Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2019
OR
☐
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: 001-31892
SYNNEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
94-2703333
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
44201 Nobel Drive
Fremont, California
94538
(Address of principal executive offices)
(Zip Code)
(510) 656-3333
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
SNX
The New York Stock Exchange
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. Yes ☒ No ☐
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). Yes ☒ No ☐
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.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
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 ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding as of June 26, 2019
Common Stock, $0.001 par value
51,075,398
INDEX
Page
PART I
FINANCIAL INFORMATION
3
Item 1.
Financial Statements
Consolidated Balance Sheets (unaudited) as of May 31, 2019 and November 30, 2018
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended May 31, 2019 and 2018
4
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended May 31, 2019 and 2018
5
Consolidated Statements of Stockholders’ Equity (unaudited) for the Three and Six Months Ended May 31, 2019 and 2018
6
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended May 31, 2019 and 2018
7
Notes to the Consolidated Financial Statements (unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
39
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
40
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
41
Signatures
42
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(currency and share amounts in thousands, except par value)
(unaudited)
May 31, 2019
November 30, 2018
(As adjusted)
ASSETS
Current assets:
Cash and cash equivalents
$
271,491
454,694
Accounts receivable, net
3,457,110
3,640,496
Receivables from vendors, net
350,330
351,744
Inventories
2,608,453
2,392,559
Other current assets
327,730
323,323
Total current assets
7,015,116
7,162,817
Property and equipment, net
564,290
571,326
Goodwill
2,192,076
2,203,316
Intangible assets, net
1,266,671
1,377,305
Deferred tax assets
82,353
76,508
Other assets
155,452
152,227
Total assets
11,275,958
11,543,498
LIABILITIES AND EQUITY
Current liabilities:
Borrowings, current
728,962
833,216
Accounts payable
2,764,919
3,048,102
Accrued compensation and benefits
325,165
358,352
Other accrued liabilities
612,159
672,635
Income taxes payable
30,012
41,322
Total current liabilities
4,461,217
4,953,627
Long-term borrowings
2,792,649
2,622,782
Other long-term liabilities
305,019
325,119
Deferred tax liabilities
180,020
206,916
Total liabilities
7,738,905
8,108,444
Commitments and contingencies (Note 16-Commitments and Contingencies)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued or outstanding
—
Common stock, $0.001 par value, 100,000 shares authorized, 52,929 and 52,861 shares
issued as of May 31, 2019 and November 30, 2018, respectively
53
Additional paid-in capital
1,527,383
1,512,201
Treasury stock, 2,336 and 2,167 shares as of May 31, 2019 and November 30, 2018,
respectively
(165,601
)
(149,533
Accumulated other comprehensive income (loss)
(188,561
(126,288
Retained earnings
2,363,779
2,198,621
Total stockholders’ equity
3,537,053
3,435,054
Total liabilities and equity
(Amounts may not add due to rounding)
The accompanying Notes are an integral part of these Consolidated Financial Statements (unaudited).
CONSOLIDATED STATEMENTS OF OPERATIONS
(currency and share amounts in thousands, except per share amounts)
Three Months Ended
Six Months Ended
May 31, 2018
Revenue:
Products
4,567,072
4,422,093
8,647,757
8,411,836
Services
1,155,816
486,188
2,324,585
989,795
Total revenue
5,722,889
4,908,281
10,972,341
9,401,631
Cost of revenue:
(4,297,096
(4,174,771
(8,130,213
(7,940,283
(727,324
(304,352
(1,464,739
(618,675
Gross profit
698,468
429,158
1,377,389
842,673
Selling, general and administrative expenses
(523,813
(305,156
(1,040,771
(607,175
Operating income
174,655
124,002
336,618
235,498
Interest expense and finance charges, net
(43,144
(16,375
(84,750
(33,826
Other income (expense), net
21,546
(1,446
20,851
(2,624
Income before income taxes
153,057
106,181
272,719
199,048
Provision for income taxes
(38,584
(12,439
(71,140
(81,208
Net income
114,473
93,742
201,579
117,840
Earnings per common share:
Basic
2.24
2.35
3.94
2.95
Diluted
2.23
2.34
3.92
2.93
Weighted-average common shares outstanding:
50,675
39,505
50,691
39,599
50,939
39,742
50,933
39,859
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(currency in thousands)
Other comprehensive income (loss):
Change in unrealized gains of defined benefit plans, net of taxes of $0 for the three and six months ended May 31, 2019 and 2018
307
Unrealized (losses) gains on cash flow hedges during the period, net of taxes of $10,288 and $15,884 for the three and six months ended May 31, 2019, respectively, and $(11) and $(1,925) for the three and six months ended May 31, 2018, respectively
(30,654
30
(47,670
5,416
Reclassification of net gains on cash flow hedges to net income, net of taxes of $1,231 and $2,120 for the three and six months ended May 31, 2019, respectively, and $778 and $715 for the three and six months ended May 31, 2018, respectively
(3,466
(1,917
(6,016
(1,740
Total change in unrealized gains (losses) on cash flow hedges, net of taxes
(34,119
(1,887
(53,686
3,676
Foreign currency translation adjustments, net of taxes of $174 and ($24) for the three and six months ended May 31, 2019, respectively, and $109 and $86 for the three and six months ended May 31, 2018, respectively
(27,042
(42,677
(6,939
(32,022
Other comprehensive income
(61,161
(44,564
(60,318
(28,346
Comprehensive income
53,312
49,178
141,261
89,494
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(currency in thousands, except per share amounts)
Total Stockholders' equity, beginning balance
3,510,442
2,318,705
2,287,297
Common stock and additional paid-in capital:
Beginning balance
1,519,576
474,694
1,512,254
467,989
Share-based compensation
6,478
5,624
13,085
10,725
Common stock issued for employee benefit plans
1,383
1,284
2,205
2,888
Stock issuance costs (related to the Convergys acquisition in fiscal year 2018)
(107
Ending balance
1,527,436
481,602
Treasury stock:
(150,242
(78,775
(77,133
Repurchases of common stock for tax withholdings on equity awards
(176
(195
(885
(1,683
Repurchases of common stock
(15,184
(45,831
(45,985
(124,801
Retained earnings:
2,268,508
1,968,487
1,958,360
Cash dividends declared
(19,202
(13,975
(38,376
(27,946
Cumulative effect of changes in accounting principles
1,955
2,048,255
Accumulated other comprehensive income (loss):
(127,399
(45,701
(61,919
Other comprehensive income (loss)
(1,955
(90,265
Total stockholders' equity, ending balance
2,314,791
Cash dividends declared per share
0.375
0.350
The accompanying Notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization
189,839
97,506
Provision for doubtful accounts
9,813
3,852
Deferred income taxes
(14,222
(27,870
Contingent consideration
(19,034
Unrealized foreign exchange losses
3,552
1,665
Other
7,314
(3,639
Changes in operating assets and liabilities, net of acquisition of businesses:
176,358
148,789
1,525
(45,675
(214,317
39,902
(290,303
(342,083
Other operating assets and liabilities
(112,570
61,698
Net cash (used in) provided by operating activities
(47,380
62,710
Cash flows from investing activities:
Purchases of held-to-maturity investments
(32
Proceeds from maturity of held-to-maturity investments
4,659
Purchases of property and equipment
(60,412
(50,020
Acquisition of businesses, net of refunds
(6,235
(5,922
726
784
Net cash used in investing activities
(65,921
(50,531
Cash flows from financing activities:
Proceeds from borrowings
3,877,963
4,924,632
Repayments of borrowings
(3,895,664
(5,052,890
Dividends paid
Decrease in book overdraft
(703
(5,203
(14,256
Proceeds from issuance of common stock
2,206
Net cash used in financing activities
(69,820
(206,187
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(2,330
(2,176
Net decrease in cash, cash equivalents and restricted cash
(185,450
(196,184
Cash, cash equivalents and restricted cash at beginning of period
462,033
556,742
Cash, cash equivalents and restricted cash at end of period
276,583
360,558
Supplemental disclosure of non-cash investing activities:
Accrued costs for property and equipment purchases
4,835
1,695
Supplemental disclosure of non-cash financing activities:
Unsettled common stock repurchases
928
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended May 31, 2019 and 2018
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 two reportable segments: Technology Solutions and Concentrix. The Technology Solutions segment distributes a broad range of information technology (“IT”) systems and products and also provides systems design and integration solutions. The Concentrix segment offers a portfolio of technology-enabled strategic solutions and end-to-end global business outsourcing services focused on customer engagement, process optimization, technology innovation, front and back-office automation and business transformation to clients in ten industry verticals.
