SYNNEX Corporation
SYNNEX CORP (Form: 10-Q, Received: 04/04/2013 15:21:49)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 __________________________________________________________
FORM 10-Q
 __________________________________________________________
(Mark One)
S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2013
OR
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 
Commission File Number: 001-31892
 _______________________________________________________
SYNNEX CORPORATION
(Exact name of registrant as specified in its charter)
 _______________________________________________________
Delaware
 
94-2703333
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
44201 Nobel Drive
Fremont, California
 
94538
(Address of principal executive offices)
 
(Zip Code)
(510) 656-3333
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   S     No   £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   S     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
Large accelerated filer  S
Accelerated filer  £
Non-accelerated filer £
Smaller reporting company £
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   S

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
 
Outstanding as of March 28, 2013
Common Stock, $0.001 par value
 
37,305,224


 



Table of Contents

SYNNEX CORPORATION
 
FORM 10-Q
INDEX
 
 
 
 
 
 
Page
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1A.
Item 2.
Item 6.
 
 

2

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

SYNNEX CORPORATION  
CONSOLIDATED BALANCE SHEETS
(currency and share amounts in thousands, except for par value)
(unaudited)
 
February 28,
2013
 
November 30,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
232,074

 
$
163,699

Short-term investments
15,739

 
15,933

Accounts receivable, net
1,196,077

 
1,401,087

Receivable from affiliates
328

 
285

Inventories
916,196

 
923,340

Current deferred tax assets
23,400

 
23,390

Other current assets
59,585

 
52,727

Total current assets
2,443,399

 
2,580,461

Property and equipment, net
120,423

 
122,923

Goodwill
184,531

 
189,088

Intangible assets, net
25,905

 
29,049

Deferred tax assets
648

 
619

Other assets
39,034

 
41,122

Total assets
$
2,813,940

 
$
2,963,262

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Borrowings under securitization, term loans and lines of credit
$
82,283

 
$
52,698

Convertible debt
142,824

 
141,436

Accounts payable
947,011

 
1,111,833

Accrued liabilities
145,987

 
181,270

Income taxes payable
14,271

 
7,470

Total current liabilities
1,332,376

 
1,494,707

Long-term borrowings
72,618

 
81,152

Long-term liabilities
54,841

 
58,783

Deferred tax liabilities
8,212

 
9,265

Total liabilities
1,468,047

 
1,643,907

Commitments and contingencies (Note 17)

 

SYNNEX Corporation stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued or outstanding

 

Common stock, $0.001 par value, 100,000 shares authorized, 37,437 and 37,348 shares issued as of February 28, 2013 and November 30, 2012, respectively
37

 
37

Additional paid-in capital
328,365

 
324,292

Treasury stock, 726 and 720 shares as of February 28, 2013 and November 30, 2012, respectively
(21,814
)
 
(21,611
)
Accumulated other comprehensive income
24,690

 
35,405

Retained earnings
1,014,269

 
980,900

Total SYNNEX Corporation stockholders’ equity
1,345,547

 
1,319,023

Noncontrolling interest
346

 
332

Total equity
1,345,893

 
1,319,355

Total liabilities and equity
$
2,813,940

 
$
2,963,262


The accompanying Notes are an integral part of these Consolidated Financial Statements (unaudited).

3

Table of Contents

SYNNEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(currency and share amounts in thousands, except for per share amounts)
(unaudited)
 
 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
Revenue
$
2,460,839

 
$
2,460,694

Cost of revenue
(2,304,752
)
 
(2,291,422
)
Gross profit
156,087

 
169,272

Selling, general and administrative expenses
(100,147
)
 
(105,284
)
Income before non-operating items, income taxes and noncontrolling interest
55,940

 
63,988

Interest expense and finance charges, net
(5,493
)
 
(6,035
)
Other income, net
1,261

 
2,099

Income before income taxes and noncontrolling interest
51,708

 
60,052

Provision for income taxes
(18,317
)
 
(20,898
)
Net income
33,391

 
39,154

Net income attributable to noncontrolling interest
(22
)
 
(931
)
Net income attributable to SYNNEX Corporation
$
33,369

 
$
38,223

Net income per share attributable to SYNNEX Corporation:
 
 
 
Basic
$
0.91

 
$
1.05

Diluted
$
0.88

 
$
1.02

Weighted-average common shares outstanding:
 
 
 
Basic
36,663

 
36,303

Diluted
38,030

 
37,632

 

The accompanying Notes are an integral part of these Consolidated Financial Statements (unaudited).

4

Table of Contents

SYNNEX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(currency in thousands)
(unaudited)
 
 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
Net income
$
33,391

 
$
39,154

Other comprehensive income (loss):
 
 
 
Unrealized gains on available-for-sale securities, net of $0 tax for both the three months ended February 28, 2013 and February 29, 2012.
239

 
87

Foreign currency translation adjustments, net of $448 and $0 tax for the three months ended February 28, 2013 and February 29, 2012, respectively
(10,962
)
 
5,801

Total other comprehensive income (loss)
(10,723
)
 
5,888

Comprehensive income:
22,668

 
45,042

Comprehensive income attributable to noncontrolling interest
(14
)
 
(474
)
Comprehensive income attributable to SYNNEX Corporation
$
22,654

 
$
44,568

 

The accompanying Notes are an integral part of these Consolidated Financial Statements (unaudited).

5

Table of Contents

SYNNEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(currency in thousands)
(unaudited)
 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
Cash flows from operating activities:
 
 
 
Net income
$
33,391

 
$
39,154

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation expense
4,275

 
4,041

Amortization of intangible assets
1,953

 
2,075

Accretion of convertible notes discount
1,388

 
1,284

Share-based compensation
2,483

 
2,009

Provision for doubtful accounts
1,699

 
2,052

Tax benefits from employee stock plans
240

 
2,043

Excess tax benefit from share-based compensation
(416
)
 
(2,056
)
Gains on investments
(569
)
 
(1,332
)
Changes in assets and liabilities, net of acquisition of businesses:
 
 
 
Accounts receivable
176,302

 
113,939

Receivables from affiliates, net
(43
)
 
(227
)
Inventories
(9,023
)
 
22,157

Other assets
(7,200
)
 
(15,371
)
Accounts payable
(146,833
)
 
(95,294
)
Accrued liabilities
(12,476
)
 
(9,654
)
Deferred liabilities
(4,266
)
 
9,358

Net cash provided by operating activities
40,905

 
74,178

Cash flows from investing activities:
 
 
 
Purchase of trading investments
(155
)
 
(3,085
)
Proceeds from sale of trading investments
927

 
3,876

Acquisition of businesses, net of cash acquired
(877
)
 
(8
)
Purchase of property and equipment
(3,041
)
 
(4,605
)
Loans and deposits to third parties, net of payments received
279

 
217

Proceeds from sale of investment in equity-method investee
4,153

 

Changes in restricted cash
(387
)
 
10,657

Net cash provided by investing activities
899

 
7,052

Cash flows from financing activities:
 
 
 
Proceeds from securitization and revolving line of credit
136,735

 
740,830

Payment of securitization and revolving line of credit
(101,967
)
 
(818,035
)
Payment of long-term bank loans, capital leases and other borrowings
(690
)
 
(749
)
Excess tax benefit from share-based compensation
416

 
2,056

Decrease in book overdraft

 
(9,465
)
Cash paid for repurchase of treasury stock
(103
)
 

Proceeds from issuance of common stock, net of taxes paid for settlement of equity awards
1,249

 
5,731

Payment for purchase of shares of subsidiary from noncontrolling interest
(11,400
)
 

Net cash provided by (used in) financing activities
24,240

 
(79,632
)
Effect of exchange rate changes on cash and cash equivalents
2,331

 
(413
)
Net increase in cash and cash equivalents
68,375

 
1,185

Cash and cash equivalents at beginning of period
163,699

 
67,571

Cash and cash equivalents at end of period
$
232,074

 
$
68,756

 

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

6

Table of Contents

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)
 
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION:  
SYNNEX Corporation (together with its subsidiaries, herein referred to as “SYNNEX” or the “Company”) is a business process services company offering a comprehensive range of services to resellers, retailers, and original equipment manufacturers (“OEMs”) worldwide. SYNNEX’s business process services include wholesale distribution and business process outsourcing (“BPO”) services. SYNNEX is headquartered in Fremont, California and has operations in North America, Central America, Asia and Europe.
The accompanying interim unaudited Consolidated Financial Statements as of February 28, 2013 and for the three month periods ended February 28, 2013 and February 29, 2012 have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The amounts as of November 30, 2012 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the fiscal year ended November 30, 2012 , included in the Company’s Annual Report on Form 10-K for the fiscal year then ended.
The results of operations for the three months ended February 28, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending November 30, 2013, or any future period and the Company makes no representations related thereto.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  
The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2012 . There have been no material changes to these accounting policies, except as described below. For a discussion of the significant accounting policies, please see the discussion in the Annual Report on Form 10-K for the fiscal year ended November 30, 2012 .
Restricted cash  
Restricted cash balances relate to temporary restrictions caused by the timing of lockbox collections under the Company’s borrowing arrangements, amounts held for outstanding letters of credit and future payments to contractors for the long-term projects at the Company’s Mexico operation.  
The following table summarizes the restricted cash balances as of February 28, 2013 and November 30, 2012 and the location where these amounts are recorded on the Consolidated Balance Sheets:
 
As of 
 
February 28, 2013
 
November 30, 2012
Related to borrowing arrangements and others:
 
 
 
        Other current assets
$
25,624

 
$
23,247

Related to long-term projects:
 
 
 
        Other assets
4,197

 
6,103

Total restricted cash
$
29,821

 
$
29,350

 

7

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

Concentration of credit risk  
Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of accounts receivable, and cash and cash equivalents. The Company’s cash and cash equivalents are maintained with high quality institutions, the compositions and maturities of which are regularly monitored by management. Through February 28, 2013 , the Company had not experienced any losses on such deposits.  
Accounts receivable include amounts due from customers and vendors primarily in the technology industry. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. The Company also maintains allowances for potential credit losses. In estimating the required allowances, the Company takes into consideration the overall quality and aging of the receivable portfolio, the existence of a limited amount of credit insurance and specifically identified customer and vendor risks. Through February 28, 2013 , such losses have been within management’s expectations.  
In the three months ended February 28, 2013 , one customer accounted for 10% of the Company's total revenue. In the three months ended February 29, 2012, no customer accounted for 10% or more of the Company's total revenue. Products purchased from the Company’s largest OEM supplier, Hewlett-Packard Company (“HP”), accounted for approximately 31% and 35% of the total revenue for the three months ended February 28, 2013 and February 29, 2012 , respectively.
As of February 28, 2013 , no customer exceeded 10% of the total consolidated accounts receivable balance. As of November 30, 2012, one customer accounted for 10% of the consolidated accounts receivable balance.
Revenue recognition
The Company generally recognizes revenue on the sale of hardware and software products when they are shipped and on services when they are performed, if a purchase order exists, the sales price is fixed or determinable, collection of resulting accounts receivable is reasonably assured, risk of loss and title have transferred and product returns are reasonably estimable. Provisions for sales returns are estimated based on historical data and are recorded concurrently with the recognition of revenue. These provisions are reviewed and adjusted periodically by the Company. Revenue is reduced for early payment discounts and volume incentive rebates offered to customers. The Company recognizes revenue on certain service contracts, post-contract software support services, and extended warranty contracts, where it is not the primary obligor, on a net basis.
The Company provides services such as call center, renewals, maintenance and contract management services to its customers under contracts that typically consist of a master services agreement or statement of work, which contains the terms and conditions of each program and service offerings. Typically the contracts are time-based or transactions or volume based. Revenue is generally recognized over the term of the contract or when service has been rendered, the sales price is fixed or determinable and collection of the resulting accounts receivable is reasonably assured.
The Company's operation in Mexico primarily focuses on projects with the Mexican government and other local agencies that are long-term in nature. Under the agreements, the Company sells computers and equipment to contractors that provide services to the Mexican government. The Company also sells computer equipment and services directly to the Mexican government. The payments are due on a monthly basis and contingent upon the satisfactory performance of certain services, fulfillment of certain obligations and meeting certain conditions. The Company recognizes revenue and cost of revenue on a straight-line basis over the term of the contract, as the contingencies are satisfied and payments become due.
Net income per common share  
Net income per common share-basic is computed by dividing the net income attributable to SYNNEX Corporation for the period by the basic weighted-average number of outstanding common shares.  
Net income per common share-diluted is computed by adding the dilutive effect of in-the-money employee stock options, restricted stock awards, restricted stock units and similar equity instruments granted by the Company to the basic weighted-average number of outstanding common shares. The Company uses the treasury stock method, under which, the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in “Additional paid-in capital” when the award becomes deductible are assumed to be used to repurchase shares.  

8

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

The Company accounts for the conversion spread on its convertible debt using the treasury stock method. It is the Company’s intent to settle the principal amount of the convertible debt in cash; accordingly, the principal amount has been excluded from the determination of diluted earnings per share.  
The calculation of net income per common share attributable to SYNNEX Corporation is presented in Note 12.  
Recent accounting pronouncements  
In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting update which requires companies to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The amendments are effective prospectively for reporting periods beginning after December 15, 2012 with early adoption permitted. The accounting update will be applicable to the Company in the first quarter of fiscal year 2014.
In March 2013, the FASB issued an accounting update that clarifies the applicable guidance for the release of the cumulative translation adjustment when an entity ceases to have a controlling financial interest in a subsidiary or a group or assets that is a business within a foreign entity. The guidance clarifies that the accounting for the release of cumulative translation adjustment into net income for sales or transfers of a controlling financial interest within a foreign entity is the same irrespective of whether the sale or transfer is of a subsidiary or a group of assets that is a business. The accounting update is applicable for fiscal years and interim reporting periods within those years beginning after December 15, 2013 with early adoption permitted. The accounting update will be applicable for the Company in the second quarter of fiscal year 2014.
During fiscal year 2013, the following accounting standards were adopted:
In June 2011, the FASB issued an accounting update that amends the presentation of “Comprehensive income” in the financial statements. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company adopted the accounting update in the first quarter of fiscal year 2013 and updated its presentation of comprehensive income in the financial statements.

