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SYNNEX CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Selected Consolidated Financial
Data and the Consolidated Financial Statements and related Notes included
elsewhere in this Report.
When used in this Annual Report on Form 10-K or the Report, the words
"believes," "plans," "estimates," "anticipates," "expects," "intends," "allows,"
"can," "may," "designed," "will," and similar expressions are intended to
identify forward-looking statements. These are statements that relate to future
periods and include statements about our business model and our services, our
market strategy, including expansion of our product lines, our infrastructure,
anticipated benefits of our acquisitions, impact of MiTAC International
Corporation, or MiTAC International, ownership interest in us, our revenue and
operating results, our gross margins, competition with Synnex Technology
International Corp., our future needs for additional financing, concentration of
customers, our international operations, including our operations in Japan,
expansion of our operations, our strategic acquisitions of businesses and
assets, effects of future expansion of our operations, adequacy of our cash
resources to meet our capital needs, cash held by our foreign subsidiaries, our
convertible notes, including the settlement of our convertible notes, adequacy
of our disclosure controls and procedures, pricing pressures, competition,
impact of our accounting policies, our anti-dilution share repurchase program,
and statements regarding our securitization programs and revolving credit lines.
Forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed, as well as
the seasonality of the buying patterns of our customers, concentration of sales
to large customers, dependence upon and trends in capital spending budgets in
the information technology, or IT, and consumer electronics, or CE, industries,
fluctuations in general economic conditions and risks set forth under Part I,
Item 1A, "Risk Factors." These forward-looking statements speak only as of the
date hereof. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
Overview
We are a Fortune 500 corporation and a leading business process services
company, servicing resellers, retailers and original equipment manufacturers, or
OEMs, in multiple regions around the world. Our primary business process
services are wholesale distribution and business process outsourcing, or BPO. We
operate in two segments: distribution services and global business services, or
GBS. Our distribution services segment distributes IT systems, peripherals,
system components, software, networking equipment, CE, and complementary
products and also offers data center server and storage solutions. Our GBS
segment offers a range of BPO services to customers that include technical
support, renewals management, lead management, direct sales, customer service,
back office processing and information technology outsourcing, or ITO. Many of
these services are delivered and supported on the proprietary software platforms
we have developed to provide additional value to our customers.
We combine our core strengths in distribution with our BPO services to help our
customers achieve greater efficiencies in time to market, cost minimization,
real-time linkages in the supply chain and after-market product support. We
distribute more than 25,000 technology products (as measured by active SKUs)
from more than 200 IT, CE and OEM suppliers to more than 20,000 resellers,
system integrators, and retailers throughout the United States, Canada, Japan
and Mexico. As of November 30, 2012, we had over 11,000 full-time and temporary
employees worldwide. From a geographic perspective, approximately 87%, of our
total revenue was from North America for both the fiscal years 2012 and 2011and
98% for the fiscal year 2010.
In our distribution services segment, we purchase IT systems, peripherals,
system components, software, networking equipment, CE and complementary products
from our primary suppliers such as Hewlett-Packard Company, or HP, Lenovo, Acer
Inc., Panasonic Corporation and Seagate Technologies LLC and sell them to our
reseller and retail customers. We perform a similar function for our
distribution of licensed software products. Our reseller customers include
value-added resellers, or VARs, corporate resellers, government resellers,
system integrators, direct marketers, and national and regional retailers. In
our distribution business, we provide comprehensive IT solutions in key vertical
markets such as government and healthcare. We also provide specialized service
offerings that increase efficiencies in areas like print management, renewals,
networking and other services. In our GBS segment, our customers are primarily
manufacturers of IT hardware and CE devices, developers of software, cloud
service providers, and broadcast and social media.
Revenue and Cost of Revenue
We derive our revenue primarily through the distribution of IT systems,
peripherals, system components, software, networking equipment, CE, contract
assembly services and BPO. For products, we recognize revenue generally as
products are shipped, if a purchase order exists, the sales price is fixed or
determinable, collection of the resulting accounts receivable is
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reasonably assured, risk of loss and title have transferred and product returns
are reasonably estimable. Shipping terms are typically F.O.B. our warehouse.
Provisions for sales returns are estimated based on historical data and are
recorded concurrently with the recognition of revenue. We review and adjust
these provisions periodically. Revenue is reduced for early payment discounts
and volume incentive rebates offered to customers. We provide our BPO services
in our GBS segment to 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 we offer. Our agreements are usually
short-term in nature, subject to early termination by our customers or us for
any reason, typically with 30 to 90 days notice. Revenue is recognized as
services are performed and if collection is reasonably assured.
In fiscal years 2012 and 2011, no customer accounted for more than 10% of our
total revenue. In fiscal year 2010, one customer accounted for 11% of our total
revenue. Approximately 36%, 35%, and 38% of our total revenue in fiscal years
2012, 2011, and 2010, respectively, were derived from the sale of HP products
and services.
The market for IT products and services is generally characterized by declining
unit prices and short product life cycles. Our overall business is also highly
competitive on the basis of price. 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. From time to time, we also
participate in the incentive and rebate programs of our OEM suppliers. These
programs are important determinants of the final sales price we charge to our
reseller customers. To mitigate the risk of declining prices and obsolescence of
our distribution inventory, our OEM suppliers generally offer us limited price
protection and return rights for products that are marked down or discontinued
by them. We carefully manage our inventory to maximize the benefit to us of
these supplier provided protections.
In our distribution services 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.
A significant portion of our cost of revenue is the purchase price we pay our
OEM suppliers for the products we sell, net of any rebates and purchase
discounts received from our OEM suppliers. Cost of product distribution revenue
also consists of provisions for inventory losses and write-downs, freight
expenses associated with the receipt in and shipment out of our inventory, and
royalties due to OEM vendors. In addition, cost of revenue includes the cost of
materials, labor and overhead for our contract assembly and BPO services.
Margins
The distribution and contract assembly services industries in which we operate
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. Our gross margin has fluctuated annually due to changes in the mix of
products and services we offer, customers we sell to, incentives and rebates
received from our OEM suppliers, competition, seasonality and replacement of
less profitable business with investments in higher margin, more profitable
lines and lower costs associated with increased efficiencies. Increased
competition arising from industry consolidation and low demand for IT products
may hinder our ability to maintain or improve our gross margin. Generally, when
our revenue becomes more concentrated on limited products or customers, our
gross margin tends to decrease due to increased pricing pressure from OEM
suppliers or reseller customers. Our operating margin from continuing operations
has also fluctuated annually, based primarily on our ability to achieve
economies of scale, the management of our operating expenses, changes in the
relative mix of our distribution, contract assembly and BPO revenue, and the
timing of our acquisitions and investments.
Economic and Industry Trends
Our revenue is highly dependent on the end-market demand for IT and CE products.
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 and 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 distribution industry and increased price-based
competition. The GBS industry is also extremely competitive. The customers'
performance measures are based on competitive pricing terms and quality of
services. Accordingly, we could be subject to pricing pressure and may
experience a decline in our average selling prices for our services. During
fiscal year 2010, the economic environment was slow in recovering from the
recession in the prior year. The economy stabilized and grew modestly during
fiscal years 2011 and 2012. While we are susceptible to economic trends in the
global economy, our distribution business is largely concentrated in the United
States, Canada and Japan, so we will be most directly impacted by economic
strength or weakness in these geographies.
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Seasonality
Our operating results are affected by the seasonality of the IT and CE products
industries. 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 our customers and end-users. These patterns may not be
repeated in subsequent periods.
Deferred Compensation Plan
We have a deferred compensation plan for a limited number of our directors and
employees. We maintain a liability on our balance sheet for salary and bonus
amounts deferred by participants and we accrue interest expense on uninvested
amounts. Interest expense on the deferred amounts is classified in selling,
general and administrative expenses on our Consolidated Statements of
Operations. The participant may designate one or more investments as the measure
of investment return on the participant's account. The equity securities are
either classified as trading securities or cost-method securities. Generally,
the gains (losses) on the deferred compensation securities are recorded in other
income (expense), net and an equal amount is charged (or credited if losses) to
selling, general and administrative expenses relating to compensation amounts
which are payable to the plan participants. For the deferred compensation
investments, we recorded a gain of $2.6 million, a loss of $1.1 million and a
gain of $0.2 million, in fiscal years 2012, 2011 and 2010, respectively.
