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Synnex 10-K 2011
Annual Report on Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

 

 

(Mark One)

 

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

 

For the fiscal year ended November 30, 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)

 

(IRS 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)

Securities registered to Section 12(b) of the Act:

Common Stock, par value $0.001 per share

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  x

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

 

Large accelerated filer  ¨        Accelerated filer  x        Non-accelerated filer  ¨        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

The aggregate market value of Common Stock held by non-affiliates of the registrant (based upon the closing sale price on the New York Stock Exchange as of the last business day of the registrant’s most recently completed second fiscal quarter May 31, 2010) was $636,555,170. Shares held by each executive officer, director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of January 31, 2011, there were 36,294,297 shares of Common Stock, $0.001 per share par value, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12 (as to Beneficial Ownership), 13 and 14 of Part III incorporate by reference information from the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s 2011 Annual Meeting of Stockholders to be held on March 21, 2011.

 

 


Table of Contents

SYNNEX CORPORATION

 

TABLE OF CONTENTS

 

2010 FORM 10-K

 

          Page  

PART I

     1   

Item 1.

   Business Overview      1   

Item 1A.

   Risk Factors      8   

Item 1B.

   Unresolved Staff Comments      22   

Item 2.

   Properties      22   

Item 3.

   Legal Proceedings      22   

Item 4.

   (Removed and Reserved)      23   

PART II

     24   

Item 5.

   Market for Registrant’s Common Equity and Related Stockholder Matters      24   

Item 6.

   Selected Consolidated Financial Data      26   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk      53   

Item 8.

   Financial Statements and Supplementary Data      55   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      109   

Item 9A.

   Controls and Procedures      109   

Item 9B.

   Other Information      110   

PART III

     111   

Item 10.

   Directors and Executive Officers of the Registrant      111   

Item 11.

   Executive Compensation      111   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     111   

Item 13.

   Certain Relationships and Related Transactions      112   

Item 14.

   Principal Accountant Fees and Services      112   

PART IV

     113   

Item 15.

   Exhibits and Financial Statement Schedules      113   


Table of Contents

PART I

 

When used in this Annual Report on Form 10-K (the “Report”), the words “believes,” “plans,” “estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “may,” “designed,” “will,” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about our business model and our services, our market strategy, including expansion of our product lines, our infrastructure, our investment in our IT systems, anticipated benefits of our acquisitions, anticipated increase in fourth quarter seasonality, impact of our disposition of certain assets to MiTAC International Corporation, or MiTAC International, our revenue and operating results, our gross margins, competition with Synnex Technology International Corp., our future needs for additional financing, concentration of customers, adequacy of our facilities, our legal proceedings, 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, pricing pressures, competition, impact of rules and regulations affecting public companies, impact of our pricing policies, our dividend policy, impact of our accounting policies, 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 I, Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

In the sections of this Report entitled “Business Overview” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all references to “SYNNEX,” “we,” “us,” “our” or the “Company” mean SYNNEX Corporation and our subsidiaries, except where it is made clear that the term means only the parent company or one of its segments.

 

SYNNEX, the SYNNEX Logo, CONCENTRIX, the CONCENTRIX Logo, EMJ, NEW AGE ELECTRONICS, PC WHOLESALE, ASPIRE, ENCOVER, and all other SYNNEX company, product and services names and slogans are trademarks or registered trademarks of SYNNEX Corporation. SYNNEX and the SYNNEX Logo Reg. U.S. Pat. & Tm. Off. Other names and marks are the property of their respective owners.

 

Item 1. Business Overview

 

We are a Fortune 500 corporation and a leading business process services company, servicing resellers, retailers and original equipment manufacturers, or OEMs, in multiple regions around the world. Our primary business process services are distribution and business process outsourcing, or BPO. We operate in two segments: distribution services and global business services, or GBS. Our distribution services segment distributes IT systems, peripherals, system components, software, networking equipment, consumer electronics, or CE, and complementary products. We also provide contract assembly services within our distribution segment. Our GBS segment offers a range of BPO services to our customers that include customer management, renewal management, back office processing and information technology outsourcing, or ITO, on a global platform. To further enhance our BPO 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 with our BPO services to help our customers achieve greater efficiencies in time to market, cost minimization, real-time linkages in the supply chain and aftermarket product support. We distribute more than 20,000 technology products (as measured by SKUs) from more than 100 IT, CE

 

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and OEM suppliers to more than 15,000 resellers, system integrators, and retailers throughout the United States, Canada and Mexico. Our GBS segment provides outsourced services to customers in multiple, geographic locations and in multiple languages. As of November 30, 2010, we had over 8,000 full-time and temporary employees in both segments worldwide. From a geographic perspective, approximately 98% of our total revenue was from North America for each of the fiscal years ended November 30, 2010, 2009 and 2008.

 

We purchase IT systems, peripherals, system components, software, networking equipment, CE and complementary products from our primary suppliers such as Hewlett-Packard Company, or HP, Acer, Panasonic, Lenovo and Seagate 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 and government resellers, system integrators, direct marketers, and national and regional retailers.

 

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

 

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

 

Our GBS segment includes a variety of technologies and concentrations of employees. Any shift in business or size of the market and any failure of technology may impact the business offerings and programs. Generally, the employee turnover rate in this business and the risk of losing the experienced employees are high. Higher turnover rates can increase costs and decrease the operating efficiencies and productivity.

 

We have been in business since 1980 and are headquartered in Fremont, California. Our distribution segment has operations in the United States, Canada, Japan, and Mexico. Our GBS segment has operations in the United States, China, Costa Rica, India, the Philippines, and the United Kingdom. We were originally incorporated in the State of California as COMPAC Microelectronics, Inc. in November 1980, and we changed our name to SYNNEX Information Technologies, Inc. in February 1994. We later reincorporated in the State of Delaware under the name of SYNNEX Corporation in October 2003.

 

Our Products and Suppliers

 

We distribute a broad line of IT products, including IT systems, peripherals, system components, software and networking equipment for more than 100 OEM suppliers, enabling us to offer comprehensive solutions to our reseller and retail customers.

 

During fiscal year 2010, our product mix by category was in the following ranges:

 

Product Category:

    

Peripherals

   32% - 36%

IT Systems

   29% - 33%

System Components

   14% - 18%

Software

   11% - 15%

Networking Equipment

   4% - 8%

 

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Our suppliers include leading IT systems, networking equipment and CE suppliers. Our primary OEM suppliers are HP, Acer, Panasonic, Lenovo, Seagate, Lexmark, Microsoft, Intel, Xerox, and Symantec.

 

Our largest OEM supplier is HP. Revenue from the sale of HP products and services represented approximately 38%, 36%, and 32% of our revenue for fiscal years 2010, 2009, and 2008, respectively. We entered into a U.S. Business Development Partner Agreement with HP on November 6, 2003, which governs our relationship with HP in the United States. The agreement remains in effect until May 31, 2011 unless terminated earlier in accordance with its terms. Historically, the agreement has been renewed before expiration. As is typical with our OEM supplier agreements, either party may terminate the agreement upon 30 days written notice. In addition, either party may terminate the agreement with cause upon 15 days written notice. “Cause” is not defined in the agreement. In the event of any breach of the agreement by us, HP may terminate the agreement and we may be required to refund HP any discounts or program payments paid during the period we were in breach of the agreement and reimburse HP for reasonable attorneys’ fees. In the event the agreement is terminated for cause or if we fail to perform our obligations under the agreement, our agreements with HP for the resale of products, support and services will automatically terminate upon such default or termination. If either party becomes insolvent or bankrupt, the other party may terminate the agreement without notice and cancel any unfulfilled obligations, except for payment obligations. Our subsidiaries in Canada and Mexico have territorial supplier agreements with subsidiaries of HP located in the respective countries.

 

In addition to HP, we have distribution agreements with most of our suppliers. These agreements usually provide for nonexclusive distribution rights and pertain to specific geographic territories. The agreements are also generally short-term, subject to periodic renewal, and often contain provisions permitting termination by either our supplier or us without cause upon relatively short notice. An OEM supplier that elects to terminate a distribution agreement will generally repurchase its products carried in our inventory.

