SYNNEX Corporation (now TD SYNNEX) — FY2013 Form 10-K
Reporting period: Fiscal year ended November 30, 2013. The filing also reports the fourth quarter ended November 30, 2013; this is an annual report, not a standalone quarterly filing. All amounts are U.S. dollars unless stated otherwise.
Business context and reporting period
SYNNEX operated distribution services and global business services (GBS). Distribution covers IT and consumer electronics products and design/integration services; GBS provides business-process outsourcing. Approximately 88% of FY2013 revenue came from North America. Hewlett-Packard products and services represented about 31% of annual revenue; no individual customer accounted for 10% or more.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $10.845 billion | $10.286 billion |
| Gross profit / margin | $655.0 million / 6.04% | $656.7 million / 6.39% |
| Operating income before non-operating items, taxes and noncontrolling interest | $240.8 million / 2.22% of revenue | $255.0 million / 2.48% |
| Net income attributable to SYNNEX | $152.2 million | $151.4 million |
| EPS, basic / diluted | $4.13 / $3.06 | $4.14 / $3.99 |
| Cash from operating activities | $35.7 million | $242.8 million |
| Cash and cash equivalents at year-end | $151.6 million | $163.7 million |
| Working capital at year-end | $1.142 billion | $1.086 billion |
| Total borrowings at year-end | $317.9 million | $275.3 million |
FY2013 Q4 revenue was $3.059 billion, gross profit $179.8 million, operating income $69.4 million and net income attributable to SYNNEX $41.5 million. Quarterly basic and diluted EPS were $1.12 and $1.10, respectively.
Changes versus prior comparable period
- Annual revenue rose 5.4%, with distribution revenue up 5.3% and GBS revenue up 13.3%. Distribution growth reflected stronger U.S. and Japan sales, expanded product/vendor lines and the Supercom Canada acquisition; foreign exchange, mainly the weaker yen, reduced reported growth by 2.6%.
- Gross profit was nearly flat, while gross margin fell 35 basis points to 6.04%, attributed to product and business mix; FY2012 had benefited from hard-drive supply constraints.
- Operating income declined 5.6%. Distribution operating income fell 3.6%; GBS operating income fell 41.0% to $8.0 million, with acquisition/integration costs and staffing investments cited as factors.
- Net income was broadly stable, but diluted EPS declined to $3.06. The cash settlement of the convertible-note conversion premium reduced FY2013 diluted EPS by $0.97.
- Operating cash flow fell to $35.7 million, principally as receivables and inventory increased with higher business volumes, partly offset by higher accounts payable.
Outlook, risks, contingencies and unusual items
- IBM transaction: The company agreed to acquire IBM’s customer care business for $505 million, subject to adjustments and closing conditions. The expected initial closing was in Q1 calendar 2014; consideration was primarily cash, with stock consideration capped at the lesser of $75 million or 5% of shares outstanding. Management said existing liquidity and borrowing capacity were expected to support the transaction. No formal revenue or earnings guidance is provided.
- Debt and liquidity: FY2013 borrowings totaled $317.9 million. The $143.8 million principal amount of 4% convertible notes was settled in August 2013 for $218.9 million in cash, including a $75.1 million conversion premium. The company had $144 million outstanding under its U.S. receivables securitization facility; its new $275 million revolving facility and term-loan facility of up to $225 million had no borrowings at year-end. It reported compliance with material debt covenants.
- One-time income: Other income included $12.3 million received from a class-action legal settlement, supporting FY2013 pretax results.
- Principal risks: Low distribution margins and intense competition; dependence on major OEMs, especially HP, under short-term agreements; inventory obsolescence and supplier price-protection limits; working-capital and customer-credit exposure; variable-rate debt and renewal/availability of financing; foreign-exchange exposure; and execution, integration and regulatory risks related to the IBM acquisition. MiTAC Holdings and affiliates held approximately 26% of shares, creating potential influence and related-party conflict considerations.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect and that no material proceedings were then pending. The filing describes guarantees totaling $364.7 million and $91.2 million of non-cancellable operating lease commitments. Tax examinations and uncertain tax positions remain relevant; the filing reports $21.9 million of gross unrecognized tax benefits.
Important facts for investors to verify
- Whether the IBM acquisition closed on the anticipated timetable, its final price and funding mix, and subsequent integration costs and results.
- Whether operating cash flow recovered after the substantial FY2013 working-capital outflow, and how receivables, inventory and payables developed.
- Whether gross-margin pressure and the decline in GBS operating profitability continued or reversed.
- How to interpret diluted EPS: confirm the conversion-premium accounting adjustment and distinguish it from basic EPS and cash earnings.
- Current debt, facility availability, covenant headroom, and liquidity after the acquisition; the filing’s stated balances are as of November 30, 2013.
- HP supplier concentration, related-party dealings and ownership influence, and exposure to guarantees, tax matters and customer credit risk.