Critical Accounting Policies and Estimates
The discussions and analyses of our consolidated financial condition and results
of operations are based on our Consolidated Financial Statements, which have
been prepared in conformity with generally accepted accounting principles in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of any contingent assets and liabilities at the
financial statement date, and reported amounts of revenue and expenses during
the reporting period. On an ongoing basis, we review and evaluate our estimates
and assumptions, including those that relate to accounts receivable, vendor
programs, inventories, goodwill and intangible assets, and income taxes. Our
estimates are based on our historical experience and a variety of other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making our judgment about the carrying
values of assets and liabilities that are not readily available from other
sources. Actual results could differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies are affected by our
judgment, estimates and/or assumptions used in the preparation of our
Consolidated Financial Statements.
Revenue Recognition. We generally recognize revenue on the sale of hardware and
software products when they are shipped and on services when they are performed,
if a purchase order exists, the sales price is fixed or determinable, collection
of resulting accounts receivable is reasonably assured, risk of loss and title
have transferred and product returns are reasonably estimable. Provisions for
sales returns are estimated based on historical data and are recorded
concurrently with the recognition of revenue. These provisions are reviewed and
adjusted periodically by us. Revenue is reduced for early payment discounts and
volume incentive rebates offered to customers. We recognize revenue on certain
service contracts, post-contract software support services, and extended
warranty contracts, where we are not the primary obligor, on a net basis.
We provide services such as call center, renewals, maintenance and contract
management services to our customers under contracts that typically consist of a
master services agreement or statement of work, which contains the terms and
conditions of each program and service offerings. Typically the contracts are
time-based or transactions or volume based. Revenue is generally recognized over
the term of the contract or when service has been rendered, the sales price is
fixed or determinable and collection of the resulting accounts receivable is
reasonably assured.
Our Mexico operation primarily focuses on projects with the Mexican government
and other public agencies that are long-term in nature. Under the agreements, we
sell computers and equipment to contractors that provide services to the Mexican
government. We also sell computers, equipment and services directly to the
Mexican government. The payments are due on a monthly basis and contingent upon
the satisfactory performance of certain services, fulfillment of certain
obligations and meeting certain conditions. We recognize revenue and cost of
revenue on a straight-line basis over the term of the contract as the
contingencies are satisfied and payments become due.
Allowance for Doubtful Accounts. We provide allowances for doubtful accounts on
our accounts receivable for estimated losses resulting from the inability of our
customers to make payments for outstanding balances. In estimating the required
allowance, we take into consideration the overall quality and aging of the
accounts receivable, credit evaluations of customers' financial condition and
existence of credit insurance. We also evaluate the collectability of accounts
receivable based on specific customer circumstances, current economic trends,
historical experience with collections and value and adequacy of collateral
received from customers.
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OEM Supplier Programs. We receive funds from OEM suppliers for inventory price
protection, product rebates, marketing and infrastructure reimbursement, and
promotion programs. Product rebates are recorded as a reduction of cost of
revenue. Marketing, infrastructure and promotion programs are recorded, net of
direct costs, in selling, general and administrative expenses. Any excess funds
associated with these programs are recorded in cost of revenue. We accrue
rebates based on the terms of the program and sales of qualifying products. Some
of these programs may extend over one or more quarterly reporting periods.
Certain OEM supplier agreements provide a right for the suppliers to audit
program claims on a periodic basis. Amounts received or receivable from OEM
suppliers that are not yet earned are deferred on our balance sheet. Actual
rebates may vary based on volume or other sales achievement levels, which could
result in an increase or reduction in the estimated amounts previously accrued.
In addition, OEM suppliers may seek to change the terms of some or all of these
programs or cease them altogether. Any such change could lower our gross margins
on products we sell or revenue earned. We also provide reserves for receivables
on OEM supplier programs for estimated losses resulting from OEM suppliers'
inability to pay or rejections of such claims by OEM suppliers.
Inventories. Our inventory levels are based on our projections of future demand
and market conditions. Any sudden decline in demand and/or rapid product
improvements and technological changes can cause us to have excess and/or
obsolete inventories. On an ongoing basis, we review for estimated obsolete or
unmarketable inventories and write-down our inventories to their estimated net
realizable value based upon our forecasts of future demand and market
conditions. These write-downs are reflected in our cost of revenue. If actual
market conditions are less favorable than our forecasts, additional inventory
reserves may be required. Our estimates are influenced by the following
considerations: sudden decline in demand due to economic downturns, rapid
product improvements and technological changes, our ability to return to OEM
suppliers a certain percentage of our purchases, and protection from loss in
value of inventory under our OEM supplier agreements.
Goodwill and Intangible Assets. Goodwill represents the excess of the purchase
price over the fair value of the identifiable net assets acquired in an
acquisition. We assess potential impairment of our goodwill and intangible
assets when there is evidence that recent events or changes in circumstances
have made recovery of an asset's carrying value unlikely. We also assess
potential impairment of our goodwill on an annual basis during our fourth
quarter, regardless if there is evidence or suspicion of impairment. The amount
of an impairment loss would be recognized as the excess of the asset's carrying
value over its fair value. Factors we consider important, which may cause
impairment, include: significant changes in the manner of use of the acquired
asset, negative industry or economic trends, and significant under-performance
relative to historical or projected operating results.
An accounting update to the provisions of the accounting standard for goodwill
gives companies the option to first assess qualitative factors to determine
whether it is necessary to perform the two-step quantitative goodwill impairment
test. We conducted our annual impairment analysis in the fourth quarter of
fiscal year 2012 using this qualitative approach. For the purpose of goodwill
analysis, we have two reporting units, our distribution services reporting unit
and our GBS reporting unit. Our goodwill impairment analysis did not result in
any impairment charge for fiscal years 2012, 2011, and 2010.
Long-lived assets. We review the recoverability of our long-lived assets, such
as property and equipment and certain other assets, when events or changes in
circumstances occur that indicate the carrying value of the asset group may not
be recoverable. The assessment of possible impairment is based on our ability to
recover the carrying value of the asset or asset group from the expected future
pre-tax cash flows, undiscounted and without interest charges, of the related
operations. If these cash flows are less than the carrying value of such assets,
an impairment loss is recognized for the difference between estimated fair value
and carrying value.
Determining the fair value of a reporting unit, intangible asset or a long-lived
asset is judgmental and involves the use of significant estimates and
assumptions. We base our fair value estimates on assumptions that we believe are
reasonable, but are uncertain and subject to changes in market conditions.
Income Taxes. We estimate our income taxes in each of the tax jurisdictions in
which we operate. Our current tax expense is estimated after adjusting for
temporary differences resulting from the different treatment of certain items
and foreign tax credits. These differences may result in deferred tax assets and
liabilities, which are included in our Consolidated Balance Sheets. We assess
the likelihood that our deferred tax assets, which include net operating loss
carry forwards and temporary differences that are expected to be deductible in
future years, will be recoverable from future taxable income or other tax
planning strategies. If recovery is not likely, we provide a valuation allowance
based on our estimates of future taxable income in the various tax
jurisdictions, and the amount of deferred taxes in excess of amounts that are
ultimately considered more likely than not realizable. The provision for current
and deferred taxes involves evaluations and judgments of uncertainties in the
interpretation of complex tax regulations by various tax authorities. Actual
results could differ from our estimates.
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Recent Acquisitions
We seek to augment our services offering expansion with strategic acquisitions
of businesses and assets that complement and expand our global BPO capabilities.
We also divest businesses that we deem no longer strategic to our ongoing
operations. Our historical acquisitions have brought us new reseller and retail
customers, OEM suppliers, and product lines, have extended the geographic reach
of our operations, particularly in targeted markets, and have diversified and
expanded the services we provide to our OEM suppliers and customers. We account
for acquisitions using the purchase method of accounting and include acquired
entities within our Consolidated Financial Statements from the closing date of
the acquisition.
Acquisitions during the fiscal years 2011 and 2012
On December 1, 2010, we acquired 70.0% of the capital stock of Marubeni Infotec
Corporation, a subsidiary of Marubeni Corporation. SB Pacific Corporation
Limited, or SB Pacific, our equity method investee at that time, acquired the
remaining 30.0% noncontrolling interest. At the time of the acquisition, our
total direct and indirect ownership of Marubeni Infotec Corporation was 80.0%.
Marubeni Infotec Corporation, now known as SYNNEX Infotec Corporation, or
Infotec Japan, is a distributor of IT equipment, electronic components and
software in Japan. This acquisition was in the distribution services segment and
enabled our expansion into Japan.
The aggregate consideration for the transaction initially was JPY700.0 million,
or approximately $8.4 million, of which our direct share was $5.9 million. In
the first quarter of fiscal year 2012, we reached an agreement with the sellers
to reduce the purchase price by JPY125.2 million. The purchase price as adjusted
was JPY574.8 million, or approximately $6.9 million. The total net tangible
liabilities in excess of net tangible assets acquired were $19.2 million. We
recorded $26.1 million in goodwill and intangibles. Subsequent to the
acquisition, in fiscal year 2011, SB Pacific and we invested $6.4 million and
$15.0 million, respectively, in additional capitalization of Infotec Japan.