 

Our distribution and contract assembly business subjects us to the risk that the value of our inventory will be affected adversely by suppliers’ price reductions or by technological changes affecting the usefulness or desirability of the products comprising our inventory. Many of our OEM suppliers offer us limited protection from the loss in value of our inventory due to technological change or a supplier’s price reductions. Under many of these agreements, we have a limited period of time to return or exchange products or claim price protection credits. We monitor our inventory levels and attempt to time our purchases to maximize our protection under supplier programs.

 

Our Customers

 

We distribute IT products to more than 15,000 resellers, system integrators and retailers. Resellers are classified primarily by the end-users to whom they sell as well as the services they provide. End-users include large corporations or enterprises, federal, state and local governments, small/medium sized businesses, or SMBs, and individual consumers. In addition, resellers vary greatly in size and geographic reach. Our reseller customers buy from us and other distributors. Our larger reseller customers also buy certain products directly from OEM suppliers. Systems integrators offer services in addition to product resale, primarily in systems customization, integration, and deployment. Retailers serve mostly end-users and to a small degree, small office/home office customers.

 

In fiscal year 2010, one customer accounted for 11% of our total revenue. No customer accounted for more than 10% of our total revenue in fiscal years 2009 and 2008. Some of our largest customers include CDW Corporation, Iron Bow Technologies, Staples Business Depot, Systemax, Inc., and Insight Enterprises, Inc.

 

In our GBS segment, our customers are primarily manufacturers of hardware and CE devices and publishers of software.

 

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Our Services

 

We offer a variety of business process services to our customers. These services can be purchased individually or they can be purchased in combination with others in the form of supply chain solutions and aftermarket product support. The two major categories of services include the following:

 

Distribution Services. We have sophisticated pick, pack and ship operations, which allows us to efficiently receive shipments from our OEM suppliers and quickly fill orders for our reseller and retail customers. We generally stock or otherwise have access to the inventory of our OEM suppliers to satisfy the demands of our reseller and retail customers.

 

BPO Services. We provide BPO services to our customers that help them market and support their products in multiple geographies and languages. These services include customer management, renewal management, back office processing and ITO on a global platform, including technical support, demand generation and marketing and administration functions. We deliver these services through various methods including voice, chat, web, email, and digital print.

 

The above major categories of services are complemented by the following:

 

Contract Assembly Services. We provide our OEM contract assembly customers with systems design and build-to-order, or BTO, and configure-to-order, or CTO, assembly capabilities. BTO assembly consists of building a group of systems with the same pre-defined specifications, generally for our OEM customers’ inventory. CTO assembly consists of building a customized system for an OEM customer’s individual order specifications. We also offer production value-added services such as kitting, reconfiguration, asset tagging and hard drive imaging.

 

Logistics Services. We provide logistics support to our reseller customers such as outsourced fulfillment, virtual distribution and direct ship to end-users. Other logistics support activities we provide include generation of customized shipping documents, multi-level serial number tracking for customized, configured products and online order and shipment tracking. We also offer full turn-key logistics solutions designed to address the needs of large volume or specialty logistics services. Our full turn-key service offering is modular in nature and is designed to cover all aspects of the logistics lifecycle including, transportation management, inventory optimization, complementary product matching, reverse logistics, asset refurbishment and disposal and strategic procurement.

 

Online Services. We maintain electronic data interchange, or EDI, and web-based communication links with many of our reseller and retail customers. These links improve the speed and efficiency of our transactions with our customers by enabling them to search for products, check inventory availability and prices, configure systems, place and track orders, receive invoices, review account status and process returns. We also have web-based application software that allows our customers or their end-user customers to order software and take delivery online.

 

Financing Services. We offer our reseller customers a wide range of financing options, including net terms, third party leasing, floor plan financing, letters of credit backed financing and arrangements where we collect payments directly from the end-user. The availability and terms of our financing services are subject to our credit policies or those of third party financing providers to our customers.

 

Marketing Services. We offer our OEM suppliers a full range of marketing activities targeting resellers, system integrators and retailers including direct mail, external media advertising, reseller product training, targeted telemarketing campaigns, national and regional trade shows, database analysis, print on demand services and web-based marketing.

 

Technical Solutions Services. We provide our reseller customers technical support services, including pre-sales and post-sales support.

 

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For a discussion of our business by segments, please see Note 17—Segment Information in the Notes to the Consolidated Financial Statements.

 

Sales and Marketing

 

As of November 30, 2010, we employed 4,971 sales, marketing, contact center and demand generation services professionals. For distribution, we serve our large commercial, government reseller and retail customers through dedicated sales professionals. We market to smaller resellers and OEMs through dedicated regional sales teams. In addition, we have dedicated product management and sales specialists that focus on the sale and promotion of the products and services of selected suppliers or for specific end-market verticals. These specialists are also directly involved in establishing new relationships with leading OEMs to create demand for their products and services and with resellers for their customers’ needs. Our sales and marketing professionals are complemented by members of our executive management team who are integral in identifying potential new customer opportunities, promoting sales growth and ensuring customer satisfaction. We have sales and marketing professionals in close geographic proximity to our reseller, retail and OEM customers.

 

In addition, as part of our GBS segment, we have sales teams dedicated to cultivating new BPO opportunities in customer management, renewal management and back office processing on a global platform.

 

Our Operations

 

We operate over 20 distribution facilities in the United States, Canada and Mexico. Our distribution processes are highly automated to reduce errors, ensure timely order fulfillment and enhance the efficiency of our warehouse operations and back office administration. Our distribution facilities are geographically dispersed to be near reseller customers and their end-users. This decentralized, regional strategy enables us to benefit from lower shipping costs and shorter delivery lead times to our customers. Furthermore, we track several performance measurements to continuously improve the efficiency and accuracy of our distribution operations. Our regional locations also enable us to make local deliveries and provide will-call fulfillment to more customers than if our distribution operations were more centralized, resulting in better service to our customers. Our workforce is comprised of permanent and temporary employees, enabling us to respond to short-term changes in order activity.

 

Our proprietary IT systems and processes enable us to automate many of our distribution operations. We use radio frequency and bar code scanning technologies in all of our warehouse operations to maintain real-time inventory records, facilitate frequent cycle counts and improve the accuracy of order fulfillment. We use hand-held devices to capture real-time labor cost data, enabling efficient management of our daily labor costs.

 

To enhance the accuracy of our distribution order fulfillment and protect our inventory from shrinkage, our distribution systems also incorporate numerous controls. These controls include order weight checks, bar code scanning, and serial number profile verification that the product shipped matches the customer order. We also use digital video imaging to record our small package shipping activities by order. These images and other warehouse and shipping data are available online to our customer service representatives, enabling us to quickly respond to order inquiries by our customers.

 

We operate our principal contract assembly facilities in the United States. We generally assemble IT systems, including servers and IT appliances, by incorporating system components from our distribution inventory and other sources. Additionally, we perform production value-added services, including kitting, asset tagging, hard drive imaging and reconfiguration. Our contract assembly facilities are ISO 9001:2008 and ISO 14001:2004 certified.

 

In our GBS segment, we provide a comprehensive range of services to enhance the customer lifecycle and acquire, support, retain and renew customer relationships. These services primarily consist of technical support,

 

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customer service, renewal management, demand generation, back office support for sales, marketing and administrative functions, ITO services and solutions. Services are provided from multiple global locations to customers worldwide in multiple languages. The GBS services platform is supported by proprietary technology to enable efficient and secure customer contact through various methods including voice, chat, web, e-mail and digital print.

 

International Operations

 

Approximately 17% of our total revenue for both fiscal years 2010 and 2009, and approximately 20% for fiscal year 2008, originated outside of the United States. Approximately 15% for both fiscal years 2010 and 2009, and 18% for fiscal year 2008, of our total revenue was generated in Canada. A key element in our business strategy has been to locate our services in markets that are cost beneficial, but low risk. For a discussion of our net revenue by geographic region, please see Note 17—Segment Information in the Notes to the Consolidated Financial Statements.

