UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class |
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Outstanding as of July 2, 2020 |
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Common Stock, $0.001 par value |
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SYNNEX CORPORATION
FORM 10-Q
INDEX
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Page |
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PART I |
3 |
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Item 1. |
3 |
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Consolidated Balance Sheets (unaudited) as of May 31, 2020 and November 30, 2019 |
3 |
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4 |
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5 |
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6 |
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Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended May 31, 2020 and 2019 |
7 |
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8 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
27 |
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Item 3. |
40 |
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Item 4. |
40 |
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PART II |
41 |
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Item 1A. |
41 |
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Item 2. |
41 |
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Item 6. |
43 |
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44 |
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2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
SYNNEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(currency and share amounts in thousands, except par value)
(unaudited)
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May 31, 2020 |
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November 30, 2019 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Receivables from vendors, net |
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Inventories |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Intangible assets, net |
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Deferred tax assets |
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Other assets, net |
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Total assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Borrowings, current |
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$ |
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$ |
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Accounts payable |
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Accrued compensation and benefits |
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Other accrued liabilities |
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Income taxes payable |
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Total current liabilities |
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Long-term borrowings |
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Other long-term liabilities |
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Deferred tax liabilities |
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Total liabilities |
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Commitments and contingencies (Note 15) |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Treasury stock, |
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( |
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( |
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Accumulated other comprehensive income (loss) |
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( |
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( |
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Retained earnings |
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Total stockholders' equity |
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Total liabilities and equity |
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$ |
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$ |
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(Amounts may not add due to rounding)
The accompanying Notes are an integral part of these Consolidated Financial Statements (unaudited).
3
SYNNEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(currency and share amounts in thousands, except per share amounts)
(unaudited)
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Three Months Ended |
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Six Months Ended |
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May 31, 2020 |
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May 31, 2019 |
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May 31, 2020 |
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May 31, 2019 |
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Revenue: |
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Products |
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$ |
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$ |
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$ |
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$ |
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Services |
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Total revenue |
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Cost of revenue: |
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Products |
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Services |
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Gross profit |
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Selling, general and administrative expenses |
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( |
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( |
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( |
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Operating income |
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Interest expense and finance charges, net |
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( |
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( |
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( |
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( |
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Other income (expense), net |
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Income before income taxes |
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Provision for income taxes |
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( |
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( |
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( |
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( |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Earnings per common share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-average common shares outstanding: |
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Basic |
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Diluted |
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(Amounts may not add due to rounding)
The accompanying Notes are an integral part of these Consolidated Financial Statements (unaudited).
4
SYNNEX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(currency in thousands)
(unaudited)
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Three Months Ended |
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Six Months Ended |
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May 31, 2020 |
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May 31, 2019 |
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May 31, 2020 |
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May 31, 2019 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss): |
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Change in unrealized gains (losses) of defined benefit plans, net of taxes of $ |
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Unrealized gains (losses) on cash flow hedges during the period, net of taxes of $ |
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( |
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( |
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( |
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( |
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Reclassification of net (gains) losses on cash flow hedges to net income, net of tax expense (benefit) of ($ |
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( |
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( |
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Total change in unrealized gains (losses) on cash flow hedges, net of taxes |
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( |
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( |
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( |
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( |
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Foreign currency translation adjustments, net of taxes of $ |
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( |
) |
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( |
) |
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( |
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( |
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Other comprehensive income (loss) |
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( |
) |
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( |
) |
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( |
) |
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( |
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Comprehensive income (loss) |
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$ |
( |
) |
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$ |
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$ |
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$ |
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(Amounts may not add due to rounding)
The accompanying Notes are an integral part of these Consolidated Financial Statements (unaudited).
5
SYNNEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(currency in thousands, except per share amounts)
(unaudited)
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Three Months Ended |
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Six Months Ended |
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May 31, 2020 |
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May 31, 2019 |
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May 31, 2020 |
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May 31, 2019 |
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Total Stockholders' equity, beginning balance |
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$ |
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$ |
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$ |
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$ |
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Common stock and additional paid-in capital: |
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Beginning balance |
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Share-based compensation |
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Common stock issued for employee benefit plans |
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Stock issuance costs (related to the Convergys acquisition in fiscal year 2018) |
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— |
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— |
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— |
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( |
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Ending balance |
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Treasury stock: |
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Beginning balance |
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( |
) |
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( |
) |
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( |
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( |
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Repurchases of common stock for tax withholdings on equity awards |
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( |
) |
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( |
) |
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( |
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( |
) |
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Repurchases of common stock |
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( |
) |
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( |
) |
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( |
) |
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( |
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Ending balance |
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( |
) |
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( |
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( |
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( |
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Retained earnings: |
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Beginning balance |
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Net income |
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Cash dividends declared |
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( |
) |
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( |
) |
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( |
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( |
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Cumulative effect of changes in accounting principles |
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— |
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— |
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— |
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Ending balance |
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Accumulated other comprehensive income (loss): |
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Beginning balance |
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( |
) |
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( |
) |
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( |
) |
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( |
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Other comprehensive income (loss) |
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( |
) |
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( |
) |
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( |
) |
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( |
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Cumulative effect of changes in accounting principles |
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— |
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— |
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— |
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( |
) |
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Ending balance |
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( |
) |
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( |
) |
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( |
) |
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( |
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Total stockholders' equity, ending balance |
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$ |
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$ |
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$ |
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$ |
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Cash dividends declared per share |
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$ |
— |
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$ |
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$ |
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$ |
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(Amounts may not add due to rounding)
The accompanying Notes are an integral part of these Consolidated Financial Statements (unaudited).
6
SYNNEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(currency in thousands)
(unaudited)
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Six Months Ended |
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May 31, 2020 |
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May 31, 2019 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Share-based compensation |
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Provision for doubtful accounts |
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Deferred income taxes |
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( |
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( |
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Contingent consideration |
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( |
) |
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Unrealized foreign exchange (gains) losses |
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( |
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Other |
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Changes in operating assets and liabilities, net of acquisition of businesses: |
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Accounts receivable, net |
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Receivables from vendors, net |
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Inventories |
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( |
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( |
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Accounts payable |
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( |
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Other operating assets and liabilities |
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( |
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Net cash provided by (used in) operating activities |
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( |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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( |
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( |
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Acquisition of businesses |
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( |
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( |
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Other |
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( |
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Net cash used in investing activities |
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( |
) |
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( |
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Cash flows from financing activities: |
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Proceeds from borrowings, net of debt discount and issuance costs |
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Repayments of borrowings |
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( |
) |
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( |
) |
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Dividends paid |
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( |
) |
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( |
) |
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Decrease in book overdraft |
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( |
) |
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( |
) |
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Repurchases of common stock |
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( |
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( |
) |
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Proceeds from issuance of common stock |
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Repurchases of common stock for tax withholdings on equity awards |
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( |
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( |
) |
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Other |
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|
|
|
|
( |
) |
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
( |
) |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
|
|
|
( |
) |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
|
$ |
|
|
|
Supplemental disclosure of non-cash investing activities: |
|
|
|
|
|
|
|
|
|
Accrued costs for property and equipment purchases |
|
$ |
|
|
|
$ |
|
|
|
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
|
|
|
Unsettled common stock repurchases |
|
$ |
|
|
|
$ |
|
|
(Amounts may not add due to rounding)
The accompanying Notes are an integral part of these Consolidated Financial Statements (unaudited).
7
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION:
SYNNEX Corporation (together with its subsidiaries, herein referred to as “SYNNEX” or the “Company”) is a business process services company headquartered in Fremont, California and has operations in North and South America, Asia-Pacific, Europe and Africa.
The Company has
On January 9, 2020, the Company announced a plan to separate its Concentrix segment into an independent publicly-traded company. The transaction, which was delayed due to the focus on managing the economic impact of the COVID-19 pandemic, barring further economic disruption, is now expected to be completed in the fourth quarter of calendar year 2020. The plan is subject to current economic and capital market trends. The separation is intended to qualify as a tax-free transaction for federal income tax purposes for both the Company and its then current stockholders. Immediately following the separation, it is expected that the Company’s stockholders will own shares of both SYNNEX and Concentrix, at the same percentage ownership that they held of SYNNEX 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 the Company’s Board of 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 the Securities and Exchange Commission.
The accompanying interim unaudited Consolidated Financial Statements as of May 31, 2020 and for the three and six months ended May 31, 2020 and 2019 have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission. The amounts as of November 30, 2019 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2019.
Interim results of operations are not necessarily indicative of financial results for a full year, and the Company makes no representations related thereto. Certain columns and rows may not add due to the use of rounded numbers.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
For a discussion of the Company’s significant accounting policies, refer to the discussion in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2019. As described more fully in Note 16, as of May 31, 2020, due to the ongoing impact of the COVID-19 pandemic on the Company’s business, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, these estimates may change in future periods. Accounting pronouncements adopted during the six months ended May 31, 2020 are discussed below.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash equivalents, accounts receivable, receivables from vendors and derivative instruments.
The Company’s cash and cash equivalents and derivative instruments are transacted and maintained with financial institutions with high credit standing, and their compositions and maturities are regularly monitored by management. Through May 31, 2020, the Company has not experienced any credit losses on such deposits and derivative instruments.
Accounts receivable include amounts due from customers, including related party customers. Receivables from vendors, net, includes amounts due from original equipment manufacturer (“OEM”) vendors primarily in the technology industry. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. The Company also maintains allowances for potential credit losses. In estimating the required allowances, the Company takes into consideration the overall quality and aging of its receivable portfolio, the existence of a limited amount of credit insurance and specifically identified customer and vendor risks. Through May 31, 2020, such losses have been within management’s expectations.
8
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
purchased from the Company’s largest OEM supplier, HP Inc., accounted for approximately
As of May 31, 2020 and November 30, 2019,
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is computed based on the weighted-average method. Inventories are comprised of finished goods and work-in-process. Finished goods include products purchased for resale, system components purchased for both resale and for use in the Company’s projects and integration-based completed systems. Work-in-process inventories are not material to the Consolidated Financial Statements.
Leases
The Company enters into leases as a lessee for property and equipment in the ordinary course of business. When procuring goods or services, or upon entering into a contract with its customers and clients, the Company determines whether an arrangement contains a lease at its inception. As part of that evaluation, the Company considers whether there is an implicitly or explicitly identified asset in the arrangement and whether the Company, as the lessee, or the customer, if the Company is the lessor, has the right to control the use of that asset. Effective December 1, 2019, when the Company is the lessee, all leases with a term of more than 12 months are recognized as right-of-use (“ROU”) assets and associated lease liabilities in the Consolidated Balance Sheet. Lease liabilities are measured at the lease commencement date and determined using the present value of the lease payments not yet paid, at the Company’s incremental borrowing rate, which approximates the rate at which the Company would borrow on a secured basis in the country where the lease was executed. The interest rate implicit in the lease is generally not determinable in transactions where the Company is the lessee. The ROU asset equals the lease liability adjusted for any initial direct costs, prepaid rent and lease incentives. The Company’s variable lease payments generally relate to payments tied to various indexes, non-lease components and payments above a contractual minimum fixed amount.
Operating leases are included in other assets, net, other accrued liabilities and other long-term liabilities in the Consolidated Balance Sheet. Finance leases are included in property and equipment, net, borrowings, current and long-term borrowings in the Consolidated Balance Sheet. Substantially all of the Company's leases are classified as operating leases.
For all asset classes, the Company has elected the lessee practical expedient to combine lease and non-lease components (e.g., maintenance services) and account for the combined unit as a single lease component. Variable lease payments are recognized in the period in which the obligation for those payments is incurred.
