SYNNEX Corporation
SYNNEX CORP (Form: 10-Q, Received: 07/09/2010 14:55:51)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended May 31, 2010

OR

 

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

For the transition period from              to             

Commission File Number: 001-31892

 

 

SYNNEX CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-2703333

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

44201 Nobel Drive

Fremont, California

  94538
(Address of principal executive offices)   (Zip Code)

(510) 656-3333

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

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

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

 

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

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

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

 

Class

 

Outstanding at July 1, 2010

Common Stock, $0.001 par value   35,600,512

 

 

 


Table of Contents

SYNNEX CORPORATION

FORM 10-Q

INDEX

 

          Page

PART I.

  

FINANCIAL INFORMATION

   3

Item 1.

  

Financial Statements

   3
  

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

   3
  

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

   4
  

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

   5
  

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

   6
  

Notes to Consolidated Financial Statements (unaudited)

   7

Item 2.

  

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

   32

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   48

Item 4.

  

Controls and Procedures

   48

PART II.

  

OTHER INFORMATION

   49

Item 1A.

  

Risk Factors

   49

Item 6.

  

Exhibits

   61

Signatures

   62

Exhibit Index

   63

 

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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

SYNNEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except for par values)

(unaudited)

             May 31,        
2010
   November 30,
2009

ASSETS

       

 

(As Adjusted -

See Note 2)

Current assets:

     

Cash and cash equivalents

   $ 58,605    $ 37,816

Short-term investments

     16,851      21,219

Accounts receivable, net

     732,967      820,633

Receivable from vendors, net

     120,636      99,610

Receivable from affiliates

     711      5,144

Inventories

     791,897      713,813

Current deferred tax assets

     27,836      27,787

Current deferred assets

     13,298      13,830

Other current assets

     66,760      26,144

Assets held for sale

     —        74,185
             

Total current assets

     1,829,561      1,840,181

Property and equipment, net

     93,796      94,725

Goodwill

     112,073      107,563

Intangible assets, net

     19,126      18,066

Deferred tax assets

     302      2,849

Long-term deferred assets

     13,876      10,636

Other assets

     35,713      25,890
             

Total assets

   $ 2,104,447    $ 2,099,910
             

LIABILITIES AND EQUITY

     

Current liabilities:

     

Borrowings under securitization, term loans and lines of credit

   $ 150,788    $ 150,740

Accounts payable

     660,662      687,432

Payable to affiliates

     58,663      82,728

Accrued liabilities

     103,495      117,599

Current deferred liabilities

     17,145      18,798

Income taxes payable

     296      2,431

Liabilities related to assets held for sale

     —        18,148
             

Total current liabilities

     991,049      1,077,876

Long-term borrowings

     9,214      9,410

Long-term liabilities

     49,130      29,285

Long-term deferred liabilities

     7,896      9,742

Convertible debt

     128,992      126,785

Deferred tax liabilities

     5,546      8,077
             

Total liabilities

     1,191,827      1,261,175
             

Commitments and contingencies (Note 15)

     —        —  

SYNNEX Corporation’s stockholders’ equity:

     

Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued or outstanding

     —        —  

Common stock, $0.001 par value, 100,000 shares authorized, 35,061 and 33,602 shares issued and outstanding

     35      34

Additional paid-in capital

     273,914      249,892

Accumulated other comprehensive income

     24,965      27,151

Retained earnings

     610,748      551,245
             

Total SYNNEX Corporation stockholders’ equity

     909,662      828,322

Non-controlling interest

     2,958      10,413
             

Total equity

     912,620      838,735
             

Total liabilities and equity

   $ 2,104,447    $ 2,099,910
             

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

 

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SYNNEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     May 31, 2010     May 31, 2009     May 31, 2010     May 31, 2009  
          

(As Adjusted -

See Note 2)

         

(As Adjusted -

See Note 2)

 

Revenue

   $ 2,032,812      $ 1,802,705      $ 3,968,850      $ 3,523,075   

Cost of revenue

     (1,916,145     (1,701,765     (3,743,022     (3,321,288
                                

Gross profit

     116,667        100,940        225,828        201,787   

Selling, general and administrative expenses

     (73,233     (70,947     (143,441     (138,007
                                

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

     43,434        29,993        82,387        63,780   

Interest expense and finance charges, net

     (3,736     (4,178     (7,545     (9,277

Other income (expense), net

     (93     1,417        1,070        1,029   
                                

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

     39,605        27,232        75,912        55,532   

Provision for income taxes

     (14,651     (9,944     (27,718     (20,266
                                

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

     24,954        17,288        48,194        35,266   

Income from discontinued operations, net of tax

     —          1,586        75        2,660   

Gain on sale of discontinued operations, net of tax

     —          —          11,351        —     
                                

Net income

     24,954        18,874        59,620        37,926   

Net income attributable to non-controlling interest

     (110     (241     (117     (402
                                

Net income attributable to SYNNEX Corporation

   $ 24,844      $ 18,633      $ 59,503      $ 37,524   
                                

Amounts attributable to SYNNEX Corporation:

        

Income from continuing operations, net of tax

   $ 24,844      $ 17,402      $ 48,093      $ 35,422   

Discontinued operations:

        

Income from discontinued operations, net of tax

     —          1,231        59        2,102   

Gain on sale of discontinued operations, net of tax

     —          —          11,351        —     
                                

Net income attributable to SYNNEX Corporation:

   $ 24,844      $ 18,633      $ 59,503      $ 37,524   
                                

Earnings per share - basic:

        

Income from continuing operations

   $ 0.72      $ 0.53      $ 1.41      $ 1.10   

Income from discontinued operations

     —          0.04        0.33        0.06   
                                

Net income per common share - basic

   $ 0.72      $ 0.57      $ 1.74      $ 1.16   
                                

Earnings per share - diluted:

        

Income from continuing operations

   $ 0.70      $ 0.51      $ 1.36      $ 1.07   

Income from discontinued operations

     —          0.04        0.32        0.06   
                                

Net income per common share - diluted

   $ 0.70      $ 0.55      $ 1.68      $ 1.13   
                                

Weighted-average common shares outstanding - basic

     34,624        32,475        34,256        32,296   
                                

Weighted-average common shares outstanding - diluted

     35,703        33,731        35,483        33,249   
                                

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

 

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SYNNEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

     Six Months Ended  
     May 31, 2010     May 31, 2009  
           (As Adjusted -
See Note 2)
 

Cash flows from operating activities:

    

Net income

   $ 59,620      $ 37,926   

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

    

Depreciation expense

     5,527        5,934   

Amortization of intangible assets

     2,580        4,073   

Accretion of convertible notes discount

     2,207        1,983   

Share-based compensation

     3,666        4,154   

Provision for doubtful accounts

     4,924        8,171   

Inventory reserve

     2,384        5,694   

Tax benefits from employee stock plans

     10,496        3,305   

Excess tax benefit from share-based compensation

     (8,798     (2,718

Realized and unrealized gain on investments

     (179     (1,444

Loss (gain) on disposal of assets and businesses

     (12,146     71   

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

    

Accounts receivable

     94,199        113,551   

Receivables from vendors

     (18,080     8,776   

Receivables from affiliates

     4,433        (2,093

Inventories

     (53,507     52,969   

Other assets

     (31,494     20,803   

Payable to affiliates

     (24,065     29,027   

Accounts payable

     (46,697     (56,548

Accrued liabilities

     (5,511     (8,594

Deferred liabilities

     (3,017     (12,107
                

Net cash provided by (used in) operating activities

     (13,458     212,933   
                

Cash flows from investing activities:

    

Purchase of trading investments

     (4,733     (4,517

Proceeds from sale of trading investments

     6,947        4,201   

Investment in held-to-maturity term deposits

     (4,864     (7,929

Proceeds from redemption of held-to-maturity term deposits

     10,017        5,047   

Acquisition of businesses, net of cash acquired

     (37,248     (11,042

Purchase of property and equipment

     (4,757     (4,843

Proceeds from sale of businesses

     30,460        —     

Loan advances to third parties

     (2,844     —     

Increase in restricted cash

     (10,565     (20,141
                

Net cash used in investing activities

     (17,587     (39,224
                

Cash flows from financing activities:

    

Proceeds from revolving line of credit and securitization

     1,829,441        1,214,517   

Payment of revolving line of credit and securitization

     (1,829,819     (1,374,713

Payment of bank loans

     (293     (10,006

Excess tax benefit from share-based compensation

     8,798        2,718   

Book overdraft

     10,269        4,149   

Proceeds from issuance of common stock

     12,372        3,585   
                

Net cash provided by (used in) financing activities

     30,768        (159,750
                

Effect of exchange rate changes on cash and cash equivalents

     (524     (2,935
                

Net increase (decrease) in cash and cash equivalents

     (801     11,024   

Cash and cash equivalents at beginning of period

     59,406        56,026   
                

Cash and cash equivalents at end of period

   $ 58,605      $ 67,050   
                

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

 

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SYNNEX CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Three Months Ended     Six Months Ended  
      May 31, 2010      May 31, 2009      May 31, 2010     May 31, 2009  
           (As Adjusted -
See Note 2)
         (As Adjusted -
See Note 2)
 

Net income

   $ 24,954      $ 18,874      $ 59,620    $ 37,926   

Other comprehensive income:

         

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

     (1     (18     8      (18

Foreign currency translation adjustment

     580        18,692        1,087      13,666   
                               

Total other comprehensive income

     579        18,674        1,095      13,648   
                               

Comprehensive income :

     25,533        37,548        60,715      51,574   

Comprehensive income attributable to non-controlling interest

     (37     (241     37      (402
                               

Comprehensive income attributable to SYNNEX Corporation

   $ 25,496      $ 37,307      $ 60,752    $ 51,172   
                               

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

 

     Three Months Ended
May 31, 2010
    Three Months Ended
May 31, 2009
 
     Attributable to
SYNNEX
Corporation
    Attributable to
non-controlling
interests
    Total     Attributable to
SYNNEX
Corporation
    Attributable to
non-controlling
interests
   Total  

Net income

   $ 24,844      $ 110      $ 24,954      $ 18,633      $ 241    $ 18,874   

Other comprehensive income:

             

Unrealized loss on available-for-sale securities

     (1     —          (1     (18     —        (18

Foreign currency translation adjustment

     653        (73     580        18,692        —        18,692   
                                               

Total other comprehensive income

     652        (73     579        18,674        —        18,674   
                                               

Total comprehensive income :

   $ 25,496      $ 37      $ 25,533      $ 37,307      $ 241    $ 37,548   
                                               
     Six Months Ended
May 31, 2010
    Six Months Ended
May 31, 2009
 
     Attributable to
SYNNEX
Corporation
    Attributable to
non-controlling
interests
            Total             Attributable to
SYNNEX
Corporation
    Attributable to
non-controlling
interests
           Total          

Net income

   $ 59,503      $ 117      $ 59,620      $ 37,524      $ 402    $ 37,926   

Other comprehensive income:

             

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

     8        —          8        (18     —        (18

Foreign currency translation adjustment

     1,241        (154     1,087        13,666        —        13,666   
                                               

Total other comprehensive income

     1,249        (154     1,095        13,648        —        13,648   
                                               

Total comprehensive income :

   $ 60,752      $ (37   $ 60,715      $ 51,172      $ 402    $ 51,574   
                                               

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

 

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Table of Contents

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION:

SYNNEX Corporation (together with its subsidiaries, herein referred to as “SYNNEX” or the “Company”) is a business process services company offering a comprehensive range of services to original equipment manufacturers (“OEMs”), software publishers, reseller customers and retail customers worldwide. SYNNEX’s service offering includes product distribution, logistics services, global business services (“GBS”) and contract assembly. SYNNEX is headquartered in Fremont, California and has operations in the United States, Canada, China, Mexico, Japan, the Philippines and the United Kingdom (“UK”).

The accompanying interim unaudited consolidated financial statements as of May 31, 2010 and for the three and six month periods ended May 31, 2010 and 2009 have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The amounts as of November 30, 2009 have been derived from the Company’s annual audited financial statements except as adjusted for the adoption of new accounting standards as explained in Note 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended November 30, 2009, included in the Company’s Annual Report on Form 10-K for the fiscal year then ended.

The results of operations for the three and six months ended May 31, 2010 are not necessarily indicative of the results that may be expected for the year ending November 30, 2010, or any future period and the Company makes no representations related thereto.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2009. There have been no material changes to these accounting policies, except as described below. For a discussion of the significant accounting policies, please see the discussion in the Annual Report on Form 10-K for the fiscal year ended November 30, 2009.

