SYNNEX Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended August 31, 2012. The filing identifies the registrant as SYNNEX Corporation; it does not identify the company as TD SYNNEX.
Business context
SYNNEX provides technology product distribution and business process outsourcing (GBS) services. Distribution remains the dominant business; operations span North America, Asia-Pacific and other regions. All financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2,576.9 million | $2,572.1 million | $7,520.4 million | $7,568.9 million |
| Gross profit | $151.9 million | $153.8 million | $477.6 million | $442.7 million |
| Operating income* | $57.1 million | $66.5 million | $180.4 million | $171.5 million |
| Net income attributable to SYNNEX | $35.1 million | $39.0 million | $107.7 million | $100.2 million |
| Diluted EPS | $0.93 | $1.07 | $2.84 | $2.72 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $218.6 million | $116.0 million |
*Income before non-operating items, income taxes and noncontrolling interest.
- Q3 gross margin was 5.90% versus 5.98%; operating margin was 2.21% versus 2.59%. Nine-month gross margin improved to 6.35% from 5.85%, and operating margin to 2.40% from 2.27%.
- Q3 revenue increased 0.2% year over year, while operating income declined 14.2% and diluted EPS declined 13.1%. Nine-month revenue decreased 0.6%, while operating income rose 5.1% and diluted EPS rose 4.4%.
- Distribution revenue was down 0.1% in Q3 and 0.9% for nine months. GBS revenue rose 22.8% and 20.3%, respectively, but GBS operating income fell 42.2% in Q3 and 40.1% for nine months.
- Q3 interest expense and finance charges were $5.8 million, down from $6.5 million; nine-month expense was $17.4 million, down from $18.9 million. Effective tax rates were 33.2% for Q3 and 34.3% for nine months.
Liquidity, cash flow and debt
- At August 31, cash and cash equivalents were $173.0 million, up from $67.6 million at November 30, 2011; $84.8 million was held by foreign subsidiaries. Current assets were $2,349.1 million and current liabilities $1,284.3 million (working capital $1,064.9 million).
- Nine-month operating cash flow was $218.6 million, compared with $116.0 million. Investing cash outflow was $3.5 million and financing cash outflow was $108.1 million. Capital expenditures were $11.5 million; operating cash flow less capital expenditures was approximately $207.1 million.
- Total borrowings were $300.6 million, down from $383.0 million at November 30, 2011. The $140.1 million carrying value of convertible notes was classified as current because holders may require cash repurchase in May 2013; total current borrowings were $215.2 million.
- No balance was outstanding under the U.S. receivables securitization at quarter-end (versus $64.5 million at November 30, 2011). The Canadian revolver had $12.9 million outstanding. The company reported compliance with material debt covenants.
Material changes, outlook and risks
- A major distribution customer contract shifted from full-service distribution to fee-for-service beginning in late 2011. Management said this reduced reported revenue by approximately $105.0 million in Q3 and $340.4 million for the nine months; the transition also affected product-category comparisons.
- Management attributed lower Q3 margins to product mix, competitive pricing, lower vendor incentives than in the prior-year quarter, and higher SG&A. Nine-month gross margin benefited from supply constraints on some products and lower inventory reserves, partly offset by lower vendor incentives.
- Management stated it expected sufficient resources and liquidity for working-capital needs over the next 12 months. It also said it intended to settle the convertible notes in cash, while acknowledging that the 2013 put/call features make settlement timing uncertain. No specific earnings or revenue guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
- Risks include dependence on HP, whose products represented approximately 38% of Q3 revenue and 36% of nine-month revenue; thin distribution margins; volatile IT and consumer-electronics demand; customer credit and inventory risks; reliance on receivables financing and floor-plan programs; and exposure to foreign exchange and international operations. The company also had $269.7 million of guarantees for subsidiaries, a customer and divestiture-related obligations. It reported no material proceedings and did not expect disclosed contingencies to have a material adverse effect.
- MiTAC International and affiliates beneficially owned approximately 27% of shares, creating potential influence over stockholder matters and related-party governance considerations. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the fee-for-service transition’s lower reported revenue and stated margin benefits persist, and how comparable operating performance develops.
- Progress and funding plans for the $143.8 million principal amount of convertible notes with the May 2013 holder put; confirm available refinancing or cash-settlement capacity.
- HP supplier concentration, vendor rebate and inventory-protection terms, and any changes in customer or supplier relationships.
- Sustainability of operating cash flow and working-capital conversion, particularly receivables, inventory, and access to securitization and other credit facilities.
- GBS profitability trends, acquisition integration, and the assumptions underlying contingent consideration and other reported benefits.