NOTE 3—ACQUISITIONS AND DIVESTITURES:
Fiscal year 2012 acquisitions and divestitures
In fiscal year 2012, the Company purchased all the shares of its subsidiary SYNNEX Infotec Corporation (“Infotec Japan”) held by the noncontrolling interest SB Pacific Corporation Limited ("SB Pacific") for $17,450 . During the three months ended February 28, 2013, the Company made the final payment of $11,400 of the purchase price. The transaction increased the Company's ownership interest in Infotec Japan from 70.0% to 99.8% . In fiscal year 2012, the Company also sold its 33.3% noncontrolling interest in SB Pacific, its equity-method investee at that time, back to SB Pacific. During the three months ended February 28, 2013, the Company received the final payment of $4,153 of the sale price. The controlling shareholder of SB Pacific is Robert Huang, who is the Company’s founder and former Chairman.
In fiscal year 2012, the Company acquired a business in the Global Business Services ("GBS") segment for a purchase price of $6,200 with $1,200 payable upon the completion of certain post-closing procedures and $1,300 contingent consideration payable upon the achievement of certain target earnings. The Company recorded goodwill of $6,150 in relation to this acquisition. The determination of the fair value of the net assets acquired is preliminary subject to the finalization of more detailed analysis. This acquisition did not meet the conditions of a material business combination and was not subject to the disclosure requirements of accounting guidance for business combinations utilizing the purchase method of accounting.

NOTE 4—SHARE-BASED COMPENSATION:  
The Company recognizes share-based compensation expense for all share-based awards made to employees and directors, including employee stock options, restricted stock awards, restricted stock units and employee stock purchases, based on estimated fair values.

9

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

The Company uses the Black-Scholes valuation model to estimate fair value of stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility assumption was determined using historical volatility of the Company’s common stock.
The following table summarizes the number of share-based awards granted under the Company’s Amended and Restated 2003 Stock Incentive Plan, as amended, during the three months ended February 28, 2013 and February 29, 2012 and the grant-date fair value of the awards:
 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
 
Number of grants
 
Fair value of grants
 
Number of grants
 
Fair value of grants
Restricted stock awards
2

 
$
54

 
4
 
$
154

Restricted stock units
98

 
3,467

 

 

 
100

 
$
3,521

 
4
 
$
154

The Company recorded share-based compensation expenses of $2,483 and $2,009 in "Selling, general and administrative expenses" for the three months ended February 28, 2013 , and February 29, 2012 , respectively.

NOTE 5—BALANCE SHEET COMPONENTS:
 
As of
 
February 28, 2013
 
November 30, 2012
Short-term investments:
 
 
 
Trading securities
$
5,539

 
$
5,709

Available-for-sale securities
36

 
44

Held-to-maturity securities
8,317

 
8,297

Cost method investments
1,847

 
1,883

 
$
15,739

 
$
15,933

 
As of
 
February 28, 2013
 
November 30, 2012
Accounts receivable, net:
 
 
 
Accounts receivable
$
1,250,239

 
$
1,461,796

Less: Allowance for doubtful accounts
(17,473
)
 
(18,229
)
Less: Allowance for sales returns
(36,689
)
 
(42,480
)
 
$
1,196,077

 
$
1,401,087


10

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

 
As of
 
February 28, 2013
 
November 30, 2012
Property and equipment, net:
 
 
 
Land
$
18,467

 
$
18,699

Equipment and computers
100,806

 
101,994

Furniture and fixtures
21,029

 
21,373

Buildings and leasehold improvements
101,912

 
101,848

Construction in progress
1,565

 
1,804

Total property and equipment, gross
243,779

 
245,718

Less: Accumulated depreciation
(123,356
)
 
(122,795
)
 
$
120,423

 
$
122,923

Goodwill:
 
Distribution
 
GBS
 
Total
Balance as of November 30, 2012
$
105,860

 
$
83,228

 
$
189,088

Goodwill adjustments during the period

 
123

 
123

Foreign exchange translation
(3,464
)
 
(1,216
)
 
(4,680
)
Balance as of February 28, 2013
$
102,396

 
$
82,135

 
$
184,531

 
The additions to "Goodwill" recorded during the three months ended February 28, 2013 relate to adjustments for the purchase price allocation for a prior period acquisition in the GBS segment.
Intangible assets, net:
 
As of February 28, 2013
 
As of November 30, 2012
 
Gross
Amounts
 
Accumulated
Amortization
 
Net
Amounts
 
Gross
Amounts
 
Accumulated
Amortization
 
Net
Amounts
Vendor lists
$
36,941

 
$
(29,078
)
 
$
7,863

 
$
36,945

 
$
(28,684
)
 
$
8,261

Customer lists
48,504

 
(31,082
)
 
17,422

 
50,406

 
(30,360
)
 
20,046

Other intangible assets
4,896

 
(4,276
)
 
620

 
4,962

 
(4,220
)
 
742

 
$
90,341

 
$
(64,436
)
 
$
25,905

 
$
92,313

 
$
(63,264
)
 
$
29,049

 
Amortization expenses for the three months ended February 28, 2013 and February 29, 2012 was $1,953 and $2,075 , respectively.


11

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

NOTE 6—INVESTMENTS:  
The carrying amount of the Company’s investments is shown in the table below:  
 
February 28, 2013
 
November 30, 2012
 
Cost Basis
 
Unrealized
Gains
 
Carrying
Value
 
Cost Basis
 
Unrealized Gains
 
Carrying
Value
Short-term:
 
 
 
 
 
 
 
 
 
 
 
Trading securities
$
4,959

 
$
580

 
$
5,539

 
$
5,636

 
$
73

 
$
5,709

Available-for-sale securities

 
36

 
36

 

 
44

 
44

Held-to-maturity investments
8,317

 

 
8,317

 
8,297

 

 
8,297

Cost method securities
1,847

 

 
1,847

 
1,883

 

 
1,883

 
$
15,123

 
$
616

 
$
15,739

 
$
15,816

 
$
117

 
$
15,933

Long-term investments in other assets:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
$
983

 
$
255

 
$
1,238

 
$
1,095

 
$
22

 
$
1,117

Cost-method investments
3,301

 

 
3,301

 
3,313

 

 
3,313

 
Short-term trading securities generally consist of equity securities relating to the Company’s deferred compensation plan. Short-term and long-term available-for-sale securities primarily consist of investments in other companies’ equity securities. Held-to-maturity investments primarily consist of term deposits with maturities from the date of purchase greater than three months and less than one year. These term deposits are held until the maturity date and are not traded. Cost-method securities primarily consist of investments in a hedge fund and a private equity fund under the Company’s deferred compensation plan.
Trading securities and available-for-sale securities are recorded at fair value in each reporting period and therefore the carrying value of these securities equals their fair value. For cost-method securities, the Company records an impairment charge when the decline in fair value is determined to be other-than-temporary. The fair value of the cost-method investments is based on (i) the published fund values, (ii) a valuation model developed internally based on the published value of the securities held by the fund or (iii) an internal valuation of the investee.
The following table summarizes the total gains and losses recorded in “Other income, net” in the Consolidated Statement of Operations for changes in the fair value of the Company's trading investments during the three months ended February 28, 2013 and February 29, 2012 :
 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
Gain on trading investments
$
569

 
$
1,089


NOTE 7—DERIVATIVE INSTRUMENTS:  
In the ordinary course of business, the Company is exposed to foreign currency risk, interest risk, equity risk and credit risk. The Company’s transactions in some of its foreign operations are denominated in local currency. The Company’s foreign locations enter into transactions, and own monetary assets and liabilities, that are denominated in currencies other than their functional currency. As part of its risk management strategy, the Company uses short-term forward contracts in most of the above mentioned currencies to minimize its balance sheet exposure to foreign currency risk. These derivatives are not designated as hedging instruments. The forward exchange contracts are recorded at fair value in each reporting period and any gains or losses, resulting from the changes in fair value, are recorded in earnings in the period of change. Generally, the Company does not use derivative instruments to cover equity risk and credit risk. The Company’s policy is not to allow the use of derivatives for trading or speculative purposes. The fair value of the Company’s forward exchange contracts are also disclosed in Note 8.

12

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

The following table summarizes the fair value of the Company’s foreign exchange forward contracts as of February 28, 2013 and November 30, 2012 :
   
 
Fair Value as of
Location                 
 
February 28, 2013
 
November 30, 2012
Other current assets
 
$
1,847

 
$
1,292

Accrued liabilities
 
46

 

The notional amounts of the foreign exchange forward contracts that were outstanding as of February 28, 2013 and November 30, 2012 were $97,629 and $128,518 , respectively. The notional amounts represent the gross amounts of foreign currency that will be bought or sold at maturity. In relation to its forward contracts, the Company recorded in “Other income, net” gains of $3,428 during the three months ended February 28, 2013 and losses of $956 during the three months ended February 29, 2012 .

NOTE 8—FAIR VALUE MEASUREMENTS:  
The Company’s fair value measurements are classified and disclosed in one of the following three categories:  
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following table summarizes the valuation of the Company’s investments and financial instruments that are measured at fair value on a recurring basis:  
 
As of February 28, 2013
 
As of November 30, 2012
 
Total
 
Fair value measurement category
 
Total
 
Fair value measurement category
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
145,867

 
$
145,867

 
$

 
$

 
$
95,074

 
$
95,074

 
$

 
$

Trading securities
5,539

 
5,539

 

 

 
5,709

 
5,709

 

 

Available-for-sale securities in short-term investments
36

 
36

 

 

 
44

 
44

 

 

Available-for-sale securities in other assets
1,238

 
1,238

 

 

 
1,117

 
1,117

 

 

Forward foreign currency exchange contracts
1,847

 

 
1,847

 

 
1,292

 

 
1,292

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward foreign currency exchange contracts
$
46

 
$

 
$
46

 
$

 
$

 
$

 
$

 
$

Acquisition-related contingent consideration
2,209

 

 

 
2,209

 
2,611

 

 

 
2,611

 
The Company's cash equivalents consist primarily of highly liquid investments in money market funds and term deposits with maturity periods of three months or less. The carrying value of the cash equivalents approximates the fair value since they are near their maturity. Investments in trading and available-for-sale securities consist of equity securities and are recorded at

13

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

fair value based on quoted market prices. The fair values of forward exchange contracts are measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers.
The acquisition-related contingent consideration liability represents the future potential earn-out payments relating to the acquisitions in the GBS segment. The fair values of the contingent consideration liabilities are based on the Company’s probability assessment of the established profitability measures during the periods ranging from one year to three years from the date of the acquisitions. During the three months ended February 28, 2013 , the fair value of the contingent consideration liability was remeasured and the resulting decrease of $305 was recorded as a benefit to “Selling, general and administrative expenses” in the Consolidated Statements of Operations. The change in the fair value was due to updated estimates of expected revenue and gross profit related to the achievement of established earn-out targets.
The carrying value of held-to-maturity securities, accounts receivable, accounts payable and short-term debt, approximate fair value due to their short maturities and the interest rates which are variable in nature. The carrying value of the Company's term loans approximate their fair value since they bear interest rates that are similar to existing market rates. The convertible debt had a carrying value of $142,824 and $141,436 , and a fair value of $186,708 and $167,735 , respectively, as of February 28, 2013 and November 30, 2012 . The fair value of convertible debt is based on the closing price of the convertible debt traded in a limited trading market and is categorized as level 2 in the fair value measurement category levels.
During the three months ended February 28, 2013 , there were no transfers between the fair value measurement category levels.

NOTE 9—ACCOUNTS RECEIVABLE ARRANGEMENTS:  
The Company primarily finances its United States operations with an accounts receivable securitization program (the “U.S. Arrangement”). The Company can finance up to a maximum of $400,000 in U.S. trade accounts receivable (“U.S. Receivables”). The maturity date of the U.S. Arrangement is October 18, 2015. The effective borrowing cost under the U.S. Arrangement is a blend of the prevailing dealer commercial paper rates plus a program fee of 0.425% per annum based on the used portion of the commitment, and a facility fee of 0.425% per annum payable on the aggregate commitment of the lenders. As of both February 28, 2013 and November 30, 2012 there were no borrowings outstanding under the U.S. Arrangement.
Under the terms of the U.S. Arrangement, the Company sells, on a revolving basis, its U.S. Receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings by this subsidiary are secured by pledging all of such subsidiary's rights, title and interest in and to the U.S. Receivables as security for repayment of its borrowings. Any borrowings under the U.S. Arrangement are recorded as debt on the Company's Consolidated Balance Sheets. As is customary in trade accounts receivable securitization arrangements, a credit rating agency's downgrade of the third party issuer of commercial paper or of a back-up liquidity provider (which provides a source of funding if the commercial paper market cannot be accessed) could result in an increase in the Company's cost of borrowing or loss of the Company's financing capacity under these programs if the commercial paper issuer or liquidity back-up provider is not replaced. Loss of such financing capacity could have a material adverse effect on the Company's financial condition and results of operations.
The Company also has other financing agreements in North America with various financial institutions (“Flooring Companies”) to allow certain customers of the Company to finance their purchases directly with the Flooring Companies. Under these agreements, the Flooring Companies pay the Company directly on behalf of the customer and typically charge certain fees which the Company records as flooring fees. The Company is contingently liable to repurchase inventory sold under flooring agreements in the event of any default by its customers under the agreement and such inventory being repossessed by the Flooring Companies. Please see Note 17—Commitments and Contingencies for further information.
The following table summarizes the net sales financed through the flooring agreements and the flooring fees incurred:  
 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
Net sales financed
$
186,335

 
$
170,892

Flooring fees (1)
1,227

 
1,022

____________________________________
(1)
Flooring fees are included within “Interest expense and finance charges, net.”

14

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

As of February 28, 2013 and November 30, 2012 , accounts receivable subject to flooring agreements were $42,195 and $55,963 , respectively.
Infotec Japan has arrangements with various banks and financial institutions for the sale and financing of approved accounts receivable and notes receivable. The amount outstanding under these arrangements that was sold, but not collected as of February 28, 2013 and November 30, 2012 was $17,899 and $11,233 , respectively.

