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SYNNEX CORP - 10-Q - 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 the Consolidated Financial Statements and related Notes included elsewhere in this Report. When used in this Quarterly Report on Form 10-Q or the Report, the words "believes," "plans," "estimates," "anticipates," "expects," "intends," "allows," "can," "may," "designed," "will," and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about market trends, our business model and our services, our market strategy, including expansion of our product lines, our infrastructure, anticipated benefits, costs, and timing of our acquisitions, including our acquisition of the customer care business of International Business Machines Corporation, or IBM, our employee hiring, impact of MiTAC Holdings Corporation, or MiTAC Holdings, 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, including our Concentrix business, 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, adequacy of our disclosure controls and procedures, pricing pressures, competition, impact of our accounting policies, our tax rates, 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 II, Item 1A, "Risk Factors." These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Overview We are a Fortune 500 corporation and a leading business process services company, offering a comprehensive range of services to resellers, retailers, original equipment manufacturers, or OEMs, financial and insurance institutions and several other industry verticals worldwide. Our primary business process services are wholesale IT distribution and global business services. We operate in two segments: distribution services, hereinafter referred to as Technology Solutions, and global business services, hereinafter referred to as Concentrix. Our Technology Solutions segment distributes peripherals, IT systems including data center server and storage solutions, system components, software, networking equipment, CE, and complementary products. Within our Technology Solutions services segment, we also provide systems design and integration services. Our Concentrix segment offers a range of global business services around process optimization, customer engagement strategy and backoffice automation to customers in various industry verticals. On January 31, 2014, under the terms of a Master Asset Purchase Agreement, we completed the initial closing of our acquisition of the assets of the customer care business of International Business Machines Corporation, or IBM. The preliminary aggregate purchase price of $503.1 million is subject to certain post-closing adjustments. The initial closing represents countries which comprise approximately 80% of the preliminary valuation of the customer care business. The subsequent closings are expected to occur in the second fiscal quarter of 2014, but contractually no later than June 30, 2015, and are subject to customary closing conditions, including regulatory approvals. As of February 28, 2014, we have paid $69.0 million towards the subsequent closings of the acquisition and expect to pay an additional amount of $40.0 million in cash at the final closing. The acquisition has been integrated into our Concentrix segment. The acquisition in its entirety, including subsequent closures, is anticipated to add approximately 33,000 employees in six continents, providing business process outsourcing delivery capabilities in over 40 languages to approximately 170 customers in 36 countries. We combine our core strengths in distribution with our customer engagement 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 30,000 technology products (as measured by active SKUs) from more than 300 IT, CE and OEM suppliers to more than 20,000 resellers, system integrators, and retailers throughout the United States, Canada, Japan and Mexico. As of February 28, 2014, we had approximately 49,000 full-time, contractors and temporary employees worldwide. 28-------------------------------------------------------------------------------- Table of Contents From a geographic perspective, approximately 85% and 87%, of our total revenue was from North America for the three months ended February 28, 2014 and 2013, respectively. In our Technology Solutions segment, we purchase peripherals, IT systems, system components, software, networking equipment, including CE and complementary products from our primary suppliers such as Hewlett-Packard Company, or HP, Lenovo, AsusTek Computer Inc., Beats Electronics LLC 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 Technology Solutions, we also provide comprehensive IT solutions in key vertical markets such as government and healthcare and we provide specialized service offerings that increase efficiencies in the areas of print management, renewals, networking, logistics services and supply chain management. Additionally, within our Technology Solutions segment, we provide our customers with systems design and integration services for data center servers and storage solutions built specific to our customers' datacenter environments. In our Concentrix segment, our portfolio of services includes end to end process outsourcing to customers in various industry vertical