Business context and reporting period
SYNNEX Corporation filed this unaudited Form 10-Q for the quarter ended May 31, 2012, covering its fiscal second quarter and six-month year-to-date period. The company operates in technology distribution and global business services (GBS), including business-process outsourcing. Dollar amounts below are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $2,482.8M | $2,495.8M | $4,943.5M | $4,996.7M |
| Gross profit | $156.4M | $145.1M | $325.7M | $288.9M |
| Gross margin | 6.30% | 5.81% | 6.59% | 5.78% |
| Operating income before non-operating items, tax and noncontrolling interest | $59.3M | $54.2M | $123.3M | $105.0M |
| Net income attributable to SYNNEX | $34.4M | $31.4M | $72.6M | $61.1M |
| Diluted earnings per share | $0.90 | $0.85 | $1.91 | $1.65 |
Q2 gross margin improved to 6.30% from 5.81%; operating income margin rose to 2.39% from 2.17%. SG&A increased 6.8% in Q2 to $97.1M and 10.1% year to date to $202.4M. Net interest expense was $5.5M in Q2 and $11.6M year to date. The effective tax rate was 34.8% for both the quarter and six-month period.
Six-month operating cash flow was $122.4M, versus $162.3M a year earlier. Investing activities provided $10.2M, compared with $76.5M used in the prior year, which included acquisition spending. Financing activities used $104.8M, primarily reflecting net repayments of securitization, revolving and term-loan borrowings. Cash and cash equivalents were $97.2M at May 31, 2012, up from $67.6M at November 30, 2011; short-term investments were $15.2M. Restricted cash totaled $18.5M.
Total borrowings were $290.7M, down from $383.0M at November 30, 2011. The $138.7M carrying amount of convertible debt was classified as current because holders may put the notes to the company in May 2013. Current liabilities were $1,162.8M and current assets were $2,180.2M. Stockholders’ equity was $1,238.8M; total equity, including noncontrolling interest, was $1,245.8M.
Material changes versus the prior comparable period
- Revenue declined 0.5% in Q2 and 1.1% year to date. Management attributed the decrease largely to a major customer moving from traditional distribution to a fee-for-service arrangement, reducing reported revenue by approximately $84.5M in Q2 and $234.5M year to date.
- Distribution revenue declined 0.8% in Q2 and 1.3% year to date. GBS revenue increased 23.1% and 19.0%, respectively, supported by fiscal 2011 acquisitions and customer growth.
- Management said the fee-for-service transition, product mix and product supply-demand conditions supported higher gross margins. Lower vendor incentives partly offset these benefits.
- Distribution operating income increased 11.8% in Q2 and 21.6% year to date. GBS operating income fell 30.4% and 37.7%, respectively, as acquired-business costs and investments in growth weighed on margins.
- HP products represented approximately 36% of revenue in both Q2 and the first half, up from approximately 34% in the comparable 2011 periods. No customer accounted for 10% or more of revenue in 2012.
Outlook, risks and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management stated it expected sufficient resources and liquidity to meet working-capital needs for the next 12 months, while noting that the business is working-capital intensive and relies on receivables securitization and credit facilities. Cash held by foreign subsidiaries was $90.7M; repatriation could incur U.S. taxes and some balances are subject to local restrictions.
The convertible notes’ May 2013 holder put is a significant upcoming funding consideration. Management said it currently intends to cash-settle the notes and expects to use available financing features or other resources; settlement timing remains uncertain. The company reported compliance with material debt covenants. Its U.S. receivables facility and principal U.S. revolving credit facility expire in November 2013; the filing warns that loss of securitization capacity or failure to renew financing could materially affect liquidity.
Key risks include low distribution margins and competitive pricing, dependence on major OEMs—particularly HP—customer credit and inventory obsolescence, seasonality and variable IT spending, foreign-exchange exposure, and acquisition integration. The company had $243.1M of guarantees for subsidiary and other obligations. It was contingently liable for customer floor-plan financing repurchases, but reported no repurchases or known pending defaults. It recorded a $4.1M contingent indemnification liability related to a prior divestiture and said it was not involved in material proceedings. Management stated disclosure controls were effective and there had been no material change in internal control over financial reporting.
Investor verification priorities
- Verify the cash-settlement plan, liquidity sources and refinancing or repayment arrangements for the $143.8M principal convertible notes with the May 2013 put feature.
- Assess whether the improvement in gross margin can persist as product mix, supply conditions and vendor incentives change, and distinguish underlying growth from the customer’s fee-for-service revenue presentation change.
- Track GBS profitability and acquisition-related costs, given rising segment revenue but lower operating income.
- Review working-capital cash conversion, customer collections, inventory exposure and continued access to securitization, floor-plan and revolving facilities.
- Monitor HP supplier concentration, foreign cash availability and tax implications, guarantees, and potential obligations under customer financing arrangements.