Recently adopted accounting pronouncements
In February 2018, the Financial Accounting Standard Board (the “FASB”) issued guidance that permits the Company to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the Tax Cuts and Jobs Act of 2017 to retained earnings. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The adoption of this new guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In February 2016, the FASB issued a new standard which revises various aspects of accounting for leases, with amendments in 2018 and 2019 codified as Accounting Standards Codification Topic 842, Leases. The Company adopted the guidance effective December 1, 2019, applying the optional transition method, which allows an entity to apply the new standard at the adoption date with a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, the Company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components for all asset classes. The Company made a policy election to not recognize ROU assets and lease liabilities for short-term leases for all asset classes. The most significant impact of adoption to the Company’s Consolidated Financial Statements relates to the recognition of a right-of-use asset and a lease liability for virtually all of its leases other than short-term leases. The liability was equal to the present value of lease payments. The asset is based on the liability, and subject to adjustment, such as for initial direct costs. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee depends primarily on its classification. For income statement purposes, operating leases will result in a straight-line expense while finance leases will result in a front-loaded expense pattern. Upon adoption, the Company recorded $
9
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
Recently issued accounting pronouncements
In March 2020, the FASB issued optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”) on financial reporting. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are elective and are effective upon issuance for all entities through December 31, 2022. The Company is currently evaluating the impact of the new guidance.
In December 2019, the FASB issued new guidance that simplifies the accounting for income taxes. The guidance is effective for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. Certain amendments should be applied prospectively, while other amendments should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of the new guidance.
In August 2018, the FASB issued new guidance to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The amendment requires the Company to disclose the weighted-average interest crediting rates used in cash balance pension plans. It also requires the Company to disclose the reasons for significant changes in the benefit obligation or plan assets including significant gains and losses affecting the benefit obligation for the period. This standard is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The adoption is not expected to have a material impact on the Company's Consolidated Financial Statements.
In August 2018, the FASB issued guidance to improve the effectiveness of fair value measurement disclosures by removing or modifying certain disclosure requirements and adding other requirements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Certain amendments should be applied prospectively, while all other amendments should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of the new guidance.
In June 2016, the FASB issued a new credit loss standard that replaces the incurred loss impairment methodology in current GAAP. The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. It is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption for fiscal years beginning after December 15, 2018 is permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating the impact of the new guidance.
NOTE 3—SHARE-BASED COMPENSATION:
The Company recognizes share-based compensation expense for all share-based awards made to employees and directors, including employee stock options, restricted stock awards, restricted stock units, performance-based restricted stock units and employee stock purchases, based on estimated fair values.
The following table summarizes the number of share-based awards granted under the Company’s 2013 Stock Incentive Plan, as amended, during the three and six months ended May 31, 2020 and 2019, and the measurement-date fair value of those awards:
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||||||||||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
||||||||||||||||||||
|
|
|
Shares awarded |
|
|
Fair value of grants |
|
|
Shares awarded |
|
|
Fair value of grants |
|
|
Shares awarded |
|
|
Fair value of grants |
|
|
Shares awarded |
|
|
Fair value of grants |
|
||||||||
|
Stock options |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
The Company recorded share-based compensation expense in the Consolidated Statements of Operations for the three and six months ended May 31, 2020 and 2019 as follows:
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
||||
|
Total share-based compensation (recorded in selling, general and administrative expenses) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Tax benefit recorded in the provision for income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Effect on net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 4—BALANCE SHEET COMPONENTS:
Cash, cash equivalents and restricted cash:
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same amounts shown in the Consolidated Statements of Cash Flows:
|
|
|
As of |
|
|||||
|
|
|
May 31, 2020 |
|
|
November 30, 2019 |
|
||
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Restricted cash included in other current assets |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash |
|
$ |
|
|
|
$ |
|
|
Restricted cash balances relate primarily to temporary restrictions caused by the timing of lockbox collections under borrowing arrangements, restrictions placed by banks as collateral for the issuance of bank guarantees and the terms of a government grant.
Accounts receivable, net:
|
|
|
As of |
|
|||||
|
|
|
May 31, 2020 |
|
|
November 30, 2019 |
|
||
|
Accounts receivable |
|
$ |
|
|
|
$ |
|
|
|
Less: Allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
|
Accounts receivable, net |
|
$ |
|
|
|
$ |
|
|
Receivables from vendors, net:
|
|
|
As of |
|
|||||
|
|
|
May 31, 2020 |
|
|
November 30, 2019 |
|
||
|
Receivables from vendors |
|
$ |
|
|
|
$ |
|
|
|
Less: Allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
|
Receivables from vendors, net |
|
$ |
|
|
|
$ |
|
|
Property and equipment, net:
|
|
|
As of |
|
|||||
|
|
|
May 31, 2020 |
|
|
November 30, 2019 |
|
||
|
Land |
|
$ |
|
|
|
$ |
|
|
|
Equipment, computers and software |
|
|
|
|
|
|
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
|
|
Buildings, building improvements and leasehold improvements |
|
|
|
|
|
|
|
|
|
Construction-in-progress |
|
|
|
|
|
|
|
|
|
Total property and equipment, gross |
|
$ |
|
|
|
$ |
|
|
|
Less: Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Property and equipment, net |
|
$ |
|
|
|
$ |
|
|
11
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
Depreciation expense was $
Goodwill:
|
|
|
Technology Solutions |
|
|
Concentrix |
|
|
Total |
|
|||
|
Balance as of November 30, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign exchange translation |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance as of May 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Intangible assets, net:
|
|
|
As of May 31, 2020 |
|
|
As of November 30, 2019 |
|
||||||||||||||||||
|
|
|
Gross Amounts |
|
|
Accumulated Amortization |
|
|
Net Amounts |
|
|
Gross Amounts |
|
|
Accumulated Amortization |
|
|
Net Amounts |
|
||||||
|
Customer relationships and lists |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Vendor lists |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Technology |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Other intangible assets |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Amortization expense was $
Estimated future amortization expense of the Company’s intangible assets is as follows:
|
Fiscal years ending November 30, |
|
|
|
|
|
2020 (remaining six months) |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total |
|
$ |
|
|
Other accrued liabilities:
|
|
|
As of |
|
|||||
|
|
|
May 31, 2020 |
|
|
November 30, 2019 |
|
||
|
Customer advances and other customer liabilities |
|
$ |
|
|
|
$ |
|
|
|
Current operating lease liabilities |
|
|
|
|
|
|
— |
|
|
Derivative instruments |
|
|
|
|
|
|
|
|
|
Other accrued expenses and payables |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Other accrued expenses and payables includes accrued expenses, sales and value added tax accruals, sales return reserve, and other third-party liabilities.
12
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
Accumulated other comprehensive income (loss):
The components of accumulated other comprehensive income (loss) (“AOCI”), net of taxes, were as follows:
|
|
|
Unrecognized gains (losses) on defined benefit plans, net of taxes |
|
|
Unrealized gains (losses) on cash flow hedges, net of taxes |
|
|
Foreign currency translation adjustment and other, net of taxes |
|
|
Total |
|
||||
|
Balance as of November 30, 2019 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income (loss) before reclassification |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Reclassification of (gains) losses from Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2020 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Refer to Note 5 for the location of gains and losses reclassified from other comprehensive income (loss) to the Consolidated Statements of Operations.
Foreign currency translation adjustment and other, net of taxes, is comprised of foreign currency translation adjustment and unrealized gains and losses on available-for-sale debt securities. Substantially, all of the balance at both November 30, 2019 and May 31, 2020 represents foreign currency translation adjustment.
NOTE 5—DERIVATIVE INSTRUMENTS:
In the ordinary course of business, the Company is exposed to foreign currency risk, interest rate risk, equity risk, commodity price changes and credit risk. The Company enters into transactions, and owns monetary assets and liabilities, that are denominated in currencies other than the legal entity’s functional currency. The Company may enter into forward contracts, option contracts, swaps, or other derivative instruments to offset a portion of the risk on expected future cash flows, earnings, net investments in certain foreign subsidiaries and certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates. Generally, the Company does not use derivative instruments to cover equity risk and credit risk. The Company’s hedging program is not used for trading or speculative purposes.
All derivatives are recognized on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded in the Consolidated Statements of Operations, or as a component of AOCI in the Consolidated Balance Sheets, as discussed below.
Cash Flow Hedges
To protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries with functional currencies that are not in U.S. dollars may hedge a portion of forecasted revenue or costs not denominated in the subsidiaries’ functional currencies. These instruments mature at various dates through
Non-Designated Derivatives
13
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
The Company uses short-term forward contracts to offset the foreign exchange risk of assets and liabilities denominated in currencies other than the functional currency of the respective entities. These contracts, which are not designated as hedging instruments, mature or settle within
Fair Values of Derivative Instruments in the Consolidated Balance Sheets
The fair values of the Company’s derivative instruments are disclosed in Note 6 — Fair Value Measurements and summarized in the table below:
|
|
|
Value as of |
|
|||||
|
Balance Sheet Line Item |
|
May 31, 2020 |
|
|
November 30, 2019 |
|
||
|
Derivative instruments not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts (notional value) |
|
$ |
|
|
|
$ |
|
|
|
Other current assets |
|
|
|
|
|
|
|
|
|
Other accrued liabilities |
|
|
|
|
|
|
|
|
|
Interest rate swap (notional value) |
|
$ |
|
|
|
$ |
|
|
|
Other assets, net |
|
|
|
|
|
|
|
|
|
Other accrued liabilities |
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges: |
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts (notional value) |
|
$ |
|
|
|
$ |
|
|
|
Other current assets and other assets, net |
|
|
|
|
|
|
|
|
|
Other accrued liabilities and other long-term liabilities |
|
|
|
|
|
|
|
|
|
Interest rate swaps (notional value) |
|
$ |
|
|
|
$ |
|
|
|
Other accrued liabilities |
|
|
|
|
|
|
|
|
Volume of Activity
The notional amounts of foreign exchange forward contracts represent the gross amounts of foreign currency, including, principally, the Philippine Peso, the Indian Rupee, the Euro, the Canadian Dollar, the British Pound, the Chinese Yuan, the Brazilian Real and the Colombian Peso that will be bought or sold at maturity. The term and notional amount of interest rate swaps are determined based on management’s assessment of future interest rates and other factors such as debt maturities. The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change.
14
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
The Effect of Derivative Instruments on AOCI and the Consolidated Statements of Operations
The following table shows the gains and losses, before taxes, of the Company’s derivative instruments designated as cash flow hedges and not designated as hedging instruments in Other Comprehensive Income (“OCI”), and the Consolidated Statements of Operations for the periods presented:
|
|
|
Location of Gain (Loss) |
|
Three Months Ended May 31, |
|
|
Six Months Ended May 31, |
|
||||||||||
|
|
|
in Income |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for services |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Cost of revenue for services |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Selling, general and administrative expenses |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Interest expense and finance charges, net |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in OCI: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest rate swaps |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) reclassified from AOCI into income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI into income |
|
Revenue for services |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Gain (loss) reclassified from AOCI into income |
|
Cost of revenue for services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI into income |
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI into income |
|
Interest expense and finance charges, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized from foreign exchange forward contracts, net(1) |
|
Other income (expense), net |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Gains (losses) recognized from interest rate swaps, net |
|
Interest expense and finance charges, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
(1) |
|
There were no material gain or loss amounts excluded from the assessment of effectiveness. Existing net losses in AOCI that are expected to be reclassified into earnings in the normal course of business within the next twelve months are $
Offsetting of Derivatives
The Company’s derivative instruments are generally governed by standard International Swaps and Derivatives Association, Inc. master agreements, which generally do not require the Company to post any collateral, and specify netting rights, and other customary provisions including events of defaults and termination rights.
