Business Context and Reporting Period
Company: SYNNEX Corporation (TD SYNNEX CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 31, 2010
Business Overview: SYNNEX is a business process services company providing product distribution, logistics, global business services (GBS), and contract assembly to OEMs, resellers, and retailers. Operations are primarily in North America (98% of revenue), with segments focused on Distribution Services and GBS.
Key Financial Metrics
| Metric | Three Months Ended Aug 31, 2010 | Nine Months Ended Aug 31, 2010 | Three Months Ended Aug 31, 2009 | Nine Months Ended Aug 31, 2009 |
|---|---|---|---|---|
| Revenue | $2,177,066 | $6,145,916 | $1,998,060 | $5,521,135 |
| Gross Profit | $124,869 | $350,697 | $105,977 | $307,764 |
| Gross Margin % | 5.74% | 5.71% | 5.30% | 5.57% |
| Net Income (Attributable to SYNNEX) | $30,914 | $90,417 | $22,465 | $59,989 |
| Diluted EPS | $0.86 | $2.54 | $0.65 | $1.78 |
| Cash and Cash Equivalents | $68,063 (as of Aug 31, 2010) | |||
| Total Debt (Current + Long-term) | $325,040 (as of Aug 31, 2010) |
Note: All figures in thousands except per share data and percentages.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 9.0% for the quarter and 11.3% for the nine-month period compared to the prior year. Growth was driven by strong IT demand in the U.S., improved market conditions in Canada, and the acquisition of Jack of All Games (video game distribution).
- Profitability: Net income attributable to SYNNEX increased 37.6% for the quarter and 50.7% for the nine-month period. Operating margins improved due to higher gross profit dollars and a change in revenue recognition for certain service contracts (recorded on a net basis).
- Cash Flow: Net cash used in operating activities was $33.0 million for the nine months ended August 31, 2010, a significant shift from the $200.9 million provided by operations in the prior year. This was primarily due to increased inventory purchases to support business growth and higher vendor receivables.
- Accounting Changes: The company adopted new accounting standards for convertible debt (ASC 470-20) retrospectively, which increased non-cash interest expense and adjusted prior period net income and EPS downward.
Guidance, Outlook, and Risks
- Outlook: Management expects to have sufficient resources to meet working capital requirements for the next twelve months. The company intends to settle its convertible debt in cash at some future date and maintains credit facilities to support this.
- Recent Transactions:
- Acquisition: Purchased Jack of All Games, Inc. for approximately $37.4 million (adjusted) to expand consumer electronics offerings.
- Divestitures: Sold controlling interest in Nihon Daikou Shouji (NDS) for $3.1 million and sold contract assembly assets to MiTAC International for $66.3 million in inventory value.
- Key Risks:
- Supplier Concentration: Hewlett-Packard (HP) accounted for approximately 37% of total revenue. Loss of this relationship would be material.
- Related Party Transactions: MiTAC International owns ~30% of SYNNEX stock. Significant purchases ($154.5M for nine months) and sales were made with MiTAC, creating potential conflicts of interest.
- Liquidity: The business is working capital intensive. Reliance on securitization programs and revolving credit lines exposes the company to credit market conditions.
- Inventory Risk: Rapid technological changes in IT and consumer electronics can lead to inventory obsolescence.
Investor Verification Checklist
- Inventory Levels: Verify the $794 million inventory balance against sales velocity to assess obsolescence risk, given the $126.9 million cash outflow for inventory in the nine-month period.
- Debt Covenants: Confirm continued compliance with financial covenants (minimum net worth, fixed charge coverage) given the $325 million total debt load.
- Convertible Debt Settlement: Monitor the company's ability to generate cash to settle the $143.8 million principal of 4.0% Convertible Senior Notes due 2018, as management intends a cash settlement.
- Related Party Dependence: Assess the impact of the MiTAC International relationship on future revenue stability and potential conflicts of interest.
- Operating Cash Flow: Analyze the reversal from positive to negative operating cash flow to ensure it is a temporary working capital build-up rather than a structural issue.