Business context and reporting period
This is SYNNEX Corporation’s unaudited Form 10-Q for the quarter ended May 31, 2015 (fiscal second quarter) and the six months then ended. The filing identifies the issuer as SYNNEX Corporation. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
SYNNEX operated Technology Solutions, an IT and consumer-electronics distributor and systems integrator, and Concentrix, a business-process and customer-engagement services provider. The IBM customer relationship management business acquired in 2014 was included in Concentrix.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $3,253.8 | $3,453.5 | $6,456.2 | $6,480.5 |
| Gross profit / margin | $300.1 / 9.22% | $279.0 / 8.08% | $588.3 / 9.11% | $485.7 / 7.49% |
| Operating income / margin | $89.4 / 2.75% | $68.1 / 1.97% | $168.3 / 2.61% | $130.0 / 2.01% |
| Net income attributable to SYNNEX | $51.9 | $39.6 | $98.2 | $78.0 |
| Diluted EPS | $1.30 | $1.00 | $2.47 | $2.00 |
- Q2 revenue fell 5.8%, while gross profit rose 7.5%, operating income rose 31.3%, and diluted EPS increased 30%. Six-month revenue was down 0.4%, while operating income increased 29.4% and diluted EPS increased 23.5%.
- Six-month operating cash flow was $335.6, versus cash use of $199.7 in the prior-year period. Working-capital movements included $369.5 from lower receivables and $133.4 from lower inventory, partly offset by a $256.1 reduction in accounts payable.
- Six-month investing cash flow was $28.7, including $65.3 received for IBM acquisition working-capital and other closing adjustments, partly offset by $45.3 of capital expenditures. Financing cash use was $326.7, primarily reflecting net repayments of securitization and revolving borrowings.
- At May 31, cash and cash equivalents were $215.5, restricted cash $27.5, and current assets $3,309.0 versus current liabilities of $1,660.1. Total borrowings were $735.7, compared with $980.5 at November 30, 2014. Long-term borrowings were $654.6; current borrowings were $81.1. The company held $165.0 of cash at foreign subsidiaries.
- Cash dividends declared were $0.125 per share for Q2 and $0.25 per share for the six months. A further $0.125-per-share dividend was announced after quarter-end.
Material changes and management commentary
- Technology Solutions revenue declined 7.8% in Q2 and 4.7% for the six months, primarily due to the loss of a significant consumer-retail vendor after its acquisition by another company and adverse currency translation. Increased systems-design and integration demand partly offset the decline.
- Concentrix revenue increased 16.5% in Q2 and 62.6% for the six months, largely reflecting the IBM CRM acquisition. Excluding acquisition and currency effects, management reported growth of 10.2% in Q2 and 5.8% for the six months, citing new contracts and higher existing-customer volumes.
- Management attributed improved gross margins to product and service mix, stronger Technology Solutions pricing, foreign-exchange benefits in systems integration, and lower inventory reserves. Concentrix results included losses associated with a delayed customer launch: $7.4 in Q2 and $17.7 for the six months at the operating-income level.
- In May 2015, SYNNEX amended its U.S. credit agreement, increasing the term loan to $625.0 million, with maturity in May 2020. It also entered into $400.0 million of interest-rate swaps to economically fix a portion of variable-rate debt.
- Management said available cash, expected operating cash flow, and existing liquidity should meet working-capital and investment needs for the next 12 months. No specific revenue or earnings guidance was provided. The company reported compliance with material debt covenants.
Risks, contingencies, and other notable items
- Key exposures include IT and consumer-electronics demand, seasonality, competition and pricing pressure, foreign-exchange movements, customer and supplier concentration, and successful integration of the IBM CRM acquisition. HP products represented approximately 24% of revenue in the 2015 periods; one customer represented 16% of accounts receivable.
- Liquidity depends substantially on working-capital financing, including the $600 million U.S. receivables securitization facility. It had no balance outstanding at May 31, 2015; the filing warns that disruption to the facility or its funding providers could adversely affect financing capacity.
- The company received an FTC Civil Investigative Demand concerning an industry data-sharing program. It said the demand sought information, no proceedings had been instituted, and the matter’s outcome could not be predicted.
- SYNNEX was seeking to withdraw from a Japanese multi-employer pension plan; subject to approvals, additional costs could be up to $3.0 million. Other disclosed exposures include a guarantee of up to $35.0 million related to a prior business sale and a $4.1 million contingent indemnification liability.
- Foreign-currency translation contributed to a $23.5 million six-month other comprehensive loss. MiTAC Holdings and affiliates owned approximately 25% of SYNNEX and had significant influence over shareholder matters; related-party inventory purchases were $44.1 million for the six months.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change to the risk factors in the prior annual report.
Important facts for investors to verify
- Whether Concentrix can sustain underlying growth and improve profitability after the IBM CRM integration and delayed customer launch.
- Whether Technology Solutions can offset the lost vendor relationship and currency-related revenue pressure through systems integration and other business.
- How working-capital requirements and financing availability evolve, including the securitization facility, debt repayments, and covenant headroom.
- The duration and financial effect of customer and supplier concentration, foreign-exchange exposure, and the FTC inquiry.
- Any final pension-withdrawal cost, material developments in contingencies, or changes to dividends and capital-allocation plans.