In fiscal year 2012, we purchased the shares of Infotec Japan held by SB Pacific
for $17.5 million, increasing our ownership interest in Infotec Japan to 99.8%.
Infotec Japan has arrangements with various banks and financial institutions for
the sale and financing of approved accounts receivable and notes receivable. The
amount outstanding under these arrangements that was sold, but not yet collected
as of November 30, 2012 and 2011 were $11.2 million and $11.0 million,
respectively.
During fiscal year 2011, we acquired certain businesses of e4e, Inc., or e4e,
100% of the stock of the global email company limited, or gem, and certain
assets of VisionMAX Solutions Inc., or VisionMAX, for an aggregate purchase
price of $43.3 million. The acquisitions were integrated into our GBS segment
and brought additional BPO scale, complemented our service offerings in social
media and cloud computing and expanded our customer base and geographic
presence. The net tangible assets acquired were $10.2 million and we recorded
$33.2 million in goodwill and intangibles on finalization of the purchase price
allocation.
In fiscal year 2012, we acquired a business in the GBS segment for a purchase
price of $6.2 million with $1.2 million payable upon the completion of certain
post-closing procedures and $1.3 million contingent consideration payable upon
the achievement of certain target earnings. We recorded goodwill of $6.0 million
in relation to this acquisition. The determination of the fair value of the net
assets acquired is preliminary subject to the finalization of more detailed
analysis.
With the exception of Infotec Japan, the above acquisitions, 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 guidance for
business combinations utilizing the purchase method of accounting.
Building Acquisition
During the first quarter of fiscal year 2011, we entered into a capital lease
arrangement with the option to purchase a distribution and warehouse facility in
Illinois. In October 2011, we completed the purchase of the 450 thousand square
foot building for a total consideration of $15.4 million.
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Results of Operations
The following table sets forth, for the indicated periods, data as percentages
of revenue:
Statements of Operations Data: Fiscal Years Ended November 30,
2012 2011 2010
Revenue 100.00 % 100.00 % 100.00 %
Cost of revenue (93.61) (93.94 ) (94.29 )
Gross profit 6.39 6.06 5.71
Selling, general and administrative expenses (3.91) (3.60 ) (3.40 )
Income from continuing operations before
non-operating items, income taxes and
noncontrolling interest 2.48 2.46 2.31
Interest expense and finance charges, net (0.22) (0.25 ) (0.20 )
Other income (expense), net 0.04 (0.01 ) 0.02
Income from continuing operations before income
taxes and noncontrolling interest 2.30 2.20 2.13
Provision for income taxes (0.82) (0.76 ) (0.77 )
Income from continuing operations before
noncontrolling interest, net of tax 1.48 1.44 1.36
Income from discontinued operations, net of tax - - 0.00
Gain on sale of discontinued operations, net of tax - - 0.13
Net income 1.48 1.44 1.49
Net income attributable to noncontrolling interest (0.01) (0.00) (0.00)
Net income attributable to SYNNEX Corporation 1.47 % 1.44 % 1.49 %
Fiscal Years Ended November 30, 2012, 2011 and 2010
Revenue
Fiscal Years Ended November 30, Percent Change
2012 2011 2010 2012 to 2011 2011 to 2010
(in thousands)
Revenue $ 10,285,507 $ 10,409,840 $ 8,614,141 (1.2 )% 20.8 %
Distribution Revenue 10,121,271 10,275,295 8,526,309 (1.5 )% 20.5 %
GBS Revenue 197,391 163,376 112,380 20.8 % 45.4 %
Inter-Segment Elimination (33,155 ) (28,831 ) (24,548 ) 15.0 % 17.4 %
In our distribution business, we sell in excess of 25,000 technology products
(as measured by active SKUs) from more than 200 IT, CE and OEM suppliers to more
than 20,000 resellers. The prices of our products are highly dependent on the
volumes purchased within a product category. The products we sell from one
period to the next are often not comparable because of rapid changes in product
models and features. The revenue generated in our GBS segment relates to BPO
services such as technical support, renewals management, lead management, direct
sales, customer service, back office processing and ITO. The inter-segment
elimination relates to the inter-segment, back office support services provided
by our GBS segment to our distribution services segment. Third-party GBS revenue
can be derived by netting the inter-segment eliminations into GBS revenue. The
GBS programs and customer service requirements change frequently from one period
to the next and are often not comparable.
Our revenue from the distribution services segment in fiscal year 2012 decreased
from fiscal year 2011 primarily due to the effects of transitioning a certain
customer contract from a traditional full service distribution relationship that
had existed to a fee-for-service basis starting in the fourth quarter of fiscal
year 2011. The impact of this change resulted in approximately 4% lower revenue
recorded during fiscal year 2012. In comparison to fiscal year 2011, our sales
of systems components increased by 7%, our sales of IT systems remained
relatively consistent and our sales of software, networking equipment and
peripherals decreased by 14%, 4% and 3%, respectively. The decrease in our
software sales compared to the prior year is primarily due to lower sales from
gaming software.
Overall, the demand for IT products continued to be stable in North America
while the demand for CE products was more challenging in North America and
slower in Japan.
During fiscal year 2011, our revenue in the distribution services segment
increased compared to the prior year period due to our acquisition of Infotec
Japan, stability in the market conditions in the United States and the full year
impact of our
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acquisition of Jack of All Games, which was completed at the end of our first
fiscal quarter of 2010. This increase was offset by the sale of a portion of our
contract assembly business in fiscal year 2010 and by transitioning of certain
customer contracts from the traditional full service distribution relationship
that had existed, to a fee-for-service basis starting in the fourth quarter of
fiscal year 2011. During fiscal year 2011, revenue from Infotec Japan was
approximately $1.22 billion, or 12% of our distribution revenue. Compared to the
prior year period, our sales in North America from peripherals increased 8%,
sales of IT systems increased 8%, sales of system components increased 10%,
sales of networking systems increased 19% and sales of software increased 13%.
In our GBS segment, approximately 70% of the increase in revenue in fiscal year
2012 as compared to fiscal year 2011, was due to revenue generated from
acquisitions that occurred in the fourth quarter of fiscal year 2011. In
addition, we generated revenue from new customer accounts and increased revenue
from our existing customer base.
Approximately 75% of the increase in revenue in the fiscal year 2011 as compared
to fiscal year 2010, is revenue generated from our fiscal year 2011 acquisitions
and the full year impact of our fiscal year 2010 fourth quarter acquisitions,
offset in part by the fiscal year 2010 sale of Nihon Daikou Shouji, or NDS,
which generated $11.9 million in revenue in fiscal year 2010. In addition, our
revenue benefited from organic growth from expansion of our customer base and
service offerings.
Gross Profit
Fiscal Years Ended November 30, Percent Change
2012 2011 2010 2012 to 2011 2011 to 2010
(in thousands)
Gross Profit $ 656,737 $ 630,498 $ 491,616 4.2 % 28.3 %
Percentage of Revenue 6.39% 6.06 % 5.71 %
Our gross profit is affected by a variety of factors, including competition,
average selling prices, the variety of products and services we sell, our
customers, 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 our mix of business
including our BPO services.
Our gross margin for the fiscal year 2012 increased by 33 basis points over
fiscal year 2011. Our gross margins in the current year were favorably impacted
by 25 basis points by the effects of transitioning certain customer revenue to a
fee-for-service basis. The margins also benefited from lower reserve
requirements and more favorable vendor incentive rebates as compared to the
prior year period. Our margins were also favorably impacted by supply-demand
constraints of hard disk drives, which started in the fourth quarter of fiscal
year 2011 and ended in the first quarter of fiscal year 2012.
Our gross profit as a percentage of revenue in fiscal year 2011 increased by 35
basis points over fiscal year 2010. The increase is primarily attributable to
the favorable changes in our product and service mix, higher vendor rebates in
our distribution services segment and growth in our GBS segment. Our margins
were also favorably impacted by the effects of transitioning certain customer
revenue to a fee-for-service basis in the fourth quarter of fiscal year 2011 and
by our ability to respond to the unexpected supply-demand constraints of hard
disk drives.
Selling, General and Administrative Expenses
Fiscal Years Ended November 30, Percent Change
2012 2011 2010 2012 to 2011 2011 to 2010
(in thousands)
Selling, General and
Administrative Expenses $ 401,725 $ 374,270 $ 292,466 7.3 % 28.0 %
Percentage of Revenue 3.91 % 3.60 % 3.40 %
Approximately two-thirds of our selling, general and administrative expenses
consist of personnel costs such as salaries, commissions, bonuses, share-based
compensation, deferred compensation expense or income, and temporary personnel
costs. Selling, general and administrative expenses also include costs of our
facilities, utility expense, professional fees, depreciation expense on our
capital equipment, bad debt expense, amortization expense on our intangible
assets, and marketing expenses, offset in part by reimbursements from our OEM
suppliers.