The accompanying interim unaudited Consolidated Financial Statements as of May 31, 2019 and for the three and six months ended May 31, 2019 and 2018 have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The amounts as of November 30, 2018 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, 2018.
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, 2018. Accounting pronouncements adopted during the six months ended May 31, 2019 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 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, 2019, the Company had 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, 2019, such losses have been within management’s expectations.
One customer accounted for 18% of the Company’s total revenue during both the three and six months ended May 31, 2019. The same customer accounted for 18% (as adjusted) of the Company's total revenue during both the three and six months ended May 31, 2018. Products purchased from the Company’s largest OEM supplier, HP Inc., accounted for approximately 12% and 11% of total revenue during the three and six months ended May 31, 2019 and approximately 13% (as adjusted) of total revenue during both the three and six months ended May 31, 2018.
As of May 31, 2019 and November 30, 2018, one customer comprised 15% and 11% (as adjusted), respectively, of the total accounts receivable balance.
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 systems design and integration business and completed systems. Work-in-process inventories are not material to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
Reclassifications
Certain reclassifications have been made to prior period amounts in the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and the notes thereto to conform to current period presentation. These reclassifications had no effect on total current assets, total assets, total current liabilities, total liabilities or cash flows from operating, investing or financing activities as previously reported. In addition, refer below for impact of reclassifications made due to adoption of new accounting pronouncements.
Recently adopted accounting pronouncements
In June 2018, the Financial Accounting Standard Board (the “FASB”) issued new guidance which simplifies the accounting for share-based compensation issued to non-employees by making the guidance substantially the same as the accounting for employee share-based compensation. The Company adopted the guidance during the first quarter ended February 28, 2019. The guidance did not have a material impact on the Company’s consolidated financial results for the three and six months ended May 31, 2019, nor is it likely to have a material impact for the remainder of the fiscal year.
In January 2016, the FASB issued new guidance which amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. With respect to the Company’s consolidated financial statements, the most significant impact relates to the accounting for equity investments (other than those that are consolidated or accounted under the equity method) which will be measured at fair value through earnings. The Company adopted the guidance as of December 1, 2018, by means of a cumulative-effect adjustment to the balance sheet, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. This resulted in a reclassification of net unrealized gains of $1,955 from accumulated other comprehensive income (loss) (“AOCI”) to opening retained earnings. The Company has elected to use the measurement alternative for non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical or similar investments of the same issuer, less impairment. The adoption of this guidance increases the volatility of the other income (expense), net, as a result of the remeasurement of the equity securities; however, the adoption did not have a material impact on the Company’s consolidated financial results for the three and six months ended May 31, 2019, nor is it likely to have a material impact for the remainder of the fiscal year.
In May 2014, the FASB issued a comprehensive new revenue recognition standard for contracts with customers with amendments in 2015 and 2016, codified as Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). The Company adopted the guidance effective December 1, 2018 on a full retrospective basis to ensure a consistent basis of presentation within the Company’s consolidated financial statements for all periods reported. In addition, the Company elected the one year practical expedient for contract costs.
The primary impact of adoption in the Technology Solutions segment relates to the application of gross versus net indicators. In addition, the Company is recognizing revenue earlier on certain arrangements with acceptance provisions due to the determination of when transfer of control occurs. Additionally, the Company reclassified certain amounts on the consolidated balance sheet related to sales returns and allowances from a reduction of accounts receivable to other accrued liabilities as these amounts represent refund liabilities to customers. Similarly, the Company reclassified certain amounts for the Company's right to recover assets from customers related to sales returns from inventories to other current assets. The Company also presented receivables from customers separately from other receivables. The impact of adoption is not material to the Concentrix segment and relates primarily to the capitalization of certain sales commissions that are assessed to be incremental for obtaining new contracts. Such costs are amortized over the period of expected benefit rather than being expensed as incurred as was the Company’s prior practice. Prior periods were not adjusted as the amounts were not material to the Company’s consolidated financial statements.
The effects of adoption on the Company’s Consolidated Balance Sheet as of November 30, 2018, the Company’s Consolidated Statements of Operations for the three and six months ended May 31, 2018, and the Company’s Consolidated Statement of Cash Flows for the six months ended May 31, 2018 were as follows:
As of November 30, 2018
Consolidated Balance Sheet Caption
As reported
Adjustments for
ASC Topic 606
As adjusted
Assets
Accounts receivable, net(1)
3,855,431
(215,000
3,640,431
2,518,319
(125,760
Other current assets(1)
261,536
52,080
313,616
Liabilities and Stockholders' Equity
613,449
59,186
206,024
892
2,195,635
2,986
(1)
Amounts “As adjusted” may not agree to the Consolidated Balance Sheet due to other reclassifications to conform to current period presentation.
9
Three Months Ended May 31, 2018
Six Months Ended May 31, 2018
Consolidated Statement of Operations
4,486,395
(64,302
8,535,158
(123,322
4,972,583
9,524,953
(4,239,137
64,366
(8,063,233
122,950
429,094
64
843,045
(372
123,938
235,870
106,117
199,420
(12,424
(15
(81,293
85
93,693
49
118,127
(287
2.96
(0.01
2.94
Consolidated Statement of Cash Flows Caption
Adjustments to reconcile net income to cash used in operating activities:
(27,785
(85
Accounts receivables, net
111,551
37,238
30,537
9,365
62,254
(556
Net cash provided by operating activities
Refer to Note 3 for additional information, including changes in accounting policies relating to revenue recognition.
Recently issued accounting pronouncements
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.
10
In February 2018, 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 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.
In February 2016, the FASB issued a new standard which revises various aspects of accounting for leases. The most significant impact to the Company’s Consolidated Financial Statements relates to the recognition by a lessee of a right-of-use asset and a lease liability for virtually all of its leases other than short-term leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will primarily depend 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. This accounting standard will be applicable to the Company at the beginning of its first quarter of fiscal year 2020 using a modified retrospective approach and early adoption is permitted. The Company expects that most of its operating lease commitments will be subject to the new standard and be recognized as operating lease liabilities and right-of-use assets upon adoption. The Company is currently evaluating the impact of the adoption of this new standard on its Consolidated Financial Statements.
NOTE 3—REVENUE FROM CONTRACTS WITH CUSTOMERS:
Revenue Recognition
The Company generates revenue primarily from (i) the sale of various IT products through its Technology Solutions business unit and (ii) the provision of business outsourcing services focused on customer engagement through its Concentrix business unit. The Company accounts for a contract with a customer when it has written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection. The Company generally invoices a customer upon shipment, after performance of services or in accordance with specific contractual provisions. Payments are due as per contract terms and do not contain a significant financing component. Revenue is presented net of taxes collected from customers and remitted to government authorities. All revenue is generated from contracts with customers.
Products revenue represents revenue from the Company’s Technology Solutions segment and services revenue represents revenue from the Company’s Concentrix segment.
Technology Solutions
The Company recognizes revenues from the sale of IT hardware and software as control is transferred to customers, which is at the point in time when the product is shipped or delivered. Products sold by the Company are delivered via shipment from the Company’s facilities, drop-shipment directly from the vendor, or by electronic delivery of keys for software products. Binding purchase orders from customers together with agreement to the Company's terms and conditions of sale by way of an executed agreement or other signed documents are considered to be the contract with a customer. In situations where arrangements include customer acceptance provisions, revenue is recognized when the Company can objectively verify the products comply with specifications underlying acceptance and the customer has control of the goods.
Provisions for sales returns and allowances are estimated based on historical data and are recorded concurrently with the recognition of revenue. A liability is recorded at the time of sale for estimated product returns based upon historical experience and an asset is recognized for the amount expected to be recorded in inventory upon product return. These provisions are reviewed and adjusted periodically by the Company. Revenue is reduced for early payment discounts and volume incentive rebates offered to customers, which are considered variable consideration, at the time of sale based on an evaluation of the contract terms and historical experience. The Company recognizes revenue on a net basis on certain contracts, where the Company’s performance obligation is to arrange for the products or services to be provided by another party or the rendering of logistics services for the delivery of inventory for which the Company does not assume the risks and rewards of ownership, by recognizing the margins earned in revenue with no associated cost of revenue. Such arrangements include supplier service contracts, post-contract software support services and extended warranty contracts.
11
The Company considers shipping and handling activities as costs to fulfill the sale of products. Shipping revenue is included in net sales when control of the product is transferred to the customer, and the related shipping and handling costs are included in cost of products sold.
