Business Context and Reporting Period
Company: SYNNEX Corporation (TD SYNNEX CORP)
Filing Type: Form 10-K (Annual Report)
Period Ended: November 30, 2005
Business Overview: SYNNEX is a global IT supply chain services company providing product distribution, logistics, contract assembly, and demand generation marketing. The company distributes products from over 100 OEMs (including HP, IBM, Intel, Lenovo, and Microsoft) to more than 15,000 resellers. It also provides contract assembly services, primarily for Sun Microsystems. Operations are headquartered in Fremont, California, with facilities in North America, Asia, and Europe.
Key Financial Metrics (Fiscal Year 2005)
| Metric | Value (in thousands) | Percentage of Revenue |
|---|---|---|
| Total Revenue | $5,640,769 | 100.0% |
| Gross Profit | $238,558 | 4.23% |
| Operating Income | $78,937 | 1.40% |
| Net Income | $52,825 | 0.94% |
| Diluted EPS | $1.70 | - |
| Cash and Cash Equivalents | $13,636 | - |
| Working Capital | $350,529 | - |
| Total Debt (Short & Long Term) | $29,701 | - |
| Accounts Receivable Securitization | $274,751 (Off-balance sheet) | - |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 9.5% to $5.64 billion from $5.15 billion in 2004. Distribution revenue grew 12.0% to $5.12 billion, while contract assembly revenue declined 9.9% to $520 million due to decreased demand from Sun Microsystems.
- Profitability: Net income increased 13.4% to $52.8 million. This was significantly aided by a $12.7 million gain on the sale of discontinued operations (SYNNEX K.K., the Japan subsidiary).
- Operating Expenses: Selling, general, and administrative (SG&A) expenses rose 15.9% to $159.6 million. This increase included a $2.5 million restructuring charge in the Canadian segment and a $1.4 million increase in deferred compensation expense.
- Interest Expense: Interest expense and finance charges more than doubled (114.0% increase) to $17.0 million, driven by higher interest rates and increased debt levels related to the EMJ acquisition.
- Divestitures: The company sold 93% of its Japan subsidiary (SYNNEX K.K.) to MCJ Company Limited in May 2005 and divested EMJ America operations in June 2005.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects gross margins to remain relatively stable but notes risks from industry consolidation, low demand, and changes in OEM terms. The company anticipates continued seasonality with higher sales in the fourth fiscal quarter.
- Key Risks:
- Supplier Concentration: HP products represented 28% of total revenue. The agreement with HP expires May 31, 2006, and can be terminated with 30 days' notice.
- Customer Concentration: Sun Microsystems accounted for 93% of contract assembly revenue.
- Inventory Risk: Rapid technological changes and price reductions by OEMs pose risks to inventory value, though supplier price protection programs mitigate some exposure.
- Warehouse Theft: The company experienced organized thefts in 2003 and 2005 (approx. $4.0 million in 2005), though insurance covered the majority of losses.
- Unusual Items:
- Discontinued Operations: Results of the Japan subsidiary are reported as discontinued operations. The sale generated a significant one-time gain.
- Restructuring: A $2.5 million charge was incurred in Canada to eliminate duplicate personnel and facilities following the EMJ acquisition.
- Accounting Changes: The company is preparing to adopt SFAS No. 123R (Share-Based Payment) effective February 28, 2006, which will require expensing stock options, potentially reducing future net income.
Investor Verification Checklist
- HP Contract Status: Verify the renewal status of the U.S. Business Development Partner Agreement with HP, which expires May 31, 2006, given HP represents 28% of revenue.
- Sun Microsystems Dependency: Assess the stability of the contract assembly relationship with Sun Microsystems, which drives 93% of that segment's revenue.
- Working Capital Management: Review the reliance on accounts receivable securitization programs ($275 million capacity) to fund operations and the impact of potential credit rating downgrades on these facilities.
- Stock-Based Compensation Impact: Monitor the financial impact of the upcoming adoption of SFAS No. 123R on net income and EPS starting in the quarter ending February 28, 2006.
- Legal Proceedings: Track the status of the $4.2 million judgment appeal regarding Daisytek (Canada), Inc., and the trademark infringement suit filed by Seanix Technology Inc.