markets delivered through omni-channels that include both voice and non-voice mediums. Our clients include corporations in the automotive, banking and financial services, healthcare and pharmaceutical, insurance, media and communications, retail and ecommerce, consumer electronics, technology and travel and telecommunications industries and the government and public sector. Critical Accounting Policies and Estimates There have been no material changes in our critical accounting policies and estimates for the three months ended February 28, 2014 from our disclosure in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013. For more information on all of our critical accounting policies, please see the discussion in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013 and Note 2 of the financial statements. Recent Acquisitions and Divestitures We continually seek to augment our product and service offerings through both internal expansion and strategic acquisitions of businesses and assets that complement and expand our global operational capabilities. We also divest businesses that we deem no longer strategic to our ongoing operations. Our historical acquisitions 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. Our prior acquisitions have brought us new reseller and retail customers, OEM suppliers, product lines and service offerings and technological capabilities. 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 fiscal year 2014 IBM customer care business acquisition On January 31, 2014, under the terms of a Master Asset Purchase Agreement, we completed the initial closing of our acquisition of the assets of the customer care business of IBM. The preliminary aggregate purchase price of $503.1 million is subject to certain post-closing adjustments. The initial closing represents countries which comprise approximately 80% of the preliminary valuation of the customer care business. The subsequent closings are expected to occur in the second fiscal quarter of 2014, but contractually, no later than June 30, 2015, and are subject to customary closing conditions, including regulatory approvals. As of February 28, 2014, we have paid $69.0 million (recorded in other current assets) towards the subsequent closings of the acquisition and expect to pay an additional amount of $40.0 million in cash at the final closing. We issued 1,266,357 shares of our common stock at a fair value of $71.1 million based on the closing price of our common stock on the date of acquisition. The estimated purchase price allocation consisted of $27.2 million of net tangible assets, $180.6 million of intangible assets and $186.3 million of goodwill. The purchase price allocation is preliminary, subject to finalization of valuation procedures. The acquisition has been integrated into the Concentrix segment and extends our service portfolio, delivery capabilities and geographic reach. 29-------------------------------------------------------------------------------- Table of Contents Acquisitions during fiscal year 2013 In April 2013, we acquired substantially all of the assets of Supercom Canada Limited or Supercom Canada, a distributor of IT and consumer electronics products and services in Canada. The purchase price was approximately CAD37.6 million, or US$36.7 million, in cash, including approximately CAD4.5 million, or US$4.3 million, in deferred payments, subject to certain post-closing conditions, payable within 18 months. Subsequent to the acquisition, we repaid debt and working capital lines in the amount of US$53.7 million. Based on the preliminary purchase price allocation, we recorded net tangible assets of US$26.9 million, goodwill of US$5.4 million and intangible assets of US$4.4 million in relation to this acquisition. The determination of the fair value of the assets and liabilities acquired is preliminary and subject to the finalization of more detailed analysis. The acquisition is integrated into the Technology Solutions segment and has expanded our existing product and service offerings in Canada. Results of Operations The following table sets forth, for the indicated periods, data as percentages of revenue: Statements of Operations Data: Three Months Ended February 28, 2014 February 28, 2013 Revenue 100.00 % 100.00 % Cost of revenue (93.17 ) (93.66 ) Gross profit 6.83 6.34 Selling, general and administrative expenses (4.78 ) (4.07 ) Income from operations before non-operating items, income taxes and noncontrolling interest 2.05 2.27 Interest expense and finance charges, net (0.15 ) (0.22 ) Other income, net 0.10 0.05 Income from operations before income taxes and noncontrolling interest 2.00 2.10 Provision for income taxes (0.73 ) (0.74 ) Net income 1.27 1.36 Net income attributable to noncontrolling interest 0.00 0.00 Net income attributable to SYNNEX Corporation 1.27 % 1.36 % Segment Information In the first quarter of fiscal year 2014, we realigned our business segments. Certain operations which were previously reported under the Concentrix segment and which primarily provided inter-segment support and IT services have now been aligned with and report into the Technology Solutions segment. The financial information presented herein reflects the impact of the preceding