Concentrix
The Company recognizes revenue from services contracts over time as the promised services are delivered to customers for an amount that reflects the consideration to which the Company is entitled in exchange for those services. Service contracts may be based on a fixed price or on a fixed unit-price per transaction or other objective measure of output. The Company determines whether the services performed during the initial phases of an arrangement, such as setup activities, are distinct. In most cases, the arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company records deferred revenue attributable to certain process transition, setup activities where such activities do not represent separate performance obligations. Billings relating to such transition activities are classified under contract liabilities and subsequently recognized ratably over the period in which the related services are performed. The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage. As a result, revenue is generally recognized over the period the services are provided on a usage basis. This results in revenue recognition that corresponds with the benefit to the customer of the services transferred to date relative to the remaining services promised. Revenue on fixed price contracts is recognized on a straight-line basis over the term of the contract as services are provided. Revenue on unit-price transactions is recognized using an objective measure of output including staffing hours or the number of transactions processed by service agents. Customer contract terms can range from less than one year to more than five years.
Certain customer contracts include incentive payments from the customer upon achieving certain agreed-upon service levels and performance metrics or service level agreements that could result in credits or refunds to the customer. Revenue relating to such arrangements is accounted for as variable consideration when the likely amount of revenue to be recognized can be estimated to the extent that it is probable that a significant reversal of any incremental revenue will not occur.
Deferred revenue contract liabilities and deferred costs to obtain or fulfill a contract are not material.
Refer to Note 12 – Segment Information for disaggregated revenue disclosure.
NOTE 4—ACQUISITION:
Fiscal Year 2018 acquisition
On October 5, 2018, the Company acquired 100% of Convergys Corporation ("Convergys"), an Ohio Corporation, a customer experience outsourcing company, for a purchase price of $2,269,527, pursuant to a merger agreement dated June 28, 2018. The acquisition is related to the Company's Concentrix segment and the Company believes the acquisition adds scale, diversifies the revenue base, expands the Company's service delivery footprint and strengthens the Company’s leadership position as a top global provider of customer engagement services.
During the six months ended May 31, 2019, the Company recorded measurement period adjustments of $10,154 to goodwill. These comprised an increase of $13,834 in tax liabilities and an increase of $23,988 to the fair value of other acquired net tangible assets.
To date acquisition-related and integration expenses were $80,721, of which $15,714 and $43,231 were incurred during the three and six months ended May 31, 2019. Substantially all acquisition-related and integration expenses were recorded in "Selling, general and administrative expenses." The charges during the three and six months ended May 31, 2019 comprised of legal and professional services, severance and lease termination payments, accelerated depreciation and other costs incurred to complete the acquisition and retention payments to integrate the business.
NOTE 5—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.
12
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, 2019 and 2018, and the measurement-date fair value of those awards:
Shares
awarded
Fair value
of grants
Stock options
38
1,050
17
500
Restricted stock awards
16
1,654
20
1,896
26
2,609
22
2,106
Restricted stock units
51
4,765
2,554
58
2,946
94
7,874
82
5,710
The Company recorded share-based compensation expense in the Consolidated Statements of Operations for the three and six months ended May 31, 2019 and 2018 as follows:
Total share-based compensation (recorded in selling, general and
administrative expenses)
6,505
5,645
13,140
10,780
Tax benefit recorded in the provision for income taxes
(1,684
(1,565
(3,493
(3,112
Net effect on net income
4,821
4,080
9,647
7,668
NOTE 6—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
Restricted cash included in other current assets
4,819
7,126
Restricted cash included in other assets
273
213
Cash, cash equivalents and restricted cash
Restricted cash balances relate primarily to temporary restrictions caused by the timing of lockbox collections under borrowing arrangements, the issuance of bank guarantees and a government grant.
Accounts receivable, net:
Accounts receivable
3,469,435
3,648,975
Less: Allowance for doubtful accounts
(12,325
(8,479
Receivables from vendors, net:
Receivables from vendors
354,754
357,930
(4,424
(6,186
13
Property and equipment, net:
Land
40,737
31,102
Equipment, computers and software
479,448
423,467
Furniture and fixtures
110,116
104,474
Buildings, building improvements and leasehold improvements
405,893
368,107
Construction-in-progress
3,388
29,021
Total property and equipment, gross
1,039,582
956,170
Less: Accumulated depreciation
(475,292
(384,844
Depreciation expense was $42,601 and $84,118 for the three and six months ended May 31, 2019 and $22,596 and $44,520, respectively, for the three and six months ended May 31, 2018.
Goodwill:
Technology
Solutions
Total
Balance as of November 30, 2018
427,775
1,775,541
Additions/adjustments from acquisitions (See Note 4)
(10,154
Foreign exchange translation
(1,880
794
(1,086
Balance as of May 31, 2019
425,895
1,766,181
Intangible assets, net:
As of May 31, 2019
Gross
Amounts
Accumulated
Amortization
Net
Customer relationships and lists
1,545,582
(427,033
1,118,549
1,552,322
(333,266
1,219,056
Vendor lists
178,804
(60,176
118,628
179,019
(53,318
125,701
14,748
(8,068
6,680
14,767
(7,064
7,704
Other intangible assets
35,475
(12,661
22,814
35,559
(10,715
24,844
1,774,609
(507,938
1,781,667
(404,363
Amortization expense was $52,864 and $105,721, respectively, for the three and six months ended May 31, 2019, and $26,276 and $52,986, respectively, for the three and six months ended May 31, 2018.
Estimated future amortization expense of the Company's intangible assets is as follows:
Fiscal years ending November 30,
2019 (remaining six months)
100,309
2020
188,570
2021
173,532
2022
150,213
2023
131,762
Thereafter
522,286
14
The components of accumulated other comprehensive income (loss) (“AOCI”), net of taxes, are as follows:
Unrecognized
gains (losses) on
defined benefit
plan, net
of taxes
Unrealized gains
(losses)
on cash flow
hedges, net of
taxes
Foreign currency
translation
adjustment and other,
net of taxes
(3,263
16,920
(139,945
Opening balance adjustment for the adoption of new
accounting guidance
Other comprehensive income (loss) before reclassification
(54,302
Reclassification of (gains) losses from Other comprehensive
income (loss)
(2,956
(36,766
(148,839
Refer to Note 7 for location of gains and losses reclassified from other comprehensive income (loss) to the Consolidated Statement 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 securities. Substantially, all of the balance at both November 30, 2018 and May 31, 2019 represents foreign currency translation adjustment.
NOTE 7—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 on 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 March 2021. The Company also uses interest rate derivative contracts to economically convert a portion of its variable-rate debt to fixed-rate debt. The swaps have maturities at various dates through October 31, 2023. Gains and losses on cash flow hedges are recorded in AOCI until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of Revenue from Services in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of costs are recognized as a component of "Cost of revenue" for "services" and/or "Selling, general and administrative expenses" in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest expense are recognized in "Interest expense and Finance charges, net" in the same period as the related expense is recognized. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into earnings in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are recorded in earnings unless they are re-designated as hedges of other transactions.
15
Non-Designated Derivatives
The Company uses short-term forward contracts to offset the foreign exchange risk on 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 in six months or less. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.
Fair Values of Derivative Instruments in the Consolidated Balance Sheets
The fair values of the Company’s derivative instruments are disclosed in Note 8 — Fair Value Measurements and summarized in the table below:
Value as of
Balance Sheet Line Item
Derivative instruments not designated as hedging instruments:
Foreign exchange forward contracts (notional value)
929,689
1,008,895
7,287
12,651
1,685
1,856
Interest rate swap (notional value)
100,000
1,342
3,519
Derivative instruments designated as cash flow hedges:
392,356
624,014
Other current assets and other assets
5,269
3,834
Other accrued liabilities and other long-term liabilities
3,649
12,306
Interest rate swaps (notional value)
1,900,000
5,869
70,979
9,004
Volume of Activity
The notional amounts represent the gross amounts of foreign currency, including, principally, the Philippine Peso, the Indian Rupee, the Euro, the British Pound, the Brazilian Real, the Canadian Dollar and the Chinese Yuan that will be bought or sold at maturity. 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.
