Business context and reporting period
SYNNEX Corporation’s unaudited Form 10-Q covers the fiscal third quarter and first nine months ended August 31, 2011, compared with the same periods in 2010. The filing describes two segments: technology distribution and global business services (GBS), including business-process outsourcing. The issuer named in this 2011 filing is SYNNEX Corporation.
Key financial results
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2,572.1 | $2,177.1 | $7,568.9 | $6,145.9 |
| Gross profit | $153.8 | $124.9 | $442.7 | $350.7 |
| Operating income before non-operating items | $66.5 | $52.2 | $171.5 | $134.5 |
| Net income attributable to SYNNEX | $39.0 | $30.9 | $100.2 | $90.4 |
| Diluted EPS | $1.07 | $0.86 | $2.72 | $2.54 |
- Revenue grew 18.1% in Q3 and 23.2% year to date. Q3 gross margin was 5.98%, up from 5.74%; nine-month gross margin was 5.85%, up from 5.71%. Operating margin before non-operating items was 2.59% and 2.27%, respectively, versus 2.40% and 2.19% in the comparable periods.
- Q3 diluted EPS from continuing operations was $1.07 versus $0.86; nine-month continuing-operations diluted EPS was $2.72 versus $2.22. Prior-year nine-month net income also included $11.4 million after tax from the sale of a discontinued business, so reported net income growth understates the improvement in continuing operations.
- Cash from operating activities was $116.0 million for the nine months, versus cash used of $33.0 million in 2010. Investing used $74.3 million, including acquisitions and $21.3 million of capital expenditures; financing used $43.0 million. Cash and cash equivalents ended at $86.3 million, down from $88.0 million at November 30, 2010.
- At August 31, current assets were $2,278.3 million and current liabilities $1,242.1 million (current ratio approximately 1.83). Total borrowings, including convertible debt, were $451.7 million, up from $386.3 million at November 30, 2010. Current borrowings were $228.6 million and long-term borrowings $223.1 million. The filing excludes the $143.8 million convertible-note principal from its scheduled principal payments table because settlement timing and amount are uncertain.
Changes, outlook, and risks
- Growth reflected the December 2010 acquisition of Infotec Japan, which contributed about $297 million of Q3 revenue and $914 million year to date, and the GBS acquisitions. Infotec Japan’s assumed working-capital debt contributed to higher interest expense. GBS revenue grew 30.7% in Q3 and 39.9% year to date; organic call-center revenue grew 5% and 14%, respectively.
- Management attributed improved margins to GBS growth, product and business mix, and favorable vendor rebates. Results also benefited from reductions in the estimated earn-outs for Aspire and Encover: $4.1 million in Q3 and $5.4 million year to date, recorded as lower SG&A. This benefit is an unusual estimate-driven item and should be considered when assessing underlying earnings.
- No specific earnings or revenue guidance is provided. Management said it expected existing cash, liquidity sources, and borrowing availability to meet working-capital needs for the next twelve months, while cautioning that interim results are not necessarily indicative of full-year results.
- Key exposures include low distribution margins, inventory obsolescence and customer credit risk, dependence on OEM suppliers, and supplier concentration: HP products represented about 37% of Q3 revenue and 35% year to date. The company also relies on securitization and credit facilities for working capital; loss of securitization capacity could materially affect liquidity. Management reported compliance with material debt covenants and sufficient availability on credit arrangements.
- Other matters include $240.5 million of guarantees for subsidiaries’ trade credit lines and loans, contingent repurchase obligations under customer floor-plan financing, and a $4.1 million indemnification liability related to a prior divestiture. Management said it did not expect disclosed commitments and contingencies to have a material adverse effect. The March 2011 Japan earthquake caused nominal damage at Infotec Japan, and operations had substantially recovered. A September 2011 acquisition of gem was reported as immaterial.
- MiTAC International and affiliates beneficially owned approximately 29% of the company’s common stock, creating potential influence and related-party/conflict-of-interest considerations. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer and security identity: this filing is for SYNNEX Corporation, not an entity named TD SYNNEX in the filing text.
- Assess how much of earnings growth is attributable to acquisitions, vendor rebates, mix changes, and the $4.1 million Q3 earn-out remeasurement benefit.
- Review Infotec Japan’s integration, acquired debt, cash generation, and continuing exposure to Japan operations and pension obligations.
- Monitor working-capital cash conversion, borrowing availability and maturities, and the 2013 convertible-note put/redemption provisions; the filing provides no specific forecast beyond management’s next-twelve-month liquidity assessment.
- Track HP supplier concentration, inventory protection and obsolescence, customer collections, and the contingent obligations and guarantees described above.