 

Purchasing

 

Product costs represent our single largest expense and IT and CE product inventory is one of our largest working capital investments. Furthermore, product procurement from our OEM suppliers is a highly complex process that involves incentive programs, rebate programs, price protection, volume and early payment discounts and other arrangements. Consequently, efficient and effective purchasing operations are critical to our success.

 

Our purchasing group works closely with many areas of our organization, especially our product managers who work closely with our OEM suppliers and our sales force, to understand the volume and mix of IT products that should be purchased. In addition, the purchasing group utilizes an internally developed, proprietary information systems application tool, which further aids in forecasting future product demand based on several factors, including historical sales levels, expected product life cycle and current and projected economic conditions. Our information system tools also track warehouse and channel inventory levels and open purchase orders on a real-time basis enabling us to stock inventory at a regional level closer to the customer as well as to actively manage our working capital resources. This level of automation promotes greater efficiencies of inventory management by replenishing and turning inventory, as well as placing purchase orders on a more frequent basis. Furthermore, our system tools also allow for automated checks and controls to prevent the generation of inaccurate orders.

 

Managing our OEM supplier incentive programs is another critical function of our purchasing group. We attempt to maximize the benefits of incentives, rebates and volume and early payment discounts that our OEM suppliers offer us from time to time. We carefully evaluate these supplier incentive benefits relative to our product handling and carrying costs so that we do not overly invest in our inventory. We also closely monitor inventory levels on a product-by-product basis and plan purchases to take advantage of OEM supplier provided price protection. By managing inventory levels and customer purchase patterns at each of our regional distribution facilities, we can minimize our shipping costs by stocking products near to our resellers, retailers, and their end-user customers.

 

Financial Services

 

We offer various financing options to our customers as well as prepayment, credit card and cash on delivery terms. We also collect outstanding accounts receivable on behalf of our reseller customers in certain situations. In issuing credit terms to our reseller and retail customers, we closely and regularly monitor their creditworthiness through our information systems, credit ratings information and periodic detailed credit file reviews by our financial services staff. We have also purchased credit insurance in some geographies to further control credit risks. Finally, we establish reserves for estimated credit losses in the normal course of business based on the overall quality and aging of the accounts receivable portfolio, the existence of a limited amount of credit insurance and specifically identified customer risks.

 

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We also sell to certain reseller customers pursuant to third party floor plan financing. The expenses charged by these financing companies are subsidized either by our OEM suppliers or paid by us. We generally receive payment from these financing companies within 15 to 30 days from the date of sale, depending on the specific arrangement.

 

Information Technology

 

Our IT systems manage the entire order cycle, including processing customer orders, production planning, customer billing and payment tracking. These internally developed IT systems make our operations more efficient and provide visibility into our operations. We believe our IT infrastructure is scalable to support further growth. Continuous enhancement of our IT systems improves product and inventory management, streamlines order and fulfillment processes, and increases operational flexibility.

 

To allow our customers and suppliers to communicate and transact business with us in an efficient and consistent manner, we have implemented a mix of proprietary and off-the-shelf software programs, which integrate our IT systems with those of our customers and suppliers. In particular, we maintain EDI and web-based communication links with many of our reseller and retail customers to enable them to search for products, check real-time pricing, inventory availability and specifications, place and track orders, receive invoices and process returns. We plan to continue making significant investments in our IT systems to facilitate the flow of information, increase our efficiency and lower transaction costs.

 

Competition

 

We operate in a highly competitive environment, both in the United States and internationally. The IT product industry is characterized by intense competition, based primarily on product availability, credit terms, price, speed and accuracy of delivery, effectiveness of sales and marketing programs, ability to tailor specific solutions to customer needs, quality and depth of product lines, pre-sale and post-sale technical support, flexibility and timely response to design changes, technological capabilities and product quality, service and support. We compete with a variety of regional, national and international IT product distributors and manufacturers.

 

Our major competitors in IT product distribution include Arrow Electronics, Inc., Avnet, Inc., Ingram Micro, Inc., ScanSource, Inc., Westcon Group and Tech Data Corporation and, to a lesser extent, regional distributors. We also face competition from our OEM suppliers, which also sell directly to resellers, retailers and end-users. The distribution industry has historically undergone, and continues to undergo, consolidation. Over the years, a number of providers within the IT distribution industry exited or merged with other providers. We have participated in this consolidation through our acquisitions of Merisel Canada, Inc., Gates/Arrow, EMJ Data Systems Limited, Azerty United Canada, PC Wholesale, New Age Electronics, Jack of All Games, and Marubeni Infotec Corporation, and we continue to evaluate other new opportunities. Our major competitors in our global business services include Teleperformance, TeleTech Holdings, Inc. and Accenture, and other global and regional service providers.

 

We constantly seek to expand our business into areas primarily related to our core distribution business as well as other support, logistics, BPO and related value-added services. As we enter new business areas, we may encounter increased competition from our current competitors and/or new competitors.

 

Some of our competitors are substantially larger and may have greater financial, operating, manufacturing and marketing resources than us. Some of our competitors may have broader geographic breadth and range of services than us. Some may have more developed relationships with their existing customers. We attempt to offset our comparative scale differences by focusing on a limited number of leading OEMs in the distribution segment and by running a more efficient and low cost operation, and by offering a high level of value-add and customer service in both the distribution and GBS segments.

 

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Employees

 

As of November 30, 2010, we had 7,454 full-time employees, including 4,971 professionals in sales, marketing, contact center, renewal management, and demand generation services, 1,735 in operations, and 748 in executive, finance, IT and administration. Given the variability in our business and the quick response time required by customers, it is critical that we are able to rapidly ramp-up and ramp-down our distribution capabilities to maximize efficiency. As a result, we frequently use a significant number of temporary or contract workers, which totaled 651, on a full-time equivalent basis, as of November 30, 2010. Our employees are not represented by a labor union, nor are they covered by a collective bargaining agreement. We consider our employee relations to be good.

 

Available Information

 

Our website is http://www.synnex.com. We make available free of charge, on or through our website, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, if any, or other filings filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing or furnishing these reports with the Securities and Exchange Commission, or SEC. Information contained on our website is not a part of this report. We have adopted a code of ethics applicable to our employees including our principal executive, financial and accounting officers, and it is available free of charge, on our website’s investor relations page.

 

The SEC maintains an Internet site at http://www.sec.gov that contains the Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, if any, or other filings filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, proxy and information statements of ours. All reports that we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC, 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

 

Item 1A. Risk Factors

 

The following are certain risk factors that could affect our business, financial results and results of operations. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause the actual results and conditions to differ materially from those projected in the forward-looking statements. Before you invest in our Company, you should know that making such an investment involves some risks, including the risks described below. The risks that have been highlighted here are not the only ones that we face. If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Related to Our Business

 

We anticipate that our revenue and operating results will fluctuate, which could adversely affect the enterprise value of our Company and our securities.

 

Our operating results have fluctuated and will fluctuate in the future as a result of many factors, including:

 

   

general economic conditions and level of IT and CE spending;

 

   

the loss or consolidation of one or more of our significant OEM suppliers or customers;

 

   

market acceptance, product mix and useful life of the products we distribute;

 

   

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

 

   

competitive conditions in our industries that impact our margins;

 

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pricing, margin and other terms with our OEM suppliers;

 

   

decline in inventory value as a result of product obsolescence and market acceptance;

 

   

variations in our levels of excess inventory and doubtful accounts, and changes in the terms of OEM supplier-inventory protections, such as price protection and return rights; and

 

   

the impact of the business acquisitions and dispositions we make.

 

Although we attempt to control our expense levels, these levels are based, in part, on anticipated revenue. Therefore, we may not be able to control spending in a timely manner to compensate for any unexpected revenue shortfall.