15
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
Credit exposure for derivative financial instruments is limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the Company’s obligations to the counterparties. The Company manages the potential risk of credit losses through careful evaluation of counterparty credit standing and selection of counterparties from a limited group of financial institutions
NOTE 6—FAIR VALUE MEASUREMENTS:
The Company’s fair value measurements are classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following table summarizes the valuation of the Company’s investments and financial instruments that are measured at fair value on a recurring basis:
|
|
|
As of May 31, 2020 |
|
|
As of November 30, 2019 |
|
||||||||||||||||||||||||||
|
|
|
|
|
|
|
Fair value measurement category |
|
|
|
|
|
|
Fair value measurement category |
|
||||||||||||||||||
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Marketable equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government bond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign currency exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign currency exchange contracts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s cash equivalents consist primarily of highly liquid investments in money market funds and term deposits with maturity periods of
The carrying values of accounts receivable, accounts payable and short-term debt approximate fair value due to their short maturities and interest rates which are variable in nature. The carrying value of the Company’s term loans approximate their fair value since they bear interest rates that are similar to existing market rates.
During the six months ended May 31, 2020, there were
16
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
NOTE 7—ACCOUNTS RECEIVABLE ARRANGEMENTS:
The Company has an uncommitted supply-chain financing program with a global financial institution under which trade accounts receivable of certain customers and their affiliates may be acquired, without recourse, by the financial institution. Available capacity under this program is dependent on the level of the Company’s trade accounts receivable with these customers and the financial institution’s willingness to purchase such receivables. As of May 31, 2020 and November 30, 2019, accounts receivable sold to and held by the financial institution under this program were $
SYNNEX Japan, the Company’s Japanese Technology Solutions subsidiary, has arrangements with financial institutions for the sale and financing of approved accounts receivable and notes receivable. The amounts outstanding under these arrangements that were sold, but not collected, as of May 31, 2020 and November 30, 2019 were $
The Company also has other financing agreements in North America with financial institutions (“Flooring Companies”) to allow certain customers of the Company to finance their purchases directly with the Flooring Companies. Under these agreements, the Flooring Companies pay to the Company the selling price of products sold to various customers, less a discount, within approximately 15 to
The following table summarizes the net sales financed through flooring agreements and the flooring fees incurred:
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
||||
|
Net sales financed |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Flooring fees(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of May 31, 2020 and November 30, 2019, accounts receivable subject to flooring agreements were $
NOTE 8—BORROWINGS:
Borrowings consist of the following:
|
|
|
As of |
|
|||||
|
|
|
May 31, 2020 |
|
|
November 30, 2019 |
|
||
|
SYNNEX United States accounts receivable securitization arrangement |
|
$ |
|
|
|
$ |
|
|
|
SYNNEX Japan credit facility - revolving line of credit component |
|
|
|
|
|
|
|
|
|
SYNNEX United States credit agreement - revolving line of credit component |
|
|
|
|
|
|
|
|
|
SYNNEX United States credit agreement - current portion of term loan component |
|
|
|
|
|
|
|
|
|
SYNNEX United States term loan credit agreement - current portion |
|
|
|
|
|
|
|
|
|
Other borrowings |
|
|
|
|
|
|
|
|
|
Borrowings, current |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
SYNNEX Japan credit facility - term loan component |
|
$ |
|
|
|
$ |
|
|
|
SYNNEX United States credit agreement - term loan component |
|
|
|
|
|
|
|
|
|
SYNNEX United States term loan credit agreement |
|
|
|
|
|
|
|
|
|
Other term debt |
|
|
|
|
|
|
|
|
|
Long-term borrowings, before unamortized debt discount and issuance costs |
|
$ |
|
|
|
$ |
|
|
|
Less: unamortized debt discount and issuance costs |
|
|
( |
) |
|
|
( |
) |
|
Long-term borrowings |
|
$ |
|
|
|
$ |
|
|
17
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
SYNNEX United States accounts receivable securitization arrangement
In the United States, the Company has an accounts receivable securitization program to provide additional capital for its operations (the “U.S. AR Arrangement”). Prior to the amendment in May 2020 that is described in this paragraph, under the terms of the U.S. AR Arrangement, which had a maturity date of
Under the terms of the U.S. Arrangement, the Company and two of its U.S. subsidiaries sell, on a revolving basis, their receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in the receivables acquired by the Company's bankruptcy-remote subsidiary as security. Any amounts received under the U.S. AR Arrangement are recorded as debt on the Company's Consolidated Balance Sheets.
SYNNEX Canada accounts receivable securitization arrangement
In Canada, the Company has an accounts receivable securitization program with a bank to provide additional capital for its operations which was set to expire in
The Company has guaranteed the performance obligations of SYNNEX Canada under this facility.
SYNNEX Japan credit facility
SYNNEX Japan has a credit agreement with a group of banks for a maximum commitment of JPY
Concentrix India revolving lines of credit facilities
The Company's Indian subsidiaries have credit facilities with a financial institution to borrow up to an aggregate amount of $
18
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
SYNNEX United States credit agreement
In the United States, the Company has a senior secured credit agreement (as amended, the "U.S. Credit Agreement") with a group of financial institutions. The U.S. Credit Agreement includes a $
SYNNEX United States term loan credit agreement
The Company has a secured term loan credit agreement (the “U.S. Term Loan Credit Agreement”) with a group of financial institutions in the original principal amount of $
SYNNEX Canada revolving line of credit
SYNNEX Canada has an uncommitted revolving line of credit with a bank under which it can borrow up to CAD
Other borrowings and term debt
Other borrowings and term debt include lines of credit with financial institutions at certain locations outside the United States, factoring of accounts receivable with recourse provisions, capital leases, a building mortgage and book overdrafts. As of May 31, 2020, commitments for these revolving credit facilities aggregated $
The maximum commitment amounts for local currency credit facilities have been translated into United States Dollars at May 31, 2020 exchange rates.
19
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
Future principal payments
As of May 31, 2020, future principal payments under the above loans are as follows:
|
Fiscal Years Ending November 30, |
|
|
|
|
|
2020 (remaining six months) |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
$ |
|
|
Interest expense and finance charges
The total interest expense and finance charges for the Company's borrowings were $
Covenant compliance
The Company's credit facilities have a number of covenants and restrictions that, among other things, require the Company to maintain specified financial ratios and satisfy certain financial condition tests. The covenants also limit the Company’s ability to incur additional debt, make or forgive intercompany loans, pay dividends and make other types of distributions, make certain acquisitions, repurchase the Company’s stock, create liens, cancel debt owed to the Company, enter into agreements with affiliates, modify the nature of the Company’s business, enter into sale-leaseback transactions, make certain investments, transfer and sell assets, cancel or terminate any material contracts and merge or consolidate. As of May 31, 2020, the Company was in compliance with all material covenants for the above arrangements.
NOTE 9—EARNINGS PER COMMON SHARE:
The following table sets forth the computation of basic and diluted earnings per common share for the periods indicated:
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
||||
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Less: net income allocated to participating securities(1) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net income attributable to common stockholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares - basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Less: net income allocated to participating securities(1) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net income attributable to common stockholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares - basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Anti-dilutive shares excluded from diluted earnings per share calculation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
|
|
(1) |
|
NOTE 10—SEGMENT INFORMATION:
Summarized financial information related to the Company’s reportable business segments for the periods presented is shown below:
|
|
|
Technology Solutions |
|
|
Concentrix |
|
|
Inter-Segment Elimination |
|
|
Consolidated |
|
||||
|
Three months ended May 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
External revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Three months ended May 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
External revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Six months ended May 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
External revenue |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Six months ended May 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
External revenue |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Total assets as of May 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Total assets as of November 30, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Inter-segment elimination represents services and other transactions, principally intercompany investments and loans, between the Company's reportable segments that are eliminated on consolidation.
Geographic information
The Company attributes revenues from external customers to the country from where Technology Solutions products are delivered and the country of domicile of the Concentrix legal entity that is party to the client contract.
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Others |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
As of |
|
|||||
|
|
|
May 31, 2020 |
|
|
November 30, 2019 |
|
||
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
|
United States |
|
$ |
|
|
|
$ |
|
|
|
Philippines |
|
|
|
|
|
|
|
|
|
Others |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
21
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
NOTE 11—RELATED PARTY TRANSACTIONS:
The Company has a business relationship with MiTAC Holdings Corporation (“MiTAC Holdings”), a publicly-traded company in Taiwan, which began in 1992 when MiTAC Holdings became the Company's primary investor through its affiliates. As of both May 31, 2020 and November 30, 2019, MiTAC Holdings and its affiliates beneficially owned approximately
Beneficial ownership of the Company’s common stock by MiTAC Holdings
As noted above, MiTAC Holdings and its affiliates in the aggregate beneficially owned approximately 18% of the Company’s outstanding common stock as of May 31, 2020. These shares are owned by the following entities:
|
|
|
|
|
As of May 31, 2020 |
|
|
|
MiTAC Holdings(1) |
|
|
|
|
||
|
Synnex Technology International Corp.(2) |
|
|
|
|
||
|
Total |
|
|
|
|
||
_________________________
|
(1) |
|
Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC Holdings. Excludes |
|
(2) |
|
|
MiTAC Holdings generally has significant influence over the Company regarding matters submitted to stockholders for consideration, including any merger or acquisition of the Company. Among other things, this could have the effect of delaying, deterring or preventing a change of control over the Company.
The following table presents the Company's transactions with MiTAC Holdings and its affiliates for the periods indicated:
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
||||
|
Purchases of inventories and services |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Sale of products to MiTAC Holdings and affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments made for rent and overhead costs for use of facilities of MiTAC Holdings and affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Company’s receivable from and payable to MiTAC Holdings and its affiliates for the periods presented:
|
|
|
May 31, 2020 |
|
|
November 30, 2019 |
|
||
|
Receivable from related parties (included in Accounts receivable, net) |
|
$ |
|
|
|
$ |
|
|
|
Payable to related parties (included in Accounts payable) |
|
|
|
|
|
|
|
|
The Company’s business relationship with MiTAC Holdings and its affiliates has been informal and is generally not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments. The Company negotiates pricing and other material terms on a case-by-case basis with MiTAC Holdings and affiliates. The Company has adopted a policy requiring that material transactions with MiTAC Holdings or its related parties be approved by its Audit Committee, which is composed solely of independent directors. In addition, Mr. Miau’s compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors.
Synnex Technology International is a publicly-traded corporation in Taiwan that currently provides distribution and fulfillment services to various markets in Asia and Australia, and is also a potential competitor of the Company. Neither MiTAC Holdings nor Synnex Technology International is restricted from competing with the Company.
NOTE 12—PENSION AND EMPLOYEE BENEFITS PLANS:
The Company has 401(k) plans in the United States under which eligible employees may contribute up to the maximum amount as provided by law. Employees become eligible to participate in these plans on the first day of the month after their employment date. The
22
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
Company may make discretionary contributions under the plans. Employees in most of the Company's foreign subsidiaries are covered by government-mandated defined contribution plans. During the three and six months ended May 31, 2020, the Company contributed $
The Company has a deferred compensation plan for certain directors and officers. Distributions under the plan are subject to Section 409A of the United States Tax Code. The Company may invest balances in the plan in trading securities reported on recognized exchanges. As of May 31, 2020 and November 30, 2019, the deferred compensation liability balance was $
Defined Benefit Plans
The Company has defined benefit pension or retirement plans for eligible employees in certain foreign subsidiaries. Benefits under these plans are primarily based on years of service and compensation during the years immediately preceding retirement or termination of participation in the plans. In addition, the Company has a frozen defined benefit pension plan, which includes both a qualified and non-qualified portion, for all eligible employees in the U.S. (“the cash balance plan”). The pension benefit formula for the cash balance plan is determined by a combination of compensation, age-based credits and annual guaranteed interest credits. The qualified portion of the cash balance plan has been funded through contributions made to a trust fund. The plan assumptions are evaluated annually and are updated as deemed necessary.
