Business context and reporting period
SYNNEX Corporation’s unaudited Form 10-Q covers the three months ended February 28, 2013, compared with the three months ended February 29, 2012. The filing describes wholesale distribution of technology products and global business services (GBS). Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where appropriate.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $2,460.8 million | $2,460.7 million | Flat |
| Gross profit / margin | $156.1 million / 6.34% | $169.3 million / 6.88% | Profit down 7.8%; margin down 54 bps |
| Operating income / margin | $55.9 million / 2.27% | $64.0 million / 2.60% | Down 12.6%; margin down 33 bps |
| Net income attributable to SYNNEX | $33.4 million | $38.2 million | Down 12.7% |
| Diluted EPS | $0.88 | $1.02 | Down 13.7% |
| Operating cash flow | $40.9 million | $74.2 million | Down 44.9% |
Interest expense and finance charges, net, were $5.5 million, down from $6.0 million. The effective tax rate was 35.4%, versus 34.8%.
Cash, debt and liquidity
At February 28, 2013, cash and cash equivalents were $232.1 million, versus $163.7 million at November 30, 2012; short-term investments were $15.7 million. Total borrowings were $297.7 million, up from $275.3 million, including $225.1 million classified as current. Cash less total borrowings was approximately negative $65.7 million. Current assets were $2,443.4 million and current liabilities $1,332.4 million, for a current ratio of approximately 1.83. Management said it expected available resources and liquidity to meet working-capital needs for the next 12 months and reported compliance with material debt covenants.
Operating cash flow benefited from $176.3 million of accounts-receivable collections, partly offset by payments on accounts payable and accrued liabilities and inventory purchases. Investing activities provided $0.9 million, including $4.2 million received from the sale of an equity-method investment; financing activities provided $24.2 million, including net borrowings. Cash increased $68.4 million during the quarter.
Material changes versus the prior comparable period
- Revenue was essentially unchanged, but lower gross margin reduced gross profit and operating income. Management attributed the year-over-year margin decline primarily to the prior-year benefit from hard-drive shortages, alongside increased price competition, lower supplier incentive rebates and softer demand in some markets; lower reserves and business mix provided offsets.
- Distribution revenue declined 0.3% reported, while management said it grew 1.2% on a constant-currency basis, citing commercial distribution growth and new vendors, offset by weakness in PC and printer sales, particularly to retail customers. Distribution operating income fell 16.5%.
- GBS revenue rose 16.5% to $52.5 million and operating income rose 95.7% to $3.9 million, reflecting new contracts, higher volume in some existing contracts and improved margins; declines in volume from other customers partly offset growth.
- SG&A fell 4.9% to $100.1 million, which partly offset the gross-profit decline. Management cited lower doubtful-account provisions, deferred compensation expense and operating costs, with higher personnel costs as a partial offset.
- Foreign-currency translation reduced other comprehensive income by $11.0 million, compared with a $5.8 million gain in the prior-year quarter.
Outlook, risks and unusual items
- Guidance: The filing provides no specific numerical earnings or revenue guidance. Management described demand as stable in U.S. and Asian markets and expressed confidence in liquidity for the next 12 months, while cautioning that quarterly results are not necessarily indicative of full-year results.
- Convertible notes: The $143.75 million principal amount of 4.0% convertible senior notes had May 2013 put and call features, leading the company to classify the notes as current. Holders could require cash repurchase at the first put date; the company said it intended to settle principal in cash and had financing facilities available for that purpose. The timing and manner of settlement remained uncertain.
- Acquisition: In March 2013, the company signed an agreement to acquire substantially all assets of Supercom Canada for approximately CAD36.5 million (about $35.4 million), including deferred payments, subject to approvals and expected to close in April 2013.
- Concentration and operating risks: One customer accounted for 10% of quarterly revenue; HP products accounted for approximately 31%, down from 35% a year earlier. The company cited low margins, competition, supplier dependence, changing technology, inventory obsolescence, customer credit exposure, seasonality, foreign-exchange movements and reliance on working-capital financing as risks.
- Contingencies and related matters: Guarantees issued totaled $333.3 million. The company had contingent obligations to repurchase customer inventory under floor-plan financing arrangements but reported no repurchases and no known pending defaults. It reported a $4.1 million contingent indemnification liability related to a prior sale and said ordinary-course claims were not expected to have a material adverse effect. No material proceedings were reported.
- Ownership and controls: MiTAC International and affiliates held approximately 27% of the company’s common stock; the filing notes potential influence and conflicts of interest, as well as a related-party and competitor relationship. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the May 2013 put, redemption and conversion features of the $143.75 million notes were ultimately resolved, and the resulting cash, borrowing and dilution effects.
- Whether gross-margin pressure, supplier rebates and distribution operating performance persisted after the quarter, and whether GBS growth and margins continued.
- Whether operating cash generation and working-capital needs remained adequate as receivables, inventory and payables fluctuated seasonally.
- Whether the Supercom Canada acquisition closed on the stated terms and delivered the expected expansion benefits.
- Developments in HP and customer concentration, foreign-exchange exposure, guarantees and floor-plan financing contingencies.