Our selling, general and administrative expenses in fiscal year 2012 increased
compared to the prior year fiscal year 2011 due to increased investment in our
business and our fiscal year 2011 acquisitions. The costs related to our
acquisitions in the fourth quarter of fiscal year 2011 in our GBS segment
accounted for $10.5 million of the increase in fiscal year 2012. Our personnel
and general overhead expenses were higher by $14.2 million due to investment in
our business operations. Our deferred compensation expenses were higher by $2.8
million based on the performance of those investments. In addition, the
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fiscal year 2011 results benefited by $5.4 million for changes in the fair value
of certain contingent consideration pertaining to our acquisitions in our GBS
segment in comparison to a benefit of $0.7 million recognized in fiscal year
2012. These increases were offset in part by $4.2 million lower bad debt expense
and $0.5 million benefit from fluctuations in foreign currency exchange rates.
The increase in selling, general and administrative expenses in fiscal year 2011
from fiscal year 2010 was primarily due to our acquisition of Infotec Japan, our
acquisitions in the GBS segment and the organic growth in our business. During
fiscal year 2011, 22% of our total selling, general and administrative expenses
were attributable to our acquisitions, offset by a benefit of $5.4 million
recognized for changes in the fair value of certain contingent consideration
pertaining to our acquisitions in our GBS segment. The prior year operating
expense also included $7.7 million related to the portion of our manufacturing
business and NDS that were sold in fiscal year 2010. In addition, our deferred
compensation expense was lower by $2.4 million as compared to the prior year.
These benefits were offset by $13.5 million in higher personnel costs to support
the organic growth in our business and the unfavorable impact of changes in
foreign currency translation of approximately $2.6 million.
Income from Continuing Operations before Non-Operating Items, Income Taxes and
Noncontrolling Interests
Fiscal Years Ended November 30, Percent Change
2012 2011 2010 2012 to 2011 2011 to 2010
(in thousands)
Income from continuing
operations before
non-operating items,
income taxes and
noncontrolling interest $ 255,012 $ 256,228 $ 199,150 (0.5 )% 28.7 %
Percentage of Total
Revenue 2.48 % 2.46 % 2.31 %
Distribution income from
continuing operations
before non-operating
items, income taxes and
noncontrolling interest 241,817 237,322 187,478 1.9 % 26.6 %
Percentage of
Distribution Revenue 2.39 % 2.31 % 2.20 %
GBS income from
continuing operations
before non-operating
items, income taxes and
noncontrolling interest 13,483 18,906 11,672 (28.7 )% 62.0 %
Percentage of GBS Revenue 6.83 % 11.57 % 10.39 %
Inter-Segment Elimination (288 ) - - - -
Our income from continuing operations before non-operating items, income taxes
and noncontrolling interest as a percentage of revenue was 2.48% in fiscal year
2012 compared to 2.46% in fiscal year 2011. In our distribution services
segment, our operating margins were favorably impacted by the effects of
transitioning of certain distribution customer revenue to a fee-for-service
basis beginning from the fourth quarter of fiscal year 2011 and by the
supply-demand constraints of hard disk drives primarily in the first quarter of
fiscal year 2012. These benefits from our higher gross margins were partially
offset by higher selling, general and administrative expenses. Our operating
margins in our GBS segment in fiscal year 2012 were lower than the prior fiscal
year 2011 because the prior year results benefited by $5.4 million for changes
in the fair value of certain contingent consideration liabilities pertaining to
the acquisitions in this segment.
Our income from continuing operations before non-operating items, income taxes
and noncontrolling interest as a percentage of revenue increased to 2.46% in
fiscal year 2011 from 2.31% in fiscal year 2010. In our distribution services
segment, the improvement in our operating margins was driven in large part by
the unexpected supply-demand constraints of hard disk drives and by the impact
of transitioning certain customer revenue to a fee-for-service basis in the
fourth quarter of fiscal year 2011. Our operating margins in our GBS segment in
fiscal year 2011 benefited by $5.4 million recognized for changes in the fair
value of certain contingent consideration liabilities pertaining to the
acquisitions in this segment. This benefit was offset in part by $1.1 million
acquisition and integration costs pertaining to fiscal year 2011 and fourth
quarter fiscal year 2010 acquisitions.
Interest Expense and Finance Charges, Net
Fiscal Years Ended November 30, Percent Change
2012 2011 2010 2012 to 2011 2011 to 2010
(in thousands)
Interest expense and finance
charges, net $ 22,930 $ 25,505 $ 17,114 (10.1 )% 49.0 %
Percentage of revenue 0.22 % 0.25 % 0.20 %
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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.
Interest expense and finance charges, net were lower in fiscal year 2012 as
compared to the fiscal year 2011 because of lower levels of borrowings and lower
interest rates. In addition, the interest income from our Mexico contracts was
higher in fiscal year 2012 compared to the prior year.
The increase in interest expense and finance charges, net, in fiscal year 2011
from fiscal year 2010, was due to our acquisition of Infotec Japan in fiscal
year 2011. The interest expense on Infotec Japan's working capital credit lines
during fiscal year 2011 was $4.6 million. The remaining increases in interest
expense as compared to the prior year periods were due to lower interest income
from our Mexico contracts and higher levels of borrowings and higher interest
rates on our lines of credit.
Other Income (Expense), Net
Fiscal Years Ended November 30, Percent Change
2012 2011 2010 2012 to 2011 2011 to 2010
(in thousands)
Other income (expense), net $ 4,471 $ (1,005 ) $ 1,550 544.9 % (164.8 )%
Percentage of revenue 0.04 % (0.01)% 0.02 %
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 other income increased in fiscal year 2012 as compared to fiscal year 2011
primarily due to $3.4 million higher gains from our deferred compensation
investments. In addition, we recognized a gain of $1.3 million on the sale of
our investment in SB Pacific.
The change in other income (expense), net in fiscal year 2011 from fiscal year
2010, was primarily due to $1.1 million higher losses on our investments and
$0.8 million losses from foreign currency fluctuations. In addition, the prior
year results included gains of $0.8 million and $0.5 million recognized on the
sale of the BDG division of SYNNEX Canada Limited, or SYNNEX Canada, and NDS,
respectively.
Provision for Income Taxes
Income taxes consist of our current and deferred tax expense resulting from our
income earned in domestic and foreign jurisdictions.
Our effective tax rate in fiscal year 2012 was 35.5% as compared to 34.5% and
36.4% in fiscal years 2011 and 2010, respectively. The increase in our effective
tax rate in fiscal year 2012 as compared to the prior year was due to the $5.4
million benefit in fiscal year 2011 for changes in the fair value of certain
contingent consideration liabilities pertaining to the acquisitions in our GBS
segment. These benefits were not subject to income tax. The fiscal year 2011
effective tax rate was also lower due to the benefit of certain state tax
credits and the release of tax reserves due to the expiration of the statute of
limitations. The effective tax rate in fiscal year 2010 benefited from the
release of certain tax reserves resulting from the conclusion of the Internal
Revenue Service, or IRS, tax audits and the expiration of the statute of
limitations. This was offset by the loss of tax holidays in a foreign location
and the changes in the mix of income in the different tax jurisdictions in which
we operate.
Our future effective tax rates could be adversely affected by earnings being
lower than anticipated in countries where we have lower statutory rates and
earnings being higher than anticipated in countries where we have higher
statutory rates, by changes in the valuations of our deferred tax assets or
liabilities, or by changes or interpretations in tax laws, regulations or
accounting principles. In addition, we are subject to the continuous examination
of our income tax returns by the 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.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests represents the share of net
income attributable to others, which is recognized for the portion of
subsidiaries' equity not owned by us. The noncontrolling interest in fiscal
years 2012 and 2011 primarily represents SB Pacific's ownership of Infotec
Japan. This noncontrolling interest has been reflected in the results of
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our distribution services segment. As of November 30, 2012, we had purchased all
the shares of Infotec Japan held by SB Pacific.
The noncontrolling interest in fiscal year 2010 represents the share of net
income attributable to the minority owners of NDS and HiChina Web Solutions, or
HiChina. HiChina was sold in December 2009 and is presented in discontinued
operations in our Consolidated Statements of Operations. NDS was sold in August
2010. These noncontrolling interests were reflected in the results of our GBS
segment.
