Business Context and Reporting Period
Company: SYNNEX Corporation (TD SYNNEX CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2011
Business Overview: SYNNEX is a leading business process services company providing distribution and business process outsourcing (BPO) services to resellers, retailers, and OEMs. Operations are divided into two segments: Distribution Services and Global Business Services (GBS). The company operates globally with significant presence in North America, Asia-Pacific (notably Japan following the Infotec acquisition), and other regions.
Key Financial Metrics
| Metric | Three Months Ended May 31, 2011 | Six Months Ended May 31, 2011 |
|---|---|---|
| Revenue | $2,495.8 million | $4,996.7 million |
| Gross Profit | $145.1 million (5.81% margin) | $288.9 million (5.78% margin) |
| Net Income (Attributable to SYNNEX) | $31.4 million | $61.1 million |
| Diluted EPS | $0.85 | $1.65 |
| Cash and Cash Equivalents | $95.1 million | $95.1 million (as of period end) |
| Total Debt (Current + Long-term) | $285.6 million (excluding convertible debt principal) | $419.3 million (Total borrowings including convertible debt) |
| Operating Cash Flow (6 months) | $162.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 22.8% for the three months and 25.9% for the six months ended May 31, 2011, compared to the prior year periods. This growth was primarily driven by the acquisition of Infotec Japan (contributing ~13% of distribution revenue in Q2) and improved demand in U.S. and Canadian IT markets.
- Profitability: Net income attributable to SYNNEX increased 26.8% (three months) and 2.7% (six months) year-over-year. Gross profit margins improved slightly by 7 to 9 basis points due to a favorable shift in business mix and contributions from recent acquisitions.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses increased 24.2% (three months) and 28.2% (six months). Approximately 21-22% of these expenses were attributable to the Infotec Japan and GBS segment acquisitions. Excluding acquisitions, operating expenses were lower due to reduced bad debt expense and a $1.3 million benefit from changes in fair value of contingent consideration.
- Interest Expense: Interest expense and finance charges increased significantly (67.8% for three months) primarily due to interest on the working capital credit facility of the newly acquired Infotec Japan.
- Cash Flow: Net cash provided by operating activities turned positive at $162.3 million for the six months ended May 31, 2011, compared to a net use of $13.5 million in the prior year period, driven by net income and improved working capital management.
Guidance, Outlook, Risks, and Unusual Items
- Acquisitions: The company completed the acquisition of Infotec Japan (Dec 2010) and businesses of e4e, Inc. (Q1 2011). These acquisitions expanded the company's footprint in Japan and its BPO capabilities. Pro forma results indicate the Infotec acquisition would have increased revenue and income in the prior year period.
- Convertible Debt: The company has $143.8 million in 4.0% Convertible Senior Notes due 2018. Management intends to settle these in cash if converted. The notes are not currently convertible at a premium to principal.
- Share Repurchase Program: In June 2011 (subsequent event), the Board approved a $65 million anti-dilution share repurchase program over three years.
- Risks and Contingencies:
- Supplier Concentration: Hewlett-Packard (HP) accounted for approximately 34% of total revenue for the three and six months ended May 31, 2011.
- Related Party Transactions: MiTAC International Corporation owns approximately 29% of the company's common stock. Significant transactions with MiTAC have decreased following the sale of contract assembly assets in July 2010.
- Japan Operations: The March 2011 earthquake and tsunami in Japan caused nominal inventory and facility damage to Infotec Japan but temporarily disrupted supply chains. The company continues to monitor the impact.
- Liquidity: The company relies heavily on accounts receivable securitization and revolving credit lines. It remains in compliance with all material debt covenants.
Investor Verification Checklist
- Acquisition Integration: Verify the integration progress and financial performance of Infotec Japan and e4e, Inc. to ensure they meet projected revenue and margin targets.
- Supplier Concentration: Monitor the relationship with HP, which represents over one-third of revenue, and assess the risk of contract termination or margin compression.
- Debt Structure: Review the terms of the $143.8 million convertible notes and the company's liquidity position to ensure sufficient cash flow to service debt or settle notes if triggered.
- Working Capital Management: Analyze the sustainability of the improved operating cash flow, specifically the reduction in inventory purchases and accounts receivable collection efficiency.
- Foreign Exchange Exposure: Assess the impact of currency fluctuations, particularly the Japanese Yen, given the new significant operations in Japan.