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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 25-------------------------------------------------------------------------------- Table of Contents 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. 26-------------------------------------------------------------------------------- Table of Contents 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. 27-------------------------------------------------------------------------------- Table of Contents 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. 28-------------------------------------------------------------------------------- Table of Contents 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. 29-------------------------------------------------------------------------------- Table of Contents 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 30-------------------------------------------------------------------------------- Table of Contents 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 31-------------------------------------------------------------------------------- Table of Contents 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 % 32-------------------------------------------------------------------------------- Table of Contents 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 33-------------------------------------------------------------------------------- Table of Contents 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. 34-------------------------------------------------------------------------------- Table of Contents 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. 35-------------------------------------------------------------------------------- Table of Contents 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 36-------------------------------------------------------------------------------- Table of Contents 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 37-------------------------------------------------------------------------------- Table of Contents 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 38-------------------------------------------------------------------------------- Table of Contents 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. 39-------------------------------------------------------------------------------- Table of Contents 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. 40-------------------------------------------------------------------------------- Table of Contents 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. 41-------------------------------------------------------------------------------- Table of Contents 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. 42-------------------------------------------------------------------------------- Table of Contents |