SYNNEX Corporation
SYNNEX CORP (Form: 10-Q, Received: 10/08/2010 16:49:31)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2010

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)

 

(I.R.S. 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   x     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   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    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   x

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

 

Class

 

Outstanding at October 1, 2010

Common Stock, $0.001 par value   35,763,931

 

 

 


Table of Contents

SYNNEX CORPORATION

FORM 10-Q

INDEX

 

                Page    
PART I.     

FINANCIAL INFORMATION

   3

Item 1.

    

Financial Statements

   3
    

Consolidated Balance Sheets (unaudited) as of August 31, 2010 and November 30, 2009

   3
    

Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended August  31, 2010 and 2009

   4
    

Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended August 31,  2010 and 2009

   5
    

Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended August 31, 2010 and 2009

   6
    

Notes to Consolidated Financial Statements (unaudited)

   7

Item 2.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   28

Item 3.

    

Quantitative and Qualitative Disclosures about Market Risk

   43

Item 4.

    

Controls and Procedures

   43
PART II.     

OTHER INFORMATION

   44

Item 1A.

    

Risk Factors

   44

Item 6.

    

Exhibits

   55

Signatures

   56

Exhibit Index

   57

 

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Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

SYNNEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except for par values)

(unaudited)

 

     August 31, 2010    November 30, 2009
         

(As Adjusted -

See Note 2)

ASSETS

     

Current assets:

     

Cash and cash equivalents

     $ 68,063        $ 37,816  

Short-term investments

     18,698        21,219  

Accounts receivable, net

     813,558        820,633  

Receivable from vendors, net

     115,130        99,610  

Receivable from affiliates

     13,688        5,144  

Inventories

     794,052        713,813  

Current deferred tax assets

     27,601        27,787  

Current deferred assets

     9,633        13,830  

Other current assets

     62,478        26,144  

Assets held for sale

     -        74,185  
             

Total current assets

     1,922,901        1,840,181  

Property and equipment, net

     87,997        94,725  

Goodwill

     116,508        107,563  

Intangible assets, net

     17,774        18,066  

Deferred tax assets

     296        2,849  

Long-term deferred assets

     11,548        10,636  

Other assets

     18,583        25,890  
             

Total assets

     $                     2,175,607        $                     2,099,910  
             

LIABILITIES AND EQUITY

     

Current liabilities:

     

Borrowings under securitization, term loans and lines of credit

     $ 186,046        $ 150,740  

Accounts payable

     712,365        687,432  

Payable to affiliates

     17,377        82,728  

Accrued liabilities

     124,552        117,599  

Current deferred liabilities

     12,227        18,798  

Income taxes payable

     764        2,431  

Liabilities related to assets held for sale

     -        18,148  
             

Total current liabilities

     1,053,331        1,077,876  

Long-term borrowings

     8,861        9,410  

Long-term liabilities

     30,058        29,285  

Long-term deferred liabilities

     6,494        9,742  

Convertible debt

     130,133        126,785  

Deferred tax liabilities

     5,446        8,077  
             

Total liabilities

     1,234,323        1,261,175  
             

Commitments and contingencies (Note 15)

     

SYNNEX Corporation’s 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, 35,105 and 33,602 shares issued and outstanding

     35        34  

Additional paid-in capital

     278,230        249,892  

Accumulated other comprehensive income

     21,357        27,151  

Retained earnings

     641,662        551,245  
             

Total SYNNEX Corporation stockholders’ equity

     941,284        828,322  

Non-controlling interest

     -        10,413  
             

Total equity

     941,284        838,735  
             

Total liabilities and equity

     $ 2,175,607        $ 2,099,910  
             

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

 

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SYNNEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(unaudited)

 

     Three Months Ended    Nine Months Ended
     August 31, 2010    August 31, 2009    August 31, 2010    August 31, 2009
          (As Adjusted -
See Note 2)
        (As Adjusted -
See Note 2)

Revenue

     $         2,177,066        $         1,998,060        $         6,145,916        $         5,521,135  

Cost of revenue

     (2,052,197)       (1,892,083)       (5,795,219)       (5,213,371) 
                           

Gross profit

     124,869        105,977        350,697        307,764  

Selling, general and administrative expenses

     (72,715)       (67,778)       (216,156)       (205,785) 
                           

Income from continuing operations before non-operating items, income taxes and non-controlling interest

     52,154        38,199        134,541        101,979  

Interest expense and finance charges, net

     (4,585)       (4,220)       (12,130)       (13,497) 

Other income (expense), net

     (300)       729        770        1,758  
                           

Income from continuing operations before income taxes and non-controlling interest

     47,269        34,708        123,181        90,240  

Provision for income taxes

     (16,319)       (13,200)       (44,037)       (33,466) 
                           

Income from continuing operations before non-controlling interest, net of tax

     30,950        21,508        79,144        56,774  

Income from discontinued operations, net of tax

     -            1,192        75        3,852  

Gain on sale of discontinued operations, net of tax

     -            -            11,351        -      
                           

Net income

     30,950        22,700        90,570        60,626  

Net income attributable to non-controlling interest

     (36)       (235)       (153)       (637) 
                           

Net income attributable to SYNNEX Corporation

     $ 30,914        $ 22,465        $ 90,417        $ 59,989  
                           

Amounts attributable to SYNNEX Corporation:

           

Income from continuing operations, net of tax

     $ 30,914        $ 21,501        $ 79,007        $ 56,923  

Discontinued operations:

           

Income from discontinued operations, net of tax

     -            964        59        3,066  

Gain on sale of discontinued operations, net of tax

     -            -            11,351        -      
                           

Net income attributable to SYNNEX Corporation

     $ 30,914        $ 22,465        $ 90,417        $ 59,989  
                           

Earnings per share attributable to SYNNEX Corporation:

           

Basic:

           

Income from continuing operations

     $ 0.88        $ 0.65        $ 2.29        $ 1.75  

Discontinued operations

     -            0.03        0.33        0.10  
                           

Net income per common share - basic

     $ 0.88        $ 0.68        $ 2.62        $ 1.85  
                           

Diluted:

           

Income from continuing operations

     $ 0.86        $ 0.62        $ 2.22        $ 1.69  

Discontinued operations

     -            0.03        0.32        0.09  
                           

Net income per common share - diluted

     $ 0.86        $ 0.65        $ 2.54        $ 1.78  
                           

Weighted-average common shares outstanding - basic

     35,083        32,837        34,534        32,478  
                           

Weighted-average common shares outstanding - diluted

     35,910        34,595        35,628        33,700  
                           

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

 

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SYNNEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Nine Months Ended
     August 31, 2010    August 31, 2009
         

(As Adjusted -

See Note 2)

Cash flows from operating activities:

     

Net income

      $                 90,570         $                 60,626  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

     

Depreciation expense

     8,365        8,980  

Amortization of intangible assets

     3,858        6,156  

Accretion of convertible notes discount

     3,349        3,009  

Share-based compensation

     6,372        6,030  

Provision for doubtful accounts

     6,063        9,915  

Inventory reserve

     6,779        7,828  

Tax benefits from employee stock plans

     10,539        7,247  

Excess tax benefit from share-based compensation

     (8,819)       (6,007) 

Realized and unrealized loss (gain) on investments

     369        (2,193) 

Loss (gain) on disposal of assets and businesses

     (12,900)       96  

Other-than temporary impairment on securities and assets

     570        94  

Changes in assets and liabilities, net of acquisition of businesses:

     

Accounts receivable

     6,308        74,974  

Receivables from vendors

     (12,658)       6,861  

Receivables from affiliates

     4,655        (1,258) 

Inventories

     (126,869)       7,389  

Other assets

     (9,594)       31,115  

Payable to affiliates

     (18,351)       2,191  

Accounts payable

     20,024        (283) 

Accrued liabilities

     (3,226)       (4,333) 

Deferred liabilities

     (8,407)       (17,498) 
             

Net cash provided by (used in) operating activities

     (33,003)       200,939  
             

Cash flows from investing activities:

     

Purchase of trading investments

     (4,733)       (5,539) 

Proceeds from sale of trading investments

     7,746        4,436  

Investment in held-to-maturity term deposits

     (11,373)       (11,862) 

Proceeds from redemption of held-to-maturity term deposits

     12,964        7,974  

Acquisition of businesses, net of cash acquired

     (37,248)       (16,120) 

Purchase of property and equipment

     (7,146)       (19,419) 

Proceeds from sale of businesses

     34,730        -  

Loans and deposits to third parties, net

     (5,724)       -  

Increase in restricted cash

     (4,345)       (23,045) 
             

Net cash used in investing activities

     (15,129)       (63,575) 
             

Cash flows from financing activities:

     

Proceeds from revolving line of credit and securitization

     2,756,474        1,979,524  

Payment of revolving line of credit and securitization

     (2,718,995)       (2,092,770) 

Payment of bank loans

     (443)       (20,204) 

Excess tax benefit from share-based compensation

     8,819        6,007  

Book overdraft

     (2,643)       (8,789) 

Proceeds from issuance of common stock

     12,750        8,864  
             

Net cash provided by (used in) financing activities

     55,962        (127,368) 
             

Effect of exchange rate changes on cash and cash equivalents

     827        (4,785) 
             

Net increase in cash and cash equivalents

     8,657        5,211  

Cash and cash equivalents at beginning of period

     59,406        56,026  
             

Cash and cash equivalents at end of period

      $ 68,063         $ 61,237  
             

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

 

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Table of Contents

SYNNEX CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Three Months Ended    Nine Months Ended
       August 31, 2010        August 31, 2009        August 31, 2010        August 31, 2009  
          (As Adjusted -
See Note 2)
        (As Adjusted -
See Note 2)

Net income

     $                 30,950        $                 22,700        $                 90,570        $                 60,626  

Other comprehensive income (loss):

           

Unrealized gain (loss) on available-for-sale securities

     (18)       22        (10)       4  

Foreign currency translation adjustment

     (2,963)       (481)       (1,876)       13,185  
                           

Total other comprehensive income (loss):

     (2,981)       (459)       (1,886)       13,189  
                           

Comprehensive income:

     27,969        22,241        88,684        73,815  

Comprehensive income attributable to non-controlling interest

     (190)       (235)       (153)       (637) 
                           

Comprehensive income attributable to SYNNEX Corporation

     $ 27,779        $ 22,006        $ 88,531        $ 73,178  
                           

The following is a summary of total comprehensive income and its allocation between the shareholders of SYNNEX Corporation and non-controlling interests:

 

    Three Months Ended
August 31, 2010
  Three Months Ended
August 31, 2009
    Attributable  to
SYNNEX
Corporation
  Attributable to
non-controlling
interest
  Total   Attributable to
SYNNEX

Corporation
  Attributable  to
non-controlling
interest
  Total
          (As adjusted - See Note 2)

Net income

    $ 30,914       $ 36       $ 30,950       $ 22,465       $ 235       $ 22,700  

Other comprehensive income (loss):

           

Unrealized gain (loss) on available-for- sale securities

    (18)      -       (18)      22       -       22  

Foreign currency translation adjustment

    (3,117)      154       (2,963)      (481)      -       (481) 
                                   

Total other comprehensive income (loss)

    (3,135)      154       (2,981)      (459)      -       (459) 
                                   

Total comprehensive income

    $     27,779       $   190       $   27,969       $   22,006       $ 235       $     22,241  
                                   
    Nine Months Ended
August 31, 2010
  Nine Months Ended
August 31, 2009
    Attributable to
SYNNEX
Corporation
  Attributable to
non-controlling
interest
  Total   Attributable to
SYNNEX
Corporation
  Attributable  to
non-controlling
interest
  Total
                (As adjusted - See Note 2)

Net income

    $ 90,417       $ 153       $ 90,570       $ 59,989       $ 637       $ 60,626  

Other comprehensive income (loss):

           

Unrealized gain (loss) on available-for- sale securities

    (10)      -       (10)       4       -       4  

Foreign currency translation adjustment

    (1,876)      -       (1,876)       13,185       -       13,185  
                                   

Total other comprehensive income (loss)

    (1,886)      -       (1,886)       13,189       -       13,189  
                                   

Total comprehensive income

    $ 88,531       $ 153       $     88,684       $     73,178       $ 637       $     73,815  
                                   

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended August 31, 2010 and 2009

(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 original equipment manufacturers (“OEMs”), software publishers, reseller customers and retail customers worldwide. SYNNEX’s service offering includes product distribution, logistics services, global business services (“GBS”) and contract assembly. SYNNEX is headquartered in Fremont, California and has operations in the United States, Canada, China, Japan, Mexico, the Philippines and the United Kingdom (“UK”).

The accompanying interim unaudited consolidated financial statements as of August 31, 2010 and for the three and nine month periods ended August 31, 2010 and 2009 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, 2009 have been derived from the Company’s annual audited financial statements except as adjusted for the adoption of new accounting standards as explained in Note 2. 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 year ended November 30, 2009, included in the Company’s Annual Report on Form 10-K for the fiscal year then ended.

The results of operations for the three and nine months ended August 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ended November 30, 2010, 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, 2009. 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, 2009.

Restricted cash

As of August 31, 2010 and November 30, 2009, the Company had restricted cash in the amounts of $35,948 and $31,319, respectively. A part of the restricted cash balance relates to future payments to contractors for the long-term projects at the Company’s Mexico operation. The Company receives the payments from the Mexican government for the equipment and services on a monthly basis. A portion of the payments to the contractors are withheld per the agreement and will be paid upon completion of the projects. The remaining balance of restricted cash relates to temporary restrictions caused by the timing of lockbox collections under the Company’s borrowing arrangements.

The following table summarizes the restricted cash balances as of August 31, 2010 and November 30, 2009 and the location where these amounts are recorded on the Consolidated Balance Sheet.

 

    August 31, 2010   November 30, 2009

Related to long-term projects:

   

Other current assets

    $ 9,424       $ -      

Other assets

    1,960       14,304  
           

Total

    11,384       14,304  
           

Related to borrowing arrangements:

   

Other current assets

    24,564       17,015  
           

Total

    24,564       17,015  
           
           

Total restricted cash

    $                         35,948       $                         31,319  
           

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(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, 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 August 31, 2010, the Company had not experienced any losses on such deposits.

Accounts receivable include amounts due from customers 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 risks. Through August 31, 2010, such losses have been within management’s expectations.

In the three and nine months ended August 31, 2010, one customer accounted for approximately 12% and 11%, respectively, of the Company’s total revenue. In the three months ended August 31, 2009, one customer was approximately 10% of the Company’s total revenue and in the nine months ended August 31, 2009, no single customer exceeded 10% of the Company’s total revenue. As of August 31, 2010 and November 30, 2009, one customer accounted for approximately 12% and 11%, respectively, of the total consolidated accounts receivable balance. Products purchased from the Company’s largest OEM supplier, Hewlett-Packard Company (“HP”), accounted for approximately 37% of the total revenue for both the three and nine months ended August 31, 2010 and approximately 35% of the total revenue for both the three and nine months ended August 31, 2009.

Revenue recognition

The Company recognizes revenue generally as products are shipped, if a purchase order exists, the sale 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. Shipping terms are typically F.O.B. the Company’s warehouse. 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 a primary obligor, on a net basis beginning in the first fiscal quarter of 2010. Approximately 4% of revenue was recorded on a net basis for both the three and nine months ended August 31, 2010.

The Company purchases licensed software products from OEM vendors and distributes them to customers. Revenue is recognized upon shipment of software products when a purchase order exists, the sales price is fixed or determinable and collection of the resulting accounts receivable is reasonably assured. Subsequent to the sale of software products, the Company generally has no obligation to provide any modification, customization, upgrades, enhancements, or any other post-sales customer support.

The Company’s Mexico operation primarily focuses on projects with the Mexican government and other local agencies that are long-term in nature. The Company sells the computers and equipment to the contractors who provide services to the Mexican government. Under the agreements, the payments are due on a monthly basis and contingent upon the contractors performing certain services, fulfillment of certain obligations and meeting certain conditions. The Company recognizes product revenue and cost of revenue on a straight-line basis over the term of the contract, which coincides with payments no longer being contingent.