NOTE 10—BORROWINGS:  
Borrowings consist of the following:  
 
As of
 
February 28, 2013
 
November 30, 2012
Convertible debt
$
142,824

 
$
141,436

SYNNEX Canada term loan
8,170

 
8,648

Infotec Japan credit facility
135,047

 
111,542

Other borrowings and capital leases
11,684

 
13,660

Total borrowings
297,725

 
275,286

Less: Current portion
(225,107
)
 
(194,134
)
Non-current portion
$
72,618

 
$
81,152

Convertible debt  
In May 2008, the Company issued $143,750 of aggregate principal amount of its 4.0% Convertible Senior Notes due 2018 (the “Convertible Senior Notes”) in a private placement. The carrying amount of the Convertible Senior Notes, net of the unamortized debt discount, was $142,824 and $141,436 as of February 28, 2013 and November 30, 2012 , respectively. The Convertible Senior Notes are senior unsecured obligations of the Company and have a cash coupon interest rate of 4.0% per annum. The Company may redeem the Convertible Senior Notes, in whole or in part, for cash on or after May 20, 2013, at a redemption price equal to 100% of the principal amount of the Convertible Senior Notes to be redeemed, plus any accrued and unpaid interest (including any additional interest and any contingent interest) up to, but excluding, the redemption date. See Note 11 Convertible Debt. Also, the Convertible Senior Notes contain various features which under certain circumstances could allow the holders to convert the Convertible Senior Notes into shares before their ten -year maturity. Further, the date of settlement of the Convertible Senior Notes is uncertain due to various features including put and call elements which occur in May, 2013. Because of the May 2013 put and call features, the Company has classified the Convertible Senior Notes as short-term debt in the Consolidated Balance Sheets.
SYNNEX U.S. securitization  
The Company can finance up to a maximum of $400,000 in U.S. Receivables under its U.S. Arrangement. See Note 9 Accounts Receivable Arrangements. The effective borrowing cost under the U.S. Arrangement is a blend of the prevailing dealer commercial paper rates, plus a program fee on the used portion of the commitment and a facility fee payable on the aggregate commitment. As of both February 28, 2013 and November 30, 2012 there were no borrowings outstanding under the U.S. Arrangement.
SYNNEX U.S. senior secured revolving line of credit  
The Company has a senior secured revolving line of credit arrangement (the “Revolver”) with a financial institution which provides a maximum commitment of $100,000 which expires in October 2017. The Revolver includes an accordion feature to increase the maximum commitment by an additional $50,000 to $150,000 at the Company's request, in the event the current lender consents to such increase or another lender participates in the Revolver. Interest on borrowings under the Revolver is based on a base rate or London Interbank Offered Rate (“LIBOR”), at the Company's option. The margin on the LIBOR is determined in accordance with the Company's fixed charge coverage ratio and is currently 1.50% per annum. The Company's base rate is based on the financial institution's prime rate. The Revolver also contains an unused line fee of 0.30%

15

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

per annum. The Revolver is secured by the Company's inventory and other assets. It would be an event of default under the Revolver if a lender under the U.S. Arrangement declines to extend the maturity date at any point within thirty days prior to the maturity date of the U.S. Arrangement, unless the Company has a binding commitment in place to renew or replace the U.S. Arrangement. There is no event of default if within the thirty day period prior to maturity of the Revolver if: (a) borrowing availability exceeds 90% of the commitment amount and (b) the fixed charge coverage ratio, when measured at the end of the fiscal quarter on a trailing four quarter basis, is greater than or equal to 1.75 to 1.00. There were no borrowings outstanding under this credit arrangement as of both February 28, 2013 and November 30, 2012 .
SYNNEX Canada revolving line of credit  
SYNNEX Canada Limited ("SYNNEX Canada") has a revolving line of credit arrangement with a financial institution (the “Canadian Revolving Arrangement”) which has a maximum commitment of CAD100,000 and includes an accordion feature to increase the maximum commitment by an additional CAD25,000 to CAD125,000 , at SYNNEX Canada's request. The Canadian Revolving Arrangement also provides a sublimit of $5,000 for the issuance of standby letters of credit. As of February 28, 2013 and November 30, 2012 , outstanding standby letters of credit totaled $3,323 and $3,447 , respectively. SYNNEX Canada has granted a security interest in substantially all of its assets in favor of the lender under the Canadian Revolving Arrangement. In addition, the Company pledged its stock in SYNNEX Canada as collateral for the Canadian Revolving Arrangement. The interest rate applicable under the Canadian Revolving Arrangement is equal to (i) the Canadian base rate plus a margin of 0.75% for a Base Rate Loan in Canadian Dollars, (ii) the US base rate plus a margin of 0.75% for a Base Rate Loan in U.S. Dollars, and (iii) the Bankers' Acceptance rate ("BA") plus a margin of 2.00% for a BA Rate Loan. The Canadian base rate means the greater of (a) the prime rate determined by a major Canadian financial institution and (b) the one month Canadian Dealer Offered Rate ("CDOR") (the average rate applicable to Canadian dollar bankers' acceptances for the applicable period) plus 1.50% . The US base rate means the greater of (a) a reference rate determined by a major Canadian financial institution for US dollar loans made to Canadian borrowers and (b) the US federal funds rate plus 0.50% . A fee of 0.25% per annum is payable with respect to the unused portion of the commitment. The credit arrangement expires in May 2017. As of both February 28, 2013 and November 30, 2012 , there were no borrowings outstanding under the Canadian Revolving Arrangement.
SYNNEX Canada term loan
SYNNEX Canada has a term loan associated with the purchase of its logistics facility in Guelph, Canada. The interest rate for the unpaid principal amount is a fixed rate of 5.374% per annum. The final maturity date for repayment of the unpaid principal is April 1, 2017.
Infotec Japan credit facility
Infotec Japan has a credit agreement with a group of financial institutions for a maximum commitment of JPY14,000,000 . The credit agreement is comprised of a JPY6,000,000 long-term loan and a JPY8,000,000 short-term revolving credit facility. The credit agreement was refinanced in December 2012, to increase the short-term revolving credit facility to JPY8,000,000 from JPY4,000,000 . The interest rate for the long-term and short-term loans is based on the Tokyo Interbank Offered Rate ("TIBOR") plus a margin of 1.90% per annum. The refinanced credit facility expires in December 2015. The long-term loan can be repaid at any time prior to December 2015 without penalty. The Company has issued a guarantee to cover all obligations of Infotec Japan to the lenders.
Other borrowings and capital leases
Infotec Japan has a short-term revolving credit facility of JPY1,000,000 with a financial institution. The credit facility was renewed for one year in March 2013 and bears an interest rate that is based on TIBOR plus a margin of 1.60% per annum. As of February 28, 2013 and November 30, 2012 , the balances outstanding under this credit facility were $10,804 and $12,124 , respectively. In addition, as of November 30, 2012, Infotec Japan had a term loan with a financial institution with a balance of $424 , which was repaid in December 2012 and bore a fixed interest rate of 1.50% .
As of February 28, 2013 and November 30, 2012 , the Company also had $880 and $1,112 , respectively, outstanding in capital lease obligations primarily pertaining to Infotec Japan and under arrangements with various banks and financial institutions for the sale and financing of approved accounts receivable and notes receivable with recourse provisions to Infotec Japan.

16

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

Interest expense and finance charges 
For the three months ended February 28, 2013 and February 29, 2012, the total interest expense and finance charges for the Company's borrowings were $6,556 and $6,954 , respectively, including non-cash interest expenses of $1,388 and $1,284 , respectively, for the Convertible Senior Notes. The variable interest rates ranged between 0.67% and 3.53% during the three months ended February 28, 2013 and between 0.87% and 3.92% during the three months ended February 29, 2012 .
Covenants compliance  
In relation to the U.S. Arrangement, the Revolver, the Infotec Japan credit facility and the Canadian Revolving Arrangement, the Company has a number of covenants and restrictions that, among other things, require the Company to comply with certain financial and other covenants. These covenants require the Company to maintain specified financial ratios and satisfy certain financial condition tests, including minimum net worth and fixed charge coverage ratios. They also limit the Company’s ability to incur additional debt, make or forgive intercompany loans, pay dividends and make other types of distributions, make certain acquisitions, repurchase the Company’s stock, create liens, cancel debt owed to the Company, enter into agreements with affiliates, modify the nature of the Company’s business, enter into sale-leaseback transactions, make certain investments, enter into new real estate leases, transfer and sell assets, cancel or terminate any material contracts and merge or consolidate. The covenants also limit the Company’s ability to pay cash upon conversion, redemption or repurchase of the Convertible Senior Notes subject to certain liquidity tests.
Guarantees  
The Company has issued guarantees to certain vendors and lenders of its subsidiaries for trade credit lines and loans to ensure compliance with subsidiary sales agreements. In addition, the Company, as the ultimate parent, guaranteed the obligations of SYNNEX Investment Holdings Corporation up to $35,035 in connection with the December 2009 sale of China Civilink (Cayman), which operated in China as HiChina Web Solutions, to Alibaba.com Limited. The total guarantees issued by the Company as of February 28, 2013 and November 30, 2012 were $333,301 and $264,162 , respectively. The Company is obligated under these guarantees to pay amounts due should its subsidiaries or customer not pay valid amounts owed to their vendors or lenders or not comply with subsidiary sales agreements.

NOTE 11—CONVERTIBLE DEBT:  
 
As of
  
February 28, 2013
 
November 30, 2012
Principal amount
$
143,750

 
$
143,750

Less: Unamortized debt discount
(926
)
 
(2,314
)
Net carrying amount
$
142,824

 
$
141,436

 
In May 2008, the Company issued $143,750 of aggregate principal amount of the Convertible Senior Notes in a private placement. The Convertible Senior Notes have a cash coupon interest rate of 4.0% per annum. Interest on the Convertible Senior Notes is payable in cash semi-annually in arrears on May 15 and November 15 of each year, and commenced on November 15, 2008. In addition, the Company will pay contingent interest in respect of any six -month period from May 15 to November 14 or from November 15 to May 14, with the initial six -month period commencing May 15, 2013, if the trading price of the Convertible Senior Notes for each of the ten trading days immediately preceding the first day of the applicable six -month period equals 120% or more of the principal amount of the Convertible Senior Notes. During any interest period when contingent interest is payable, the contingent interest payable per Convertible Senior Note is equal to 0.55% of the average trading price of the Convertible Senior Notes during the ten trading days immediately preceding the first day of the applicable six -month interest period. The Convertible Senior Notes mature on May 15, 2018, subject to earlier redemption, repurchase or conversion.  
Holders may convert their Convertible Senior Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date for such Convertible Senior Notes under the following circumstances: (1) during any fiscal quarter after the fiscal quarter ended August 31, 2008 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least twenty trading days in the period of thirty consecutive trading days

17

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the conversion price of the Convertible Senior Notes on the last day of such preceding fiscal quarter; (2) during the five business-day period after any five consecutive trading-day period (the “Measurement Period”) in which the trading price per $ 1 principal amount of the Convertible Senior Notes for each day of that Measurement Period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate of the Convertible Senior Notes on each such day; (3) if the Company has called the particular Convertible Senior Notes for redemption, until the close of business on the business day prior to the redemption date; or (4) upon the occurrence of certain corporate transactions. These contingencies were not triggered as of February 28, 2013 . In addition, holders may also convert their Convertible Senior Notes at their option at any time beginning on November 15, 2017, and ending at the close of business on the business day immediately preceding the maturity date for the Convertible Senior Notes, without regard to the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the common stock or a combination thereof at the Company’s election. The initial conversion rate for the Convertible Senior Notes is 33.9945 shares of common stock per $1 principal amount of Convertible Senior Notes, equivalent to an initial conversion price of $29.42 per share of common stock. Such conversion rate will be subject to adjustment in certain events but will not be adjusted for accrued interest, including any additional interest and any contingent interest. The Company may enter into convertible hedge arrangements to hedge the in-the-money feature of the Convertible Senior Notes to counter the potential share dilution.
The Company may not redeem the Convertible Senior Notes prior to May 20, 2013. The Company may redeem the Convertible Senior Notes, in whole or in part, for cash on or after May 20, 2013, at a redemption price equal to 100% of the principal amount of the Convertible Senior Notes to be redeemed, plus any accrued and unpaid interest (including any additional interest and any contingent interest) up to, but excluding, the redemption date. Also, the Convertible Senior Notes contain various features which under certain circumstances could allow the holders to convert the Convertible Senior Notes into shares before their ten-year maturity.
Holders may require the Company to repurchase all or a portion of their Convertible Senior Notes for cash on May 15, 2013 at a purchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest (including any additional interest and any contingent interest) up to, but excluding, the repurchase date. If the Company undergoes a fundamental change, holders may require it to purchase all or a portion of their Convertible Senior Notes for cash at a price equal to 100% of the principal amount of the Convertible Senior Notes to be purchased, plus any accrued and unpaid interest (including any additional interest and any contingent interest,) up to, but excluding, the fundamental change repurchase date.  
The Convertible Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with other senior unsecured debt and rank senior to subordinated debt, if any. The Convertible Senior Notes effectively rank junior to any of the Company’s secured indebtedness to the extent of the assets securing such indebtedness. The Convertible Senior Notes are also structurally subordinated in right of payment to all indebtedness and other liabilities and commitments (including trade payables) of the Company’s subsidiaries. The net proceeds from the Convertible Senior Notes were used for general corporate purposes and to reduce outstanding balances under the U.S. Arrangement and the Revolver.  
The Convertible Senior Notes are governed by an indenture, dated as of May 12, 2008, between U.S. Bank National Association, as trustee, and the Company, which contains customary events of default.  
The Convertible Senior Notes as hybrid instruments are accounted for as convertible debt and are recorded at carrying value. The right of the holders of the Convertible Senior Notes to require the Company to repurchase the Convertible Senior Notes in the event of a fundamental change and the contingent interest feature would require separate measurement from the Convertible Senior Notes; however, the amount is insignificant. The additional shares issuable following certain corporate transactions do not require bifurcation and separate measurement from the Convertible Senior Notes.  
In accordance with the provisions of the standards for accounting for convertible debt, the Company recognized both a liability and an equity component of the Convertible Senior Notes in a manner that reflects its non-convertible debt borrowing rate at the date of issuance of 8.0% . The value assigned to the debt component, which is the estimated fair value, as of the issuance date, of a similar note without the conversion feature, was determined to be $120,332 . The difference between the Convertible Senior Note cash proceeds and this estimated fair value was estimated to be $23,418 and was retroactively recorded as a debt discount and will be amortized to “Interest expense and finance charges, net” over the five -year period to the first put date, utilizing the effective interest method.  

18

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

As of February 28, 2013 , the remaining amortization period is approximately three months assuming the redemption of the Convertible Senior Notes at the first purchase date of May 20, 2013. Based on a cash coupon interest rate of 4.0% , the Company recorded contractual interest expense of $1,624 during both the three months ended February 28, 2013 and February 29, 2012 . Based on an effective rate of 8.0% , the Company recorded non-cash interest expenses of $1,388 and $1,284 , respectively, during the three months ended February 28, 2013 and February 29, 2012 . As of both February 28, 2013 and November 30, 2012 , the carrying value of the equity component of the Convertible Senior Notes, net of allocated issuance costs, was $22,836 .
The date of settlement of the Convertible Senior Notes is uncertain due to the various features of the Convertible Senior Notes including put and call elements. Because of the May 2013 put and call features, the Company has classified the Convertible Senior Notes as short-term debt in the Consolidated Balance Sheets.
The Company currently intends to settle the principal amount of the Convertible Senior Notes using cash at some future date. The Company maintains within its U.S. Arrangement and Revolver ongoing features that allow the Company to utilize cash from these facilities to cash settle the Convertible Senior Notes.