During the three and six months ended May 31, 2020, net periodic pension costs were $
NOTE 13—EQUITY:
Share repurchase program
In June 2017, the Board of Directors authorized a $
On March 24, 2020, as a result of the unpredictable economic environment due to the impact of the COVID-19 pandemic, the Company announced the suspension of further share repurchases. In June 2020, the Board of Directors authorized a $
Dividends
On March 24, 2020, as a result of the unpredictable economic environment due to the impact of the COVID-19 pandemic, the Company announced the suspension of its quarterly dividend.
NOTE 14—LEASES:
The Company leases certain of its facilities and equipment under operating lease agreements, which expire in various periods through
The following table presents the various components of lease costs.
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||
|
|
|
May 31, 2020 |
|
|
May 31,2020 |
|
||
|
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
|
Short-term lease cost |
|
|
|
|
|
|
|
|
|
Variable lease cost |
|
|
|
|
|
|
|
|
|
Sublease income |
|
|
( |
) |
|
|
( |
) |
|
Total operating lease cost |
|
$ |
|
|
|
$ |
|
|
23
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
|
Fiscal Years Ending November 30, |
|
|
|
|
|
2020 (remaining six months) |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total payments |
|
$ |
|
|
|
Less: imputed interest* |
|
|
|
|
|
Total present value of lease payments |
|
$ |
|
|
*
As of May 31, 2020, the Company had $
During the three and six months ended May 31, 2019, rent expense was $
The following amounts were recorded in the Company's Consolidated Balance Sheet as of May 31, 2020:
|
Operating leases |
|
Balance sheet location |
|
May 31, 2020 |
|
|
|
Operating lease ROU assets |
|
Other assets, net |
|
$ |
|
|
|
Current operating lease liabilities |
|
Other accrued liabilities |
|
|
|
|
|
Non-current operating lease liabilities |
|
Other long-term liabilities |
|
|
|
|
The following table presents supplemental cash flow information related to the Company's operating leases for the six months ended May 31, 2020. Cash payments related to variable lease costs and short-term leases are not included in the measurement of operating lease liabilities, and, as such, are excluded from the amounts below:
|
|
|
|
|
Six months ended |
|
|
|
Cash flow information |
|
|
|
May 31, 2020 |
|
|
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
$ |
|
|
|
Non-cash ROU assets obtained in exchange for lease liabilities (subsequent to initial adoption) |
|
|
|
|
|
|
The weighted-average remaining lease term and discount rate as of May 31, 2020 were as follows:
|
Operating lease term and discount rate |
|
|
|
Operating Leases |
|
|
|
Weighted-average remaining lease term (years) |
|
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
|
% |
Future minimum contractually required cash payment obligations under non-cancellable lease agreements as of November 30, 2019 were as follows:
|
Fiscal Years Ending November 30, |
|
|
|
|
|
2020 |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total minimum lease payments |
|
$ |
|
|
24
SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
For the three and six months ended May 31, 2020 and 2019
(currency and share amounts in thousands, except per share amounts)
(unaudited)
NOTE 15— COMMITMENTS AND CONTINGENCIES:
The Company was contingently liable as of May 31, 2020 under agreements to repurchase repossessed inventory acquired by flooring companies as a result of default on floor plan financing arrangements by the Company's customers. These arrangements are described in Note 7 and do not have expiration dates. As the Company does not have access to information regarding the amount of inventory purchased from the Company, still on hand with the customer at any point in time, the Company’s repurchase obligations relating to inventory cannot be reasonably estimated. Losses, if any, would be the difference between the repossession cost and the resale value of the inventory. There have been no repurchases through May 31, 2020 under these agreements and the Company is not aware of any pending customer defaults or repossession obligations. The Company believes that, based on historical experience, the likelihood of a material loss pursuant to these inventory repurchase obligations is remote.
From time to time, the Company receives notices from third parties, including customers and suppliers, seeking indemnification, payment of money or other actions in connection with claims made against them. Also, from time to time, the Company has been involved in various bankruptcy preference actions where the Company was a supplier to the companies now in bankruptcy. In addition, the Company is subject to various other claims, both asserted and unasserted, that arise in the ordinary course of business. The Company evaluates these claims and records the related liabilities. It is possible that the ultimate liabilities could differ from the amounts recorded.
The Company does not believe that the above commitments and contingencies will have a material adverse effect on the Company's results of operations, financial position or cash flows.
NOTE 16— RISKS AND UNCERTAINTIES RELATED TO THE COVID-19 PANDEMIC:
On March 11, 2020, the World Health Organization characterized the COVID-19 outbreak as a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and work force participation and created significant volatility and disruption of financial markets. These disruptions have impacted the Company’s business including Concentrix’ ability to support customer demand due to decreased workforce productivity and limiting the Technology Solutions segment’s ability to support end market demand due to supply chain disruptions. As a result, many of the estimates and assumptions used in preparation of these interim financial statements required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve with respect to the pandemic, the Company’s estimates may materially change in future periods.
25
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
26
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 in Fremont, California. We have significant operations in North and South America, Asia-Pacific, Europe and Africa. We were originally incorporated in the State of California as COMPAC Microelectronics, Inc. in November 1980, and we changed our name to SYNNEX Information Technologies, Inc. in February 1994. We later reincorporated in the State of Delaware under the name of SYNNEX Corporation in October 2003. As of May 31, 2020, we had over 235,000 full-time and temporary employees worldwide.
In December 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”). In March 2020, the World 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 ended May 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 in India and the 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 associates who 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.
‒In March 2020, we announced the suspension of share repurchases and our quarterly dividends. In June 2020, our board of directors approved a new three-year $400 million share repurchase program effective July 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.
‒On January 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
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 the Securities and Exchange Commission.
Critical Accounting Policies and Estimates
During the three and six months ended May 31, 2020, there were no material changes to our critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019.
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 May 31, 2020, the impact of COVID-19 on our business continued to unfold. As a result, many of our estimates and assumptions carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change in future periods.
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.
28
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 May 31, 2020 in the billing currency using their comparable prior period currency conversion rate. Generally, when the dollar either strengthens or weakens against other currencies, 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.
29
Non-GAAP Financial Information:
The following table provides the reconciliations of our most comparable GAAP measures to our non-GAAP measures presented:
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
||||
|
|
|
(in thousands, except per share amounts) |
|
|||||||||||||
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
5,532,639 |
|
|
$ |
5,722,889 |
|
|
$ |
10,796,836 |
|
|
$ |
10,972,341 |
|
|
Foreign currency translation |
|
|
68,323 |
|
|
|
|
|
|
|
76,517 |
|
|
|
|
|
|
Revenue in constant currency |
|
$ |
5,600,962 |
|
|
$ |
5,722,889 |
|
|
$ |
10,873,353 |
|
|
$ |
10,972,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
111,724 |
|
|
$ |
174,655 |
|
|
$ |
300,379 |
|
|
$ |
336,618 |
|
|
Acquisition-related and integration expenses |
|
|
3,468 |
|
|
|
16,533 |
|
|
|
18,538 |
|
|
|
44,382 |
|
|
Amortization of intangibles |
|
|
46,326 |
|
|
|
52,864 |
|
|
|
93,492 |
|
|
|
105,721 |
|
|
Non-GAAP operating income |
|
$ |
161,518 |
|
|
$ |
244,052 |
|
|
$ |
412,409 |
|
|
$ |
486,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
2.02 |
% |
|
|
3.05 |
% |
|
|
2.78 |
% |
|
|
3.07 |
% |
|
Non-GAAP operating margin |
|
|
2.92 |
% |
|
|
4.26 |
% |
|
|
3.82 |
% |
|
|
4.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
56,960 |
|
|
$ |
114,473 |
|
|
$ |
179,544 |
|
|
$ |
201,579 |
|
|
Interest expense and finance charges, net |
|
|
33,921 |
|
|
|
43,144 |
|
|
|
70,297 |
|
|
|
84,750 |
|
|
Provision for income taxes |
|
|
22,310 |
|
|
|
38,584 |
|
|
|
54,385 |
|
|
|
71,140 |
|
|
Depreciation (excluding accelerated depreciation included in acquisition-related and integration expenses below) |
|
|
35,998 |
|
|
|
38,890 |
|
|
|
73,535 |
|
|
|
80,407 |
|
|
Amortization of intangibles |
|
|
46,326 |
|
|
|
52,864 |
|
|
|
93,492 |
|
|
|
105,721 |
|
|
EBITDA |
|
$ |
195,515 |
|
|
$ |
287,955 |
|
|
$ |
471,253 |
|
|
$ |
543,597 |
|
|
Other (income) expense, net (excluding amounts included in acquisition-related and integration expenses below) |
|
|
(1,702 |
) |
|
|
(21,375 |
) |
|
|
(4,365 |
) |
|
|
(20,680 |
) |
|
Acquisition-related and integration expenses |
|
|
3,704 |
|
|
|
16,362 |
|
|
|
19,056 |
|
|
|
44,211 |
|
|
Adjusted EBITDA |
|
$ |
197,517 |
|
|
$ |
282,942 |
|
|
$ |
485,944 |
|
|
$ |
567,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
1.10 |
|
|
$ |
2.23 |
|
|
$ |
3.47 |
|
|
$ |
3.92 |
|
|
Acquisition-related and integration expenses |
|
|
0.07 |
|
|
|
0.32 |
|
|
|
0.37 |
|
|
|
0.86 |
|
|
Amortization of intangibles |
|
|
0.90 |
|
|
|
1.03 |
|
|
|
1.81 |
|
|
|
2.06 |
|
|
Contingent consideration |
|
|
— |
|
|
|
(0.37 |
) |
|
|
— |
|
|
|
(0.37 |
) |
|
Income taxes related to the above (1) |
|
|
(0.25 |
) |
|
|
(0.35 |
) |
|
|
(0.55 |
) |
|
|
(0.77 |
) |
|
Non-GAAP diluted EPS |
|
$ |
1.83 |
|
|
$ |
2.86 |
|
|
$ |
5.09 |
|
|
$ |
5.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
4,470,928 |
|
|
$ |
4,567,074 |
|
|
$ |
8,551,952 |
|
|
$ |
8,647,759 |
|
|
Foreign currency translation |
|
|
46,015 |
|
|
|
|
|
|
|
46,690 |
|
|
|
|
|
|
Revenue in constant currency |
|
$ |
4,516,943 |
|
|
$ |
4,567,074 |
|
|
$ |
8,598,642 |
|
|
$ |
8,647,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
88,144 |
|
|
$ |
112,393 |
|
|
$ |
188,589 |
|
|
$ |
213,764 |
|
|
Acquisition-related and integration expenses |
|
|