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
2019
2018
Revenue for services
Cost of revenue for services
Derivative Instruments designated as cash flow hedges:
Gains (losses) recognized in OCI:
Foreign exchange contracts
277
6,712
Interest rate swaps
(41,219
(70,265
7,341
(40,942
(63,554
Gains (losses) reclassified from AOCI into income:
Loss reclassified from AOCI into income
24
Gain (loss) reclassified from AOCI into income
Cost of revenue for
services
4,128
7,448
Selling, general and
administrative expenses
1,692
3,153
Gain (loss) reclassified from AOCI into
income
Interest expense and
finance charges, net
(1,147
2,695
(2,480
2,455
4,697
8,137
Derivative Instruments not designated as hedging instruments:
Gains (losses) recognized from foreign exchange forward contracts, net(1)
Other income
(expense), net
7,291
8,709
9,943
5,675
Loss recognized from interest rate swaps, net
(1,188
(2,177
6,103
7,766
The gains and losses largely offset the currency gains and losses that resulted from changes in the assets and liabilities denominated in nonfunctional currencies.
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 $985.
Offsetting of Derivatives
In the Consolidated Balance Sheets, the Company does not offset derivative assets against liabilities in master netting arrangements. If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $4,057 each as of May 31, 2019 and $6,850 each as of November 30, 2018.
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 8—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:
Fair value measurement category
Level 1
Level 2
Level 3
Assets:
Cash equivalents
43,515
108,785
Marketable equity securities
2,536
5,492
Foreign government bond
1,145
1,104
Forward foreign currency exchange contracts
12,556
16,485
9,388
Liabilities:
Contingent consideration payable
13,966
33,098
5,334
14,162
Convertible debentures conversion option
32
77,238
The Company’s cash equivalents consist primarily of highly liquid investments in money market funds and term deposits with maturity periods of three months or less. The carrying values of cash equivalents approximate fair value since they are near their maturity. Investments in marketable equity securities, primarily comprising investments in other companies’ equity securities as per local customary business practice, are recorded at fair value based on quoted market prices. The fair values of forward exchange contracts are measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. Fair values of long-term foreign currency exchange contracts are measured using valuations based upon quoted prices for similar assets and liabilities in active markets and are valued by reference to similar financial instruments, adjusted for terms specific to the contracts. Fair values of interest rate swaps are measured using standard valuation models using inputs that are readily available in public markets, or can be derived from observable market transactions, including London Interbank Offered Rate (“LIBOR”) spot and forward rates. The effect of nonperformance risk on the fair value of derivative instruments was not material as of May 31, 2019 and November 30, 2018.
Contingent consideration payable represents future potential earn-out payments related to the Westcon-Comstor Americas acquisition in fiscal year 2017. The fair value of the contingent consideration liability was based on a probabilistic analysis using an option pricing model as implemented via a Monte Carlo simulation. During the six months ended May 31, 2019, the fair value of the contingent consideration liability was remeasured and the resulting decrease of $19,034 recorded as a benefit to "other income (expense), net" in the Consolidated Statements of Operations. The change in the fair value was due to final settlement of the gross profit related to the achievement of the established earn-out target with the sellers. The settled amount was paid subsequent to May 31, 2019.
The fair value of the Convertible Debentures conversion option was based on a probabilistic analysis using the Monte Carlo simulation approach. The model considered simulated movements in the Company's stock price until the conversion date using estimated stock volatility of 35%, a risk free rate of 2.7%, discount and dividend yields of 4.6% and $0.35 per share each quarter, respectively, over the estimated period until the Company would be entitled to redeem the debentures in September 2019. During the six months ended May 31, 2019, the Company settled substantially all the outstanding convertible debentures and recorded a loss of $1,559 upon settlement in other income (expense), net.
18
The carrying values of term deposits with maturities less than one year, accounts receivable, accounts payable and short-term debt approximate fair value due to their short maturities and interest rates which are variable in nature. Long-term non-marketable equity securities consist primarily of investments in equity securities of private entities. The fair value of non-marketable equity investments is based on an internal valuation of the investees based on the best available information at the measurement date. 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, 2019, there were no transfers between the fair value measurement category levels.
NOTE 9—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, 2019 and November 30, 2018, accounts receivable sold to and held by the financial institution under this program were $39,765 and $33,677, respectively. Discount fees related to the sale of trade accounts receivable under this facility are included in “Interest expense and finance charges, net” in the Consolidated Statements of Operations. During the three and six months ended May 31, 2019 and 2018, discount fees were not material to the Company's results of operations.
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, 2019 and November 30, 2018 were $3,757, and $2,848, respectively.
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 30 days from the date of sale. The Company is contingently liable to repurchase inventory sold under flooring agreements in the event of any default by its customers under the agreement and such inventory being repossessed by the Flooring Companies. Please see Note 16 for further information.
The following table summarizes the net sales financed through flooring agreements and the flooring fees incurred:
Net sales financed
492,552
355,720
902,741
720,204
Flooring fees(1)
3,176
2,287
5,826
4,205
Flooring fees are included within “Interest expense and finance charges, net.”
As of May 31, 2019 and November 30, 2018, accounts receivable subject to flooring agreements were $103,248 and $84,668, respectively.
19
NOTE 10—BORROWINGS:
Borrowings consist of the following:
SYNNEX United States accounts receivable securitization arrangement
544,800
615,000
SYNNEX Japan credit facility - revolving line of credit component
24,485
20,268
SYNNEX United States credit agreement - current portion
of term loan component
60,000
SYNNEX United States term loan credit agreement - current portion
90,000
58,125
Convertible debentures
69,762
Other borrowings
9,653
10,061
SYNNEX Japan credit facility - term loan component
64,677
61,685
SYNNEX United States credit agreement - term loan component
1,050,000
1,080,000
SYNNEX United States term loan credit agreement
1,687,500
1,491,875
Other term debt
340
541
Long-term borrowings, before unamortized debt discount
and issuance costs
2,802,517
2,634,101
Less: unamortized debt discount and issuance costs
(9,868
(11,319
In the United States, the Company has an accounts receivable securitization program to provide additional capital for its operations (the “U.S. AR Arrangement”). Under the terms of the U.S. AR Arrangement, which expires in fiscal year 2020, the Company’s subsidiary that is the borrower under this facility can borrow up to a maximum of $850,000 based upon eligible trade accounts receivable. In addition, the U.S. AR Arrangement includes an accordion feature to allow requests for an increase in the lenders' commitment by an additional $150,000. The effective borrowing cost under the U.S. AR Arrangement is a blended rate based upon the composition of the lenders, that includes prevailing dealer commercial paper rates and a rate based upon LIBOR, provided that LIBOR shall 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, is payable on the commitment of the lenders.
Under the terms of the U.S. AR Arrangement, the Company and two of its U.S. subsidiaries sell, on a revolving basis, their eligible receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in, and to 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. Under the terms of this program, SYNNEX Canada Limited (“SYNNEX Canada”) can borrow up to CAD100,000, or $74,003, in exchange for the transfer of eligible trade accounts receivable, on an ongoing revolving basis through May 10, 2020. The program includes an accordion feature that allows SYNNEX Canada to request an increase in the bank's commitment by an additional CAD50,000, or $37,001. Any amounts received under this arrangement are recorded as debt on the Company's Consolidated Balance Sheets and are secured by pledging all of the rights, title and interest in the receivables to the bank. The effective borrowing cost is based on the weighted average of the Canadian Dollar Offered Rate plus a margin of 2.00% per annum and the prevailing lender commercial paper rates. In addition, SYNNEX Canada is obligated to pay a program fee of 0.75% 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 CAD60,000, or $44,402, and when the unused portion exceeds CAD60,000, or $44,402, a fee of 0.40% on the first CAD25,000, or $18,501, of the unused portion and a fee of 0.55% per annum on the remaining unused commitment. As of both May 31, 2019 and November 30, 2018, there was no outstanding balance under this arrangement.
SYNNEX Japan credit facility
SYNNEX Japan has a credit agreement with a group of banks for a maximum commitment of JPY15,000,000 or $138,594. The credit agreement is comprised of a JPY7,000,000, or $64,677, term loan and a JPY8,000,000, or $73,917, 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 the Company’s 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 the Company's consolidated current leverage ratio. The term loan can be repaid at any time prior to the expiration date without penalty. The Company has guaranteed the obligations of SYNNEX Japan under this facility.
Latin America revolving line of credit facility
One of the Company’s subsidiaries in Mexico maintains a United States Dollar denominated $40,000 revolving credit facility with a financial institution (the “LATAM facility”). The revolving credit facility matures in one year or less. The Company guarantees the obligations under this credit facility. The interest rate on this facility ranges from 10.79% to 10.85%.
There were no borrowings outstanding under the LATAM facility as of either May 31, 2019 or November 30, 2018.