NOTE 12—NET INCOME PER COMMON SHARE:  
The following table sets forth the computation of basic and diluted net income per common share for the periods indicated:  
 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
Net income attributable to SYNNEX Corporation
$
33,369

 
$
38,223

Weighted-average common shares - basic
36,663

 
36,303

Effect of dilutive securities:
 
 
 
Stock options, restricted stock awards and restricted stock units
520

 
635

Conversion spread of convertible debt
847

 
694

Weighted-average common shares - diluted
38,030

 
37,632

Net income per share attributable to SYNNEX Corporation:
 
 
 
Basic
$
0.91

 
$
1.05

Diluted
$
0.88

 
$
1.02

Options to purchase 19 and 7 shares of common stock during the three months ended February 28, 2013 and February 29, 2012 , respectively, have not been included in the computation of diluted net income per share as their effect would have been anti-dilutive.

NOTE 13—SEGMENT INFORMATION:  
Operating segments
Operating segments are based on components of the Company that engage in business activity that earn revenue and incur expenses and (a) whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resource allocation and performance and (b) for which discrete financial information is available.
The distribution services segment distributes IT systems, peripherals, system components, software, networking equipment, consumer electronics ("CE") and complementary products and offers data center server and storage solutions. The distribution services segment also provides contract assembly services.
The GBS segment offers a range of BPO services to customers that include technical support, renewals management, lead management, direct sales, customer service, back office processing and information technology outsourcing ("ITO"). Many of

19

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

these services are delivered and supported on the proprietary software platforms that the Company has developed to provide additional value to its customers.
Summarized financial information related to the Company’s reportable business segments for the three months ended February 28, 2013 and February 29, 2012 is shown below:
 
Distribution
 
GBS
 
Inter-Segment
Elimination
 
Consolidated
Three months ended February 28, 2013
 
 
 
 
 
 
 
Revenue
$
2,416,904

 
$
52,483

 
$
(8,548
)
 
$
2,460,839

Income from operations before non-operating items, income taxes and noncontrolling interest
52,062

 
3,898

 
(20
)
 
55,940

Three months ended February 29, 2012
 
 
 
 
 
 
 
Revenue
2,423,264

 
45,062

 
(7,632
)
 
2,460,694

Income from operations before non-operating items, income taxes and noncontrolling interest
62,365

 
1,992

 
(369
)
 
63,988

 
 
 
 
 
 
 
 
Total assets as of February 28, 2013
$
2,704,032

 
$
314,108

 
$
(204,200
)
 
$
2,813,940

Total assets as of November 30, 2012
2,848,689

 
316,993

 
(202,420
)
 
2,963,262

The inter-segment elimination relates to the inter-segment, back office support services provided by the GBS segment to the distribution services segment, elimination of inter-segment profit, inter-segment investments and inter-segment receivables.
Segment by geography
The Company primarily operates in North America. The United States and Canada are included in the “North America” operations. China, India, Japan and the Philippines are included in “Asia-Pacific” operations and the remaining countries it operates in are included in “Other” operations. The revenues attributable to countries are based on geography of entities from where the products are distributed or services are provided.
Shown below is summarized financial information related to the geographic areas in which the Company operated during the three months ended February 28, 2013 and February 29, 2012:
 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
Revenue:
 
 
 
North America
$
2,129,513

 
$
2,109,839

Asia-Pacific
311,624

 
337,133

Other
19,702

 
13,722

 
$
2,460,839

 
$
2,460,694

 
As of
 
February 28, 2013
 
November 30, 2012
Property and equipment, net:
 
 
 
North America
$
86,409

 
$
87,689

Asia-Pacific
21,546

 
22,782

Other
12,468

 
12,452

 
$
120,423

 
$
122,923

Revenue in the United States was approximately 74% and 71% of the total revenue for the three months ended February 28, 2013 and February 29, 2012, respectively. Revenue in Canada was approximately 13% and 15% of total revenue

20

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

for the three months ended February 28, 2013 and February 29, 2012, respectively. Revenue in Japan was approximately 12% and 13% of the total revenue for the three months ended February 28, 2013 and February 29, 2012, respectively.
Property and equipment, net in the United States was approximately 58% and 57% of the total as of February 28, 2013 and November 30, 2012 , respectively. Property and equipment, net in Canada was approximately 14% of the total as of both February 28, 2013 and November 30, 2012 . No other country represented more than 10% of the total property and equipment, net.

NOTE 14—RELATED PARTY TRANSACTIONS: 
The Company has a business relationship with MiTAC International Corporation (“MiTAC International”), a publicly-traded company in Taiwan that began in 1992 when it became its primary investor through its affiliates. As of both February 28, 2013 and November 30, 2012 , MiTAC International and its affiliates beneficially owned approximately 27% of the Company’s common stock. Matthew Miau, the Company’s Chairman Emeritus of the Board of Directors and a director, is the Chairman of MiTAC International and a director or officer of MiTAC International’s affiliates. The shares owned by MiTAC International are held by the following entities:
 
As of February 28, 2013
MiTAC International (1)
5,908

Synnex Technology International Corp. (2)
4,283

Total
10,191

_____________________________________
(1)
Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC International. Excludes 591 shares (of which 381 shares are directly held and 210  shares are subject to exercisable options) held by Matthew Miau.
(2)
Synnex Technology International Corp. ("Synnex Technology International") is a separate entity from the Company and is a publicly-traded corporation in Taiwan. Shares are held via Peer Development Ltd., a wholly-owned subsidiary of Synnex Technology International. MiTAC International owns a noncontrolling interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a noncontrolling interest of 13.7% in Synnex Technology International.
MiTAC International generally has significant influence over the Company and over the outcome of all matters submitted to stockholders for consideration, including any merger or acquisition of the Company. Among other things, this could have the effect of delaying, deterring or preventing a change of control over the Company.
The Company purchased inventories from MiTAC International and its affiliates totaling $2,725 and $241 during the three months ended February 28, 2013 and February 29, 2012 , respectively. The Company’s sales to MiTAC International and its affiliates during the three months ended February 28, 2013 and February 29, 2012, totaled $295 and $1,134 , respectively. In addition, during the three months ended February 28, 2013 and February 29, 2012, the Company recorded $931 and $945 , respectively, in reimbursements for rent and overhead costs for facilities used.
The Company’s business relationship with MiTAC International has been informal and is not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments. The Company negotiates manufacturing, pricing and other material terms on a case-by-case basis with MiTAC International and its contract assembly customers for a given project. While MiTAC International is a related party and a controlling stockholder, the Company believes that the significant terms under its arrangements with MiTAC International, including pricing, will not materially differ from the terms it could have negotiated with unaffiliated third parties, and it has adopted a policy requiring that material transactions with MiTAC International or its related parties be approved by its Audit Committee, which is composed solely of independent directors. In addition, Matthew Miau’s compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors.  
Synnex Technology International is a publicly-traded corporation in Taiwan that currently provides distribution and fulfillment services to various markets in Asia and Australia, and is also a potential competitor of the Company. Neither MiTAC International, nor Synnex Technology International is restricted from competing with the Company.


21

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

NOTE 15—PENSION AND EMPLOYEE BENEFITS PLANS:  
The employees of Infotec Japan are covered by certain defined benefit pension plans, including a multi-employer pension plan. Full-time employees are eligible to participate in the plans on the first day of February following their date of hire and are not required to contribute to the plans.
The components of net periodic pension costs pertaining to the Company's single employer benefit plan during the three months ended February 28, 2013 and February 29, 2012 were as follows:
 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
Service cost
$
161

 
$
177

Interest cost
41

 
46

Expected return on plan assets
(16
)
 
(28
)
Net periodic pension costs
$
186

 
$
195

During the three months ended February 28, 2013 and February 29, 2012, the Company contributed $173 and $198 , respectively, to the single-employer benefit plan.

NOTE 16—EQUITY:
Share repurchase program 
In June 2011, the Board of Directors authorized a three -year $65,000 share repurchase program. During the three months ended February 28, 2013 , the Company purchased 3 shares at a weighted-average price of $32.27 per share. As of February 28, 2013 the Company has purchased 310 shares for a total cost of $9,561 under this share repurchase program.
The share purchases were made on the open market and the shares repurchased by the Company are held in treasury for general corporate purposes.

22

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

Changes in equity
A reconciliation of the changes in equity for the three months ended February 28, 2013 and February 29, 2012 is presented below:
 
 
Three Months Ended February 28, 2013
 
Three Months Ended February 29, 2012
 
 
  Attributable to  
SYNNEX
Corporation
 
  Attributable to  
Noncontrolling
interest
 
Total Equity    
 
Attributable
  to SYNNEX  
    Corporation     
 
  Attributable to  
Noncontrolling
interest
 
Total Equity    
Beginning balance of equity:
 
$
1,319,023

 
$
332

 
$
1,319,355

 
$
1,158,379

 
$
10,079

 
$
1,168,458

Issuance of common stock on exercise of options
 
1,041

 

 
1,041

 
5,873

 

 
5,873

Issuance of common stock for employee stock purchase plan
 
308

 

 
308

 
333

 

 
333

Tax benefit from exercise of non-qualified stock options
 
240

 

 
240

 
2,043

 

 
2,043

Taxes paid for the settlement of equity awards
 
(99
)
 

 
(99
)
 
(95
)
 

 
(95
)
Share-based compensation
 
2,483

 

 
2,483

 
2,009

 

 
2,009

Repurchase of treasury stock
 
(103
)
 

 
(103
)
 

 

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
33,369

 
22

 
33,391

 
38,223

 
931

 
39,154

Other comprehensive income (loss):
 

 

 

 

 

 

Changes in unrealized gain on available-for-sale securities
 
239

 

 
239

 
15

 
72

 
87

Net unrealized components of defined benefit pension plans
 

 

 

 
64

 
(64
)
 

Foreign currency translation adjustments
 
(10,954
)
 
(8
)
 
(10,962
)
 
6,266

 
(465
)
 
5,801

Total other comprehensive income (loss)
 
(10,715
)
 
(8
)
 
(10,723
)
 
6,345

 
(457
)
 
5,888

Total comprehensive income
 
22,654

 
14

 
22,668

 
44,568

 
474

 
45,042

Ending balance of equity:
 
$
1,345,547

 
$
346

 
$
1,345,893

 
$
1,213,110

 
$
10,553

 
$
1,223,663

The balance of "Accumulated other comprehensive income," which is included in the total equity attributable to SYNNEX Corporation, primarily comprises of cumulative translation adjustments.

23

SYNNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(continued)
For the three months ended February 28, 2013 and February 29, 2012
(currency and share amounts in thousands, except per share amounts)
(unaudited)

NOTE 17—COMMITMENTS AND CONTINGENCIES:
The Company was contingently liable as of February 28, 2013 under agreements to repurchase repossessed inventory acquired by Flooring Companies as a result of default on floor plan financing arrangements by the Company's customers. These arrangements are described in Note 9 Accounts Receivable Arrangements. Losses, if any, would be the difference between the repossession cost and the resale value of the inventory. There have been no repurchases through February 28, 2013 under these agreements and the Company is not aware of any pending customer defaults or repossession obligations. From time to time, the Company receives notices from third parties, including customers and suppliers, seeking indemnification, payment of money or other actions in connection with claims made against them. Also, the Company is involved in various bankruptcy preference actions where the Company was a supplier to the companies now in bankruptcy. In addition, the Company is subject to various other claims, both asserted and unasserted, that arise in the ordinary course of business. The Company is not currently involved in any material proceedings.
In December 2009, the Company sold China Civilink (Cayman), which operated in China as HiChina Web Solutions, to Alibaba.com Limited. In conjunction with this sale, the Company has recorded a contingent indemnification liability of $4,122 .
The Company does not believe that the above commitments and contingencies will have a material adverse effect on the Company's results of operations, financial position or cash flows.

NOTE 18—SUBSEQUENT EVENTS:
In March 2013, the Company announced that it has signed a definitive agreement to acquire substantially all of the assets of Supercom Canada Limited, a distributor of IT and consumer electronics products and services in Canada. The acquisition is expected to close in April 2013 subject to regulatory and other approvals. The purchase price will be approximately CAD36,500 , or approximately US$35,413 , in cash, which includes approximately CAD4,450 , or approximately US$4,317 , in deferred payments, subject to certain post-closing conditions, payable within 18 months. The acquisition will be integrated into the distribution services segment and is expected to expand the Company's existing product and service offerings in Canada.


