Business Context and Reporting Period
Company: SYNNEX Corporation (TD SYNNEX CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 31, 2005
Business Overview: SYNNEX is a global IT supply chain services company providing distribution, contract assembly, logistics, and demand generation marketing. The company operates primarily in North America, with significant operations in Asia and Europe. It is an affiliate of MiTAC International Corporation, which held approximately 67% ownership as of August 31, 2005.
Key Financial Metrics
| Metric | Three Months Ended Aug 31, 2005 |
Nine Months Ended Aug 31, 2005 |
Nine Months Ended Aug 31, 2004 |
|---|---|---|---|
| Revenue | $1,391,590 | $4,047,681 | $3,709,632 |
| Gross Profit | $58,978 | $171,668 | $154,112 |
| Gross Margin % | 4.24% | 4.24% | 4.15% |
| Operating Income (Before non-operating items) |
$19,729 | $54,548 | $54,550 |
| Net Income | $9,038 | $40,026 | $31,313 |
| Diluted EPS | $0.29 | $1.28 | $1.05 |
| Cash & Equivalents (Balance Sheet) |
$9,870 | N/A | |
| Total Debt (Current + Long-term) |
$61,715 | N/A | |
| Net Working Capital | $342,200 | N/A |
Note: All figures in thousands except per share data and percentages.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 6.7% for the quarter and 9.1% for the nine-month period compared to the prior year. This was driven by a 9.3% increase in Distribution revenue, partially offset by a 13.1% decline in Contract Assembly revenue due to decreased demand from Sun Microsystems.
- Profitability: Net income for the nine months ended August 31, 2005, was $40.0 million, a 27.8% increase from $31.3 million in the prior year. This increase was significantly aided by a $12.3 million gain on the sale of discontinued operations (SYNNEX K.K.).
- Operating Expenses: Selling, general, and administrative (SG&A) expenses increased 16.2% for the quarter and 17.6% for the nine-month period. This was attributed to the acquisition of EMJ Data Systems, restructuring charges of $2.5 million, and increased deferred compensation expenses.
- Interest Expense: Interest expense and finance charges increased 174.1% for the quarter and 115.0% for the nine-month period, driven by higher interest rates and increased debt levels in the Canadian subsidiary following the EMJ acquisition.
- Cash Flow: Net cash used in operating activities was $4.4 million for the nine months ended August 31, 2005, compared to $21.6 million used in the prior year. The improvement was largely due to net income and non-cash adjustments, though working capital requirements (inventory and receivables) consumed cash.
Guidance, Outlook, and Risks
Management Commentary:
- Discontinued Operations: The company sold 93% of its Japan subsidiary (SYNNEX K.K.) in May 2005 for shares of MCJ Company Ltd. The results of this business are reported as discontinued operations. The company holds MCJ shares valued at $19.2 million as of August 31, 2005, with forward contracts hedging 58% of the position.
- Restructuring: A restructuring program in the Canadian distribution segment, initiated in Q1 2005 and completed in Q3 2005, resulted in total charges of $2.5 million to eliminate duplicate facilities and personnel.
- Outlook: Management expects operating expenses to increase in future periods due to infrastructure investments. The company anticipates continued volatility in the IT industry and low gross margins.
Risks and Contingencies:
- Customer Concentration: HP accounted for approximately 28% of revenue in the nine months ended August 31, 2005. Sun Microsystems accounted for 93% of Contract Assembly revenue.
- Inventory Risk: The IT industry faces rapid technological changes and declining unit prices. The company relies on OEM price protection, which may not fully cover inventory value declines.
- Related Party Transactions: Significant purchases of inventory ($303.6 million for nine months) were made from MiTAC International and affiliates. The relationship is informal and not governed by long-term commitments.
- Financing: The company relies heavily on debt, accounts receivable flooring, and securitization programs for working capital. Variable interest rates expose the company to interest rate risk.
- Legal: The company is defending a trademark infringement action and a civil matter involving third-party investors in eManage.com, Inc.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of net income excluding the $12.3 million one-time gain from the sale of SYNNEX K.K.
- Contract Assembly Dependency: Assess the risk associated with the 93% reliance on Sun Microsystems for contract assembly revenue and the impact of product life cycle transitions.
- Working Capital Trends: Monitor the increase in accounts receivable and inventory levels against revenue growth to ensure efficient capital management.
- Debt Covenants: Review compliance with financial covenants in the $275 million accounts receivable securitization program and other credit facilities.
- Restructuring Completion: Confirm that the $2.5 million restructuring charges in Canada are fully recognized and that expected cost savings are materializing.
- MCJ Investment Valuation: Track the fair value of the MCJ stock received for the Japan subsidiary sale and the effectiveness of the hedging contracts.