— |
|
|
|
649 |
|
|
|
— |
|
|
|
981 |
|
|
Amortization of intangibles |
|
|
9,947 |
|
|
|
10,975 |
|
|
|
20,135 |
|
|
|
21,969 |
|
|
Non-GAAP operating income |
|
$ |
98,091 |
|
|
$ |
124,017 |
|
|
$ |
208,724 |
|
|
$ |
236,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
1.97 |
% |
|
|
2.46 |
% |
|
|
2.21 |
% |
|
|
2.47 |
% |
|
Non-GAAP operating margin |
|
|
2.19 |
% |
|
|
2.72 |
% |
|
|
2.44 |
% |
|
|
2.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
50,192 |
|
|
$ |
90,258 |
|
|
$ |
118,706 |
|
|
$ |
148,302 |
|
|
Interest expense and finance charges, net |
|
|
20,992 |
|
|
|
19,442 |
|
|
|
39,784 |
|
|
|
37,950 |
|
|
Provision for income taxes |
|
|
16,786 |
|
|
|
23,657 |
|
|
|
29,069 |
|
|
|
48,134 |
|
|
Depreciation |
|
|
5,837 |
|
|
|
5,475 |
|
|
|
11,713 |
|
|
|
10,844 |
|
|
Amortization of intangibles |
|
|
9,947 |
|
|
|
10,975 |
|
|
|
20,135 |
|
|
|
21,969 |
|
|
EBITDA |
|
$ |
103,754 |
|
|
$ |
149,807 |
|
|
$ |
219,407 |
|
|
$ |
267,199 |
|
|
Other (income) expense, net |
|
|
174 |
|
|
|
(20,965 |
) |
|
|
1,029 |
|
|
|
(20,621 |
) |
|
Acquisition-related and integration expenses |
|
|
— |
|
|
|
649 |
|
|
|
— |
|
|
|
981 |
|
30
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
||||
|
|
|
(in thousands, except per share amounts) |
|
|||||||||||||
|
Adjusted EBITDA |
|
$ |
103,928 |
|
|
$ |
129,491 |
|
|
$ |
220,436 |
|
|
$ |
247,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrix |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,066,363 |
|
|
$ |
1,160,877 |
|
|
$ |
2,254,982 |
|
|
$ |
2,334,148 |
|
|
Foreign currency translation |
|
|
22,308 |
|
|
|
|
|
|
|
29,827 |
|
|
|
|
|
|
Revenue in constant currency |
|
$ |
1,088,671 |
|
|
$ |
1,160,877 |
|
|
$ |
2,284,809 |
|
|
$ |
2,334,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
23,580 |
|
|
$ |
62,263 |
|
|
$ |
111,791 |
|
|
$ |
122,853 |
|
|
Acquisition-related and integration expenses |
|
|
3,468 |
|
|
|
15,884 |
|
|
|
18,538 |
|
|
|
43,401 |
|
|
Amortization of intangibles |
|
|
36,379 |
|
|
|
41,889 |
|
|
|
73,357 |
|
|
|
83,752 |
|
|
Non-GAAP operating income |
|
$ |
63,427 |
|
|
$ |
120,036 |
|
|
$ |
203,686 |
|
|
$ |
250,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
2.21 |
% |
|
|
5.36 |
% |
|
|
4.96 |
% |
|
|
5.26 |
% |
|
Non-GAAP operating margin |
|
|
5.95 |
% |
|
|
10.34 |
% |
|
|
9.03 |
% |
|
|
10.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,768 |
|
|
$ |
24,215 |
|
|
$ |
60,838 |
|
|
$ |
53,277 |
|
|
Interest expense and finance charges, net |
|
|
12,928 |
|
|
|
23,702 |
|
|
|
30,513 |
|
|
|
46,801 |
|
|
Provision for income taxes |
|
|
5,524 |
|
|
|
14,926 |
|
|
|
25,315 |
|
|
|
23,006 |
|
|
Depreciation (excluding accelerated depreciation included in acquisition-related and integration expenses below) |
|
|
30,161 |
|
|
|
33,415 |
|
|
|
61,822 |
|
|
|
69,563 |
|
|
Amortization of intangibles |
|
|
36,379 |
|
|
|
41,889 |
|
|
|
73,357 |
|
|
|
83,752 |
|
|
EBITDA |
|
$ |
91,760 |
|
|
$ |
138,147 |
|
|
$ |
251,845 |
|
|
$ |
276,399 |
|
|
Other (income) expense, net (excluding amounts included in acquisition-related and integration expenses below) |
|
|
(1,876 |
) |
|
|
(410 |
) |
|
|
(5,394 |
) |
|
|
(60 |
) |
|
Acquisition-related and integration expenses |
|
|
3,704 |
|
|
|
15,713 |
|
|
|
19,056 |
|
|
|
43,230 |
|
|
Adjusted EBITDA |
|
$ |
93,588 |
|
|
$ |
153,450 |
|
|
$ |
265,507 |
|
|
$ |
319,569 |
|
|
|
(1) |
The tax effect of taxable and deductible non-GAAP adjustments was calculated using the effective year-to-date tax rate during the respective periods. |
Three and Six Months Ended May 31, 2020 and 2019
Revenue
|
|
|
Three Months Ended |
|
|
Percent |
|
|
Six Months Ended |
|
|
Percent |
|
||||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
||||||
|
|
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
||||||||||
|
Revenue |
|
$ |
5,532,639 |
|
|
$ |
5,722,889 |
|
|
|
(3.3 |
)% |
|
$ |
10,796,836 |
|
|
$ |
10,972,341 |
|
|
|
(1.6 |
)% |
|
Technology Solutions revenue |
|
|
4,470,928 |
|
|
|
4,567,074 |
|
|
|
(2.1 |
)% |
|
|
8,551,952 |
|
|
|
8,647,759 |
|
|
|
(1.1 |
)% |
|
Concentrix revenue |
|
|
1,066,363 |
|
|
|
1,160,877 |
|
|
|
(8.1 |
)% |
|
|
2,254,982 |
|
|
|
2,334,148 |
|
|
|
(3.4 |
)% |
|
Inter-segment elimination |
|
|
(4,652 |
) |
|
|
(5,063 |
) |
|
|
|
|
|
|
(10,098 |
) |
|
|
(9,565 |
) |
|
|
|
|
Our revenue includes sales of products and services. In our Technology Solutions segment, we distribute a comprehensive range of products for the technology industry and design and integrate data center equipment. The prices of our products are highly dependent on the volumes purchased within a product category. The products we sell from one period to the next are often not comparable due to changes in product models, features and customer demand requirements. The revenue generated by our Concentrix segment relates to business outsourcing services focused on customer experience, process optimization and back office automation. Inter-segment elimination represents services generated between our reportable segments that are eliminated on consolidation. Substantially all of the inter-segment revenue represents services provided by the Concentrix segment to the Technology Solutions segment.
Revenue in our Technology Solutions segment slightly decreased during the three and six months ended May 31, 2020, compared to the prior year periods, due to a decline in project and integration-based server solutions. Some of this decline was offset by demand for technology equipment as COVID-19 related government mandated shelter-in-place restrictions during the second quarter of fiscal year 2020 led to increased needs for work-at-home, learn-at-home and related solutions.
Revenue in our Concentrix segment during the three and six month periods ended May 31, 2020, decreased compared to prior periods primarily due to the impact of COVID-19 related government mandated shelter-in-place restrictions in several countries in the world. These restrictions adversely impacted our revenue due to the inability of a significant number of our associates being unable to work, despite client demand. Our revenue was also adversely impacted by lower demand from clients in the media and communications and travel, transportation and tourism industry verticals, partially offset by an increase in the technology and banking and financial services industry verticals. In addition,
31
revenue during the three and six months ended May 31, 2020, decreased compared to prior year periods due to adverse translation effect of foreign currencies.
Gross Profit
|
|
|
Three Months Ended |
|
|
Percent |
|
|
Six Months Ended |
|
|
Percent |
|
||||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
||||||
|
|
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
|
||||||||||||
|
Gross profit |
|
$ |
617,812 |
|
|
$ |
698,468 |
|
|
|
(11.5 |
)% |
|
$ |
1,316,157 |
|
|
$ |
1,377,389 |
|
|
|
(4.4 |
)% |
|
Gross margin |
|
|
11.17 |
% |
|
|
12.20 |
% |
|
|
|
|
|
|
12.19 |
% |
|
|
12.55 |
% |
|
|
|
|
|
Technology Solutions gross profit |
|
$ |
274,616 |
|
|
$ |
269,978 |
|
|
|
1.7 |
% |
|
$ |
529,721 |
|
|
$ |
517,545 |
|
|
|
2.4 |
% |
|
Technology Solutions gross margin |
|
|
6.14 |
% |
|
|
5.91 |
% |
|
|
|
|
|
|
6.19 |
% |
|
|
5.98 |
% |
|
|
|
|
|
Concentrix gross profit |
|
$ |
345,170 |
|
|
$ |
430,528 |
|
|
|
(19.8 |
)% |
|
$ |
790,359 |
|
|
$ |
863,837 |
|
|
|
(8.5 |
)% |
|
Concentrix gross margin |
|
|
32.37 |
% |
|
|
37.09 |
% |
|
|
|
|
|
|
35.05 |
% |
|
|
37.01 |
% |
|
|
|
|
|
Inter-segment elimination |
|
$ |
(1,974 |
) |
|
$ |
(2,038 |
) |
|
|
|
|
|
$ |
(3,923 |
) |
|
$ |
(3,993 |
) |
|
|
|
|
Our Technology Solutions gross margin is affected by a variety of factors, including competition, selling prices, mix of products and services, product costs along with rebate and discount programs from our suppliers, reserves or settlement adjustments, freight costs, inventory losses, acquisition of business units and fluctuations in revenue. Concentrix margins, which are higher than those in our Technology Solutions segment, can be impacted by resource location, client mix and pricing, additional lead time for programs to be fully scalable, and transition and initial set-up costs.
Technology Solutions gross profit and margin increased, during the three and six months ended May 31, 2020, as compared to the prior year period, driven by strong demand for technology products as COVID-19 related government mandated shelter-in-place restrictions during the second quarter of fiscal year 2020 led to a greater need for work-at-home, learn-at-home and related solutions. This increase was partially offset by lower revenue and margins in our projects and integration-based solutions business.
Concentrix gross profit and margin decreased during the three and six months ended May 31, 2020, as compared to the prior year periods, primarily due to a decrease in revenue and an incremental impact of approximately $46 million due to COVID-19 related non-productive workforce costs. In addition, our gross margin was temporarily impacted by decreased productivity as we transitioned our workforce to work-from-home.
Selling, General and Administrative Expenses
|
|
|
Three Months Ended |
|
|
Percent |
|
|
Six Months Ended |
|
|
Percent |
|
||||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
||||||
|
|
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
||||||||||
|
Selling, general and administrative expenses |
|
$ |
506,088 |
|
|
$ |
523,813 |
|
|
|
(3.4 |
)% |
|
$ |
1,015,778 |
|
|
$ |
1,040,771 |
|
|
|
(2.4 |
)% |
|
Percentage of revenue |
|
|
9.15 |
% |
|
|
9.15 |
% |
|
|
|
|
|
|
9.41 |
% |
|
|
9.49 |
% |
|
|
|
|
|
Technology Solutions selling, general and administrative expenses |
|
$ |
186,472 |
|
|
$ |
157,586 |
|
|
|
18.3 |
% |
|
$ |
341,132 |
|
|
$ |
303,781 |
|
|
|
12.3 |
% |
|
Percentage of Technology Solutions revenue |
|
|
4.17 |
% |
|
|
3.45 |
% |
|
|
|
|
|
|
3.99 |
% |
|
|
3.51 |
% |
|
|
|
|
|
Concentrix selling, general and administrative expenses |
|
$ |
321,590 |
|
|
$ |
368,265 |
|
|
|
(12.7 |
)% |
|
$ |
678,569 |
|
|
$ |
740,983 |
|
|
|
(8.4 |
)% |
|
Percentage of Concentrix revenue |
|
|
30.16 |
% |
|
|
31.72 |
% |
|
|
|
|
|
|
30.09 |
% |
|
|
31.75 |
% |
|
|
|
|
|
Inter-segment elimination |
|
$ |
(1,974 |
) |
|
$ |
(2,038 |
) |
|
|
|
|
|
$ |
(3,923 |
) |
|
$ |
(3,993 |
) |
|
|
|
|
Our selling, general and administrative expenses consist primarily of personnel costs such as salaries, commissions, bonuses, share-based compensation and temporary personnel costs. Selling, general and administrative expenses also include cost of warehouses, delivery centers and other non-integration facilities, utility expenses, legal and professional fees, depreciation on certain of our capital equipment, bad debt expense, amortization of our non-technology related intangible assets, and marketing expenses, offset in part by reimbursements from our OEM suppliers.
During the three and six months ended May 31, 2020, selling, general and administrative expenses in our Technology Solutions segment increased in absolute dollars and as a percentage of revenue compared to the prior year period, primarily due to an increase in allowance for doubtful accounts and higher salaries and employee related expenses due to COVID-19, partially offset by a decrease in amortization of intangible assets and acquisition-related and integration expenses. Incremental costs related to COVID-19 were approximately $37 million for the three and six months ended May 31, 2020.
