SYNNEX Corporation — Q1 FY2018 Form 10-Q
Reporting period: Three months ended February 28, 2018. The unaudited filing covers SYNNEX Corporation, a technology distributor and business-process services provider with Technology Solutions and Concentrix segments. Unless stated otherwise, amounts below are in U.S. dollars and rounded to millions.
Financial results and liquidity
- Revenue: $4,552.4 million, up 29.3% year over year. Constant-currency revenue was $4,514.3 million. Products contributed $4,048.8 million and services $503.6 million.
- Profit and margins: Gross profit was $414.0 million, up 21.1%; gross margin declined to 9.10% from 9.71%. Operating income rose 10.0% to $111.9 million, while operating margin fell to 2.47% from 2.89%.
- Net income and EPS: Net income was $24.4 million versus $61.8 million; diluted EPS was $0.61 versus $1.54. The decline chiefly reflects a provisional $41.7 million net tax expense related to U.S. tax reform. Excluding that adjustment, the company reported a 29.1% effective tax rate and non-GAAP diluted EPS of $2.14 versus $1.82. Non-GAAP measures exclude specified items and are not GAAP results.
- Cash flow: Operating cash flow was negative $5.7 million, compared with negative $185.6 million a year earlier. Investing cash flow was negative $27.9 million and financing cash flow negative $146.4 million. Cash, cash equivalents and restricted cash ended the quarter at $378.2 million, down $178.5 million from the start of the period.
- Debt and liquidity: Current and long-term borrowings totaled approximately $1,815.8 million, versus $1,941.6 million at November 30, 2017. Cash and cash equivalents were $372.3 million; approximately $241.6 million was held by foreign subsidiaries. The current ratio was approximately 1.48. Management said available cash, expected operating cash flow and existing liquidity sources should meet current and planned needs for the next 12 months. The company reported compliance with material credit covenants.
- Working capital: Cash conversion cycle was 50 days versus 53 days a year earlier; days sales outstanding increased to 52 from 44, days inventory outstanding was 51 versus 52, and days payable outstanding increased to 53 from 43.
Changes versus the prior comparable period
- Technology Solutions revenue increased 32.9% to $4,048.8 million, primarily due to the September 2017 Westcon-Comstor Americas acquisition and favorable currency translation. Excluding that acquisition, segment revenue grew 11.4% on a constant-currency basis, according to management.
- Concentrix revenue increased 6.2% to $507.7 million, supported by Tigerspike, consumer-electronics industry growth and favorable currency translation; constant-currency growth was 3.3%, partly offset by expired contracts.
- Technology Solutions operating income was $82.3 million, up 2.3%, but segment operating margin declined to 2.03% from 2.64%. Concentrix operating income increased 39.2% to $29.7 million, and its operating margin rose to 5.84% from 4.46%.
- Interest expense and finance charges, net, rose 113.3% to $17.5 million, reflecting acquisition-related borrowing and higher benchmark rates. The company’s borrowings are primarily variable-rate; it had $600 million notional of interest-rate swaps to economically fix part of its variable-rate debt.
Outlook, commentary and notable items
- The filing provides no specific revenue or earnings guidance. Management cited broad-based Technology Solutions demand, while noting Concentrix contract expirations and segment-specific margin pressures.
- The Westcon-Comstor acquisition included contingent consideration of up to $200 million tied to gross-profit targets for the year ended February 28, 2018; the payable amount was still being finalized. A $33.1 million contingent-consideration liability was recorded.
- U.S. tax reform accounting remained provisional. The $67.6 million transition-tax expense and $25.9 million deferred-tax benefit may be revised as the company completes its analysis; the transition tax is payable over eight years.
- Key risks and exposures include customer and supplier concentration: one customer represented 18% of quarterly revenue, and HP Inc. products represented approximately 12%. The filing also describes foreign-currency and variable-interest-rate exposure, working-capital funding needs, and contingent inventory repurchase obligations under customer floor-plan financing. Management reported no material proceedings, no known pending repossessions, and no material changes to the risk factors in its prior annual report.
- Dennis Polk became President and CEO on March 1, 2018, following Kevin Murai’s retirement. The board had authorized a three-year, $300 million share-repurchase program; purchases through February 28 totaled approximately $0.2 million. The company declared a $0.35-per-share dividend payable April 27, 2018.
Important facts for investors to verify
- How much of reported growth and future performance reflects Westcon-Comstor and Tigerspike versus organic demand, and whether acquisition integration delivers expected results.
- The final Westcon-Comstor earn-out amount, its cash impact, and any additional integration costs.
- Final tax-reform accounting, including the transition-tax estimate and deferred-tax remeasurement.
- Whether thin consolidated margins, higher interest costs and working-capital requirements affect earnings and operating cash generation.
- Customer concentration, foreign cash availability, variable-rate debt exposure, covenant headroom and contingent inventory-repurchase exposure.