The Company provides GBS 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 it offers. These agreements are usually short-term in nature and subject to early termination by the customers or the Company for any reason, typically with 30 to 90 days notice. Typically the contracts are time-based or transactions based. Revenue is generally recognized over the term of the contract if the service has already been rendered, the sales price is fixed or determinable and collection of the resulting accounts receivable is reasonably assured.

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 weighted-average number of shares of common stock outstanding during the period. Diluted weighted-average shares include the dilutive effect of stock options, restricted stock and restricted stock units. The calculation of net income per common share attributable to SYNNEX Corporation is presented in Note 10.

ASC 260, “Earnings per Share,” requires that employee stock options, non-vested restricted stock and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options. Under the treasury stock method, 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.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

With respect to the Company’s convertible debt, the Company intends to settle its conversion spread (i.e., the intrinsic value of convertible debt based on the conversion price and current market price) in shares. The Company accounts for its conversion spread using the treasury stock method. It is the Company’s intent to cash-settle the principal amount of the convertible debt; accordingly, the principal amount has been excluded from the determination of diluted earnings per share.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to current period presentation. Such reclassifications have no effect on net income as previously reported.

Recent accounting pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued an update to the existing multiple-element revenue arrangements guidance. This revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. This accounting update is effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. This standard is applicable to the Company beginning December 1, 2010. The Company is currently assessing the future impact of this new accounting update to its consolidated financial statements.

In October 2009, the FASB issued an accounting standard addressing how entities account for revenue arrangements that contain both hardware and software elements. Due to the significant difference in the level of evidence required for separation of multiple deliverables within different accounting standards, this particular accounting standard will modify the scope of accounting guidance for software revenue recognition. Many tangible products containing software and non-software components that function together to deliver the tangible products’ essential functionality will be accounted for under the revised multiple-element arrangement revenue recognition guidance disclosed above. This accounting standard is effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. This standard is applicable to the Company beginning December 1, 2010. The Company is currently assessing the future impact of this new accounting standard to its consolidated financial statements.

During the fiscal year 2010, the Company adopted the following accounting standards:

In December 2007, the FASB issued a new accounting pronouncement for business combinations which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. In April 2009, the FASB issued additional guidance to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If the fair value cannot be reasonably estimated, the asset or liability will be recognized in accordance with ASC 450, “Contingencies.” The new standard is effective for fiscal years that begin after December 15, 2008, and was adopted by the Company in the first quarter of fiscal year 2010. The Company began accounting for business combinations under the new standard effective December 1, 2009.

In December 2007, the FASB issued accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. This standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This standard is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and was adopted by the Company in the first quarter of fiscal year 2010 with retrospective application of presentation and disclosure requirements.

In April 2008, the FASB issued a new accounting pronouncement which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350, “Intangibles—Goodwill and Other.” The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under this standard and the period of expected cash flows used to measure the fair value of the asset under ASC 805, “Business Combinations.” This new standard is effective for fiscal years beginning after December 15, 2008 and was adopted by the Company in the first quarter of fiscal year 2010 with no material impact on its consolidated results of operations and financial condition.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

In May 2008, the FASB issued a new accounting pronouncement which requires an issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. This is effective for fiscal years beginning after December 15, 2008 on a retroactive basis and was adopted by the Company in the first quarter of fiscal year 2010. The accounting pronouncement is applicable to the Company’s Notes which were issued in May 2008. Although the adoption of this pronouncement did not impact the Company’s actual past or future cash flows, it resulted in an increase in non-cash interest expense. The accompanying comparative consolidated financial statements and footnotes have been adjusted for all periods presented to reflect the retrospective application of the new standard. See Note 9.

The following financial statement line items for the three and nine months ended August 31, 2009 and as of November 30, 2009, were impacted as a result of applying the new standard retrospectively:

 

    Three months ended August 31, 2009
    As previously reported         As adjusted         Effect of Change
    increase / (decrease)    

Consolidated Statement of Operations:

     

Interest expense and finance charges, net

    $ (3,194)      $ (4,220)      $ 1,026  

Income from continuing operations before income taxes and non-controlling interest

    35,734       34,708       (1,026) 

Provision for income taxes

    (13,612)      (13,200)      412  

Income from continuing operations before non-controlling interest, net of tax

    22,122       21,508       (614) 

Net income attributable to SYNNEX Corporation

    23,079       22,465       (614) 

Earnings per share attributable to SYNNEX Corporation:

     
                 

Net income per common share - basic

    $ 0.70       $ 0.68       $ (0.02) 
                 

Net income per common share - diluted

    $ 0.67       $ 0.65       $ (0.02) 
                 
    Nine months ended August 31, 2009
      As previously reported     As adjusted   Effect of Change
increase / (decrease)

Consolidated Statement of Operations:

     

Interest expense and finance charges, net

    $ (10,488)      $ (13,497)      $ 3,009  

Income from continuing operations before income taxes and non-controlling interest

    93,249       90,240       (3,009) 

Provision for income taxes

    (34,676)      (33,466)      1,210  

Income from continuing operations before non-controlling interest, net of tax

    58,573       56,774       (1,799) 

Net income attributable to SYNNEX Corporation

    61,788       59,989       (1,799) 

Earnings per share attributable to SYNNEX Corporation:

     
                 

Net income per common share - basic

    $ 1.90       $ 1.85       $ (0.05) 
                 

Net income per common share - diluted

    $ 1.83       $ 1.78       $ (0.05) 
                 
    As of November 30, 2009
    As previously reported   As adjusted   Effect of Change
increase / (decrease)

Consolidated Balance Sheet:

     

Other current assets

    $ 26,522       $ 26,144       $ (378) 

Convertible debt

    143,750       126,785       (16,965) 

Deferred tax liabilities

    1,442       8,077       6,635  

Additional paid-in capital

    236,213       249,892       13,679  

Retained earnings

    554,972       551,245       (3,727) 

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

The following financial statement line items for the three and nine months ended August 31, 2010 and as of August 31, 2010, were impacted as a result of applying the new standard:

 

    Three months ended August 31, 2010
       Amount as currently  
reported
  Amount as would
    have been reported    
prior to adoption of

new standard
  Effect of adoption  -
   increase / (decrease)    
on current period

Consolidated Statement of Operations:

     

Income from continuing operations before income taxes and non-controlling interest

    $ 47,269       $ 48,381       $ (1,112) 

Net income attributable to SYNNEX Corporation

    30,914       31,580       (666) 

Earnings per share attributable to SYNNEX Corporation:

     
                 

Net income per common share - basic

    $ 0.88       $ 0.90       $ (0.02) 
                 

Net income per common share - diluted

    $ 0.86       $ 0.88       $ (0.02) 
                 
    Nine months ended August 31, 2010
      Amount as currently  
reported
  Amount as would
  have been reported  
prior to adoption of
new standard
  Effect of adoption -
  increase / (decrease)  
on current period

Consolidated Statement of Operations:

     

Income from continuing operations before income taxes and non-controlling interest

    $ 123,181       $ 126,443       $ (3,262) 

Net income attributable to SYNNEX Corporation

    90,417       92,370       (1,953) 

Earnings per share attributable to SYNNEX Corporation:

     
                 

Net income per common share - basic

    $ 2.62       $ 2.67       $ (0.05) 
                 

Net income per common share - diluted

    $ 2.54       $ 2.59       $ (0.05) 
                 
    As of August 31, 2010
      Amount as currently  
reported
  Amount as would
  have been reported  
prior to adoption of
new standard
  Effect of Change
  increase / (decrease)  

Consolidated Balance Sheet:

     

Other current assets

    $ 62,478       $ 62,769       $ (291) 

Convertible debt

    130,133       143,750       (13,617) 

Deferred tax liabilities

    5,446       120       5,326  

Additional paid-in capital

    278,230       264,551       13,679  

Retained earnings

    641,662       647,342       (5,680) 

In June 2008, the FASB ratified guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. This is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The ratification of this new standard did not have a material impact on the Company’s consolidated results of operations and financial condition.

In November 2008, the FASB clarified guidance that the initial carrying value of an equity method investment should be determined in accordance with ASC 805, “Business Combinations.” Other-than-temporary impairment of an equity method investment should be recognized in accordance with ASC 323, “Investments—Equity Method and Joint Ventures” (“ASC 323”). ASC 323 is effective on a prospective basis in fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years, and was adopted by the Company in the first quarter of fiscal year 2010. The Company accounts for its equity method investment in accordance with ASC 323.

In November 2008, the FASB ratified the standard that applies to defensive assets that are acquired intangible assets which the acquirer does not intend to actively use, but intends to hold to prevent its competitors from obtaining access to the asset. This standard clarifies that defensive intangible assets are separately identifiable and should be accounted for as a separate unit of accounting in accordance with ASC 805, “Business Combinations” and ASC 820, “Fair Value Measurements and Disclosures .” This standard is effective for intangible assets acquired in fiscal years beginning on or after December 15, 2008 and was adopted by the Company in the first quarter of fiscal year 2010. Intangible assets acquired in fiscal year 2010 and later will be accounted for in accordance with this standard. The ratification of this standard did not have a material impact on the Company’s consolidated results of operations and financial condition. The Company did not hold any defensive assets as of August 31, 2010.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

In November 2008, the FASB ratified the standard that clarifies whether a financial instrument for which the payoff to the counterparty is based, in whole or in part, on the stock of an entity’s consolidated subsidiary is indexed to the reporting entity’s own stock. This standard is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years and was adopted by the Company in the first quarter of fiscal year 2010. The Company did not have any such financial instruments as of August 31, 2010.

In June 2009, the FASB issued a new accounting pronouncement that eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This standard will be effective for transfers of financial assets in annual reporting periods beginning after November 15, 2009 and in interim periods within those first annual reporting periods with earlier adoption prohibited. This standard was adopted by the Company during the first quarter of fiscal year 2010. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations and financial condition.

In June 2009, the FASB issued a new accounting pronouncement to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest. This new standard will be effective as of the beginning of the annual reporting period commencing after November 15, 2009 and was adopted by the Company in the first quarter of fiscal year 2010. The Company did not have any variable interest entities as of the date of adoption.

In January 2010, the FASB issued an update to existing standards on fair value measurements, which requires new disclosures about inputs and valuation techniques used in recurring and non-recurring fair value measurements and about significant transfers between the three levels of fair value measurements. The new disclosure requirements are effective for interim and annual periods beginning after December 15, 2009 and were adopted by the Company in the second quarter of fiscal year 2010. The accounting update did not have a material impact on the Company’s consolidated financial statements.

NOTE 3—SHARE-BASED COMPENSATION:

The Company recognizes share-based compensation expense under the provisions of ASC 718, “Compensation—Stock Compensation,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases, based on estimated fair values.

The Company uses the Black-Scholes valuation model to estimate fair value of share-based awards, which requires various assumptions including estimating stock price volatility and expected life. Under the fair value recognition provisions of ASC 718, “Compensation—Stock Compensation,” share-based compensation is estimated at the grant-date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. 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 during the three and nine months ended August 31, 2010 and 2009 and the grant-date fair value of the awards:

 

    Three months ended   Three months ended
    August 31, 2010   August 31, 2009
          Number of      
grants
      Fair value    
of grants
        Number of      
grants
        Fair value      
of grants

Stock options

  -           $ -     -           $ -  

Restricted stock awards

  4       98     -           -  

Restricted stock units

  -           -     -           -  
                   
  4       $ 98     -           $ -  
                   

 

    Nine months ended   Nine months ended
    August 31, 2010   August 31, 2009
          Number of      
grants
      Fair value    
of grants
        Number of      
grants
        Fair value      
of grants

Stock options

  60       $ 769     50       $ 309  

Restricted stock awards

  53       1,514     14       273  

Restricted stock units

  100       2,306     -           -  
                   
  213       $ 4,589     64       $ 582  
                   

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

The Company recorded share-based compensation expense, for the three and nine months ended August 31, 2010 of $2,706 and $6,372 and for the three and nine months ended August 31, 2009 of $1,876 and $6,030, respectively. Share-based compensation expense for the three months ended August 31, 2010 was higher than the prior year period due to $844 one time recognition of costs for the modification and accelerated vesting of stock options and restricted awards on the retirement of the Company’s founder and former Chairman, Mr. Robert T. Huang.

NOTE 4—BALANCE SHEET COMPONENTS:

 

         August 31, 2010           November 30, 2009    

Short-term investments

    

Trading securities

     $ 7,097       $ 10,301  

Available-for-sale securities

     85       112  

Held-to-maturity securities

     9,018       7,785  

Cost method securities

     2,498       3,021  
            
     $ 18,698       $ 21,219  
            

Accounts receivable, net

    

Trade accounts receivable

     $ 863,641       $ 864,895  

Less: Allowance for doubtful accounts

     (20,976)      (23,780) 

Less: Allowance for sales returns

     (29,107)      (20,482) 
            
     $ 813,558       $ 820,633  
            

Receivable from vendors, net

    

Receivables from vendors

     $ 120,087       $ 105,429  

Less: Allowance for doubtful accounts

     (4,957)      (5,819) 
            
     $ 115,130       $ 99,610  
            

Inventories

    

Components

     $ 12,810       $ 59,364  

Finished goods

     781,242       654,449  
            
     $ 794,052       $ 713,813  
            

Property and equipment, net

    

Land

     $ 13,154       $ 15,721  

Equipment and computers

     57,814       62,691  

Furniture and fixtures

     9,406       10,152  

Buildings, leasehold improvements

     78,230       80,864  

Construction in progress

     557       882  
            

Total property and equipment, gross

     159,161       170,310  

Less: Accumulated depreciation

     (71,164)      (75,585) 
            
     $ 87,997       $ 94,725  
            

Goodwill

 

         Distribution                 GBS                        Total           

Balance at November 30, 2009

     $ 82,415       $ 25,148       $ 107,563  

Changes during the period

     6,551       2,820       9,371  

Foreign currency translation

     (426)      -           (426) 
                  

Balance at August 31, 2010

     $ 88,540       $ 27,968       $ 116,508  
                  

In the distribution segment, goodwill increased as of August 31, 2010 compared to November 30, 2009, due to the acquisition of Jack of All Games, Inc. by $6,790 and was offset by the sale of the BDG division. In the GBS segment, goodwill increased by $2,820 for the earn-out accrual relating to the Company’s 2009 acquisition, which is scheduled to be paid in the fiscal year ended November 30, 2012.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

Intangible assets, net

 

     August 31, 2010   November 30, 2009
     Gross
     Amount    
  Accumulated
   Amortization  
  Net
    Amount     
  Gross
     Amount    
  Accumulated
   Amortization  
  Net
    Amount     

Vendor lists

     $         36,815       $         (25,179)      $         11,636       $         34,315       $         (24,104)      $         10,211  

Customer lists

     22,244       (17,161)      5,083       21,440       (15,024)      6,416  

Other intangible assets

     4,404       (3,349)      1,055       4,734       (3,295)      1,439  
                                    
     $ 63,463       $ (45,689)      $ 17,774       $ 60,489       $ (42,423)      $ 18,066  
                                    

Amortization expense for the three and nine months ended August 31, 2010 was $1,278 and $3,858, respectively. Amortization expense for the three and nine months ended August 31, 2009 was $2,083 and $6,156, respectively. The increase in intangible assets as of August 31, 2010 compared to November 30, 2009 is due to the acquisition of Jack of All Games, Inc. offset by the sale of intangible assets related to the BDG division, which resulted in a gain of $785. The changes are all within the distribution segment.

