Business context and reporting period
SYNNEX Corporation (NYSE: SNX), the company’s name during this filing period, filed this Form 10-K for the fiscal year ended November 30, 2016. It operated two segments: Technology Solutions, distributing IT and consumer electronics products and providing systems integration, and Concentrix, providing outsourced customer-engagement and business-process services. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are for context.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $14.062 billion | $13.338 billion | +5.4% |
| Gross profit / margin | $1.283 billion / 9.12% | $1.192 billion / 8.94% | Margin +0.18 percentage points |
| Operating income / margin | $379.6 million / 2.70% | $354.6 million / 2.66% | Income +7.1% |
| Net income attributable to SYNNEX | $234.9 million | $208.5 million | +12.7% |
| Diluted EPS | $5.88 | $5.24 | +12.2% |
| Cash from operating activities | $327.0 million | $643.6 million | Down $316.7 million |
Consolidated net margin was 1.67%, versus 1.56% in FY 2015. FY 2016 adjusted EBITDA, a non-GAAP measure, was $515.5 million, compared with $468.2 million; non-GAAP diluted EPS was $7.04 versus $6.28. These measures exclude specified acquisition and integration expenses, restructuring costs and intangible amortization.
At November 30, 2016, cash and cash equivalents were $380.7 million, working capital was $1.567 billion, and total borrowings were approximately $967.0 million, up from $730.9 million a year earlier. Current and long-term borrowings were $363.7 million and $603.2 million, respectively. The company reported covenant compliance and said available cash, operating cash flows and existing liquidity sources were expected to meet needs for at least the next 12 months. Cash held by foreign subsidiaries was $200.0 million; repatriation could incur U.S. taxes and be subject to local restrictions.
The cash conversion cycle was 42 days versus 41 days in FY 2015. Days sales outstanding improved to 41 from 45, while days inventory outstanding increased to 45 from 37. Capital expenditures were $123.2 million. Operating cash flow less capital expenditures was approximately $203.7 million, calculated from reported figures.
In the fourth quarter of FY 2016, revenue was $3.887 billion, operating income was $130.6 million, net income attributable to SYNNEX was $85.3 million, and diluted EPS was $2.13. The comparable FY 2015 quarter reported revenue of $3.550 billion, operating income of $105.0 million, net income attributable to SYNNEX of $62.2 million, and diluted EPS of $1.56.
Material changes versus the prior year
- Technology Solutions revenue increased 4.6% to $12.491 billion, supported mainly by strong systems design and integration demand; segment operating income rose 4.1% to $315.5 million. Its gross margin eased to 5.41% from 5.53%.
- Concentrix revenue increased 12.1% to $1.588 billion, and operating income rose to $63.9 million from $51.1 million. Results included Minacs from its August 1, 2016 acquisition and improved performance on a previously loss-making contract.
- The Minacs acquisition cost approximately $435.6 million in cash. It contributed approximately $157.0 million of revenue and $3.9 million of net income in FY 2016; the purchase-price allocation included $196.5 million of goodwill and $193.4 million of intangible assets.
- Operating cash flow fell substantially as inventory increased $410.2 million, partly offset by a $265.6 million increase in accounts payable and a $97.5 million decrease in receivables. Management attributed higher inventory and payables primarily to purchases supporting strong systems integration demand.
- HP products and services represented approximately 17% of consolidated revenue, down from 25% in each of the prior two years. One customer represented 12% of FY 2016 revenue; no customer reached 10% in FY 2015.
Outlook, commentary and risks
The filing provides no specific numerical revenue or earnings guidance. Management stated that it expected liquidity to be sufficient for at least 12 months and anticipated continued investment in working capital, personnel, facilities and operations, including potential acquisitions. Management described the three-year economic environment as stable, while emphasizing that results are exposed to market and seasonal variability.
- Technology Solutions has structurally low margins, intense price competition, short product life cycles and inventory-obsolescence exposure. Supplier agreements are generally short-term and may be terminated on short notice; HP is the largest supplier.
- Working-capital needs are significant and are supported by borrowings, receivables financing and customer floor-plan arrangements. Debt facilities include financial covenants and variable-rate exposure; a $400 million interest-rate swap notional amount hedged part of the U.S. term loan. Financing availability or cost could change.
- Concentrix faces contract termination and volume risk, performance bonuses or penalties, high employee turnover, and risks to service delivery and client data from technology failures or security breaches. Delivery operations are concentrated in India and the Philippines.
- International operations expose the company to currency movements, local regulation and geopolitical, economic and operational disruptions. Foreign currency translation reduced reported revenue in FY 2016, though constant-currency revenue growth was higher.
- Acquisition integration, goodwill and intangible-asset recoverability, customer and supplier concentration, tax audits and uncertain tax positions are additional risks. Goodwill testing produced no impairment charge for FY 2014–2016.
- Unusual or notable items included $4.3 million of restructuring costs, primarily related to closed Concentrix delivery-center activities, and a $5.0 million benefit from class-action legal settlements. The company reported no material pending legal proceedings and no material inventory repurchases under customer floor-plan guarantees.
Important facts for investors to verify
- Whether Concentrix growth and Minacs integration deliver durable operating-profit and cash-flow improvement after acquisition-related costs.
- Whether inventory growth, the cash conversion cycle and operating cash flow normalize as systems integration volumes evolve.
- Debt balances, upcoming principal payments, borrowing capacity, covenant headroom and the renewal or availability of receivables and revolving facilities.
- Exposure to HP and other suppliers, the 12% customer concentration, and the terms and profitability of major customer contracts.
- Foreign cash repatriation and tax exposure, including the reported $32.8 million of unrecognized tax benefits and ongoing tax audits.