Business context and reporting period
Historical filing is for SYNNEX Corporation, for the quarter and nine months ended August 31, 2013; it is not a filing under the later TD SYNNEX name. SYNNEX operated wholesale technology distribution and global business services (GBS), with most revenue generated in North America. Amounts below are in U.S. dollars and millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2,733.9 | $2,576.9 | $7,786.1 | $7,520.4 |
| Gross profit / margin | $164.3 / 6.01% | $151.9 / 5.90% | $475.2 / 6.10% | $477.6 / 6.35% |
| Operating income | $63.5 | $57.1 | $171.4 | $180.4 |
| Net income attributable to SYNNEX | $46.6 | $35.1 | $110.7 | $107.7 |
| Basic / diluted EPS | $1.26 / $0.19 | $0.96 / $0.93 | $3.01 / $1.97 | $2.95 / $2.84 |
Q3 revenue increased 6.1%; operating income rose 11.3% and attributable net income rose about 32.6%. Nine-month revenue increased 3.5%, while gross profit fell 0.5% and operating income declined 5.0%. Q3 diluted EPS was unusually low because the cash-settled convertible-note conversion premium reduced the diluted-EPS numerator by $39.5 million; the filing says this reduced diluted EPS by $1.05. The nine-month diluted EPS calculation included a $36.4 million adjustment.
- Cash flow: Nine-month operating cash flow was $118.1, down from $218.6. It included a $108.6 reduction in receivables, partly offset by a $67.0 inventory increase and a $52.2 decrease in accounts payable. Investing cash use was $32.8; financing cash use was $114.8. Cash declined $24.3 to $139.4.
- Debt and liquidity: Total borrowings were $233.3 at August 31, versus $275.3 at November 30, 2012; current and long-term borrowings were $165.1 and $68.2. Cash was $139.4, and current assets of $2,561.7 exceeded current liabilities of $1,459.0 by $1,102.6 (current ratio approximately 1.76). Foreign subsidiaries held $132.8 of cash, subject to potential U.S. tax on repatriation and some local restrictions. Management said available resources were sufficient for the next 12 months, including potential IBM acquisition financing.
- Debt transaction: In August, the company repaid $143.8 principal on its 4% convertible notes and paid a $75.1 conversion premium, for total cash settlement of $218.9. It reported no outstanding convertible debt at quarter-end.
Material changes, outlook, and risks
- Distribution revenue grew 6.0% in Q3 and 3.3% year to date; GBS revenue grew 10.7% and 14.1%, respectively. Management cited U.S. growth, the Supercom Canada acquisition, and GBS new contracts and expanded customer business. Foreign-exchange translation weighed on distribution revenue.
- Q3 gross margin improved 11 basis points, which management attributed mainly to product mix and lower reserves for certain vendor programs. Nine-month gross margin was 25 basis points lower year over year, partly reflecting unusually favorable prior-year supplier rebates and hard-drive market conditions.
- Q3 GBS operating income fell to $1.8 from $4.6; management cited upfront staffing for recent wins and $2.3 of charges, including costs associated with the proposed IBM transaction. Q3 other income included $12.3 from a class-action legal settlement. The effective tax rate was 35.8% for Q3 and 35.6% year to date.
- After quarter-end, SYNNEX announced a proposed $505.0 acquisition of IBM’s customer care business, with up to $75.0 in stock consideration and the balance primarily in cash. It expected to offer employment to approximately 35,000 employees. Closing was subject to regulatory and other conditions; subsequent closings could extend through June 30, 2015. Completion, financing, integration, and realization of expected benefits were uncertain.
- The U.S. receivables securitization commitment was increased after quarter-end from $400.0 to $500.0, with an accordion option up to $600.0. The company reported compliance with material debt covenants. Risks include working-capital intensity, low distribution margins, customer and supplier concentration, currency movements, credit exposure, and reliance on financing arrangements. HP products represented 31% of nine-month revenue; one customer represented 10% of revenue.
- Contingencies included $341.1 of guarantees and potential repurchase obligations under customer floor-plan financing; no repurchases or known pending defaults were reported. Management did not expect disclosed contingencies to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
- No numerical earnings or revenue guidance was provided. Management noted improved Q3 demand in U.S. and Asian markets, while Canada remained in a flat-to-modest economic environment; it cautioned that quarterly results may not indicate full-year performance.
Investor verification points
- Verify the cash-flow and working-capital trend, especially inventory growth and the year-over-year decline in operating cash generation.
- Assess the diluted-EPS impact of the convertible-note premium separately from basic EPS and operating performance.
- Review the proposed IBM transaction’s final terms, financing, regulatory approvals, integration costs, employee transition, and closing timetable.
- Monitor customer and supplier concentration, including HP exposure, and changes in vendor rebates, inventory protections, and gross margins.
- Confirm continuing access to securitization and credit facilities, covenant compliance, and the availability of foreign-held cash for U.S. needs.