Business context and reporting period
The filing is SYNNEX Corporation’s unaudited Form 10-Q for the quarter ended August 31, 2016; the filing identifies the registrant as SYNNEX Corporation. It reports Technology Solutions, an IT products distribution and integration business, and Concentrix, a business-process outsourcing and customer-engagement services business. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
- Third quarter: Revenue was $3.670 billion, up 10.1% year over year; gross profit was $326.0 million and gross margin 8.88%, versus 8.73%. Operating income increased 20.6% to $98.0 million (2.67% margin). Net income attributable to SYNNEX was $58.7 million, or $1.47 diluted EPS, versus $48.2 million, or $1.21.
- Nine months: Revenue was $10.175 billion, up 3.9%. Gross profit rose 2.9% to $904.2 million, while gross margin eased to 8.89% from 8.98%. Operating income was $249.0 million, down 0.3%; net income attributable to SYNNEX was $149.6 million, up from $146.4 million. Diluted EPS was $3.75 versus $3.68.
- Cash flow: Nine-month operating cash flow was $275.3 million, down from $557.4 million. The current period included a $224.8 million inventory cash outflow, partly offset by collections and payables. Investing cash outflow was $412.2 million, including $404.5 million for Minacs and $95.2 million of capital expenditures. Financing provided $23.0 million. Cash and cash equivalents ended at $223.3 million, compared with $336.1 million at November 30, 2015.
- Liquidity and debt: Current assets were $3.616 billion and current liabilities $2.116 billion. Total borrowings were $808.4 million, versus $730.9 million at November 30, 2015; $187.9 million was current and $620.5 million long-term. The company said it was compliant with material debt covenants and believed available liquidity would meet needs for the next 12 months.
- Segments: Third-quarter Technology Solutions revenue grew 9.8% and operating income 11.8%; Concentrix revenue grew 13.1% and operating income 83.3%. For nine months, segment revenue grew 3.9% and 4.2%, respectively; operating income was nearly flat in Technology Solutions and down 3.2% in Concentrix.
Material changes versus comparable periods
- Third-quarter growth reflected seasonally stronger Technology Solutions demand, particularly systems design and integration, and Minacs’ addition to Concentrix. Minacs contributed approximately $36.2 million of revenue and $0.9 million of net income after its August 1, 2016 acquisition.
- Concentrix benefited from improved performance on a previously loss-making contract: it generated $7.5 million of profit in the quarter, compared with a $5.0 million loss in the year-earlier quarter. Nine-month Concentrix operating income nevertheless declined, with higher depreciation, facility and restructuring costs among the factors.
- Third-quarter gross margin improved, but nine-month gross margin declined. Management cited product mix and the prior-year benefit from foreign-exchange movements in Technology Solutions.
- Nine-month operating cash flow fell materially from the prior year, principally reflecting the different working-capital movements: inventory increased in 2016, while receivables fell substantially in both periods.
Outlook, commentary, risks and unusual items
- The filing provides no numerical revenue, earnings or margin guidance. Management stated that cash, expected operating cash flow and existing financing sources were expected to cover working-capital and investment needs for the next 12 months; this is forward-looking and not a guarantee.
- Minacs’ preliminary purchase price was $435.6 million, including $221.4 million of preliminary goodwill and $147.1 million of intangible assets. Purchase-price allocation remained subject to final valuation and post-closing adjustments. Acquisition and integration costs were reported, alongside restructuring costs, including closure-related costs at three Concentrix delivery centers in North America.
- The U.S. accounts-receivable securitization facility, with $91.5 million outstanding at quarter-end, matured November 4, 2016. Management said it expected renewal based on its credit standing and historical renewals. Loss of financing capacity could adversely affect liquidity.
- Customer and supplier concentration is notable: one customer represented 12% of quarterly revenue and 10% of nine-month revenue; HP products represented approximately 16% and 17%, respectively. The filing also describes reliance on working-capital financing, foreign-exchange exposures, and seasonal and industry demand risks.
- Contingencies include customer floor-plan inventory repurchase obligations that the company said could not be reasonably estimated, a $35.0 million parent guarantee expiring in fiscal 2018, and ordinary-course claims. Management said it was not involved in material proceedings and did not expect the disclosed commitments and contingencies to have a material adverse effect.
- Other reported items included $5.0 million of nine-month class-action settlement benefits, $4.3 million of nine-month restructuring costs, and negative foreign-currency translation effects in other comprehensive income. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: this source filing is for SYNNEX Corporation and covers the quarter ended August 31, 2016.
- Check whether the U.S. receivables securitization facility was renewed or replaced after its November 4, 2016 maturity, and review subsequent liquidity and borrowing disclosures.
- Track final Minacs purchase accounting, integration costs, acquired goodwill and intangible-asset amortization, and the acquisition’s ongoing contribution to Concentrix.
- Assess whether working-capital cash flows, particularly inventory investment and receivables collection, normalize and support cash generation.
- Monitor customer and supplier concentration, Concentrix contract performance and restructuring, covenant compliance, and the unquantified floor-plan repurchase exposure.