SYNNEX Corporation Form 10-Q Summary
Issuer and period: The filing is by SYNNEX Corporation, for the quarter ended August 31, 2014, and the nine months then ended. The company operated Technology Solutions (IT distribution and related services) and Concentrix (business-process outsourcing). Financial amounts below are in U.S. dollars.
Financial performance
- Third-quarter revenue: $3.535 billion, up 29.3% year over year. Gross profit was $299.7 million, with gross margin of 8.48%, compared with 6.01%. Operating income was $78.8 million (2.23% margin), versus $63.5 million (2.32% margin).
- Third-quarter earnings: Net income attributable to SYNNEX was $45.0 million, versus $46.6 million. Basic EPS was $1.16 versus $1.26; diluted EPS was reported as $1.15 versus $0.19. The prior-year diluted EPS was materially affected by accounting for the convertible-note conversion premium and is not directly comparable.
- Nine-month results: Revenue was $10.016 billion, up 28.6%; gross profit was $785.4 million, with gross margin of 7.84% versus 6.10%. Operating income was $208.8 million (2.09% margin), versus $171.4 million (2.20% margin). Net income attributable to SYNNEX was $123.0 million versus $110.7 million; diluted EPS was $3.16 versus $1.97.
- Segment trends: Third-quarter Technology Solutions revenue rose 19.1% to $3.205 billion; Concentrix revenue rose to $333.8 million from $46.3 million, primarily due to the IBM customer-care acquisition. For nine months, Technology Solutions operating income increased to $210.6 million, while Concentrix recorded an operating loss of $2.2 million, compared with income of $6.5 million.
- Cash flow and liquidity: Nine-month operating cash flow was negative $246.6 million, compared with positive $118.1 million a year earlier, largely reflecting increases in receivables ($246.1 million) and inventory ($355.8 million). Investing cash outflow was $440.4 million, including $390.4 million for acquisitions and $40.2 million of capital expenditures. Financing cash inflow was $665.8 million. Cash and cash equivalents were $127.7 million at August 31, versus $151.6 million at November 30, 2013; current assets were $3.608 billion and current liabilities $2.516 billion.
- Debt: Total borrowings were $1.001 billion, up from $317.9 million at November 30, 2013; $726.2 million was classified as current. Borrowing supported the IBM acquisition, working capital and Technology Solutions growth. The company reported compliance with material debt covenants.
Material changes and unusual items
- The phased acquisition of IBM’s customer-care business was substantially completed by August 31; the final closing occurred September 30, 2014. The preliminary purchase price was approximately $503.4 million, including $71.1 million in SYNNEX shares. The acquired business contributed approximately $280 million of third-quarter and $600 million of nine-month revenue; its earnings were not separately identifiable.
- Acquisition and integration expenses were approximately $9.9 million for the quarter and $34.6 million for nine months. Higher acquired-intangible amortization and transition, ramp-up and duplicative costs weighed on Concentrix results.
- Third-quarter other expense was $0.5 million, versus $12.2 million of other income in the prior-year quarter, which included a $12.3 million class-action settlement. Nine-month other income fell to $2.2 million from $13.9 million, also reflecting lower settlement benefit and foreign-exchange and investment results.
- After quarter-end, the company announced a quarterly cash dividend of $0.125 per share, initially payable October 31, 2014. It also authorized a new three-year, $100 million share-repurchase program in June 2014; no repurchases were made in the reported nine-month period.
Outlook, risks and contingencies
Management provided no specific revenue or earnings guidance. It stated that available liquidity and financing sources were expected to be sufficient for working capital, planned capital expenditures, anticipated repurchases and dividends over the next 12 months. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Key risks include successful integration and realization of benefits from the IBM acquisition; customer and employee retention; Concentrix contract volumes, performance penalties and staffing utilization; and exposure to international operating, geopolitical, foreign-exchange and labor risks.
- Technology Solutions faces low margins, demand and inventory volatility, pricing pressure, and reliance on major OEM suppliers. HP products represented approximately 25% of third-quarter and 26% of nine-month revenue.
- The business is working-capital intensive and relies on securitization and revolving credit facilities. Variable interest rates, covenant restrictions, and any reduced access to receivables financing could affect liquidity. Approximately $119.9 million of cash was held by foreign subsidiaries; repatriation may be subject to U.S. tax and local restrictions.
- The company disclosed a Federal Trade Commission Civil Investigative Demand concerning an industry sales-data database program. It had responded; no proceedings had been instituted, and the potential impact could not be predicted. The filing also describes customer floor-plan repurchase exposure, $361.8 million of guarantees, and ordinary-course claims, while stating that no material proceedings were pending and that the disclosed contingencies were not expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile reported diluted EPS comparisons, especially the prior-year convertible-note conversion-premium effect.
- Track IBM acquisition integration costs, final purchase-price allocation, customer retention, and Concentrix profitability.
- Monitor working-capital needs, operating cash conversion, current debt maturities, and continued access to securitization and credit facilities.
- Assess supplier concentration, particularly HP, and inventory, customer-credit and product-obsolescence exposure.
- Review subsequent dividend payments, share-repurchase activity, and any developments in the FTC inquiry or other contingencies.