NOTE 5—INVESTMENTS:

The carrying amount of the Company’s investments is shown in the table below:

 

     August 31, 2010   November 30, 2009
         Original    
Cost
  Unrealized
  (Losses)/ Gains  
      Carrying    
Value
      Original    
Cost
  Unrealized
  (Losses)/ Gains  
      Carrying    
Value

Short-term investments

            

Trading securities

     $         9,474       $         (2,377)      $         7,097       $         11,631       $         (1,330)      $         10,301  

Available-for-sale securities

     110       (25)      85       147       (35)      112  

Held-to-maturity securities

     9,018       -        9,018       7,785       -        7,785  

Cost method securities

     2,498       -        2,498       3,021       -        3,021  
                                    
     $ 21,100       $ (2,402)      $ 18,698       $ 22,584       $ (1,365)      $ 21,219  
                                    

Short-term trading securities generally consist of equity securities relating to the Company’s deferred compensation plan. Short-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 investments 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 following table summarizes the total realized and unrealized gains and losses recorded on the Company’s trading investments and the other-than-temporary loss recorded on cost and available-for-sale securities in the three and nine months ended August 31, 2010 and 2009:

 

    Three months ended
August 31,
  Nine months ended
August  31,
            2010                   2009                   2010                   2009        

Realized and unrealized gain (loss) on trading investments

    $         (548)      $         655       $         (369)      $         2,193  

Other-than-temporary loss on cost securities

    (363)      -        (363)      (53) 

Other-than-temporary loss on available-for-sale securities

    -        -        -        (39) 

As of August 31, 2010, the available-for-sale securities have been in a loss position for more than 12 months.

In the fourth quarter of fiscal year 2009, investments with maturities from the date of purchase greater than three months and less than one year have been corrected to classify such amounts as short-term investments rather than cash equivalents. The impact on net cash used in investing activities for the nine months ended August 31, 2009 was $59,687 as reported and is $63,575 as corrected. The Company concluded that the correction was not material to prior period interim consolidated financial statements for fiscal 2009 based on SEC Staff Accounting Bulletin No. 99: Materiality.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 6—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 its foreign operations are denominated in the Canadian Dollar, British Pound, Philippines Peso, Japanese Yen, Mexican Peso and Chinese Renminbi. 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 as the Company uses forward contracts to hedge foreign currency balance sheet exposures. 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 interest rate risk, 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 14. The following table summarizes the Company’s derivative instruments not designated as hedging instruments under ASC 815, “Derivatives and Hedging,” as of August 31, 2010 and November 30, 2009:

Foreign exchange forward contracts:

 

    Fair value as of    

                         Location                        

      August 31, 2010           November 30, 2009      

                Accrued liabilities

    $ -           $ (113)   

              Other current assets

    1,975       -        
             
    $ 1,975       $ (113)   
             
              Location              Three months ended   Nine months ended
   

 

August 31, 2010

 

 

August 31, 2009

 

 

    August 31, 2010    

 

 

    August 31, 2009    

            Realized and unrealized gain/ (loss)

   
 
Other income/
(expense), net
  $

 

1,737

 

  $

 

648

 

  $

 

790

 

  $

 

(5,421)

 

                         
    $ 1,737   $ 648   $ 790   $ (5,421)
                         

NOTE 7—ACCOUNTS RECEIVABLE ARRANGEMENTS:

The Company primarily finances its U.S. operations with an accounts receivable securitization program (the “U.S. Arrangement”) by selling up to a maximum of $350,000 in U.S. trade accounts receivable (“U.S. Receivables”). On January 23, 2009, the Company amended and restated the U.S. Arrangement (the “U.S. Amended and Restated Arrangement”) to replace the lead bank and agent. The effective borrowing cost under the U.S. Amended and Restated Arrangement is a blend of the prevailing dealer commercial paper rates, plus a program fee of 0.75% per annum based on the used portion of the commitment and a facility fee of 0.75% per annum payable on the commitment. The balance outstanding on the U.S. Amended and Restated Arrangement as of August 31, 2010 was $155,400 and as of November 30, 2009 was $119,000.

During the first quarter of fiscal year 2010, the U.S. Amended and Restated Arrangement was renewed for one year with a new maturity date of January 10, 2011. Under the terms of renewal, the program fee is reduced from 0.75% to 0.65% and the facility fee is reduced from 0.75% to 0.65%.

Under the terms of the U.S. Amended and Restated Arrangement, the Company sells, on a revolving basis, its U.S. Receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in and to the U.S. Receivables as security. Any borrowings under the U.S. Amended and Restated Arrangement are recorded as debt on the Company’s consolidated balance sheet. 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 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 to the Company the selling price of products sold to various customers, less a discount, within approximately 15 to 30 days from the date of sale. 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. See Note 15 for additional information.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

The following table summarizes the net sales financed through the flooring agreements and the flooring fees incurred:

 

    Three Months Ended   Nine Months Ended
        August 31, 2010           August 31, 2009           August 31, 2010           August 31, 2009    

Net Sales Financed

    $ 172,273       $ 160,279       $ 472,275       $ 507,875  

Flooring Fees (1)

    917       756       2,394       2,419  

 

  (1)

Flooring fees are included within “Interest expense and finance charges, net.”

As of August 31, 2010 and November 30, 2009, accounts receivable subject to flooring agreements were $52,005 and $47,219, respectively.

NOTE 8—BORROWINGS:

Borrowings consist of the following:

 

         August 31, 2010           November 30, 2009    

Convertible debt

     $ 130,133       $ 126,785  

SYNNEX U.S. securitization

     155,400       119,000  

SYNNEX U.S. revolving line of credit

     -           -      

SYNNEX Canada revolving line of credit

     30,044       29,097  

SYNNEX Canada term loan

     9,463       9,994  

Others

     -           2,059  
            

Total borrowings

     325,040       286,935  

Less: Current portion

     (186,046)      (150,740) 
            

Non-current portion

     $ 138,994       $ 136,195  
            

Convertible debt

In May 2008, the Company issued $143,750 of aggregate principal amount of its 4.0% Convertible Senior Notes due 2018 (“the Notes”) in a private placement. The carrying amount of the convertible debt, net of the unamortized debt discount, was $130,133 and $126,785 as of August 31, 2010 and November 30, 2009, respectively. The 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 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 Notes to be redeemed, plus any accrued and unpaid interest to (including any additional interest and any contingent interest), but excluding, the redemption date. See Note 9. Also, the Notes contain various features which under certain circumstances could allow the holders to convert the Notes into shares before their ten-year maturity.

SYNNEX U.S. securitization

The U.S. Amended and Restated Arrangement allows the Company to sell up to a maximum of $350,000 in U.S. Receivables. During the first quarter of fiscal year 2010, the U.S. Amended and Restated Arrangement was renewed for one year with a new maturity date of January 10, 2011. The effective borrowing costs under the U.S. Amended and Restated 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 commitment. Under the terms of renewal the program fee was reduced from 0.75% to 0.65% and the facility fee was reduced from 0.75% to 0.65%.

SYNNEX U.S. senior secured revolving line of credit

The Company has a senior secured revolving line of credit arrangement (the “Revolver”) with a group of financial institutions. On January 23, 2009, the Company amended and restated its U.S. senior secured revolving line of credit arrangement (the “Amended and Restated Revolver”) to replace the lead bank and agent. The Amended and Restated Revolver’s maximum commitment was amended from $120,000 to $80,000. The Amended and Restated Revolver retains an accordion feature to increase the maximum commitment by an additional $70,000 to $150,000 at the Company’s request, in the event one or more of the existing lenders or another financial institution which becomes a lender agrees to provide the increased commitment. Interest on borrowings under the Amended and Restated Revolver is based on the financial institution’s prime rate or LIBOR plus 2.50% per annum at the Company’s option. A fee of 0.50% per annum is payable with respect to the unused portion of the commitment. The Amended and Restated Revolver is secured by the Company’s inventory and other assets and expires on February 11, 2011. Among other changes, the Revolver was further amended such that it is a default under the Amended and Restated Revolver if the maturity date of the U.S. Amended and Restated Arrangement is not extended. In addition, it would be an event of default under the Amended and Restated Revolver if (1) a lender under the U.S. Amended and Restated Arrangement declines to extend the maturity date at any point within 60 days prior to the maturity date of the U.S. Amended and Restated Arrangement, unless availability under the Amended and Restated Revolver exceeds $60,000 or the Company has a binding commitment in place to renew or replace the U.S. Amended and Restated Arrangement or (2) at least 20 days prior to the maturity date of the U.S. Amended and Restated Arrangement the Company does not have in place a binding commitment to renew or replace the U.S. Amended and Restated Arrangement on substantially similar terms and conditions, unless the Company has no amounts outstanding under the Amended and Restated Revolver at such time. There was no borrowing outstanding as of August 31, 2010 and November 30, 2009, respectively.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

SYNNEX Canada revolving line of credit

SYNNEX Canada Limited (“SYNNEX Canada”) replaced its revolving line of credit arrangement of C$30,000 and its renewable revolving accounts receivable securitization program (the “Canadian Arrangement”) of C$110,000 with a secured revolving credit arrangement (the “Canadian Revolving Arrangement”) in May 2009, with a financial institution for a maximum commitment of C$125,000. The Canadian Revolving Arrangement provides a sublimit of $5,000 for the issuance of standby letters of credit. As of August 31, 2010, the outstanding standby letters of credit totaled $3,212. SYNNEX Canada has granted a security interest on 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 Canadian Revolving Arrangement expires in May 2012. The interest rate applicable will be at least (i) 2.5% for a Base Rate Loan in Canadian Dollars, (ii) 3.25% for a Base Rate Loan in U.S. Dollars, and (iii) 1% for a BA (Banker’s Acceptance) Rate Loan. A fee of 0.375% per annum is payable with respect to the unused portion of the commitment.

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 any unpaid principal amount is a fixed rate of 5.374% per annum. The final maturity date for repayment of any unpaid principal is April 1, 2017.

Others

The Company did not renew its other lines of credit facilities and therefore there was no balance outstanding as of August 31, 2010. The balance outstanding under these other lines of credit as of November 30, 2009 was $2,059.

SYNNEX Canada credit facility

SYNNEX Canada has a credit facility with a financial institution in Canada to allow SYNNEX Canada to issue documentary letters of credit. In February 2010, as a result of the sale of the BDG division, the limit on this facility was reduced from C$30,000 to C$390 with validity up to 180 days. The letters of credit are issued to secure purchases of inventory from manufacturers and to finance import activities. This facility has an overdraft limit up to a maximum amount of C$2,000 available in Canadian and U.S. dollars for a maximum of two business days to repay draws under letters of credit or letters of guarantee. SYNNEX Canada has granted a lien, in favor of the financial institution in Canada, on the inventory financed under this credit facility, all accounts receivable from the sale of such inventory, all proceeds of sale of such inventory and collection of such accounts receivable and up to C$1,000 cash on deposit equal to 100% of the outstanding letters of credit with the financial institution in Canada. In connection with this credit facility, the Company issued a guarantee of SYNNEX Canada’s obligations in favor of the financial institution in Canada, which was reduced to C$7,000 from C$20,000. Letters of credit issued against this facility were $868 as of November 30, 2009. There were no letters of credit issued as of August 31, 2010.

Interest expense and finance charges

For the three and nine months ended August 31, 2010, the total interest expense and finance charges for accounts receivable securitization, the Revolver, the Notes and all other debt and lines of credit were $5,722 and $16,858, respectively, including non-cash debt accretion expense of $1,141 and $3,349, respectively, for the Notes. For the three and nine months ended August 31, 2009, the total interest expense and finance charges for accounts receivable securitization, the Revolver, the Notes and all other debt and lines of credit were $6,086 and $19,846, respectively, including non-cash debt accretion expense of $1,026 and $3,009, respectively, for the Notes. The interest expense and finance charges are included in “Interest expense and finance charges, net” in the consolidated statement of operations. The interest expense for the nine months ended August 31, 2009, includes the partial write off of $929 in unamortized debt costs relating to the amendment of the U.S. Arrangement and the Revolver and the termination of the Canadian Arrangement and the Canadian Revolving Arrangement of $30,000. The range of interest rates was between 0.98% and 3.75% and between 0.90% and 3.75% in the three and nine months ended August 31, 2010. The range of interest rates was between 1.98% and 7.64% and between 1.98% and 10.77% in the three and nine months ended August 31, 2009.

Covenants compliance

In relation to the U.S. Amended and Restated Arrangement, the Amended and Restated Revolver 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 and restrict its ability to incur additional debt. These covenants require the Company to maintain specified financial ratios and satisfy certain financial condition tests, including minimum net worth and fixed charge coverage ratio. They also limit the Company’s ability to make or forgive intercompany loans, pay dividends and make 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 Notes subject to certain liquidity tests.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

As of August 31, 2010, the Company was in compliance with all material covenants for the above arrangements.

Guarantees

The Company has issued guarantees to certain vendors and lenders of its subsidiaries’ for trade credit lines and loans, totaling $105,878 and $105,097 as of August 31, 2010 and November 30, 2009, respectively. The Company is obligated under these guarantees to pay amounts due should its subsidiaries not pay valid amounts owed to their vendors or lenders. The vendor guarantees are typically less than one-year arrangements, with 30-day cancellation clauses and the lender guarantees are typically for the term of the loan agreement.

NOTE 9—CONVERTIBLE DEBT:

 

Convertible debt            August 31, 2010              November 30, 2009  

Principal amount

     $ 143,750       $ 143,750  

Less: Unamortized debt discount

     (13,617)      (16,965) 
            

Net carrying amount

     $ 130,133       $ 126,785  
            

In May 2008, the Company issued $143,750 of aggregate principal amount of its 4.0% Convertible Senior Notes due 2018 in a private placement. The Notes have a cash coupon interest rate of 4.0% per annum. Interest on the Notes is payable in cash semi-annually in arrears on May 15 and November 15 of each year, beginning 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 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 Notes. During any interest period when contingent interest is payable, the contingent interest payable per Note is equal to 0.55% of the average trading price of the Notes during the ten trading days immediately preceding the first day of the applicable six-month interest period. The Notes mature on May 15, 2018, subject to earlier redemption, repurchase or conversion.

Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date for such 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 20 trading days in the period of 30 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 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 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 Notes on each such day; (3) if the Company has called the particular 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. In addition, holders may also convert their 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 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 Notes will be 33.9945 shares of common stock per $1 principal amount of 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 not redeem the Notes prior to May 20, 2013. The Company may redeem the 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 Notes to be redeemed, plus any accrued and unpaid interest to (including any additional interest and any contingent interest), but excluding, the redemption date.

Holders may require the Company to repurchase all or a portion of their Notes for cash on May 15, 2013 at a purchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to (including any additional interest and any contingent interest), but excluding, the repurchase date. If the Company undergoes a fundamental change, holders may require it to purchase all or a portion of their Notes for cash at a price equal to 100% of the principal amount of the Notes to be purchased, plus any accrued and unpaid interest to (including any additional interest and any contingent interest), but excluding, the fundamental change repurchase date.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

The 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 notes, if any. The Notes effectively rank junior to any of the Company’s secured indebtedness to the extent of the assets securing such indebtedness. The 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 Notes were used for general corporate purposes and to reduce outstanding balances under the U.S. Arrangement and the Revolver.

The Notes are governed by an indenture, dated as of May 12, 2008, between the Company and U.S. Bank National Association, as trustee, which contains customary events of default.

The Notes as hybrid instruments are accounted as convertible debt and are recorded at carrying value. The right of the holders of the Notes to require the Company to repurchase the Notes in the event of a fundamental change and the contingent interest feature would require separate measurement from the Notes; however, the amount is insignificant. The additional shares issuable following certain corporation transactions do not require bifurcation and separate measurement from the Notes.

As previously discussed in Note 2, the Company adopted new standards effective December 1, 2009, that changed the accounting for the Notes. Under the previous standards the Notes were recognized entirely as a liability at historical value. In accordance with the provisions of the new standards, the Company retrospectively recognized both a liability and an equity component of the 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 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 over the five year period to the first put date, utilizing the effective interest method. The corresponding offset was recorded to “additional paid-in capital” and was adjusted for deferred taxes of $9,157. Underlying debt issuance costs of $3,575 associated with the Notes were allocated between the liability and equity components of the debt in accordance with the provisions of the new standard.