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 $22,000. 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. The Company guarantees the obligations under these credit facilities. These credit facilities can be terminated at any time by the Company’s Indian subsidiaries or the financial institution.
There were no borrowings outstanding under these credit facilities as of either May 31, 2019 or November 30, 2018.
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 $600,000 commitment for a revolving credit facility and a term loan in the original principal amount of $1,200,000. The Company may request incremental commitments to increase the principal amount of the revolving line of credit or term loan by $500,000, plus an additional amount which is dependent upon the Company's 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 $15,000, 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 expiration date without penalty. Interest on borrowings under the U.S. Credit Agreement can be based on LIBOR or a base rate at the Company's 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 Federal Funds Rate, plus a margin of 0.5%, (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 1.0%. 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 the Company’s consolidated leverage ratio, as calculated under the U.S. Credit Agreement. The Company’s 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 the Company's United States domestic subsidiaries.
There were no borrowings outstanding under the revolving line of credit under the U.S. Credit Agreement as of either May 31, 2019 or November 30, 2018.
In order to fund the Convergys acquisition (See Note 4), the related refinancing or settlement of Convergys' debt and payment of related fees and expenses, the Company entered into a secured term loan credit agreement on August 9, 2018 (the “U.S. Term Loan Credit Agreement”) with a group of financial institutions, which provided for the extension of one or more term loans in an aggregate principal amount not to exceed $1,800,000. The U.S. Term Loan Credit Agreement matures in October 2023. Until November 30, 2018, the Company had drawn $1,550,000 of term loans. During the six months ended May 31, 2019, the Company borrowed the remaining available amount of $250,000 under the facility to settle part of Convergys' outstanding Convertible Debentures. The outstanding principal amount of the term loans is payable in quarterly installments of $22,500 with the unpaid balance due in full on the maturity date. The term loan can be repaid at any time prior to the expiration date without penalty. Interest on borrowings under the U.S. Term Loan Credit Agreement can be based on LIBOR or a base rate at the Company’s option, plus a margin. The margin for LIBOR loans ranges from 1.25% to 1.75% and the margin for base rate loans 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,
21
(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, the Company paid term loan commitment fees. The margins above the Company's applicable interest rates are, and the term loan commitment fee were, based on the Company's consolidated leverage ratio as calculated under the U.S. Term Loan Credit Agreement. The Company's obligations under the U.S. Term Loan Credit Agreement are secured by substantially all of the Company’s 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 its domestic subsidiaries.
Convertible Debentures
In connection with the Convergys acquisition, Convergys was merged into Concentrix CVG and Concentrix CVG became the obligor under Convergys' $124,963 aggregate principal amount of 5.75% Junior Subordinated Convertible Debentures due September 2029. The Company determined that the embedded conversion feature included in the Convertible Debentures required liability treatment because a portion was convertible into a fixed dollar amount based on a variable conversion rate, and was recorded at fair value in other accrued liabilities in the Consolidated Balance Sheets. Subsequent to the acquisition, the Company has settled substantially the entire principal amount and conversion obligation in excess of the aggregate principal amount in cash, of which $69,258 of the principal amount was settled in cash for $148,023 during the six months ended May 31, 2019.
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 CAD50,000, or $37,948. 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, 2019 and November 30, 2018, there were no borrowings outstanding under this credit facility.
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, 2019, commitments for these revolving credit facilities aggregated $19,240. 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 guaranteed by the Company or secured by accounts receivable.
The maximum commitment amounts for local currency credit facilities have been translated into United States Dollars at May 31, 2019 exchange rates.
Future principal payments
As of May 31, 2019, future principal payments under the above loans are as follows:
Fiscal Years Ending November 30,
653,909
150,208
214,894
1,049,968
1,462,500
3,531,479
Interest expense and finance charges
The total interest expense and finance charges for the Company's borrowings were $44,068 and $87,710, respectively, for the three and six months ended May 31, 2019, and $20,077 and $38,301, respectively, for the three and six months ended May 31, 2018. The variable interest rates ranged between 0.86% and 6.25% during the three months ended May 31, 2019, and between 0.70% and 11.38% during the six months ended May 31, 2019. During the three months ended May 31, 2018, the variable interest rates ranged between 0.58% and 11.38%, and between 0.58% and 12.74% during the six months ended May 31, 2018.
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, 2019, the Company was in compliance with all material covenants for the above arrangements.
NOTE 11—EARNINGS PER COMMON SHARE:
The following table sets forth the computation of basic and diluted earnings per common share for the periods indicated.
Basic earnings per common share:
Less: net income allocated to participating securities(1)
(1,032
(864
(1,820
(1,081
Net income attributable to common stockholders
113,441
92,878
199,759
116,759
Weighted-average number of common shares - basic
Basic earnings per common share
Diluted earnings per common share:
(1,027
(860
(1,813
(1,076
113,446
92,882
199,766
116,764
Weighted average number of common shares - basic
Effect of dilutive securities:
Stock options and restricted stock units
264
237
242
260
Weighted-average number of common shares - diluted
Diluted earnings per common share
Anti-dilutive shares excluded from diluted earnings per share calculation
89
67
120
Restricted stock awards granted to employees by the Company are considered participating securities.
23
NOTE 12—SEGMENT INFORMATION:
Summarized financial information related to the Company’s reportable business segments for the periods presented is shown below:
Inter-Segment
Elimination
Consolidated
Three months ended May 31, 2019
Revenue
4,567,074
1,160,877
(5,063
External revenue
112,393
62,263
Three months ended May 31, 2018
Revenue (as adjusted)
4,422,106
491,246
(5,071
External revenue (as adjusted)
Operating income (as adjusted)
96,318
27,684
Six months ended May 31, 2019
8,647,759
2,334,148
(9,565
213,764
122,853
Six months ended May 31, 2018
8,411,905
998,983
(9,257
178,151
57,347
Total assets as of May 31, 2019
10,113,314
4,602,188
(3,439,544
Total assets as of November 30, 2018 (as adjusted)
10,207,964
4,776,313
(3,440,779
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 customer contract. Shown below are the countries that accounted for 10% or more of the Company’s revenue and property and equipment, net, for the periods presented:
United States
3,794,587
3,526,883
7,146,294
6,702,300
Others
1,928,302
1,381,398
3,826,047
2,699,331
289,471
287,498
Philippines
61,905
75,770
212,914
208,058
NOTE 13—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, 2019 and November 30, 2018, MiTAC Holdings and its affiliates beneficially owned approximately 18% of the Company’s outstanding common
stock. Mr. Matthew Miau, Chairman Emeritus of the Company’s Board of Directors and a director, is the Chairman of MiTAC Holdings and a director or officer of MiTAC Holdings’ affiliates.
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, 2019. These shares are owned by the following entities:
MiTAC Holdings(1)
5,240
Synnex Technology International Corp.(2)
3,860
9,100
(1
Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC Holdings. Excludes 366 shares directly held by Mr. Miau, 217 shares indirectly held by Mr. Miau through a charitable remainder trust, and 9 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 14.4% 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 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:
Purchases of inventories
41,959
49,902
78,104
102,067
Sale of products to MiTAC Holdings and affiliates
245
528
405
861
Reimbursements received for rent and overhead costs for use of facilities by MiTAC Holdings and affiliates
35
71
The following table presents the Company’s receivable from and payable to MiTAC Holdings and its affiliates for the periods presented:
Receivable from related parties (included in Accounts receivable, net)
134
65
Payable to related parties (included in Accounts payable)
24,402
22,905
The Company’s business relationship with MiTAC Holdings has been informal and is 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. 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 14—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 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, 2019, the Company contributed $12,424 and $23,544, respectively, to defined contribution plans. During the three and six months ended May 31, 2018, the Company contributed $9,381 and $19,365, respectively, to defined contribution plans.
25
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, 2019 and November 30, 2018, the deferred compensation liability balance was $6,193 and $6,146, respectively.
Defined Benefit Plans
The Company has a 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, as part of the Convergys acquisition, the Company acquired 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”) and unfunded defined benefit plans for certain eligible employees in the Philippines, Malaysia and France. 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 plan assumptions are evaluated annually and are updated as deemed necessary.
During the three and six months ended May 31, 2019, net periodic pension costs were $2,894 and $5,474, respectively, and the Company’s contribution was $1,835 and $3,212, respectively. During the three and six months ended May 31, 2018, net periodic pension costs were $1,455 and $2,795, respectively, and the Company’s contribution was $853 and $2,115, respectively. The plans were underfunded by $86,948 and $89,001 as of May 31, 2019 and November 30, 2018.
