Business context and reporting period
SYNNEX Corporation (the registrant named in this 2014 filing) reported its unaudited first quarter of fiscal 2014, ended February 28, 2014. It operated Technology Solutions, a technology products distribution and integration business, and Concentrix, a global business services business. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance and position
| Metric | Q1 FY2014 | Q1 FY2013 / comparison |
|---|---|---|
| Revenue | $3,027 million | $2,461 million; up 23.0% |
| Gross profit / margin | $206.6 million / 6.83% | $156.1 million / 6.34% |
| Operating income / margin | $62.0 million / 2.05% | $55.9 million / 2.27%; income up 10.7% |
| Net income attributable to SYNNEX / diluted EPS | $38.4 million / $1.01 | $33.4 million / $0.88 |
| Operating cash flow | $(35.0) million | $40.9 million |
| Cash and cash equivalents | $148.4 million at February 28 | $151.6 million at November 30, 2013 |
| Total borrowings | $762.7 million | $317.9 million at November 30, 2013 |
Gross margin improvement reflected a larger Concentrix contribution, partly offset by favorable prior-year reserve effects in Technology Solutions. SG&A rose 44.5% to $144.7 million, including $8.9 million of IBM acquisition and integration expenses and higher amortization. The effective tax rate was 36.3%, versus 35.4%.
Technology Solutions revenue was $2,902.9 million, up 20.0%; operating income was $63.5 million, up 18.7%. Concentrix revenue was $127.0 million, up 186.3%, but it recorded an operating loss of $1.8 million versus income of $2.4 million. Concentrix results included the recently acquired IBM customer care business.
Investing cash outflow was $388.7 million, principally for the IBM acquisition. Financing cash inflow was $418.6 million, primarily reflecting increased borrowings. Operating cash use mainly reflected a $136.9 million increase in inventory and a $30.7 million decrease in accounts payable, partly offset by collections and higher accrued liabilities. Of reported cash, $138.0 million was held by foreign subsidiaries; repatriation could incur U.S. tax and some balances were subject to local restrictions.
Material changes versus the prior comparable period
- Revenue increased 23.0%; management cited stronger U.S. and Japan demand, product-line expansion, systems integration growth, the Supercom Canada acquisition, and IBM customer care revenue. Foreign exchange translation reduced reported revenue growth by 3.8 percentage points; constant-currency growth was 23.8%.
- The initial closing of the IBM customer care acquisition occurred January 31, 2014. The preliminary total purchase price was $503.1 million, subject to adjustment; the initial closing covered countries representing about 80% of preliminary valuation. Initial consideration included $321.0 million cash and $71.1 million in SYNNEX shares. The company also reported $69.0 million paid toward subsequent closings. The acquired business contributed $74.5 million of quarterly revenue; its earnings were not separately identifiable.
- Borrowings rose substantially, including $225.0 million drawn under a new U.S. term loan and higher U.S. receivables securitization borrowings. The company said the increase funded the acquisition and its working-capital needs. It reported compliance with material debt covenants.
- Concentrix segment reporting was realigned in Q1; comparative segment data was recast to reflect the new structure.
Outlook, management commentary, risks and unusual items
Management expected consumer and commercial IT demand to remain strong in the U.S. and Japan and to improve in Canada; it characterized expected business process outsourcing industry growth as moderate. IBM acquired-business revenue was expected to be flat during integration and then grow toward fiscal year-end, offset in part by contracts expected not to renew. The next acquisition phase was anticipated in Q2 FY2014, subject to customary conditions and regulatory approvals; remaining closings were contractually due no later than June 30, 2015. The filing gives no specific consolidated revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of the full year.
Key exposures include integration and completion risks for the IBM acquisition, customer and contract retention, employee attrition, low Technology Solutions margins, inventory obsolescence, working-capital needs, variable-rate debt and reliance on securitization and credit facilities. Hewlett-Packard products represented approximately 28% of revenue, down from 31%; no customer represented 10% or more of revenue in the current quarter. The company also disclosed a January 2014 FTC Civil Investigative Demand concerning an industry sales-data program operated under the Global Technology Distribution Council; it said it was not then involved in material proceedings and did not expect disclosed contingencies to have a material adverse effect.
Other notable items: other income included $2.9 million from a class-action legal settlement; $8.9 million of IBM-related acquisition and integration expense was recorded; and the company had $366.3 million of guarantees outstanding. MiTAC Holdings and affiliates beneficially owned about 25% of common stock, with related-party dealings and potential competitive conflicts disclosed. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, final terms, regulatory approvals, and integration costs and benefits of the remaining IBM customer care acquisition closings.
- Whether the acquired Concentrix business meets management’s stated revenue-growth expectations, retains customers and employees, and improves segment profitability after integration expenses and amortization.
- Working-capital conversion and inventory trends, given negative operating cash flow despite higher net income.
- Debt levels, borrowing costs, facility availability, covenant headroom, and reliance on receivables securitization; assess the effect of $138.0 million held by foreign subsidiaries and potential repatriation taxes.
- Exposure to HP and other suppliers, customer credit, FX movements, and the FTC inquiry’s status and any resulting developments.