TD SYNNEX CORP annual report, FY2011

Business context and reporting period

This is SYNNEX Corporation’s Form 10-K for the fiscal year ended November 30, 2011, filed January 27, 2012. It is an annual report, not a standalone fourth-quarter filing; the filing also reports selected Q4 results. SYNNEX operated distribution services and global business services (GBS), providing IT and consumer-electronics distribution, contract assembly, and business-process outsourcing. The filing identifies the registrant as SYNNEX Corporation; it does not identify it as TD SYNNEX Corp.

Financial performance and liquidity

Dollar amounts below are in millions except per-share data. Fiscal-year comparisons are 2011 versus 2010 unless stated otherwise.

MetricFY 2011FY 2010Change / context
Revenue$10,409.8$8,614.1Up 20.8%
Gross profit / gross margin$630.5 / 6.06%$491.6 / 5.71%Gross profit up 28.3%; margin up 35 basis points
Income from continuing operations before non-operating items, taxes and noncontrolling interest$256.2 / 2.46% of revenue$199.2 / 2.31%Up 28.7%
Net income attributable to SYNNEX$150.3$127.9FY 2010 included an $11.4 gain on a discontinued-business sale
Diluted EPS$4.08$3.58FY 2010 included discontinued operations; continuing-operations diluted EPS was $4.08 vs. $3.26
Operating cash flow$219.2$(65.9)Improved $285.1
Capital expenditures$40.2$12.7Included $15.4 for an Illinois facility
Cash and working capital at year-end$67.6 / $1,066.2$88.0 / $895.2Current assets were $2,438.4; current liabilities $1,372.3
Total borrowings at year-end$383.0$386.3Includes $143.8 principal of 4.0% convertible notes; $159.2 was current

Q4 FY 2011 revenue was $2,841.0 million, compared with $2,468.2 million in Q4 FY 2010. Net income attributable to SYNNEX was $50.2 million versus $37.5 million, and diluted EPS was $1.37 versus $1.04.

Material changes versus the prior comparable period

  • Distribution revenue rose 20.5% to $10,275.3 million; GBS revenue rose 45.4% to $163.4 million. Management attributed growth to the Infotec Japan acquisition, the full-year contribution from Jack of All Games, improved market conditions, GBS acquisitions, and organic service growth.
  • Revenue from Japan was approximately 12% of FY 2011 total, reflecting the Infotec acquisition. North America accounted for approximately 87% of revenue, versus 98% in each of FY 2010 and FY 2009.
  • Gross-margin improvement reflected product and service mix, higher distribution vendor rebates, GBS growth, supply-demand constraints in certain products, and a fourth-quarter transition of some customer revenue to fee-for-service arrangements.
  • SG&A increased 28.0% to $374.3 million, largely due to acquisitions and organic growth; SG&A rose to 3.60% of revenue from 3.40%. Interest expense and finance charges increased 49.0% to $25.5 million, including costs associated with Infotec Japan and higher borrowings.
  • Operating cash flow rebounded from use of cash in FY 2010. Receivables and inventory reductions contributed $38.9 million and $28.2 million, respectively, while lower accounts payable reduced cash flow by $50.0 million.

Outlook, risks and unusual items

  • The filing provides no numerical revenue or earnings guidance. Management said it expected available resources and borrowing arrangements to meet working-capital needs for the next 12 months. Management also noted historical fourth-quarter seasonality, which may not recur.
  • The business has low distribution margins and depends heavily on IT and consumer-electronics demand, pricing, inventory discipline, vendor rebates and supplier protections. HP represented approximately 35% of FY 2011 revenue; supplier agreements are generally short-term and may be terminable on short notice.
  • Liquidity depends substantially on working-capital facilities, receivables financing and credit availability. Debt arrangements include financial covenants; the company reported compliance at year-end. The $143.8 million convertible notes carry a 4.0% coupon and may be put to the company for cash in May 2013. Variable-rate borrowings expose the company to interest-rate increases.
  • Key operating risks include customer credit and collections, product obsolescence, supplier or shipping disruption, foreign-exchange movements, IT and telecommunications outages, and competition. Hard-drive shortages following Thailand floods affected supply in FY 2011. Japan earthquake and tsunami disruptions caused nominal damage to Infotec Japan, with operations substantially recovered.
  • FY 2011 acquisitions included Infotec Japan and GBS businesses/assets from e4e, gem and VisionMAX. The GBS acquisitions involved preliminary purchase-price allocations. A $5.4 million reduction in estimated earn-out consideration benefited SG&A and GBS results.
  • MiTAC International and affiliates beneficially owned approximately 29% of shares, creating potential influence and related-party conflict risks. SYNNEX reported $238.7 million of guarantees for subsidiary trade credit lines, loans and certain divestiture obligations. Management did not expect disclosed legal proceedings and contingencies to have a material adverse effect; it reported no material bankruptcy preference proceedings.
  • The company paid no cash dividends and said it intended to retain future earnings. A board-authorized $65 million anti-dilution repurchase program had $63.3 million remaining at year-end; $1.7 million of shares had been repurchased in FY 2011.

Important facts for investors to verify

  • Whether FY 2011 growth and the 35-basis-point gross-margin expansion persisted after acquisition contributions, vendor rebates and the Q4 fee-for-service transition.
  • Infotec Japan’s ongoing contribution, including its working-capital borrowings, integration costs, and the impact of Japanese and regional supply conditions.
  • Cash conversion and access to receivables securitization and revolving facilities, especially given the business’s substantial working-capital needs and upcoming facility maturities.
  • The timing and funding of the convertible notes’ May 2013 holder put, alongside covenant and refinancing requirements.
  • Exposure to HP concentration, changes in supplier terms, customer credit losses, and the realization of acquisition-related goodwill and intangible assets.
  • The amount and possible cash impact of subsidiary guarantees, tax uncertainties and the contingent indemnification obligation related to the prior HiChina sale.