Discontinued Operations
On December 28, 2009, HiChina was sold to Alibaba.com Limited. HiChina provided
domain name registration and web site hosting and design. HiChina was a
subsidiary of SYNNEX Investment Holdings Corporation, a wholly-owned subsidiary
of SYNNEX Corporation. Under the terms of the agreement, we received $65.4
million for our estimated 79% controlling ownership in HiChina. During fiscal
year 2010, we recorded total gain on the sale of $11.4 million, net of $1.2
million income taxes. We, the ultimate parent, have guaranteed the obligations
of SYNNEX Investment Holdings Corporation up to $35.0 million in connection with
the sale of HiChina. HiChina was a part of our GBS segment. We have no
significant continuing involvement in the operations of HiChina. In conjunction
with the sale of HiChina, we recorded a contingent indemnification liability of
$4.1 million.
The sale of HiChina qualified as a discontinued operation and accordingly, we
have excluded results of HiChina's operations from our Consolidated Statements
of Operations for fiscal year 2010 to present this business in discontinued
operations.
The following table shows the results of operations of HiChina for fiscal year
2010, which are included in the earnings from discontinued operations:
Fiscal Year Ended
November 30, 2010*
(in thousands)
Revenue $ 2,959
Cost of revenue (1,706 )
Gross profit 1,253
Selling, general and administrative expenses (1,199 )
Income before non-operating items, income taxes and
noncontrolling interest 54
Interest income, net 17
Other income, net 5
Income before income taxes and noncontrolling interest 76
Provision for income taxes (1 )
Income from discontinued operations 75
Income from discontinued operations attributable to
noncontrolling interest
(16 )
Income from discontinued operations attributable to SYNNEX
Corporation
$ 59
_____________________________
* Includes the results of operations from December 1, 2009 to the disposition
date of December 28, 2009.
Liquidity and Capital Resources
Cash Flows
Our business is working capital intensive. Our working capital needs are
primarily to finance accounts receivable and inventory. We rely heavily on debt,
accounts receivable arrangements, our securitization programs and our revolver
programs for our working capital needs.
We have financed our growth and cash needs to date primarily through working
capital financing facilities, convertible debt, bank credit lines and cash
generated from operations.
To increase our market share and better serve our customers, we may further
expand our operations through investments or acquisitions. We expect that such
expansion would require an initial investment in personnel, facilities and
operations. These investments or acquisitions would likely be funded primarily
by additional borrowings or issuing common stock.
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Net cash provided by operating activities was $242.8 million in fiscal year
2012, primarily generated from our net income of $152.5 million. Our cash
provided by operating activities benefited from higher accounts payable balances
of $106.9 million and lower inventory balances of $49.5 million. These benefits
were offset in part by higher accounts receivable balances of $113.0 million.
Net cash provided by operating activities in fiscal year 2011 was $219.2
million, primarily consisting of our net income of $150.6 million. Our net cash
provided by operating activities in fiscal year 2011 benefited from improvements
in our cash conversion cycle resulting in $29.5 million lower accounts
receivable and $28.2 million lower inventory balances. These benefits were
offset by $50.0 million lower accounts payable due to timing of payments to our
vendors.
Net cash used in operating activities was $65.9 million in fiscal year 2010,
which was mainly due to the purchase of inventory as business levels increased
resulting in $240.1 million higher inventory, higher accounts receivable of
$186.4 million from higher sales year over year in the United States and Canada
and higher net receivables from affiliates of $11.4 million. The above increases
were partially offset by lower accounts payable of $220.2 million and net income
of $128.1 million.
Net cash used in investing activities in fiscal year 2012 was $9.6 million. Our
investment in the purchase of equipment and leasehold improvements during the
year to support the growth in our distribution services and GBS segments was
$14.5 million. Cash paid for acquisitions was $1.6 million and loans given to
third parties, net of collections were $1.1 million. We realized $3.5 million
from divesting our 33.3% ownership in SB Pacific and received $2.2 million in
net proceeds from the trading activities in our deferred compensation
investments. Due to the timing of our lockbox collections under our borrowing
arrangements our restricted cash was lower by $2.2 million.
Net cash used in investing activities in fiscal year 2011 was $126.4 million
which included $57.3 million, net of cash acquired, used for our acquisitions of
Encover, Inc., e4e, gem and VisionMAX in our GBS segment and $4.5 million, net
of cash acquired, used for the acquisition of Infotec Japan in our distribution
services segment, offset by $1.5 million collected from the sellers of Jack of
All Games upon the final settlement of the purchase price. We also collected
$1.0 million on our sale of certain contract manufacturing business related
assets in the prior year to MiTAC International. Our capital expenditures during
the period were $40.2 million, of which $15.4 million was used for the purchase
of a distribution and logistics facility in Illinois and the remainder in
equipment and infrastructure investments. In addition, we invested $4.8 million
in SB Pacific, our equity-method investee. Our restricted cash increased by
$14.0 million primarily due to the timing of lockbox collections under our
borrowing arrangements. Our investment in term deposits with a maturity period
of over three months, net of the proceeds from maturity deposits was $6.8
million.
Net cash provided by investing activities was $1.1 million in fiscal year 2010,
which included $37.8 million cash received from the sale of our businesses, $9.7
million in proceeds from our held-to-maturity term deposits, net of purchases;
and a $15.2 million decrease in our restricted cash; partially offset by $47.4
million cash used for the acquisition of Jack of All Games and the fiscal fourth
quarter acquisitions in our GBS segment and $12.7 million investment in capital
expenditures. Cash received from the sales of our businesses included $33.1
million from the sale of HiChina, $3.2 million from the sale of the BDG division
of SYNNEX Canada, and $1.5 million from the sale of NDS.
Net cash used in financing activities in fiscal year 2012 was $137.5 million,
consisting of $106.5 million net payments on our securitization arrangements,
revolving lines of credit and our term loans as we reduced our external
borrowing levels during the year. Our higher cash balances during the year also
resulted in $26.5 million lower book overdraft. During the year, $7.8 million
was used for the repurchase of our treasury stock, $6.1 million was used to
repurchase shares of Infotec Japan from the noncontrolling interest and $1.1
million was paid for acquisition related contingent considerations. These
payments were offset in part by $7.2 million proceeds from the exercise of
employee stock options and $3.1 million was the excess tax benefits from
share-based compensation.
Net cash used in financing activities in fiscal year 2011 was $114.4 million,
consisting primarily of $139.8 million net payments on our securitization
arrangements and our revolving lines of credit, offset by debt refinancing of
Infotec Japan with a new credit facility. The book overdraft was higher by $13.6
million. In addition, the capital contribution related to SB Pacific was $6.4
million and financing from the exercise of employee stock options was $6.3
million during the year, offset by taxes paid for net share settlement of equity
awards of $4.7 million. Cash used for the repurchase of treasury stock was $1.7
million.
Net cash provided by financing activities was $93.8 million in fiscal year 2010,
consisting primarily of $92.4 million of net receipts from our securitization
arrangements and revolving line of credit, $15.9 million proceeds from the
issuance of common stock, and $9.8 million excess tax benefit from share-based
compensation which was partially offset by $24.4 million lower book overdraft.
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We believe the unused portions of the lines of credit on our arrangements are
sufficient to support our operating activities.
Capital Resources
Our cash and cash equivalents totaled $163.7 million and $67.6 million as of
November 30, 2012 and 2011, respectively. Of our total cash and cash equivalents
the cash held by our foreign subsidiaries was $92.8 million and $59.5 million as
of November 30, 2012 and November 30, 2011, respectively. Repatriation of the
cash held by our foreign subsidiaries would be subject to United States federal
income taxes. Also, repatriation of some foreign balances is restricted by local
laws. However, we have historically fully utilized and reinvested all foreign
cash to fund our foreign operations and expansion. If in the future, our
intentions change and we repatriate the cash back to the United States, we will
report the expected impact of the applicable taxes depending upon the planned
timing and manner of such repatriation. Presently, we believe we have sufficient
resources, cash flow and liquidity within the United States to fund current and
expected future working capital requirements.
As of November 30, 2012, there were approximately $248.3 million of cumulative
undistributed earnings of foreign subsidiaries. Repatriation of the
undistributed earnings would be subject to United States federal income taxes,
less applicable foreign taxes. Also, repatriation of some foreign balances is
restricted by local laws. We have not provided for U.S. federal income tax or
foreign withholding taxes on foreign subsidiaries' undistributed earnings as
currently we have no plan to repatriate those earnings back to the United
States. Further, it is not currently practical to estimate the amount of income
tax that might be payable if any earnings were to be distributed by individual
foreign subsidiaries. However, if in the future, we intend to repatriate the
undistributed earnings of foreign subsidiaries to the United States in the form
of dividend or otherwise, we will include the impact of U.S. taxes as well as
local taxes and withholding taxes in the provision for income taxes and also in
the deferred taxes or tax payable liabilities depending upon the planned timing
and manner of such repatriation.