Restricted cash

As of May 31, 2010, the Company had restricted cash in the amount of $42,325, of which $18,690 is reported in “Other assets” for future payments to its contractors relating to the long-term projects at the Company’s Mexico operation. The Company receives the payments from the Mexican government for the equipment and services on a monthly basis. A portion of the payments to the contractors are withheld per agreement, which will be paid upon completion of the projects. The remaining amount of $23,635 is reported in “Other current assets” and relates to temporary restrictions caused by the timing of lockbox collections under the Company’s borrowing arrangements.

As of November 30, 2009, the Company had restricted cash in the amount of $31,319 of which $14,304 is reported in “Other assets” for future payments to its vendors relating to the long-term projects at the Company’s Mexico operation. The remaining amount of $17,015 is reported in “Other current assets” and relates to temporary restrictions caused by the timing of lockbox collections under the Company’s borrowing arrangements.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of accounts receivable, cash and cash equivalents. The Company’s cash and cash equivalents are maintained with high quality institutions, the compositions and maturities of which are regularly monitored by management. Through May 31, 2010, the Company had not experienced any losses on such deposits.

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

Accounts receivable include amounts due from customers primarily in the technology industry. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. The Company also maintains allowances for potential credit losses. In estimating the required allowances, the Company takes into consideration the overall quality and aging of the receivable portfolio, the existence of a limited amount of credit insurance and specifically identified customer risks. Through May 31, 2010, such losses have been within management’s expectations.

In the three and six months ended May 31, 2010, one customer accounted for approximately 12% and 11%, respectively, of the Company’s total revenue. In the three and six months ended May 31, 2009, no single customer exceeded 10% of the Company’s total revenue. At May 31, 2010, no customer accounted for more than 10% of the consolidated accounts receivable balance. At November 30, 2009, one customer accounted for approximately 11% of the total consolidated accounts receivable balance. Products purchased from the Company’s largest OEM supplier, Hewlett-Packard Company (“HP”), accounted for approximately 38% of the total revenue for both the three and six months ended May 31, 2010 and approximately 36% and 35% of the total revenue for the three and six months ended May 31, 2009, respectively.

Revenue recognition

The Company recognizes revenue generally as products are shipped, if a purchase order exists, the sale price is fixed or determinable, collection of resulting accounts receivable is reasonably assured, risk of loss and title have transferred and product returns are reasonably estimable. Shipping terms are typically F.O.B. the Company’s warehouse. Provisions for sales returns are estimated based on historical data and are recorded concurrently with the recognition of revenue. These provisions are reviewed and adjusted periodically by the Company. Revenue is reduced for early payment discounts and volume incentive rebates offered to customers.

The Company recognizes revenue on certain service contracts, post-contract software support services, and extended warranty contracts, where it is not a primary obligor, on a net basis beginning in the first fiscal quarter of 2010. Approximately 4% of revenue was recorded on a net basis for both the three and six months ended May 31, 2010.

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

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

The Company provides GBS services to its customers under contracts that typically consist of a master services agreement or statement of work, which contains the terms and conditions of each program and service it offers. These agreements are usually short-term in nature and subject to early termination by the customers or the Company for any reason, typically with 30 to 90 days notice. Typically the contracts are time-based or transactions based. Revenue is generally recognized over the term of the contract if the service has already been rendered, the sales price is fixed or determinable and collection of the resulting accounts receivable is reasonably assured.

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

Net income per common share

Net income per common share-basic is computed by dividing the net income for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted weighted-average shares include the dilutive effect of stock options, restricted stock and restricted stock units. The calculation of net income per common share is presented in Note 10.

ASC 260, “Earnings per Share,” requires that employee stock options, non-vested restricted stock and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

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

Reclassifications

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

Recent accounting pronouncements

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

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

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

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

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

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

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

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

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

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

 

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

Consolidated Statement of Operations:

     

Interest expense and finance charges, net

  $ (3,180   $ (4,178   $ 998   

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

    28,230        27,232        (998

Provision for income taxes

    (10,346     (9,944     402   

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

    17,884        17,288        (596

Net income attributable to SYNNEX Corporation

    19,229        18,633        (596

Earnings per share

     
                       

Net income per common share - basic

  $ 0.59      $ 0.57      $ (0.02
                       

Net income per common share - diluted

  $ 0.57      $ 0.55      $ (0.02
                       
    Six months ended May 31, 2009  
    As previously reported     As adjusted     Effect of Change
increase / (decrease)
 

Consolidated Statement of Operations:

     

Interest expense and finance charges, net

  $ (7,294   $ (9,277   $ 1,983   

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

    57,515        55,532        (1,983

Provision for income taxes

    (21,064     (20,266     798   

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

    36,451        35,266        (1,185

Net income attributable to SYNNEX Corporation

    38,709        37,524        (1,185

Earnings per share

     
                       

Net income per common share - basic

  $ 1.20      $ 1.16      $ (0.04
                       

Net income per common share - diluted

  $ 1.16      $ 1.13      $ (0.03
                       
    As of November 30, 2009  
    As previously reported     As adjusted     Effect of Change
increase / (decrease)
 

Consolidated Balance Sheets

     

Other current assets

  $ 26,522      $ 26,144      $ (378

Convertible debt

    143,750        126,785        (16,965

Deferred tax liabilities

    1,442        8,077        6,635   

Additional paid-in capital

    236,213        249,892        13,679   

Retained earnings

    554,972        551,245        (3,727

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

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

 

     Three months ended May 31, 2010  
     Amount as currently
reported
   Amount as would
 have been reported 
prior to adoption of
new standard
    Effect of adoption -
increase / (decrease)
on current period
 

Consolidated Statement of Operations:

       

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

   $ 39,605    $ 40,688      $ (1,083

Net income attributable to SYNNEX Corporation

     24,844      25,492        (648

Earnings per share

       
                       

Net income per common share - basic

   $ 0.72    $ 0.74      $ (0.02
                       

Net income per common share - diluted

   $ 0.70    $ 0.71      $ (0.01
                       
     Six months ended May 31, 2010  
     Amount as currently
reported
   Amount as would
have been reported
prior to adoption of
new standard
    Effect of adoption -
increase / (decrease)
on current period
 

Consolidated Statement of Operations:

       

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

   $ 75,912    $ 78,061      $ (2,149

Net income attributable to SYNNEX Corporation

     59,503      60,788        (1,285

Earnings per share

       
                       

Net income per common share - basic

   $ 1.74    $ 1.77      $ (0.03
                       

Net income per common share - diluted

   $ 1.68    $ 1.71      $ (0.03
                       
     As of May 31, 2010  
     Amount as currently
reported
   Amount as would
have been reported
prior to adoption of
new standard
    Effect of Change
increase / (decrease)
 

Consolidated Balance Sheets

       

Other current assets

   $ 66,760    $ 67,080      $ (320

Convertible debt

     128,992      143,750        (14,758

Deferred tax liabilities

     5,546      (225     5,771   

Additional paid-in capital

     273,914      260,235        13,679   

Retained earnings

     610,748      615,760        (5,012

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

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

In November 2008, the FASB clarified guidance that the initial carrying value of an equity method investment should be determined in accordance with ASC 805, “Business Combinations.” Other-than-temporary impairment of an equity method investment should be recognized in accordance with ASC 323, “Investments –Equity Method and Joint Ventures.” ASC 323 is effective on a prospective basis in fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years, and was adopted by the Company in the first quarter of fiscal year 2010. The Company currently has no equity method investments; however, any future investments will be accounted for in accordance with ASC 323.

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

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

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

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

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

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 3—SHARE-BASED COMPENSATION:

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

The Company uses the Black-Scholes valuation model to estimate fair value of share-based awards, which requires various assumptions including estimating stock price volatility and expected life. Under the fair value recognition provisions of ASC 718, “Compensation—Stock Compensation,” share-based compensation is estimated at the grant-date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. The expected stock price volatility assumption was determined using historical volatility of the Company’s common stock.

The following table summarizes the number of share-based awards granted under the Company’s Amended and Restated 2003 Stock Incentive Plan during the three and six months ended May 31, 2010 and 2009 and the grant-date fair value of the awards:

 

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

Stock options

   60    $ 769    50    $ 309

Restricted stock awards

   41      1,204    14      273

Restricted stock units

   100      2,673    —        —  
                       
   201    $ 4,646    64    $ 582
                       
     Six months ended
May 31, 2010
   Six months ended
May 31, 2009
     Number of
grants
   Fair value
of grants
   Number of
grants
   Fair value
of grants

Stock options

   60    $ 769    50    $ 309

Restricted stock awards

   49      1,453    14      273

Restricted stock units

   100      2,673    —        —  
                       
   209    $ 4,895    64    $ 582
                       

The Company recorded share-based compensation expense, for the three and six months ended May 31, 2010 of $1,743 and $3,666 and for the three and six months ended May 31, 2009 of $2,154 and $4,154, respectively.

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 4—BALANCE SHEET COMPONENTS:

 

          May 31,     
2010
    November 30,
2009
 

Short-term investments

    

Trading securities

   $ 8,439      $ 10,301   

Available-for-sale securities

     107        112   

Held-to-maturity securities

     5,444        7,785   

Cost method securities

     2,861        3,021   
                
   $ 16,851      $ 21,219   
                

Accounts receivable, net

    

Trade accounts receivable

   $ 783,448      $ 864,895   

Less: Allowance for doubtful accounts

     (20,783     (23,780

Less: Allowance for sales returns

     (29,698     (20,482
                
   $ 732,967      $ 820,633   
                

Receivable from vendors, net

    

Receivables from vendors

   $ 125,947      $ 105,429   

Less: Allowance for doubtful accounts

     (5,311     (5,819
                
   $ 120,636      $ 99,610   
                

Inventories

    

Components

   $ 56,049      $ 59,364   

Finished goods

     735,848        654,449   
                
   $ 791,897      $ 713,813   
                

Property and equipment, net

    

Land

   $ 15,660      $ 15,721   

Equipment and computers

     66,748        62,691   

Furniture and fixtures

     10,571        10,152   

Buildings, leasehold improvements

     81,646        80,864   

Construction in progress

     134        882   
                
     174,759        170,310   

Less: Accumulated depreciation

     (80,963     (75,585
                
   $ 93,796      $ 94,725   
                

Goodwill

 

     Distribution          GBS                Total      

Balance at November 30, 2009

   $ 82,415    $ 25,148    $ 107,563

Changes during the period

     4,007      —        4,007

Foreign currency translation

     503      —        503
                    

Balance at May 31, 2010

   $ 86,925    $ 25,148    $ 112,073
                    

Goodwill increased as of May 31, 2010 compared to November 30, 2009, due to the acquisition of Jack of All Games, Inc. by $4,245 and was offset by the sale of the BDG division. These changes were all within the distribution segment.

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

Intangible assets, net

 

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

Vendor lists

   $ 36,815    $ (24,794   $ 12,021    $ 34,315    $ (24,104   $ 10,211

Customer lists

     22,454      (16,599     5,855      21,440      (15,024     6,416

Other intangible assets

     4,423      (3,173     1,250      4,734      (3,295     1,439
                                           
   $ 63,692    $ (44,566   $ 19,126    $ 60,489    $ (42,423   $ 18,066
                                           

Amortization expense for the three and six months ended May 31, 2010 was $1,346 and $2,580, respectively. Amortization expense for the three and six months ended May 31, 2009 was $1,996 and $4,073, respectively. The increase in intangible assets as of May 31, 2010 compared to November 30, 2009 is due to the acquisition of Jack of All Games, Inc. offset by the sale of intangible assets related to the BDG division, which resulted in a gain of $785. The changes are all within the distribution segment.

NOTE 5—INVESTMENTS:

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

 

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

Short-term investments

               

Trading securities

   $ 10,197    $ (1,758   $ 8,439    $ 11,631    $ (1,330   $ 10,301

Available-for-sale securities

     134      (27     107      147      (35     112

Held-to-maturity securities

     5,444      —          5,444      7,785      —          7,785

Cost method securities

     2,861      —          2,861      3,021      —          3,021
                                           
   $ 18,636    $ (1,785   $ 16,851    $ 22,584    $ (1,365   $ 21,219
                                           

Short-term trading securities generally consist of equity securities relating to the Company’s deferred compensation plan. Short-term available-for-sale securities primarily consist of investments in other companies’ equity securities. Held-to-maturity investments primarily consist of term deposits with maturities from the date of purchase greater than three months and less than one year. These term deposits are held until the maturity date and are not traded. Cost investments primarily consist of investments in a hedge fund and a private equity fund under the Company’s deferred compensation plan.

Trading securities and available-for-sale securities are recorded at fair value in each reporting period and therefore the carrying value of these securities equals their fair value. For cost method securities, the Company records an impairment charge when the decline in fair value is determined to be other-than-temporary.