Concentrix selling, general and administrative expenses during the three and six months ended May 31, 2020, decreased in absolute dollars and as a percentage of revenue, compared to the prior year period, due to lower facilities and employee costs pursuant to Convergys acquisition-related integration and facility rationalization undertaken in fiscal year 2019, partially offset by incremental COVID-19 costs of $6.5 million, a decrease in the amortization of intangible assets by $5.4 million and $10.2 million for the three and six months ended May 31,
32
2020, compared to the respective prior year periods, and a decrease in acquisition-related and integration expenses of $12.4 million and $24.9 million for the same periods, as the integration and facility rationalization related to the Convergys acquisition in fiscal 2018 near completion.
Operating Income
|
|
|
Three Months Ended |
|
|
Percent |
|
|
Six Months Ended |
|
|
Percent |
|
||||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
||||||
|
|
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
|
||||||||||||
|
Operating income |
|
$ |
111,724 |
|
|
$ |
174,655 |
|
|
|
(36.0 |
)% |
|
$ |
300,379 |
|
|
$ |
336,618 |
|
|
|
(10.8 |
)% |
|
Operating margin |
|
|
2.02 |
% |
|
|
3.05 |
% |
|
|
|
|
|
|
2.78 |
% |
|
|
3.07 |
% |
|
|
|
|
|
Technology Solutions operating income |
|
$ |
88,144 |
|
|
$ |
112,393 |
|
|
|
(21.6 |
)% |
|
$ |
188,589 |
|
|
$ |
213,764 |
|
|
|
(11.8 |
)% |
|
Technology Solutions operating margin |
|
|
1.97 |
% |
|
|
2.46 |
% |
|
|
|
|
|
|
2.21 |
% |
|
|
2.47 |
% |
|
|
|
|
|
Concentrix operating income |
|
$ |
23,580 |
|
|
$ |
62,263 |
|
|
|
(62.1 |
)% |
|
$ |
111,791 |
|
|
$ |
122,853 |
|
|
|
(9.0 |
)% |
|
Concentrix operating margin |
|
|
2.21 |
% |
|
|
5.36 |
% |
|
|
|
|
|
|
4.96 |
% |
|
|
5.26 |
% |
|
|
|
|
Operating income and margin in our Technology Solutions segment decreased during the three and six months ended May 31, 2020, compared to the prior year periods, due to lower volumes, as well as COVID-19 related incremental costs associated with allowances for doubtful accounts and higher salary and employee related costs.
Operating income and margin in our Concentrix segment decreased during the three and six months ended May 31, 2020, compared to the prior year periods, due to the impact of COVID-19 related revenue decrease and incremental costs. These decreases were partially offset by lower acquisition-related and integration expenses and the amortization of intangible assets, as compared to the prior year periods.
Interest Expense and Finance Charges, Net
|
|
|
Three Months Ended |
|
|
Percent |
|
|
Six Months Ended |
|
|
Percent |
|
||||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
||||||
|
|
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
||||||||||
|
Interest expense and finance charges, net |
|
$ |
33,921 |
|
|
$ |
43,144 |
|
|
|
(21.4 |
)% |
|
$ |
70,297 |
|
|
$ |
84,750 |
|
|
|
(17.1 |
)% |
|
Percentage of revenue |
|
|
0.61 |
% |
|
|
0.75 |
% |
|
|
|
|
|
|
0.65 |
% |
|
|
0.77 |
% |
|
|
|
|
Amounts recorded in interest expense and finance charges, net, consist primarily of interest expense paid on our lines of credit and term loans, fees associated with third party accounts receivable flooring arrangements and the sale or pledge of accounts receivable through our securitization facilities, offset by income earned on our cash investments.
During the three and six months ended May 31, 2020, our interest expense and finance charges, net, decreased compared to the prior year period, due to lower interest expense as a result of reduction of over $500 million in our average borrowings during fiscal year 2020, as compared to the prior year periods, as well as a lower interest rate environment. Approximately 57% of our outstanding borrowings at May 31, 2020 have been economically converted to fixed-rate debt through interest rate swaps.
Other Income (Expense), Net
|
|
|
Three Months Ended |
|
|
Percent |
|
|
Six Months Ended |
|
|
Percent |
|
||||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
||||||
|
|
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
||||||||||
|
Other income (expense), net |
|
$ |
1,466 |
|
|
$ |
21,546 |
|
|
|
93.2 |
% |
|
$ |
3,847 |
|
|
$ |
20,851 |
|
|
|
81.6 |
% |
|
Percentage of revenue |
|
|
0.03 |
% |
|
|
0.38 |
% |
|
|
|
|
|
|
0.04 |
% |
|
|
0.19 |
% |
|
|
|
|
Amounts recorded as other income (expense), net include foreign currency transaction gains and losses, investment gains and losses, non-service component of pension costs, and other non-operating gains and losses, such as settlements received from class actions lawsuits.
The decrease in other income (expense), net during the three and six months ended May 31, 2020, compared to the prior year periods, was primarily due to a $19.0 million gain recorded in fiscal year 2019 upon the settlement of contingent consideration related to our acquisition of Westcon-Comstor Americas in fiscal year 2017. This increase was partially offset during the three months ended May 31, 2020, by higher foreign currency exchange gains compared to the prior year period. During the six months ended May 31, 2020, the decrease compared to the prior year period was partially offset by a $3.5 million gain upon reversal of certain tax indemnification provisions set up at the time of disposition of a subsidiary in a prior year.
Provision for Income Taxes
33
|
|
|
Three Months Ended |
|
|
Percent |
|
|
Six Months Ended |
|
|
Percent |
|
||||||||||||
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
|
Change |
|
||||||
|
|
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
|
||||||||||||
|
Provision for income taxes |
|
$ |
22,310 |
|
|
$ |
38,584 |
|
|
|
(42.2 |
)% |
|
$ |
54,385 |
|
|
$ |
71,140 |
|
|
|
(23.6 |
)% |
|
Percentage of income before income taxes |
|
|
28.14 |
% |
|
|
25.21 |
% |
|
|
|
|
|
|
23.25 |
% |
|
|
26.09 |
% |
|
|
|
|
Income taxes consist of our current and deferred tax expense resulting from our income earned in domestic and foreign jurisdictions. Income taxes for the interim periods presented have been included in the accompanying Consolidated Financial Statements on the basis of an estimated annual effective tax rate.
During the three months ended May 31, 2020, our income tax expense decreased due to a decrease in our income before income taxes due primarily to the economic impact of COVID-19. The effective tax rate increased compared to the prior year period, as more of our taxable income in our Concentrix segment was generated in higher tax jurisdictions. In addition, the effective tax rate for the three months ended May 31, 2019 was favorably impacted by the nontaxable contingent consideration gain related to the fiscal year 2017 Westcon-Comstor Americas acquisition.
During the six months ended May 31, 2020, our income tax expense decreased due to a decrease in our income before income taxes due primarily to the economic impact of COVID-19. The effective tax rate for the six months ended May 31, 2019 was favorably impacted by the nontaxable contingent consideration gain related to the fiscal year 2017 Westcon-Comstor Americas acquisition. The effective tax rate decreased for the six months ended May 31, 2020, compared to the prior year period, due to the benefit from exercising of employee stock options and reversal of uncertain tax positions.
Liquidity and Capital Resources
Cash Conversion Cycle
|
|
|
|
|
Three Months Ended |
|
|||||
|
|
|
|
|
May 31, 2020 |
|
|
May 31, 2019 |
|
||
|
|
|
|
|
(Amounts in thousands) |
|
|||||
|
Days sales outstanding ("DSO") |
|
|
|
|
|
|
|
|
|
|
|
Revenue (products and services) |
|
(a) |
|
$ |
5,532,639 |
|
|
$ |
5,722,889 |
|
|
Accounts receivable |
|
(b) |
|
|
3,215,370 |
|
|
|
3,457,110 |
|
|
Days sales outstanding |
|
(c) = (b)/((a)/the number of days during the period) |
|
|
53 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days inventory outstanding ("DIO") |
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (products and services) |
|
(d) |
|
$ |
4,914,826 |
|
|
$ |
5,024,420 |
|
|
Inventories |
|
(e) |
|
|
3,033,320 |
|
|
|
2,608,453 |
|
|
Days inventory outstanding |
|
(f) = (e)/((d)/the number of days during the period) |
|
|
57 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days payable outstanding ("DPO") |
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (products and services) |
|
(g) |
|
$ |
4,914,826 |
|
|
$ |
5,024,420 |
|
|
Accounts payable |
|
(h) |
|
|
3,405,317 |
|
|
|
2,764,919 |
|
|
Days payable outstanding |
|
(i) = (h)/((g)/the number of days during the period) |
|
|
64 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle ("CCC") |
|
(j) = (c)+(f)-(i) |
|
|
46 |
|
|
|
53 |
|
Cash Flows
Our Technology Solutions business is working capital intensive. Our working capital needs are primarily to finance accounts receivable and inventory. We rely heavily on term loans, accounts receivable arrangements, our securitization programs, and our revolver programs for our working capital needs. We have financed our growth and cash needs to date primarily through cash generated from operations and financing activities. As a general rule, when sales volumes are increasing, our net investment in working capital dollars typically increases, which generally results in decreased cash flow generated from operating activities. Conversely, when sales volume decreases, our net investment in working capital dollars typically decreases, which generally results in increases in cash flows generated from operating activities. Concentrix working capital is primarily comprised of accounts receivable. Our cash conversion cycle was 46 days and 53 days as of May 31, 2020 and 2019, respectively. The decrease was primarily due to working capital efficiencies in the Technology Solutions segment, partially offset by inventory purchases related to larger projects expected to transact in subsequent quarters.
34
To increase our market share and better serve our customers, we may further expand our operations through investments or acquisitions. We expect that such expansion would require an initial investment in working capital, personnel, facilities and operations. These investments or acquisitions would likely be funded primarily by our existing cash and cash equivalents, additional borrowings, or the issuance of securities.
Net cash provided by operating activities was $1.226 billion during the six months ended May 31, 2020, primarily due to net income of $179.5 million, adjustments for non-cash items of $214.3 million, decreases in accounts receivable of $621.7 million and receivables from vendors of $59.9 million, an increase in accounts payable of $227.2 million and a net change of $420.9 million in other operating assets and liabilities. These cash inflows were partially offset by an increase in inventories of $495.6 million. The decrease in accounts receivable and vendor receivables is primarily due to lower revenue in both segments during the three months ended May 31, 2020 compared to a seasonally high fourth quarter of fiscal year 2019. Notwithstanding the current economic uncertainties due to the impact of COVID-19, DSO in our Technology Solutions segment also decreased by approximately 3 days from the end of fiscal year 2019. The increase in accounts payable and cash inflow from changes in other operating assets and liabilities reflects primarily efficient working capital management and prepayments from customers received in our Technology Solutions segment. The increase in inventories was driven by purchases related to larger projects expected to transact in subsequent quarters. The adjustments for non-cash items consist primarily of amortization and depreciation, provision for doubtful accounts, share-based compensation expense and deferred tax benefit.
Net cash used in operating activities was $47.4 million during the six months ended May 31, 2019, primarily due to a decrease in accounts payable of $290.3 million, an increase in inventories of $214.3 million, and a net change in other operating assets and liabilities of $112.6 million. These cash outflows were partially offset by net income of $201.6 million, adjustments for non-cash items of $190.3 million, and a decrease in accounts receivable of $176.4 million. Typically, revenue in both our business segments, and consequently our accounts receivable and payable are highest in our fourth fiscal quarter and lower in interim periods which results in an increase in cash generated from operations. The increase in inventories was primarily due to growth in our projects and integration-based data center server solutions where we carry higher levels of inventories. The adjustments for non-cash items consist primarily of amortization and depreciation, stock-based compensation expense, a $19.0 million gain recorded upon the settlement of contingent consideration related to our Westcon-Comstor Americas acquisition in fiscal year 2017, and deferred tax benefit.