segment structure change for all periods presented. Three Months Ended February 28, 2014 and 2013 Revenue Three Months Ended February 28, 2014 February 28, 2013 Percent Change (in thousands) Revenue $ 3,026,984 $ 2,460,839 23.0 % Technology Solutions revenue 2,902,907 2,418,916 20.0 % Concentrix revenue 126,965 44,350 186.3 % Inter-segment elimination (2,888 ) (2,427 ) 19.0 % 30-------------------------------------------------------------------------------- Table of Contents In our Technology Solutions segment, we distribute in excess of 30,000 technology products (as measured by active SKUs) from more than 300 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 Concentrix segment relates to global business services process optimization, customer engagement strategy and back office automation. Inter-segment elimination represents services and transactions generated between our reportable segments that are eliminated on consolidation. Revenue in our Technology Solutions segment during the three months ended February 28, 2014 increased from the prior year period due to strong consumer and commercial sales growth in U.S. and Japan and the April 2013 acquisition of Supercom Canada. In comparison to the prior year period, first quarter 2014 revenue was negatively impacted by 3.8% for the translation impact of foreign exchange rates, primarily from the weakening of the Japanese yen and the Canadian dollar. On a constant currency basis, revenue increased by 23.8% from the prior year period. Sales in US and Japan benefitted from increased demand for consumer electronics, expansion of our vendor lines and growth in our systems design and integration services. Our revenue from notebook, tablet, networking and software products also increased compared to the prior year period. Consumer and commercial IT demand are expected to continue to be strong in the U.S. and Japan and to continue to improve in Canada. The increase in revenue in our Concentrix segment from the prior year period is primarily due to the January 31, 2014 acquisition of assets of the IBM customer care business. The acquisition added $74.5 million in revenue to our consolidated results. The revenue from our legacy Concentrix business also increased over the prior year period, benefiting from new customer contracts and increased volumes of business. The second phase of the acquisition is anticipated to close in the second quarter of fiscal year 2014. The business process outsourcing market is expected to continue to have overall moderate industry growth rates. Revenue from the acquired IBM customer care business is expected to be flat during the integration period and is then expected to grow toward the end of fiscal year 2014. Revenue growth will be offset by the expiration of certain contracts that were expected to not renew at the time of acquisition. Gross Profit Three Months Ended February 28, 2014 February 28, 2013 Percent Change (in thousands) Gross profit $ 206,646 $ 156,087 32.4 % Percentage of revenue 6.83 % 6.34 % Our gross profit is affected by a variety of factors, including our sources of revenue by segments, competition, average selling prices, mix of products and services we sell, our customers, product costs along with rebate and discount programs from our suppliers, reserves or settlement adjustments, freight costs, charges for inventory losses, acquisitions and divestitures of business units and fluctuations in revenues. The increase in our gross margins in the three months ended February 28, 2014 as compared to the prior year period is primarily due to the change in our segment business mix as a result of our acquisition of the IBM customer care business on January 31, 2014 and the increase in our revenue from our legacy Concentrix business. Offsetting this increase was the impact of lower reserve requirements, primarily related to vendor programs in our Technology Solutions segment, benefiting the prior year period. Selling, General and Administrative Expenses Three Months Ended February 28, 2014 February 28, 2013 Percent Change (in thousands) Selling, general and administrative expenses $ 144,696 $ 100,147 44.5 % Percentage of revenue 4.78 % 4.07 % 31-------------------------------------------------------------------------------- Table of Contents Our selling, general and administrative expenses primarily consists of personnel costs such as salaries, commissions, bonuses, share-based compensation, temporary personnel costs and deferred compensation expense or income. Selling, general and administrative expenses also include costs incurred in relation to the acquisition and integration of businesses, cost of facilities, utility expenses, professional fees, depreciation on our capital equipment, bad debt expense, amortization of our intangible assets, and marketing expenses, offset in part by reimbursements from our OEM suppliers. The increase in our selling, general and administrative expenses in the three months ended February 28, 2014 compared to the prior year period is primarily the result of our January 31, 2014 acquisition of the IBM customer care business in the Concentrix segment. The acquisition added approximately 34,000 employees and contractors to our personnel resources. We also