During the three months ended May 31, 2010, the total realized and unrealized loss recorded on the Company’s trading investments was $73 and during the six months ended May 31, 2010, the total realized and unrealized gain was $179. For the three and six months ended May 31, 2009 the total realized and unrealized gain recorded on the Company’s trading investments was $2,099 and $1,484, respectively.

 

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Table of Contents

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

For the three and six months ended May 31, 2010 and for the three months ended May 31, 2009, there was no other-than-temporary loss recorded on cost securities. For the six months ended May 31, 2009, the Company recorded an other-than-temporary loss of $53 on cost securities.

As of May 31, 2010, the available-for-sale securities and certain of our cost method securities have been in a loss position for more than 12 months.

In the fourth quarter of fiscal year 2009, investments with maturities from the date of purchase greater than three months and less than one year have been corrected to classify such amounts as short-term investments rather than cash equivalents. The impact on net cash used in investing activities for the six months ended May 31, 2009 was $36,342 as reported and is $39,224 as corrected. The Company concluded that the correction was not material to prior period interim consolidated financial statements for fiscal 2009 based on SEC Staff Accounting Bulletin No. 99: Materiality.

NOTE 6—DERIVATIVE INSTRUMENTS:

In the ordinary course of business, the Company is exposed to foreign currency risk, interest risk, equity risk and credit risk. The Company’s transactions in its foreign operations are denominated in the Canadian Dollar, British Pound, Philippines Peso, Japanese Yen, Mexican Peso and Chinese Renminbi. The Company’s foreign locations enter into transactions, and own monetary assets and liabilities, that are denominated in currencies other than their functional currency. As part of its risk management strategy, the Company uses short-term forward contracts in most of the above mentioned currencies to minimize its balance sheet exposure to foreign currency risk. These derivatives are not designated as hedging instruments as the Company uses forward contracts to hedge foreign currency balance sheet exposures. The forward exchange contracts are recorded at fair value in each reporting period and any gains or losses, resulting from the changes in fair value, are recorded in earnings in the period of change. Generally, the Company does not use derivative instruments to cover interest rate risk, equity risk and credit risk. The Company’s policy is not to allow the use of derivatives for trading or speculative purposes. The fair value of the Company’s forward exchange contracts are also disclosed in Note 14. The following table summarizes the Company’s derivative instruments not designated as hedging instruments under ASC 815, “Derivatives and Hedging,” as of May 31, 2010 and November 30, 2009:

 

          Fair value as of  

Derivatives not designated as hedging instruments under ASC 815:

   Location         May 31, 2010          November 30, 2009  

Foreign exchange forward contracts

   Accrued Liabilities    $ (198   $ (113

Foreign exchange forward contracts

   Other Current Assets      977        —     
                   
      $ 779      $ (113
                   

 

          Three months ended     Six months ended  

Realized and unrealized gain/ (loss)

  

Location

   May 31, 2010     May 31, 2009     May 31, 2010     May 31, 2009  

Foreign exchange forward contracts

   Other income/ (expense), net    $ (626   $ (9,964   $ (947   $ (6,069
                                   
      $ (626   $ (9,964   $ (947   $ (6,069
                                   

NOTE 7—ACCOUNTS RECEIVABLE ARRANGEMENTS:

The Company primarily finances its U.S. operations with an accounts receivable securitization program (the “U.S. Arrangement”) by selling up to a maximum of $350,000 in U.S. trade accounts receivable (“U.S. Receivables”). On January 23, 2009, the Company amended and restated the U.S. Arrangement (the “U.S. Amended and Restated Arrangement”) to replace the lead bank and agent. The effective borrowing cost under the U.S. Amended and Restated Arrangement is a blend of the prevailing dealer commercial paper rates, plus a program fee of 0.75% per annum based on the used portion of the commitment and a facility fee of 0.75% per annum payable on the commitment. The balance outstanding on the U.S. Amended and Restated Arrangement as of May 31, 2010 was $146,300 and as of November 30, 2009 was $119,000.

 

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Table of Contents

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

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

Under the terms of the U.S. Amended and Restated Arrangement, the Company sells, on a revolving basis, its U.S. Receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in and to the U.S. Receivables as security. Any borrowings under the U.S. Amended and Restated Arrangement are recorded as debt on the Company’s consolidated balance sheet. As is customary in trade accounts receivable securitization arrangements, a credit rating agency’s downgrade of the third party issuer of commercial paper or of a back-up liquidity provider (which provides a source of funding if the commercial paper market cannot be accessed) could result in an increase in the Company’s cost of borrowing or loss of the Company’s financing capacity under these programs if the commercial paper issuer or liquidity back-up provider is not replaced. Loss of such financing capacity could have a material adverse effect on the Company’s financial condition and results of operations.

SYNNEX Canada Limited (“SYNNEX Canada”) replaced its renewable revolving accounts receivable securitization program in Canada (the “Canadian Arrangement”), with a secured revolving credit arrangement (“Canadian Revolving Arrangement”) in May 2009. In connection with a Canadian Revolving Arrangement, the Company pledged the stock of SYNNEX Canada. Prior to replacing the Canadian Arrangement in May 2009, the Canadian Arrangement was accounted for as an off-balance sheet transaction because the Company funded the advances by selling its rights, title and interest in U.S. and Canadian trade accounts receivables (“Canadian Receivables”) to the financial institution on a fully-serviced basis. The Canadian Revolving Arrangement is accounted for as an on-balance sheet transaction. The balance outstanding on the Canadian Revolving Arrangement as of May 31, 2010 was $1,060 and as of November 20, 2009 was $29,097.

The Company also has other financing agreements with various financial institutions (“Flooring Companies”) to allow certain customers of the Company to finance their purchases directly with the Flooring Companies. Under these agreements, the Flooring Companies pay to the Company the selling price of products sold to various customers, less a discount, within approximately 15 to 30 days from the date of sale. The Company is contingently liable to repurchase inventory sold under flooring agreements in the event of any default by its customers under the agreement and such inventory being repossessed by the Flooring Companies. See Note 15 for additional information. The net sales financed for the three and six months ended May 31, 2010 were $153,995 and $300,002, respectively. The net sales financed for the three and six months ended May 31, 2009 were $145,869 and $348,078, respectively. Approximately $44,062 and $47,219 of accounts receivable at May 31, 2010 and November 30, 2009, respectively, were subject to flooring agreements. Flooring fees were approximately $768 and $1,477 in the three and six months ended May 31, 2010, respectively, and $780 and $1,663 in the three and six months ended May 31, 2009, respectively, and are included within “Interest expense and finance charges, net.”

NOTE 8—BORROWINGS:

Borrowings consist of the following:

 

          May 31,     
2010
    November 30,
2009
 

Convertible debt

   $ 128,992      $ 126,785   

SYNNEX U.S. securitization

     146,300        119,000   

SYNNEX U.S. revolving line of credit

     1,000        —     

SYNNEX Canada revolving line of credit

     1,060        29,097   

SYNNEX Canada term loan

     9,821        9,994   

Others

     1,821        2,059   
                
     288,994        286,935   

Less: Current portion

     (150,788     (150,740
                

Non-current portion

   $ 138,206      $ 136,195   
                

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

Convertible debt

In May 2008, the Company issued $143,750 of aggregate principal amount of its 4.0% Convertible Senior Notes due 2018 (“the Notes”) in a private placement. The carrying amount of the convertible debt, net of the unamortized debt discount, was $128,992 and $126,785 as of May 31, 2010 and November 30, 2009. The Notes are senior unsecured obligations of the Company and have a cash coupon interest rate of 4.0% per annum. The Company may redeem the Notes, in whole or in part, for cash on or after May 20, 2013, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to (including any additional interest and any contingent interest), but excluding, the redemption date. See Note 9. Also, the Notes contain various features which under certain circumstances could allow the holders to convert the Notes into shares before their ten-year maturity.

SYNNEX U.S. securitization

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

SYNNEX U.S. senior secured revolving line of credit

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

SYNNEX Canada revolving line of credit

SYNNEX Canada replaced its revolving line of credit arrangement of C$30,000 and the Canadian Arrangement of C$110,000 with the Canadian Revolving Arrangement in May 2009, with a financial institution for a maximum commitment of C$125,000. The Canadian Revolving Arrangement provides a sublimit of $5,000 for the issuance of standby letters of credit. As of May 31, 2010, outstanding standby letters of credit totaled $3,282. SYNNEX Canada has granted a security interest on substantially all of its assets in favor of the lender under this revolving credit facility. In addition, the Company pledged its stock in SYNNEX Canada as collateral for the Canadian Revolving Arrangement. The Canadian Revolving Arrangement expires in May 2012. The interest rate applicable will be at least (i) 2.5% for a Base Rate Loan in Canadian Dollars, (ii) 3.25% for a Base Rate Loan in U.S. Dollars, and (iii) 1% for a BA (Banker’s Acceptance) Rate Loan. A fee of 0.375% per annum is payable with respect to the unused portion of the commitment.

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

SYNNEX Canada term loan

SYNNEX Canada has a term loan associated with the purchase of its logistics facility in Guelph, Canada. The interest rate for any unpaid principal amount is a fixed rate of 5.374% per annum. The final maturity date for repayment of any unpaid principal is April 1, 2017.

Others

The Company has other overdraft and lines of credit facilities. The balance outstanding as of May 31, 2010 and November 30, 2009 was $1,821 and $2,059, respectively.

SYNNEX Canada credit facility

SYNNEX Canada has a credit facility with a financial institution in Canada to allow SYNNEX Canada to issue documentary letters of credit. In February 2010, as a result of the sale of the BDG division, the limit on this facility was reduced from C$30,000 to C$390 with validity up to 180 days. The letters of credit are issued to secure purchases of inventory from manufacturers and to finance import activities. This facility has an overdraft limit up to a maximum amount of C$2,000 available in Canadian and U.S. dollars for a maximum of two business days to repay draws under letters of credit or letters of guarantee. SYNNEX Canada has granted a lien, in favor of the financial institution in Canada, on the inventory financed under this credit facility, all accounts receivable from the sale of such inventory, all proceeds of sale of such inventory and collection of such accounts receivable and up to C$1,000 cash on deposit equal to 100% of the outstanding letters of credit with the financial institution in Canada. In connection with this credit facility, the Company issued a guarantee of SYNNEX Canada’s obligations in favor of the financial institution in Canada, which was reduced to C$7,000 from C$20,000. Letters of credit issued against this facility were $90 as of May 31, 2010 and $868 as of November 30, 2009.

Interest expense and finance charges

For the three and six months ended May 31, 2010, the total interest expense and finance charges for accounts receivable securitization, the Revolver, the Notes and all other debt and lines of credit were $5,414 and $11,136, respectively, including non-cash debt accretion expense of $1,112 and $2,207, respectively, for the Notes. For the three and six months ended May 31, 2009, the total interest expense and finance charges for accounts receivable securitization, the Revolver, the Notes and all other debt and lines of credit were $6,334 and $13,760, respectively, including non-cash debt accretion expense of $998 and $1,983, respectively, for the Notes. The interest expense and finance charges are included in “Interest expense and finance charges, net” in the consolidated statement of operations. The interest expense for the six months ended May 31, 2009, includes the partial write off of $842 in unamortized debt costs relating to the amendment of the U.S. Arrangement and the Revolver and the termination of the Canadian Arrangement and the Canadian Revolving Arrangement of $30,000. The range of interest rates was between 0.90% and 3.75% in the three months ended May 31, 2010 and between 1.98% and 9.89% in the three months ended May 31, 2009. The range of interest rates was between 0.90% and 3.75% in the six months ended May 31, 2010 and between 1.98% and 10.77% in the six months ended May 31, 2009.

Covenants compliance

In relation to the U.S. Amended and Restated Arrangement, the Amended and Restated Revolver and the Canadian Revolving Arrangement, the Company has a number of covenants and restrictions that, among other things, require the Company to comply with certain financial and other covenants and restrict its ability to incur additional debt. These covenants require the Company to maintain specified financial ratios and satisfy certain financial condition tests, including minimum net worth and fixed charge coverage ratio. They also limit the Company’s ability to make or forgive intercompany loans, pay dividends and make distributions, make certain acquisitions, repurchase the Company’s stock, create liens, cancel debt owed to the Company, enter into agreements with affiliates, modify the nature of the Company’s business, enter into sale-leaseback transactions, make certain investments, enter into new real estate leases, transfer and sell assets, cancel or terminate any material contracts and merge or consolidate. The covenants also limit the Company’s ability to pay cash upon conversion, redemption or repurchase of the Notes subject to certain liquidity tests.