Net cash used in investing activities during the six months ended May 31, 2020 was $92.0 million, primarily due to capital expenditures of $84.6 million related to infrastructure investments to support growth in both of our business segments and $2.6 million of cash paid related to the settlement of employee stock-based awards assumed under the Convergys acquisition, being paid in accordance with the original vesting schedule.
Net cash used in investing activities during the six months ended May 31, 2019 was $65.9 million, primarily due to capital expenditures of $60.4 million related to infrastructure investments to support growth in both of our business segments and $6.2 million of cash paid related to the settlement of employee stock-based awards assumed under the Convergys acquisition.
Net cash used in financing activities during the six months ended May 31, 2020 was $237.6 million, representing primarily a pay down of our revolving lines of credit with cash generated from operations and scheduled quarterly repayments of our term loans aggregating $213.4 million. In addition, we paid dividends of $20.8 million in January 2020, prior to suspension of our dividends program due to the COVID-19 related economic uncertainties in March 2020.
Net cash used in financing activities during the six months ended May 31, 2019 was $69.8 million primarily due to a return of cash to stockholders in the form of $38.4 million of dividend payments and $14.3 million of repurchases of our common stock. In addition, net repayments under our borrowing arrangements were $17.7 million. During the six months ended May 31, 2019, the Company drew the last tranche of $250.0 million under a term loan facility obtained in fiscal year 2018 for the Convergys acquisition for the settlement of the remaining amount of convertible debentures assumed as part of the acquisition and the remainder was used for working capital.
Capital Resources
Our cash and cash equivalents totaled $1.113 billion and $225.5 million as of May 31, 2020 and November 30, 2019, respectively. Of our total cash and cash equivalents, the cash held by our foreign subsidiaries was $326.2 million and $219.7 million as of May 31, 2020 and November 30, 2019, respectively. Our cash and cash equivalents held by foreign subsidiaries are no longer subject to U.S. federal tax on repatriation into the United States. Repatriation of some foreign balances is restricted by local laws. Historically, we have fully utilized and reinvested all foreign cash to fund our foreign operations and expansion. If in the future our intentions change, and we repatriate the cash back to the United States, we will report in our Consolidated Financial Statements the impact of state and withholding taxes depending upon the planned timing and manner of such repatriation. Presently, we believe we have sufficient resources, cash flow and liquidity within the United States to fund current and expected future working capital, investment and other general corporate funding requirements.
We believe that our available cash and cash equivalents balances, cash flows from operations and our existing sources of liquidity will be sufficient to satisfy our current and planned working capital and investment needs for the next twelve months in all geographies. We also believe that our longer-term working capital, planned capital expenditures, anticipated stock repurchases, dividend payments and other general corporate funding requirements will be satisfied through cash flows from operations and, to the extent necessary, from our borrowing facilities and future financial market activities.
Historically, we have renewed our accounts receivable securitization program and our U.S. credit facility agreement described below on, or prior to, their respective expiration dates. We have no reason to believe that these and other arrangements will not be renewed or replaced as
35
we continue to be in good credit standing with the participating financial institutions. We have had similar borrowing arrangements with various financial institutions throughout our years as a public company.
On-Balance Sheet Arrangements
In the United States, we have an accounts receivable securitization program to provide additional capital for our operations (the “U.S. AR Arrangement”). Prior to the amendment in May 2020 described in this paragraph, under the terms of the U.S. AR Arrangement, which had a maturity date of May 2020, our subsidiary, which is the borrower under this facility, could borrow up to a maximum of $850.0 million based upon eligible trade accounts receivable. The effective borrowing cost under the U.S. AR Arrangement is a blended rate based upon the composition of the lenders that included prevailing dealer commercial paper rates and a rate based upon LIBOR, provided that LIBOR would not be less than zero. In addition, a program fee of 0.75% per annum based on the used portion of the commitment, and a facility fee of 0.35% per annum was payable on the adjusted commitment of the lenders. In May 2020, the U.S. AR Arrangement was amended to revise the maximum borrowing amount to $650,000 and to extend the maturity date of the U.S. AR Arrangement to May 2022. The program fee payable on the used portion of the lenders’ commitment, was modified to accrue at 1.25% per annum in the case of lender groups who fund their advances based on prevailing commercial paper rates, and 1.30% per annum in the case of lender groups who fund their advances based on LIBOR (subject to a 0.50% per annum floor). The amendment also modified the facility fee payable on the adjusted commitment of the lenders, to accrue at different tiers ranging between 0.35% per annum and 0.45% per annum depending on the amount of outstanding advances from time to time. In addition, the U.S. AR Arrangement includes an accordion feature to allow requests for an increase in the lenders' commitment by an additional $150.0 million.
Under the terms of the U.S. AR Arrangement, we and two of our U.S. subsidiaries sell, on a revolving basis, our receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in the receivables acquired by our bankruptcy-remote subsidiary as security. Any amounts received under the U.S. AR Arrangement are recorded as debt on our Consolidated Balance Sheets. As of May 31, 2020, there were no borrowings outstanding under this facility. As of November 30, 2019, $108.0 million was outstanding under the U.S. AR Arrangement.
In Canada, we have an accounts receivable securitization program with a bank to provide additional capital for operations. Under the terms of this program, as renewed in March 2020, SYNNEX Canada Limited (“SYNNEX Canada”) can borrow up to CAD100.0 million, or $72.6 million, in exchange for the transfer of eligible trade accounts receivable, on an ongoing revolving basis through May 2023. The program includes an accordion feature that allows us to request an increase in the bank's commitment by an additional CAD50.0 million, or $36.3 million. Any amounts received under this arrangement are recorded as debt on our Consolidated Balance Sheets and are secured by pledging all of the rights, title and interest in the receivables to the bank. We guarantee the performance obligations of SYNNEX Canada under this arrangement. The effective borrowing cost is based on the weighted-average of the Canadian Dollar Offered Rate plus a margin of 1.00% per annum and the prevailing lender commercial paper rates. In addition, prior to an event of termination, SYNNEX Canada is obligated to pay a program fee of 0.75% per annum based on the used portion of the commitment. After an event of termination, the program fee shall be the sum of the base rate and 2.50% per annum, based on the used portion of the commitment. SYNNEX Canada pays a fee of 0.40% per annum for any unused portion of the commitment up to CAD60.0 million, or $43.6 million, and when the unused portion exceeds CAD60.0 million, or $43.6 million, a fee of 0.55% per annum on the remaining unused commitment. As of both May 31, 2020 and November 30, 2019, there was no outstanding balance under this arrangement.
SYNNEX Japan has a credit agreement with a group of banks for a maximum commitment of JPY15.0 billion or $139.1 million. The credit agreement is comprised of a JPY7.0 billion, or $64.9 million, term loan and a JPY8.0 billion, or $74.2 million, revolving credit facility and expires in November 2021. The interest rate for the term loan and revolving credit facility is based on the Tokyo Interbank Offered Rate, plus a margin, which is based on our consolidated leverage ratio, and currently equals 0.70% per annum. The unused line fee on the revolving credit facility is currently 0.10% per annum based on our consolidated current leverage ratio. The term loan can be repaid at any time prior to the expiration date without penalty. We have guaranteed the obligations of SYNNEX Japan under this facility. As of May 31, 2020 and November 30, 2019, the balances outstanding under the term loan component of these facilities were $64.9 million and $63.9 million, respectively. As of May 31, 2020, there were no borrowings outstanding under the revolving credit facility. As of November 30, 2019, $5.9 million was outstanding under the revolving credit facility.
Indian subsidiaries of our Concentrix segment have credit facilities with a financial institution to borrow up to an aggregate amount of $22.0 million. The interest rate under these facilities is the higher of the bank's minimum lending rate or LIBOR, plus a margin of 0.9% per annum. We guarantee the obligations under these credit facilities. These credit facilities can be terminated at any time by our Indian subsidiaries or the financial institution. There were no borrowings outstanding under these credit facilities as of either May 31, 2020 or November 30, 2019.
In the United States, we have a senior secured credit agreement (as amended, the "U.S. Credit Agreement") with a group of financial institutions. The U.S. Credit Agreement includes a $600.0 million commitment for a revolving credit facility and a term loan in the original principal amount of $1.2 billion. We can request incremental commitments to increase the principal amount of the revolving line of credit or term loan by $500.0 million, plus an additional amount which is dependent upon our pro forma first lien leverage ratio, as calculated under the U.S. Credit Agreement. The U.S. Credit Agreement matures in September 2022. The outstanding principal amount of the term loan is repayable in quarterly installments of $15.0 million, with the unpaid balance due in full on the September 2022 maturity date. The term loan can be repaid at any time prior to the maturity date without penalty. Interest on borrowings under the U.S. Credit Agreement can be based on LIBOR or a base rate at our option, plus a margin. The margin for LIBOR loans ranges from 1.25% to 2.00% and the margin for base rate loans ranges from 0.25% to 1.00%, provided that LIBOR shall not be less than zero. The base rate is a variable rate which is the highest of (a) the
36
Federal Funds Rate, plus a margin of 0.50%, (b) the rate of interest announced, from time to time, by the agent, Bank of America, N.A., as its “prime rate,” and (c) the Eurodollar Rate, plus 1.00%. The unused revolving credit facility commitment fee ranges from 0.175% to 0.30% per annum. The margins above the applicable interest rates and the revolving commitment fee for revolving loans are based on our consolidated leverage ratio, as calculated under the U.S. Credit Agreement. Our obligations under the U.S. Credit Agreement are secured by substantially all of the parent company’s and its United States domestic subsidiaries’ assets on a pari passu basis with the interests of the lenders under the U.S. Term Loan Credit Agreement (defined below) pursuant to an intercreditor agreement and are guaranteed by certain of our United States domestic subsidiaries. As of both May 31, 2020 and November 30, 2019, the balance outstanding under the term loan component of the U.S. Credit Agreement was $1.1 billion. There were no borrowings outstanding under the revolving line of credit under the U.S. Credit Agreement as of May 31, 2020. As of November 30, 2019, the balance outstanding under the revolving line of credit component of the U.S. Credit Agreement was $25.8 million.
We have a secured term loan credit agreement (the “U.S. Term Loan Credit Agreement”) with a group of financial institutions, in the original principal amount of $1.8 billion. The U.S. Term Loan Credit Agreement matures in October 2023.The outstanding principal amount of the term loans is payable in quarterly installments of $22.5 million, with the unpaid balance due in full on the maturity date. The term loan can be repaid at any time prior to the maturity date without penalty. Interest on borrowings under the U.S. Term Loan Credit Agreement can be based on LIBOR or a base rate at our option, plus a margin. The margin for LIBOR loans ranges from 1.25% to 1.75% and the margin for base rate loan ranges from 0.25% to 0.75%, provided that LIBOR shall not be less than zero. The base rate is a variable rate which is the highest of (a) 0.5% plus the greater of (x) the Federal Funds Rate in effect on such day and (y) the overnight bank funding rate in effect on such day, (b) the Eurodollar Rate plus 1.0% per annum, and (c) the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the U.S. During the period in which the term loans were available to be drawn, we paid term loan commitment fees. The margins above our applicable interest rates are, and the term loan commitment fee were, based on our consolidated leverage ratio as calculated under the U.S. Term Loan Credit Agreement. Our obligations under the U.S. Term Loan Credit Agreement are secured by substantially all of the parent company and certain of its domestic subsidiaries’ assets on a pari passu basis with the interests of the lenders under the existing U.S. Credit Agreement pursuant to an intercreditor agreement, and are guaranteed by certain of our domestic subsidiaries. As of both May 31, 2020 and November 30, 2019, the balance outstanding under the U.S. Term Loan Credit Agreement was $1.7 billion.
