Business Context and Reporting Period
Company: SYNNEX Corporation (now TD SYNNEX Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2009
Business Overview: SYNNEX is a business process services company providing product distribution, logistics, global business services (GBS), and contract assembly to OEMs and resellers. Operations are organized into two segments: Distribution Services and GBS. The company is headquartered in Fremont, California, with significant operations in North America (97% of revenue).
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenue | $1,728,892 | $1,748,574 |
| Gross Profit | $105,797 | $95,850 |
| Gross Margin | 6.12% | 5.48% |
| Operating Income | $34,700 | $32,780 |
| Net Income | $19,480 | $16,828 |
| Diluted EPS | $0.59 | $0.51 |
| Cash from Operations | $204,942 | $73,175 |
| Cash & Equivalents (End of Period) | $60,017 | $43,554 |
| Total Debt (Current + Long-term) | $158,456 | $349,003 |
Material Changes vs. Prior Period
- Revenue: Decreased 1.1% year-over-year. Distribution revenue declined 1.6% due to foreign exchange headwinds in Canada, partially offset by U.S. growth from the New Age Electronics acquisition. GBS revenue increased 30.3% driven by higher call volumes and acquisitions.
- Profitability: Gross margin expanded 64 basis points to 6.12%, driven by product mix, favorable foreign currency impacts on inventory, and improved variable incentives. Operating income rose 5.9% despite a 12.7% increase in SG&A expenses (primarily due to higher compensation and bad debt reserves).
- Liquidity & Debt: Significant reduction in working capital borrowings. Total borrowings decreased from $349.0 million to $158.5 million, primarily due to repayments of securitization arrangements and the revolving line of credit. Net cash provided by operating activities surged to $204.9 million, largely due to a $142.3 million decrease in accounts receivable.
- Acquisitions: Completed two small acquisitions in the GBS segment for approximately $6.8 million total consideration.
Outlook, Risks, and Contingencies
- Debt Restructuring: In January 2009, the company amended its U.S. securitization program and senior secured revolving line of credit. The revolver commitment was reduced from $120 million to $80 million, and the securitization maturity was shortened to January 2010. The company incurred a $0.8 million charge for the write-off of unamortized debt costs.
- Convertible Debt: The company has $143.8 million in 4.0% Convertible Senior Notes due 2018. New accounting rules (FSP No. APB 14-1) adopted in fiscal 2010 are expected to increase reported interest expense.
- Related Party Risk: MiTAC International and affiliates own approximately 39% of the company's stock. The company relies on MiTAC for contract assembly services (notably for Sun Microsystems) and purchases inventory from them ($77.9 million in Q1 2009). Terms are negotiated on a case-by-case basis without long-term commitments.
- Market Risks: The company faces risks from low gross margins, concentration of OEM suppliers (HP accounted for 35% of revenue), and economic downturns affecting IT spending. Inventory obsolescence and credit exposure to resellers are also highlighted risks.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial covenants given the recent reduction in revolver capacity and the shortened maturity of the securitization program.
- Related Party Transactions: Assess the stability of the MiTAC International relationship and the potential impact of pricing changes on the contract assembly segment.
- Bad Debt Reserves: Review the $4.5 million increase in bad debt reserves and the allowance for doubtful accounts ($19.9 million) in light of the economic downturn.
- Accounting Changes: Monitor the impact of FSP No. APB 14-1 on future interest expense and net income starting in fiscal 2010.
- Working Capital: Confirm the sustainability of the strong operating cash flow, which was heavily influenced by the reduction in accounts receivable balances.