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

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

Guarantees

The Company has issued guarantees to certain vendors and lenders of its subsidiaries’ for trade credit lines and loans, totaling $107,358 and $105,097 as of May 31, 2010 and November 30, 2009, respectively. The Company is obligated under these guarantees to pay amounts due should its subsidiaries not pay valid amounts owed to their vendors or lenders. The vendor guarantees are typically less than one-year arrangements, with 30-day cancellation clauses and the lender guarantees are typically for the term of the loan agreement.

NOTE 9—CONVERTIBLE DEBT:

 

            May 31,     
2010
    November 30,
2009
 

Convertible debt

    

Principal amount

   $ 143,750      $ 143,750   

Less: Unamortized debt discount

     (14,758     (16,965
                

Net carrying amount

   $ 128,992      $ 126,785   
                

In May 2008, the Company issued $143,750 of aggregate principal amount of its 4.0% Convertible Senior Notes due 2018 in a private placement. The Notes have a cash coupon interest rate of 4.0% per annum. Interest on the Notes is payable in cash semi-annually in arrears on May 15 and November 15 of each year, beginning November 15, 2008. In addition, the Company will pay contingent interest in respect of any six-month period from May 15 to November 14 or from November 15 to May 14, with the initial six-month period commencing May 15, 2013, if the trading price of the Notes for each of the ten trading days immediately preceding the first day of the applicable six-month period equals 120% or more of the principal amount of the Notes. During any interest period when contingent interest is payable, the contingent interest payable per Note is equal to 0.55% of the average trading price of the Notes during the ten trading days immediately preceding the first day of the applicable six-month interest period. The Notes mature on May 15, 2018, subject to earlier redemption, repurchase or conversion.

Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date for such Notes under the following circumstances: (1) during any fiscal quarter after the fiscal quarter ended August 31, 2008 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the conversion price of the Notes on the last day of such preceding fiscal quarter; (2) during the five business-day period after any five consecutive trading-day period (the “Measurement Period”) in which the trading price per $1 principal amount of the Notes for each day of that Measurement Period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate of the Notes on each such day; (3) if the Company has called the particular Notes for redemption, until the close of business on the business day prior to the redemption date; or (4) upon the occurrence of certain corporate transactions. In addition, holders may also convert their Notes at their option at any time beginning on November 15, 2017, and ending at the close of business on the business day immediately preceding the maturity date for the Notes, without regard to the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the common stock or a combination thereof at the Company’s election. The initial conversion rate for the Notes will be 33.9945 shares of common stock per $1 principal amount of Notes, equivalent to an initial conversion price of $29.42 per share of common stock. Such conversion rate will be subject to adjustment in certain events but will not be adjusted for accrued interest, including any additional interest and any contingent interest.

The Company may not redeem the Notes prior to May 20, 2013. The Company may redeem the Notes, in whole or in part, for cash on or after May 20, 2013, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to (including any additional interest and any contingent interest), but excluding, the redemption date.

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

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

The Notes are senior unsecured obligations of the Company and rank equally in right of payment with other senior unsecured debt and rank senior to subordinated notes, if any. The Notes effectively rank junior to any of the Company’s secured indebtedness to the extent of the assets securing such indebtedness. The Notes are also structurally subordinated in right of payment to all indebtedness and other liabilities and commitments (including trade payables) of the Company’s subsidiaries. The net proceeds from the Notes were used for general corporate purposes and to reduce outstanding balances under the U.S. Arrangement and the Revolver.

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

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

As previously discussed in Note 2, the Company adopted new standards effective December 1, 2009, that changed the accounting for the Notes. Under the previous standards the Notes were recognized entirely as a liability at historical value. In accordance with the provisions of the new standards, the Company retrospectively recognized both a liability and an equity component of the Notes in a manner that reflects its non-convertible debt borrowing rate at the date of issuance of 8.0%. The value assigned to the debt component, which is the estimated fair value, as of the issuance date, of a similar note without the conversion feature, was determined to be $120,332. The difference between the Note cash proceeds and this estimated fair value was estimated to be $23,418 and was retroactively recorded as a debt discount and will be amortized to interest expense and finance charges over the five year period to the first put date, utilizing the effective interest method. The corresponding offset was recorded to additional paid-in capital and was adjusted for deferred taxes of $9,157. Underlying debt issuance costs of $3,575 associated with the Notes were allocated between the liability and equity components of the debt in accordance with the provisions of the new standard.

As of May 31, 2010, the remaining amortization period is approximately 35 months assuming the redemption of the debentures at the first purchase date of May 20, 2013. Based on a cash coupon interest rate of 4.0%, the Company recorded contractual interest expense of $1,624 and $3,247, respectively, during the three and six months ended May 31, 2010 and $1,653 and $3,306 during the three and six months ended May 31, 2009, respectively. Based on an effective rate of 8.0%, the Company recorded non-cash interest expense of $1,112 and $2,208 during the three and six months ended May 31, 2010, respectively, and $998 and $1,983 during the three and six months ended May 31, 2009, respectively. As of May 31, 2010 and November 30, 2009, respectively, the carrying value of the equity component of the Notes, net of allocated issuance costs, was $22,836. As of May 31, 2010, the if-converted value of the Notes did not exceed the principal balance.

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

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 10—NET INCOME PER COMMON SHARE:

The following table sets forth the computation of basic and diluted net income per common share for the periods indicated:

 

     Three months ended    Six months ended
     May 31,
2010
   May 31,
2009
   May 31,
2010
   May 31,
2009

Amounts attributable to SYNNEX Corporation:

           

Income from continuing operations, net of tax

   $   24,844    $   17,402    $   48,093    $   35,422

Discontinued operations:

           

Income from discontinued operations, net of tax

     —        1,231      59      2,102

Gain on sale of discontinued operations, net of tax

     —        —        11,351      —  
                           

Net income attributable to SYNNEX Corporation

   $ 24,844    $ 18,633    $ 59,503    $ 37,524
                           

Weighted-average common shares-basic

     34,624      32,475      34,256      32,296

Effect of dilutive securities:

           

Stock options and restricted stock

     1,079      1,256      1,227      953
                           

Weighted-average common shares-diluted

     35,703      33,731      35,483      33,249
                           

Earnings per share - basic:

           

Income from continuing

   $ 0.72    $ 0.53    $ 1.41    $ 1.10

Income from discontinued operations

     —        0.04      0.33      0.06
                           

Net income per common share-basic

   $ 0.72    $ 0.57    $ 1.74    $ 1.16
                           

Earnings per share - diluted:

           

Income from continuing

   $ 0.70    $ 0.51    $ 1.36    $ 1.07

Income from discontinued operations

     —        0.04      0.32      0.06
                           

Net income per common share-diluted

   $ 0.70    $ 0.55    $ 1.68    $ 1.13
                           

Options to purchase 45 and 40 shares of common stock for the three and six months ended May 31, 2010, respectively, and 78 and 377 shares for the three and six months ending May 31, 2009, respectively, have not been included in the computation of diluted net income per share as their effect would have been anti-dilutive.

NOTE 11—RELATED PARTY TRANSACTIONS:

The Company has a business relationship with MiTAC International Corporation (“MiTAC International”), a publicly-traded company in Taiwan that began in 1992 when it became its primary investor through its affiliates. As of May 31, 2010, MiTAC International and its affiliates beneficially owned approximately 30% of the Company’s common stock. In addition, Matthew Miau, the Company’s Chairman Emeritus of the Board of Directors, is also the Chairman of MiTAC International and a director or officer of MiTAC International’s affiliates. As a result, MiTAC International generally has significant influence over the Company and over the outcome of all matters submitted to stockholders for consideration, including any merger or acquisition of ours. Among other things, this could have the effect of delaying, deterring or preventing a change of control over the Company with the loss of any premium that stockholders otherwise might receive in connection with such a transaction.

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

The Company works closely with MiTAC International on OEM outsourcing and to jointly market MiTAC International’s design and electronic manufacturing services and its contract assembly capabilities. This relationship has enabled the Company to build relationships with MiTAC International’s customers and it continues to work with and depend on MiTAC International to jointly serve its shared customers. The Company purchased inventories, including notebook computers, motherboards and other peripherals, from MiTAC International and its affiliates totaling $48,536 and $114,923 for the three and six months ended May 31, 2010, respectively, and $100,325 and $178,203 for the three and six months ended May 31, 2009, respectively. The Company’s sales to MiTAC International and its affiliates in the three and six months ended May 31, 2010, totaled $567 and $1,235, respectively and $552 and $1,559 for the three and six months ended May 31, 2009, respectively. Most of these purchases and sales were pursuant to the Company’s Master Supply Agreement with MiTAC International and Sun Microsystems, one of its contract assembly customers. In fiscal year 2010, Oracle Corporation acquired Sun Microsystems and all of the Company’s contract assembly services to Oracle Corporation are covered by this Master Supply Agreement. The Company’s business relationship to date with MiTAC International has been informal and is not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments.

Accordingly, the Company negotiates manufacturing, pricing and other material terms on a case-by-case basis with MiTAC International and its contract assembly customers for a given project. While MiTAC International is a related party and a controlling stockholder, the Company believes that the significant terms under these agreements, including pricing, would not materially differ from the terms it could have negotiated with unaffiliated third parties, and it has adopted a policy requiring that material transactions with MiTAC International or its related parties be approved by its Audit Committee, which is composed solely of independent directors. In addition, Mr. Miau’s compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors. As MiTAC International’s ownership interest in the Company decreases as a result of sales of the Company’s stock and additional dilution, its interest in the success of the business and operations may decrease as well.

The Company remains dependent on MiTAC International as a contract assembly partner, and any change in the pricing or other material terms demanded by MiTAC International could have a material adverse effect on its business, particularly its contract assembly business with Oracle Corporation.

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

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

 

MiTAC International (1)

   6,177,796

Synnex Technology International Corp. (2)

   4,426,895
    

Total

   10,604,691
    

 

(1) Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC International. Excludes 841,916 shares (of which 445,249 shares are directly held and 396,667 shares are subject to exercisable options) held by Matthew Miau.
(2) Synnex Technology International Corp. (“Synnex Technology International”) is a separate entity from the Company and is publicly-traded corporation in Taiwan. Shares are held via Peer Development Ltd, a wholly-owned subsidiary of Synnex Technology International. MiTAC International owns a minority interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a minority interest of 14.8% in Synnex Technology International. Neither MiTAC International nor Mr. Miau are affiliated with any person(s), entity, or entities, that hold a majority interest in MiTAC Incorporated.

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

The Company purchased shares of MiTAC International and one of its affiliates related to the deferred compensation plan of Robert Huang, our founder and former Chairman. As of May 31, 2010, the value of the investment was $1,000. Except as described herein, none of the Company’s officers or directors has an interest in MiTAC International or its affiliates.

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

Synnex Technology International is a publicly-traded corporation in Taiwan that currently provides distribution and fulfillment services to various markets in Asia and Australia, and is also a potential competitor of the Company. Neither MiTAC International nor Synnex Technology International is restricted from competing with the Company.

NOTE 12—SEGMENT INFORMATION:

Description of Segments

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

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

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

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

 

     Distribution            GBS            Inter-Segment
Elimination
    Consolidated

Three months ended May 31, 2010

          

Revenue

   $   2,011,211    $ 27,645    $ (6,044   $   2,032,812

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

     40,452      2,982      —          43,434

Three months ended May 31, 2009

          

Revenue

   $ 1,782,955    $ 25,027    $ (5,277   $ 1,802,705

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

     27,434      2,559      —          29,993

Six months ended May 31, 2010

          

Revenue

   $ 3,926,551    $ 53,717    $ (11,418   $ 3,968,850

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

     76,446      5,941      —          82,387

Six months ended May 31, 2009

          

Revenue

   $ 3,484,094    $ 49,428    $ (10,447   $ 3,523,075

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

     58,561      5,219      —          63,780

Total assets as of May 31, 2010

   $ 2,062,862    $ 175,709    $ (134,124   $ 2,104,447

Total assets as of November 30, 2009

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

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

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

Segment by Geography

The Company primarily operates in North America. The United States and Canada are included in the “North America” operations and China, Mexico, Japan, the Philippines and the UK are included in “Other” operations. The revenues attributable to countries are based on geography of entities from where the products are distributed or services are provided. Shown below is summarized financial information related to the geographic areas in which the Company operated in the three and six months ended May 31, 2010 and 2009:

 

     Three Months Ended    Six Months Ended
     May 31, 2010    May 31, 2009    May 31, 2010    May 31, 2009

Revenue

           

North America

   $   1,987,188    $   1,766,300    $   3,886,685    $   3,445,452

Other

     45,624      36,405      82,165      77,623
                           
   $ 2,032,812    $ 1,802,705    $ 3,968,850    $ 3,523,075
                           
               As of
               May 31, 2010    November 30,
2009

Long-lived assets

           

North America

         $ 101,154    $ 70,610

Other

           28,355      50,005
                   
         $ 129,509    $ 120,615
                   

Revenue in the United States was approximately 82% of the total revenue for both the three and six months ended May 31, 2010, and 82% and 81% of the total revenue for the three and six months ended May 31, 2009, respectively. Revenue in Canada was approximately 15% and 16% of total revenue for the three and six months ended May 31, 2010, respectively, and 16% for both the three and six months ended May 31, 2009. No other geographical location accounted for more than 10% of the Company’s total revenue.