SYNNEX Canada has an uncommitted revolving line of credit with a bank under which it can borrow up to CAD50.0 million, or $36.3 million. Borrowings under the facility are secured by eligible inventory and bear interest at a base rate plus a margin ranging from 0.50% to 2.25% depending on the base rate used. The base rate could be a Banker's Acceptance Rate, a Canadian Prime Rate, LIBOR or U.S. Base Rate. As of both May 31, 2020 and November 30, 2019, there were no borrowings outstanding under this credit facility.
Other borrowings and term debt include lines of credit with financial institutions at certain locations outside the United States, factoring of accounts receivable with recourse provisions, capital leases, a building mortgage and book overdrafts. As of May 31, 2020, commitments for these revolving credit facilities aggregated $82.4 million. Interest rates and other terms of borrowing under these lines of credit vary by country, depending on local market conditions. Borrowings under these facilities are generally guaranteed by us or secured by eligible accounts receivable. As of May 31, 2020 and November 30, 2019, the balances outstanding under these revolving credit facilities were $8.8 million and $6.0 million, respectively.
The maximum commitment amounts for local currency credit facilities have been translated into United States Dollars at May 31, 2020 exchange rates.
Off-Balance Sheet Arrangements
We have financing programs in the United States and Japan under which trade accounts receivable of certain customers may be sold to financial institutions. Available capacity under these programs is dependent upon the level of our trade accounts receivable eligible to be sold into these programs and the financial institutions’ willingness to purchase such receivables. At May 31, 2020 and November 30, 2019, we had a total of $30.3 million and $35.3 million, respectively, of trade accounts receivable sold to and held by the financial institutions under these programs.
Covenant Compliance
Our credit facilities have a number of covenants and restrictions that, among other things, require us to maintain specified financial ratios and satisfy certain financial condition tests. They also limit our ability to incur additional debt, make intercompany loans, pay dividends and make other types of distributions, make certain acquisitions, repurchase our stock, create liens, cancel debt owed to us, enter into agreements with affiliates, modify the nature of our business, enter into sale-leaseback transactions, make certain investments, enter into new real estate leases, transfer and sell assets, cancel or terminate any material contracts and merge or consolidate. As of May 31, 2020, we were in compliance with all material covenants for the above arrangements, and we do not believe we are at material risk of not meeting such covenants.
Contractual Obligations
Our contractual obligations consist of future payments due under our loans, payments for our operating lease commitments and repatriation tax under the TCJA which are already recorded on our Consolidated Balance Sheet. In addition, our contractual obligations include interest on our debt and operating lease arrangements. As of May 31, 2020, there have been no material changes from our disclosure in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019. For more information on our future minimum rental obligations under non-cancellable lease agreements as of May 31, 2020, see Note 14 to the Consolidated Financial Statements.
37
Guarantees
We are contingently liable under agreements, without expiration dates, to repurchase repossessed inventory acquired by flooring companies as a result of default on floor plan financing arrangements by our customers. There have been no repurchases through May 31, 2020 under these agreements and we are not aware of any pending customer defaults or repossession obligations. As we do not have access to information regarding the amount of inventory purchased from us still on hand with the customer at any point in time, our repurchase obligations relating to inventory cannot be reasonably estimated. As of May 31, 2020 and November 30, 2019, accounts receivable subject to flooring arrangements was $53.3 million and $69.6 million, respectively. For more information on our third-party revolving short-term financing arrangements, see Note 7 to the Consolidated Financial Statements.
Related Party Transactions
We have a business relationship with MiTAC Holdings, a publicly-traded company in Taiwan, which began in 1992 when MiTAC Holdings became our primary investor through its affiliates. As of both May 31, 2020 and November 30, 2019, MiTAC Holdings and its affiliates beneficially owned approximately 18% of our outstanding common stock. Mr. Matthew Miau, the Chairman Emeritus of our Board of Directors and a director, is the Chairman of MiTAC Holdings' and a director or officer of MiTAC Holdings' affiliates.
The shares owned by MiTAC Holdings are held by the following entities:
|
|
|
As of May 31, 2020 |
|
|
|
|
|
(in thousands) |
|
|
|
MiTAC Holdings(1) |
|
|
5,300 |
|
|
Synnex Technology International Corp.(2) |
|
|
3,860 |
|
|
Total |
|
|
9,160 |
|
|
(1) |
|
Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC Holdings. Excludes 190 thousand shares held directly by Mr. Miau, 217 thousand shares indirectly held by Mr. Miau through a charitable remainder trust, and 190 thousand shares held by his spouse. |
|
(2) |
|
Synnex Technology International Corp. (“Synnex Technology International”) is a separate entity from us and is a publicly-traded corporation in Taiwan. Shares are held via Peer Development Ltd., a wholly-owned subsidiary of Synnex Technology International. MiTAC Holdings owns a noncontrolling interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a noncontrolling interest of 14.9% in Synnex Technology International. Neither MiTAC Holdings nor Mr. Miau is affiliated with any person(s), entity, or entities that hold a majority interest in MiTAC Incorporated. |
MiTAC Holdings generally has significant influence over us regarding matters submitted to stockholders for consideration, including any merger or acquisition of ours. Among other things, this could have the effect of delaying, deterring or preventing a change of control over us.
We purchased inventories and services from MiTAC Holdings and its affiliates totaling $55.3 million and $98.6 million during the three and six months ended May 31, 2020, respectively, and totaling $42.0 million and $78.1 million, respectively, during the three and six months ended May 31, 2019. Our sales to MiTAC Holdings and its affiliates totaled $0.3 million and $0.6 million during the three and six months ended May 31, 2020, respectively, and totaled $0.2 million and $0.4 million, respectively, during the three and six months ended May 31, 2019. In addition, we paid reimbursements for rent and overhead costs for the use of facilities of MiTAC Holdings and its affiliates amounting to $34 thousand and $64 thousand during the three and six months ended May 31, 2020. There were no reimbursements during the three and six months ended May 31, 2019.
As of May 31, 2020 and November 30, 2019, our payables to MiTAC Holdings and its affiliates were $28.5 million and $23.2 million, respectively. As of May 31, 2020 and November 30, 2019, our receivables from MiTAC Holdings and its affiliates were $9.5 million and $4.4 million, respectively.
Our business relationship with MiTAC Holdings and its affiliates has been informal and is generally not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments. We negotiate pricing and other material terms on a case-by-case basis with MiTAC Holdings. We have adopted a policy requiring that material transactions with MiTAC Holdings or its related parties be approved by our Audit Committee, which is composed solely of independent directors. In addition, Mr. Miau’s compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors.
Synnex Technology International is a publicly-traded corporation in Taiwan that currently provides distribution and fulfillment services to various markets in Asia and Australia, and is also our potential competitor. MiTAC Holdings and its affiliates are not restricted from competing with us.
Recently Issued Accounting Pronouncements
For a summary of recent accounting pronouncements and the anticipated effects on our Consolidated Financial Statements, see Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our quantitative and qualitative disclosures about market risk during the six months ended May 31, 2020 from our Annual Report on Form 10-K for the fiscal year ended November 30, 2019. For a discussion of the Company's exposure to market risk, reference is made to disclosures set forth in Part II, Item 7A of our above-mentioned Annual Report on Form 10-K.
38
ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with management’s evaluation during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
39
PART II - OTHER INFORMATION
ITEM 1A. Risk Factors
You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Part I-Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019. In addition, the risk to our business from the impact of the COVID-19 pandemic and the United Kingdom’s withdrawal from the European Union are set forth below:
The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, could adversely affect our business, results of operations and financial condition.
We could be negatively impacted by the widespread outbreak of an illness or any other communicable disease, or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains. In December 2019, there was an outbreak of a new strain of coronavirus, COVID-19. On March 11, 2020, the World 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 due to “shelter-in-place” restrictions by various governments worldwide and created significant volatility and disruption of financial markets. This has adversely impacted our results of operations during the three months ended May 31, 2020. The extent of the impact of the COVID-19 pandemic on our future operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transports, the effect on our customers and clients and demand for our products and services; our ability to sell and provide our products and services, including as a result of travel restrictions and people working from home; the ability of our clients to pay for our services and solutions; and any closures of our and our customers’ and clients’ offices and facilities all of which are uncertain and cannot be predicted. An extended period of global supply chain and economic disruption could materially affect our business, our plans to separate our Concentrix segment into an independent public company, our results of operations, our access to sources of liquidity, the carrying value of our goodwill and intangible assets, our financial condition and our stock price.
The United Kingdom’s withdrawal from the European Union (“EU”) could adversely impact our business, results of operations and financial condition.
On January 31, 2020, the United Kingdom left the EU (“Brexit”). The United Kingdom and EU are now in a transitional period during which the United Kingdom will maintain access to the EU single market and to the global trade deals negotiated by the EU on behalf of its members, and remain subject to EU law, until December 31, 2020.
The uncertainty regarding the status of Brexit has negatively impacted the United Kingdom’s and the EU’s economies. This negative impact will likely continue until the United Kingdom and EU reach and implement a definitive resolution on their future trading relationship. Any additional impact of Brexit will depend on the terms of such resolution. Even if the United Kingdom maintains access to the EU single market and trade deals following the transition period, Brexit could result in further economic downturn globally. If the United Kingdom ultimately loses access to the EU single market and trade deals, significant market and economic disruption could occur, our customer experience, service quality and international operations could be negatively impacted, and the demand for our services could be depressed. Additionally, we may face new regulations regarding trade, tax, security and employees, among others, in the United Kingdom. Compliance with such regulations could be costly, negatively impacting our business, results of operations and financial condition. Brexit could also adversely affect European and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the Euro and the British Pound.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
(c) Issuer Purchases of Equity Securities:
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Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
|
||||
|
March 1, 2020 to March 31, 2020 |
|
|
35,000 |
|
|
$ |
97.29 |
|
|
|
35,000 |
|
|
|
215,423,120 |
|
|
April 1, 2020 to April 30, 2020 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
215,423,120 |
|
|
May 1, 2020 to May 31, 2020 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
215,423,120 |
|
|
|
|
|
35,000 |
|
|
$ |
97.29 |
|
|
|
35,000 |
|
|
|
|
|
In June 2017, we announced that our Board of Directors authorized a three-year $300,000,000 share repurchase program pursuant to which we could repurchase our outstanding common stock from time to time in the open market or through privately negotiated transactions. As of May 31, 2020, and upon expiration of the program in June 2020, we had repurchased 874,517 shares of our common stock at an average price of $96.71 per share for an aggregate purchase price of $84,576,880 since inception of the stock repurchase program.
40
In June 2020, we announced that our Board of Directors authorized a three-year $400,000,000 share repurchase program, effective July 1, 2020, pursuant to which we may repurchase our outstanding common stock from time to time in the open market or through privately negotiated transactions.
For the majority of restricted stock awards and units granted by us, the number of shares issued on the date the restricted stock awards and units vest is net of shares withheld to meet applicable tax withholding requirements. Although these withheld shares are not issued or considered common stock repurchases under our stock repurchase program and therefore are not included in the preceding table, they are treated as common stock repurchases in our financial statements as they reduce the number of shares that would have been issued upon vesting.
The covenants of our borrowings arrangements limit our ability to pay dividends, make other types of distributions and repurchase our outstanding common stock (see Note 8 to the Consolidated Financial Statements). We were in compliance with all material covenants as of May 31, 2020.
41
ITEM 6. Exhibits
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Exhibit Number |
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Description of Document |
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10.1 |
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10.2 |
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31.1 |
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31.2 |
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32.1* |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 |
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Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: July 9, 2020
SYNNEX CORPORATION
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By: |
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/s/ Dennis Polk |
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Dennis Polk |
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President and Chief Executive Officer |
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(Duly authorized officer and principal executive officer) |
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By: |
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/s/ Marshall W. Witt |
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Marshall W. Witt |
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Chief Financial Officer |
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(Duly authorized officer and principal financial officer) |
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