24


ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this Report.  
When used in this Quarterly Report on Form 10-Q or the Report, the words “believes,” “plans,” “estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “may,” “designed,” “will,” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about our business model and our services, our market strategy, including expansion of our product lines, our infrastructure, anticipated benefits, costs, and timing of our acquisitions, impact of MiTAC International Corporation, or MiTAC International, ownership interest in us, our revenue and operating results, our gross margins, competition with Synnex Technology International Corp., our future needs for additional financing, concentration of customers, our international operations, including our operations in Japan, expansion of our operations, our strategic acquisitions of businesses and assets, effects of future expansion of our operations, adequacy of our cash resources to meet our capital needs, cash held by our foreign subsidiaries, our convertible notes, including the settlement of our convertible notes, adequacy of our disclosure controls and procedures, pricing pressures, competition, impact of our accounting policies, our anti-dilution share repurchase program, and statements regarding our securitization programs and revolving credit lines. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed, as well as the seasonality of the buying patterns of our customers, concentration of sales to large customers, dependence upon and trends in capital spending budgets in the IT and consumer electronics, or CE, industries, fluctuations in general economic conditions and risks set forth under Part II, Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview
We are a Fortune 500 corporation and a leading business process services company, servicing resellers, retailers and original equipment manufacturers, or OEMs, in multiple regions around the world. Our primary business process services are wholesale distribution and business process outsourcing, or BPO. We operate in two segments: distribution services and global business services, or GBS. Our distribution services segment distributes IT systems, peripherals, system components, software, networking equipment, CE, and complementary products and also offers data center server and storage solutions. Our GBS segment offers a range of BPO services to customers that include technical support, renewals management, lead management, direct sales, customer service, back office processing and information technology outsourcing, or ITO. Many of these services are delivered and supported on the proprietary software platforms we have developed to provide additional value to our customers.
We combine our core strengths in distribution with our BPO services to help our customers achieve greater efficiencies in time to market, cost minimization, real-time linkages in the supply chain and after-market product support. We distribute more than 25,000 technology products (as measured by active SKUs) from more than 200 IT, CE and OEM suppliers to more than 20,000 resellers, system integrators, and retailers throughout the United States, Canada, Japan and Mexico. As of February 28, 2013 , we had over 12,000 full-time and temporary employees worldwide. From a geographic perspective, approximately 87% and 86% , of our total revenue was from North America for the three months ended February 28, 2013 and February 29, 2012.
In our distribution services segment, we purchase IT systems, peripherals, system components, software, networking equipment, CE and complementary products from our primary suppliers such as Hewlett-Packard Company, or HP, Lenovo, Seagate Technologies LLC, Panasonic Corporation and Acer Inc. and sell them to our reseller and retail customers. We perform a similar function for our distribution of licensed software products. Our reseller customers include value-added resellers, or VARs, corporate resellers, government resellers, system integrators, direct marketers, and national and regional retailers. In our distribution business, we provide comprehensive IT solutions in key vertical markets such as government and healthcare. We also provide specialized service offerings that increase efficiencies in areas like print management, renewals, networking and other services. In our GBS segment, our customers are primarily manufacturers of IT hardware and CE devices, developers of software, cloud service providers, and broadcast and social media.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates for the three months ended February 28, 2013 from our disclosure in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012 . For

25

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more information on our critical accounting policies, please see the discussion in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012 .
Recent Acquisitions and Divestitures 
We seek to augment our services offering expansion with strategic acquisitions of businesses and assets that complement and expand our global BPO capabilities. We also divest businesses that we deem no longer strategic to our ongoing operations. Our historical acquisitions have brought us new reseller and retail customers, OEM suppliers, and product lines, have extended the geographic reach of our operations, particularly in targeted markets, and have diversified and expanded the services we provide to our OEM suppliers and customers. We account for acquisitions using the purchase method of accounting and include acquired entities within our Consolidated Financial Statements from the closing date of the acquisition.  
Acquisitions and divestitures during fiscal year 2012
In fiscal year 2012, we purchased all the shares of our subsidiary SYNNEX Infotec Corporation, or Infotec Japan, held by the noncontrolling interest SB Pacific Corporation Limited, or SB Pacific, for $17.5 million. During the three months ended February 28, 2013, we made the final payment of $11.4 million of the purchase price. The transaction increased our ownership interest in Infotec Japan from 70.0% to 99.8%. In fiscal year 2012, we also sold our 33.3% noncontrolling interest in SB Pacific, our equity-method investee at that time, back to SB Pacific. During the three months ended February 28, 2013, we received the final payment of $4.2 million of the sale price. The controlling shareholder of SB Pacific is Robert Huang, who is our founder and former Chairman.
In fiscal year 2012, we acquired a business in the GBS segment for a purchase price of $6.2 million with $1.2 million payable upon the completion of certain post-closing procedures and $1.3 million contingent consideration payable upon the achievement of certain target earnings. We recorded goodwill of $6.2 million in relation to this acquisition. The determination of the fair value of the net assets acquired is preliminary subject to the finalization of more detailed analysis. This acquisition did not meet the conditions of a material business combination and was not subject to the disclosure requirements of accounting guidance for business combinations utilizing the purchase method of accounting.
Acquisitions subsequent to three months ended February 28, 2013
In March 2013, we announced that we have signed a definitive agreement to acquire substantially all of the assets of Supercom Canada Limited, a distributor of IT and consumer electronics products and services in Canada. The acquisition is expected to close in April 2013 subject to regulatory and other approvals. The purchase price will be approximately CAD36.5 million , or approximately US$35.4 million, in cash, which includes approximately CAD4.5 million , or approximately US$4.3 million, in deferred payments, subject to certain post-closing conditions, payable within 18 months. The acquisition will be integrated into the distribution services segment and is expected to expand our existing product and service offerings in Canada.



26

Table of Contents

Results of Operations  
The following table sets forth, for the indicated periods, data as percentages of revenue:  
Statements of Operations Data:
Three Months Ended
 
February 28, 2013
 
February 29, 2012
Revenue
100.00
 %
 
100.00
 %
Cost of revenue
(93.66
)
 
(93.12
)
Gross profit
6.34

 
6.88

Selling, general and administrative expenses
(4.07
)
 
(4.28
)
Income from operations before non-operating items, income taxes and noncontrolling interest
2.27

 
2.60

Interest expense and finance charges, net
(0.22
)
 
(0.25
)
Other income, net
0.05

 
0.09

Income from operations before income taxes and noncontrolling interest
2.10

 
2.44

Provision for income taxes
(0.74
)
 
(0.85
)
Net income
1.36

 
1.59

Net income attributable to noncontrolling interest
(0.00)

 
(0.04
)
Net income attributable to SYNNEX Corporation
1.36
 %
 
1.55
 %
Three Months Ended February 28, 2013 and February 29, 2012
Revenue  
 
Three Months Ended
 
 
 
February 28, 2013
 
February 29, 2012
 
Percent  Change
 
(in thousands)
 
 
Revenue
$
2,460,839

 
$
2,460,694

 
0.0
 %
Distribution revenue
2,416,904

 
2,423,264

 
(0.3
)%
GBS revenue
52,483

 
45,062

 
16.5
 %
Inter-segment elimination
(8,548
)
 
(7,632
)
 
12.0
 %
In our distribution services segment, we sell in excess of 25,000 technology products (as measured by active SKUs) from more than 200 IT, CE and OEM suppliers to more than 20,000 resellers. The prices of our products are highly dependent on the volumes purchased within a product category. The products we sell from one period to the next are often not comparable because of rapid changes in product models and features. The revenue generated in our GBS segment relates to BPO services such as technical support, renewals management, lead management, direct sales, customer service, back office processing and ITO. The inter-segment elimination relates to the inter-segment, back office support services provided by our GBS segment to our distribution services segment. Third-party GBS revenue can be derived by netting the inter-segment eliminations into GBS revenue. The GBS programs and customer service requirements change frequently from one period to the next and are often not comparable.
Our revenue in the distribution services segment during the three months ended February 28, 2013 decreased by 0.3% compared to the three months ended February 29, 2012 due to changes in foreign exchange rate, primarily the result of the weakening of the Japanese Yen. On a constant dollar basis our revenue increased by 1.2% over the three months ended February 29, 2012 , primarily due to growth in our commercial distribution business and the addition of new vendors. This increase was offset by weakness in personal computer and printer sales, specifically to our retail customers.
By product category, in comparison to the three months ended February 29, 2012 , our sales of peripherals, system components and networking increased by 6%, 11% and 14%, respectively, while sales of systems and software decreased by 7% and 3%, respectively.

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Table of Contents

In our GBS segment, revenue in the three months ended February 28, 2013 increased 16.5% from the three months ended February 29, 2012 primarily due to revenue generated from new customer contracts and increased business volume from certain existing contracts. These increases were offset in part by lower business volume from other customers with declining business performance.
The demand for our products and services has continued to be stable in the U.S and Asian markets.
Gross Profit
 
Three Months Ended
 
 
 
February 28, 2013
 
February 29, 2012
 
Percent  Change
 
(in thousands)
 
 
Gross profit
$
156,087

 
$
169,272

 
(7.8
)%
Percentage of revenue
6.34
%
 
6.88
%
 

Our gross profit is affected by a variety of factors, including competition, average selling prices, mix of products and services we sell, our customers, our sources of revenue by segments, product costs along with rebate and discount programs from our suppliers, reserves or settlements thereof, freight costs, charges for inventory losses, acquisitions and divestitures of business units, fluctuations in revenue, and our mix of business including our GBS services.
In the three months ended February 28, 2013 our gross margins were 54 basis points lower as compared to the three months ended February 29, 2012 , primarily because gross margins in the prior year period benefited from the shortages of hard disk drives. Our gross margins during the three months ended February 28, 2013 were favorably impacted by lower levels of reserves and our mix of business by segment, offset by the negative impact of increased price competition, lower incentive rebates and softer end market demand in certain geographies such as Canada.
No specific customers, or changes in pricing strategy, individually or in the aggregate, contributed materially to the change in gross profit.
Selling, General and Administrative Expenses
 
Three Months Ended
 
 
 
February 28, 2013
 
February 29, 2012
 
Percent  Change
 
(in thousands)
 
Selling, general and administrative expenses
$
100,147

 
$
105,284

 
(4.9
)%
Percentage of revenue
4.07
%
 
4.28
%
 
 
Approximately two-thirds of our selling, general and administrative expenses consist of personnel costs such as salaries, commissions, bonuses, share-based compensation, deferred compensation expense or income, and temporary personnel costs. Selling, general and administrative expenses also include costs of our facilities, utility expense, professional fees, depreciation expense on our capital equipment, bad debt expense, amortization expense on our intangible assets, and marketing expenses, offset in part by reimbursements from our OEM suppliers.
Our selling, general and administrative expenses in the three months ended February 28, 2013 were 4.9% lower compared to the three months ended February 29, 2012 , primarily due to a decrease in provision for doubtful accounts, deferred compensation expense and general operating costs which, on a constant currency basis, were lower by $5.3 million. Also, changes in foreign exchange rates resulted in $1.6 million lower selling, general and administrative expenses primarily due to the weakening of the Japanese Yen. These benefits were offset in part by $1.8 million higher personnel cost due to increased headcount in both our segments.

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Table of Contents

Income from Operations before Non-Operating Items, Income Taxes and Noncontrolling Interests
 
Three Months Ended
 
 
 
February 28, 2013
 
February 29, 2012
 
Percent  Change
 
(in thousands)
 
 
Income from operations before non-operating items, income taxes and noncontrolling interest
$
55,940

 
$
63,988

 
(12.6
)%
Percentage of total revenue
2.27
%
 
2.60
%
 
 
Distribution income from operations before non-operating items, income taxes and noncontrolling interest
52,062

 
62,365

 
(16.5
)%
Percentage of distribution revenue
2.15
%
 
2.57
%
 
 
GBS income from operations before non-operating items, income taxes and noncontrolling interest
3,898

 
1,992

 
95.7
 %
Percentage of GBS revenue
7.43
%
 
4.42
%
 
 
Inter-segment eliminations
(20)

 
(369
)
 
(94.6
)%
Our income from operations before non-operating items, income taxes and noncontrolling interest as a percentage of revenue decreased in the three months ended February 28, 2013 as compared to the three months ended February 29, 2012. In our distribution services segment, our operating margins decreased due to lower gross margin as the prior year period benefited from shortage of hard disk drives, offset in part by a decrease in selling, general and administrative expenses.
In our GBS segment, our income from operations before non-operating items, income taxes and noncontrolling interest as a percentage of revenue increased in the three months ended February 28, 2013 as compared to the three months ended February 29, 2012 due to higher gross profit resulting from the increase in revenue and improved margins from new and existing customer contracts, offset marginally by an increase in selling, general and administrative costs to support the increase in revenue.
Interest Expense and Finance Charges, Net
 
Three Months Ended
 
 
 
February 28, 2013
 
February 29, 2012
 
Percent  Change
 
(in thousands)
 
 
Interest expense and finance charges, net
$
5,493

 
$
6,035

 
(9.0
)%
Percentage of revenue
0.22
%
 
0.25
%
 
 
Amounts recorded in interest expense and finance charges, net, consist primarily of interest expense paid on our lines of credit and other debt, fees associated with third party accounts receivable flooring arrangements, non-cash interest expense on our convertible debt and the sale or pledge of accounts receivable through our securitization facilities, offset by income earned on our cash investments and financing income from our multi-year contracts in our Mexico operation.
The decrease in interest expense and finance charges, net, during the three months ended February 28, 2013 was due to lower average borrowings during the period compared to the three months ended February 29, 2012 .
Other Income, Net
 
Three Months Ended
 
 
 
February 28, 2013
 
February 29, 2012
 
Percent  Change
 
(in thousands)
 
 
Other income net
$
1,261

 
$
2,099

 
(39.9
)%
Percentage of revenue
0.05
%
 
0.09
%
 
 
Amounts recorded as other income, net include foreign currency transaction gains and losses, investment gains and losses (including those in our deferred compensation plan) and other non-operating gains and losses.

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Table of Contents

The change in other income, net during the three months ended February 28, 2013 from the three months ended February 29, 2012 was primarily due to changes in earnings on our deferred compensation investments and foreign exchange gains and losses.
Provision for Income Taxes
Income taxes consist of our current and deferred tax expense resulting from our income earned in domestic and foreign jurisdictions.
Our effective tax rate for the three months ended February 28, 2013 was 35.4% as compared to 34.8% for the three months ended February 29, 2012 . Our effective tax rate was impacted by changes in the mix of income in the different tax jurisdictions in which we operate.
Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and earnings being higher than anticipated in countries where we have higher statutory rates, by changes in the valuations of our deferred tax assets or liabilities, or by changes or interpretations in tax laws, regulations or accounting principles. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests represents the share of net income attributable to others, which is recognized for the portion of subsidiaries’ equity not owned by us. The noncontrolling interest in the three months ended February 29, 2012 primarily represents SB Pacific’s 30.0% ownership of Infotec Japan. This noncontrolling interest has been reflected in the results of our distribution services segment. During fiscal year 2012, we purchased all the shares of Infotec Japan held by SB Pacific.