incurred approximately $8.9 million in acquisition-related expenses and integration expenses in our Concentrix segment related to the IBM customer care business acquisition. The amortization of our intangible assets was approximately $3.7 million higher than the prior year period, which was primarily the result of the acquisition. In addition to the increased costs related to the IBM customer care business acquisition, personnel and general operating expenses were higher than the prior year period due to the acquisition of Supercom Canada in the Technology Solutions segment in April 2013, growth and increased business volumes in both business segments, which was partly offset by $3.6 million favorable impact of foreign currency translation. Income from Operations before Non-Operating Items, Income Taxes and Noncontrolling Interests Three Months Ended February 28, 2014 February 28, 2013 Percent Change (in thousands) Income from operations before non-operating items, income taxes and noncontrolling interest $ 61,950 $ 55,940 10.7 % Percentage of total revenue 2.05 % 2.27 % Technology Solutions income from operations before non-operating items, income taxes and noncontrolling interest 63,531 53,536 18.7 % Percentage of Technology Solutions revenue 2.19 % 2.21 % Concentrix income (loss) from operations before non-operating items, income taxes and noncontrolling interest (1,779 ) 2,424 (173.4 )% Percentage of Concentrix revenue (1.40 )% 5.47 % Inter-segment eliminations 198 (20 ) (1,090.0 )% The operating margin in our Technology Solutions segment during the three months ended February 28, 2014 was slightly lower than the prior year period primarily due to prior year results benefiting from lower reserve requirements. Excluding this factor, operating margins improved reflecting the growth in our business and efficient management of our operating expenses. The operating margin of our Concentrix segment in the three months ended February 28, 2014 was adversely affected by $8.9 million in acquisition and integration expenses incurred in relation to our acquisition of the IBM customer care business. In addition, the amortization expense of our intangible assets was approximately $3.7 million higher than the prior year period as a result of the acquisition. Excluding these factors, the operating margin of the Concentrix segment benefitted from the acquisition of the IBM customer care business. Interest Expense and Finance Charges, Net Three Months Ended February 28, 2014 February 28, 2013 Percent Change (in thousands) Interest expense and finance charges, net $ 4,498 $ 5,493 (18.1 )% Percentage of revenue 0.15 % 0.22 % 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, and the sale or pledge of accounts receivable through our securitization facilities, offset by income earned on our cash investments and financing income 32-------------------------------------------------------------------------------- Table of Contents from our multi-year contracts in our Mexico operation. Interest expense recorded in the three months ended February 28, 2013 also includes non-cash interest expense incurred on our convertible debt. The reduction in our interest expense during the three months ended February 28, 2014 as compared to the prior year period is primarily the result of the settlement of the convertible debt in August 2013. The prior period interest expense includes approximately $3.0 million in cash and non-cash interest expense components related to the convertible debt. This was partly offset by $2.0 million higher interest expense on our borrowing lines during the three months ended February 28, 2014. The increase in borrowing levels was primarily to fund the acquisition of the IBM customer care business on January 31, 2014 and to infuse working capital into the newly acquired business. Interest expense also included higher flooring fees as a result of our higher business volumes, offset in part by the benefit of foreign currency translation. Other Income, Net Three Months Ended February 28, 2014 February 28, 2013 Percent Change (in thousands) Other income, net $ 2,968 $ 1,261 135.4 % Percentage of revenue 0.10 % 0.05 % Amounts recorded as other income, net include foreign currency transaction gains and losses, investment gains and losses (including those in our deferred compensation plan) and other non-operating gains and losses. The increase in other income, net in the three months ended February 28, 2014 was due to $2.9 million received from a class-action legal settlement, offset in part by foreign exchange losses and lower earnings on our deferred compensation investments. Provision for Income Taxes Income taxes consist of our current and deferred tax expense resulting from our income earned in domestic and foreign jurisdictions. Our effective tax rate for the three months ended February 28, 2014 was 36.3%, compared to 35.4% for the three months ended February 28, 2013. The increase in our effective tax rate, compared to the prior year period, was due to increased profitability of our operations in higher tax jurisdictions. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and earnings being higher than anticipated in countries where we have higher statutory rates, by changes in the valuations of our deferred tax assets or liabilities, or by changes or interpretations in tax laws, regulations or accounting principles. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests represents the share of net income attributable to others, which is recognized for the portion of subsidiaries' equity not owned by us. The change in the net income loss attributable to noncontrolling interests in the three months ended February 28, 2014 as compared to the prior year period was not material to our results of operations. 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. 33-------------------------------------------------------------------------------- Table of Contents We have financed our growth and cash needs to date primarily through working capital financing facilities, convertible debt, bank credit lines and cash generated from operations. To increase our market share and better serve our customers, we may further expand our operations through investments or acquisitions. We expect that such expansion would require an initial investment in personnel, facilities and operations. These investments or acquisitions would likely be funded primarily by additional borrowings or issuing common stock. Net cash used in operating activities was $35.0 million for the three months ended February 28, 2014, primarily consisting of an increase in inventories of $136.9 million and a decrease in accounts payable of $30.7 million, partly offset by our net income of $38.5 million, adjustments for non-cash items of $16.1 million, a $52.0 million decrease in accounts receivable and a $39.8 million increase in accrued liabilities. The increase in inventories is primarily due to the timing of purchases for the fulfillment of customer orders. The decrease in accounts receivables is the result of collections of prior quarter sales partly offset by high sales volumes in the first quarter of fiscal year 2014 and the receivables from the newly acquired IBM customer care business. The adjustments for non-cash items primarily consist of depreciation and amortization expense. Net cash provided by operating activities was $40.9 million for the three months ended February 28, 2013, primarily resulting from a $176.3 million reduction in accounts receivable, $33.4 million net income and non-cash adjustments of $11.1 million offset in part by $159.3 million decrease in accounts payables and accrued liabilities and a $9.0 million increase in inventory. The changes in our accounts receivables and our accounts payables are due to the timing of collections and payments following the seasonally high fourth quarter of fiscal year 2012. The adjustments for non-cash items primarily consist of $6.2 million of depreciation and amortization expense. Net cash used in investing activities for the three months ended February 28, 2014 was $388.7 million, which was primarily comprised of a cash payment of $321.0 million paid at the initial closing for the acquisition of IBM customer care business and $69.0 million toward subsequent closings. Our capital expenditures during the period were $4.3 million to support our growth and higher business volumes. These cash outflows were offset in part by a $4.1 million change in restricted cash due to the timing of our lockbox collections under our borrowing arrangements. Net cash provided by investing activities for the three months ended February 28, 2013 was $0.9 million, which included $4.2 million received from the fiscal year 2012 sale of our equity-method investee SB Pacific Limited and $0.8 million proceeds from sale of our deferred compensation investments, net of purchases, offset in part by $3.0 million investment in property and equipment and $0.9 million paid for prior acquisitions in our Concentrix segment. Net cash provided by financing activities for the three months ended February 28, 2014 was $418.6 million, consisting primarily of $443.7 million of net receipts on our securitization arrangement, revolving lines of credit and other credit facility arrangements. The increase in borrowings was primarily to fund the acquisition and working capital requirements of the IBM customer care business. Net cash provided by financing activities for the three months ended February 28, 2013 was $24.2 million, consisting primarily of $34.1 million net receipts on our revolving lines of credit and term loans. We paid $11.4 million for fiscal year 2012 purchase of shares of our subsidiary Infotec Japan from the noncontrolling interest. The proceeds from the issue of common stock upon the exercise of employee stock awards were $1.2 million and $0.1 million was used for repurchase of treasury stock. Capital Resources Our cash and cash equivalents totaled $148.4 million and $151.6 million as of February 28, 2014 and November 30, 2013, respectively. Of our total cash and cash equivalents, the cash held by our foreign subsidiaries was $138.0 million and $142.5 million as of February 28, 2014 and November 30, 2013, 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. 