 

Our operating results also are affected by the seasonality of the IT and CE products and services industry. We have historically experienced higher sales in our fourth fiscal quarter due to patterns in the capital budgeting, federal government spending and purchasing cycles of end-users. These patterns may not be repeated in subsequent periods. You should not rely on period-to-period comparisons of our operating results as an indication of future performance. The results of any quarterly period are not indicative of results to be expected for a full fiscal year. In future quarters, our operating results may be below our expectations or those of our public market analysts or investors, which would likely cause our share price to decline.

 

We depend on a small number of OEMs to supply the IT and CE products and services that we sell and the loss of, or a material change in, our business relationship with a major OEM supplier could adversely affect our business, financial position and operating results.

 

Our future success is highly dependent on our relationships with a small number of OEM suppliers. Sales of HP products and services represented approximately 38%, 36%, and 32% of our total revenue in fiscal years 2010, 2009, and 2008, respectively. Our OEM supplier agreements typically are short-term and may be terminated without cause upon short notice. For example, our agreement with HP will expire on May 31, 2011. The loss or deterioration of our relationships with a major OEM supplier, the authorization by OEM suppliers of additional distributors, the sale of products by OEM suppliers directly to our reseller and retail customers and end-users, or our failure to establish relationships with new OEM suppliers or to expand the distribution and supply chain services that we provide OEM suppliers could adversely affect our business, financial position and operating results. For example in fiscal year 2008, International Business Machines Corporation, or IBM, terminated its approval to market IBM System X and related products and services. In addition, OEM suppliers may face liquidity or solvency issues that in turn could negatively affect our business and operating results.

 

Our business is also highly dependent on the terms provided by our OEM suppliers. Generally, each OEM supplier has the ability to change the terms and conditions of its distribution agreements, such as reducing the amount of price protection and return rights or reducing the level of purchase discounts, rebates and marketing programs available to us. From time to time we may conduct business with a supplier without a formal agreement because the agreement has expired or otherwise. In such case, we are subject to additional risk with respect to products, warranties and returns, and other terms and conditions. If we are unable to pass the impact of these changes through to our reseller and retail customers, our business, financial position and operating results could be adversely affected.

 

Our gross margins are low, which magnifies the impact of variations in revenue, operating costs and bad debt on our operating results.

 

As a result of significant price competition in the IT and CE products and services industry, our gross margins are low, and we expect them to continue to be low in the future. Increased competition arising from industry consolidation and low demand for certain IT and CE products and services may hinder our ability to maintain or improve our gross margins. These low gross margins magnify the impact of variations in revenue, operating costs and bad debt on our operating results. A portion of our operating expenses is relatively fixed, and

 

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planned expenditures are based in part on anticipated orders that are forecasted with limited visibility of future demand. As a result, we may not be able to reduce our operating expenses as a percentage of revenue to mitigate any further reductions in gross margins in the future. If we cannot proportionately decrease our cost structure in response to competitive price pressures, our business and operating results could suffer.

 

We also receive purchase discounts and rebates from OEM suppliers based on various factors, including sales or purchase volume and breadth of customers. A decrease in net sales could negatively affect the level of volume rebates received from our OEM suppliers and thus, our gross margins. Because some rebates from OEM suppliers are based on percentage increases in sales of products, it may become more difficult for us to achieve the percentage growth in sales required for larger discounts due to the current size of our revenue base. A decrease or elimination of purchase discounts and rebates from our OEM suppliers would adversely affect our business and operating results.

 

Because we sell on a purchase order basis, we are subject to uncertainties and variability in demand by our reseller, retail and contract assembly services customers, which could decrease revenue and adversely affect our operating results.

 

We sell to our reseller, retail and contract assembly services customers on a purchase order basis, rather than pursuant to long-term contracts or contracts with minimum purchase requirements. Consequently, our sales are subject to demand variability by our reseller, retail and contract assembly services customers. The level and timing of orders placed by our customers vary for a variety of reasons, including seasonal buying by end-users, the introduction of new hardware and software technologies and general economic conditions. Customers submitting a purchase order may cancel, reduce or delay their orders. If we are unable to anticipate and respond to the demands of our reseller, retail and contract assembly services customers, we may lose customers because we have an inadequate supply of products, or we may have excess inventory, either of which may harm our business, financial position and operating results.

 

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

 

We provide contact center support services to our customers under contracts with provisions that could impact our profitability. Many of our contracts have short termination provisions that could cause fluctuations in our revenue and operating results from period to period. For example, some contracts have performance related bonus or penalty provisions, whereby we could receive a bonus if we satisfy certain performance levels or have to pay a penalty for failing to do so. In addition, our customers may not guarantee a minimum call volume; however, we hire employees based on anticipated average call volumes. The reduction of call volume, loss of any customers, payment of any penalties for failure to meet performance levels or inability to terminate any unprofitable contracts may have an adverse impact on our operations and financial results.

 

We are subject to the risk that our inventory value may decline, and protective terms under our OEM supplier agreements may not adequately cover the decline in value, which in turn may harm our business, financial position and operating results.

 

The IT and CE products industry is subject to rapid technological change, new and enhanced product specification requirements, and evolving industry standards. These changes may cause inventory on hand to decline substantially in value or to rapidly become obsolete. Most of our OEM suppliers offer limited protection from the loss in value of inventory. For example, we can receive a credit from many OEM suppliers for products held in inventory in the event of a supplier price reduction. In addition, we have a limited right to return a certain percentage of purchases to most OEM suppliers. These policies are often subject to time restrictions and do not protect us in all cases from declines in inventory value. In addition, our OEM suppliers may become unable or unwilling to fulfill their protection obligations to us. The decrease or elimination of price protection or the inability of our OEM suppliers to fulfill their protection obligations could lower our gross margins and cause us to record inventory write-downs. If we are unable to manage our inventory with our OEM suppliers with a high

 

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degree of precision, we may have insufficient product supplies or we may have excess inventory, resulting in inventory write-downs, either of which may harm our business, financial position and operating results.

 

We depend on OEM suppliers to maintain an adequate supply of products to fulfill customer orders on a timely basis, and any supply shortages or delays could cause us to be unable to timely fulfill orders, which in turn could harm our business, financial position and operating results.

 

Our ability to obtain particular products in the required quantities and to fulfill reseller and retail customer orders on a timely basis is critical to our success. In most cases, we have no guaranteed price or delivery agreements with our OEM suppliers. We occasionally experience a supply shortage of certain products as a result of strong demand or problems experienced by our OEM suppliers. If shortages or delays persist, the price of those products may increase, or the products may not be available at all. In addition, our OEM suppliers may decide to distribute, or to substantially increase their existing distribution business, through other distributors, their own dealer networks, or directly to resellers, retailers or end-users. Accordingly, if we are not able to secure and maintain an adequate supply of products to fulfill our reseller and retail customer orders on a timely basis, our business, financial position and operating results may be adversely affected.

 

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

 

The market for video games is characterized by short product life cycles and frequent introductions of new products. The life cycle of a video game generally involves a relatively high level of sales during the first few months after introduction followed by a rapid decline in sales and may result in product obsolescence. Therefore, the markets in which we compete frequently introduce new products. As a result, competition is intense for resellers’ and retailers’ limited shelf space and promotions. If our vendors’ new products are not introduced in a timely manner or do not achieve significant market acceptance, we may not generate sufficient sales or profitability. Further, if we are unable to successfully compete for resellers’ or retailers’ space and promotional resources, this could negatively impact market acceptance of our products and negatively impact our business and operating results.

 

In addition to competing with video game manufacturers, we compete with downloadable and online gaming providers and used video game resellers. The popularity of downloadable and online games has increased and continued increases in downloadable and online gaming may result in a reduced level of over the counter retail video games sales. In addition, certain of our video game reseller and retail customers sell used video games that are generally priced lower than new video games, which could result in an increase in pricing pressure. If such customers increase their mix of sales of used video games relative to new video games, it could negatively impact our sales of new video games.

 

Because we conduct substantial operations in China, risks associated with economic, political and social events in China could negatively affect our business and operating results.