Liquidity and Capital Resources  
Cash Flows  
Our business is working capital intensive. Our working capital needs are primarily to finance accounts receivable and inventory. We rely heavily on debt, accounts receivable arrangements, our securitization programs and our revolver programs for our working capital needs.
We have financed our growth and cash needs to date primarily through working capital financing facilities, convertible debt, bank credit lines and cash generated from operations.
To increase our market share and better serve our customers, we may further expand our operations through investments or acquisitions. We expect that such expansion would require an initial investment in personnel, facilities and operations. These investments or acquisitions would likely be funded primarily by additional borrowings or issuing common stock.
Net cash provided by operating activities was $40.9 million for the three months ended February 28, 2013 , primarily from $176.3 million collections from the accounts receivable and $33.4 million net income offset in part by $159.3 million payments on accounts payables and accrued liabilities and $9.0 million inventory purchases. The changes in our accounts receivables and our accounts payables are due to the timing of collections and payments following our seasonally high fourth quarter of fiscal year 2012. Net cash provided by operating activities for the three months ended February 29, 2012 was $74.2 million primarily from $113.9 million collections from our customers, $39.2 million net income and $22.2 million lower inventory balances, offset by $95.3 million lower accounts payable.
Net cash provided by investing activities for the three months ended February 28, 2013 was $0.9 million, which included $4.2 million received from fiscal year 2012 sale of our equity-method investee SB Pacific Limited and $0.8 million proceeds from sale of our deferred compensation investments, net of purchases, offset in part by $3.0 million investment in property and equipment and $0.9 million paid for prior acquisitions in our GBS segment. Net cash provided by investing activities for the three months ended February 29, 2012 was $7.1 million, which was primarily due to the $10.7 million decrease in our restricted cash. The changes in our restricted cash were caused by the timing of lockbox collections under our borrowing arrangements. Our capital expenditure during the period was $4.6 million, which was used for the investment in equipment and infrastructure.
Net cash provided by financing activities for the three months ended February 28, 2013 was $24.2 million, consisting primarily of $34.1 million net receipts on our revolving lines of credit and term loans. We paid $11.4 million for fiscal year

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2012 purchase of shares of our subsidiary Infotec Japan from the noncontrolling interest. The proceeds from the issue of common stock upon the exercise of employee stock awards were $1.2 million and $0.1 million was used for repurchase of treasury stock. Net cash used in financing activities for the three months ended February 29, 2012 was $79.6 million, consisting primarily of $78.0 million net payments on our securitization arrangements, revolving lines of credit, and our term loans. The book overdraft was higher by $9.5 million, due to timing of payments. Proceeds from the exercise of employee stock options were $5.7 million during the period.
Capital Resources  
Our cash and cash equivalents totaled $232.1 million and $163.7 million as of February 28, 2013 and November 30, 2012 , respectively. Of our total cash and cash equivalents, the cash held by our foreign subsidiaries was $106.1 million and $92.8 million as of February 28, 2013 and November 30, 2012 , respectively. Repatriation of the cash held by our foreign subsidiaries would be subject to United States federal income taxes. Also, repatriation of some foreign balances is restricted by local laws. However, we have historically fully utilized and reinvested all foreign cash to fund our foreign operations and expansion. If in the future, our intentions change and we repatriate the cash back to the United States, we will report the expected impact of the applicable taxes depending upon the planned timing and manner of such repatriation. Presently, we believe we have sufficient resources, cash flow and liquidity within the United States to fund current and expected future working capital requirements.
We believe we will have sufficient resources to meet our present and future working capital requirements for the next twelve months, based on our financial strength and performance, existing sources of liquidity, available cash resources and funds available under our various borrowing arrangements.  
In May 2008, we issued $143.8 million of aggregate principal amount of our 4.0% Convertible Senior Notes due 2018, or the Convertible Senior Notes, in a private placement. However, under certain circumstances we may redeem the Convertible Senior Notes, in whole or in part, for cash on or after May 20, 2013, at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. In addition, if certain triggering events are met, the Convertible Senior Notes can be converted. We have the option to pay cash, issue shares of common stock or deliver any combination thereof upon conversion. Because we currently intend to settle the principal amount of the Convertible Senior Notes using cash at some future date, we maintain within our U.S. Arrangement and the Amended and Restated Revolver ongoing features that allow us to utilize cash from these facilities to cash settle the Convertible Senior Notes. (See On-Balance Sheet Arrangements below). These borrowing arrangements are renewable on their expiration dates. We have no reason to believe that these arrangements will not be renewed as we continue to be in good credit standing with the participating financial institutions. We have had similar borrowing arrangements with various financial institutions throughout our years as a public company. We also retain the ability to issue equity securities and utilize the proceeds to cash-settle the Convertible Senior Notes. See Note 11 Convertible Debt.
On-Balance Sheet Arrangements  
We primarily finance our United States operations with an accounts receivable securitization program, or the U.S. Arrangement. We can finance up to a maximum of $400.0 million in U.S. trade accounts receivable, or U.S. Receivables. The maturity date of the U.S. Arrangement is October 18, 2015. The effective borrowing cost under the U.S. Arrangement is a blend of the prevailing dealer commercial paper rates plus a program fee of 0.425% per annum based on the used portion of the commitment, and a facility fee of 0.425% per annum payable on the aggregate commitment of the lenders. As of both February 28, 2013 and November 30, 2012, there were no borrowings outstanding under the U.S. Arrangement.
Under the terms of the U.S. Arrangement, we sell, on a revolving basis, our U.S. Receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings by this subsidiary are secured by pledging all such subsidiary's rights, title and interest in and to the U.S. Receivables as security for repayment of its borrowings. Any borrowings under the U.S. Arrangement are recorded as debt on our Consolidated Balance Sheets. As is customary in trade accounts receivable securitization arrangements, a credit rating agency's downgrade of the third party issuer of commercial paper or of a back-up liquidity provider (which provides a source of funding if the commercial paper market cannot be accessed) could result in an increase in our cost of borrowing or loss of our financing capacity under these programs if the commercial paper issuer or liquidity back-up provider is not replaced. Loss of such financing capacity could have a material adverse effect on our financial condition and results of operations.
We have a senior secured revolving line of credit arrangement, or the Revolver, with a financial institution which provides a maximum commitment of $100.0 million which expires in October 2017. The Revolver includes an accordion feature to increase the maximum commitment by an additional $50.0 million to $150.0 million at our request, in the event the current lender consents to such increase or another lender participates in the Revolver. Interest on borrowings under the

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Revolver is based on a base rate or London Interbank Offered Rate, or LIBOR, at our option. The margin on the LIBOR is determined in accordance with our fixed charge coverage ratio and is currently 1.50% per annum. Our base rate is based on the financial institution's prime rate. The Revolver also contains an unused line fee of 0.30% per annum. The Revolver is secured by our inventory and other assets. It would be an event of default under the Revolver if a lender under the U.S. Arrangement declines to extend the maturity date at any point within thirty days prior to the maturity date of the U.S. Arrangement, unless we have a binding commitment in place to renew or replace the U.S. Arrangement. There is no event of default if within the thirty day period prior to maturity of the Revolver if: (a) borrowing availability exceeds 90% of the commitment amount and (b) the fixed charge coverage ratio, when measured at the end of the fiscal quarter on a trailing four quarter basis, is greater than or equal to 1.75 to 1.00. There were no borrowings outstanding under this credit arrangement as of both February 28, 2013 and November 30, 2012 .
SYNNEX Canada Limited, or SYNNEX Canada, has a revolving line of credit arrangement with a financial institution, or the Canadian Revolving Arrangement, which has a maximum commitment of CAD100.0 million and includes an accordion feature to increase the maximum commitment by an additional CAD25.0 million to CAD125.0 million , at SYNNEX Canada's request. The Canadian Revolving Arrangement also provides a sublimit of $5.0 million for the issuance of standby letters of credit. As of February 28, 2013 and November 30, 2012 , outstanding standby letters of credit totaled $3.3 million and $3.4 million , respectively. SYNNEX Canada has granted a security interest in substantially all of its assets in favor of the lender under the Canadian Revolving Arrangement. In addition, we pledged our stock in SYNNEX Canada as collateral for the Canadian Revolving Arrangement. The interest rate applicable under the Canadian Revolving Arrangement is equal to (i) the Canadian base rate plus a margin of 0.75% for a Base Rate Loan in Canadian Dollars, (ii) the US base rate plus a margin of 0.75% for a Base Rate Loan in U.S. Dollars, and (iii) the Bankers' Acceptance rate ("BA") plus a margin of 2.00% for a BA Rate Loan. The Canadian base rate means the greater of (a) the prime rate determined by a major Canadian financial institution and (b) the one month Canadians or CDOR (the average rate applicable to Canadian dollar bankers' acceptances for the applicable period) plus 1.50% . The US base rate means the greater of (a) a reference rate determined by a major Canadian financial institution for US dollar loans made to Canadian borrowers and (b) the US federal funds rate plus 0.50% . A fee of 0.25% per annum is payable with respect to the unused portion of the commitment. The credit arrangement expires in May 2017. There were no borrowings outstanding under our Canadian Revolving Arrangement as of both February 28, 2013 and November 30, 2012 .
SYNNEX Canada has a term loan associated with the purchase of its logistics facility in Guelph, Canada. The interest rate for the unpaid principal amount is a fixed rate of 5.374% per annum. The final maturity date for repayment of the unpaid principal is April 1, 2017. The balance outstanding on the term loan as of February 28, 2013 and November 30, 2012 was $8.2 million and $8.6 million , respectively.
Infotec Japan has a credit agreement with a group of financial institutions for a maximum commitment of JPY14.0 billion. The credit agreement is comprised of a JPY6.0 billion long-term loan and a JPY8.0 billion short-term revolving credit facility. The credit agreement was refinanced in December 2012, to increase the short-term revolving credit facility to JPY8.0 billion from JPY4.0 billion. The interest rate for the long-term and short-term loans is based on the Tokyo Interbank Offered Rate, or TIBOR plus a margin of 1.90% per annum. The refinanced credit facility expires in December 2015. The long-term loan can be repaid at any time prior to December 2015 without penalty. We have issued a guarantee to cover all obligations of Infotec Japan to the lenders. The balance outstanding on the credit facility was $135.0 million and $111.5 million as of February 28, 2013 and November 30, 2012, respectively.
Infotec Japan has a short-term revolving credit facility of JPY1.0 billion with a financial institution. The credit facility was renewed for one year in March 2013 and bears an interest rate that is based on TIBOR plus a margin of 1.60% per annum. As of February 28, 2013 and November 30, 2012 , the balances outstanding under this credit facility were $10.8 million and $12.1 million, respectively. In addition, as of November 30, 2012, Infotec Japan had a term loan with a financial institution with a balance of $0.4 million, which was repaid in December 2012 and bore a fixed interest rate of 1.50% .
As of February 28, 2013 and November 30, 2012 , we also had $0.9 million and $1.1 million, respectively, outstanding in capital lease obligations primarily pertaining to Infotec Japan and under arrangements with various banks and financial institutions for the sale and financing of approved accounts receivable and notes receivable with recourse provisions to Infotec Japan.
Covenants Compliance  
In relation to our U.S. Arrangement, the Revolver, the Infotec Japan credit facility and the Canadian Revolving Arrangement, we have a number of covenants and restrictions that, among other things, require us to comply with certain financial and other covenants. These covenants require us to maintain specified financial ratios and satisfy certain financial condition tests, including minimum net worth and fixed charge coverage ratios. They also limit our ability to incur additional

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debt, make or forgive intercompany loans, pay dividends and make other types of distributions, make certain acquisitions, repurchase our stock, create liens, cancel debt owed to us, enter into agreements with affiliates, modify the nature of our business, enter into sale-leaseback transactions, make certain investments, enter into new real estate leases, transfer and sell assets, cancel or terminate any material contracts and merge or consolidate. The covenants also limit our ability to pay cash upon conversion, redemption or repurchase of the Convertible Senior Notes, subject to certain liquidity tests. As of February 28, 2013 , we were in compliance with all material covenants for the above arrangements. 
Convertible Debt  
In May 2008, we issued $143.8 million of aggregate principal amount of our 4.0% Convertible Senior Notes due 2018, or the Convertible Senior Notes, in a private placement. The Convertible Senior Notes have a cash coupon interest rate of 4.0% per annum. Interest on the Convertible Senior Notes is payable in cash semi-annually in arrears on May 15 and November 15 of each year and commenced on November 15, 2008. In addition, we will pay contingent interest in respect of any six-month period from May 15 to November 14 or from November 15 to May 14, with the initial six-month period commencing May 15, 2013, if the trading price of the Convertible Senior Notes for each of the ten trading days immediately preceding the first day of the applicable six-month period equals 120% or more of the principal amount of the Convertible Senior Notes. During any interest period when contingent interest is payable, the contingent interest payable per Convertible Senior Note is equal to 0.55% of the average trading price of the Convertible Senior Notes during the ten trading days immediately preceding the first day of the applicable six-month interest period. The Convertible Senior Notes mature on May 15, 2018, subject to earlier redemption, repurchase or conversion.
Holders may convert their Convertible Senior Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date for such Convertible Senior Notes under the following circumstances: (1) during any fiscal quarter after the fiscal quarter ended August 31, 2008 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least twenty trading days in the period of thirty consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the conversion price of the Convertible Senior Notes on the last day of such preceding fiscal quarter; (2) during the five business-day period after any five consecutive trading-day period, or the Measurement Period, in which the trading price per $1,000 principal amount of the Convertible Senior Notes for each day of that Measurement Period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate of the Convertible Senior Notes on each such day; (3) if we have called the particular Convertible Senior Notes for redemption, until the close of business on the business day prior to the redemption date; or (4) upon the occurrence of certain corporate transactions. These contingencies were not triggered as of February 28, 2013 . In addition, holders may also convert their Convertible Senior Notes at their option at any time beginning on November 15, 2017, and ending at the close of business on the business day immediately preceding the maturity date for the Convertible Senior Notes, without regard to the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of the common stock or a combination thereof at our election. The initial conversion rate for the Convertible Senior Notes is 33.9945 shares of common stock per $1,000 principal amount of Convertible Senior Notes, equivalent to an initial conversion price of $29.42 per share of common stock. Such conversion rate will be subject to adjustment in certain events but will not be adjusted for accrued interest, including any additional interest and any contingent interest. We may enter into convertible hedge arrangements to hedge the in-the-money feature of the Convertible Senior Notes to counter the potential share dilution.
We may not redeem the Convertible Senior Notes prior to May 20, 2013. We may redeem the Convertible Senior Notes, in whole or in part, for cash on or after May 20, 2013, at a redemption price equal to 100% of the principal amount of the Convertible Senior Notes to be redeemed, plus any accrued and unpaid interest (including any additional interest and any contingent interest) up to, but excluding, the redemption date. Also, the Convertible Senior Notes contain various features which under certain circumstances could allow the holders to convert the Convertible Senior Notes into shares before their ten-year maturity. Further, the date of settlement of the Convertible Senior Notes is uncertain due to various features including put and call elements occur in May, 2013.
Holders may require us to repurchase all or a portion of their Convertible Senior Notes for cash on May 15, 2013 at a purchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest up to (including any additional interest and any contingent interest), but excluding, the repurchase date. If we undergo a fundamental change, holders may require us to purchase all or a portion of their Convertible Senior Notes for cash at a price equal to 100% of the principal amount of the Convertible Senior Notes to be purchased, plus any accrued and unpaid interest up to (including any additional interest and any contingent interest), but excluding, the fundamental change repurchase date.
The Convertible Senior Notes are our senior unsecured obligations and rank equally in right of payment with other senior unsecured debt and rank senior to subordinated debt, if any. The Convertible Senior Notes effectively rank junior to any

