Business Context and Reporting Period
Company: SYNNEX Corporation (now TD SYNNEX Corp)
Filing Type: Form 10-K (Annual Report)
Period Ended: November 30, 2006
Business Overview: SYNNEX is a global IT supply chain services company providing product distribution, logistics, contract assembly, and demand generation marketing. The company distributes products from over 100 OEMs (including HP, IBM, Intel, Lenovo, and Microsoft) to more than 15,000 resellers. It also provides contract assembly services, primarily for Sun Microsystems. Operations are headquartered in Fremont, California, with facilities in the U.S., Canada, China, Mexico, and the U.K.
Key Financial Metrics (Fiscal Year 2006)
| Metric | 2006 (in thousands) | 2005 (in thousands) |
|---|---|---|
| Revenue | $6,343,514 | $5,640,769 |
| Gross Profit | $285,359 | $238,558 |
| Gross Margin | 4.50% | 4.23% |
| Operating Income | $96,242 | $78,937 |
| Operating Margin | 1.52% | 1.40% |
| Net Income | $51,385 | $52,825 |
| Diluted EPS | $1.61 | $1.70 |
| Cash and Equivalents | $27,881 | $13,636 |
| Working Capital | $416,865 | $350,529 |
| Total Debt (Short & Long Term) | $98,801 | $29,701 |
Cash Flow: Net cash used in operating activities was $18.9 million in 2006, compared to $7.3 million provided in 2005. This shift was primarily due to increased working capital requirements (inventory and receivables) driven by revenue growth and a multi-year contract in Mexico.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 12.5% to $6.34 billion. Distribution revenue grew 13.3%, while contract assembly revenue grew 4.5%.
- Profitability: While Net Income decreased slightly (2.7%) due to discontinued operations in the prior year, Income from Continuing Operations increased 29.7% to $51.4 million. Operating margin improved to 1.52% from 1.40%.
- Debt Levels: Total borrowings increased significantly to $98.8 million from $29.7 million, largely due to a $70.4 million term loan secured in Mexico to fund a long-term government project.
- Acquisitions: Completed three acquisitions in 2006: Telpar ($3.3M), Azerty United Canada ($14.3M), and Concentrix ($8.0M). These added capabilities in auto-ID, printer supplies, and demand generation marketing.
- Discontinued Operations: The company sold its Japan subsidiary (SYNNEX K.K.) in 2005. Consequently, 2005 net income included a $12.7 million gain on sale, which was not present in 2006.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook: Management expects continued growth driven by organic expansion and strategic acquisitions. The company focuses on operating income growth over revenue growth. They anticipate seasonality with higher sales in the fourth fiscal quarter.
Key Risks:
- Supplier Concentration: HP products represented 25% of total revenue. The U.S. agreement with HP expires May 31, 2007, and can be terminated with 30 days' notice.
- Customer Concentration: Sun Microsystems accounted for 91% of contract assembly revenue.
- Low Margins: Gross margins are low (4.5%), making the company highly sensitive to revenue fluctuations and operating costs.
- Inventory Risk: Rapid technological changes and price reductions by OEMs can lead to inventory write-downs.
- Related Party Transactions: Significant reliance on MiTAC International for manufacturing services and supply chain support.
Unusual Items:
- Share-Based Compensation: Adoption of SFAS 123(R) in Dec 2005 resulted in a $3.7 million expense in 2006, impacting operating income.
- Restructuring: A $2.5 million restructuring charge was incurred in 2005 (not 2006) related to the EMJ acquisition integration.
- Legal Proceedings: Pending trademark infringement suit by Seanix Technology Inc. and a securities fraud suit by Acropolis Systems, Inc. (seeking ~$2M).
Investor Verification Checklist
- HP Contract Renewal: Verify the status of the HP U.S. Business Development Partner Agreement expiring May 31, 2007.
- Sun Microsystems Dependency: Assess the stability of the contract assembly relationship with Sun Microsystems, which drives nearly all assembly revenue.
- Mexico Project Viability: Review the performance and cash flow implications of the long-term Mexican government contract that drove the $70M term loan.
- Inventory Valuation: Monitor inventory levels and write-downs given the rapid obsolescence risk in the IT sector.
- Debt Covenants: Confirm compliance with financial covenants (minimum net worth, fixed charge ratio) in the securitization and credit facilities.
- Acquisition Integration: Evaluate the financial contribution of the 2006 acquisitions (Telpar, Azerty, Concentrix) to ensure they meet strategic goals.