TD SYNNEX CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Report. Amounts in certain tables may not add or compute due to rounding.
When used in this Quarterly Report on Form 10-Q, or this "Report", the words
"anticipates," "believes," "estimates," "expects," "intends," "allows," "can,"
"may," "could," "designed," "will," and similar expressions are intended to
identify forward-looking statements. These are statements that relate to future
periods and include statements about the impact of COVID-19, market trends, our
business model and our services, our business and market strategy, our proposed
separation of SYNNEX and Concentrix, including the timing and impact thereof,
future growth, including expansion of our product and service lines, our
employee hiring; and retention of the ownership interest of MiTAC Holdings
Corporation ("MiTAC Holdings "), in us and its impact, our revenue, including our
products revenue, sources of revenue, our gross margins, our operating costs and
results, timing of payment, the value of our inventory, our competition,
including with Synnex Technology International Corp., our future needs for
additional financing, the likely sources for such funding and the impact of such
funding, concentration of customers and suppliers, customer and supplier
contract terms, customer forecasts and its impact on us, relationships with our
suppliers, adequacy of our facilities, productivity, our data center and contact
center operations, use of technology at contact centers, ability to manage and
communicate with international resources, scalability of customer management
solutions, ability to meet demand, managing inventory and our shipping costs,
our operations and trends related thereto, our international operations, foreign
currency exchange rates and hedging activities, expansion of our operations and
related effects, including our Concentrix business, our strategic acquisitions
and divestitures of businesses and assets, seasonality of sales, changes in
share price, adequacy of our cash resources to meet our capital needs, our debt
and financing arrangements, cash held by our foreign subsidiaries and
repatriation, changes in fair value of derivative instruments, our tax
liabilities, adequacy of our disclosure controls and procedures, dependency on
personnel, pricing pressures, impact of economic and industry trends, changes to
the markets in which we compete, impact of our accounting policies and recently
issued accounting pronouncements, our estimates and assumptions, impact of
inventory repurchase obligations and commitments and contingencies, our
effective tax rates, our share repurchase and dividend program, our
securitization programs, term loans and revolving credit lines, and our
investments in working capital and personnel. Forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are
not limited to, those risks discussed herein and risks related to the impact of
COVID-19 or coronavirus, or other pandemics, and the impact of related
governmental, individual and business responses, including the ability of our
staff to travel to work, our ability to maintain adequate inventories, delivery
capabilities, the impact on our customers and supply chain, and the impact on
demand in general, the proposed separation, as well as the seasonality of the
buying patterns of our customers, concentration of sales to large customers,
dependence upon and trends in capital spending budgets in the IT, and consumer
electronics ("CE"), industries, fluctuations in general economic and market
conditions, change in the market for our customers' products, employee turnover,
changes in value of foreign currencies and interest rates and other risk factors
contained below under Part I, Item 1A, "Risk Factors." These forward-looking
statements speak only as of the date hereof. We do not intend to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based, except as may be required by law.
In the sections of this Report entitled "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," all references
to "SYNNEX," "we," "us," "our" or the "Company" mean SYNNEX Corporation and its
subsidiaries, except where it is made clear that the term means only the parent
company or one of its segments.
SYNNEX, the SYNNEX Logo, CONCENTRIX, and all other SYNNEX company, product and
services names and slogans are trademarks or registered trademarks of SYNNEX
Corporation . SYNNEX, the SYNNEX Logo, and CONCENTRIX Reg. U.S. Pat. & Tm. Off.
Other names and marks are the property of their respective owners.
Overview
We are a Fortune 200 corporation and a leading business process services
company, providing a comprehensive range of distribution, logistics and
integration services for the technology industry and providing outsourced
services focused on customer experience to a broad range of enterprises. We are
organized to provide our products and services through two reportable business
segments: Technology Solutions and Concentrix. Our Technology Solutions segment
sells peripherals, information technology ("IT") systems including data center
server and storage solutions, system components, software, networking,
communications and security equipment, consumer electronics ("CE") and
complementary products. Our Concentrix segment offers a portfolio of
technology-infused strategic solutions and end-to-end business services focused
on customer experience, process optimization, technology innovation, front and
back-office automation and business transformation to clients in five primary
industry verticals.
