SYNNEX Corporation — Q2 FY2013 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2013. The filing identifies the registrant as SYNNEX Corporation. Dollar amounts below are USD millions unless stated otherwise. Financial statements are unaudited.
Business context
SYNNEX provides wholesale distribution of IT and consumer-electronics products and business process outsourcing services through its Distribution Services and Global Business Services (GBS) segments. The business is working-capital intensive and operates primarily in North America.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Revenue | $2,591.4 | $2,482.8 | $5,052.2 | $4,943.5 |
| Gross profit | $154.8 | $156.4 | $310.9 | $325.7 |
| Gross margin | 5.97% | 6.30% | 6.15% | 6.59% |
| Operating income | $52.0 | $59.3 | $107.9 | $123.3 |
| Net income attributable to SYNNEX | $30.8 | $34.4 | $64.1 | $72.6 |
| Diluted EPS | $0.81 | $0.90 | $1.69 | $1.91 |
- Quarterly revenue rose 4.4%; six-month revenue rose 2.2%. Q2 GBS revenue increased 15.4%, while Distribution revenue increased 4.2%.
- Operating income fell 12.4% in Q2 and 12.5% for the six-month period. Management cited pricing pressure and mixed demand, lower incentive rebates and, for the half-year, softer demand in some regions. Prior-year margins benefited from hard-drive shortages.
- Q2 SG&A increased 5.9% to $102.8 million, including $2.1 million of one-time Supercom Canada integration costs. GBS operating income rose to $4.4 million in Q2 from $2.6 million; Distribution operating income declined to $47.7 million from $56.4 million.
- Effective tax rate was 35.4% for both periods in FY2013, versus 34.8% in FY2012.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $91.5 million, down from $122.4 million. Investing used $24.2 million, including acquisition spending; financing used $19.6 million. Cash increased by $52.7 million to $216.4 million.
- At May 31, cash and cash equivalents were $216.4 million; short-term investments were $14.5 million. Current assets were $2,491 million and current liabilities $1,395 million, implying working capital of about $1,096 million and a current ratio of about 1.8.
- Total borrowings were $296.7 million, including $143.8 million of convertible notes and $134.4 million under Infotec Japan’s credit facility. The notes converted by May 17; the company elected cash settlement and expected to make final payments in Q3 FY2013. A $35.6 million estimated conversion-spread amount was recorded at quarter-end. U.S. securitization and revolving facilities had no borrowings outstanding.
- Management said it believed available U.S. liquidity and resources were sufficient for working-capital needs over the next 12 months. Foreign-subsidiary cash was $118.9 million; repatriation could trigger U.S. taxes and some balances were subject to local restrictions.
Changes, outlook and risks
- In April, SYNNEX acquired substantially all Supercom Canada assets for approximately CAD36.5 million (US$35.6 million), including deferred payments. The acquisition added to Distribution and was expected to expand Canadian offerings; purchase accounting remained preliminary. Management said Canada faced a challenging demand environment.
- Foreign exchange, primarily a weaker Japanese yen, reduced reported revenue growth and affected expenses. Q2 distribution growth also reflected U.S. sales, local-currency Japan sales and Supercom Canada; software sales declined, partly due to lower gaming sales and a strategic exit from less profitable products.
- No specific numerical earnings or revenue guidance is provided in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key disclosed risks include low margins and competitive pricing, reliance on major OEMs (HP accounted for about 32% of revenue versus 36% a year earlier), customer concentration (one customer represented 10% of revenue in FY2013 periods), demand and inventory volatility, working-capital and financing needs, foreign exchange, and acquisition integration. The company reported compliance with material debt covenants and effective disclosure controls.
- Contingencies include customer floor-plan repurchase obligations, guarantees totaling $328.0 million, and ordinary-course claims; management did not expect disclosed contingencies to materially adversely affect results, financial position or cash flows. No material proceedings were reported.
Investor verification points
- Confirm the timing and total cash cost of the convertible-note and conversion-spread settlement after quarter-end.
- Track gross-margin recovery, supplier rebates and pricing pressure, especially in Distribution, and whether GBS growth and profitability continue.
- Assess Supercom Canada integration, final purchase-price allocation and contribution to results.
- Monitor working-capital cash conversion, Infotec Japan borrowings, facility availability and covenant headroom.
- Review continued exposure to HP, the customer contributing 10% of revenue, foreign-currency movements, and the scope of guarantees and floor-plan obligations.