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of our secured indebtedness to the extent of the assets securing such indebtedness. The Convertible Senior Notes are also structurally subordinated in right of payment to all indebtedness and other liabilities and commitments (including trade payables) of our subsidiaries. The net proceeds from the Convertible Senior Notes were used for general corporate purposes and to reduce outstanding balances under the U.S. Arrangement and the Revolver.
The Convertible Senior Notes are governed by an indenture, dated as of May 12, 2008, between U.S. Bank National Association, as trustee, and us, which contains customary events of default.
The Convertible Senior Notes as hybrid instruments are accounted for as convertible debt and are recorded at carrying value. The right of the holders of the Convertible Senior Notes to require us to repurchase the Convertible Senior Notes in the event of a fundamental change and the contingent interest feature would require separate measurement from the Convertible Senior Notes; however, the amount is insignificant. The additional shares issuable following certain corporate transactions do not require bifurcation and separate measurement from the Convertible Senior Notes.
In accordance with the provisions of the standards for accounting for convertible debt, we recognized both a liability and an equity component of the Convertible Senior Notes in a manner that reflects our non-convertible debt borrowing rate at the date of issuance of 8.0%. The value assigned to the debt component, which is the estimated fair value, as of the issuance date, of a similar note without the conversion feature, was determined to be $120.3 million. The difference between the Convertible Senior Note cash proceeds and this estimated fair value was estimated to be $23.4 million and was retroactively recorded as a debt discount and will be amortized to interest expense and finance charges, net over the five-year period to the first put date, utilizing the effective interest method.
As of February 28, 2013 , the remaining amortization period is approximately three months assuming the redemption of the Convertible Senior Notes at the first purchase date of May 20, 2013. Based on a cash coupon interest rate of 4.0%, we recorded contractual interest expense of $1.6 million during both the three months ended February 28, 2013 and February 29, 2012 . Based on an effective rate of 8.0%, we recorded non-cash interest expense of $1.4 million and $1.3 million during the three months ended February 28, 2013 and February 29, 2012 , respectively. As of both February 28, 2013 and November 30, 2012 , the carrying value of the equity component of the Convertible Senior Notes, net of allocated issuance costs, was $22.8 million .
The date of settlement of the Convertible Senior Notes is uncertain due to the various features of the Convertible Senior Notes including put and call elements. Because of the May 2013 put and call features, we have classified the Convertible Senior Notes as short-term debt in the Consolidated Balance Sheets.
We currently intend to settle the principal amount of the Convertible Senior Notes using cash at some future date. We maintain within our U.S. Arrangement and Revolver ongoing features that allow us to utilize cash from these facilities to cash settle the Convertible Senior Notes.
Guarantees
We issued guarantees to certain vendors and lenders of our subsidiaries for trade credit lines and loans to ensure compliance with subsidiary sales agreements. In addition, we, as the ultimate parent, guaranteed the obligations of SYNNEX Investment Holdings Corporation up to $35.0 million in connection with the December 2009 sale of China Civilink (Cayman), which operated in China as HiChina Web Solutions, to Alibaba.com Limited. The total guarantees issued by us as of February 28, 2013 and November 30, 2012 were $333.3 million and $264.2 million , respectively. We are obligated under these guarantees to pay amounts due should our subsidiaries or customer not pay valid amounts owed to their vendors or lenders or not comply with subsidiary sales agreements.
Related Party Transactions  
We have a business relationship with MiTAC International Corporation, or MiTAC International, a publicly-traded company in Taiwan that began in 1992 when it became our primary investor through its affiliates. As of both February 28, 2013 and November 30, 2012 , MiTAC International and its affiliates beneficially owned approximately 27% of our common stock. Matthew Miau, our Chairman Emeritus of the Board of Directors and director, is the Chairman of MiTAC International and a director or officer of MiTAC International’s affiliates.

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The shares owned by MiTAC International are held by the following entities:
 
As of February 28, 2013
 
(in thousands)
MiTAC International (1)
5,908

Synnex Technology International Corp. (2)
4,283

Total
10,191

_____________________________________
(1)
Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC International. Excludes 591 shares (of which 381 shares are directly held and 210  shares are subject to exercisable options) held by Matthew Miau.
(2)
Synnex Technology International Corp., or Synnex Technology International, is a separate entity from us and is a publicly-traded corporation in Taiwan. Shares are held via Peer Development Ltd., a wholly-owned subsidiary of Synnex Technology International. MiTAC International owns a noncontrolling interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a noncontrolling interest of 13.7% in Synnex Technology International.
MiTAC International generally has significant influence over us and over the outcome of all matters submitted to stockholders for consideration, including any merger or acquisition of ours. Among other things, this could have the effect of delaying, deterring or preventing a change of control over us.  
We purchased inventories from MiTAC International and its affiliates totaling $2.7 million and $0.2 million during the three months ended February 28, 2013 and February 29, 2012 , respectively. Our sales to MiTAC International and its affiliates during the three months ended February 28, 2013 and February 29, 2012, totaled $0.3 million and $1.1 million , respectively. In addition, during both the three months ended February 28, 2013 and February 29, 2012, we recorded $0.9 million in reimbursements for rent and overhead costs for facilities used.
Our business relationship with MiTAC International has been informal and is not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments. We negotiate manufacturing, pricing and other material terms on a case-by-case basis with MiTAC International and our contract assembly customers for a given project. While MiTAC International is a related party and a controlling stockholder, we believe that the significant terms under our arrangements with MiTAC International, including pricing, will not materially differ from the terms we could have negotiated with unaffiliated third parties, and we have adopted a policy requiring that material transactions with MiTAC International or its related parties be approved by our Audit Committee, which is composed solely of independent directors. In addition, Matthew Miau’s compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors. 
Synnex Technology International is a publicly-traded corporation in Taiwan that currently provides distribution and fulfillment services to various markets in Asia and Australia, and is also our potential competitor. Neither MiTAC International, nor Synnex Technology International is restricted from competing with us.
Recent Accounting Pronouncements  
In February 2013, the Financial Accounting Standards Board, or FASB, issued an accounting update which requires companies to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The amendments are effective prospectively for reporting periods beginning after December 15, 2012 with early adoption permitted. The accounting update will be applicable to us in the first quarter of fiscal year 2014.
In March 2013, the FASB issued an accounting update that clarifies the applicable guidance for the release of the cumulative translation adjustment when an entity ceases to have a controlling financial interest in a subsidiary or a group or assets that is a business within a foreign entity. The guidance clarifies that the accounting for the release of cumulative translation adjustment into net income for sales or transfers of a controlling financial interest within a foreign entity is the same irrespective of whether the sale or transfer is of a subsidiary or a group of assets that is a business. The accounting update is applicable for fiscal years and interim reporting periods within those years beginning after December 15, 2013 with early adoption permitted. The accounting update will be applicable to us in the second quarter of fiscal year 2014.

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During fiscal year 2013, the following accounting standards were adopted:
In June 2011, the FASB issued an accounting update that amends the presentation of comprehensive income in the financial statements. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We adopted the accounting update in the first quarter of fiscal year 2013 and updated our presentation of comprehensive income in the financial statements.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk  
There have been no material changes in our quantitative and qualitative disclosures about market risk for the three months ended February 28, 2013 from our Annual Report on Form 10-K for the fiscal year ended November 30, 2012 . For further discussion of quantitative and qualitative disclosures about market risk, reference is made to our Annual Report on Form 10-K for the fiscal year then ended.

ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with management’s evaluation during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II - OTHER INFORMATION
 
ITEM 1A. Risk Factors  
The following are certain risk factors that could affect our business, financial results and results of operations. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q because these factors could cause the actual results and conditions to differ materially from those projected in the forward-looking statements. Before you invest in our Company, you should know that making such an investment involves some risks, including the risks described below. The risks that have been highlighted here are not the only ones that we face. If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business  
We anticipate that our revenue and operating results will fluctuate, which could adversely affect the enterprise value of our Company and our securities.  
Our operating results have fluctuated and will fluctuate in the future as a result of many factors, including: 
general economic conditions and level of IT and CE spending;
the loss or consolidation of one or more of our significant OEM suppliers or customers;
market acceptance, product mix, quality, pricing, availability and useful life of our products;
market acceptance, quality, pricing and availability of our services;
competitive conditions in our industry;
pricing, margin and other terms with our OEM suppliers;
decline in inventory value as a result of product obsolescence and market acceptance;
variations in our levels of excess inventory and doubtful accounts;
changes in the terms of OEM supplier-inventory protections, such as price protection and return rights; and
the impact of the business acquisitions and dispositions we make.
Although we attempt to control our expense levels, these levels are based, in part, on anticipated revenue. Therefore, we may not be able to control spending in a timely manner to compensate for any unexpected revenue shortfall. 
Our operating results also are affected by the seasonality of the IT and CE products and services industry. We have historically experienced higher sales in our fourth fiscal quarter due to patterns in the capital budgeting, federal government spending and purchasing cycles of end-users. These patterns may not be repeated in subsequent periods. You should not rely on period-to-period comparisons of our operating results as an indication of future performance. The results of any quarterly period are not indicative of results to be expected for a full fiscal year. In future quarters, our operating results may be below our expectations or those of our public market analysts or investors, which would likely cause our share price to decline. 
We depend on a small number of OEMs to supply the IT and CE products and services that we sell and the loss of, or a material change in our business relationship with a major OEM supplier could adversely affect our business, financial position and operating results.
Our future success is highly dependent on our relationships with a small number of OEM suppliers. For example, sales of HP products and services represented approximately 31% and 35% of our total revenue for the three months ended February 28, 2013 and February 29, 2012, respectively. Our OEM supplier agreements typically are short-term and may be terminated without cause upon short notice. The loss or deterioration of our relationship with HP or any other major OEM supplier, the authorization by OEM suppliers of additional distributors, the sale of products by OEM suppliers directly to our

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reseller and retail customers and end-users, or our failure to establish relationships with new OEM suppliers or to expand the distribution and supply chain services that we provide OEM suppliers could adversely affect our business, financial position and operating results. For example in fiscal year 2008, International Business Machines Corporation, or IBM, terminated its approval to market IBM System X and related products and services. In addition, OEM suppliers may face liquidity or solvency issues that in turn could negatively affect our business and operating results.
Our business is also highly dependent on the terms provided by our OEM suppliers. Generally, each OEM supplier has the ability to change the terms and conditions of its distribution agreements, such as reducing the amount of price protection and return rights or reducing the level of purchase discounts, rebates and marketing programs available to us.
From time to time we may conduct business with a supplier without a formal agreement because the agreement has expired or otherwise terminated. In such case, we are subject to additional risk with respect to products, warranties and returns, and other terms and conditions. If we are unable to pass the impact of these changes through to our reseller and retail customers, our business, financial position and operating results could be adversely affected. 
Our gross margins are low, which magnifies the impact of variations in revenue, operating costs and bad debt on our operating results.  
As a result of significant price competition in the IT and CE products and services industry, our gross margins are low, and we expect them to continue to be low in the future. Increased competition arising from industry consolidation and low demand for certain IT and CE products and services may hinder our ability to maintain or improve our gross margins. These low gross margins magnify the impact of variations in revenue, operating costs and bad debt on our operating results. A portion of our operating expense is relatively fixed, and planned expenditures are based in part on anticipated orders that are forecasted with limited visibility of future demand. As a result, we may not be able to reduce our operating expense as a percentage of revenue to mitigate any further reductions in gross margins in the future. If we cannot proportionately decrease our cost structure in response to competitive price pressures, our business and operating results could suffer.
We also receive purchase discounts and incentive rebates from OEM suppliers based on various factors, including sales or purchase volume and breadth of customers. A decrease in net sales could negatively affect the level of volume rebates received from our OEM suppliers and thus, our gross margins. Because some rebates from OEM suppliers are based on percentage increases in sales of products, it may become more difficult for us to achieve the percentage growth in sales required for larger discounts due to the current size of our revenue base. A decrease or elimination of purchase discounts and rebates from our OEM suppliers would adversely affect our business and operating results.
Because we sell on a purchase order basis, we are subject to uncertainties and variability in demand by our reseller, retail and contract assembly services customers, which could decrease revenue and adversely affect our operating results.  
We sell to our reseller, retail and contract assembly services customers on a purchase order basis, rather than pursuant to long-term contracts or contracts with minimum purchase requirements. Consequently, our sales are subject to demand variability by our reseller, retail and contract assembly services customers. The level and timing of orders placed by our customers vary for a variety of reasons, including seasonal buying by end-users, the introduction of new hardware and software technologies and general economic conditions. Customers submitting a purchase order may cancel, reduce or delay their orders. If we are unable to anticipate and respond to the demands of our reseller, retail and contract assembly services customers, we may lose customers because we have an inadequate supply of products, or we may have excess inventory, either of which could harm our business, financial position and operating results.
The success of our contact center and renewals management business is subject to the terms and conditions of our customer contracts.  
We provide contact center support services and renewals management services to our customers under contracts with provisions that could impact our profitability. Many of our contracts have short termination provisions that could cause fluctuations in our revenue and operating results from period to period. For example, some contracts have performance-related bonus or penalty provisions, whereby we could receive a bonus if we satisfy certain performance levels or have to pay a penalty for failing to do so. The programs that we put in place for our customer products may not be accepted by the market. In addition, with respect to our contact center business, our customers may not guarantee a minimum call volume; however, we hire employees based on anticipated average call volumes. The reduction of call volume, loss of any customers, payment of any penalties for failure to meet performance levels or inability to terminate any unprofitable contracts could have an adverse impact on our operations and financial results.

