Business context and reporting period
Historical filing by SYNNEX Corporation (the registrant named in this 10-Q; not filed under the later TD SYNNEX name). The unaudited report covers fiscal first quarter ended February 29, 2012, compared with the three months ended February 28, 2011. SYNNEX operated distribution and Global Business Services (GBS) segments, providing technology-product distribution and business-process outsourcing.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $2,460.7 million | $2,500.9 million | -1.6% |
| Gross profit / margin | $169.3 million / 6.88% | $143.8 million / 5.75% | Gross profit +17.7%; margin +113 bps |
| Operating income before non-operating items | $64.0 million / 2.60% of revenue | $50.9 million / 2.03% | +25.8% |
| Net income attributable to SYNNEX | $38.2 million | $29.7 million | +28.6% |
| Diluted EPS | $1.02 | $0.80 | +27.5% |
| Operating cash flow | $74.2 million | $59.4 million | +$14.8 million |
Interest expense and finance charges, net, were $6.0 million, versus $6.2 million; other income was $2.1 million, versus $1.0 million. The effective tax rate was 34.8%, compared with 35.0%. Distribution revenue declined 1.8%, to $2,423.3 million; GBS revenue increased 14.8%, to $45.1 million. Distribution operating income rose to $62.4 million from $47.2 million, while GBS operating income fell to $2.0 million from $3.6 million.
Cash, debt and liquidity
At February 29, 2012, cash and cash equivalents were $68.8 million and short-term investments were $16.4 million. Current assets were $2,298.0 million against current liabilities of $1,182.6 million. Total borrowings were $300.9 million, including $137.4 million carrying value of convertible debt; total liabilities were $1,475.5 million. Borrowings were down from $383.0 million at November 30, 2011, primarily reflecting lower working-capital facility use. Operating cash flow benefited from lower receivables ($113.9 million) and inventory ($22.2 million), partly offset by lower accounts payable ($95.3 million). Investing activities provided $7.1 million, including a $10.7 million reduction in restricted cash; financing activities used $79.6 million. Capital expenditures were $4.6 million.
Changes, outlook and risks
- Management attributed lower reported distribution revenue mainly to shifting a customer from traditional full-service distribution to fee-for-service in Q4 FY2011; this reduced quarterly revenue by approximately $150 million. Management said the change benefited gross margin, along with product mix and supply-demand constraints in some products.
- SG&A increased 13.3% to $105.3 million, including added personnel and costs from FY2011 acquisitions. GBS margins weakened as acquisition-related costs and growth investments rose.
- Management described North American IT-product demand as stable and said it expected sufficient resources and liquidity for working-capital needs over the next 12 months. The filing gives no quantified earnings or revenue guidance and cautions that quarterly results are not necessarily indicative of full-year results.
- HP products generated approximately 35% of revenue, up from 33% a year earlier. The filing highlights supplier concentration, low-margin competition, demand and inventory volatility, customer credit risk, reliance on receivables financing, foreign exchange exposure, and acquisition integration as material risks.
- The company reported compliance with material debt covenants. The Canadian revolving facility was due to expire in May 2012; U.S. securitization and revolver arrangements were due in November 2013. Convertible notes have a 2013 holder put feature, and the company said it intended to cash-settle them at a future date.
- Contingencies include $233.8 million of guarantees for subsidiary vendor and lender obligations and a $4.1 million contingent indemnification liability related to a prior divestiture. No floor-plan inventory repurchases had occurred, and management did not expect the disclosed contingencies to materially adversely affect results or financial condition.
- After quarter-end, on April 1, 2012, SYNNEX increased its direct ownership of Infotec Japan from 70.0% to 81.0% and total direct and indirect ownership from 80.0% to 84.7%, while reducing its SB Pacific interest from 33.3% to 19.7%.
Important facts for investors to verify
- How much of the margin improvement persists, and how the customer’s fee-for-service transition affects revenue and profitability in subsequent periods.
- Whether GBS can restore margins as acquisition costs and growth investments continue.
- HP’s continuing share of revenue and any changes to supplier terms, product availability, rebates, or customer relationships.
- Working-capital and financing needs, facility renewals, covenant headroom, and ability to fund the 2013 convertible-note put or other cash obligations.
- Integration and performance of acquired businesses, Japan ownership changes, and collection exposure, including long-term public-sector projects in Mexico.