Long-lived assets in the United States were approximately 63% and 42% of total long-lived assets as of May 31, 2010 and November, 30 2009, respectively. Long-lived assets in Canada were approximately 15% and 17% of total long-lived assets as of May 31, 2010 and November 30, 2009, respectively.

NOTE 13—ACQUISITIONS

Fiscal year 2010 acquisitions

On February 26, 2010, the Company purchased substantially all of the North American assets of Jack of All Games, Inc, a distributor of video game hardware and software. The Company expects this acquisition to expand its consumer electronics product offerings. The acquisition is fully integrated into the Company’s distribution segment. During the three months ended May 31, 2010 the Company made certain adjustments to the fair value of inventories and other assets acquired, and liabilities assumed, related to this transaction. These adjustments had the impact of lowering the purchase price by $4,509. The total consideration as adjusted is $38,144. This includes $2,936 in deferred payments that are generally payable six months after the close and subject to compliance with certain post-closing conditions.

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

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

       Fair Value    

Purchase Consideration:

  

Cash Payment

   $ 37,248   

Less: Amount due from seller

     (2,040

Accrual subject to post closing conditions

     2,936   
        
   $ 38,144   
        

Allocation:

  

Accounts receivable

   $ 9,703   

Vendor accounts receivable

     2,677   

Inventory

     26,689   

Other current asset

     290   

Goodwill

     4,245   

Intangibles (1)

     4,500   

Accounts payable

     (8,429

Accrued liabilities

     (1,531
        
   $ 38,144   
        

 

(1) Intangibles will be amortized over a period of 3 to 10 years.

Fiscal year 2009 acquisitions

In the first quarter of fiscal year 2009, the Company completed two acquisitions in the GBS segment. Through these acquisitions, the Company acquired web development services and complementary products for total consideration of $6,579. One of the acquisitions is reported under discontinued operations.

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

NOTE 14—FAIR VALUE MEASUREMENTS:

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

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

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

 

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

Trading securities

   $   8,439    $ 8,439    $ —      $ —      $  10,301      $ 10,301    $ —        $ —  

Available-for-sale securities

     107      107      —        —        112        112      —          —  

Forward foreign currency exchange contracts

     779      —        779      —        (113     —        (113     —  

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

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

 

     Three Months Ended     Six Months Ended  
       May 31,  
2010
      May 31,  
2009
      May 31,  
2010
      May 31,  
2009
 

Realized gain (loss)

   $ (909   $ (2,885   $ (1,195   $ (783

Unrealized gain (loss)

     210        (3,185     427        (1,957
                                

Total realized and unrealized gain (loss)

   $ (699   $ (6,070   $ (768   $ (2,740
                                

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

 

     As of May 31, 2010    As of November 30, 2009
     Carrying
Value
   Fair Value    Carrying
Value
   Fair Value
               (As adjusted-
see Note 2)
    

Cost method investments in short-term investments

   $ 2,861    $ 3,660    $ 3,021    $ 2,496

Long-term accounts receivable

     9,022      9,022      7,169      7,169

SYNNEX Canada term loan

     9,821      9,821      9,994      9,994

Convertible debt

     128,992      161,351      126,785      168,788

The Company’s cost method securities in short-term investments consist of investments in a hedge fund and a private equity fund. The Company records an impairment charge when the decline in fair value is determined to be other-than-temporary. No other-than-temporary impairment charges were recorded in the three and six months ended May 31, 2010 and in the three months ended May 31, 2009. In the six months ended May 31, 2009, $53 was recognized as other-than-temporary impairment charges relating to the carrying value of the Company’s cost method securities.

The fair value of the cost method investments is based on a valuation model developed internally to measure impairment primarily based on the operating results and future earnings prospects of the investee. The fair value of long-term accounts receivable is based on customer rating and creditworthiness. The carrying value of the SYNNEX Canada term loan approximates its fair value since interest rates offered to the Company for debt of similar terms and maturities are approximately the same. The fair value of convertible debt is based on the closing price of the convertible debt traded in a limited trading market.

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

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

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

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

NOTE 15—COMMITMENTS AND CONTINGENCIES:

The Company was contingently liable as of May 31, 2010, under agreements to repurchase repossessed inventory acquired by Flooring Companies as a result of default on floor plan financing arrangements by the Company’s customers. These arrangements are described in Note 7. Losses, if any, would be the difference between the repossession cost and the resale value of the inventory. There have been no repurchases through May 31, 2010 under these agreements, nor is the Company aware of any pending customer defaults or repossession obligations.

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

The Company does not believe that the above commitments and contingencies will have a material adverse effect on the Company’s results of operations, financial position or cash flows.

NOTE 16—RESTRUCTURING CHARGES:

In fiscal year 2007, in connection with the acquisition of the Redmond Group of Companies (“RGC”), the Company announced a restructuring program in Canada under ASC 805, “Business Combinations” (“ASC 805”). During the three and six months ended May 31, 2010, the Company made payments of $91 and $182, respectively, for the remaining lease obligations on the RGC facility. During both the three and six months ended May 31, 2010, the Company also recorded additional charges of $158 for the remaining lease obligations. The remaining balance outstanding on facility and exit costs as of May 31, 2010 and November 30, 2009 was $533 and $557, respectively.

NOTE 17— DISCONTINUED OPERATIONS:

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

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

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

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

 

     Three months ended     Six months ended  
     May 31, 2009          May 31, 2010 *               May 31, 2009        

Revenue

   $ 9,348      $ 2,959      $ 17,870   

Cost of revenue

     (3,910     (1,706     (7,482
                        

Gross profit

     5,438        1,253        10,388   

Selling, general and administrative expenses

     (3,732     (1,199     (7,770
                        

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

     1,706        54        2,618   
                        

Interest income (expense and finance charges), net

     97        17        228   

Other income (expense), net

     13        5        (5
                        

Income before income taxes and non-controlling interest

     1,816        76        2,841   

Provision for income taxes

     (230     (2     (181
                        

Income from discontinued operations

     1,586        74        2,660   

Income from discontinued operations attributable to non-controlling interest

     (355     (15     (558
                        

Income from discontinued operations attributable to SYNNEX Corporation

   $ 1,231      $ 59      $ 2,102   
                        

 

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

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

 

     November 30,
2009
Assets:   

Cash and cash equivalents

   $ 21,590

Short term investments

     8,952

Property and equipment, net

     6,256

Goodwill

     29,920

Intangible assets

     3,670

Other assets

     3,797
      

Total assets held for sale

   $ 74,185
      
Liabilities:   

Current deferred liabilities

   $ 10,198

Other liabilities

     7,950
      

Total liabilities related to assets held for sale

   $ 18,148
      

Non-controlling interest

   $ 7,402
      

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and six months ended May 31, 2010 and 2009

(amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 18—EQUITY:

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

 

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

Beginning balance of equity:

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

(As adjusted - see Note 2)

             

Issuance of common stock on exercise of options and restricted stock

     11,928        —          11,928        3,202        —        3,202   

Issuance of common stock for employee stock purchase plan

     444        —          444        383        —        383   

Tax benefit from exercise of non-qualified stock options

     10,496        —          10,496        3,305        —        3,305   

Share based compensation

     3,666        —          3,666        4,154        —        4,154   

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

     (5,946     (7,403     (13,349     4,203        —        4,203   

Non-controlling interest’s share of discontinued operations

     —          (15     (15     —          —        —     

Comprehensive income:

             

Net income

     59,503        117        59,620        37,524        402      37,926   

Other comprehensive income (loss):

             

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

     8        —          8        (18     —        (18

Foreign currency translation adjustment

     1,241        (154     1,087        13,666        —        13,666   
                                               

Total other comprehensive income (loss)

     1,249        (154     1,095        13,648        —        13,648   
                                               

Total comprehensive income (loss)

     60,752        (37     60,715        51,172        402      51,574   
                                               

Ending balance of equity:

   $ 909,662      $ 2,958      $ 912,620      $ 758,749      $ 5,075    $ 763,824   
                                               

 

(1) See Note 17- Discontinued Operations for further discussion.

NOTE 19— SUBSEQUENT EVENTS:

Effective June 21, 2010, the Company’s founder Robert T. Huang retired as Chairman of the Board of Directors and as a member of the Board of Directors. The Company’s Board unanimously named Dwight A. Steffensen as non-executive Chairman and independent director of the Board.

 

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

Forward-Looking Statements

When used in this Quarterly Report on the Form 10Q or the Report, the words “believes,” “plans,” “estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “may,” “designed,” “will,” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about our business model and our services, our market strategy, our infrastructure, our investment in our IT systems, anticipated benefits of our acquisitions, our anticipated relationship with SB Pacific Corporation, our anticipated disposition of our interest in Nihon Daikou Shouji Co., Ltd., impact of acquisitions on our financial position, our revenue and operating results, our gross margins, our agreements with MiTAC International Corporation, or MiTAC International, our relationship with MiTAC International and Oracle Corporation, competition with Synnex Technology International, our estimates regarding our capital requirements, our future needs for additional financing, concentration of products and customers, expansion of our operations, our international operations, our strategic acquisitions of businesses and assets, adequacy of our cash resources to meet our capital needs, the settlement of our convertible notes, adequacy of our disclosure controls and procedures, dependency on personnel, competition, impact of rules and regulations affecting public companies, our estimated fair value of our reporting units and statements regarding our securitization programs and revolving credit lines. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as the seasonality of the buying patterns of our customers, concentration of sales to large customers, dependence upon and trends in capital spending budgets in the IT industry, fluctuations in general economic conditions and risks set forth below under Part II, Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview

We are a Fortune 500 corporation and a leading business process services company, serving resellers, retailers and original equipment manufacturers, or OEMs, in multiple regions around the world. We operate in two segments, distribution services and global business services, or GBS. Our primary business process services are distribution, contract assembly and business process outsourcing services, or BPO. Our distribution services segment distributes computing, consumer electronics, complementary products and video games to a variety of customers, including value-added resellers, or VARs, system integrators and retailers, as well as provides assembly services to OEMs, including integrated supply chain management, build-to-order and configure-to-order system configurations, materials management and logistics. Our GBS segment offers a range of services to our customers that include customer management, software development, and back office processing on a global platform. We deliver these services through various methods including voice, chat, web, email, and digital print.

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

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

We purchase IT systems, peripherals, system components, software, networking equipment, various consumer electronics and video games from OEM suppliers such as Hewlett-Packard Company, or HP, Panasonic, Acer, Lenovo and Lexmark 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 VARs, corporate resellers, government resellers, system integrators, direct marketers and retailers. Products purchased from our largest OEM supplier, HP, accounted for approximately 38% of our total revenue for both the three and six months ended May 31, 2010 and 36% and 35% for the three and six months ended May 31, 2009, respectively.

 

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

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

Recent Acquisitions and Divestitures

We seek to augment our services offering with strategic acquisitions of businesses and assets that complement and expand our global business process services capabilities. We also divest businesses that we deem not strategic to our ongoing operations. Our historical acquisitions have brought us new reseller customers, retail customers and OEM suppliers, new product lines, extended the geographic reach of our operations, particularly targeted in international markets, and diversified and expanded the services we provide to our OEM suppliers and customers. We account for acquisitions using the purchase method of accounting and include acquired entities within our consolidated financial statements from the closing date of the acquisition.

On February 26, 2010, we purchased substantially all of the North American assets of Jack of All Games, Inc., a distributor of video game hardware and software. During the three months ended May 31, 2010 we made certain adjustments to the fair value of inventories and other assets acquired, and the liabilities assumed, related to this transaction. These adjustments had the impact of lowering the purchase price by $4.5 million. The total consideration as adjusted is $38.1 million. This includes approximately $2.9 million in deferred payments that are generally payable six months after the close and subject to compliance with certain post closing conditions. The net tangible assets acquired were $29.4 million and we recognized approximately $4.5 million of intangible assets and approximately $4.2 million in goodwill. The acquisition is fully integrated into our distribution segment and we expect it will continue to expand our consumer electronics product offerings.

The above acquisition did not meet the conditions of a material business combination and was not subject to the disclosure requirements of accounting guidance for business combinations utilizing the purchase method of accounting.

