SYNNEX Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended May 31, 2014; financial statements are unaudited. The filing is by SYNNEX Corporation, the company name shown in the source filing.
Business context and reporting period
SYNNEX operates Technology Solutions, an IT product distribution and systems integration business, and Concentrix, a business process outsourcing services business. The period includes the initial and second closings of the IBM customer care business acquisition, completed January 31 and April 30, 2014. The acquired operations are included in Concentrix.
Key financial metrics
| Metric | Three months ended May 31, 2014 | Six months ended May 31, 2014 |
|---|---|---|
| Revenue | $3.454 billion; +33.3% year over year | $6.481 billion; +28.3% |
| Gross profit / gross margin | $279.0 million / 8.08%, versus 5.97% | $485.7 million / 7.49%, versus 6.15% |
| Operating income / operating margin | $68.1 million / 1.97%, versus 2.01% | $130.0 million / 2.01%, versus 2.14% |
| Net income attributable to SYNNEX | $39.6 million; +28.5% | $78.0 million; +21.6% |
| Diluted EPS | $1.01, versus $0.81 | $2.01, versus $1.69 |
| Operating cash flow | Six-month cash used: $199.7 million, versus $91.5 million provided in the prior-year period |
At May 31, 2014, cash and cash equivalents were $204.6 million; total borrowings were $976.3 million, up from $317.9 million at November 30, 2013. Approximate net debt was $771.8 million. Current assets were $3.585 billion and current liabilities $2.549 billion. The company reported compliance with material debt covenants.
Material changes versus the prior comparable period
- Revenue growth reflected higher Technology Solutions sales and the IBM customer care business, which contributed $244.1 million of second-quarter revenue and $318.6 million for the six-month period. Technology Solutions revenue rose 24.1% in the quarter; Concentrix revenue rose substantially, primarily due to the acquisition.
- Gross margin improved, primarily because the acquired services business changed segment mix. However, consolidated operating margin declined slightly: acquisition and integration costs and higher acquired-intangible amortization increased SG&A.
- Concentrix recorded operating losses of $2.2 million for the quarter and $3.9 million for the six months, including acquisition-related costs. Technology Solutions operating income increased.
- Operating cash flow turned negative as receivables and inventory rose by $200.1 million and $332.1 million, respectively. Investing cash outflow was $402.3 million, mainly the $390.4 million cash payment for the IBM acquisition; financing cash inflow was $656.2 million.
- Debt increased principally to fund the acquisition and working capital. The company issued $71.1 million of stock consideration for the IBM transaction.
Outlook, commentary, risks and unusual items
- Management expected U.S. IT demand to remain strong and Canadian demand stable. Japan growth was expected to normalize after pre-consumption-tax buying and the Windows XP refresh. The filing does not provide formal numerical earnings or revenue guidance.
- Management expected acquired IBM customer care revenue to be flat during integration and then grow toward fiscal year-end; anticipated growth could be offset by contracts expected not to renew. Remaining acquisition closings were expected in the second half of 2014, subject to conditions; as of May 31, the company expected to pay an additional $40.0 million in cash at final closing.
- Second-quarter acquisition and integration expenses were approximately $15.9 million (six months: $24.8 million). Six-month other income included $2.9 million from a class-action settlement.
- In January 2014, the company received an FTC Civil Investigative Demand concerning an industry data aggregation program. It was seeking information; no proceedings had been instituted, and the company said the matter was preliminary and its potential impact could not be predicted.
- Key risks include integration and retention challenges following the IBM acquisition, contract losses or penalties in Concentrix, working-capital and financing needs, variable-rate debt and covenant restrictions, foreign exchange exposure, and reliance on major suppliers. HP products represented about 25% of quarterly revenue. No customer represented 10% or more of revenue in the current periods.
- The company stated it believed cash, liquidity and borrowing availability were sufficient for expected needs over the next 12 months. It also disclosed that $177.3 million of cash was held by foreign subsidiaries; U.S. repatriation could incur tax and some balances are subject to local restrictions.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, final purchase-price allocation, remaining closings and integration costs for the IBM customer care acquisition; assess retention, contract renewals and segment profitability.
- Whether working-capital investment, especially receivables and inventory, converts into operating cash flow and whether borrowing levels decline.
- Debt capacity, interest-rate exposure, covenant headroom and continued availability of securitization and revolving facilities.
- Actual performance against management’s qualitative demand outlook, including normalization in Japan and the expected acquired-business growth profile.
- Developments in the FTC inquiry, customer and supplier concentration, and any material change in contingencies or guarantees.