NOTE 15—EQUITY:
Share repurchase program
In June 2017, the Board of Directors authorized a three-year $300,000 share repurchase program, effective July 1, 2017, pursuant to which the Company may repurchase its outstanding common stock from time to time in the open market or through privately negotiated transactions. During the three and six months ended May 31, 2019, the Company repurchased shares aggregating 160 for a total cost of $15,184. As of May 31, 2019, the Company had repurchased shares aggregating 840 for a total cost of $81,172. The share purchases were made on the open market and the shares repurchased by the Company are held in treasury for general corporate purposes.
Dividends
On June 25, 2019, the Company announced a cash dividend of $0.375 per share payable on July 26, 2019 to stockholders of record as of July 12, 2019. Future dividends are subject to continued capital availability, compliance with the covenants and conditions in some of the Company's credit facilities and declaration by the Board of Directors in the best interest of the Company’s stockholders.
NOTE 16—COMMITMENTS AND CONTINGENCIES:
The Company leases certain of its facilities under operating lease agreements, which expire in various periods through 2029. Future minimum contractually required cash payment obligations under non-cancellable lease agreements as of May 31, 2019 were as follows:
110,244
194,810
153,439
113,682
76,576
109,970
Total minimum lease payments
758,721
During the three and six months ended May 31, 2019, rent expense was $66,470 and $130,897, respectively. During the three and six months ended May 31, 2018, rent expense was $29,642 and $61,315, respectively. Sublease income was immaterial for each of the periods presented and is immaterial for the amounts entitled to be received in future periods under non-cancellable sublease arrangements.
The Company was contingently liable as of May 31, 2019 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 9 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, 2019 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.
27
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. Prior period amounts have been adjusted to reflect the adoption of ASC Topic 606.
When used in this Quarterly Report on Form 10-Q, or this "Report", the words “believes,” “estimates,” “expects,” “allows,” “can,” “may,” “designed,” “will,” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about market trends, our business model and our services, our market strategy, including expansion of our product lines, our infrastructure, our investment in information technology, or IT, systems, our employee hiring, retention and turnover, the ownership interest of MiTAC Holdings Corporation's, or MiTAC Holdings', in us and its impact, our revenue, our gross margins, our operating costs and results, the value of our inventory, competition with Synnex Technology International Corp., our future needs for additional financing, the likely sources for such funding and the impact of such funding, market acceptance of our customers’ products, concentration of customers, our international operations, foreign currency exchange rates, expansion and scaling of our operations and related effects, including our Concentrix business, our strategic acquisitions and divestitures of businesses and assets, including our acquisition of Convergys and the impact of the acquisition on our business, revenue, cost of revenue and gross margin, our goodwill, seasonality of sales, adequacy of our capital resources to meet our capital needs, cash held by our foreign subsidiaries and repatriation, changes in fair value of derivative instruments, adequacy of our disclosure controls and procedures, pricing pressures, competition, impact of economic and industry trends, impact of our accounting policies and recently issued accounting pronouncements, our belief regarding the impact of inventory repurchase obligations and commitments and contingencies, our effective tax rates, our share repurchase and dividend program, and our securitization programs and revolving credit lines, our succession planning, our investments in working capital, personnel, facilities and operations. 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, 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, or CE, industries, fluctuations in general economic conditions and other risk factors contained herein under Item 1A, if any, and in our Annual Report on Form 10-K for the year ended November 30, 2018. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking 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.
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 engagement 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 distributes peripherals, IT systems including data center server and storage solutions, system components, software, networking, communications and security equipment, consumer electronics, or CE, and complementary products. Within our Technology Solutions segment, we also provide systems design and integration solutions. Our Concentrix segment offers a portfolio of technology-enabled strategic solutions and end-to-end business services focused on customer engagement, process optimization, technology innovation, front and back-office automation and business transformation to clients in ten identified industry verticals.
In our Technology Solutions segment, we distribute more than 30,000 technology products (as measured by active SKUs) from more than 400 IT, CE and original equipment manufacturers, or OEM, suppliers, to more than 25,000 resellers, system integrators, and retailers throughout the United States, Canada, Japan and Central and South America. We purchase peripherals, IT systems, system components, software, networking, communications, 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, or 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 after-market product support. We also provide comprehensive IT solutions in key vertical markets such as government and healthcare and we provide specialized service offerings that increase efficiencies in the areas of print management, renewals, networking, 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 product or bundle of products we distribute and services we provide.
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 interaction 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 mediums in more than 70 languages.
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 customers’ products, any failure of technology or failure of acceptance of our customers’ 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 and Europe. 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, 2019, we had over 231,000 full-time and temporary employees worldwide.
Critical Accounting Policies and Estimates
On December 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606 applying the full retrospective method. See Note 2 to the Consolidated Financial Statements for information regarding the impact of adopting this new revenue standard and Note 3 for our revised revenue recognition critical accounting policy. Except for the above, there have been 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, 2018.
During the six months ended May 31, 2019, we adopted certain other new accounting pronouncements. The impact of adoption of these pronouncements was not material to our consolidated financial statements. See Note 2 to the Consolidated Financial Statements for further information.
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 further 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.
Convergys acquisition
On October 5, 2018, we acquired 100% of Convergys Corporation, a customer experience outsourcing company, for a purchase price of approximately $2.3 billion. The acquisition is related to our Concentrix segment and we believe the acquisition adds scale, diversifies our revenue base, expands our service delivery footprint and strengthens our leadership position as a top global provider of customer engagement services.
Results of Operations
The following table sets forth, for the indicated periods, data as percentages of total revenue:
Statements of Operations Data:
Products revenue
79.80
%
90.09
78.81
89.47
Services revenue
20.20
9.91
21.19
10.53
100.00
Cost of products revenue
(75.09
(85.06
(74.10
(84.46
Cost of services revenue
(12.71
(6.20
(13.35
(6.58
12.20
8.74
12.55
8.96
(9.15
(6.22
(9.49
(6.46
3.05
2.53
3.07
2.50
(0.75
(0.33
(0.77
(0.36
0.38
(0.03
0.19
2.67
2.16
2.49
2.12
(0.67
(0.25
(0.65
(0.86
2.00
1.91
1.84
1.25
29
Certain non-GAAP financial information
In addition to disclosing financial results that are determined in accordance with accounting principles generally accepted in the United States (“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, 2019 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 as adjusted to exclude acquisition-related and integration expenses, and the 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, or adjusted EBITDA, which is non-GAAP operating income, as defined above, plus depreciation.
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, (iii) contingent consideration and the per share amount of the net impact of the adjustments related to the Tax Cuts and Jobs Act of 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. 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 only as a complement to, and in conjunction with data presented in accordance with GAAP.
Non-GAAP Financial Information:
The following table provides the reconciliations of our most comparable GAAP measures to our non-GAAP measures presented:
(in thousands, except per share amounts)
Foreign currency translation
56,850
107,938
Revenue in constant currency
5,779,739
11,080,279
Acquisition-related and integration expenses
16,533
2,046
44,382
3,851
Amortization of intangibles
52,864
26,276
105,721
52,986
Non-GAAP operating income
244,052
152,324
486,721
292,335
Depreciation (excluding accelerated depreciation included in acquisition-related and integration expenses above)
38,890
22,596
80,407
44,520
Adjusted EBITDA
282,942
174,920
567,128
336,855
Operating margin
Non-GAAP operating margin
4.26
3.10
4.44
3.11
Diluted EPS
Acquisition-related and integration expenses (benefit)
0.32
0.86
0.03
1.03
0.66
2.06
1.32
(0.37
Income taxes related to the above (1)
(0.35
(0.18
(0.38
U.S. tax reform adjustment
(0.42
0.61
Non-GAAP diluted EPS
2.86
2.38
5.70
4.51
42,381
79,114
4,609,455
8,726,873
649
981
10,975
12,462
21,969
25,278
124,017
110,826
236,714
207,280
Depreciation
5,475
5,010
10,844
9,844
129,492
115,836
247,558
217,124
2.46
2.18
2.47
2.72
2.51
2.74
14,469
28,824
1,175,346
2,362,972
15,884
43,401
41,889
13,814
83,752
27,708
120,036
41,498
250,006
85,055
33,415
17,586
69,563
34,676
153,451
59,084
319,569
119,731
5.36
5.64
5.26
5.74
10.34
8.45
10.71
8.51
31
The tax effect of taxable and deductible non-GAAP adjustments was calculated using the effective year-to-date tax rate during the respective periods. The effective tax rate for fiscal year 2018 excludes the impact of the transition tax on accumulated overseas profits and the remeasurement of deferred tax assets and liabilities to the new U.S. tax rate related to the enactment of the Tax Cuts and Jobs Act of 2017.