Restructuring Charges

In fiscal year 2007, in connection with the acquisition of the Redmond Group of Companies, or RGC, we announced a restructuring program in Canada under ASC 805, “Business Combinations,” or ASC 805. During the three and six months ended May 31, 2010, we made a payment of $0.1 million and $0.2 million, respectively, which is included in selling, general and administrative expenses, for the remaining lease obligations on the RGC facility. During the three and six months ended May 31, 2010, we accrued additional $0.2 million for the remaining lease obligations on the facility. The remaining balance outstanding on facility and exit costs as of May 31, 2010 and November 30, 2009 was $0.5 million and $0.6 million, respectively.

Critical Accounting Policies and Estimates

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

 

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Results of Operations

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

 

     Three Months Ended     Six Months Ended  
     May 31,
2010
    May 31,
2009
    May 31,
2010
    May 31,
2009
 

Statements of Operations Data:

        

Revenue

   100.00   100.00   100.00   100.00

Cost of revenue

   (94.26   (94.40   (94.31   (94.27
                        

Gross profit

   5.74      5.60      5.69      5.73   

Selling, general and administrative expenses

   (3.60   (3.94   (3.61   (3.92
                        

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

   2.14      1.66      2.08      1.81   

Interest expense and finance charges, net

   (0.19   (0.23   (0.19   (0.26

Other income (expense), net

   (0.00   0.08      0.02      0.03   
                        

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

   1.95      1.51      1.91      1.58   

Provision for income taxes

   (0.72   (0.55   (0.70   (0.58
                        

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

   1.23      0.96      1.21      1.00   

Income from discontinued operations, net of tax

   —        0.08      0.00      0.08   

Gain on sale of discontinued operations, net of tax

   —        —        0.29      —     
                        

Net income

   1.23      1.04      1.50      1.08   
                        

Net income attributable to non-controlling interest

   (0.01   (0.01   (0.00   (0.01
                        

Net income attributable to SYNNEX Corporation

   1.22   1.03   1.50   1.07
                        

Three and Six Months Ended May 31, 2010 and 2009

Revenue

 

     Three Months Ended    Six Months Ended
     May 31,
2010
    May 31,
2009
    %
Change
   May 31,
2010
    May 31,
2009
    %
Change
     (in thousands)          (in thousands)      

Revenue

   $   2,032,812      $   1,802,705      12.8%    $   3,968,850      $   3,523,075      12.7%

Distribution revenue

     2,011,211        1,782,955      12.8%      3,926,551        3,484,094      12.7%

GBS revenue

     27,645        25,027      10.5%      53,717        49,428      8.7%

Inter-segment elimination

     (6,044     (5,277   14.5%      (11,418     (10,447   9.3%

In our distribution business, we sell in excess of 20,000 technology products (as measured by active SKU’s) from more than 100 IT OEM suppliers to more than 15,000 resellers. The prices of our products are highly dependent on the volumes purchased within a product category. The products we sell from one period to the next are often not comparable because of rapid changes in product models and features. The revenue generated in our GBS segment relates to BPO services such as demand generation, pre-sales support, product marketing, print and fulfillment, back office IT, development outsourcing, and post-sales technical support. The inter-segment eliminations relate to the inter-segment back-office support services provided by our GBS segment to our distribution segment. GBS revenue to third parties is net of inter-segment eliminations. The programs and customer service requirements change frequently from one period to the next and are often not comparable.

Our revenue in the distribution segment increased during the three months ended May 31, 2010, compared to the prior year quarter primarily because of an increase in sales in the U.S. markets, sales from gaming products following our first quarter acquisition of Jack of All Games and benefits from fluctuations in foreign exchange rates. By product line, our sales of peripherals increased 22%, sales of IT systems increased 12%, sales of system components increased 23% and our sales of networking systems increased 26%. Our revenue from software sales (including services and warranty contracts) decreased by 38% as compared to the prior year period primarily because of the presentation of revenue earned on certain types of services and extended warranty contracts on a net basis in fiscal year 2010 – see Note 2, Revenue Recognition. The increase in our GBS segment revenue was primarily due to higher call volumes in our contact centers and the organic growth in our business.

 

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Our revenue in the distribution segment increased during the six months ended May 31, 2010, compared to the prior year period due to the improvement in market conditions and demand. In addition, our new customer initiatives and new vendor lines increased sales in the North American market. Our sales from Jack of All Games gaming products also contributed to the increase in revenue. By product line, our sales of peripherals increased 17%, sales of IT systems and system components both increased 19% and our sales of networking systems increased 26%. Our revenue from software sales decreased by 37% as compared to the prior period, because of the presentation of revenue earned on certain types of services and extended warranty contracts on a net basis in fiscal year 2010. The revenue from software sales was approximately 7% of our total consolidated revenue. The increase in our GBS segment revenue was primarily due to higher call volumes in our contact centers.

Gross Profit

 

     Three Months Ended     Six Months Ended  
     May 31, 2010     May 31, 2009     % Change     May 31, 2010     May 31, 2009     % Change  
     (in thousands)           (in thousands)        

Gross profit

   $ 116,667      $ 100,940      15.6   $ 225,828      $ 201,787      11.9

Percentage of revenue

     5.74     5.60   2.5     5.69     5.73   -0.7

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

Our gross profit in dollars in both the three and six months ended May 31, 2010 increased as compared to the prior year mainly due to increased revenue. For the three and six months ended May 31, 2010, gross profit as a percentage of revenue increased 14 basis points and decreased 4 basis points, respectively, over the corresponding prior year periods. Gross profit as a percentage of revenue for the three and six months ended May 31, 2010 was approximately 24 basis points and 23 basis points higher as a result of accounting for certain service contracts, post-contract software support services, and extended warranty contracts on a net basis in fiscal year 2010, offset by the unfavorable impact of product and geographic mix, as compared to the corresponding prior year periods.

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

Selling, General and Administrative Expenses

 

     Three Months Ended     Six Months Ended  
     May 31, 2010     May 31, 2009     % Change     May 31, 2010     May 31, 2009     % Change  
     (in thousands)           (in thousands)        

Selling, general and administrative expenses

   $ 73,233      $ 70,947      3.2   $ 143,441      $ 138,007      3.9

Percentage of revenue

     3.60     3.94   -8.6     3.61     3.92   -7.9

Approximately two-thirds of our selling, general and administrative expenses consist of personnel costs such as salaries, commissions, bonuses, share-based compensation, deferred compensation expense or income, and temporary personnel costs. Selling, general and administrative expenses also include costs of our facilities, utility expense, professional fees, depreciation expense on our capital equipment, bad debt expense, amortization expense on our intangible assets, and marketing expenses, offset in part by reimbursements from OEM suppliers.

Selling, general and administrative expenses increased for the three months ended May 31, 2010 on a dollar basis from the comparable prior year quarter mainly due to an increase in compensation cost of $5.5 million resulting from an increase in the number of employees and the complete integration of our fiscal first quarter 2010 acquisition of Jack of All Games and an increase in other operating expenses by $1.2 million due to the growth in our business, costs incurred in consolidating our U.S. warehouses and costs associated with the integration of Jack of All Games. These increases were partially offset by a decrease in bad debt expense of $2.3 million a decrease in deferred compensation expense of $1.8 million, and a decrease in amortization of intangibles of $0.5 million. Our total operating expenses were also negatively impacted by approximately $2.3 million as compared to the prior year period due to fluctuations in foreign exchange rates.

 

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Selling, general and administrative expenses increased for the six months ended May 31, 2010 mainly due to an increase in compensation cost of $7.3 million, resulting from an increase in the number of employees primarily as a result of growing our business in the U.S., investments in strategic initiatives and the full quarter impact of our acquisition of Jack of All Games and an increase in other operating expenses of $4.6 million, as compared to the prior year due to the growth of our business, costs incurred in consolidating our U.S. warehouses and costs associated with the integration of Jack of All Games. These increases were partially offset by a decrease in bad debt expense of $3.6 million, a decrease in deferred compensation expense of $0.5 million and a decrease in the amortization costs for intangibles of $1.0 million.

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

 

     Three Months Ended     Six Months Ended  
     May 31, 2010     May 31, 2009     % Change     May 31, 2010     May 31, 2009     % Change  
     (in thousands)           (in thousands)        

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

   $ 43,434      $ 29,993      44.8   $ 82,387      $ 63,780      29.2

Percentage of Total Revenue

     2.14     1.66   28.9     2.08     1.81   14.9

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

     40,452        27,434      47.5     76,446        58,561      30.5

Percentage of Distribution Revenue

     2.01     1.54   30.5     1.95     1.68   16.1

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

     2,982        2,559      16.5     5,941        5,219      13.8

Percentage of GBS Revenue

     10.79     10.22   5.6     11.06     10.56   4.7

Our income from continuing operations before non-operating items, income taxes and non-controlling interest as a percentage of revenue increased to 2.14% and 2.08% for the three and six months ended May 31, 2010, respectively, compared to 1.66% and 1.81% for the comparable prior year periods. The distribution segment income from continuing operations before non-operating items, income taxes and non-controlling interest as percentage of distribution revenue increased to 2.01% and 1.95% for the three and six months ended May 31, 2010, respectively, from 1.54% and 1.68% in the comparable prior year periods. These margins were higher as a result of accounting for certain service contracts, post-contract software support services, and extended warranty contracts on a net basis in fiscal year 2010. Higher gross profit dollars were offset, in part, by higher selling and administrative expenses due to the growth of our business, investments in strategic initiatives and the costs related to the integration of Jack of All Games into our business operations.

The GBS segment income from continuing operations before non-operating items, income taxes and non-controlling interest as a percentage of revenue increased to 10.79% and 11.06% for the three and six months ended May 31, 2010, respectively, from 10.22% and 10.56% in the comparable prior year periods, primarily due to higher gross profit, partially offset by higher non-billable personnel costs incurred for new agents in their training period.

Interest Expense and Finance Charges, Net

 

     Three Months Ended     Six Months Ended  
     May 31, 2010     May 31, 2009
(As  Adjusted -
see Note 2)
    % Change     May 31, 2010     May 31, 2009
(As Adjusted  -

see Note 2)
    % Change  
     (in thousands)           (in thousands)        

Interest expense and finance charges, net

   $ 3,736      $ 4,178      -10.6   $ 7,545      $ 9,277      -18.7

Percentage of revenue

     0.19     0.23   -17.4     0.19     0.26   -26.9

Amounts recorded in interest expense and finance charges, net, consist primarily of interest expense paid on our lines of credit and other debt, fees associated with third party accounts receivable flooring arrangements, non-cash interest expense on our convertible debt and the sale or pledge of accounts receivable through our securitization facilities, offset by income earned on our cash investments and financing income from our multi-year contracts in our Mexico operation.

The decrease in interest expense and finance charges, net, for the three and six months ended May 31, 2010 compared to the prior year periods was approximately $0.5 million and $1.7 million, respectively, due to lower levels of borrowings and lower interest rates, partially offset by the impact of lower interest income relating to our large Mexico contract.

 

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Other Income (Expense), Net

 

     Three Months Ended     Six Months Ended  
     May 31, 2010     May 31, 2009     % Change     May 31, 2010     May 31, 2009     % Change  
     (in thousands)           (in thousands)        

Other income (expense), net

   $ (93   $ 1,417      106.6   $ 1,070      $ 1,029      -4.0

Percentage of revenue

     0.00     0.08   -100.0     0.02     0.03   -33.3

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 decrease in other income (expense), net for the three and six months ended May 31, 2010 compared to the prior year periods was due to lower earnings from trading securities related to our deferred compensation program. The realized and unrealized losses in the three and six months ended May 31, 2010 were $0.1 million and $0.2 million, respectively, as compared to the realized and unrealized gains of $2.0 million and $1.4 million in the comparable prior year periods. In addition, we recognized $0.8 million from the sale of the BDG division by SYNNEX Canada in the first quarter of fiscal year 2010.

Provision for Income Taxes

Our effective tax rate in the three and six months ended May 31, 2010 was 37.0% and 36.5%, respectively, compared with an effective tax rate of 36.5% in the comparable prior year periods. The increase in the effective tax rate for the quarter, respectively, as compared to the prior year period was primarily due to an additional $0.4 million expense incurred for the settlement of IRS audits for prior years. The annual effective tax rate remained flat from the prior year.

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.

Non-controlling Interest

Non-controlling interest is the portion of earnings from operations attributable to others. In March 2008, we acquired a controlling interest in Nihon Daikou Shouji Co. Ltd, or NDS, which operates in Japan. The non-controlling interest is contained within our GBS segment and represents the share of NDS’s income that is attributable to others. In June 2010, we announced our intention to dilute our controlling interest in NDS by contributing our interest and operations to a joint venture with SB Pacific Corporation Limited, a newly formed company, which will be led by our former Chairman of the Board of Directors, Mr. Robert T. Huang.