In our Technology Solutions segment, we distribute more than 40,000 technology
products (as measured by active SKUs) from more than 400 IT, CE and OEM,
suppliers, to more than 25,000 resellers, system integrators, and retailers
throughout the United States , Canada , Japan , Mexico and Central and South
America . We purchase peripherals, IT systems, system components, software,
networking, communications and, security equipment, CE and complementary
products from our suppliers and sell them to our reseller and retail customers.
We perform a similar function for our distribution of licensed software
products. Our reseller customers include value-added resellers ("VARs"),
corporate resellers, government resellers, system integrators, direct marketers,
and national and regional retailers. We combine our core strengths in
distribution with demand generation, supply chain management and design and
integration solutions to help our customers achieve greater efficiencies in time
to market, cost minimization, real-time linkages in the supply chain and
aftermarket product support. We also provide comprehensive IT solutions in key
vertical markets such as government and healthcare, and we provide specialized
service
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offerings that increase efficiencies in the areas of print management, renewals, logistics services and supply chain management. Additionally, we provide our customers with systems design and integration solutions for data center servers and networking solutions built specific to our customers' workloads and data center environments. Our Technology Solutions business is characterized by low gross profit as a percentage of revenue, or gross margin, and low income from operations as a percentage of revenue, or operating margin. The market for IT and CE products is generally characterized by declining unit prices and short product life cycles. We set our sales price based on the market supply and demand characteristics for each particular product or bundle of products we distribute and services we provide. In our Technology Solutions segment, we are highly dependent on the end-market demand for IT and CE products, and on our partners' strategic initiatives and business models. This end-market demand is influenced by many factors including the introduction of new IT and CE products and software by OEMs, replacement cycles for existing IT and CE products, trends toward cloud computing, overall economic growth and general business activity. A difficult and challenging economic environment may also lead to consolidation or decline in the IT and CE industries and increased price-based competition. In our Concentrix segment, we provide a comprehensive range of strategic services and solutions to enhance our clients' customer life cycles to acquire, support and renew customer relationships, to automate and optimize processes, to maximize the value of every customer experience and to improve business outcomes. Our portfolio of services includes end-to-end process outsourcing to customers in various industry vertical markets delivered through omni-channels that include both voice and non-voice media and in more than 70 languages. Our portfolio of solutions and services support our clients and their customers globally. Our Concentrix segment generates revenue from performing services that are generally tied to our clients' products and services and how they are received in the marketplace. Any shift in business or size of the market for our clients' products, any failure of technology or failure of acceptance of our clients' products in the market may impact our business. The employee turnover rate in this business and the risk of losing experienced employees is high. Higher turnover rates can increase costs and decrease operating efficiencies and productivity. We have been in business since 1980 and are headquartered inFremont, California . We have significant operations inNorth and South America ,Asia-Pacific ,Europe andAfrica . We were originally incorporated in theState of California asCOMPAC Microelectronics, Inc. inNovember 1980 , and we changed our name toSYNNEX Information Technologies, Inc. inFebruary 1994 . We later reincorporated in theState of Delaware under the name ofSYNNEX Corporation inOctober 2003 . As ofMay 31, 2020 , we had over 235,000 full-time and temporary employees worldwide. InDecember 2019 , there was an outbreak of a new strain of coronavirus ("COVID-19"). InMarch 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, including our own, and created significant volatility and disruption of financial markets. The impact of the COVID-19 pandemic on our business is discussed below and at other appropriate places in the discussion of the results of our operations for the three and six months endedMay 31, 2020 : -The disruptions due to COVID-19 have impacted our business including logistics operations in our Technology Solutions segment and limited the productive ability of many of our associates in our Concentrix segment. More than half our Concentrix segment work force, which includes associates inIndia andthe Philippines , our largest countries of operations by headcount, reside in areas that are under "shelter-in-place" or similar restrictions by various governments worldwide, limiting their ability to work productively. We have successfully transitioned most of our workforce in both segments to a remote working environment