As of August 31, 2010, the remaining amortization period is approximately 32 months assuming the redemption of the debentures 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 $1,625 and $4,872, respectively, during the three and nine months ended August 31, 2010 and $1,652 and $4,957 during the three and nine months ended August 31, 2009, respectively. Based on an effective rate of 8.0%, the Company recorded non-cash interest expense of $1,141 and $3,349 during the three and nine months ended August 31, 2010, respectively, and $1,026 and $3,009 during the three and nine months ended August 31, 2009, respectively. As of August 31, 2010 and November 30, 2009, respectively, the carrying value of the equity component of the Notes, net of allocated issuance costs, was $22,836. As of August 31, 2010, the if-converted value of the Notes did not exceed the principal balance.

The Notes contain various features which under certain circumstances could allow the holders to convert the Notes into shares before their ten-year maturity. Further, the date of settlement of the Notes is uncertain due to the various features of the Notes including put and call features. Because the Company currently intends to settle the Notes using cash at some future date, the Company maintains within its U.S. Amended and Restated Arrangement and the Amended and Restated Revolver ongoing features that allow the Company to utilize cash from these facilities to cash settle the Notes, if desired.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 10—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   Nine months ended
      August 31, 2010       August 31, 2009       August 31, 2010       August 31, 2009  

Amounts attributable to SYNNEX Corporation:

       

Income from continuing operations, net of tax

    $ 30,914       $ 21,501       $ 79,007       $ 56,923  

Discontinued operations:

       

Income from discontinued operations, net of tax

    -       964       59       3,066  

Gain on sale of discontinued operations, net of tax

    -       -       11,351       -    
                       

Net income attributable to SYNNEX Corporation

    $ 30,914       $ 22,465       $ 90,417       $ 59,989  
                       

Weighted-average common shares - basic

    35,083       32,837       34,534       32,478  

Effect of dilutive securities:

       

Stock options and restricted stock

    827       1,758       1,094       1,222  
                       

Weighted-average common shares - diluted

    35,910       34,595       35,628       33,700  
                       

Earnings per share attributable to SYNNEX Corporation:

       

Basic:

       

Income from continuing operations

    $ 0.88       $ 0.65       $ 2.29       $ 1.75  

Discontinued operations

    -           0.03       0.33       0.10  
                       

Net income per common share - basic

    $ 0.88       $ 0.68       $ 2.62       $ 1.85  
                       

Diluted:

       

Income from continuing operations

    $ 0.86       $ 0.62       $ 2.22       $ 1.69  

Discontinued operations

    -           0.03       0.32       0.09  
                       

Net income per common share - diluted

    $ 0.86       $ 0.65       $ 2.54       $ 1.78  
                       

Options to purchase 67 and 50 shares of common stock for the three and nine months ended August 31, 2010, respectively, and 261 shares for the nine months ended August 31, 2009, respectively, have not been included in the computation of diluted net income per share as their effect would have been anti-dilutive. No options were anti-dilutive during the three months ended August 31, 2009.

NOTE 11—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 August 31, 2010, MiTAC International and its affiliates beneficially owned approximately 30% of the Company’s common stock. In addition, Matthew Miau, the Company’s Chairman Emeritus of the Board of Directors, is also the Chairman of MiTAC International and a director or officer of MiTAC International’s affiliates. As a result, 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 with the loss of any premium that stockholders otherwise might receive in connection with such a transaction.

The Company works closely with MiTAC International on OEM outsourcing and jointly market MiTAC International’s design and electronic manufacturing services and its contract assembly capabilities. This relationship has enabled the Company to build relationships with MiTAC International’s customers and it continues to work with and depend on MiTAC International to jointly serve its shared customers. The Company purchased inventories, including notebook computers, motherboards and other peripherals, from MiTAC International and its affiliates totaling $39,622 and $154,545 in the three and nine months ended August 31, 2010, respectively, and $69,013 and $247,216 in the three and nine months ended August 31, 2009, respectively. The Company’s sales to MiTAC International and its affiliates totaled $391 and $1,626 in the three and nine months ended August 31, 2010, respectively and $639 and $2,199 in the three and nine months ended August 31, 2009, respectively. Most of these purchases and sales were pursuant to the Company’s Master Supply Agreement with MiTAC International and Sun Microsystems, one of its contract assembly customers. In fiscal year 2010, Oracle Corporation acquired Sun Microsystems and all of the Company’s contract assembly services to Oracle Corporation are covered by this Master Supply Agreement. The Company’s business relationship to date 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.

On July 31, 2010, the Company sold to MiTAC International certain assets related to the Company’s contract assembly business. The transaction included the sale of inventory and customer contracts, primarily related to customers then being jointly served by MiTAC International and the Company. The value of the inventory sold was $66,261. As part of this transaction, the Company will provide MiTAC International certain transition services for the business for a fee of $250 per month over the next twelve months. In addition, during the three and nine months ended August 31, 2010, the Company also received $245 in reimbursements for facilities and overhead costs incurred. The sale agreement also includes earn-out and profit sharing provisions, which are based on near-term operating performance metrics for the defined customers included in this transaction.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

The Company negotiated 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 these agreements, including pricing, would 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, Mr. Miau’s compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors. As MiTAC International’s ownership interest in the Company decreases as a result of sales of the Company’s stock and additional dilution, its interest in the success of the business and operations may decrease as well.

Beneficial Ownership of the Company’s Common Stock by MiTAC International

As noted above, MiTAC International and its affiliates in the aggregate beneficially owned approximately 30% of the Company’s common stock as of August 31, 2010. These shares are owned by the following entities:

 

     August 31, 2010
         (shares in thousands)    

MiTAC International (1)

   6,178  

Synnex Technology International Corp.  (2)

   4,427  
    

Total

   10,605  
    

 

  (1) Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC International. Excludes 842 thousand shares (of which 445 thousand shares are directly held and 397 thousand 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 minority interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a minority interest of 14.6% in Synnex Technology International. Neither MiTAC International nor Mr. Miau is affiliated with any person(s), entity, or entities, that hold a majority interest in MiTAC Incorporated.

While the ownership structure of MiTAC International and its affiliates is complex, it has not had a material adverse effect on the Company’s business in the past, and it does not expect it to do so in the future.

During fiscal year 2007, the Company purchased shares of MiTAC International and one of its affiliates related to the deferred compensation plan of Robert T. Huang, the Company’s founder and former Chairman. During fiscal year 2008, the Company purchased additional shares of MiTAC International related to Mr. Huang’s deferred compensation plan. As of August 31, 2010, the value of the investment was $753. Except as described herein, none of the Company’s officers or directors has an interest in MiTAC International or its affiliates.

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.

On August 31, 2010, the Company sold its controlling interests in Nihon Daikou Shouji Co., Ltd. (“NDS”) for $3,072 to SB Pacific Corporation Limited, a newly formed company, led by the Company’s founder and former Chairman, Mr. Robert T. Huang. Concurrently, the Company invested in a 33.3% non-controlling interest in SB Pacific Corporation Limited. A gain of $493 was recorded on the sale of NDS in Other income (expense) during the three and nine months ended August 31, 2010.

NOTE 12— SEGMENT INFORMATION:

Description of Segments

Operating segments are based on products and services provided by each segment, internal organization structure, the manner in which operations are managed, the criteria used by the Chief Operating Decision Maker (“CODM”) to assess the segment performance as well as resources allocation and the availability of discrete financial information.

The distribution services segment distributes information technology, consumer electronics, complementary products and video games to a variety of customers, including value-added resellers, system integrators, retailers, as well as provides assembly services to OEMs, including integrated supply chain management, build-to-order and configure-to-order system configurations, materials management and logistics.

The GBS services segment offers a range of services to the Company’s customers that include customer management, software development, and back office processing on a global platform. The Company delivers these services through various methods including voice, chat, web, email, and digital print. The Company also sells products complementary to these service offerings in China.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

Summarized financial information related to the Company’s reportable business segments for the three and nine months ended August 31, 2010 and 2009, and as of August 31, 2010 and November 30, 2009 is shown below:

 

        Distribution                 GBS                  Inter-Segment    
Elimination
      Consolidated    

Three months ended August 31, 2010

       

Revenue

    $         2,152,537       $         30,968       $ (6,439)      $ 2,177,066  

Income from continuing operations before non-operating items, income taxes and non-controlling interest

    47,928       4,226       -           52,154  

Three months ended August 31, 2009

       

Revenue

    $ 1,977,829       $ 25,411       $ (5,180)      $ 1,998,060  

Income from continuing operations before non-operating items, income taxes and non-controlling interest

    34,823       3,376       -           38,199  

Nine months ended August 31, 2010

       

Revenue

    $ 6,079,088       $ 84,685       $ (17,857)      $ 6,145,916  

Income from continuing operations before non-operating items, income taxes and non-controlling interest

    124,374       10,167       -           134,541  

Nine months ended August 31, 2009

       

Revenue

    $ 5,461,922       $ 74,839       $ (15,626)      $ 5,521,135  

Income from continuing operations before non-operating items, income taxes and non-controlling interest

    93,384       8,594       -           101,978  

Total assets as of August 31, 2010

    $ 2,134,327       $ 177,932       $     (136,652)      $         2,175,607  

Total assets as of November 30, 2009

    $ 2,002,750       $ 184,667       $ (87,507)      $ 2,099,910  

The inter-segment eliminations relate to the inter-segment back-office support services provided by the GBS segment to the distribution segment and inter-segment investments. Total assets in the GBS segment as of November 30, 2009 include assets held for sale.

Segment by Geography

The Company primarily operates in North America. The United States and Canada are included in the “North America” operations and China, Mexico, Japan, the Philippines and the UK 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 in the three and nine months ended August 31, 2010 and 2009:

 

    Three Months Ended   Nine Months Ended
        August 31, 2010           August 31, 2009           August 31, 2010           August 31, 2009    

  Revenue

       

  North America

    $ 2,140,886       $ 1,962,826       $ 6,027,570       $ 5,408,279  

  Other

    36,180       35,234       118,346       112,856  
                       
    $ 2,177,066       $ 1,998,060       $ 6,145,916       $ 5,521,135  
                       
            As of
                August 31, 2010           November 30, 2009    

  Long-lived assets

       

  North America

        $ 83,288       $ 70,610  

  Other

        23,292       50,005  
               
        $ 106,580       $ 120,615  
               

Revenue in the United States was approximately 83% of the total revenue for both the three and nine months ended August 31, 2010, and 83% and 82% of the total revenue for the three and nine months ended August 31, 2009, respectively. Revenue in Canada was approximately 15% and 16% of total revenue for the three and nine months ended August 31, 2010, respectively, and 15% and 16% for the three and nine months ended August 31, 2009. No other geographical location accounted for more than 10% of the Company’s total revenue.

Long-lived assets in the United States were approximately 60% and 42% of total long-lived assets as of August 31, 2010 and November, 30 2009, respectively. Long-lived assets in Canada were approximately 18% and 17% of total long-lived assets as of August 31, 2010 and November 30, 2009, respectively.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 13—ACQUISITIONS AND DIVESTITURES:

Fiscal year 2010 acquisitions

On February 26, 2010, the Company purchased substantially all of the North American assets of Jack of All Games, Inc, a distributor of video game hardware and software. The Company expects this acquisition to expand its consumer electronics product offerings. The acquisition is fully integrated into the Company’s distribution segment. During the three and nine months ended August 31, 2010, the Company made certain adjustments to the fair value of inventories and other assets acquired, and liabilities assumed, related to this transaction. These adjustments had the impact of lowering the purchase price by $5,299. The total consideration as adjusted is $37,354. The net tangible assets acquired were $26,064 and the Company recognized approximately $4,500 of intangible assets and approximately $6,790 in goodwill.

The preliminary purchase price allocation based on the estimated fair value of the assets acquired and liabilities assumed is as follows:

 

             Fair Value         

Purchase Consideration:

  

Cash Payment

     $ 37,248  

Less: Amount due from seller (1)

     (2,685) 

Accrual subject to post closing conditions (1)

     2,791  
      
     $ 37,354  
      

Allocation:

  

Accounts receivable, net

     $ 10,112  

Receivable from vendors, net

     2,679  

Inventories

     22,949  

Other current assets

     290  

Goodwill

     6,790  

Intangible assets, net (2)

     4,500  

Accounts payable

     (8,700) 

Accrued liabilities

     (1,266) 
      
     $ 37,354  
      

 

  (1) Based on Agreed-upon changes to the acquisition price.
  (2) Intangibles will be amortized over a period of 3 to 10 years.

Fiscal year 2010 divestitures

On December 28, 2009, the Company sold its controlling interest in China Civilink (Cayman), the results of which are presented in discontinued operations. Please see Note 17- Discontinued Operations for a detailed discussion on this transaction.

On July 31, 2010, the Company sold to MiTAC International, inventory and certain customer contracts, primarily related to contract assembly customers jointly served by the Company and MiTAC International. The sale agreement includes earn-out and profit-sharing provisions, which are based on near-term operating performance metrics for the defined customers included in the transaction. The Company will provide MiTAC International certain transition services on a fee basis. Please see Note 11—Related Party Transactions for more information on this transaction.

On August 31, 2010, the Company sold its controlling interests in NDS for $3,072 to SB Pacific Corporation Limited, a newly formed company led by the Company’s founder and former Chairman, Mr. Robert T. Huang. Concurrently, the Company invested in a 33.3% non-controlling interest in SB Pacific Corporation Limited. A gain of $493 was recorded on the sale of NDS in Other income (expense) during the three and nine months ended August 31, 2010.

Fiscal year 2009 acquisitions

In the first quarter of fiscal year 2009, the Company completed two acquisitions in the GBS segment. Through these acquisitions, the Company acquired web development services and complementary products for total consideration of $6,579. In the three and nine months ended August 31, 2010, the Company recorded additional goodwill and accrued $2,820 for the earn-out payment related to one of these acquisitions. The other acquisition is reported under discontinued operations.

The above acquisitions in fiscal 2010 and 2009, individually and in the aggregate, did not meet the conditions of a material business combination and were not subject to the disclosure requirements of accounting for business combinations utilizing the purchase method of accounting.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 14—FAIR VALUE MEASUREMENTS:

The Company adopted ASC 820, “Fair Value Measurements and Disclosures,” effective December 1, 2007 for financial assets and liabilities measured on a recurring basis. The Company adopted ASC 820, “Fair Value Measurements and Disclosures,” effective December 1, 2008 for non-financial assets and liabilities. ASC 820, “Fair Value Measurements and Disclosures,” applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. ASC 820, “Fair Value Measurements and Disclosures,” establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements to be 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).

There was no impact for the adoption of ASC 820, “Fair Value Measurements and Disclosures,” to the Consolidated Financial Statements. The following table summarizes the valuation of the Company’s short-term investments and financial instruments by the above ASC 820, “Fair Value Measurements and Disclosures,” categories as of August 31, 2010 and November 30, 2009:

 

    August 31, 2010   November 30, 2009
        Fair value measurement category       Fair value measurement category
        Total         Level 1            Level 2                 Level 3              Total         Level 1            Level 2                 Level 3       

Trading securities

    $       7,097       $       7,097       $ -       $ -       $     10,301       $     10,301       $ -       $ -  

Available-for-sale securities

    85       85       -       -       112       112       -       -  

Forward foreign currency exchange contracts

    1,975       -         1,975           -       (113)      -          (113)          -  

The Company’s investments in trading and available-for-sale securities are recorded at fair value based on quoted market prices. The fair value of forward exchange contracts are measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. There were no transfers between the Level 1 and Level 2 investments and financial instruments during the three and nine months ended August 31, 2010.