Goodwill

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

Discontinued Operations

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

 

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

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

 

     Three months ended     Six months ended  
     May 31, 2009          May 31, 2010 *               May 31, 2009        
     (in thousands)     (in thousands)  

Revenue

   $ 9,348      $ 2,959      $ 17,870   

Cost of revenue

     (3,910     (1,706     (7,482
                        

Gross profit

     5,438        1,253        10,388   

Selling, general and administrative expenses

     (3,732     (1,199     (7,770
                        

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

     1,706        54        2,618   
                        

Interest income (expense and finance charges), net

     97        17        228   

Other income (expense), net

     13        5        (5
                        

Income before income taxes and non-controlling interest

     1,816        76        2,841   

(Provision for) Benefit from income taxes

     (230     (2     (181
                        

Income from discontinued operations

     1,586        74        2,660   

Income from discontinued operations attributable to non-controlling interest

     (355     (15     (558
                        

Income from discontinued operations attributable to SYNNEX Corporation

   $ 1,231      $ 59      $ 2,102   
                        

 

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

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

 

     November 30, 2009
     (in thousands)

Assets:

  

Cash and cash equivalents

   $ 21,590

Short term investments

     8,952

Property and equipment, net

     6,256

Goodwill

     29,920

Intangible assets

     3,670

Other assets

     3,797
      

Total assets held for sale

   $ 74,185
      

Liabilities:

  

Current deferred liabilities

   $ 10,198

Other liabilities

     7,950
      

Total liabilities related to assets held for sale

   $ 18,148
      

Non-controlling interest

   $ 7,402
      

 

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Liquidity and Capital Resources

Cash Flows

Our business is working capital intensive. Our working capital needs are primarily to finance accounts receivable and inventory. We rely heavily on debt, accounts receivable flooring programs, our securitization and our revolver programs for our working capital needs.

We have financed our growth and cash needs to date primarily through working capital financing facilities, convertible debt, bank credit lines and cash generated from operations. The primary uses of cash have been to fund working capital, for acquisitions and for the generation of increased sales.

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 $13.5 million in the six months ended May 31, 2010 compared to net cash provided by operating activities of $212.9 million in the six months ended May 31, 2009. Net cash used in operating activities in the six months ended May 31, 2010 was mainly due to the purchase of inventory as a result of improved market conditions and increases in purchases of Jack of All Games inventory, the payment of our accounts payable to leverage early pay discounts and the increase in other assets due to prepayment of income taxes, partially offset by collections from our customers. The cash provided by operating activities for the six months ended May 31, 2009 was mainly the result of higher collections from our customers and lower inventory purchases, offset by payments to our vendors. In May 2009, our Canadian revolving accounts receivable securitization program was refinanced with a secured revolving credit arrangement. As a result, the related accounts receivable was brought on-balance sheet as compared to off-balance sheet under the prior arrangement. At the time of refinancing, $53.1 million of accounts receivable was recorded on-balance sheet.

Net cash used in investing activities was $17.6 million in the six months ended May 31, 2010, which includes cash used for the acquisition of Jack of All Games, an increase in restricted cash which relates to lockbox collections under our borrowing arrangements and for our future payments due to our vendors relating to the long-term projects at our Mexico operation, and capital expenditures, partially offset by net cash received from the sales of HiChina Web Solutions of $27.3 million and the BDG division of SYNNEX Canada of $3.2 million. Net cash used in investing activities was $39.2 million in the six months ended May 31, 2009. Cash used in investing activities was mainly due to the increase in restricted cash, which relates to lockbox collections under our borrowing arrangements and future payments due to our vendors relating to the long-term projects at our Mexico operation. During the six months ended May 31, 2009, cash was also used to pay additional earn-out payments relating to the acquisition of New Age Electronics of $9.0 million and capital expenditures.

Net cash provided by financing activities was $30.8 million in the six months ended May 31, 2010 consisting primarily of proceeds from the issuance of common stock, higher book overdraft and the excess tax benefit from share-based compensation. Net cash used by financing activities was $159.8 million in the six months ended May 31, 2009 and primarily related to net payments on our securitization arrangements, bank loans and our revolving line of credit, partially offset by proceeds from the issuance of common stock.

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

We have also issued guarantees to certain vendors and lenders of our subsidiaries for an aggregate amount of $107.4 million as of May 31, 2010 and $105.1 million as of November 30, 2009. We are obligated under these guarantees to pay amounts due should our subsidiaries not pay valid amounts owed to their vendors or lenders. The vendor guarantees are typically less than one-year arrangements, with 30-day cancellation clauses and the lender guarantees are typically for the term of the loan agreement.

Capital Resources

Our cash and cash equivalents totaled $58.6 million and $37.8 million at May 31, 2010 and November 30, 2009, respectively. We believe we will have sufficient resources to meet our present and future working capital requirements for the next twelve months, based on our financial strength and performance, existing sources of liquidity, available cash resources and funds available under our various borrowing arrangements.

 

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In May 2008, we issued $143.8 million of aggregate principal amount of our 4.0% Convertible Senior Notes due 2018, or the Notes, in a private placement. However, under certain circumstances we may redeem the Notes, in whole or in part, for cash on or after May 20, 2013, at a redemption price equal to 100% of principal amount plus any accrued and unpaid interest. In addition, if certain triggering events are met, the Notes can be converted into shares of common stock at any time before their maturity. Because we currently intend to settle the Notes using cash at some future date, we maintain within our U.S. Amended and Restated Arrangement and the Amended and Restated Revolver ongoing features that allow us to utilize cash from these facilities to cash settle the Notes, if desired. (See On-Balance Sheet Arrangements below.) These borrowing arrangements are renewable on their expiration dates. We have no reason to believe that these arrangements will not be renewed as we continue to be in good credit standing with the participating financial institutions. We have had similar borrowing arrangements with various financial institutions throughout our years as a public company. We also retain the ability to issue equity securities and utilize the proceeds to cash-settle the Convertible Senior Notes. See Note 9.

Off-Balance Sheet Arrangements

Our Canadian subsidiary, SYNNEX Canada Limited, or SYNNEX Canada, replaced the accounts receivable securitization program in Canada, with a secured revolving credit arrangement, or the Canadian Revolving Arrangement, in May 2009. In connection with the Canadian Revolving Arrangement, we pledged our stock in SYNNEX Canada. Prior to its replacement, the Canadian Arrangement was accounted for as an off-balance sheet transaction because we funded the advances by selling rights, title and interest in U.S. and Canadian trade receivables, or Canadian Receivables, to the financial institution on a fully-serviced basis. Under the terms and conditions of the Canadian Revolving Arrangement the accounts receivable portion is accounted for as an on-balance sheet financing arrangement. The balance outstanding on the Canadian Revolving Agreement as of May 31, 2010 was $1.1 million and as of November 30, 2009 was $29.1 million.

On-Balance Sheet Arrangements

We primarily finance our U.S. operations with an accounts receivable securitization program, or U.S. Arrangement, by selling up to a maximum of $350.0 million in U.S. trade accounts receivable, or U.S. Receivables. On January 23, 2009, we amended and restated the U.S. Arrangement, or the U.S. Amended and Restated Arrangement, to replace the lead bank and agent. The effective borrowing cost under the U.S. Amended and Restated Arrangement became a blend of the prevailing dealer commercial paper rates plus a program fee based on the used portion of the commitment and a facility fee payable on the commitment. The balance outstanding on the U.S. Amended and Restated Arrangement as of May 31, 1010 was $146.3 million.

During the first quarter of fiscal year 2010, the U.S. Amended and Restated Arrangement was renewed for one year with a new maturity date of January 10, 2011. The effective borrowing costs under the U.S. Amended and Restated Arrangement is a blend of the prevailing dealer commercial paper rates, plus a program fee on the used portion of the commitment and a facility fee payable on the commitment. Under the terms of renewal the program fee was reduced from 0.75% to 0.65% and the facility fee was reduced from 0.75% to 0.65%.

Under the terms of the U.S. Amended and Restated Arrangement, we sell, on a revolving basis, our U.S. Receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in and to the U.S. Receivables as security. Any borrowings under the U.S. Amended and Restated Arrangement are recorded as debt on our consolidated balance sheet. As is customary in trade accounts receivable securitization arrangements, a credit rating agency’s downgrade of the third party issuer of commercial paper or of a back-up liquidity provider (which provides a source of funding if the commercial paper market cannot be accessed) could result in an increase in our cost of borrowing or loss of our financing capacity under these programs if the commercial paper issuer or liquidity back-up provider is not replaced. Loss of such financing capacity could have a material adverse effect on our financial condition and results of operations.

We have a senior secured revolving line of credit arrangement, or the Revolver, with a group of financial institutions. On January 23, 2009, we amended and restated the Revolver, or the Amended and Restated Revolver, to replace the lead bank and agent. The Amended and Restated Revolver’s maximum commitment was also amended from $120.0 million to $80.0 million. The Amended and Restated Revolver retains an accordion feature to increase the maximum commitment by an additional $70.0 million to $150.0 million at our request in the event one or more of the existing lenders or another financial institution which becomes a lender agrees to provide the increased commitment. Interest on borrowings under the Amended and Restated Revolver is based on the financial institution’s prime rate or LIBOR plus 2.50% per annum at our option. A fee of 0.50% per annum is payable with respect to the unused portion of the commitment. The Amended and Restated Revolver is secured by our inventory and other assets and expires on February 11, 2011. Among other changes, the Revolver was further amended such that it would be a default under the Amended and Restated Revolver if the maturity date of the U.S. Amended and Restated Arrangement were not extended. In addition, it would be also an event of default under the Amended and Restated Revolver if (1) a lender under the U.S. Amended and Restated Arrangement declines to extend the maturity date at any point within 60 days prior to the maturity date of the U.S. Amended and Restated Arrangement, unless availability under the Amended and Restated Revolver exceeds $60.0 million or we have a binding

 

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commitment in place to renew or replace the U.S. Amended and Restated Arrangement or (2) at least 20 days prior to the maturity date of the U.S. Amended and Restated Arrangement we do not have in place a binding commitment to renew or replace the U.S. Amended and Restated Arrangement on substantially similar terms and conditions, unless we have no amounts outstanding under the Amended and Restated Revolver at such time. The balance outstanding under the Amended and Restated Revolver as of May 31, 2010 was $1.0 million and there was no borrowing outstanding as of November 30, 2009.

SYNNEX Canada replaced the Canadian revolving line of credit arrangement or Canadian Arrangement of C$30.0 million and replaced the accounts receivable securitization program, of C$110.0 million with a Canadian Revolving Arrangement in May 2009, having a maximum commitment of C$125.0 million. The Canadian Revolving Arrangement provides a sublimit of $5.0 million for the issuance of standby letters of credit. As of both May 31, 2010 and November 30, 2009, there were outstanding standby letters of credit totaling $3.2 million. SYNNEX Canada has granted a security interest on substantially all of its assets in favor of the lenders under this revolving credit facility. In addition, we pledged our stock in SYNNEX Canada as collateral for the Canadian Revolving Arrangement. The Canadian Revolving Arrangement expires in May 2012. The interest rate applicable is (i) 2.5% for a Base Rate Loan in Canadian Dollars, (ii) 3.25% for a Base Rate Loan in U.S. Dollars, and (iii) 1% for a BA (Banker’s Acceptance) Rate Loan. A fee of 0.375% per annum is payable with respect to the unused portion of the commitment. The balance outstanding under our Canadian Revolving Arrangement as of May 31, 2009 and November 30, 2009 was $1.1 million and $29.1 million, respectively.

SYNNEX Canada has a credit facility with a financial institution in Canada to allow us to issue documentary letters of credit. In February 2010, as a result of the sale of the BDG division, the limit on this facility was reduced from C$30.0 million to C$0.4 million with validity up to 180 days. The letters of credit are issued to secure purchases of inventory from manufacturers and to finance import activities. This facility has an overdraft limit up to a maximum amount of C$2.0 million available in Canadian and U.S. dollars for a maximum of two business days to repay draws under letters of credit or letters of guarantee. SYNNEX Canada has granted a lien, in favor of the financial institution in Canada, on the inventory financed under this credit facility, all accounts receivable from the sale of such inventory, all proceeds of sale of such inventory and collection of such accounts receivable and up to C$1.0 million cash on deposit equal to 100% of the outstanding letters of credit with the financial institution in Canada. In connection with this credit facility, we issued a guarantee of SYNNEX Canada’s obligations in favor of the financial institution in Canada, which was reduced to C$7.0 million from C$20.0 million. Letters of credit issued against this facility were $0.1 million as of May 31, 2010 and $0.9 million as of November 30, 2009.