and implemented a number of safety and social distancing measures within our premises to protect the health and safety of associateswho are required to be on-premise to support our business. In the second quarter of 2020, we incurred net incremental costs associated with COVID-19 of approximately$89 million , of which Concentrix incurred net costs of approximately$52 million and Technology Solutions incurred net costs of approximately$37 million . We are unable to predict how long these conditions will persist, what additional measures may be introduced by governments, vendors or customers and the effect of any such additional measures on our business. As a result, many of the estimates and assumptions involved in the preparation of the financial statements included in this report on Form 10-Q, required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve with respect to the pandemic, our estimates may materially change in future periods. -InMarch 2020 , we announced the suspension of share repurchases and our quarterly dividends. InJune 2020 , our board of directors approved a new three-year$400 million share repurchase program effectiveJuly 1st, 2020 . We view this as the "first step" in the return to the capital allocation program we had in place pre-pandemic. The focus of this new repurchase program will be anti-dilutive, similar to our historical approach, albeit at a more measured pace to start given the current environment and opportunistic buying when available. -OnJanuary 9, 2020 , we announced a plan to separate our Concentrix segment into an independent publicly-traded company. The transaction, which was delayed due to the economic impact of the COVID-19 pandemic, is now expected to be completed in the fourth quarter of calendar year 2020, subject to market conditions. The separation is intended to qualify as a tax-free transaction for federal income tax purposes. Immediately following the separation, it is expected that our stockholders will own shares of both SYNNEX and Concentrix, at the same percentage ownership that they held prior to the transaction. Completion of the separation will not require a stockholder vote but will be subject to customary closing conditions, including, among others, obtaining final approval from our Board of 27
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Directors, receipt of a favorable opinion with respect to the tax-free nature of the transaction for federal income tax purposes, and the effectiveness of a Form 10 registration statement with theSecurities and Exchange Commission .
Critical Accounting Policies and Estimates
During the three and six months ended
See Note 2 to our Consolidated Financial Statements for impact of adoption of Accounting Standards Codification Topic 842, Leases, which revises various aspects of accounting for lease arrangements.
As of
Acquisitions
We continually seek to augment organic growth in both our business segments with
strategic acquisitions of businesses and assets that complement and expand our
existing capabilities. We also divest businesses that we deem no longer
strategic to our ongoing operations. In our Technology Solutions business, we
seek to acquire new OEM relationships, enhance our supply chain and integration
capabilities, the services we provide to our customers and OEM suppliers, and
expand our geographic footprint. In our Concentrix segment, we seek to enhance
our capabilities and domain expertise in our key verticals, expand our
geographic footprint and further expand into higher value service offerings. We
are also strategically focused on further increasing our scale to support our
customers.
Results of Operations
The following table sets forth, for the indicated periods, data as percentages
of total revenue:
Three Months Ended Six Months Ended
Statements of Operations Data: May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019
Products revenue 80.81 % 79.80 % 79.21 % 78.81 %
Services revenue 19.19 20.20 20.79 21.19
Total revenue 100.00 100.00 100.00 100.00
Cost of products revenue (75.85 ) (75.09 ) (74.30 ) (74.10 )
Cost of services revenue (12.99 ) (12.71 ) (13.51 ) (13.35 )
Gross profit 11.17 12.20 12.19 12.55
Selling, general and administrative
expenses (9.15 ) (9.15 ) (9.41 ) (9.49 )
Operating income 2.02 3.05 2.78 3.07
Interest expense and finance
charges, net (0.61 ) (0.75 ) (0.65 ) (0.77 )
Other income (expense), net 0.03 0.38 0.04 0.19
Income before income taxes 1.43 2.67 2.17 2.49
Provision for income taxes (0.40 ) (0.67 ) (0.50 ) (0.65 )
Net income 1.03 % 2.00 % 1.66 % 1.84 %
With the announcement of a plan to separate the Concentrix segment into a
separate publicly-traded company in a transaction expected to be completed in
the fourth calendar quarter of 2020, subject to market conditions, our services
revenue and cost of services revenue which represent revenue and cost of revenue
of our Concentrix segment are expected to be discontinued following the
separation. Further, selling, general and administrative expenses, interest
expense and finance charges, net, other income (expense), net and provision for
income-taxes are expected to decrease by amounts related to the Concentrix
segment or impacted by the proposed separation, with related reductions in gross
profit, operating income and net income. Additionally, our gross margin and
operating margin are expected to decrease due to the discontinuance of the
higher margins earned in the Concentrix segment.
