Business Context and Reporting Period
Company: SYNNEX Corporation (now TD SYNNEX Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: November 30, 2010
Business Overview: SYNNEX is a Fortune 500 business process services company operating in two primary segments: Distribution Services (IT systems, peripherals, software, consumer electronics) and Global Business Services (GBS) (BPO, customer management, renewal management). Approximately 98% of revenue is generated in North America. The company distributes over 20,000 SKUs from more than 100 OEM suppliers to over 15,000 resellers and retailers.
Key Financial Metrics
| Metric (in thousands) | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Revenue | $8,614,141 | $7,719,197 |
| Gross Profit | $491,616 | $423,030 |
| Gross Margin | 5.71% | 5.48% |
| Net Income (Attributable to SYNNEX) | $127,948 | $89,667 |
| Diluted EPS | $3.58 | $2.64 |
| Cash and Cash Equivalents | $88,038 | $37,816 |
| Working Capital | $895,185 | $762,305 |
| Total Debt (Short & Long Term) | $386,306 | $286,935 |
Note: Net Income includes a $11.35 million gain from the sale of discontinued operations (HiChina Web Solutions).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 11.6% year-over-year, driven by improved market conditions in the U.S. and Canada, the acquisition of Jack of All Games (video game distribution), and foreign exchange benefits from Canadian operations.
- Profitability: Net income attributable to SYNNEX increased 42.7% to $127.9 million. Operating income from continuing operations rose 33.1% to $199.2 million.
- Margin Expansion: Gross margin improved by 23 basis points to 5.71%, aided by a change in accounting treatment for certain service contracts (recorded on a net basis) and improved product mix.
- Cash Flow: Net cash used in operating activities was $65.9 million in 2010, a reversal from the $262.0 million provided in 2009. This was primarily due to a $240.1 million increase in inventory and a $156.8 million increase in accounts receivable to support higher sales volumes.
- Debt Levels: Total borrowings increased to $386.3 million from $286.9 million, reflecting increased utilization of securitization and revolving credit facilities to fund working capital.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management expects continued seasonality with higher sales in the fourth fiscal quarter due to capital budgeting and government spending cycles. The company anticipates that the addition of consumer electronics (CE) businesses (Jack of All Games, New Age Electronics) may increase the magnitude of this seasonal spike. The company plans to continue expanding its GBS capabilities through strategic acquisitions.
Key Risks and Contingencies:
- Supplier Concentration: Hewlett-Packard (HP) accounted for 38% of total revenue in 2010. The agreement with HP is short-term and terminable with notice; loss of this relationship would materially impact results.
- Low Margins: The distribution industry is characterized by low gross margins, making the company highly sensitive to revenue fluctuations and operating cost increases.
- Inventory Risk: Rapid technological changes and price reductions by OEMs pose a risk of inventory obsolescence and write-downs.
- Related Party Transactions: MiTAC International Corporation and affiliates own approximately 29% of the company's stock. The company recently sold contract assembly assets to MiTAC and maintains significant purchasing relationships with them.
- Discontinued Operations: The company sold its controlling interest in HiChina Web Solutions (China) in December 2009. Results are reported as discontinued operations, contributing a $11.35 million gain in 2010.
Investor Verification Checklist
- HP Dependency: Verify the status of the HP Business Development Partner Agreement and any potential changes in terms or volume.
- Working Capital Efficiency: Monitor the ratio of inventory and accounts receivable to revenue, as the 2010 cash flow burn was driven by significant increases in these assets.
- Debt Covenants: Review compliance with financial covenants (minimum net worth, fixed charge coverage) in the U.S. Arrangement, Revolver, and Canadian facilities.
- Convertible Notes: Assess the impact of the $143.8 million 4.0% Convertible Senior Notes due 2018, including the potential for cash settlement or conversion.
- Acquisition Integration: Evaluate the performance and integration of recent acquisitions (Jack of All Games, Aspire Technology, Encover) and the subsequent acquisition of Marubeni Infotec (Japan).