The following table summarizes the realized and unrealized gains and losses recorded in “Other income (expense)” in the consolidated statement of operations for the changes in the fair value of its financial instruments for trading securities and forward foreign currency contracts:

 

    Three Months Ended   Nine Months Ended
      August 31, 2010       August 31, 2009       August 31, 2010       August 31, 2009  

Realized gain (loss)

    $ (254)      $ (4,465)      $ (1,449)      $ (5,248) 

Unrealized gain (loss)

    1,444       515       1,871       (1,442) 
                       

Total realized and unrealized gain/(loss)

    $ 1,190       $ (3,950)      $ 422       $ (6,690) 
                       

The following table presents the assets and liabilities that are not carried at fair value as of August 31, 2010 and November 30, 2009:

 

    August 31, 2010   November 30, 2009
      Carrying
Value  
    Fair Value       Carrying
Value  
    Fair Value  
           

(As adjusted-

see Note 2)

   

Cost method investments in short-term investments

    $ 2,498       $ 3,451       $ 3,021       $ 2,496  

Long-term accounts receivable

    7,508       7,508       7,169       7,169  

SYNNEX Canada term loan

    9,463       9,463       9,994       9,994  

Convertible debt

    130,133       150,360       126,785       168,788  

The Company’s cost method securities in short-term investments consist of investments in a hedge fund and a private equity fund. The fair value of the cost method investments is based on either (i) the published fund values or (ii) a valuation model developed internally to measure impairment primarily based on the published value of the securities held by the fund. The Company records an impairment charge when the decline in fair value is determined to be other-than-temporary. During the three and nine months ended August 31, 2010, the Company recorded an other-than-temporary impairment of $363 on its cost method securities. In the nine months ended August 31, 2009, $53 was recognized as other-than-temporary impairment charges relating to the carrying value of the Company’s cost method securities, while no impairment was recorded in the three months ended August 31, 2009.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

The fair value of long-term accounts receivable is based on customer rating and creditworthiness. The carrying value of the SYNNEX Canada term loan approximates its fair value since interest rates offered to the Company for debt of similar terms and maturities are approximately the same. The fair value of convertible debt is based on the closing price of the convertible debt traded in a limited trading market.

The cost method investments in “Other assets” consist of investments in equity securities of private entities. The carrying value of the investments was $3,550 as of both August 31, 2010 and November 30, 2009. As of August 31, 2010, the fair value of these cost method investments is greater than the carrying value.

The carrying value of other financial instruments, including cash, held-to-maturity securities, accounts receivable, accounts payable and short-term debt approximate fair value due to their short maturities or variable-rate nature of the respective borrowings.

The Company monitors its investments for impairment by considering current factors, including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, and records reductions in carrying values when necessary. Any impairment loss is reported under “Other income (expense), net” in the consolidated statement of operations.

NOTE 15—COMMITMENTS AND CONTINGENCIES:

The Company was contingently liable as of August 31, 2010, 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 7. Losses, if any, would be the difference between the repossession cost and the resale value of the inventory. There have been no repurchases through August 31, 2010 under these agreements, nor is the Company aware of any pending customer defaults or repossession obligations.

The Company is from time to time involved in various bankruptcy preference actions where the Company was a supplier to the companies now in bankruptcy. These preference actions are filed by the bankruptcy trustee on behalf of the bankrupt estate and generally seek to have payments made by the debtor within 90 days prior to the bankruptcy returned to the bankruptcy estate for allocation among all of the bankrupt estate’s creditors. The Company is not currently involved in any material preference proceedings.

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 16—RESTRUCTURING CHARGES:

In fiscal year 2007, in connection with the acquisition of the Redmond Group of Companies (“RGC”), the Company announced a restructuring program in Canada under EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” During the three and nine months ended August 31, 2010, the Company made payments of $249 and $431, respectively, for the remaining lease obligations on the RGC facility. During the three and nine months ended August 31, 2010, the Company also recorded additional charges of $211 and $369, respectively for the remaining lease obligations. The remaining balance outstanding on facility and exit costs as of August 31, 2010 and November 30, 2009 was $497 and $557, respectively.

NOTE 17—DISCONTINUED OPERATIONS:

On December 28, 2009, China Civilink (Cayman), which operates in China as HiChina Web Solutions was sold to Alibaba.com Limited. HiChina Web Solutions provides domain name registration, web site hosting and design. HiChina Web Solution was a subsidiary of SYNNEX Investment Holdings Corporation, a wholly-owned subsidiary company of SYNNEX Corporation. Under the terms of the agreement, the Company received $59,558 for its estimated 79% controlling ownership in HiChina Web Solutions, subject to a 10% holdback for a period of six months. The total gain recorded on the sale was $11,351, net of $1,154 income taxes. The Company, as the ultimate parent, has agreed to guarantee the obligations of SYNNEX Investment Holdings Corporation up to $35,035 in connection with the sale of HiChina Web Solutions. HiChina Web Solutions was a part of the Company’s GBS segment. The Company has no significant continuing involvement in the operations of HiChina Web Solutions. During the three and nine months ended August 31, 2010, the Company received $5,837 in full settlement of the holdback amount.

Under the provisions of FASB ASC 360, “Property, Plant and Equipment,” the sale of HiChina Web Solutions qualified as a discontinued operation component of the Company. Accordingly, the Company has excluded results of HiChina’s operations from its consolidated statements of continuing operations for the nine months ended August 31, 2010 and for the three and nine months ended August 31, 2009 to present this business in discontinued operations.

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

The following table shows the results of operations of HiChina Web Solutions for the nine months ended August 31, 2010 and for the three and nine months ended August 31, 2009 which are included in the earnings from discontinued operations:

 

        Three months ended       Nine months ended
  August 31, 2009       August 31, 2010 *           August 31, 2009    

Revenue

    $ 9,103       $ 2,959       $ 26,973  

Cost of revenue

    (3,945)      (1,706)      (11,427) 
                 

Gross profit

    5,158       1,253       15,546  

Selling, general and administrative expenses

    (4,078)      (1,199)      (11,848) 
                 

Income from operations before non-operating items, income taxes and non-controlling interest

    1,080       54       3,698  
                 

Interest income (expense and finance charges), net

    99       17       327  

Other income (expense), net

    (2)      5       (7) 
                 

Income before income taxes and non-controlling interest

    1,177       76       4,018  

(Provision for) Benefit from income taxes

    15       (2)      (166) 
                 

Income from discontinued operations

    1,192       74       3,852  

Income from discontinued operations attributable to non-controlling interest

    (228)      (15)      (786) 
                 

Income from discontinued operations attributable to SYNNEX Corporation

    $ 964       $ 59       $ 3,066  
                 

 

  * Includes the results of operations from December 1, 2009 to the disposition date of December 28, 2009.

The following are the carrying amount of major classes of assets and liabilities of HiChina Web Solution’s discontinued operations which were classified as held for sale as of November 30, 2009:

 

       November 30, 2009  

Assets:

  

Cash and cash equivalents

     $ 21,590  

Short-term investments

     8,952  

Property and equipment, net

     6,256  

Goodwill

     29,920  

Intangible assets, net

     3,670  

Other assets

     3,797  
      

Total assets held for sale

     $ 74,185  
      

Liabilities:

  

Current deferred liabilities

     $ 10,198  

Other liabilities

     7,950  
      

Total liabilities related to assets held for sale

     $ 18,148  
      

Non-controlling interest

     $ 7,402  
      

NOTE 18—INCOME TAXES:

During the three and nine months ended August 31, 2010, the Company recorded a one-time adjustment of $3,118 resulting from the conclusion of an Internal Revenue Service income tax audit of the Company’s U.S. entity for the fiscal years 2004 and 2005 as well as the expiration of the statute of limitations for the fiscal year 2006. This reassessment benefited the Company with a $1,929 reduction of total income tax expenses and a $1,189 increase in “Additional paid-in capital.”

 

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SYNNEX Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended August 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 19—EQUITY:

A reconciliation of the changes in equity for the nine months ended August 31, 2010 and 2009 is presented below:

 

    Nine months ended
August 31, 2010
  Nine months ended
August 31, 2009
      Attributable to  
SYNNEX
Corporation
    Attributable to  
Non-
controlling
interest
      Total Equity       Attributable
  to SYNNEX  

    Corporation    
    Attributable to  
Non-
controlling
interest
      Total Equity    

Beginning balance of equity:

(As adjusted - see Note 2)

    $ 828,322       $   10,413       $ 838,735       $ 692,330       $     4,673       $ 697,003  

Issuance of common stock on exercise of options and restricted stock

    12,067       -           12,067       8,292       -           8,292  

Issuance of common stock for employee stock purchase plan

    683       -           683       572       -           572  

Tax benefit from exercise of non-qualified stock options

    10,539       -           10,539       7,247       -           7,247  

Change in tax reserve

    1,189       -           1,189       -           -           -      

Share based compensation

    6,372       -           6,372       6,030       -           6,030  

Change in equity for Hi-China Web Solutions  (1)

    (5,946)      (7,403)      (13,349)      4,721       -           4,721  

Change in equity from sale of Nihon Daikou Shouji  (2)

    (473)      (3,148)      (3,621)      -           -           -      

Non-controlling interest’s share of discontinued operations

    -           (15)      (15)      -           -           -      

Comprehensive income:

           

Net income

    90,417       153       90,570       59,989       637       60,626  

Other comprehensive income (loss):

           

Changes in unrealized gain (loss) on available-for-sale securities

    (10)      -           (10)      4       -           4  

Foreign currency translation adjustment

    (1,876)      -           (1,876)      13,185       -           13,185  
                                   

Total other comprehensive income (loss)

    (1,886)      -           (1,886)      13,189       -           13,189  
                                   

Total comprehensive income

    88,531       153       88,684       73,178       637       73,815  
                                   

Ending balance of equity:

    $ 941,284       $ -           $ 941,284       $ 792,370       $ 5,310       $ 797,680  
                                   

 

  (1)

See Note 17- Discontinued operations for further discussion.

  (2)

See Note 13- Acquisitions and divestitures for further discussion.

NOTE 20— SUBSEQUENT EVENTS:

On September 29, 2010, Andrea M. Zulberti, an independent director, was appointed to the Board of Directors, as well as the Audit Committee and the Compensation Committee.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

When used in this Quarterly Report on the Form 10Q 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, our investment in our IT systems, anticipated benefits of our acquisitions, impact of our disposition of certain assets to MiTAC International Corporation, or MiTAC International, impact of acquisitions, our revenue and operating results, our gross margins, our agreements with MiTAC International, competition with Synnex Technology International, our future needs for additional financing, concentration of customers, expansion of our operations, our international operations, our strategic acquisitions of businesses and assets, adequacy of our cash resources to meet our capital needs, the settlement of our convertible notes, adequacy of our disclosure controls and procedures, dependency on personnel, competition, impact of rules and regulations affecting public companies, 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 below, 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 industry, fluctuations in general economic conditions and risks set forth below 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, serving resellers, retailers and original equipment manufacturers, or OEMs, in multiple regions around the world. We operate in two segments, distribution services and global business services, or GBS. Our primary business process services are distribution, contract assembly and business process outsourcing services, or BPO. Our distribution services segment distributes computing, consumer electronics, or CE, complementary products and video games to a variety of customers, including value-added resellers, or VARs, system integrators and retailers, as well as provides assembly services to OEMs, including integrated supply chain management, build-to-order and configure-to-order system configurations, materials management and logistics. Our GBS segment offers a range of services to our customers that include customer management, software development, and back office processing on a global platform. We deliver these services through various methods including voice, chat, web, email, and digital print.

We bring synergy to our customers’ business process services requirements. In SYNNEX, OEMs can have a single service provider for supply chain management, contract assembly and distribution combined. Our business model is flexible and modular to accommodate the specific needs of our customers. To further enhance our business process services solutions, we provide value-added support services such as demand generation, pre-sales support, product marketing, print and fulfillment, back office outsourcing and post-sales technical support.

We combine our core strengths in distribution, supply chain management, and contract assembly in an effort to help our customers achieve greater efficiencies in time to market, cost minimization, real-time linkages in the supply chain and aftermarket product support. We distribute more than 20,000 technology products (as measured by SKUs) from more than 100 IT and CE, OEM suppliers to more than 15,000 resellers, system integrators, and retailers throughout the United States, Canada and Mexico. As of August 31, 2010, we had over 7,000 full-time and temporary employees worldwide. From a geographic perspective, approximately 98% of our total revenue was from North America for both the three and nine months ended August 31, 2010.

We purchase IT systems, peripherals, system components, software, networking equipment, various consumer electronics and video games from OEM suppliers such as Hewlett-Packard Company, or HP, Panasonic, Acer, Seagate and Lenovo and sell them to our reseller and retail customers. We perform a similar function for our distribution of licensed software products. Our reseller and retail customers include VARs, corporate resellers, government resellers, system integrators, direct marketers, and retailers. Products purchased from our largest OEM supplier, HP, accounted for approximately 37% of our total revenue for both the three and nine months ended August 31, 2010 and 35% for both the three and nine months ended August 31, 2009, respectively.

Our distribution segment operates in the distribution and contract assembly services industries, which are characterized by low gross profit as a percentage of revenue, or gross margin, and low income from operations as a percentage of revenue, or operating margin. The market for IT and CE products and services is generally characterized by declining unit prices and short product life cycles. We set our sales price based on the market supply and demand characteristics for each particular product or bundle of products we distribute and services we provide.

 

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In our distribution segment, we are highly dependent on the end-market demand for IT and CE products and services. This end-market demand is influenced by many factors including the introduction of new IT and CE products and software by OEMs, replacement cycles for existing IT and CE products, overall economic growth and general business activity. A difficult and challenging economic environment may also lead to consolidation or decline in the IT and CE industries and increased price-based competition.

Recent Acquisitions and Divestitures

We seek to augment our services offering with strategic acquisitions of businesses and assets that complement and expand our global business process services capabilities. We also divest businesses that we deem not strategic to our ongoing operations. Our historical acquisitions have brought us new reseller and retail customers, OEM suppliers, product lines, and have extended the geographic reach of our operations, particularly targeted in international markets, and 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.

On February 26, 2010, we purchased substantially all of the North American assets of Jack of All Games, Inc., a distributor of video game hardware and software. During the three and nine months ended August 31, 2010 we made certain adjustments to the fair value of inventories and other assets acquired, and the liabilities assumed, related to this transaction. These adjustments had the impact of lowering the purchase price by $5.3 million. Total consideration, as adjusted, was $37.4 million. The net tangible assets acquired were $26.1 million and we recognized approximately $4.5 million of intangible assets and approximately $6.8 million in goodwill. The acquisition is fully integrated into our distribution segment and we expect it will continue to expand our consumer electronics product offerings.

The above 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.

On December 28, 2009, we sold our controlling interest in China Civilink (Cayman), the results of which are presented in discontinued operations. Please see the section “Discontinued Operations” below for a detailed discussion on this transaction.

On July 31, 2010, we sold to MiTAC International, inventory and certain customer contracts, primarily related to contract assembly customers jointly served by us and MiTAC International. The sale agreement includes earn-out and profit-sharing provisions, which are based on near-term operating performance metrics for the defined customers included in the transaction. Also, we will provide MiTAC International certain transition services on a fee basis.

On August 31, 2010, we sold our majority interest in Nihon Daikou Shouji Co., Ltd., or NDS, for $3.1 million to SB Pacific Corporation Limited, a newly formed company led by our founder and former Chairman, Mr. Robert T. Huang. Concurrently, we invested in a 33.3% non-controlling interest in SB Pacific Corporation Limited.