 

A substantial portion of our IT systems operations, including our IT systems support and software development operations is located in China. In addition, we also conduct general and administrative activities from our facility in China. As of November 30, 2010, we had 928 support personnel located in China. Our operations in China are subject to a number of risks relating to China’s economic and political systems, including:

 

   

a government controlled foreign exchange rate and limitations on the convertibility of the Chinese Renminbi;

 

   

extensive government regulation;

 

   

changing governmental policies relating to tax benefits available to foreign-owned businesses;

 

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the telecommunications infrastructure;

 

   

a relatively uncertain legal system; and

 

   

uncertainties related to continued economic and social reform.

 

Our IT systems are an important part of our global operations. Any significant interruption in service, whether resulting from any of the above uncertainties, natural disasters or otherwise, could result in delays in our inventory purchasing, errors in order fulfillment, reduced levels of customer service and other disruptions in operations, any of which could cause our business and operating results to suffer.

 

We may have higher than anticipated tax liabilities.

 

We conduct business globally and file income tax returns in various tax jurisdictions. Our effective tax rate could be adversely affected by several factors, many of which are outside of our control, including:

 

   

changes in income before taxes in various jurisdictions in which we operate that have differing statutory tax rates;

 

   

changing tax laws, regulations, and/or interpretations of such tax laws in multiple jurisdictions;

 

   

effect of tax rate on accounting for acquisitions and dispositions;

 

   

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

 

   

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

 

We report our results of operations based on our determination of the amount of taxes owed in various tax jurisdictions in which we operate. The determination of our worldwide provision for income taxes and other tax liabilities requires estimation, judgment and calculations where the ultimate tax determination may not be certain. Our determination of tax liability is always subject to review or examination by tax authorities in various tax jurisdictions. Any adverse outcome of such review or examination could have a negative impact on our operating results and financial condition. The results from various tax examinations and audit may differ from the liabilities recorded in our financial statements and may adversely affect our financial results and cash flows.

 

We have pursued and intend to continue to pursue strategic acquisitions or investments in new markets and may encounter risks associated with these activities, which could harm our business and operating results.

 

We have in the past pursued and in the future expect to pursue acquisitions of, or investments in, businesses and assets in new markets, either within or outside the IT and CE products and services industry, that complement or expand our existing business. Our acquisition strategy involves a number of risks, including:

 

   

difficulty in successfully integrating acquired operations, IT systems, customers, and OEM supplier relationships, products and services and businesses with our operations;

 

   

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

 

   

diversion of our capital and management attention away from other business issues;

 

   

increase in our expenses and working capital requirements;

 

   

in the case of acquisitions that we may make outside of the United States, difficulty in operating in foreign countries and over significant geographical distances; and

 

   

other financial risks, such as potential liabilities of the businesses we acquire.

 

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We may incur additional costs and consolidate certain redundant expenses in connection with our acquisitions and investments, which may have an adverse impact on our operating margins. Future acquisitions may result in dilutive issuances of equity securities, the incurrence of additional debt, large write-offs, a decrease in future profitability, or future losses. The incurrence of debt in connection with any future acquisitions could restrict our ability to obtain working capital or other financing necessary to operate our business. Our recent and future acquisitions or investments may not be successful, and if we fail to realize the anticipated benefits of these acquisitions or investments, our business and operating results could be harmed.

 

Because of the capital-intensive nature of our business, we need continued access to capital, which, if not available to us or if not available on favorable terms, could harm our ability to operate or expand our business.

 

Our business requires significant levels of capital to finance accounts receivable and product inventory that is not financed by trade creditors. If cash from available sources is insufficient, proceeds from our accounts receivable securitization and revolving credit programs are limited or cash is used for unanticipated needs, we may require additional capital sooner than anticipated. In the event we are required, or elect, to raise additional funds, we may be unable to do so on favorable terms, or at all, and may incur expenses in raising the additional funds. Our current and future indebtedness could adversely affect our operating results and severely limit our ability to plan for, or react to, changes in our business or industry. We could also be limited by financial and other restrictive covenants in any securitization or credit arrangements, including limitations on our borrowing of additional funds and issuing dividends. Furthermore, the cost of securitization or debt financing could significantly increase in the future, making it cost prohibitive to securitize our accounts receivable or borrow, which could force us to issue new equity securities. If we issue new equity securities, existing stockholders may experience dilution, or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, we may not be able to take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. Any inability to raise additional capital when required could have an adverse effect on our business and operating results.

 

The terms of our debt arrangements impose significant restrictions on our ability to operate which in turn could negatively affect our ability to respond to business and market conditions and therefore could have an adverse effect on our business and operating results.

 

As of November 30, 2010, we had $386.3 million in outstanding short and long-term borrowings under term loans, convertible senior notes and lines of credit, excluding trade payables. The terms of one or more of the agreements under which this indebtedness was incurred may limit or restrict, among other things, our ability to:

 

   

incur additional indebtedness;

 

   

pay dividends or make certain other restricted payments;

 

   

consummate certain asset sales or acquisitions;

 

   

enter into certain transactions with affiliates; and

 

   

merge, consolidate or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets.

 

We are also required to maintain specified financial ratios and satisfy certain financial condition tests, including a minimum net worth and a fixed charge coverage ratio as outlined in our senior secured revolving line of credit arrangement. Our inability to meet these ratios and tests could result in the acceleration of the repayment of the related debt, the termination of the facility, the increase in our effective cost of funds or the cross-default of other credit and securitization arrangements. As a result, our ability to operate may be restricted and our ability to respond to business and market conditions may be limited, which could have an adverse effect on our business and operating results.

 

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We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness or we may experience a financial failure, which may hinder the repayment of our convertible debt.

 

Our ability to make scheduled debt payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot be certain that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot be certain that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Some of our credit facilities restrict our ability to dispose assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.

 

If we cannot make scheduled payments on our debt, we will be in default and, as a result:

 

   

our debt holders could declare all outstanding principal and interest to be due and payable;

 

   

the lenders under our credit agreement could terminate their commitments to loan us money and foreclose against the assets securing their borrowings; and

 

   

we could be forced into bankruptcy or liquidation, which is likely to result in delays in the payment of our indebtedness and in the exercise of enforcement remedies related to our indebtedness.

 

A portion of our revenue is financed by floor plan financing companies and any termination or reduction in these financing arrangements could increase our financing costs and harm our business and operating results.

 

A portion of our product distribution revenue is financed by floor plan financing companies. Floor plan financing companies are engaged by our customers to finance, or floor, the purchase of products from us. In exchange for a fee, we transfer the risk of loss on the sale of our products to the floor plan companies. We currently receive payment from these financing companies within approximately 15 to 30 days from the date of the sale, which allows our business to operate at much lower relative working capital levels than if such programs were not available. If these floor plan arrangements are terminated or substantially reduced, the need for more working capital and the increased financing cost could harm our business and operating results.

 

We have significant credit exposure to our customers, and negative trends in their businesses could cause us significant credit loss and negatively impact our cash flow and liquidity position.

 

We extend credit to our customers for a significant portion of our sales to them and they have a period of time, generally 30 days after the date of invoice, to make payment. As a result, we are subject to the risk that our customers will not pay on time or at all. The majority of our customers are small and medium sized businesses. Our credit exposure risk may increase due to financial difficulties or liquidity or solvency issues experienced by our customers, resulting in their inability to repay us. The liquidity or solvency issues may increase as a result of an economic downturn or a decrease in IT or CE spending by end-users. If we are unable to collect payments in a timely manner from our customers due to changes in financial or economic conditions, or for other reasons, and we are unable to collect under our credit insurance policies, we may write off the amount due from the

 

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customers. These write-offs may result in more expensive credit insurance and negatively impact our ability to utilize accounts receivable-based financing. These circumstances could negatively impact our cash flow and liquidity position. Further, we are exposed to higher collection risk as we continue to expand internationally, where the payment cycles are generally longer and the credit rating process may not be as robust as in the United States.