We believe we will have sufficient resources to meet our present and future
working capital requirements for the next twelve months, based on our financial
strength and performance, existing sources of liquidity, available cash
resources and funds available under our various borrowing arrangements.
In May 2008, we issued $143.8 million of aggregate principal amount of our 4.0%
Convertible Senior Notes due 2018, or the Convertible Senior Notes, in a private
placement. However, under certain circumstances we may redeem the Convertible
Senior Notes, in whole or in part, for cash on or after May 20, 2013, at a
redemption price equal to 100% of the principal amount plus any accrued and
unpaid interest. In addition, if certain triggering events are met, the
Convertible Senior Notes can be converted into shares of common stock at any
time before their maturity. Because we currently intend to settle the
Convertible Senior Notes using cash at some future date, we maintain within our
Amended and Restated U.S. Arrangement and the Amended and Restated Revolver
ongoing features that allow us to utilize cash from these facilities to cash
settle the Convertible Senior Notes. (See On-Balance Sheet Arrangements below).
These borrowing arrangements are renewable on their expiration dates. We have no
reason to believe that these arrangements will not be renewed as we continue to
be in good credit standing with the participating financial institutions. We
have had similar borrowing arrangements with various financial institutions
throughout our years as a public company. We also retain the ability to issue
equity securities and utilize the proceeds to cash-settle the Convertible Senior
Notes. See Note 12-Convertible Debt.
On-Balance Sheet Arrangements
We primarily finance our United States operations with an accounts receivable
securitization program, or the U.S. Arrangement. We can pledge up to a maximum
of $400.0 million in United States trade accounts receivable, or the U.S.
Receivables. In October 2012, we amended the U.S. Arrangement, or the Amended
and Restated U.S. Arrangement. The maturity date of the Amended and Restated
U.S. Arrangement was extended to October 18, 2015. The effective borrowing cost
under the Amended and Restated U.S. Arrangement is a blend of the prevailing
dealer commercial paper rates plus a program fee of 0.425% per annum based on
the used portion of the commitment, and a facility fee of 0.425% per annum
payable on the aggregate commitment of the lenders. Prior to the amendment, the
effective borrowing cost was a blend of the prevailing dealer commercial paper
rates, plus a program fee of 0.60% per annum based on the used portion of the
commitment and a facility fee of 0.60% per annum payable on the aggregate
commitment. There was no balance outstanding on the Amended and Restated U.S.
Arrangement as of November 30, 2012. The balance outstanding on the U.S.
Arrangement as of November 30, 2011 was $64.5 million.
Under the terms of the Amended and Restated U.S. 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
Amended and Restated U.S. Arrangement are recorded as debt on our Consolidated
Balance Sheets. As is customary in trade accounts receivable securitization
arrangements, a credit rating agency's downgrade of the third party issuer of
commercial paper or of a back-up liquidity provider (which provides a source
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of funding if the commercial paper market cannot be accessed) could result in an
increase in our cost of borrowing or loss of our financing capacity under these
programs if the commercial paper issuer or liquidity back-up provider is not
replaced. Loss of such financing capacity could have a material adverse effect
on our financial condition and results of operations.
We have a senior secured revolving line of credit arrangement, or the Revolver,
with a financial institution which provides a maximum commitment of $100.0
million. In October 2012, the Revolver was amended, or the Amended and Restated
Revolver, to extend the maturity date of the credit arrangement from November
2013 to October 2017. The Amended and Restated Revolver retains an accordion
feature to increase the maximum commitment by an additional $50.0 million to
$150.0 million at our request, in the event the current lender consents to such
increase or another lender participates in the Amended and Restated Revolver.
Interest on borrowings under the Amended and Restated Revolver is based on a
base rate or London Interbank Offered Rate, or LIBOR, at our option. The margin
on the LIBOR is determined in accordance with our fixed charge coverage ratio
and is currently 1.50%, compared to 2.25% prior to the amendment in October
2012. Our base rate is based on the financial institution's prime rate. The
amendment in October 2012 reduced the unused line fee to 0.30% per annum from
0.50% per annum, and is payable if the outstanding principal amount of the
Amended and Restated Revolver is less than half of the lenders' commitments. The
Amended and Restated Revolver is secured by our inventory and other assets.
It would be an event of default under the Amended and Restated Revolver if a
lender under the Amended and Restated U.S. Arrangement declines to extend the
maturity date at any point within thirty days prior to the maturity date of the
Amended and Restated U.S. Arrangement, unless we have a binding commitment in
place to renew or replace the Amended and Restated U.S. Arrangement. There is no
event of default if within the thirty day period prior to maturity of the
Amended and Restated Revolver if: (a) borrowing availability exceeds 90% of the
commitment amount and (b) the fixed charge coverage ratio, when measured at the
end of the fiscal quarter on a trailing four quarter basis, is greater than or
equal to 1.75 to 1.00. There was no borrowing outstanding under this credit
arrangement as of both November 30, 2012 and 2011.
In February 2011, we entered into an arrangement with a financial institution to
provide an unsecured revolving line of credit for general corporate purposes.
The maximum commitment under the arrangement was $25.0 million. The arrangement
included an unused line fee of 0.50% per annum. Interest on borrowings under the
line of credit was determined by either a base rate or the LIBOR, at our option.
The arrangement was terminated in August 2012. As of November 30, 2011, there
were no borrowings outstanding under this arrangement.
SYNNEX Canada, has a revolving line of credit arrangement with a financial
institution for a maximum commitment of CAD125 million, or the Canadian
Revolving Arrangement. In May 2012, SYNNEX Canada completed the renewal of this
arrangement, or the Renewed Canadian Revolving Arrangement. The Renewed Canadian
Revolving Arrangement maximum commitment is CAD100.0 million and includes an
accordion feature to increase the maximum commitment by an additional CAD25.0
million to CAD125.0 million, at SYNNEX Canada's request. The Renewed Canadian
Revolving Arrangement also provides a sublimit of $5.0 million for the issuance
of standby letters of credit. As of both November 30, 2012 and 2011, outstanding
standby letters of credit totaled $3.4 million. SYNNEX Canada has granted a
security interest in substantially all of its assets in favor of the lender
under the Renewed Canadian Revolving Arrangement. In addition, we pledged our
stock in SYNNEX Canada as collateral for the Renewed Canadian Revolving
Arrangement. The Renewed Canadian Revolving Arrangement expires in May 2017. The
interest rate applicable under the Renewed Canadian Revolving Arrangement is
equal to (1) the Canadian base rate plus a margin of 0.75% for a Base Rate Loan
in Canadian Dollars; whereas before the renewal, it was a minimum rate of 2.50%
plus a margin of 1.25% for a Base Rate Loan in Canadian Dollars, (2) the US base
rate plus a margin of 0.75% for a Base Rate Loan in U.S. Dollars; whereas before
the renewal, it was a minimum rate of 3.25% plus a margin of 2.50% for a Base
Rate Loan in U.S. Dollars, and (3) the Bankers' Acceptance rate, or BA, plus a
margin of 2.00% for a BA Rate Loan; whereas before the renewal, it was a minimum
rate of 1.00% plus a margin of 2.75% for a BA Rate Loan. The Canadian base rate
means the greater of (a) the prime rate determined by a major Canadian financial
institution and b) the one month Canadian Dealer Offered Rates or CDOR (the
average rate applicable to Canadian dollar bankers' acceptances for the
applicable period) plus 1.50%. The US base rate means the greater of (a) a
reference rate determined by a major Canadian financial institution for US
dollar loans made to Canadian borrowers and (b) the US federal funds rate plus
0.50%. After the renewal, a fee of 0.25% per annum is payable with respect to
the unused portion of the commitment; whereas before the renewal, this fee was
0.375% per annum. There were no borrowings outstanding under the Renewed
Canadian Revolving Arrangement as of November 30, 2012. The borrowings
outstanding under our Canadian Revolving Arrangement as of November 30, 2011
were $27.3 million.
SYNNEX Canada has a term loan associated with the purchase of its logistics
facility in Guelph, Canada. The interest rate for the unpaid principal amount is
a fixed rate of 5.374% per annum. The final maturity date for repayment of the
unpaid principal is April 1, 2017. The balance outstanding on the term loan as
of November 30, 2012 and 2011 was $8.6 million and $9.1 million, respectively.
Infotec Japan had a credit agreement with a group of financial institutions for
a maximum commitment of JPY10.0 billion. The credit agreement was comprised of a
JPY6.0 billion long-term loan and a JPY4.0 billion short-term revolving credit
facility. As of November 30, 2012, the balance outstanding under the term loan
was $72.7 million and the revolving
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credit facility was $38.8 million. As of November 30, 2011, the balance
outstanding under the term loan was $77.3 million and the revolving credit
facility was $51.5 million.