Restructuring Charges

In fiscal year 2007, in connection with the acquisition of the Redmond Group of Companies, or RGC, we announced a restructuring program in Canada under EITF 95-3: “Recognition of Liabilities in Connection with a Purchase Business Combination.”During the three and nine months ended August 31, 2010, we made a payment of $0.2 million and $0.4 million, respectively, which is included in selling, general and administrative expenses, for the remaining lease obligations on the RGC facility. During the three and nine months ended August 31, 2010, we accrued additional $0.2 million and $0.4 million, respectively for the remaining lease obligations on the facility. The remaining balance outstanding on facility and exit costs as of August 31, 2010 and November 30, 2009 was $0.5 million and $0.6 million, respectively.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies and estimates for the three and nine month periods ended August 31, 2010 from our disclosure in our Annual Report on Form 10-K for the year ended November 30, 2009, except for the adoption of new accounting standards relating to our convertible debt. The new accounting standard was adopted retrospectively from the date of issuance. See Note 2 of the financial statements for further discussion on the impact of this accounting change. For 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, 2009.

 

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Results of Operations

The following table sets forth, for the indicated periods, data as percentages of revenue:

 

    Three Months Ended   Nine Months Ended
    August 31, 2010   August 31, 2009   August 31, 2010   August 31, 2009

Statements of Operations Data:

       

Revenue

  100.00%     100.00%     100.00%     100.00%  

Cost of revenue

  (94.26)    (94.70)    (94.29)    (94.43) 
               

Gross profit

  5.74     5.30     5.71     5.57  

Selling, general and administrative expenses

  (3.34)    (3.39)    (3.52)    (3.73) 
               

Income from continuing operations before non-operating items, income taxes and non-controlling interest

  2.40     1.91     2.19     1.84  

Interest expense and finance charges, net

  (0.22)    (0.21)    (0.20)    (0.24) 

Other income (expense), net

  (0.01)    0.04     0.01     0.03  
               

Income from continuing operations before income taxes and non-controlling interest

  2.17     1.74     2.00     1.63  

Provision for income taxes

  (0.75)    (0.67)    (0.71)    (0.60) 
               

Income from continuing operations before non-controlling interest, net of taxes

  1.42     1.07     1.29     1.03  

Income from discontinued operations, net of tax

  -         0.06     0.00     0.07  

Gain on sale of discontinued operations, net of tax

  -         -         0.18     -      
               

Net income

  1.42     1.13     1.47     1.10  
               

Net income attributable to non-controlling interest

  (0.00)    (0.01)    (0.00)    (0.01) 
               

Net income attributable to SYNNEX Corporation

  1.42%    1.12%    1.47%     1.09% 
               

Three and Nine Months Ended August 31, 2010 and 2009

Revenue

 

    Three Months Ended   Nine Months Ended
      August 31,  
2010
    August 31,  
2009
      % Change         August 31,  
2010
    August 31,  
2009
      % Change    
    (in thousands)       (in thousands)    

  Revenue

    $       2,177,066       $     1,998,060     9.0%      $     6,145,916       $     5,521,135     11.3% 

  Distribution revenue

    2,152,537       1,977,829     8.8%      6,079,088       5,461,922     11.3% 

  GBS revenue

    30,968       25,411     21.9%      84,685       74,839     13.2% 

  Inter-segment elimination

    (6,439)      (5,180)    24.3%      (17,857)      (15,626)    14.3% 

In our distribution business, we sell in excess of 20,000 technology products (as measured by active SKU’s) from more than 100 IT and CE OEM suppliers to more than 15,000 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 demand generation, pre-sales support, product marketing, print and fulfillment, back office IT development outsourcing, and post-sales technical support. The inter-segment eliminations relate to the inter-segment back-office support services provided by our GBS segment to our distribution segment. GBS revenue to third parties is net of inter-segment eliminations. The programs and customer service requirements change frequently from one period to the next and are often not comparable.

Our revenue in the distribution segment increased during the three months ended August 31, 2010, compared to the prior year quarter primarily due to strong IT demand in the U.S. markets, improving market conditions in Canada, and sales from gaming products following our first quarter acquisition of Jack of All Games. By product line, our sales of peripherals increased 20%, sales of IT systems increased 3%, sales of system components increased 16% and our sales of networking systems increased 24%. Our revenue from software sales (including services and warranty contracts) decreased by 37% as compared to the prior year period primarily because of the presentation of revenue earned on certain types of services and extended warranty contracts on a net basis in fiscal year 2010 – see Note 2, Revenue Recognition. The increase in our GBS segment revenue was primarily due to recently won business and the ramping of new programs in our BPO services contact centers.

 

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Our revenue in the distribution segment increased during the nine months ended August 31, 2010, compared to the prior year period due to the improvement in market conditions and demand both in U.S. and Canada. In addition, our new customer initiatives and new vendor lines increased sales in the North American market. Our sales from Jack of All Games gaming products also contributed to the increase in revenue. By product line, our sales of peripherals increased 20%, sales of IT systems increased 13%, system components increased 18% and our sales of networking systems increased 25%. Our revenue from software sales decreased by 37% as compared to the prior period because of the presentation of revenue earned on certain types of services and extended warranty contracts on a net basis in fiscal year 2010. The revenue from software sales was approximately 6% of our total consolidated revenue. The increase in our GBS segment revenue was primarily due to revenue from our new programs and also from higher call volumes in our contact centers.

Gross Profit

 

    Three Months Ended   Nine Months Ended
        August 31, 2010           August 31, 2009           % Change         August 31, 2010       August 31, 2009       % Change  
    (in thousands)       (in thousands)    

Gross profit

    $ 124,869       $ 105,977     17.8%      $ 350,697       $ 307,764     13.9% 

Percentage of revenue

    5.74%      5.30%    8.3%      5.71%      5.57%    2.5% 

Our gross profit is affected by a variety of factors, including competition, average selling prices, the variety of products and services we sell, the customers to whom we sell, our sources of revenue by segments, rebate and discount programs from our suppliers, freight costs, reserves for inventory losses, acquisitions and divestitures of business units, fluctuations in revenue and overhead costs of our contract assembly, and our mix of business including our GBS services.

Our gross profit in dollars in both the three and nine months ended August 31, 2010 increased as compared to the prior year mainly due to increased revenue. For the three months ended August 31, 2010, gross profit as a percentage of revenue increased 44 basis points over the corresponding prior year period. Gross profit as a percentage of revenue for the three months ended August 31, 2010 was approximately 24 basis points higher as a result of accounting for certain service contracts, post-contract software support services, and extended warranty contracts on a net basis in fiscal year 2010. Third quarter gross profit was further improved by maximizing vendor performance incentives and changes in the mix of products and services.

For the nine months ended August 31, 2010, gross profit as a percentage of revenue increased 14 basis points over the corresponding prior year period. Gross profit as a percentage of revenue for the nine months ended August 31, 2010 was approximately 24 basis points higher as a result of accounting for certain service contracts, post-contract software support services, and extended warranty contracts on a net basis in fiscal year 2010, offset by the year to date net unfavorable impact of vendor discounts and marketing incentives and geographic mix, as compared to the corresponding prior year period.

No specific products or customers, or changes in pricing strategy individually or as a group, contributed significantly to the change in gross profit.

Selling, General and Administrative Expenses

 

    Three Months Ended   Nine Months Ended
        August 31, 2010           August 31, 2009           % Change       August 31, 2010   August 31, 2009   % Change
    (in thousands)       (in thousands)    

Selling, general and administrative expenses

    $ 72,715       $ 67,778     7.3%      $ 216,156       $ 205,785     5.0%  

Percentage of revenue

    3.34%      3.39%    -1.5%      3.52%      3.73%    -5.6%  

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 OEM suppliers.

Selling, general and administrative expenses increased for the three months ended August 31, 2010 on a dollar basis from the comparable prior year quarter mainly due to (i) a higher total compensation cost of $6.8 million resulting from an increase in the number of employees due to organic growth and our fiscal first quarter 2010 acquisition of Jack of All Games, and higher stock-based compensation expense due to the acceleration and modification of stock grants, primarily on retirement of our founder and former Chairman, and (ii) an increase in other operating expenses by $1.1 million. These increases were partially offset by a decrease in bad debt expense of $1.1 million, a decrease in deferred compensation expense of $1.4 million, and a decrease in amortization of intangibles of $0.5 million.

Selling, general and administrative expenses increased for the nine months ended August 31, 2010 as compared to the comparable prior year period mainly due to (i) an increase in compensation cost of $13.7 million, resulting from an increase in the number of employees primarily as a result of growing our business in the U.S., investments in strategic initiatives and the impact of our acquisition of Jack of All Games and (ii) an increase in other operating expenses of $4.1 million, due to the growth of our business, costs incurred in consolidating our U.S. warehouses and costs associated with the integration of Jack of All Games. These increases were partially offset by a decrease in bad debt expense of $4.7 million, a decrease in deferred compensation expense of $2.0 million, and a decrease in the amortization costs for intangibles of $1.5 million.

 

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Income from Operations before Non-Operating Items, Income Taxes and Non-controlling interest

 

    Three Months Ended   Nine Months Ended
      August 31, 2010       August 31, 2009       % Change       August 31, 2010       August 31, 2009       % Change  
    (in thousands)       (in thousands)    

Income from continuing operations before non-operating items, income taxes and non-controlling interest

    $ 52,154      $ 38,199    36.5%      $ 134,541       $ 101,979     31.9% 

Percentage of Total Revenue

    2.40%     1.91%   25.7%      2.19%      1.84%    19.0% 

Distribution income from continuing operations before non-operating items, income taxes and non-controlling interest

    47,928      34,823    37.6%      124,374       93,384     33.2% 

Percentage of Distribution Revenue

    2.23%     1.76%   26.7%      2.05%      1.71%    19.9% 

GBS income from continuing operations before non-operating items, income taxes and non-controlling interest

    4,226      3,376    25.2%      10,167       8,594     18.3% 

Percentage of GBS Revenue

    13.65%     13.29%   2.7%      12.01%      11.48%    4.6% 

Our income from continuing operations before non-operating items, income taxes and non-controlling interest as a percentage of revenue increased to 2.40% and 2.19% for the three and nine months ended August 31, 2010, respectively, compared to 1.91% and 1.84% for the comparable prior year periods. The distribution segment income from continuing operations before non-operating items, income taxes and non-controlling interest as percentage of distribution revenue increased to 2.23% and 2.05% for the three and nine months ended August 31, 2010, respectively, from 1.76% and 1.71% in the comparable prior year periods. These margins were higher as a result of accounting for certain service contracts, post-contract software support services, and extended warranty contracts on a net basis in fiscal year 2010. Higher gross profit dollars were offset, in part, by higher selling and administrative expenses due to the growth of our business, investments in strategic initiatives and the costs related to the integration of Jack of All Games into our business operations.

The GBS segment income from continuing operations before non-operating items, income taxes and non-controlling interest as a percentage of revenue increased to 13.65% and 12.01% for the three and nine months ended August 31, 2010, respectively, from 13.29% and 11.48% in the comparable prior year periods, primarily due to higher gross profit as a result of introduction of new programs and higher call volume, partially offset by higher selling and administrative expenses to support the growth and non-billable personnel in their training period.

Interest Expense and Finance Charges, Net

 

    Three Months Ended   Nine Months Ended
        August 31, 2010       August 31, 2009*       % Change   August 31, 2010   August 31, 2009*   % Change
    (in thousands)       (in thousands)    

Interest expense and finance charges, net

    $ 4,585      $ 4,220    8.6%     $ 12,130      $ 13,497    -10.1%

Percentage of revenue

    0.22%     0.21%   4.8%     0.20%     0.24%   -16.7%

 

  * As adjusted - see Note 2

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 increase in interest expense and finance charges, net, for the three months ended August 31, 2010 compared to the prior year period was approximately $0.4 million due to lower interest income relating to the winding up of a large distribution service contract in Mexico, offset by lower levels of borrowings and lower interest rates.

The decrease in interest expense and finance charges, net, for the nine months ended August 31, 2010 compared to the prior year period was approximately $1.4 million due to lower levels of borrowings and lower interest rates, partially offset by the impact of lower interest income relating to the large Mexico distribution service contract.

 

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Other Income (Expense), Net

 

    Three Months Ended   Nine Months Ended
    August 31, 2010   August 31, 2009   % Change   August 31, 2010   August 31, 2009   % Change
    (in thousands)       (in thousands)    

Other income (expense), net

    $ (300)      $ 729    -141.2%     $ 770      $ 1,758    -56.2%

Percentage of revenue

    -0.01%      0.04%   -125.0%     0.01%     0.03%   -66.7%

Amounts recorded as other income (expense), 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.

The change in other income (expense), net for the three months ended August 31, 2010 compared to the prior year period was due to $1.6 million higher realized and unrealized losses related to our deferred compensation investments, offset by a $0.5 million gain on sale of NDS.

The decrease in other income (expense), net for the nine months ended August 31, 2010 compared to the prior year period was due to an increase of $2.8 million in realized and unrealized losses related to our deferred compensation investments offset by $0.5 million gain on sale of NDS in the third quarter of fiscal year 2010 and $0.8 million gain on sale of the BDG division by SYNNEX Canada in the first quarter of fiscal year 2010.

Provision for Income Taxes

Our effective tax rate in the three and nine months ended August 31, 2010 was 34.5% and 35.7%, respectively, compared with an effective tax rate of 38.0% and 37.1% in the prior year periods. The decrease in the effective tax rate for the current year periods, as compared to the prior year periods was primarily due to the release of reserves resulting from the closure of the Internal Revenue Service, or IRS, 2004 and 2005 tax audits as well as the expiration of the IRS 2006 statute of limitations. We recorded a one-time $3.1 million adjustment for this release. This reassessment benefited us with a $1.9 million reduction of total income tax expenses and a $1.2 million increase in “Additional paid-in capital.”

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 IRS 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.

Non-controlling Interest

Non-controlling interest is the portion of earnings from operations attributable to others. In March 2008, we acquired our controlling interest in NDS, which operates in Japan. In April 2007, we acquired a controlling interest in China Civilink (Cayman), which operates in China as HiChina Web Solutions. The non-controlling interest represents the share of HiChina Web Solution and NDS’s income that is attributable to others and is contained within our GBS segment. HiChina Web Solutions was sold in December 2009 and is presented in discontinued operations in our Consolidated Statement of Operations. In addition, on August 31, 2010, we sold our controlling interest in NDS to SB Pacific Corporation Limited, a newly formed company led by our founder and former Chairman Mr. Robert T. Huang, and in which we own a non-controlling interest.

Goodwill

We conducted our annual goodwill impairment testing as of November 30, 2009 and concluded that there was no impairment. There were no significant changes to the key assumptions used in our annual goodwill impairment analysis. Hence, there were no indications of any triggering events that would necessitate further impairment analysis on the fair value of reporting units.

Discontinued Operations

On December 28, 2009, China Civilink (Cayman), which operates in China as HiChina Web Solutions was sold to Alibaba.com Limited. HiChina Web Solutions provides domain name registration, web site hosting and design. HiChina Web Solution was a subsidiary of SYNNEX Investment Holdings Corporation, a wholly-owned, subsidiary company of SYNNEX Corporation. Under the terms of the agreement, we received approximately $59.6 million for our estimated 79% controlling ownership in HiChina Web Solutions, subject to a 10% holdback for a period of six months. The total gain recorded on the sale was approximately $11.4 million, net of $1.2 million income taxes. We, the ultimate parent, have agreed to guarantee the obligations of SYNNEX Investment Holdings Corporation up to approximately $35.0 million in connection with the sale of HiChina Web Solutions. HiChina Web Solutions was a part of our GBS segment. We have no significant continuing involvement in the operations of HiChina Web Solutions. During the three and nine months ended August 31, 2010, we received $5.8 million in full settlement of the holdback amount.

 

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Under the provisions of FASB ASC 360, “Property, Plant and Equipment,” the sale of HiChina Web Solutions qualified as a discontinued operation component. Accordingly, we have excluded results of HiChina’s operations from our consolidated statements of continuing operations for the nine months ended August 31, 2010 and for the three and nine months ended August 31, 2009.