We have other lines of credit and revolving facilities with financial institutions which provide for borrowing capacity aggregating approximately $5.1 million and $5.8 million at May 31, 2010 and November 30, 2009, respectively.

We also have various term loans, including a term loan facility in Canada, short-term borrowings and mortgages with financial institutions, totaling approximately $11.6 million and $12.1 million at May 31, 2010 and November 30, 2009, respectively.

The expiration dates of our various borrowing arrangements range from 2010 to 2017.

Covenants Compliance

In relation to our U.S. Amended and Restated Arrangement, the Amended and Restated Revolver and the Canadian Revolving Arrangement, we have a number of covenants and restrictions that, among other things, require us to comply with certain financial and other covenants and restrict our ability to incur additional debt. These covenants require us to maintain specified financial ratios and satisfy certain financial condition tests, including minimum net worth and fixed charge coverage ratio. They also limit our ability to make or forgive intercompany loans, pay dividends and make distributions, make certain acquisitions, repurchase our stock, create liens, cancel debt owed to us, enter into agreements with affiliates, modify the nature of our business, enter into sale-leaseback transactions, make certain investments, enter into new real estate leases, transfer and sell assets, cancel or terminate any material contracts and merge or consolidate. The covenants also limit our ability to pay cash upon conversion, redemption or repurchase of the Note subject to certain liquidity tests.

As of May 31, 2010, we were in compliance with all material covenants for the above arrangements.

Convertible Debt

In May 2008, we issued $143.8 million of aggregate principal amount of our 4.0% Convertible Senior Notes due 2018, or the Notes, in a private placement. The Notes have a cash coupon interest rate of 4.0% per annum. Interest on the Notes is payable in cash semi-annually in arrears on May 15 and November 15 of each year, beginning November 15, 2008. In addition, we will pay contingent interest in respect of any six-month period from May 15 to November 14 or from November 15 to May 14, with the initial six-month period commencing May 15, 2013, if the trading price of the Notes for each of the ten trading days immediately preceding the first day of the applicable six-month period equals 120% or more of the principal amount of the Notes. During any interest period when contingent interest is payable, the contingent interest payable per Note is equal to 0.55% of the average trading price of the Notes during the ten trading days immediately preceding the first day of the applicable six-month interest period. The Notes mature on May 15, 2018, subject to earlier redemption, repurchase or conversion.

 

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Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date for such Notes under the following circumstances: (1) during any fiscal quarter after the fiscal quarter ended August 31, 2008 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the conversion price of the Notes on the last day of such preceding fiscal quarter; (2) during the five business-day period after any five consecutive trading-day period, or the Measurement Period, in which the trading price per $1,000 principal amount of the Notes for each day of that Measurement Period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate of the Notes on each such day; (3) if we have called the particular Notes for redemption, until the close of business on the business day prior to the redemption date; or (4) upon the occurrence of certain corporate transactions. In addition, holders may also convert their Notes at their option at any time beginning on November 15, 2017, and ending at the close of business on the business day immediately preceding the maturity date for the Notes, without regard to the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of the common stock or a combination thereof at our election. The initial conversion rate for the Notes will be 33.9945 shares of common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $29.42 per share of common stock. Such conversion rate will be subject to adjustment in certain events but will not be adjusted for accrued interest, including any additional interest and any contingent interest.

We may not redeem the Notes prior to May 20, 2013. We may redeem the Notes, in whole or in part, for cash on or after May 20, 2013, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to (including any additional interest and any contingent interest), but excluding, the redemption date.

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

The Notes are senior unsecured obligations of ours and rank equally in right of payment with other senior unsecured debt and rank senior to subordinated notes, if any. The Notes effectively rank junior to any of our secured indebtedness to the extent of the assets securing such indebtedness. The Notes are also structurally subordinated in right of payment to all indebtedness and other liabilities and commitments (including trade payables) of our subsidiaries. The net proceeds from the Notes were used for general corporate purposes and to reduce outstanding balances under the U.S. Arrangement and the Revolver.

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

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

In the first quarter of fiscal year 2010, we adopted new standards effective December 1, 2009, that changed the accounting for the Notes. Under the previous standards the Notes were recognized entirely as a liability at historical value. In accordance with the provisions of the new standards, we retrospectively recognized both a liability and an equity component of the Notes in a manner that reflects our non-convertible debt borrowing rate at the date of issuance of 8.0%. The value assigned to the debt component which is the estimated fair value, as of the issuance date, of a similar note without the conversion feature was determined to be $120.3 million. The difference between the Note cash proceeds and this estimated fair value was estimated to be $23.4 million and was retroactively recorded as a debt discount and will be amortized to interest expense and finance charges over the five year period to the first put date, utilizing the effective interest rate method. The corresponding offset was recorded to additional paid-in capital and was adjusted for deferred taxes of $9.2 million. Underlying debt issuance costs of $3.6 million associated with the Notes were allocated between the liability and equity components of the debt in accordance with the provisions of the new standard.

 

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As of May 31, 2010, the remaining amortization period is approximately 35 months assuming the redemption of the debentures at the first purchase date of May 20, 2013. Based on a cash coupon interest rate of 4.0%, we recorded contractual interest expense of $1.6 million and $3.2 million during the three and six months ended May 31, 2010, respectively, and $1.7 million and $3.3 million during the three and six months ended May 31, 2009, respectively. Based on an effective rate of 8.0%, we recorded non-cash interest expense of $1.1 million and $2.2 million during the three and six months ended May 31, 2010, respectively, and $1.0 million and $2.0 million during the three and six months ended May 31, 2009, respectively. As of May 31, 2010 and November 30, 2009, the carrying value of the equity component of the Notes, net of allocated issuance costs, was $22.8 million. As of May 31, 2010, the if-converted value of the Notes did not exceed the principal balance.

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

Related Party Transactions

We have a business relationship with MiTAC International, a publicly-traded company in Taiwan, that began in 1992 when it became our primary investor through its affiliates. As of November 30, 2009, MiTAC International and its affiliates beneficially owned approximately 30% of our common stock. In addition, Matthew Miau, the Chairman Emeritus of our Board of Directors, is also the Chairman of MiTAC International and a director or officer of MiTAC International’s affiliates. As a result, MiTAC International generally has significant influence over us and over the outcome of all matters submitted to stockholders for consideration, including any merger or acquisition of ours. Among other things, this could have the effect of delaying, deterring or preventing a change of control over us with the loss of any premium that stockholders otherwise might receive in connection with such a transaction.

We work closely with MiTAC International on OEM outsourcing and jointly market MiTAC International’s design and electronic manufacturing services and our contract assembly capabilities. This relationship has enabled us to build relationships with MiTAC International’s customers and we continue to work with and depend on MiTAC International to jointly serve our shared customers. We purchased inventories, including notebook computers, motherboards and other peripherals, from MiTAC International and its affiliates totaling approximately $48.5 million and $114.9 million for the three and six months ended May 31, 2010, respectively, and $100.3 million and $178.2 million for the three and six months ended May 31, 2009, respectively. Our sales to MiTAC International and its affiliates in the three and six months ended May 31, 2010 totaled approximately $1.0 million and $1.2 million, respectively, and $1.0 million and $1.6 million for the three and six months ended May 31, 2009, respectively. Most of these purchases and sales were pursuant to our Master Supply Agreement with MiTAC International and Sun Microsystems, one of our contract assembly customers. In fiscal year 2010, Oracle Corporation acquired Sun Microsystems and all of our contract assembly services to Oracle Corporation are covered by this Master Supply Agreement. Our business relationship to date with MiTAC International has been informal and is not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments.

Accordingly, we negotiate manufacturing, pricing and other material terms on a case-by-case basis with MiTAC International and our contract assembly customers for a given project. While MiTAC International is a related party and a controlling stockholder, we believe that the significant terms under these agreements, including pricing, would not materially differ from the terms we could have negotiated with unaffiliated third parties, and we have adopted a policy requiring that material transactions with MiTAC International or its related parties be approved by our Audit Committee, which is composed solely of independent directors. In addition, Mr. Miau’s compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors. As MiTAC International’s ownership interest in us decreases as a result of sales of our stock and additional dilution, its interest in the success of our business and operations may decrease as well.

We remain dependent on MiTAC International as a contract assembly partner, any change in the pricing or other material terms demanded by MiTAC International could have a material adverse effect on our business, particularly our contract assembly business with Oracle Corporation.

 

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Beneficial Ownership of our Common Stock by MiTAC International

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

 

MiTAC International (1)

   6,177,796

Synnex Technology International Corp. (2)

   4,426,895
    

Total

   10,604,691
    

 

(1) Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC International. Excludes 841,916 shares (of which 445,249 shares are directly held and 396,667 shares are subject to exercisable options) held by Matthew Miau.
(2) Synnex Technology International Corp., or Synnex Technology International, is a separate entity from us and is a publicly-traded corporation in Taiwan. Shares are held via Peer Development Ltd, a wholly-owned subsidiary of Synnex Technology International. MiTAC International owns a minority interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a minority interest of 14.8% in Synnex Technology International. Neither MiTAC International nor Mr. Miau are affiliated with any person(s), entity or entities that hold a majority interest in MiTAC Incorporated.

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

During fiscal year 2007, we purchased shares of MiTAC International and one of its affiliates related to the deferred compensation plan of Robert Huang, our then President and Co-Chief Executive Officer. During fiscal year 2008, we purchased additional shares of MiTAC International related to Mr. Huang’s deferred compensation plan. As of May 31, 2010, the value of the investment was $1.0 million. Except as described herein, none of our officers or directors has an interest in MiTAC International or its affiliates.

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

Recent Accounting Pronouncements

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

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

 

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

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

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

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

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

 

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

 

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

Consolidated Statement of Operations:

      

Interest expense and finance charges, net

   $ (3,180   $ (4,178   $ 998   

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

     28,230        27,232        (998

Provision for income taxes

     (10,346     (9,944     402   

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

     17,884        17,288        (596

Net income attributable to SYNNEX Corporation

     19,229        18,633        (596

Earnings per share

      
                        

Net income per common share - basic

   $ 0.59      $ 0.57      $ (0.02
                        

Net income per common share - diluted

   $ 0.57      $ 0.55      $ (0.02
                        
     Six months ended May 31, 2009  
     As previously
reported
    As adjusted     Effect of Change
increase / (decrease)
 
     (in thousands)  

Consolidated Statement of Operations:

      

Interest expense and finance charges, net

   $ (7,294   $ (9,277   $ 1,983   

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

     57,515        55,532        (1,983

Provision for income taxes

     (21,064     (20,266     798   

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

     36,451        35,266        (1,185

Net income attributable to SYNNEX Corporation

     38,709        37,524        (1,185

Earnings per share

      
                        

Net income per common share - basic

   $ 1.20      $ 1.16      $ (0.04
                        

Net income per common share - diluted

   $ 1.16      $ 1.13      $ (0.03
                        
     As of November 30, 2009  
     As previously
reported
    As adjusted     Effect of Change
increase / (decrease)
 
     (in thousands)  

Consolidated Balance Sheets

      

Other current assets

   $ 26,522      $ 26,144      $ (378

Convertible debt

     143,750        126,785        (16,965

Deferred tax liabilities

     1,442        8,077        6,635   

Additional paid-in capital

     236,213        249,892        13,679   

Retained earnings

     554,972        551,245        (3,727

 

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

 

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

Consolidated Statement of Operations:

       

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

   $ 39,605    $ 40,688      $ (1,083

Net income attributable to SYNNEX Corporation

     24,844      25,492        (648

Earnings per share

       
                       

Net income per common share - basic

   $ 0.72    $ 0.74      $ (0.02
                       

Net income per common share - diluted

   $ 0.70    $ 0.71      $ (0.01
                       
     Six months ended May 31, 2010  
     Amount as currently
reported
   Amount as would
have been reported
prior to adoption
of new  standard
    Effect of adoption -
increase / (decrease) on
current period
 
     (in thousands)  

Consolidated Statement of Operations:

       

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

   $ 75,912    $ 78,061      $ (2,149

Net income attributable to SYNNEX Corporation

     59,503      60,788        (1,285

Earnings per share

       
                       

Net income per common share - basic

   $ 1.74    $ 1.77      $ (0.03
                       

Net income per common share - diluted

   $ 1.68    $ 1.71      $ (0.03
                       
     As of May 31, 2010  
     Amount as currently
reported
   Amount as would
have been reported
prior to adoption
of new  standard
    Effect of Change
increase / (decrease)
 
     (in thousands)  

Consolidated Balance Sheets