34-------------------------------------------------------------------------------- Table of Contents Based on our financial strength and performance, existing sources of liquidity, available cash resources and funds available under our various borrowing arrangements, we believe we will have sufficient resources to meet our present and future working capital requirements for the next twelve months. Our accounts receivable securitization program and our U.S credit facility agreement 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. On-Balance Sheet Arrangements We primarily finance our United States operations with an accounts receivable securitization program, or the U.S. Arrangement. Until September 2013, our subsidiary, which is the borrower under the U.S. Arrangement, could borrow up to a maximum of $400.0 million in U.S. trade accounts receivable, or the U.S. Receivables. In September 2013, we amended the U.S Arrangement to increase the commitment of the lenders to $500.0 million. In addition, the amendment also included an accordion feature to allow requests for an increase in the lenders' commitment by an additional $100.0 million to a maximum commitment of $600.0 million. The maturity date of the U.S. Arrangement is October 2015. The effective borrowing cost under the U.S. Arrangement is a blended rate that includes prevailing dealer commercial paper rates and the daily London Interbank Offered Rate, or LIBOR, rate, plus a program fee of 0.425% per annum based on the used portion of the commitment, and a facility fee of 0.425% per annum payable on the aggregate commitment of the lenders. As of February 28, 2014 and November 30, 2013, the outstanding balances under the U.S. arrangement was $380.0 million and $144.0 million, respectively. Under the terms of the U.S. Arrangement, we sell, on a revolving basis, 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 acquired by our subsidiary as security. Any borrowings under the U.S. Arrangement are recorded as debt on our Consolidated Balance Sheets. As is customary in trade accounts receivable securitization arrangements, a credit rating agency's downgrade of the third party issuer of commercial paper or of a back-up liquidity provider (which provides a source of funding if the commercial paper market cannot be accessed) could result in an increase in our cost of borrowing or loss of our financing capacity under these programs if the commercial paper issuer or liquidity back-up provider is not replaced, or if the lender whose commercial paper issuer or liquidity back-up provider is not replaced does not elect to offer us an alternate rate. Loss of such financing capacity could have a material adverse effect on our financial condition and results of operations. In November 2013, we entered into a senior secured credit agreement, or the U.S. Credit Agreement, which is comprised of $275.0 million in a revolving credit facility and a term loan in an aggregate principal amount not to exceed $225.0 million. We may request incremental commitments to increase the principal amount of revolving loans or term loans available under the U.S. Credit Agreement up to $125.0 million. The U.S. Credit Agreement matures in November 2018. Interest on borrowings under the U.S. Credit Agreement can be based on the LIBOR, or a base rate, at our option. Loans borrowed under the Credit Agreement bear interest, in the case of LIBOR loans, at a per annum rate equal to the applicable LIBOR, plus a margin which may range from 1.75% to 2.25%, based on our consolidated leverage ratio, as determined in accordance with the U.S. Credit Agreement. Loans borrowed under the Credit Agreement that are not LIBOR loans, and are instead base rate loans, bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds Rate plus a margin of 1/2 of 1.0%, (B) LIBOR plus 1.0% per annum, and (C) the rate of interest announced, from time to time, by the agent, Bank of America, N.A., as its "prime rate," plus (ii) a margin which may range from 0.75% to 1.25%, based on our consolidated leverage ratio, as determined in accordance with the U.S. Credit Agreement. When drawn, the outstanding principal amount of the term loan will be repayable in quarterly installments, in an amount equal to (a) for each of the first eight calendar quarters ending after the term loan is made, 1.25% of the initial principal amount of the term loan, (b) for each calendar quarter ending thereafter, 2.50% of the initial principal amount of the term loan and (c) on the November 2018 maturity date of the term loan, the outstanding principal amount of the term loan. Our obligations under the U.S. Credit Agreement are secured by substantially all of the parent company and its United States domestic subsidiaries' assets and are guaranteed by certain of our United States domestic subsidiaries. There was a balance of $225.0 million outstanding under the term loan component of the U.S. Credit Agreement as of February 28, 2014, and there was no borrowing outstanding as of November 30, 2013. In addition, there was $1.5 million outstanding as of February 28, 2014 in standby letters of credit under the U.S Credit Agreement. SYNNEX Canada Limited, or SYNNEX Canada, has a revolving line of credit arrangement with a financial institution, or the Canadian Revolving Arrangement, which has a maximum commitment of CAD100.0 million and includes an accordion feature to increase the maximum commitment by an