 

In addition, our Mexico operations primarily focus on various long-term projects with government and other local agencies, which often involve extended payment terms and could expose us to additional collection risks.

 

We may suffer adverse consequences from changing interest rates.

 

Our borrowings and securitization arrangements are variable-rate obligations that could expose us to interest rate risks. As of November 30, 2010, we had $245.3 million in such variable-rate obligations. If interest rates increase, our interest expense would increase, which would negatively affect our net income. An increase in interest rates may increase our future borrowing costs and restrict our access to capital.

 

Additionally, current market conditions, the subprime mortgage crisis, and overall credit conditions could limit our availability of capital, which could cause increases in interest margin spreads over underlying indices, effectively increasing the cost of our borrowing. While some of our credit facilities have contractually negotiated spreads, terms such as these are subject to ongoing negotiations.

 

We may experience theft of product from our warehouses, water damage to our properties and other casualty events which could harm our operating results.

 

From time to time we have experienced incidents of theft at various facilities, water damages to our properties and other casualty events. These types of incidents may make it more difficult or expensive for us to obtain insurance coverage in the future. Also, the same or similar incidents may occur in the future for which we may not have sufficient insurance coverage or policy limits to be fully compensated for the loss, which may have an adverse effect on our business and financial results. For example, in fiscal year 2010, we experienced a loss of product as a result of a train derailment.

 

We are dependent on a variety of IT and telecommunications systems, and any failure of these systems could adversely impact our business and operating results.

 

We depend on IT and telecommunications systems for our operations. These systems support a variety of functions including inventory management, order processing, shipping, shipment tracking, billing, and contact center support.

 

Failures or significant downtime of our IT or telecommunications systems could prevent us from taking customer orders, printing product pick-lists, shipping products, billing customers and handling call volume. Sales also may be affected if our reseller and retail customers are unable to access our pricing and product availability information. We also rely on the Internet, and in particular electronic data interchange, or EDI, for a large portion of our orders and information exchanges with our OEM suppliers and reseller and retail customers. The Internet and individual websites have experienced a number of disruptions and slowdowns, some of which were caused by organized attacks. In addition, some websites have experienced security breakdowns. If we were to experience a security breakdown, disruption or breach that compromised sensitive information, it could harm our relationship with our OEM suppliers and reseller and retail customers. Disruption of our website or the Internet in general could impair our order processing or more generally prevent our OEM suppliers and reseller and retail customers from accessing information. Our contact call center is dependent upon telephone and data services provided by third party telecommunications service vendors and our IT and telecommunications system. Any significant increase in our IT and telecommunications costs or temporary or permanent loss of our IT or telecommunications systems could harm our relationships with our customers. The occurrence of any of these events could have an adverse effect on our operations and financial results.

 

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We rely on independent shipping companies for delivery of products, and price increases or service interruptions from these carriers could adversely affect our business and operating results.

 

We rely almost entirely on arrangements with independent shipping companies, such as FedEx and UPS, for the delivery of our products from OEM suppliers and delivery of products to reseller and retail customers. Freight and shipping charges can have a significant impact on our gross margin. As a result, an increase in freight surcharges due to rising fuel cost or general price increases will have an immediate adverse effect on our margins, unless we are able to pass the increased charges to our reseller and retail customers or renegotiate terms with our OEM suppliers. In addition, in the past, UPS has experienced work stoppages due to labor negotiations with management. An increase in freight or shipping charges, the termination of our arrangements with one or more of these independent shipping companies, the failure or inability of one or more of these independent shipping companies to deliver products, or the unavailability of their shipping services, even temporarily, could have an adverse effect on our business and operating results.

 

Changes in foreign exchange rates and limitations on the convertibility of foreign currencies could adversely affect our business and operating results.

 

In both the fiscal years ended November 30, 2010 and 2009, approximately 17% of our total revenue was generated outside the United States. Most of our international revenue, cost of revenue and operating expenses are denominated in foreign currencies. We presently have currency exposure arising from both sales and purchases denominated in foreign currencies. Changes in exchange rates between foreign currencies and the U.S. dollar may adversely affect our operating margins. For example, if these foreign currencies appreciate against the U.S. dollar, it will make it more expensive in terms of U.S. dollars to purchase inventory or pay expenses with foreign currencies. This could have a negative impact to us if revenue related to these purchases is transacted in U.S. dollars. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency and make our products, which are usually purchased by us with U.S. dollars, relatively more expensive than products manufactured locally. We currently conduct only limited hedging activities, which involve the use of currency forward contracts. Hedging foreign currencies can be risky. There is also additional risk if the currency is not freely or actively traded. Some currencies, such as the Chinese Renminbi, Indian Rupee and Philippines Peso, are subject to limitations on conversion into other currencies, which can limit our ability to hedge or to otherwise react to rapid foreign currency devaluations. We cannot predict the impact of future exchange rate fluctuations on our business and operating results.

 

Because of the experience of our key personnel in the IT and CE industries and their technological and industry expertise, if we were to lose any of our key personnel, it could inhibit our ability to operate and grow our business successfully.

 

We operate in the highly competitive IT and CE industries. We are dependent in large part on our ability to retain the services of our key senior executives and other technical and industry experts and personnel. Except for Kevin Murai, our President and Chief Executive Officer, our employees and executives generally do not have employment agreements. Furthermore, we do not carry “key person” insurance coverage for any of our key executives. We compete for qualified senior management and technical personnel. The loss of, or inability to hire, key executives or qualified employees could inhibit our ability to operate and grow our business successfully.

 

We may become involved in intellectual property or other disputes that could cause us to incur substantial costs, divert the efforts of our management, and require us to pay substantial damages or require us to obtain a license, which may not be available on commercially reasonable terms, if at all.

 

We may from time to time receive notifications alleging infringements of intellectual property rights allegedly held by others relating to our business or the products we sell or assemble for our OEM suppliers and others. Litigation with respect to patents or other intellectual property matters could result in substantial costs and diversion of management and other resources and could have an adverse effect on our business. Although we

 

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generally have various levels of indemnification protection from our OEM suppliers and contract assembly services customers, in many cases any indemnification to which we may be entitled is subject to maximum limits or other restrictions. In addition, we have developed proprietary IT systems that play an important role in our business. If any infringement claim is successful against us and if indemnification is not available or sufficient, we may be required to pay substantial damages or we may need to seek and obtain a license of the other party’s intellectual property rights. We may be unable to obtain such a license on commercially reasonable terms, if at all.

 

We are from time to time involved in other litigation in the ordinary course of business. We may not be successful in defending these or other claims. Regardless of the outcome, litigation could result in substantial expense and could divert the efforts of our management.

 

We have significant operations concentrated in the United States, Canada, China, Costa Rica, India, Japan, Mexico, the Philippines, and the United Kingdom, and any disruption in the operations of our facilities could harm our business and operating results.

 

Our worldwide operations could be subject to natural disasters and other business disruptions, which could seriously harm our revenue and financial condition and increase our costs and expenses. We have significant operations in our facilities located in the United States, Canada, China, Costa Rica, India, Japan, Mexico, the Philippines, and the United Kingdom. As a result, any prolonged disruption in the operations of our facilities, whether due to technical difficulties, power failures, break-ins, destruction or damage to the facilities as a result of a natural disaster, fire or any other reason, could harm our operating results. In addition, our Philippines operation is at greater risk due to adverse weather conditions, such as typhoons. We currently do not have a formal disaster recovery plan and may not have sufficient business interruption insurance to compensate for losses that could occur.

 

Global health, economic, political and social conditions may harm our ability to do business, increase our costs and negatively affect our stock price.