In December 2012, Infotec Japan refinanced the credit facility to increase the
short-term revolving credit facility to JPY8.0 billion and therefore the maximum
commitment of the credit agreement increased to JPY14.0 billion. The interest
rate for the long-term and short-term loans is based on the Tokyo Interbank
Offered Rate, or TIBOR, plus a margin of 2.25% per annum. After the refinancing,
this margin was lowered to 1.90%. The refinanced credit facility expires in
December 2015. The long-term loan can be repaid at any time prior to December
2015 without penalty. We had issued a guarantee of JPY7.0 billion under the
original credit agreement. Following the refinancing, this guarantee was
increased to cover all obligations of Infotec Japan to the lenders.
Infotec Japan has two term loans with financial institutions that consist of a
short-term revolving credit facility of JPY1.0 billion and a term loan of
JPY35.0 million. As of November 30, 2011, Infotec Japan had a short-term loan of
JPY1.0 billion, which was refinanced upon maturity for the same amount in fiscal
year 2012, with a new lender. The new loan is a one-year revolving credit
facility of JPY1.0 billion, which expires in February 2013 and bears an interest
rate that is based on TIBOR, plus a margin of 1.75%. The term loan of JPY35.0
million expired in December 2012 and bore a fixed interest rate of 1.50%.
In addition, as of November 30, 2012 and November 30, 2011, Infotec Japan had
$0.1 million and $0.5 million, respectively, outstanding under arrangements with
various banks and financial institutions for the sale and financing of approved
accounts receivable and notes receivable with recourse provisions to Infotec
Japan.
As of November 30, 2012 and 2011, we had capital lease obligations of $1.0
million and $1.5 million, respectively, primarily pertaining to Infotec Japan.
Covenants Compliance
In relation to our Amended and Restated U.S. Arrangement, the Amended and
Restated Revolver, the Infotec Japan credit facility and the Renewed Canadian
Revolving Arrangement, we have a number of covenants and restrictions that,
among other things, require us to comply with certain financial and other
covenants. These covenants require us to maintain specified financial ratios and
satisfy certain financial condition tests, including minimum net worth and fixed
charge coverage ratios. They also limit our ability to incur additional debt,
make or forgive intercompany loans, pay dividends and make other types of
distributions, make certain acquisitions, repurchase our stock, create liens,
cancel debt owed to us, enter into agreements with affiliates, modify the nature
of our business, enter into sale-leaseback transactions, make certain
investments, enter into new real estate leases, transfer and sell assets, cancel
or terminate any material contracts and merge or consolidate. The covenants also
limit our ability to pay cash upon conversion, redemption or repurchase of the
Convertible Senior Notes, subject to certain liquidity tests. As of November 30,
2012, 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
Convertible Senior Notes in a private placement. The Convertible Senior Notes
have a cash coupon interest rate of 4.0% per annum. Interest on the Convertible
Senior Notes is payable in cash semi-annually in arrears on May 15 and November
15 of each year and commenced on November 15, 2008. In addition, we will pay
contingent interest in respect of any six-month period from May 15 to November
14 or from November 15 to May 14, with the initial six-month period commencing
May 15, 2013, if the trading price of the Convertible Senior Notes for each of
the ten trading days immediately preceding the first day of the applicable
six-month period equals 120% or more of the principal amount of the Convertible
Senior Notes. During any interest period when contingent interest is payable,
the contingent interest payable per Convertible Senior Note is equal to 0.55% of
the average trading price of the Convertible Senior Notes during the ten trading
days immediately preceding the first day of the applicable six-month interest
period. The Convertible Senior Notes mature on May 15, 2018, subject to earlier
redemption, repurchase or conversion.
Holders may convert their Convertible Senior Notes at their option at any time
prior to the close of business on the business day immediately preceding the
maturity date for such Convertible Senior Notes under the following
circumstances: (1) during any fiscal quarter after the fiscal quarter ended
August 31, 2008 (and only during such fiscal quarter), if the last reported sale
price of our common stock for at least twenty trading days in the period of
thirty consecutive trading days ending on the last trading day of the
immediately preceding fiscal quarter is equal to or more than 130% of the
conversion price of the Convertible Senior Notes on the last day of such
preceding fiscal quarter; (2) during the five business-day period after any five
consecutive trading-day period, or the Measurement Period, in which the trading
price per $1,000 principal amount of the Convertible Senior Notes for each day
of that Measurement Period was less than 98% of the product of the last reported
sale price of the common stock and the conversion rate of the Convertible Senior
Notes on each such day; (3) if we have called the particular Convertible Senior
Notes for redemption, until the close of business on the business day prior to
the redemption
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date; or (4) upon the occurrence of certain corporate transactions. These
contingencies were not triggered as of November 30, 2012. In addition, holders
may also convert their Convertible Senior Notes at their option at any time
beginning on November 15, 2017, and ending at the close of business on the
business day immediately preceding the maturity date for the Convertible Senior
Notes, without regard to the foregoing circumstances. Upon conversion, we will
pay or deliver, as the case may be, cash, shares of the common stock or a
combination thereof at our election. The initial conversion rate for the
Convertible Senior Notes is 33.9945 shares of common stock per $1,000 principal
amount of Convertible Senior Notes, equivalent to an initial conversion price of
$29.42 per share of common stock. Such conversion rate will be subject to
adjustment in certain events but will not be adjusted for accrued interest,
including any additional interest and any contingent interest. We may enter into
convertible hedge arrangements to hedge the in-the-money feature of the
Convertible Senior Notes to counter the potential share dilution.
We may not redeem the Convertible Senior Notes prior to May 20, 2013. We may
redeem the Convertible Senior Notes, in whole or in part, for cash on or after
May 20, 2013, at a redemption price equal to 100% of the principal amount of the
Convertible Senior Notes to be redeemed, plus any accrued and unpaid interest
(including any additional interest and any contingent interest) up to, but
excluding, the redemption date. As of November 30, 2012, the Convertible Senior
Notes were classified as current debt on the Consolidated Balance Sheets. Also,
the Convertible Senior Notes contain various features which under certain
circumstances could allow the holders to convert the Convertible Senior Notes
into shares before their ten-year maturity.
Holders may require us to repurchase all or a portion of their Convertible
Senior Notes for cash on May 15, 2013 at a purchase price equal to 100% of the
principal amount of the Convertible Senior Notes to be repurchased, plus any
accrued and unpaid interest up to (including any additional interest and any
contingent interest), but excluding, the repurchase date. Accordingly, the
Convertible Senior Notes have been classified as a current obligation as of
November 30, 2012 on the Consolidated Balance Sheets. If we undergo a
fundamental change, holders may require us to purchase all or a portion of their
Convertible Senior Notes for cash at a price equal to 100% of the principal
amount of the Convertible Senior Notes to be purchased, plus any accrued and
unpaid interest up to (including any additional interest and any contingent
interest), but excluding, the fundamental change repurchase date.
The Convertible Senior Notes are our senior unsecured obligations and rank
equally in right of payment with other senior unsecured debt and rank senior to
subordinated debt, if any. The Convertible Senior Notes effectively rank junior
to any of our secured indebtedness to the extent of the assets securing such
indebtedness. The Convertible Senior Notes are also structurally subordinated in
right of payment to all indebtedness and other liabilities and commitments
(including trade payables) of our subsidiaries. The net proceeds from the
Convertible Senior Notes were used for general corporate purposes and to reduce
outstanding balances under the U.S. Arrangement and the Revolver.
The Convertible Senior Notes are governed by an indenture, dated as of May 12,
2008, between U.S. Bank National Association, as trustee, and us, which contains
customary events of default.
The Convertible Senior Notes as hybrid instruments are accounted for as
convertible debt and are recorded at carrying value. The right of the holders of
the Convertible Senior Notes to require us to repurchase the Convertible Senior
Notes in the event of a fundamental change and the contingent interest feature
would require separate measurement from the Convertible Senior Notes; however,
the amount is insignificant. The additional shares issuable following certain
corporate transactions do not require bifurcation and separate measurement from
the Convertible Senior Notes.
In accordance with the provisions of the standards for accounting for
convertible debt, we recognized both a liability and an equity component of the
Convertible Senior Notes in a manner that reflects our non-convertible debt
borrowing rate at the date of issuance of 8.0%. The value assigned to the debt
component, which is the estimated fair value, as of the issuance date, of a
similar note without the conversion feature, was determined to be $120.3
million. The difference between the Convertible Senior Note cash proceeds and
this estimated fair value was estimated to be $23.4 million and was
retroactively recorded as a debt discount and is being amortized to interest
expense and finance charges, net over the five-year period to the first put
date, utilizing the effective interest method.