additional CAD25.0 million to CAD125.0 million, at SYNNEX Canada's 35-------------------------------------------------------------------------------- Table of Contents request. The Canadian Revolving Arrangement also provides a sublimit of $5.0 million for the issuance of standby letters of credit. There were no letters of credit outstanding as of February 28, 2014 and November 30, 2013. SYNNEX Canada has granted a security interest in substantially all of its assets in favor of the lender under the Canadian Revolving Arrangement. In addition, we pledged our stock in SYNNEX Canada as collateral for the Canadian Revolving Arrangement. The interest rate applicable under the Canadian Revolving Arrangement is equal to (i) the Canadian base rate plus a margin of 0.75% for a Base Rate Loan in Canadian Dollars, (ii) the US base rate plus a margin of 0.75% for a Base Rate Loan in U.S. Dollars, and (iii) the Bankers' Acceptance rate, or BA, plus a margin of 2.00% for a BA Rate Loan. The Canadian base rate means the greater of (a) the prime rate determined by a major Canadian financial institution and (b) the one month Canadian Dealer Offered Rate, or CDOR, (the average rate applicable to Canadian dollar bankers' acceptances for the applicable period) plus 1.50%. The US base rate means the greater of (a) a reference rate determined by a major Canadian financial institution for US dollar loans made to Canadian borrowers and (b) the US federal funds rate plus 0.50%. A fee of 0.25% per annum is payable with respect to the unused portion of the commitment. There was no borrowing outstanding under our Canadian Revolving Arrangement as of both February 28, 2014 and November 30, 2013. 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 balances outstanding on the term loan as of February 28, 2014 and November 30, 2013 were $6.9 million and $7.4 million, respectively. Infotec Japan has a credit agreement with a group of financial institutions for a maximum commitment of JPY14.0 billion. The credit agreement is comprised of a JPY6.0 billion long-term loan and a JPY8.0 billion short-term revolving credit facility. The interest rate for the long-term and short-term loans is based on the Tokyo Interbank Offered Rate, or TIBOR, plus a margin that was 1.90% per annum; however, in December 2013, we amended the credit agreement to lower this margin to 1.40% per annum. The unused line fee on the revolving credit facility was 0.5% per annum, however, in December 2013, we amended this credit agreement to lower this fee to 0.1% per annum. As of February 28, 2014 and November 30, 2013, the balances outstanding under the credit facility were $120.8 million and $136.7 million, respectively. The long-term loan can be repaid at any time prior to expiration date without penalty. We have issued a guarantee to cover up to 110% of the outstanding principal amount obligations of Infotec Japan to the lenders. This credit facility expires in December 2016. In September 2013, Infotec Japan established a short-term revolving credit facility of JPY2.0 billion with a financial institution. The interest rate for the credit facility is based on TIBOR plus a margin of 0.50% per annum. In addition, there is a facility fee of 0.425% per annum. The credit facility can be renewed annually. As of February 28, 2014 and November 30, 2013, the balances outstanding under this credit facility were $19.7 million and $19.5 million, respectively. Infotec Japan has a short-term revolving credit facility of JPY1.0 billion with a financial institution. The credit facility can be renewed annually and bears an interest rate that is based on TIBOR plus a margin of 1.20% per annum. As of both February 28, 2014 and November 30, 2013, the balances outstanding under these lines were $9.8 million. As of February 28, 2014 and November 30, 2013, we also had $0.4 million and $0.5 million, respectively, outstanding in capital lease obligations primarily pertaining to Infotec Japan and under arrangements with various banks and financial institutions for the sale and financing of approved accounts receivable and notes receivable with recourse provisions to Infotec Japan. Covenants Compliance In relation to the U.S. Arrangement, the U.S. Credit Agreement, the Canadian Revolving Arrangement and the Infotec Japan credit facility, 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 leverage and fixed charge coverage ratios. They also limit our ability to incur additional debt, make 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. As of February 28, 2014, we were in compliance with all material covenants for the above arrangements. 