Three and Six Months Ended May 31, 2019 and 2018
Percent
Change
(in thousands)
16.6
16.7
Technology Solutions revenue
3.3
2.8
Concentrix revenue
136.3
133.7
Inter-segment elimination
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 servers. 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. As our software and security OEM vendors transition to “as-a-Service” type product offerings, more of our revenue is being recorded on a net basis, which impacts our revenue growth and gross margin trends. Accounting guidance generally requires the invoiced value of such transactions to be offset against cost of revenue. Consequently, the margin earned on such transactions is recorded as our revenue, with no associated cost of revenue, resulting in lower revenue and higher gross margins. The revenue generated by our Concentrix segment relates to business outsourcing services focused on process optimization, customer engagement 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 increased during the three and six months ended May 31, 2019 compared to the prior year periods, primarily due to broad-based growth across our product portfolio, primarily in the United States, partially offset by the adverse foreign currency translation impact.
Revenue in our Concentrix segment increased during the three and six months ended May 31, 2019 compared to the prior year periods, primarily due to the impact of the Convergys acquisition in October 2018, partially offset by the unfavorable impact of currency translation.
Gross Profit
62.8
63.5
Gross margin
Technology Solutions gross profit
269,978
247,331
9.2
517,545
471,618
9.7
Technology Solutions gross margin
5.91
5.59
5.98
5.61
Concentrix gross profit
430,528
183,578
134.5
863,837
374,483
130.7
Concentrix gross margin
37.09
37.37
37.01
37.49
(2,038
(1,751
(3,993
(3,428
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, customer 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, during the three and six months ended May 31, 2019, increased compared to the prior periods primarily due to product mix and a broad-based growth across our product portfolio, primarily in the United States. The increase in gross margin was also attributable to a higher proportion of our revenue generated from sales of products and services where revenue is reported on a net basis by recognizing the margins earned in revenue with no associated cost of revenue.
Concentrix gross profit during the three and six months ended May 31, 2019 increased compared to the prior year periods mainly due to the Convergys acquisition and a net favorable foreign currency translation impact. Concentrix gross margin during the three and six months ended May 31, 2019 decreased compared to the prior year periods primarily due to customer mix.
Selling, General and Administrative Expenses
Selling, general and administrative
expenses
523,813
305,156
71.7
1,040,771
607,175
71.4
Percentage of revenue
9.15
6.22
9.49
6.46
Technology Solutions selling, general and
157,586
151,013
4.4
303,781
293,467
3.5
Technology Solutions percentage of revenue
3.45
3.41
3.51
3.49
Concentrix selling, general and
368,265
155,894
136.2
740,983
317,136
133.6
Concentrix percentage of revenue
31.72
31.73
31.75
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, 2019, selling, general and administrative expenses in our Technology Solutions segment increased compared to the prior year periods, primarily due to additional investments in infrastructure and associates to support our growth, partially offset by a decrease in amortization of intangible assets and acquisition-related and integration expenses, and the favorable impact of foreign currency translation.
Concentrix selling, general and administrative expenses increased, in dollars, during the three and six months ended May 31, 2019, compared to the prior year periods, primarily due to the Convergys acquisition in October 2018. In addition, amortization of intangible assets increased by $28.1 million and $56.1 million, respectively, and acquisition-related and integration expense increased by $15.9 million and $43.4 million, respectively. Foreign currency translation favorably impacted our expenses during the three and six months ended May 31, 2019.
40.8
42.9
Technology Solutions operating income
20.0
Technology Solutions operating margin
Concentrix operating income
124.9
114.2
Concentrix operating margin
5.28
Operating income and margin in our Technology Solutions segment increased during the three and six months ended May 31, 2019, compared to the prior year periods, due to broad-based growth across our product portfolio, primarily in the United States, and scale efficiencies. Operating margin also increased due to the impact of a higher proportion of our revenue being reported on a net revenue basis.
Operating income in our Concentrix segment increased during the three and six months ended May 31, 2019, compared to the prior year periods, due to the Convergys acquisition, operational efficiencies and integration synergies and net favorable impact of foreign currency translation. Excluding the impact of amortization expenses and acquisition-related and integration expenses, operating margin in our Concentrix segment increased during the three and six months ended May 31, 2019 compared to the prior year periods.
Interest Expense and Finance Charges, Net
43,144
16,375
163.5
84,750
33,826
150.5
0.75
0.33
0.77
0.36
33
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 facility, offset by income earned on our cash investments.
During the three and six months ended May 31, 2019, our interest expense and finance charges, net, increased compared to the prior year periods, primarily due to additional borrowings to fund the Convergys acquisition and support growth in both of our segments. Additionally, our borrowings are primarily at variable rates and our interest expense has also increased with the increase in benchmark interest rates. Approximately $2.0 billion of our outstanding borrowings of $3.5 billion at May 31, 2019 have been economically converted to fixed-rate debt through interest rate swaps.
Other Income (Expense), Net
1590.0
894.6
)%
Amounts recorded as other income (expense), net include foreign currency transaction gains and losses, investment gains and losses, non-service component of pension costs, debt extinguishment gains and losses and other non-operating gains and losses, such as changes in the fair value of convertible debt conversion spread, and settlements received from class actions lawsuits.
The increase in other income, net, during the three and six months ended May 31, 2019 compared to the prior year periods was primarily due to a $19.0 million gain upon the settlement of contingent consideration related to our acquisition of Westcon-Comstor Americas in fiscal year 2017 and higher foreign currency exchange gains.
Provision for Income Taxes
38,584
12,439
210.2
71,140
81,208
(12.4
Percentage of income before income taxes
25.21
11.71
26.09
40.80
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.
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. Excluding the impact of this item, the effective tax rate was 27.75% for the three months ended May 31, 2019. The increase in the effective tax rate in the current period, compared to the prior year period, is due to the discrete impact of a tax benefit of $17.0 million related to the Tax Cuts and Jobs Act of 2017 (“the TCJA”) recorded in the prior year period. Excluding the impact of the adjustment related to the TCJA, our effective tax rate for the three months ended May 31, 2018 was 27.73%.
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. Excluding the impact of this item, the effective tax rate was 27.48% for the six months ended May 31, 2019. The decrease in the effective tax rate during the six months ended May 31, 2019, compared to the prior year period, is due to the discrete impact of a provisional net tax charge of $24.7 million related to the TCJA recorded in the six months ended May 31, 2018, the reduction in federal income tax rate from 22% to 21%, and the mix of income earned in different tax jurisdictions. Excluding the impact of the adjustment related to the TCJA, our effective tax rate for the six months ended May 31, 2018 was 28.38%.
34
Liquidity and Capital Resources
Cash Conversion Cycle
(Amounts in thousands)
Days sales outstanding
Revenue (products and services)
(a)
(b)
2,519,218
(c) = (b)/((a)/the number of days during the period)
56
47
Days inventory outstanding
Cost of revenue (products and services)
(d)
5,024,420
4,479,123
(e)
1,996,161
(f) = (e)/((d)/the number of days during the period)
48
Days payable outstanding
(g)
(h)
2,287,954
(i) = (h)/((g)/the number of days during the period)
Cash conversion cycle
(j) = (c)+(f)-(i)
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 53 days and 41 days as of May 31, 2019 and 2018, respectively. The increase was primarily due to the impact of the Convergys acquisition and the resultant larger contribution of Concentrix to our overall business, higher proportion of revenue recorded on a net basis under Principal versus Agent revenue guidance, and timing of collections of accounts receivable and payments of accounts payable.
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 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 business growth in our systems design and integration business 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 provided by operating activities was $62.7 million during the six months ended May 31, 2018, primarily due to net income of $117.8 million, a decrease in accounts and vendor receivables of $103.1 million, adjustments for non-cash items of $82.2 million, a net change in other operating assets and liabilities of $61.7 million and a decrease in inventories of $39.9 million. These cash inflows were partially offset by a decrease in accounts payable of $342.1 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 adjustments for non-cash items consist primarily of amortization and depreciation, stock-based compensation expense and the deferred tax benefit related to the remeasurement of deferred tax assets and liabilities to the new U.S. tax rate due to the enactment of the TCJA.
