SNX

Business Context and Reporting Period

Company: SYNNEX Corporation (TD SYNNEX CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2010
Business Overview: SYNNEX is a business process services company providing product distribution, logistics, global business services (GBS), and contract assembly to OEMs, resellers, and retailers. Operations are primarily in North America (approx. 98% of revenue), with segments focused on Distribution Services and GBS.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Data reflects adjustments for new accounting standards regarding convertible debt.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 12.8% for the quarter and 12.7% for the six-month period compared to the prior year. Growth was driven by increased sales in the U.S., the acquisition of Jack of All Games (video game distribution), and favorable foreign exchange rates.
• Profitability: Operating income from continuing operations increased 44.8% for the quarter and 29.2% for the six-month period. Operating margins improved to 2.14% (quarter) and 2.08% (six months) from 1.66% and 1.81% in the prior year, partly due to accounting changes recognizing certain service contracts on a net basis.
• Discontinued Operations: The prior year included a significant one-time gain of $11.4 million from the sale of HiChina Web Solutions (discontinued operations). The current period has no discontinued operations income.
• Accounting Changes: The company adopted new standards for convertible debt accounting (ASC 470-20), resulting in increased non-cash interest expense and retrospective adjustments to prior period earnings.

Guidance, Outlook, and Risks

• Outlook: Management expects continued improvement in market conditions and demand. The company plans to fund growth through working capital facilities, convertible debt, and cash from operations. No specific forward-looking financial guidance was provided in this text.
• Recent Acquisitions: Acquired Jack of All Games, Inc. for approximately $38.1 million to expand consumer electronics offerings. Goodwill of $4.2 million and intangibles of $4.5 million were recognized.
• Liquidity: The company maintains a $350 million U.S. accounts receivable securitization program and an $80 million senior secured revolving credit facility (with accordion feature up to $150 million). Management believes resources are sufficient for the next 12 months.
• Key Risks:
  • Supplier Concentration: Hewlett-Packard (HP) accounted for 38% of total revenue. Loss of this relationship would be material.
  • Related Party Dependence: Significant reliance on MiTAC International (approx. 30% owner) for manufacturing and contract assembly services, particularly for Oracle Corporation.
  • Low Margins: The distribution business operates on low gross margins, making results sensitive to revenue fluctuations and bad debt.
  • Inventory Risk: Rapid technological changes in the IT industry create risks of inventory obsolescence.

Investor Verification Checklist

• HP Dependency: Verify the status of the distribution agreement with Hewlett-Packard, which expires May 31, 2011, and represents over one-third of revenue.
• Convertible Debt Settlement: Confirm the company's intent and ability to cash-settle the $143.8 million Convertible Senior Notes due 2018, as this impacts future liquidity and dilution.
• Working Capital Trends: Monitor the shift in operating cash flow, which turned negative ($13.5 million used) for the six months ended May 31, 2010, compared to positive cash flow in the prior year, driven by inventory buildup.
• Related Party Transactions: Review the terms of the Master Supply Agreement with MiTAC International and Oracle Corporation to assess pricing stability and capacity commitments.
• Accounting Adjustments: Understand the impact of the new convertible debt accounting standard on reported interest expense and net income compared to prior periods.