Business Context and Reporting Period
Company: SYNNEX Corporation (TD SYNNEX CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 31, 2009
Business Overview: SYNNEX is a business process services company providing product distribution, logistics, global business services (GBS), and contract assembly to OEMs and resellers. Operations are organized into two segments: Distribution Services and GBS. The company operates primarily in North America (98% of revenue) with additional presence in China, Mexico, Japan, the Philippines, and the UK.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Aug 31, 2009 |
Nine Months Ended Aug 31, 2009 |
Nine Months Ended Aug 31, 2008 |
|---|---|---|---|
| Revenue | $2,007,163 | $5,548,108 | $5,672,335 |
| Gross Profit | $111,135 | $323,310 | $309,554 |
| Gross Margin | 5.54% | 5.83% | 5.46% |
| Operating Income | $39,279 | $105,677 | $103,957 |
| Net Income | $23,080 | $61,788 | $57,398 |
| Diluted EPS | $0.67 | $1.83 | $1.72 |
| Cash from Operations (9mo) | $200,939 | ||
| Total Debt (Current + Long-term) | $223,498 | ||
| Cash & Equivalents | $70,180 |
Material Changes vs. Prior Period
- Revenue: Decreased 1.9% for the quarter and 2.2% for the nine-month period compared to the prior year. The decline in the Distribution segment was attributed to softer economic demand and adverse foreign exchange translation on Canadian operations. Conversely, GBS revenue increased 17.7% (quarter) and 23.0% (nine months) due to higher call volumes and acquisitions.
- Profitability: Net income increased 4.6% for the quarter and 7.6% for the nine-month period. Gross margin improved to 5.83% for the nine months (up 37 basis points) driven by product mix, freight management, and favorable currency impacts on inventory.
- Expenses: Selling, general, and administrative (SG&A) expenses decreased 2.1% for the quarter but increased 5.9% for the nine months. The nine-month increase was primarily due to a $5.4 million increase in bad debt reserves and higher deferred compensation expenses.
- Debt Reduction: Total borrowings decreased significantly from $349.0 million at November 30, 2008, to $223.5 million at August 31, 2009. This included the full repayment of the Mexico secured term loan and refinancing of Canadian facilities.
Guidance, Outlook, and Risks
- Subsequent Event (Divestiture): On September 28, 2009, the company signed a definitive agreement to sell its controlling interest (approx. 79%) in HiChina Web Solutions (China Civilink) to Alibaba.com Limited for approximately $60 million. The transaction is expected to close before the end of calendar year 2009.
- Acquisitions: The company made two small acquisitions in the GBS segment during the first nine months of fiscal 2009 for a total consideration of approximately $6.6 million. Additionally, a $14.0 million earn-out payment was made related to the New Age Electronics (NAE) acquisition.
- Capital Expenditures: Purchased a 128,000 sq. ft. administrative and warehouse facility in Fremont, California, for approximately $12.2 million in July 2009.
- Risks:
- Concentration: Hewlett-Packard (HP) accounted for approximately 35% of total revenue. MiTAC International and affiliates own approximately 34% of the company's common stock and are a key contract assembly partner.
- Liquidity: The company relies heavily on accounts receivable securitization and revolving credit facilities. A downgrade of the commercial paper issuer or liquidity provider could increase borrowing costs or reduce capacity.
- Market Conditions: Low gross margins in the IT distribution industry magnify the impact of revenue fluctuations and bad debt. The company faces risks related to inventory obsolescence and supply chain disruptions.
Investor Verification Checklist
- HiChina Sale Closing: Verify the closing of the $60 million sale of HiChina Web Solutions to Alibaba and the realization of proceeds.
- HP Relationship: Monitor the status of the distribution agreement with HP, which represents 35% of revenue and expires May 31, 2010.
- Debt Covenants: Confirm continued compliance with financial covenants in the U.S. securitization and revolving credit facilities, particularly regarding liquidity tests.
- Bad Debt Reserves: Review the adequacy of the allowance for doubtful accounts, which increased significantly ($5.4 million) in the nine-month period.
- Convertible Debt Accounting: Assess the impact of the upcoming adoption of FSP APB 14-1 (effective fiscal 2010), which is expected to increase reported interest expense on the $143.8 million convertible senior notes.