As of November 30, 2012, the remaining amortization period is approximately five
months assuming the redemption of the Convertible Senior Notes at the first
purchase date of May 20, 2013. Based on a cash coupon interest rate of 4.0%, we
recorded contractual interest expense of $6.5 million during each of the fiscal
years 2012, 2011 and 2010. Based on an effective rate of 8.0%, we recorded
non-cash interest expense of $5.3 million, $4.9 million and $4.5 million during
fiscal years 2012, 2011 and 2010, respectively. As of both November 30, 2012 and
2011, the carrying value of the equity component of the Convertible Senior
Notes, net of allocated issuance costs, was $22.8 million.
The date of settlement of the Convertible Senior Notes is uncertain due to the
various features of the Convertible Senior Notes including put and call
elements. Because of the May 2013 put and call features, we have classified the
Convertible Senior Notes as short term debt starting May 31, 2012 in the
Consolidated Balance Sheets.
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We currently intend to settle the Convertible Senior Notes using cash at some
future date. We maintain within our Amended and Restated U.S. Arrangement and
Amended and Restated Revolver ongoing features that allow us to utilize cash
from these facilities to cash settle the Convertible Senior Notes.
Contractual Obligations
Future principal payments due after November 30, 2012 under the above loans,
Convertible Senior Notes, capital leases and operating lease arrangements are as
follows:
Payments Due by Period
Less than 1 - 3 > 5
Total 1 Year Years 3 - 5 Years Years
(in thousands)
Contractual Obligations:
Principal debt payments $ 276,629 $ 195,965 $ 1,575 $ 74,496 $ 4,593
Interest on debt 8,341 2,790 3,992 989 570
Non-cancellable capital leases 971 484 467 20 -
Non-cancellable operating leases 81,318 22,817 32,704
15,935 9,862
Total $ 367,259 $ 222,056 $ 38,738 $ 91,440 $ 15,025
In the above table, the principal amount of $143.8 million of our Convertible
Senior Notes is included in the principal debt payments due in less than one
year. As described in Note 12, the date of settlement of the Convertible Senior
Notes is uncertain due to its various features. We have classified the
Convertible Senior Notes as short-term debt due to the May 2013 put and call
features.
We have issued guarantees to certain vendors and lenders of our subsidiaries for
trade credit lines and loans, totaling $264.2 million as of November 30, 2012
and $238.7 million as of November 30, 2011. We are obligated under these
guarantees to pay amounts due should our subsidiaries not pay valid amounts owed
to their vendors or lenders.
As of November 30, 2012, we have established a reserve of $21.7 million for
unrecognized tax benefits. As we are unable to reasonably predict the timing of
settlement of these guarantees and the reserve for unrecognized tax benefits,
the table above excludes such liabilities.
Related Party Transactions
We have a business relationship with MiTAC International Corporation, or MiTAC
International, a publicly-traded company in Taiwan that began in 1992 when it
became our primary investor through its affiliates. As of November 30, 2012 and
2011, MiTAC International and its affiliates beneficially owned approximately
27% and 29%, respectively, of our common stock. In addition, Matthew Miau, our
Chairman Emeritus of the Board of Directors, is 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 of our mergers or acquisitions. Among other things, this could
have the effect of delaying, deterring or preventing a change of control over
us.
Until July 31, 2010, we worked with MiTAC International on OEM outsourcing and
jointly marketed MiTAC International's design and electronic manufacturing
services and its contract assembly capabilities. This relationship enabled us to
build relationships with MiTAC International's customers. On July 31, 2010,
MiTAC International purchased certain assets related to our contract assembly
business, including inventory and customer contracts, primarily related to
customers then being jointly serviced by MiTAC International and us. As part of
this transaction, we provided MiTAC International certain transition services
for the business for a monthly fee over a period of twelve months. The sales
agreement also included earn-out and profit sharing provisions, which were based
on operating performance metrics achieved over twelve to eighteen months from
the closing date for the defined customers included in this transaction. During
fiscal years 2012 and 2011, we recorded $3.7 million and $6.7 million,
respectively, for service fees earned, reimbursements for facilities and
overhead costs and the achieved earn-out condition.
We purchased inventories from MiTAC International and its affiliates totaling
$3.2 million, $5.2 million and $157.1 million during fiscal years 2012, 2011 and
2010, respectively. Our sales to MiTAC International and its affiliates during
fiscal years 2012, 2011 and 2010 totaled $2.7 million, $4.2 million and $5.6
million, respectively. Most of the purchases and sales in fiscal year 2010 were
pursuant to our Master Supply Agreement with MiTAC International and our former
contract assembly customer Sun Microsystems, which was acquired by Oracle
Corporation in 2010.
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Our business relationship with MiTAC International has been informal and is not
governed by long-term commitments or arrangements with respect to pricing terms,
revenue or capacity commitments.
During the period of time that we worked with MiTAC International, we 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, we
believe that the significant terms under our arrangements with MiTAC
International, including pricing, will not materially differ from the terms we
could have negotiated with unaffiliated third parties, and we have adopted a
policy requiring that material transactions with MiTAC International or its
related parties be approved by our Audit Committee, which is composed solely of
independent directors. In addition, Matthew Miau's compensation is approved by
the Nominating and Corporate Governance Committee, which is also composed solely
of independent directors.
Beneficial Ownership of Our Common Stock by MiTAC International
As noted above, MiTAC International and its affiliates in the aggregate
beneficially owned approximately 27% of our common stock as of November 30,
2012. These shares are owned by the following entities:
As of November 30, 2012
(shares in thousands)
MiTAC International(1) 5,908
Synnex Technology International Corp.(2) 4,283
Total 10,191
_________________________
(1) Shares are held via Silver Star Developments Ltd., a wholly-owned
subsidiary of MiTAC International. Excludes 591 thousand shares (of which
381 thousand shares are directly held and 210 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
noncontrolling interest of 8.7% in MiTAC Incorporated, a privately-held
Taiwanese company, which in turn holds a noncontrolling interest of 13.7%
in Synnex Technology International. Neither MiTAC International nor
Mr. Miau is affiliated with any person(s), entity, or entities that hold a
majority interest in MiTAC Incorporated.
Synnex Technology International is a publicly-traded corporation in Taiwan that
currently provides distribution and fulfillment services to various markets in
Asia and Australia, and is also our potential competitor. Neither MiTAC
International nor Synnex Technology International is restricted from competing
with us.
Others
On August 31, 2010, we acquired a 33.3% noncontrolling interest in SB Pacific,
which was recorded as an equity-method investment. We were not the primary
beneficiary in SB Pacific. The controlling shareholder of SB Pacific is Robert
Huang, who is our founder and former Chairman. The balance of the investment as
of November 30, 2011 was $6.0 million. We regarded SB Pacific to be a variable
interest entity.
During fiscal year 2012, we sold our ownership interest in SB Pacific back to SB
Pacific. A gain of $1.3 million was recognized in other income (expense), net on
this transaction representing the difference between the sale proceeds and the
carrying value of the investment.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, issued an
accounting update that amends the presentation of comprehensive income in the
financial statements. The new guidance is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2011, with
early adoption permitted. The accounting update will be applicable to us
beginning in the first quarter of fiscal year 2013. We will update our
presentation of comprehensive income to comply with the updated disclosure
requirements in fiscal year 2013.
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During fiscal year 2012, the following accounting standards were adopted:
In May 2011, the FASB issued an accounting update that amends existing guidance
regarding fair value measurements and disclosure requirements. The amendments
are effective during interim and annual periods beginning after December 15,
2011 and are to be applied prospectively. The accounting update was applicable
to us beginning in the second quarter of fiscal year 2012. The application of
this accounting update did not have any material impact on our Consolidated
Financial Statement.
In September 2011, the FASB issued an accounting update that gives companies the
option to make a qualitative evaluation about the likelihood of goodwill
impairment. Companies will be required to perform the two-step impairment test
only if they conclude that the fair value of a reporting unit is more likely
than not, less than its carrying value. The accounting update is effective for
annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011, with early adoption permitted. We adopted the
accounting update and performed a qualitative evaluation for the annual goodwill
impairment assessment conducted for fiscal year 2012.
In September 2011, the FASB issued an accounting update that requires additional
qualitative and quantitative disclosures by employers that participate in
multi-employer pension plans. The amendments are effective for annual periods
for the fiscal years ending after December 15, 2011, with early adoption
permitted. We adopted the new disclosure requirements in fiscal year 2012. The
application of this accounting update did not have a material impact on our
financial statements.
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