36-------------------------------------------------------------------------------- Table of Contents Convertible Debt In August 2013, we settled our Convertible Senior Notes with an aggregate principal amount of $143.8 million which were issued in May 2008 in a private placement. The Convertible Senior Notes bore a cash coupon interest rate of 4.0% per annum and the conversion rate was 33.9945 shares of common stock per $1,000 principal amount, equivalent to an initial conversion price of $29.42 per share of common stock. The Convertible Senior Notes were called in the second quarter of fiscal year 2013. No interest was accrued subsequent to May 2013 in accordance with the Indenture. The final settlement amount of $218.9 million was paid in cash and comprised of $143.8 million in principal payments and $75.1 million in payment of conversion premium. The conversion premium, which represents the difference between the total settlement amount less the principal, was recorded as a reduction of additional paid-in capital. The final settlement amount was calculated in accordance with the Indenture based on the volume weighted-average trading price of our common stock over the 60 consecutive trading-day period beginning on and including the third trading day after the related conversion. Based on a cash coupon interest rate of 4.0%, we recorded contractual interest expense of $1.6 million during the three months ended February 28, 2013. Based on an effective rate of 8.0%, we recorded non-cash interest expenses of $1.4 million during the three months ended February 28, 2013. Guarantees We issued guarantees to certain vendors, customers, lenders of our subsidiaries for trade credit lines and loans, and to a certain customer's lessor. In addition, we, as the ultimate parent, guaranteed the obligations of SYNNEX Investment Holdings Corporation up to $35.0 million in connection with the sale of China Civilink (Cayman), which operated in China as HiChina Web Solutions, to Alibaba.com Limited. The total guarantees issued by us as of February 28, 2014 and November 30, 2013 were $366.3 million and $364.7 million, respectively. We are obligated under these guarantees to pay amounts due should our subsidiaries or customer not pay valid amounts owed to their vendors or lenders or not comply with subsidiary sales agreements. Related Party Transactions We had a business relationship with MiTAC International Corporation, or MiTAC International, a publicly-traded company in Taiwan, which began in 1992 when MiTAC International became our primary investor through its affiliates. In September 2013, MiTAC Holdings Corporation, or MiTAC Holdings, was established through a stock swap from MiTAC International and became a publicly traded company on the Taiwan Stock Exchange. MiTAC International is now a wholly-owned subsidiary of MiTAC Holdings. As of February 28, 2014 and 2013, MiTAC Holdings and its affiliates beneficially owned approximately 25% and 26%, respectively, of our common stock. Matthew Miau, our Chairman Emeritus of the Board of Directors and director, is the Chairman of MiTAC Holdings' and a director or officer of MiTAC Holdings' affiliates. The shares owned by MiTAC Holdings are held by the following entities: As of February 28, 2014 (in thousands) MiTAC Holdings(1) 5,552 Synnex Technology International Corp.(2) 4,283 Total 9,835 _____________________________________ (1) Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC Holdings. Excludes 442 thousand shares directly 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 Holdings owns a noncontrolling interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a noncontrolling interest of 13.6% in Synnex Technology International. MiTAC Holdings generally has significant influence over us and over the outcome of all matters submitted to stockholders for consideration, including any merger or acquisition of ours. Among other things, this could have the effect of delaying, deterring or preventing a change of control over us. 37-------------------------------------------------------------------------------- Table of Contents We purchased inventories from MiTAC Holdings and their affiliates totaling $18.9 million and $5.3 million during the three months ended February 28, 2014 and 2013, respectively. Our sales to MiTAC Holdings, and its affiliates totaled $0.9 million and $1.4 million during the three months ended February 28, 2014 and 2013, respectively. In addition, we received reimbursements of rent and overhead costs for facilities used by MiTAC Holdings amounting to $16.0 thousand and $0.9 million during the three months ended February 28, 2014 and 2013, respectively. Our business relationship with MiTAC Holdings and its affiliates has been informal and is not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments. We negotiated manufacturing, pricing and other material terms on a case-by-case basis with MiTAC Holdings and our design and integration customers for a given project. While MiTAC Holdings is a related party and a controlling stockholder, we believe that the significant terms under our arrangements with MiTAC Holdings, 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 Holdings or its related parties be approved by its Audit Committee, which is composed solely of independent directors. In addition, Matthew Miau's compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors. Synnex Technology International is a publicly-traded corporation in Taiwan that currently provides distribution and fulfillment services to various markets in Asia and Australia, and is also our potential competitor. Neither MiTAC Holdings nor Synnex Technology International is restricted from competing with us. Recent Accounting Pronouncements For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements see Note 2 to the Consolidated Financial Statements. |