 

Worldwide economic conditions have experienced a significant downturn due to the credit conditions impacted by the subprime mortgage crisis and other factors, including slower economic activity which may impact our results of operations. External factors such as potential terrorist attacks, acts of war, geopolitical and social turmoil or epidemics and other similar outbreaks, in many parts of the world could prevent or hinder our ability to do business, increase our costs and negatively affect our stock price, which in turn, may require us to record an impairment in the carrying value of our goodwill in accordance with Accounting Standards Codification, or ASC 350, “Intangibles—Goodwill and Other.” More generally, these geopolitical social and economic conditions could result in increased volatility in the United States and worldwide financial markets and economy. For example, increased instability may adversely impact the desire of employees and customers to travel, the reliability and cost of transportation and our ability to obtain adequate insurance at reasonable rates and may require us to incur increased costs for security measures for our domestic and international operations. We are predominantly uninsured for losses and interruptions caused by terrorism, acts of war and similar events. These uncertainties make it difficult for us and our customers to accurately plan future business activities. While general economic conditions have recently begun to improve, there is no assurance that this trend will continue or at what rate.

 

Part of our business is conducted outside of the United States, exposing us to additional risks that may not exist in the United States, which in turn could cause our business and operating results to suffer.

 

We have international operations in Canada, China, Costa Rica, India, Japan, Mexico, the Philippines and the United Kingdom. For both the fiscal years ended November 30, 2010 and 2009, approximately 17% of our total revenue was generated outside the United States. Our international operations are subject to risks, including:

 

   

political or economic instability;

 

   

changes in governmental regulation;

 

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changes in import/export duties;

 

   

trade restrictions;

 

   

difficulties and costs of staffing and managing operations in certain foreign countries;

 

   

work stoppages or other changes in labor conditions;

 

   

difficulties in collecting of accounts receivable on a timely basis or at all;

 

   

taxes; and

 

   

seasonal reductions in business activity in some parts of the world.

 

We may continue to expand internationally to respond to competitive pressure and customer and market requirements. Establishing operations in any other foreign country or region presents risks such as those described above and risks specific to the particular country or region. In addition, until a payment history is established over time with customers in a new geography or region, the likelihood of collecting accounts receivable generated by such operations could be less than our expectations. As a result, there is a greater risk that reserves set with respect to the collection of such accounts receivable may be inadequate. In addition, our Mexico operations primarily focus on various long-term projects with government and other local agencies, which involve extended payment terms and could expose us to additional collection risks. Furthermore, if our international expansion efforts in any foreign country are unsuccessful, we may decide to cease operations, which would likely cause us to incur additional expenses and losses.

 

In addition, changes in policies or laws of the United States or foreign governments resulting in, among other things, higher taxation, currency conversion limitations, restrictions on fund transfers or the expropriation of private enterprises, could reduce the anticipated benefits of our international expansion. Furthermore, any actions by countries in which we conduct business to reverse policies that encourage foreign trade or investment could adversely affect our business. If we fail to realize the anticipated revenue growth of our future international operations, our business and operating results could suffer.

 

Our investments in our contact center business could adversely affect our operating results as a result of operation execution risks related to managing and communicating with remote resources, technologies, customer satisfaction and employee turnover.

 

Our contact center business in India and the Philippines may be adversely impacted if we are unable to manage and communicate with these remote resources. Service quality may be placed at risk and our ability to optimize our resources may be more complicated if we are unable to manage our resources remotely. Contact centers use a wide variety of technologies to allow them to manage a large volume of work. These technologies ensure that employees are kept productive. Any failure in technology may impact the business adversely. The success of our contact center business primarily depends on performance of our employees and resulting customer satisfaction. Any increase in average waiting time or handling time or lack of promptness or technical expertise of our employees will directly impact customer satisfaction. Any adverse customer satisfaction may impact the overall business. Generally, the employee turnover rate in the contact center business and the risk of losing experienced employees to competitors are high. Higher turnover rates increase recruiting and training costs and decrease operating efficiencies and productivity. If we are unable to successfully manage our contact centers, our results of operations could be adversely affected and we may not fully realize the anticipated benefits of our recent acquisitions.

 

Our renewal management business is subject to dynamic changes in the business model and competition, which in turn could cause our GBS operations to suffer.

 

The software and hardware renewal management and the customer management operations of our GBS segment represent emerging markets that are vulnerable to numerous changes that could cause a shift in the business and size of the market. For example, if software and hardware customers move to a utility or fee for

 

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service based business model, this business model change could significantly impact operations or cause a significant shift in the way business is currently conducted. If OEMs put more focus in this area and start to internalize opportunities, then this could also cause a significant reduction in the size of the available market for third party service providers. Similarly, if competitors offer their services at below market margin rates to “buy” business, or use other lines of business to subsidize the renewal management business, then this could cause a significant reduction in the size of the available market. In addition, if a cloud-based solution or some other technology were introduced, this new technology could cause an adverse shift in the way our renewal management operations are conducted or decrease the size of the available market.

 

Risks Related to Our Relationship with MiTAC International Corporation

 

As of November 30, 2010, our executive officers, directors and principal stockholders owned approximately 31% of our common stock and this concentration of ownership could allow them to influence all matters requiring stockholder approval and could delay or prevent a change in control of SYNNEX.

 

As of November 30, 2010, our executive officers, directors and principal stockholders owned approximately 31% of our outstanding common stock. In particular, MiTAC International and its affiliates owned approximately 29% of our common stock.

 

In addition, MiTAC International’s interests and ours may increasingly conflict. For example, until July 31, 2010, we relied on MiTAC International for certain manufacturing and supply services and for relationships with certain key customers. In July 2010, we announced that we had signed a definitive sale agreement to sell certain assets related to our contract assembly business to MiTAC International. The transaction included the sale of inventory and customer contracts, primarily related to customers then being jointly served by MiTAC International and us. Also, as part of the transaction, we provide MiTAC International with certain transition services for the business on a fee basis over the next several quarters. After the completion of the transition services, MiTAC International and we will no longer be jointly serving any current customers. In addition, we may solicit the same contract assembly customers in the future.

 

There could be potential conflicts of interest between us and MiTAC International and its affiliates, which could impact our business and operating results.

 

MiTAC International’s and its affiliates’ continuing beneficial ownership of our common stock could create conflicts of interest with respect to a variety of matters, such as potential acquisitions, competition, issuance or disposition of securities, election of directors, payment of dividends and other business matters. Similar risks could exist as a result of Matthew Miau’s positions as our Chairman Emeritus, the Chairman of MiTAC International and as a director or officer of MiTAC International’s affiliates. For fiscal years 2010 and 2009, Mr. Miau received the same compensation as other independent directors. Mr. Miau’s compensation as one of our directors is based upon the approval of the Nominating and Corporate Governance Committee, which is solely composed of independent members of the Board. We also have adopted a policy requiring material transactions in which any of our directors has a potential conflict of interest to be approved by our Audit Committee, which is also composed of independent members of the Board.

 

Synnex Technology International Corp., or Synnex Technology International, a publicly-traded company based in Taiwan and affiliated with MiTAC International, currently provides distribution and fulfillment services to various markets in Asia and Australia, and is also a potential competitor of ours. As of November 30, 2010, MiTAC Incorporated, a privately-held company based in Taiwan and a separate entity from MiTAC International, directly and indirectly owned approximately 14.6% of Synnex Technology International and approximately 8.0% of MiTAC International. As of November 30, 2010, MiTAC International directly and indirectly owned 0.1% of Synnex Technology International and Synnex Technology International directly and indirectly owned approximately 0.9% of MiTAC International. In addition, MiTAC International directly and

 

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indirectly owned approximately 8.7% of MiTAC Incorporated and Synnex Technology International directly and indirectly owned approximately 18.4% of MiTAC Incorporated as of November 30, 2010. Synnex Technology International indirectly through its ownership of Peer Developments Limited owned approximately 12.3% of our outstanding common stock as of November 30, 2010. 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.

 

Risks Related to Our Industry

 

Volatility in the IT and CE industries could have a material adverse effect on our business and operating results.

 

The IT and CE industries in which we operate have experienced decreases in demand. Softening demand for our products and services caused by an ongoing economic downturn and over-capacity may impact our revenue, as well the salability of inventory and collection of reseller and retail customer accounts receivable.