The following table shows the results of operations of HiChina Web Solutions for the nine months ended August 31, 2010 and for the three and nine months ended August 31, 2009 which are included in the earnings from discontinued operations:

 

    Three months ended   Nine months ended
  August 31, 2009   August 31, 2010 *   August 31, 2009
    (in thousands)   (in thousands)

Revenue

    $ 9,103       $ 2,959       $ 26,973  

Cost of revenue

    (3,945)      (1,706)      (11,427) 
                 

Gross profit

    5,158       1,253       15,546  

Selling, general and administrative expenses

    (4,078)      (1,199)      (11,848) 
                 

Income from operations before non-operating items, income taxes and non-controlling interest

    1,080       54       3,698  
                 

Interest income (expense and finance charges), net

    99       17       327  

Other income (expense), net

    (2)      5       (7) 
                 

Income before income taxes and non-controlling interest

    1,177       76       4,018  

(Provision for) Benefit from income taxes

    15       (2)      (166) 
                 

Income from discontinued operations

    1,192       74       3,852  

Income from discontinued operations attributable to non-controlling interest

    (228)      (15)      (786) 
                 

Income from discontinued operations attributable to SYNNEX Corporation

    $ 964       $ 59       $ 3,066  
                 

 

  * Includes the results of operations from December 1, 2009 to the disposition date of December 28, 2009.

The following are the carrying amounts of major classes of assets and liabilities of HiChina Web Solution’s discontinued operations which were classified as held for sale as of November 30, 2009:

 

      November 30, 2009  
    (in thousands)

Assets:

 

Cash and cash equivalents

    $ 21,590  

Short-term investments

    8,952  

Property and equipment, net

    6,256  

Goodwill

    29,920  

Intangible assets, net

    3,670  

Other assets

    3,797  
     

Total assets held for sale

    $ 74,185  
     

Liabilities:

 

Current deferred liabilities

    $ 10,198  

Other liabilities

    7,950  
     

Total liabilities related to assets held for sale

    $ 18,148  
     

Non-controlling interest

    $ 7,402  
     

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 flooring programs, our securitization 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. The primary uses of cash have been to fund working capital, for acquisitions and for the generation of increased sales.

 

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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 used in operating activities was $33.0 million in the nine months ended August 31, 2010 compared to net cash provided by operating activities of $200.9 million in the nine months ended August 31, 2009. Net cash used in operating activities in the nine months ended August 31, 2010 was mainly due to the purchase of inventory as a result of improved market conditions and related business opportunities, a reduction in payables to our affiliates, higher vendor receivable balances and an increase in other assets due to prepayment of income taxes, partially offset by higher accounts payable due to the aforementioned increase in inventory purchases and by higher relative collections from our customers. The cash provided by operating activities for the nine months ended August 31, 2009 was mainly the result of higher relative collections from our customers and lower inventory purchases, offset by payments to our vendors. In May 2009, our Canadian revolving accounts receivable securitization program was refinanced with a secured revolving credit arrangement. As a result, the related accounts receivable was brought on-balance sheet as compared to off-balance sheet under the prior arrangement. At the time of refinancing, $53.1 million of accounts receivable was recorded on-balance sheet.

Net cash used in investing activities was $15.1 million in the nine months ended August 31, 2010, which includes cash used for the acquisition of Jack of All Games, an increase in held-to-maturity term deposits, which comprise our term deposits with maturities from the date of purchase greater than three months and less than one year, an increase in restricted cash which relates to lockbox collections under our borrowing arrangements and for our future payments due to our vendors relating to the long-term projects at our Mexico operation, and capital expenditures, partially offset by net cash received from the sales of HiChina Web Solutions of $33.1 million (including the $5.8 million holdback amount collected during the three months ended August 31, 2010) and the BDG division of SYNNEX Canada of $3.2 million. Net cash used in investing activities was $63.6 million in the nine months ended August 31, 2009. Cash used in investing activities was mainly due to the increase in restricted cash. During the nine months ended August 31, 2009, cash was also used to pay additional earn-out payments relating to the acquisition of New Age Electronics and capital expenditures.

Net cash provided by financing activities was $56.0 million in the nine months ended August 31, 2010 consisting primarily of net receipts from our securitization arrangements and our revolving line of credit, proceeds from the issuance of common stock, and the excess tax benefit from share-based compensation offset by lower book overdraft. Net cash used by financing activities was $127.4 million in the nine months ended August 31, 2009 and was primarily related to net payments on our securitization arrangements, bank loans and our revolving line of credit, partially offset by proceeds from the issuance of common stock.

We had sufficient availability on our credit arrangements to support our operating activities as of August 31, 2010.

We have issued guarantees to certain vendors and lenders of our subsidiaries for trade credit lines and loans, totaling $105.9 million as of August 31, 2010 and $105.1 million as of November 30, 2009. We are obligated under these guarantees to pay amounts due should our subsidiaries not pay valid amounts owed to their vendors or lenders. The vendor guarantees are typically less than one-year arrangements, with 30-day cancellation clauses and the lender guarantees are typically for the term of the loan agreement.

Capital Resources

Our cash and cash equivalents totaled $68.1 million and $37.8 million as of August 31, 2010 and November 30, 2009, respectively. 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 Notes, in a private placement. However, under certain circumstances we may redeem the Notes, in whole or in part, for cash on or after May 20, 2013, at a redemption price equal to 100% of principal amount plus any accrued and unpaid interest. In addition, if certain triggering events are met, the Notes can be converted into shares of common stock at any time before their maturity. Because we currently intend to settle the Notes using cash at some future date, we maintain within our U.S. Amended and Restated Arrangement and the Amended and Restated Revolver ongoing features that allow us to utilize cash from these facilities to cash settle the Notes, if desired. (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 9.

 

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On-Balance Sheet Arrangements

We primarily finance our U.S. operations with an accounts receivable securitization program, or U.S. Arrangement, by selling up to a maximum of $350.0 million in U.S. trade accounts receivable, or U.S. Receivables. On January 23, 2009, we amended and restated the U.S. Arrangement, or the U.S. Amended and Restated Arrangement, to replace the lead bank and agent. The effective borrowing cost under the U.S. Amended and Restated Arrangement became a blend of the prevailing dealer commercial paper rates plus a program fee based on the used portion of the commitment and a facility fee payable on the commitment. The balance outstanding on the U.S. Amended and Restated Arrangement as of August 31, 2010 was $155.4 million.

During the first quarter of fiscal year 2010, the U.S. Amended and Restated Arrangement was renewed for one year with a new maturity date of January 10, 2011. The effective borrowing costs under the U.S. Amended and Restated 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 commitment. Under the terms of renewal the program fee was reduced from 0.75% to 0.65% and the facility fee was reduced from 0.75% to 0.65%.

Under the terms of the U.S. Amended and Restated Arrangement, we sell, on a revolving basis, our U.S. Receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in and to the U.S. Receivables as security. Any borrowings under the U.S. Amended and Restated Arrangement are recorded as debt on our consolidated balance sheet. 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 group of financial institutions. On January 23, 2009, we amended and restated the Revolver, or the Amended and Restated Revolver, to replace the lead bank and agent. The Amended and Restated Revolver’s maximum commitment was also amended from $120.0 million to $80.0 million. The Amended and Restated Revolver retains an accordion feature to increase the maximum commitment by an additional $70.0 million to $150.0 million at our request in the event one or more of the existing lenders or another financial institution which becomes a lender agrees to provide the increased commitment. Interest on borrowings under the Amended and Restated Revolver is based on the financial institution’s prime rate or LIBOR plus 2.50% per annum at our option. A fee of 0.50% per annum is payable with respect to the unused portion of the commitment. The Amended and Restated Revolver is secured by our inventory and other assets and expires on February 11, 2011. Among other changes, the Revolver was further amended such that it would be a default under the Amended and Restated Revolver if the maturity date of the U.S. Amended and Restated Arrangement were not extended. In addition, it would be also an event of default under the Amended and Restated Revolver if (1) a lender under the U.S. Amended and Restated Arrangement declines to extend the maturity date at any point within 60 days prior to the maturity date of the U.S. Amended and Restated Arrangement, unless availability under the Amended and Restated Revolver exceeds $60.0 million or we have a binding commitment in place to renew or replace the U.S. Amended and Restated Arrangement or (2) at least 20 days prior to the maturity date of the U.S. Amended and Restated Arrangement we do not have in place a binding commitment to renew or replace the U.S. Amended and Restated Arrangement on substantially similar terms and conditions, unless we have no amounts outstanding under the Amended and Restated Revolver at such time. There was no borrowing outstanding as of August 31, 2010 and November 30, 2009, respectively.

SYNNEX Canada Limited, or SYNNEX Canada, replaced the Canadian revolving line of credit arrangement, or Canadian Arrangement, of C$30.0 million and replaced the accounts receivable securitization program of C$110.0 million with a secured revolving credit arrangement, or the Canadian Revolving Arrangement in May 2009, having a maximum commitment of C$125.0 million. The Canadian Revolving Arrangement provides a sublimit of $5.0 million for the issuance of standby letters of credit. As of August 31, 2010, there were outstanding standby letters of credit totaling $3.2 million. SYNNEX Canada has granted a security interest on substantially all of its assets in favor of the lenders under this revolving credit facility. In addition, we pledged our stock in SYNNEX Canada as collateral for the Canadian Revolving Arrangement. The Canadian Revolving Arrangement expires in May 2012. The interest rate applicable is (i) 2.5% for a Base Rate Loan in Canadian Dollars, (ii) 3.25% for a Base Rate Loan in U.S. Dollars, and (iii) 1% for a BA (Banker’s Acceptance) Rate Loan. A fee of 0.375% per annum is payable with respect to the unused portion of the commitment. The balance outstanding under our Canadian Revolving Arrangement as of August 31, 2010 and November 30, 2009 was $30.0 million and $29.1 million, respectively.

SYNNEX Canada has a credit facility with a financial institution in Canada to allow us to issue documentary letters of credit. In February 2010, as a result of the sale of the BDG division, the limit on this facility was reduced from C$30.0 million to C$0.4 million with validity up to 180 days. The letters of credit are issued to secure purchases of inventory from manufacturers and to finance import activities. This facility has an overdraft limit up to a maximum amount of C$2.0 million available in Canadian and U.S. dollars for a maximum of two business days to repay draws under letters of credit or letters of guarantee. SYNNEX Canada has granted a lien, in favor of the financial institution in Canada, on the inventory financed under this credit facility, all accounts receivable from the sale of such inventory, all proceeds of sale of such inventory and collection of such accounts receivable and up to C$1.0 million cash on deposit equal to 100% of the outstanding letters of credit with the financial institution in Canada. In connection with this credit facility, we issued a guarantee of SYNNEX Canada’s obligations in favor of the financial institution in Canada, which was reduced to C$7.0 million from C$20.0 million. Letters of credit issued against this facility were $0.9 million as of November 30, 2009. There were no letters of credit issued as of August 31, 2010.

 

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We have a term loan mortgage facility with a financial institution in Canada with a balance of $9.5 million and $10.0 million as of August 31, 2010 and November 30, 2009, respectively. The term loan expires in 2017. As of November 30, 2009, we had other short-term borrowings with a financial institution of $2.0 million.

Covenants Compliance

In relation to our U.S. Amended and Restated Arrangement, the Amended and Restated Revolver 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 and restrict our ability to incur additional debt. These covenants require us to maintain specified financial ratios and satisfy certain financial condition tests, including minimum net worth and fixed charge coverage ratio. They also limit our ability to make or forgive intercompany loans, pay dividends and make 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 Note subject to certain liquidity tests.

As of August 31, 2010, 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 Notes, in a private placement. The Notes have a cash coupon interest rate of 4.0% per annum. Interest on the Notes is payable in cash semi-annually in arrears on May 15 and November 15 of each year, beginning 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 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 Notes. During any interest period when contingent interest is payable, the contingent interest payable per Note is equal to 0.55% of the average trading price of the Notes during the ten trading days immediately preceding the first day of the applicable six-month interest period. The Notes mature on May 15, 2018, subject to earlier redemption, repurchase or conversion.

Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date for such 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 20 trading days in the period of 30 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 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 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 Notes on each such day; (3) if we have called the particular 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. In addition, holders may also convert their 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 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 Notes will be 33.9945 shares of common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $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 not redeem the Notes prior to May 20, 2013. We may redeem the 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 Notes to be redeemed, plus any accrued and unpaid interest to (including any additional interest and any contingent interest), but excluding, the redemption date.

Holders may require us to repurchase all or a portion of their Notes for cash on May 15, 2013 at a purchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest 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 Notes for cash at a price equal to 100% of the principal amount of the Notes to be purchased, plus any accrued and unpaid interest to (including any additional interest and any contingent interest), but excluding, the fundamental change repurchase date.

The Notes are senior unsecured obligations of ours and rank equally in right of payment with other senior unsecured debt and rank senior to subordinated notes, if any. The Notes effectively rank junior to any of our secured indebtedness to the extent of the assets securing such indebtedness. The 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 Notes were used for general corporate purposes and to reduce outstanding balances under the U.S. Arrangement and the Revolver.

The Notes are governed by an indenture, dated as of May 12, 2008, between us and U.S. Bank National Association, as trustee, which contains customary events of default.

 

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The Notes as hybrid instruments are accounted as convertible debt and are recorded at carrying value. The right of the holders of the Notes to require us to repurchase the Notes in the event of a fundamental change and the contingent interest feature would require separate measurement from the Notes; however, the amount is insignificant. The additional shares issuable following certain corporate transactions do not require bifurcation and separate measurement from the Notes.

In the first quarter of fiscal year 2010, we adopted new standards effective December 1, 2009, that changed the accounting for the Notes. Under the previous standards the Notes were recognized entirely as a liability at historical value. In accordance with the provisions of the new standards, we retrospectively recognized both a liability and an equity component of the 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 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 over the five year period to the first put date, utilizing the effective interest rate method. The corresponding offset was recorded to “Additional paid-in capital” and was adjusted for deferred taxes of $9.2 million. Underlying debt issuance costs of $3.6 million associated with the Notes were allocated between the liability and equity components of the debt in accordance with the provisions of the new standard.

As of August 31, 2010, the remaining amortization period is approximately 32 months assuming the redemption of the debentures 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 and $4.9 million during the three and nine months ended August 31, 2010, respectively, and $1.7 million and $5.0 million during the three and nine months ended August 31, 2009, respectively. Based on an effective rate of 8.0%, we recorded non-cash interest expense of $1.1 million and $3.3 million during the three and nine months ended August 31, 2010, respectively, and $1.0 million and $3.0 million during the three and nine months ended August 31, 2009, respectively. As of August 31, 2010 and November 30, 2009, the carrying value of the equity component of the Notes, net of allocated issuance costs, was $22.8 million. As of August 31, 2010, the if-converted value of the Notes did not exceed the principal balance.

The Notes contain various features which under certain circumstances could allow the holders to convert the Notes into shares before their ten-year maturity. Further, the date of settlement of the Notes is uncertain due to the various features of the Notes including put and call features. Because we currently intend to settle the Notes using cash at some future date, we maintain within our U.S. Amended and Restated Arrangement and the Amended and Restated Revolver ongoing features that allow us to utilize cash from these facilities to cash settle the Notes, if desired.

Related Party Transactions

We have a business relationship with MiTAC International Corporation, a publicly-traded company in Taiwan that began in 1992 when it became our primary investor through its affiliates. As of August 31, 2010, MiTAC International and its affiliates beneficially owned approximately 30% of our common stock. In addition, Matthew Miau, the Chairman Emeritus of our Board of Directors, is also the Chairman of MiTAC International and a director or officer of MiTAC International’s affiliates. As a result, 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 with the loss of any premium that stockholders otherwise might receive in connection with such a transaction.

