Business Context and Reporting Period
Company: SYNNEX Corporation (TD SYNNEX CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2010
Business Overview: SYNNEX is a leading business process services company operating in two primary segments: Distribution Services (IT products, consumer electronics, contract assembly) and Global Business Services (GBS) (customer management, software development, back-office processing). The company serves OEMs, resellers, and retailers globally, with approximately 98% of revenue generated in North America.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Feb 28, 2010 | Three Months Ended Feb 28, 2009 |
|---|---|---|
| Revenue | $1,936,038 | $1,720,370 |
| Gross Profit | $109,161 | $100,847 |
| Gross Margin | 5.64% | 5.86% |
| Operating Income (Continuing Ops) | $38,953 | $33,787 |
| Net Income (Total) | $34,666 | $19,052 |
| Net Income Attributable to SYNNEX | $34,659 | $18,891 |
| Diluted EPS | $0.98 | $0.58 |
| Cash and Cash Equivalents | $38,054 | $56,215 |
| Total Debt (Current + Long-term) | $185,978 | $160,150 |
| Convertible Debt (Carrying Value) | $127,881 | $126,785 |
Cash Flow Summary (Three Months Ended Feb 28, 2010):
- Operating Activities: Net cash used of $22.1 million (driven by reductions in accounts payable and inventory build-up).
- Investing Activities: Net cash used of $24.6 million (primarily due to the acquisition of Jack of All Games and increased restricted cash).
- Financing Activities: Net cash provided of $25.5 million (primarily from net receipts on securitization and credit lines).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 12.5% year-over-year. Distribution revenue grew 12.6%, driven by increases in peripherals (15%), IT systems (27%), and networking systems (25%), partially offset by a 35% decrease in software sales due to a change in accounting treatment for service contracts.
- Profitability: Net income attributable to SYNNEX increased 83.5% to $34.7 million. This significant increase was bolstered by an $11.4 million pre-tax gain on the sale of discontinued operations (HiChina Web Solutions).
- Operating Margins: Operating income from continuing operations increased 15.3%. The operating margin for continuing operations improved to 2.01% from 1.96% in the prior year, aided by the net revenue accounting treatment for service contracts.
- Interest Expense: Interest expense and finance charges decreased 25.3% to $3.8 million, attributed to lower borrowings and reduced interest rates.
- Accounting Changes: The company adopted new accounting standards for convertible debt (ASC 470-20) retrospectively, which increased non-cash interest expense and adjusted prior period equity and liability balances.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
Management attributes revenue growth to strengthening market demand following the economic recession and new vendor initiatives. The company expects to continue expanding operations through investments and acquisitions, funded by borrowings or equity issuance. No specific forward-looking financial guidance (e.g., full-year revenue targets) is provided in this filing.
Unusual Items:
- Discontinued Operations: The sale of HiChina Web Solutions to Alibaba.com resulted in a net gain of $11.351 million. This is classified as a discontinued operation and significantly impacted net income for the quarter.
Risks and Contingencies:
- Concentration Risk: Hewlett-Packard (HP) accounted for 37% of total revenue. The agreement with HP expires May 31, 2010. MiTAC International and affiliates own approximately 33% of the company's stock and are a key supplier/partner.
- Liquidity & Debt: The company relies heavily on accounts receivable securitization and revolving credit facilities. A downgrade of the commercial paper issuer or liquidity provider could increase borrowing costs or reduce capacity.
- Inventory Risk: The IT industry faces rapid obsolescence. While inventory reserves decreased, the company remains exposed to price declines and product obsolescence.
- Related Party Transactions: Significant purchases ($66.4 million) were made from MiTAC International. The relationship is informal and negotiated on a case-by-case basis.
Key Facts for Investor Verification
- HP Contract Renewal: Verify the status of the distribution agreement with Hewlett-Packard, which represents 37% of revenue and expires May 31, 2010.
- Discontinued Operations Impact: Confirm the sustainability of earnings excluding the one-time $11.4 million gain from the HiChina Web Solutions sale.
- Working Capital Trends: Monitor the cash burn in operating activities ($22.1 million used) driven by inventory buildup and accounts payable reductions to ensure liquidity remains sufficient.
- Convertible Debt Accounting: Review the impact of the new accounting standard adoption on interest expense and equity, noting the increased non-cash interest charge.
- Acquisition Integration: Assess the integration progress and expected revenue contribution from the recent acquisition of Jack of All Games, Inc. ($42.7 million consideration).