In addition, we expect a decrease in our products revenue of approximately $600
million per quarter due to a Technology Solutions segment customer moving to a
consignment model where we will provide integration services on an agency basis.
This change is expected to occur in the latter half of the fourth quarter of
fiscal year 2020 or in first quarter of fiscal year 2021.
Due to the ongoing impact the COVID-19 pandemic, current results and financial
condition discussed herein may not be indicative of future operating results and
trends.
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Certain non-GAAP financial information
In addition to disclosing financial results that are determined in accordance with GAAP, we also disclose certain non-GAAP financial information, including:
• Revenue in constant currency, which is revenue adjusted for the translation
effect of foreign currencies so that certain financial results can be
viewed without the impact of fluctuations in foreign currency exchange
rates, thereby facilitating period-to-period comparisons of our business
performance. Revenue in constant currency is calculated by translating the
revenue for the three and six months ended
currency using their comparable prior period currency conversion rate.
Generally, when the dollar either strengthens or weakens against othercurrencies, the growth at constant currency rates or adjusting for currency
will be higher or lower than growth reported at actual exchange rates.
• Non-GAAP operating income, which is operating income adjusted to exclude
acquisition-related and integration expenses, restructuring costs and
amortization of intangible assets.
• Non-GAAP operating margin, which is non-GAAP operating income, as defined
above, divided by revenue.
• Adjusted earnings before interest, taxes, depreciation and amortization
("Adjusted EBITDA") which excludes other income (expense), net and
acquisition-related and integration expenses.
• Non-GAAP diluted earnings per common share ("EPS"), which is diluted EPS
excluding the per share, tax effected impact of (i) acquisition-related and
integration expenses, (ii) amortization of intangible assets and (iii) a
gain recorded in fiscal year 2019 upon the settlement of contingent
consideration related to the acquisition of Westcon-Comstor Americas in
fiscal year 2017.
We believe that providing this additional information is useful to the reader to
better assess and understand our base operating performance, especially when
comparing results with previous periods and for planning and forecasting in
future periods, primarily because management typically monitors the business
adjusted for these items in addition to GAAP results. Management also uses these
non-GAAP measures to establish operational goals and, in some cases, for
measuring performance for compensation purposes. These non-GAAP financial
measures also exclude amortization of intangible assets. Our acquisition
activities have resulted in the recognition of intangible assets which consist
primarily of customer relationships, vendor lists and technology. Definite-lived
intangible assets are amortized over their estimated useful lives and are tested
for impairment when events indicate that the carrying value may not be
recoverable. The amortization of intangible assets is reflected in our
statements of operations within each segment. Although intangible assets
contribute to our revenue generation, the amortization of intangible assets does
not directly relate to the sale of our products and the services performed for
our clients. Additionally, intangible asset amortization expense typically
fluctuates based on the size and timing of our acquisition activity.
Accordingly, we believe excluding the amortization of intangible assets, along
with the other non-GAAP adjustments which neither relate to the ordinary course
of the our business nor reflect our underlying business performance, enhances
our and our investors' ability to compare our past financial performance with
its current performance and to analyze underlying business performance and
trends. Intangible asset amortization excluded from the related non-GAAP
financial measure represents the entire amount recorded within our GAAP
financial statements, and the revenue generated by the associated intangible
assets has not been excluded from the related non-GAAP financial measure.
Intangible asset amortization is excluded from the related non-GAAP financial
measure because the amortization, unlike the related revenue, is not affected by
operations of any particular period unless an intangible asset becomes impaired
or the estimated useful life of an intangible asset is revised. As these
non-GAAP financial measures are not calculated in accordance with GAAP, they may
not necessarily be comparable to similarly titled measures employed by other
companies. These non-GAAP financial measures should not be considered in
isolation or as a substitute for the comparable GAAP measures and should be used
as a complement to, and in conjunction with data presented in accordance with
GAAP.
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