Business Context and Reporting Period
Company: SYNNEX Corporation (TD SYNNEX CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2009
Business Overview: SYNNEX is a Fortune 500 business process services company operating in two segments: Distribution Services (distributing IT products to resellers and retailers) and Global Business Services (GBS) (offering customer management, software development, and back-office processing). The company operates globally with significant presence in North America, China, Mexico, Japan, the Philippines, and the UK.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended May 31, 2009 | Six Months Ended May 31, 2009 |
|---|---|---|
| Revenue | $1,812,053 | $3,540,945 |
| Gross Profit | $106,378 | $212,175 |
| Gross Margin | 5.87% | 5.99% |
| Operating Income | $31,698 | $66,398 |
| Net Income | $19,228 | $38,708 |
| Diluted EPS | $0.57 | $1.16 |
| Cash and Cash Equivalents | $74,988 | $74,988 (Balance Sheet) |
| Operating Cash Flow (6mo) | N/A | $212,931 |
| Total Debt (Current + Long-term) | $188,692 | $188,692 (Balance Sheet) |
Material Changes vs. Prior Period
- Revenue: Decreased 3.5% for the three months and 2.4% for the six months ended May 31, 2009, compared to the prior year. The decline was primarily due to softer demand in the economic environment and adverse foreign exchange impacts on Canadian operations, partially offset by the New Age Electronics (NAE) acquisition.
- Gross Profit: Increased 5.5% (quarter) and 7.9% (six months) year-over-year. Gross margin improved by 50 basis points (quarter) and 57 basis points (six months) due to product mix, favorable foreign currency impacts on inventory, and cost minimization efforts.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses increased 8.0% (quarter) and 10.3% (six months). This was driven by a $4.2 million increase in bad debt reserves (quarter) and $6.1 million (six months), along with higher deferred compensation expenses and acquisition-related costs.
- Operating Income: Remained relatively flat for the quarter (0.1% increase) but grew 3.0% for the six-month period, reflecting margin improvements offset by higher SG&A.
- Debt Reduction: Total borrowings decreased significantly from $349.0 million at November 30, 2008, to $188.7 million at May 31, 2009, due to net repayments of securitization arrangements and bank loans.
Guidance, Outlook, and Risks
Management Commentary: Management noted that while distribution revenue declined, the GBS segment saw growth of 21.9% (quarter) and 25.8% (six months) due to higher call volumes and acquisitions. The company emphasized a focus on operating income growth over revenue growth and continued cost discipline.
Liquidity and Capital Resources: The company reported strong operating cash flow of $212.9 million for the six months ended May 31, 2009. Management believes existing resources and borrowing arrangements are sufficient to meet working capital needs for the next twelve months.
Key Risks and Contingencies:
- Concentration Risk: Hewlett-Packard (HP) accounted for approximately 35% of total revenue. MiTAC International and affiliates own approximately 37% of common stock and are a key contract assembly partner.
- Debt Covenants: The company is subject to restrictive covenants regarding additional debt, dividends, and asset sales. As of May 31, 2009, the company was in compliance with all material covenants.
- Convertible Debt: The company has $143.8 million in 4.0% Convertible Senior Notes due 2018. New accounting rules (FSP APB 14-1) expected to be adopted in fiscal 2010 may increase reported interest expense.
- Bad Debt: Increased provisions for doubtful accounts were recorded, attributed to specific receivables on a limited number of customer accounts, though broader customer credit risk showed signs of improvement.
Investor Verification Checklist
- HP Dependency: Verify the status of the distribution agreement with HP, which expires May 31, 2010, and its impact on future revenue stability.
- Bad Debt Reserves: Review the specific customer accounts driving the $6.1 million increase in bad debt reserves to assess potential future write-offs.
- Debt Maturities: Confirm the renewal status of the U.S. securitization arrangement (maturing Jan 22, 2010) and the Mexico term loan (maturing Nov 24, 2009).
- Accounting Changes: Monitor the impact of adopting FSP APB 14-1 in fiscal 2010 on reported interest expense and net income.
- Related Party Transactions: Assess the terms and volume of transactions with MiTAC International, given their 37% ownership and role as a supplier/partner.