SYNNEX Corporation Form 10-Q Summary
Reporting period: Quarter and nine months ended August 31, 2018. The filing is by SYNNEX Corporation; the metadata’s “TD SYNNEX CORP” name does not match the registrant name shown in this 2018 filing. Dollar amounts below are in millions unless stated otherwise.
Business context and results
SYNNEX operated through Technology Solutions, which distributes technology products and provides integration services, and Concentrix, which provides outsourced business and customer-engagement services. The results include the Westcon-Comstor Americas acquisition, completed September 1, 2017. The Convergys acquisition closed after quarter-end, on October 5, 2018.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $4,906.6 | $4,276.7 | $14,431.6 | $11,733.8 |
| Gross profit | $433.2 | $374.9 | $1,276.2 | $1,089.0 |
| Operating income | $116.9 | $122.2 | $352.8 | $349.1 |
| Net income | $69.3 | $75.2 | $187.4 | $210.1 |
| Diluted EPS | $1.74 | $1.87 | $4.67 | $5.24 |
| Gross margin | 8.83% | 8.77% | 8.84% | 9.28% |
| Operating margin | 2.38% | 2.86% | 2.44% | 2.98% |
Financial position, cash flow and liquidity
- Cash: $204.0 at August 31, 2018, down from $550.7 at November 30, 2017. Cash, cash equivalents and restricted cash totaled $211.1.
- Debt: Current and long-term borrowings totaled approximately $1,822.9 at quarter-end, versus $1,941.6 at November 30, 2017. The company had $732.3 of current borrowings and $1,090.7 of long-term borrowings. It reported compliance with material debt covenants.
- Working capital: Current assets were $5,405.2 and current liabilities $3,582.0. The cash conversion cycle was 51 days versus 50 days a year earlier; days sales outstanding rose to 55 from 40.
- Cash flow, nine months: Operating activities used $40.4, compared with $80.2 used in 2017. Investing activities used $74.4, including $75.5 of capital expenditures. Financing activities used $223.1, including net debt repayments, $56.0 of share repurchases and $41.8 of dividends.
Material changes and management commentary
- Q3 revenue rose 14.7%; nine-month revenue rose 23.0%. Technology Solutions revenue increased 16.8% in Q3 and 25.9% year to date, mainly reflecting Westcon-Comstor and strength in several U.S. product categories. Concentrix revenue declined 0.8% in Q3, but increased 2.4% year to date; Q3 was approximately flat excluding currency effects.
- Q3 gross profit increased 15.5%, but operating income fell 4.4% and net income fell about 7.8%. For nine months, gross profit rose 17.2%, while net income fell about 10.8%. Higher SG&A, acquisition-related costs and interest expense weighed on reported earnings. Interest expense and finance charges rose 105.6% in Q3 and 100.3% for the nine-month period.
- Q3 Concentrix operating income declined to $12.1 from $22.2, including $17.1 of Convergys-related acquisition costs. Technology Solutions Q3 operating income rose to $104.8 from $100.0. Management reported higher non-GAAP diluted EPS of $2.57 versus $2.16 in Q3 and $7.08 versus $6.06 year to date; these measures exclude specified acquisition costs and intangible amortization, among other adjustments.
- Operating cash outflow reflected working-capital movements, notably a $387.5 decrease in accounts payable and a $153.5 increase in accounts receivable, partly offset by lower inventories and noncash adjustments. Management said it expected available cash, operating cash flows and existing liquidity sources to cover working-capital, investment and general funding needs for the next 12 months, including Convergys operations.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expected Convergys to add scale, diversify revenue, expand service delivery and strengthen Concentrix; it cautioned that integration, cost savings and benefits were uncertain and could take longer than expected or fail to materialize.
- Convergys was acquired for $1,207.9 cash and 11.511 million SYNNEX shares valued at approximately $1,017.3; the company also paid $195.4 to repay certain Convergys borrowings. SYNNEX drew $1,450.0 under a new term-loan facility to fund the transaction. The filing said total debt was expected to rise to approximately $3.6 billion, with potential additional borrowing to address Convergys debentures.
- Convergys had $125.0 of convertible debentures; the company estimated a conversion amount, including accrued interest, of approximately $285.0 based on its October 5 share price. The ultimate settlement and any share issuance remained uncertain.
- The nine-month tax provision included a provisional net $24.7 charge related to the Tax Cuts and Jobs Act: $50.6 of transition tax expense partly offset by a $25.9 deferred-tax remeasurement benefit. The company had not completed its analysis; the transition tax is payable over eight years.
- Two shareholder lawsuits challenged the Convergys merger. One plaintiff’s counsel said additional disclosures mooted its claims; a preliminary injunction sought in the other case was denied. SYNNEX said it considered the actions without merit and intended to defend them.
- Other notable exposures include customer concentration (one customer represented 16% of Q3 revenue and 17% for nine months), foreign-currency and variable-rate interest exposure, and contingent obligations to repurchase certain customer inventory under floor-plan financing. No repurchases or known pending defaults were reported.
Important facts for investors to verify
- Post-acquisition debt, financing costs, covenant headroom and the eventual settlement of Convergys convertible debentures.
- Convergys integration costs, realized synergies, customer retention and contribution to Concentrix results.
- Whether working-capital trends improve, particularly receivables collection and days sales outstanding, and whether operating cash flow turns positive.
- Final tax accounting for the Tax Cuts and Jobs Act and the resolution of Westcon-Comstor contingent consideration.
- Developments in merger-related litigation and any material change in customer concentration or flooring-finance exposure.