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 investing activities during the six months ended May 31, 2018 was $50.5 million, primarily due to capital expenditures of $50.0 million, related substantially to our Concentrix segment. In addition, we made a final payment of $8.2 million for the acquisition of Tigerspike and received a refund of $2.3 million from the sellers towards the settlement of certain pre-acquisition intra group transactions related to our acquisition of Westcon-Comstor Americas in fiscal year 2017.
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.
Net cash used in financing activities during the six months ended May 31, 2018 was $206.2 million, consisting primarily of $128.3 million of net repayments under our borrowing arrangements by utilizing the cash generated from operations during the fourth fiscal quarter of 2017 and a return of cash to stockholders in the form of $46.0 million of repurchases of common stock and $27.9 million of dividend payments.
Capital Resources
Our cash and cash equivalents totaled $271.5 million and $454.7 million as of May 31, 2019 and November 30, 2018, respectively. Of our total cash and cash equivalents, the cash held by our foreign subsidiaries was $204.1 million and $301.1 million as of May 31, 2019 and November 30, 2018, 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, the cash flows expected to be generated 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, including for operations of the acquired Convergys business. 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 as 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”). Under the terms of the U.S. AR Arrangement, which expires in fiscal year 2020, our subsidiary, which is the borrower under this facility, can borrow up to a maximum of $850.0 million based upon eligible trade accounts receivable. 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. The effective borrowing cost under the U.S. AR Arrangement is a blended rate based upon the composition of the lenders that includes prevailing dealer commercial paper rates and a rate based upon LIBOR, provided that LIBOR shall 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 is payable on the adjusted commitment of the lenders.
Under the terms of the U.S. AR Arrangement, we and two of our U.S. subsidiaries sell, on a revolving basis, our eligible receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in and to 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, 2019 and November 30, 2018, $544.8 million and $615.0 million, respectively, 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, SYNNEX Canada Limited (“SYNNEX Canada”) can borrow up to 100.0 million, or $74.0 million, in exchange for the transfer of eligible trade accounts receivable, on an ongoing revolving basis through May 10, 2020. The program includes an accordion feature that allows us to request an increase in the bank's commitment by an additional 50.0 million, or $37.0 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. The effective borrowing cost is based on the weighted average of the Canadian Dollar Offered Rate plus a margin of 2.00% per annum and the prevailing lender commercial paper rates. In addition, SYNNEX Canada is obligated to pay a program fee of 0.75% 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 $44.4 million, and when the unused portion exceeds CAD60.0 million, or $44.4 million, a fee of 0.40%
36
on the first CAD25.0 million, or $18.5 million, of the unused portion and a fee of 0.55% per annum on the remaining unused commitment. As of both May 31, 2019 and November 30, 2018, 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 $138.6 million. The credit agreement is comprised of a JPY7.0 billion, or $64.7 million, term loan and a JPY8.0 billion, or $73.9 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, 2019 and November 30, 2018, the balances outstanding under the term loan component of these facilities were $64.7 million and $61.7 million, respectively. Balances outstanding under the revolving credit facilities were $24.5 million and $20.3 million as of May 31, 2019 and November 30, 2018, respectively.
One of our subsidiaries in Mexico maintains a United States Dollars denominated $40.0 million revolving credit facility with a financial institution (the “LATAM facility”). The revolving credit facility matures in one year or less. We guarantee the obligations under this credit facility. The interest rate on this facility ranges from 10.79% to 10.85%.
Our Indian subsidiaries 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.
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 may 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 expiration 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 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, 2019 and November 30, 2018, 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 either May 31, 2019 or November 30, 2018.
In order to fund the Convergys acquisition (See Note 4 to the Consolidated Financial Statements), the related refinancing or settlement of Convergys' debt and payment of related fees and expenses, we entered into a secured term loan credit agreement on August 9, 2018 (the “U.S. Term Loan Credit Agreement”) with a group of financial institutions, which provided for the extension of one or more term loans in an aggregate principal amount not to exceed $1.8 billion. The U.S. Term Loan Credit Agreement matures in October 2023. Until November 30, 2018, we had drawn $1.6 billion of term loans. During the six months ended May 31, 2019, we borrowed the remaining available amount of $250.0 million under this facility, to settle part of Convergys' outstanding Convertible Debentures. 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 expiration 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 May 31, 2019 and November 30, 2018, the balances outstanding under the U.S. Term Loan Credit Agreement were $1.8 billion and $1.6 billion, respectively.
SYNNEX Canada has an uncommitted revolving line of credit with a bank under which it can borrow up to 50.0 million, or $37.0 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, 2019 and November 30, 2018, there were no borrowings outstanding under this credit facility.
37
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, 2019, commitments for these revolving credit facilities aggregated $19.2 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 guaranteed by us or secured by eligible accounts receivable. As of May 31, 2019 and November 30, 2018, the balances outstanding under these facilities were $5.7 million and $5.6 million, respectively.
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, 2019 and November 30, 2018, we had a total of $43.5 million and $36.5 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, 2019, we were in compliance with all material covenants for the above arrangements.
Contractual Obligations
Our contractual obligations consist of future payments due under our loans, 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 payments for our operating lease arrangements. As of May 31, 2019, there have been no material changes from our disclosure in our Annual Report on Form 10-K for the fiscal year ended November 30, 2018. For more information on our future minimum rental obligations under non-cancellable lease agreements as of May 31, 2019, see Note 16 to the Consolidated Financial Statements.
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, 2019 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, 2019 and November 30, 2018, accounts receivable subject to flooring arrangements were $103.2 million and $84.7 million, respectively. For more information on our third-party revolving short-term financing arrangements, see Note 9 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, 2019 and November 30, 2018, 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:
Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC Holdings. Excludes 366 thousand shares directly held by Mr. Miau, 217 thousand shares indirectly held by Mr. Miau through a charitable remainder trust, and 9 thousand shares held by his spouse.
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 from MiTAC Holdings and its affiliates totaling $42.0 million and $78.1 million during the three and six months ended May 31, 2019, respectively, and totaling $49.9 million and $102.1 million, respectively, during the three and six months ended May 31, 2018. Our sales to MiTAC Holdings and its affiliates totaled $0.2 million and $0.4 million during the three and six months ended May 31, 2019, respectively, and totaled $0.5 million and $0.9 million, respectively, during the three and six months ended May 31, 2018. In addition, we received reimbursements of rent and overhead costs for facilities used by MiTAC Holdings amounting to $0 during both the three and six months ended May 31, 2019, and $35,000 and $71,000, during the three and six months ended May 31, 2018, respectively.
As of May 31, 2019 and November 30, 2018, our payables to MiTAC Holdings and its affiliates were $24.4 million and $22.9 million, respectively. As of May 31, 2019 and November 30, 2018, our receivables from MiTAC Holdings and its affiliates were $134,000 and $65,000, respectively.
Our business relationship with MiTAC Holdings and its affiliates has been informal and is 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 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, 2019 from our Annual Report on Form 10-K for the fiscal year ended November 30, 2018. 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.
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 also is 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.
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, 2018. There have been no material changes from the risk factors disclosed in our 2018 Annual Report on Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
(c) Issuer Purchases of Equity Securities:
Period
Total Number
of Shares
Purchased
Average Price
Paid per Share
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, 2019 to March 31, 2019
64,030
93.20
228,044,846
April 1, 2019 to April 30, 2019
May 1, 2019 to May 31, 2019
95,900
96.11
218,828,294
159,930
94.94
In June 2017, we announced that our Board of Directors authorized a three-year $300,000,000 share repurchase program pursuant to which the company may repurchase its outstanding common stock from time to time in the open market or through privately negotiated transactions. As of May 31, 2019, we had repurchased 839,517 shares of our common stock at an average price of $96.69 per share for an aggregate purchase price of $81,171,706 since inception of the stock repurchase program.
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 (see Note 10 to the Consolidated Financial Statements).
The covenants of the Company's borrowings limit our ability to pay dividends, make other types of distributions and repurchase the Company's stock (see Note 10 to the Consolidated Financial Statements). We were in compliance with all material covenants as of May 31, 2019.
ITEM 6. Exhibits
Exhibit
Number
Description of Document
31.1
Rule 13a-14(a) Certification of Chief Executive Officer.
31.2
Rule 13a-14(a) Certification of Chief Financial Officer.
32.1*
Statement of the Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
* 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.
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 2, 2019
By:
/s/ Dennis Polk
Dennis Polk
President and Chief Executive Officer
(Duly authorized officer and principal executive officer)
/s/ Marshall W. Witt
Marshall W. Witt
Chief Financial Officer
(Duly authorized officer and principal financial officer)