We work closely with MiTAC International on OEM outsourcing and jointly market MiTAC International’s design and electronic manufacturing services and our contract assembly capabilities. This relationship has enabled us to build relationships with MiTAC International’s customers and we continue to work with and depend on MiTAC International to jointly serve our shared customers. We purchased inventories, including notebook computers, motherboards and other peripherals, from MiTAC International and its affiliates totaling approximately $39.6 million and $154.5 million in the three and nine months ended August 31, 2010, respectively, and $69.0 million and $247.2 million in the three and nine months ended August 31, 2009, respectively. Our sales to MiTAC International and its affiliates totaled approximately $0.4 million and $1.6 million in the three and nine months ended August 31, 2010, respectively, and $0.6 million and $2.2 million in the three and nine months ended August 31, 2009, respectively. Most of these purchases and sales were pursuant to our Master Supply Agreement with MiTAC International and Sun Microsystems, one of our contract assembly customers. In fiscal year 2010, Oracle Corporation acquired Sun Microsystems and all of our contract assembly services to Oracle Corporation are covered by this Master Supply Agreement. Our business relationship to date 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.

On July 31, 2010, we sold to MiTAC International certain assets related to our contract assembly business. The transaction included the sale of inventory and customer contracts, primarily related to customers then being jointly served by MiTAC International and us. The value of the inventory sold was $66.3 million. As part of this transaction, we will provide MiTAC International certain transition services for the business for a fee of $0.3 million per month over the next twelve months. In addition, during the three and nine months ended August 31, 2010, we also received $0.2 million in reimbursements for facilities and overhead costs incurred. The sale agreement also includes earn-out and profit sharing provisions, which are based on near-term operating performance metrics for the defined customers included in this transaction.

 

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We negotiated 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 these agreements, including pricing, would 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, Mr. Miau’s compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors. As MiTAC International’s ownership interest in us decreases as a result of sales of our stock and additional dilution, its interest in the success of our business and operations may decrease as well.

Beneficial Ownership of our Common Stock by MiTAC International

As noted above, MiTAC International and its affiliates in the aggregate beneficially owned approximately 30% of our common stock as of August 31, 2010. These shares are owned by the following entities:

 

            August 31, 2010        
    (shares in thousands) 

 

MiTAC International (1)

 

 

6,178  

Synnex Technology International Corp. (2)

  4,427  
   

Total

  10,605  
   

 

  (1) Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC International. Excludes 842 thousand shares (of which 445 thousand shares are directly held and 397 thousand 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 minority interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a minority interest of 14.6% in Synnex Technology International. Neither MiTAC International nor Mr. Miau is affiliated with any person(s), entity or entities that hold a majority interest in MiTAC Incorporated.

While the ownership structure of MiTAC International and its affiliates is complex, it has not had a material adverse effect on our business in the past, and we do not expect it to do so in the future.

During fiscal year 2007, we purchased shares of MiTAC International and one of its affiliates related to the deferred compensation plan of Mr. Robert T. Huang, our founder and former Chairman. During fiscal year 2008, we purchased additional shares of MiTAC International related to Mr. Huang’s deferred compensation plan. As of August 31, 2010, the value of the investment was $0.8 million. Except as described herein, none of our officers or directors has an interest in MiTAC International or its affiliates.

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 ours. Neither MiTAC International nor Synnex Technology International is restricted from competing with us. In the future, we may increasingly compete with Synnex Technology International, particularly if our business in Asia expands or Synnex Technology International expands its business into geographies or customers we serve. Although Synnex Technology International is a separate entity from us, it is possible that there will be confusion as a result of the similarity of our names. Moreover, we cannot limit or control the use of the Synnex name by Synnex Technology International in certain geographies and our use of the Synnex name may be restricted as a result of registration of the name by Synnex Technology International or the prior use in jurisdictions where it currently operates.

On August 31, 2010, we sold our controlling interest in NDS for $3.1 million to SB Pacific Corporation Limited, a newly formed company led by our founder and former Chairman, Mr. Robert T. Huang. Concurrently, we invested in a 33.3% non-controlling interest in SB Pacific Corporation Limited. A gain of $0.5 million was recorded on the sale of NDS in Other income (expense) during the three and nine months ended August 31, 2010.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board, or FASB, issued an update to the existing multiple-element revenue arrangements guidance. This revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. This accounting update is effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. This standard is applicable to us beginning December 1, 2010. We are currently assessing the future impact of this new accounting update to our consolidated financial statements.

 

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In October 2009, the FASB issued an accounting standard addressing how entities account for revenue arrangements that contain both hardware and software elements. Due to the significant difference in the level of evidence required for separation of multiple deliverables within different accounting standards, this particular accounting standard will modify the scope of accounting guidance for software revenue recognition. Many tangible products containing software and non-software components that function together to deliver the tangible products’ essential functionality will be accounted for under the revised multiple-element arrangement revenue recognition guidance disclosed above. This accounting standard is effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. This standard is applicable to us beginning December 1, 2010. We are currently assessing the future impact of this new accounting standard to our consolidated financial statements.

During the fiscal year 2010, we adopted the following accounting standards:

In December 2007, the FASB issued a new accounting pronouncement for business combinations which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. In April 2009, the FASB issued additional guidance to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If the fair value cannot be reasonably estimated, the asset or liability will be recognized in accordance with ASC 450, “Contingencies.” The new standard is effective for fiscal years that begin after December 15, 2008, and was adopted by us in the first quarter of fiscal year 2010. We began accounting for business combinations under the new standard effective December 1, 2009.

In December 2007, the FASB issued accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. This standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This standard is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and was adopted by us in the first quarter of fiscal year 2010 with retrospective application of presentation and disclosure requirements.

In April 2008, the FASB issued a new accounting pronouncement which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350, “Intangibles—Goodwill and Other.” The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under this standard and the period of expected cash flows used to measure the fair value of the asset under ASC 805, “Business Combinations.” This new standard is effective for fiscal years beginning after December 15, 2008 and was adopted by us in the first quarter of fiscal year 2010 with no material impact on our consolidated results of operations and financial condition.

In May 2008, the FASB issued a new accounting pronouncement which requires an issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. This is effective for fiscal years beginning after December 15, 2008 on a retroactive basis and was adopted by us in the first quarter of fiscal year 2010. The accounting pronouncement is applicable to our Notes which were issued in May 2008. Although the adoption of this pronouncement did not impact our actual past or future cash flows, it resulted in an increase in non-cash interest expense. The accompanying comparative consolidated financial statements and footnotes have been adjusted for all periods presented to reflect the retrospective application of the new standard. See Note 9.

 

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The following financial statement line items for the three and nine months ended August 31, 2009 and as of November 30, 2009, were impacted as a result of applying the new standard retrospectively:

 

    Three months ended August 31, 2009
        As previously    
reported
      As adjusted       Effect of Change
increase / (decrease)
    (in thousands)

Consolidated Statement of Operations:

 

Interest expense and finance charges, net

    $ (3,194)      $ (4,220)      $ 1,026  

Income from continuing operations before income taxes and non-controlling interest

    35,734       34,708       (1,026) 

Provision for income taxes

    (13,612)      (13,200)      412  

Income from continuing operations before non-controlling interest, net of tax

    22,122       21,508       (614) 

Net income attributable to SYNNEX Corporation

    23,079       22,465       (614) 

Earnings per share attributable to SYNNEX Corporation:

     
                 

Net income per common share - basic

    $ 0.70       $ 0.68       $ (0.02) 
                 

Net income per common share - diluted

    $ 0.67       $ 0.65       $ (0.02) 
                 
    Nine months ended August 31, 2009
        As previously    
reported
      As adjusted       Effect of Change
increase / (decrease)
    (in thousands)

Consolidated Statement of Operations:

 

Interest expense and finance charges, net

    $ (10,488)      $ (13,497)      $ 3,009  

Income from continuing operations before income taxes and non-controlling interest

    93,249       90,240       (3,009) 

Provision for income taxes

    (34,676)      (33,466)      1,210  

Income from continuing operations before non-controlling interest, net of tax

    58,573       56,774       (1,799) 

Net income attributable to SYNNEX Corporation

    61,788       59,989       (1,799) 

Earnings per share attributable to SYNNEX Corporation:

     
                 

Net income per common share - basic

    $ 1.90       $ 1.85       $ (0.05) 
                 

Net income per common share - diluted

    $ 1.83       $ 1.78       $ (0.05) 
                 
    As of November 30, 2009
        As previously    
reported
      As adjusted       Effect of Change
increase / (decrease)
    (in thousands)

Consolidated Balance Sheet

 

Other current assets

    $ 26,522       $ 26,144       $ (378) 

Convertible debt

    143,750       126,785       (16,965) 

Deferred tax liabilities

    1,442       8,077       6,635  

Additional paid-in capital

    236,213       249,892       13,679  

Retained earnings

    554,972       551,245       (3,727) 

 

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The following financial statement line items for the three and nine months ended August 31, 2010 and as of August 31, 2010, were impacted as a result of applying the new standard:

 

     Three months ended August 31, 2010
      Amount as currently 
reported
  Amount as would
     have been reported     
 prior to adoption of
new standard
  Effect of adoption -
 increase / (decrease) on 
current period
Consolidated Statement of Operations:    (in thousands)

Income from continuing operations before income taxes and non-controlling interest

     $ 47,269       $ 48,381       $ (1,112) 

Net income attributable to SYNNEX Corporation

     30,914       31,580       (666) 

Earnings per share attributable to SYNNEX Corporation:

      
                  

Net income per common share - basic

     $ 0.88       $ 0.90       $ (0.02) 
                  

Net income per common share - diluted

     $ 0.86       $ 0.88       $ (0.02) 
                  
     Nine months ended August 31, 2010
     Amount as currently  
reported
  Amount as would
 have been reported 
 prior to  adoption of
new standard
  Effect of adoption -
 increase / (decrease) on 
current period
Consolidated Statement of Operations:    (in thousands)

Income from continuing operations before income taxes and non-controlling interest

     $ 123,181       $ 126,443       $ (3,262) 

Net income attributable to SYNNEX Corporation

     90,417       92,370       (1,953) 

Earnings per share attributable to SYNNEX Corporation:

      
                  

Net income per common share - basic

     $ 2.62       $ 2.67       $ (0.05) 
                  

Net income per common share - diluted

     $ 2.54       $ 2.59       $ (0.05) 
                  
     As of August 31, 2010
       Amount as currently  
reported
  Amount as would
 have been reported 
 prior to  adoption of
new standard
  Effect of Change
 increase / (decrease) 
Consolidated Balance Sheet:    (in thousands)

Other current assets

     $ 62,478       $ 62,769       $ (291) 

Convertible debt

     130,133       143,750       (13,617) 

Deferred tax liabilities

     5,446       120       5,326  

Additional paid-in capital

     278,230       264,551       13,679  

Retained earnings

     641,662       647,342       (5,680) 

In June 2008, the FASB ratified guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. This is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The ratification of this new standard did not have a material impact on our consolidated results of operations and financial condition.

In November 2008, the FASB clarified guidance that the initial carrying value of an equity method investment should be determined in accordance with ASC 805, “Business Combinations.” Other-than-temporary impairment of an equity method investment should be recognized in accordance with ASC 323, “Investments—Equity Method and Joint Ventures,” or ASC 323. ASC 323 is effective on a prospective basis in fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years, and was adopted by us in the first quarter of fiscal year 2010. We account for our equity method investment in accordance with ASC 323.

In November 2008, the FASB ratified the standard that applies to defensive assets that are acquired intangible assets which the acquirer does not intend to actively use, but intends to hold to prevent its competitors from obtaining access to the asset. This standard clarifies that defensive intangible assets are separately identifiable and should be accounted for as a separate unit of accounting in accordance with ASC 805, “Business Combinations” and ASC 820, “Fair Value Measurements and Disclosures.” This standard is effective for intangible assets acquired in fiscal years beginning on or after December 15, 2008 and was adopted by us in the first quarter of fiscal year 2010. Intangible assets acquired in fiscal year 2010 and later will be accounted for in accordance with this standard. The ratification of this standard did not have a material impact on our consolidated results of operations and financial condition. We do not hold any defensive assets as of August 31, 2010.

 

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In November 2008, the FASB ratified the standard that clarifies whether a financial instrument for which the payoff to the counterparty is based, in whole or in part, on the stock of an entity’s consolidated subsidiary is indexed to the reporting entity’s own stock. This standard is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years and was adopted by us in the first quarter of fiscal year 2010. We did not have any such financial instruments as of August 31, 2010.

In June 2009, the FASB issued a new accounting pronouncement that eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This standard will be effective for transfers of financial assets in annual reporting periods beginning after November 15, 2009 and in interim periods within those first annual reporting periods with earlier adoption prohibited. This standard was adopted by us during the first quarter of fiscal year 2010. The adoption of this standard did not have a material impact on our consolidated results of operations and financial condition.

In June 2009, the FASB issued a new accounting pronouncement to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest. This new standard will be effective as of the beginning of the annual reporting period commencing after November 15, 2009 and was adopted by us in the first quarter of fiscal year 2010. We did not have any variable interest entities as of the date of adoption.

In January 2010, the FASB issued an update to existing standards on fair value measurements, which requires new disclosures about inputs and valuation techniques used in recurring and non-recurring fair value measurements and about significant transfers between the three levels of fair value measurements. The new disclosure requirements are effective for interim and annual periods beginning after December 15, 2009 and were adopted by us in the second quarter of fiscal year 2010. The accounting update did not have a material impact on our consolidated 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 and nine month periods ended August 31, 2010 from our Annual Report on Form 10-K for the year ended November 30, 2009. For further discussion of quantitative and qualitative disclosures about market risk, reference is made to our Annual Report on Form 10-K for the 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 disclosure. 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

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 and useful life of the products we distribute;

 

   

market acceptance, quality, pricing and availability of our services;

 

   

competitive conditions in our industry that impact our margins;

 

   

pricing, margin and other terms with our OEM suppliers;

 

   

decline in inventory value as a result of product obsolescence;

 

   

variations in our levels of excess inventory and doubtful accounts, and 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 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. Sales of Hewlett-Packard Company, or HP, products and services represented approximately 37% of our total revenue in both the three and nine months ended August 31, 2010 and 35% in both the three and nine months ended August 31, 2009, respectively. Our OEM supplier agreements typically are short-term and may be terminated without cause upon short notice. For example, our agreement with HP will expire on May 31, 2011. The loss or deterioration of our relationships with a major OEM supplier, the authorization by OEM suppliers of additional distributors, the sale of products by OEM suppliers directly to our 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. 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.

 

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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 expenses 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 expenses 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 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 may harm our business, financial position and operating results.

The success of our contact center business is subject to the terms and conditions of our customer contracts.

We provide contact center support 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. In addition, 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 may have an adverse impact on our operations and financial results.

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 may 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. 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 may be adversely affected.

 

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The market for our video game titles and video game hardware is characterized by short product life cycles. Increased competition for limited shelf space, decreased promotional support from resellers or retailers or increased popularity of downloadable or online games could adversely impact our revenue.

The market for video games is characterized by short product life cycles and frequent introductions of new products. 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. Therefore, the markets in which we compete frequently introduce new products. 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 to competing with video game manufacturers, we compete with downloadable and online gaming providers and used video game resellers. The popularity of 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. In addition, certain of our video game reseller and retail customers sell used video games that are generally priced lower than new video games, which could result in an increase in pricing pressure. If such customers increase their mix of sales of used video games relative to new video games, it could negatively impact our sales of new video games.

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 August 31, 2010, we had 887 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;

 

   

resolution of issues arising from tax audit or examinations and any related interest or penalties; and

 

   

uncertainty in obtaining tax holiday extensions, and expiration or loss of tax holidays in various jurisdictions.

 

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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 may 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, services and businesses with our operations;

 

   

loss of key employees of acquired operations or inability to hire key employees necessary for our expansion;

 

   

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 any 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 August 31, 2010, we had approximately $325.0 million in outstanding short and long-term borrowings under term loans, convertible debt and lines of credit, 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;

 

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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.

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 insuffic