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Our renewals management business is subject to dynamic changes in the business model and competition, which in turn could cause our GBS operations to suffer.
The software and hardware renewals management and the customer management operations of our GBS segment represent emerging markets that are vulnerable to numerous changes that could cause a shift in the business and size of the market. For example, if software and hardware customers move to a utility or fee-for-service based business model, this business model change could significantly impact operations or cause a significant shift in the way business is currently conducted. If OEMs place more focus in this area and internalize these operations, then this could also cause a significant reduction in the size of the available market for third party service providers. Similarly, if competitors offer their services at below market margin rates to “buy” business, or use other lines of business to subsidize the renewals management business, then this could cause a significant reduction in the size of the available market. In addition, if a cloud-based solution or some other technology were introduced, this new technology could cause an adverse shift in the way our renewals management operations are conducted or decrease the size of the available market.
We are subject to the risk that our inventory value may decline, and protective terms under our OEM supplier agreements may not adequately cover the decline in value, which in turn may harm our business, financial position and operating results.  
The IT and CE products industry is subject to rapid technological change, new and enhanced product specification requirements, and evolving industry standards. These changes may cause inventory on hand to decline substantially in value or to rapidly become obsolete. Most of our OEM suppliers offer limited protection from the loss in value of inventory. For example, we can receive a credit from many OEM suppliers for products held in inventory in the event of a supplier price reduction. In addition, we have a limited right to return a certain percentage of purchases to most OEM suppliers. These policies are often subject to time restrictions and do not protect us in all cases from declines in inventory value. In addition, our OEM suppliers may become unable or unwilling to fulfill their protection obligations to us. The decrease or elimination of price protection or the inability of our OEM suppliers to fulfill their protection obligations could lower our gross margins and cause us to record inventory write-downs. If we are unable to manage our inventory with our OEM suppliers with a high degree of precision, we may have insufficient product supplies or we may have excess inventory, resulting in inventory write-downs, either of which could harm our business, financial position and operating results.
We depend on OEM suppliers to maintain an adequate supply of products to fulfill customer orders on a timely basis, and any supply shortages or delays could cause us to be unable to timely fulfill orders, which in turn could harm our business, financial position and operating results.  
Our ability to obtain particular products in the required quantities and to fulfill reseller and retail customer orders on a timely basis is critical to our success. In most cases, we have no guaranteed price or delivery agreements with our OEM suppliers. We occasionally experience a supply shortage of certain products as a result of strong demand or problems experienced by our OEM suppliers. For example, in fiscal year 2011, we experienced shortage in hard drives from OEM suppliers in Thailand due to floods. If shortages or delays persist, the price of those products may increase, or the products may not be available at all. In addition, our OEM suppliers may decide to distribute, or to substantially increase their existing distribution business, through other distributors, their own dealer networks, or directly to resellers, retailers or end-users. Accordingly, if we are not able to secure and maintain an adequate supply of products to fulfill our reseller and retail customer orders on a timely basis, our business, financial position and operating results could be adversely affected.
The market for CE products that we distribute is characterized by short product life cycles. Increased competition for limited retailer shelf space, decreased promotional support from resellers or retailers or increased popularity of downloadable or online content and services could adversely impact our revenue.
The market for CE products, such as personal computers and tablets, mobile devices, video game titles and hardware, and audio or visual equipment, is characterized by short product life cycles and frequent introductions of new products. For example, the life cycle of a video game generally involves a relatively high level of sales during the first few months after introduction followed by a rapid decline in sales and may result in product obsolescence. The markets in which we compete frequently introduce new products to meet changing consumer preferences and trends. As a result, competition is intense for resellers' and retailers' limited shelf space and promotions. If our vendors' new products are not introduced in a timely manner or do not achieve significant market acceptance, we may not generate sufficient sales or profitability. Further, if we are unable to successfully compete for resellers' or retailers' space and promotional resources, this could negatively impact market acceptance of our products and negatively impact our business and operating results. In addition, increased consumer use of downloadable content and online services and the further integration of technological tasks currently requiring several different CE products may negatively affect our CE product distribution business and operating results, as they may reduce consumer demand for having several different electronics devices and other physical products. For example, the popularity of

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downloadable and online games has increased and continued increases in downloadable and online gaming may result in a reduced level of over-the-counter retail video games sales.
Because we conduct substantial operations in China, risks associated with economic, political and social events in China could negatively affect our business and operating results.  
A substantial portion of our IT systems operations, including our IT systems support and software development operations, is located in China. In addition, we also conduct general and administrative activities from our facility in China. As of February 28, 2013 , we had approximately 1,000 support personnel located in China. Our operations in China are subject to a number of risks relating to China’s economic and political systems, including:  
a government controlled foreign exchange rate and limitations on the convertibility of the Chinese Renminbi;
extensive government regulation;
changing governmental policies relating to tax benefits available to foreign-owned businesses;
the telecommunications infrastructure;
a relatively uncertain legal system; and
uncertainties related to continued economic and social reform.
Our IT systems are an important part of our global operations. Any significant interruption in service, whether resulting from any of the above uncertainties, natural disasters or otherwise, could result in delays in our inventory purchasing, errors in order fulfillment, reduced levels of customer service and other disruptions in operations, any of which could cause our business and operating results to suffer.
We may have higher than anticipated tax liabilities.  
We conduct business globally and file income tax returns in various tax jurisdictions. Our effective tax rate could be adversely affected by several factors, many of which are outside of our control, including:
 
changes in income before taxes in various jurisdictions in which we operate that have differing statutory tax rates;
changing tax laws, regulations, and/or interpretations of such tax laws in multiple jurisdictions;
effect of tax rate on accounting for acquisitions and dispositions;
issues arising from tax audit or examinations and any related interest or penalties; and
uncertainty in obtaining tax holiday extensions or expiration or loss of tax holidays in various jurisdictions.
We report our results of operations based on our determination of the amount of taxes owed in various tax jurisdictions in which we operate. The determination of our worldwide provision for income taxes and other tax liabilities requires estimation, judgment and calculations where the ultimate tax determination may not be certain. Our determination of tax liability is always subject to review or examination by tax authorities in various tax jurisdictions. Any adverse outcome of such review or examination could have a negative impact on our operating results and financial condition. The results from various tax examinations and audit may differ from the liabilities recorded in our financial statements and could adversely affect our financial results and cash flows.
We have pursued and intend to continue to pursue strategic acquisitions or investments in new markets and may encounter risks associated with these activities, which could harm our business and operating results.  
We have in the past pursued and in the future expect to pursue acquisitions of, or investments in, businesses and assets in new markets, either within or outside the IT and CE products and services industry, that complement or expand our existing business. Our acquisition strategy involves a number of risks, including:  
difficulty in successfully integrating acquired operations, IT systems, customers, and OEM supplier relationships, products and services and businesses with our operations;
loss of key employees of acquired operations or inability to hire key employees necessary for our expansion;

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diversion of our capital and management attention away from other business issues;
increase in our expenses and working capital requirements;
in the case of acquisitions that we may make outside of the United States, difficulty in operating in foreign countries and over significant geographical distances; and
other financial risks, such as potential liabilities of the businesses we acquire.
We may incur additional costs and consolidate certain redundant expenses in connection with our acquisitions and investments, which may have an adverse impact on our operating margins. Future acquisitions may result in dilutive issuances of equity securities, the incurrence of additional debt, large write-offs, a decrease in future profitability, or future losses. The incurrence of debt in connection with any future acquisitions could restrict our ability to obtain working capital or other financing necessary to operate our business. Our recent and future acquisitions or investments may not be successful, and if we fail to realize the anticipated benefits of these acquisitions or investments, our business and operating results could be harmed.  
Because of the capital-intensive nature of our business, we need continued access to capital, which if not available to us or if not available on favorable terms, could harm our ability to operate or expand our business.  
Our business requires significant levels of capital to finance accounts receivable and product inventory that is not financed by trade creditors. If cash from available sources is insufficient, proceeds from our accounts receivable securitization and revolving credit programs are limited or cash is used for unanticipated needs, we may require additional capital sooner than anticipated.
In the event we are required, or elect, to raise additional funds, we may be unable to do so on favorable terms, or at all, and may incur expenses in raising the additional funds. Our current and future indebtedness could adversely affect our operating results and severely limit our ability to plan for, or react to, changes in our business or industry. We could also be limited by financial and other restrictive covenants in securitization or credit arrangements, including limitations on our borrowing of additional funds and issuing dividends. Furthermore, the cost of securitization or debt financing could significantly increase in the future, making it cost prohibitive to securitize our accounts receivable or borrow, which could force us to issue new equity securities. If we issue new equity securities, existing stockholders may experience dilution, or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, we may not be able to take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. Any inability to raise additional capital when required could have an adverse effect on our business and operating results.
The terms of our debt arrangements impose significant restrictions on our ability to operate which in turn could negatively affect our ability to respond to business and market conditions and therefore could have an adverse effect on our business and operating results.
As of February 28, 2013 , we had $297.7 million in outstanding short and long-term borrowings under term loans, convertible senior notes, lines of credit and capital leases, excluding trade payables. The terms of one or more of the agreements under which this indebtedness was incurred may limit or restrict, among other things, our ability to:  
incur additional indebtedness;
pay dividends or make certain other restricted payments;
consummate certain asset sales or acquisitions;
enter into certain transactions with affiliates; and
merge, consolidate or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets.
We are also required to maintain specified financial ratios and satisfy certain financial condition tests, including a minimum net worth and a fixed charge coverage ratio as outlined in our senior secured revolving line of credit arrangement. Our inability to meet these ratios and tests could result in the acceleration of the repayment of the related debt, the termination of the facility, the increase in our effective cost of funds or the cross-default of other credit and securitization arrangements. As a result, our ability to operate may be restricted and our ability to respond to business and market conditions may be limited, which could have an adverse effect on our business and operating results.

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We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness or we may experience a financial failure, which may hinder the repayment of our convertible debt.
Our ability to make scheduled debt payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot be certain that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.  
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot be certain that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Some of our credit facilities restrict our ability to dispose assets and use the proceeds from the disposition. As such, we may not be able to consummate those dispositions or use any resulting proceeds and, in addition, such proceeds may not be adequate to meet any debt service obligations then due.
If we cannot make scheduled payments on our debt, we will be in default and, as a result: 
our debt holders could declare all outstanding principal and interest to be due and payable;
the lenders under our credit agreement could terminate their commitments to loan us money and foreclose against the assets securing their borrowings; and
we could be forced into bankruptcy or liquidation, which is likely to result in delays in the payment of our indebtedness and in the exercise of enforcement remedies related to our indebtedness.
A portion of our revenue is financed by floor plan financing companies and any termination or reduction in these financing arrangements could increase our financing costs and harm our business and operating results.  
A portion of our product distribution revenue is financed by floor plan financing companies. Floor plan financing companies are engaged by our customers to finance, or floor, the purchase of products from us. In exchange for a fee, we transfer the risk of loss on the sale of our products to the floor plan companies. We currently receive payment from these financing companies within approximately 15 to 30 days from the date of the sale, which allows our business to operate at much lower relative working capital levels than if such programs were not available. If these floor plan arrangements are terminated or substantially reduced, the need for more working capital and the increased financing cost could harm our business and operating results.
We have significant credit exposure to our customers, and negative trends in their businesses could cause us significant credit loss and negatively impact our cash flow and liquidity position.  
We extend credit to our customers for a significant portion of our sales to them and they have a period of time, generally 30 days after the date of invoice, to make payment. As a result, we are subject to the risk that our customers will not pay on time or at all. The majority of our customers are small and medium sized businesses. Our credit exposure risk may increase due to financial difficulties or liquidity or solvency issues experienced by our customers, resulting in their inability to repay us. The liquidity or solvency issues may increase as a result of an economic downturn or a decrease in IT or CE spending by end-users. If we are unable to collect payments in a timely manner from our customers due to changes in financial or economic conditions, or for other reasons, and we are unable to collect under our credit insurance policies, we may write-off the amount due from the customers. These write-offs may result in more expensive credit insurance and negatively impact our ability to utilize accounts receivable-based financing. These circumstances could negatively impact our cash flow and liquidity position. Further, we are exposed to higher collection risk as we continue to expand internationally, where the payment cycles are generally longer and the credit rating process may not be as robust as in the United States.
In addition, our Mexico operation primarily focuses on various long-term projects with government and other local agencies, which often involve extended payment terms and could expose us to additional collection risks.  

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We may suffer adverse consequences from changing interest rates.  
Our borrowings and securitization arrangements are variable-rate obligations that could expose us to interest rate risks. If interest rates increase, our interest expense would increase, which would negatively affect our net income. An increase in interest rates may increase our future borrowing costs and restrict our access to capital.
Additionally, current market conditions, global economic crisis, and overall credit conditions could limit our availability of capital, which could cause increases in interest margin spreads over underlying indices, effectively increasing the cost of our borrowing. While some of our credit facilities have contractually negotiated spreads, terms such as these are subject to ongoing negotiations.  
We are dependent on a variety of IT and telecommunications systems and the Internet, and any failure of these systems could adversely impact our business and operating results.  
We depend on IT and telecommunications systems and the Internet for our operations. These systems support a variety of functions including inventory management, order processing, shipping, shipment tracking, billing, and our BPO business.  
Failures or significant downtime of our IT or telecommunications systems could prevent us from taking customer orders, printing product pick-lists, shipping products, billing customers and handling call volume. Sales also may be affected if our reseller and retail customers are unable to access our pricing and product availability information. We also rely on the Internet, and in particular electronic data interchange, or EDI, for a large portion of our orders and information exchanges with our OEM suppliers and reseller and retail customers. The Internet and individual websites have experienced a number of disruptions and slowdowns, some of which were caused by organized attacks. In addition, some websites have experienced security breakdowns. If we were to experience a security breakdown, disruption or breach that compromised sensitive information, it could harm our relationship with our OEM suppliers and reseller and retail customers. Disruption of our website or the Internet in general could impair our order processing or more generally prevent our OEM suppliers and reseller and retail customers from accessing information. Our BPO business is dependent upon telephone and data services provided by third party telecommunications service vendors and our IT and telecommunications system. Any significant increase in our IT and telecommunications costs or temporary or permanent loss of our IT or telecommunications systems could harm our relationships with our customers. The occurrence of any of these events could have an adverse effect on our operations and financial results.
We rely on independent shipping companies for delivery of products, and price increases or service interruptions from these carriers could adversely affect our business and operating results.  
We rely almost entirely on arrangements with independent shipping companies, such as FedEx and UPS, for the delivery of our products from OEM suppliers and delivery of products to reseller and retail customers. Freight and shipping charges can have a significant impact on our gross margin. As a result, an increase in freight surcharges due to rising fuel cost or general price increases will have an immediate adverse effect on our margins, unless we are able to pass the increased charges to our reseller and retail customers or renegotiate terms with our OEM suppliers. In addition, in the past, UPS has experienced work stoppages due to labor negotiations with management. An increase in freight or shipping charges, the termination of our arrangements with one or more of these independent shipping companies, the failure or inability of one or more of these independent shipping companies to deliver products, or the unavailability of their shipping services, even temporarily, could have an adverse effect on our business and operating results.
Changes in foreign exchange rates and limitations on the convertibility of foreign currencies could adversely affect our business and operating results.  
In the three months ended February 28, 2013 and February 29, 2012, approximately 26% and 29% of our total revenue, respectively, were generated outside the United States. Most of our international revenue, cost of revenue and operating expenses are denominated in foreign currencies. We presently have currency exposure arising from both sales and purchases denominated in foreign currencies. Changes in exchange rates between foreign currencies and the U.S. dollar may adversely affect our operating margins. For example, if these foreign currencies appreciate against the U.S. dollar, it will make it more expensive in terms of U.S. dollars to purchase inventory or pay expenses with foreign currencies. This could have a negative impact to us if revenue related to these purchases is transacted in U.S. dollars. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency and make our products, which are usually purchased by us with U.S. dollars, relatively more expensive than products manufactured locally. We currently conduct only limited hedging activities, which involve the use of currency forward contracts. Hedging foreign currencies can be risky. There is also additional risk if the currency is not freely or actively traded. Some currencies, such as the Chinese Renminbi, Indian Rupee and Philippines Peso, are subject to limitations on conversion into other currencie