately $3,017.2m at fiscal year-end. Cash less borrowings was approximately negative $1,401.6m. The company reported compliance with material debt covenants.
- About 56% of outstanding borrowings had been economically converted to fixed-rate debt through interest-rate swaps. Nine-month interest expense and finance charges fell 22.4% to $99.0m, attributed to lower average borrowings and lower rates.
- Management said available cash, operating cash flow and existing liquidity sources should meet working-capital and investment needs for the next 12 months. The U.S. receivables facility was amended in May 2020: maximum borrowing capacity was reduced from $850m to $650m and maturity extended to May 2022; no amount was outstanding at quarter-end.
Material changes, outlook and risks
- COVID-19 disrupted supply chains and workforce availability, with the sharpest impact in the second fiscal quarter. The company reported net incremental COVID-related costs of about $21m in Q3 and $110m for nine months. It said most employees were productive by quarter-end, but future effects remained uncertain and estimates could change materially.
- Technology Solutions benefited from demand for work-at-home and learn-at-home equipment, while product mix and COVID-related costs weighed on margins. Concentrix was affected by reduced productivity and non-productive workforce costs, as well as weaker demand from travel, tourism, automotive, media and communications clients. The filing cites approximately $9m of COVID-related non-productive workforce costs in Concentrix gross profit in Q3 and $55m year to date.
- The planned separation of Concentrix, delayed because of the pandemic, was then expected in calendar Q4 2020, subject to market conditions and customary approvals. Management expected services revenue and related costs to leave the continuing company after separation, with lower gross and operating margins because Concentrix had higher margins. Timing and completion were not assured.
- The quarterly dividend was suspended in March 2020. A new three-year $400m repurchase authorization became effective July 1, 2020; no shares had been repurchased under it by August 31. Management described the initial focus as anti-dilutive repurchases at a measured pace.
- Gross margin decreased year over year in both the quarter and nine-month period. Nine-month net income and operating income declined despite slightly higher revenue; the prior-year comparison included a $19m contingent-consideration settlement gain. A higher doubtful-account allowance also contributed to operating costs.
- Concentration and governance considerations include one customer generating 16% of Q3 revenue and 17% year to date, and MiTAC Holdings and affiliates owning about 18% of shares. The company also disclosed contingent obligations to repurchase customer inventory under flooring arrangements; exposure could not be reasonably estimated, though management considered material loss remote and knew of no pending defaults.
Investor facts to verify
- Whether the Concentrix separation closed as planned, its final terms, and the resulting standalone revenue, margins, costs and capital structure.
- Whether the unusually strong nine-month operating cash flow is sustainable, given its dependence on payables, customer advances and other working-capital movements.
- COVID-19’s continuing effects on workforce productivity, customer demand, supply chains, doubtful accounts and segment margins.
- Debt maturities, covenant headroom, receivables-facility availability and the company’s ability to fund working capital and capital returns.
- Customer concentration, receivable-credit quality and potential exposure under inventory repurchase guarantees.