 

While in the past, we may have benefited from consolidation in our industry resulting from delays or reductions in IT or CE spending in particular, and economic weakness in general, any such volatility in the IT and CE industries could have an adverse effect on our business and operating results.

 

Our business may be adversely affected by some OEM suppliers’ strategies to increase their direct sales, which in turn could cause our business and operating results to suffer.

 

Consolidation of OEM suppliers has resulted in fewer sources for some of the products and services that we distribute. This consolidation has also resulted in larger OEM suppliers that have significant operating and financial resources. Some OEM suppliers, including some of the leading OEM suppliers that we service, have been selling products and services directly to reseller and retail customers and end-users, thereby limiting our business opportunities. If large OEM suppliers increasingly sell directly to end-users or our resellers and retailers, rather than use us as the distributor of their products and services, our business and operating results will suffer.

 

OEMs could limit the number of supply chain service providers with which they do business, which in turn could negatively impact our business and operating results.

 

The termination of our contract by HP with us would have a significant negative effect on our revenue and operating results. A determination by any of our primary OEMs to consolidate their business with other distributors or contract assemblers would negatively affect our business and operating results. For example, IBM recently consolidated its business with distributors, including SYNNEX, and, as a result, we no longer distribute certain IBM products and services.

 

The IT and CE industries are subject to rapidly changing technologies and process developments, and we may not be able to adequately adjust our business to these changes, which in turn would harm our business and operating results.

 

Dynamic changes in the IT and CE industries, including the consolidation of OEM suppliers and reductions in the number of authorized distributors used by OEM suppliers, have resulted in new and increased responsibilities for management personnel and have placed, and continue to place, a significant strain upon our

 

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management, operating and financial systems and other resources. We may be unable to successfully respond to and manage our business in light of industry developments and trends. Also crucial to our success in managing our operations will be our ability to achieve additional economies of scale. Our failure to achieve these additional economies of scale or to respond to changes in the IT and CE industries could adversely affect our business and operating results.

 

We are subject to intense competition in the IT and CE industries, both in the United States and internationally, and if we fail to compete successfully, we will be unable to gain or retain market share.

 

We operate in a highly competitive environment, both in the United States and internationally. The IT and CE product and service distribution, BPO and contract assembly services industries are characterized by intense competition, based primarily on product and service availability, credit availability, price, speed of delivery, ability to tailor specific solutions to customer needs, quality and depth of product and service lines, pre-sale and post-sale technical support, flexibility and timely response to design changes, and technological capabilities, service and support. We compete with a variety of regional, national and international IT and CE product and service distributors and contract manufacturers and assemblers. In some instances, we also compete with our own customers, our own OEM suppliers and MiTAC International and its affiliates.

 

Our primary competitors are substantially larger and have greater financial, operating, manufacturing and marketing resources than us. Some of our competitors may have broader geographic breadth and range of services than us and may have more developed relationships with their existing customers. We may lose market share in the United States or in international markets, or may be forced in the future to reduce our prices in response to the actions of our competitors and thereby experience a reduction in our gross margins.

 

In addition, in our contact center business, we also face competition from our customers. For example, some of our customers may have internal capabilities and resources to provide their own call centers. Furthermore, pricing pressures and quality of services could impact our business adversely. Our ability to provide a high quality of service is dependent on our ability to retain and properly train our employees and to continue investing in our infrastructure, including IT and telecommunications systems.

 

We may initiate other business activities, including the broadening of our supply chain capabilities, and may face competition from companies with more experience in those new areas. In addition, as we enter new areas of business, we may also encounter increased competition from current competitors or from new competitors, including some who may once have been our OEM suppliers or reseller and retail customers. Increased competition and negative reaction from our OEM suppliers or reseller and retail customers resulting from our expansion into new business areas may harm our business and operating results.

 

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

 

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, Securities and Exchange Commission, or SEC, regulations and New York Stock Exchange, or NYSE, rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and corporate governance practices. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

 

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If we are unable to maintain effective internal control over financial reporting, our ability to report our financial results on a timely and accurate basis may be adversely affected, which in turn could cause the market price of our common stock to decline.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We completed an evaluation of the effectiveness of our internal control over financial reporting for the fiscal year ended November 30, 2010, and we have an ongoing program to perform the system and process evaluation and testing necessary to continue to comply with these requirements. In the past, however, our internal controls have not eliminated all error. For example, in fiscal year 2007, we made a reclassification adjustment to our Consolidated Financial Statements and we were unable to timely file a Form 8-K relating to an acquisition. We expect to continue to incur increased expense and to devote additional management resources to Section 404 compliance. In the event that one of our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions and our reputation may be adversely affected and the market price of our stock could decline.

 

Changes to financial accounting standards may affect our results of operations and cause us to change our business practices.

 

We prepare our financial statements to conform to generally accepted accounting principles in the United States. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Our principal executive office is located in Fremont, California, which is owned by us. We operate distribution, assembly services, contact center and administrative facilities in different countries.

 

Our distribution business segment occupies over 35 facilities covering approximately 4 million square feet and includes warehouse, logistics and administrative facilities. We own approximately 1 million square feet of property and lease the remainder.

 

Our GBS business segment occupies over 22 facilities comprising of administrative buildings, service facilities and call centers covering approximately 490 thousand square feet. We own approximately 168 thousand square feet and lease the remainder.

 

We have sublet unused portions of some of our facilities. We believe our facilities are well maintained and adequate for current operating needs. Leases for our current facilities expire between March 2011 and November 2015.

 

Item 3. Legal Proceedings

 

We are from time to time involved in legal proceedings in the ordinary course of business. We do not believe that these proceedings will have a material adverse effect on our results of operations, financial position or cash flows of our business.

 

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In addition, we have been involved in various bankruptcy preference actions where we were 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 bankruptcy estate’s creditors. We are not currently involved in any material preference proceedings.

 

Item 4. (Removed and Reserved)

 

Executive Officers of the Registrant

 

The following table sets forth information regarding our executive officers as of November 30, 2010:

 

Name

   Age     

Position

Kevin Murai

     47       President, Chief Executive Officer and a Director

Peter Larocque

     49       President, U.S. Distribution

Dennis Polk

     44       Chief Operating Officer

Thomas Alsborg

     48       Chief Financial Officer

Simon Leung

     45       Senior Vice President, General Counsel and Corporate Secretary

 

Kevin Murai, our President and Chief Executive Officer and a Director, joined us in March 2008. He served as Co-Chief Executive Officer until Robert Huang’s retirement in December 2008. Prior to SYNNEX, Mr. Murai was employed for 19 years at Ingram Micro, Inc. where he served in several executive management positions, including President and Chief Operating Officer. He holds a Bachelor of Applied Science degree in Electrical Engineering from the University of Waterloo in Ontario, Canada.

 

Peter Larocque is our President, U.S. Distribution since July 2006 and previously served as Executive Vice President of Distribution since June 2001 and Senior Vice President of Sales and Marketing from September 1997 until June 2001. Mr. Larocque is responsible for our U.S. distribution business. Mr. Larocque received a Bachelor of Science degree in Economics from the University of Western Ontario, Canada.

 

Dennis Polk is our Chief Operating Officer and has served in this capacity since July 2006. He previously served as Chief Financial Officer and Senior Vice President of Corporate Finance since joining us in February 2002. Mr. Polk received a Bachelor of Science degree in Accounting from Santa Clara University.

 

Thomas Alsborg is our Chief Financial Officer. He joined us in March 2007. Prior to SYNNEX, Mr. Alsborg was with Solectron Corporation where he served in various accounting and finance capacities over his ten-year tenure including Vice President and Chief Financial Officer of Solectron Global Services and Vice President of Finance and Vice President, Investor Relations. Prior to Solectron, Mr. Alsborg was with McDonald’s Corporation and a CPA with Ernst & Young LLP. Mr. Alsborg received a Bachelor of Science degree in Accounting from the Oral Roberts University, a Master in Business Administration, Finance and International Business from Santa Clara University.

 

Simon Leung is our Senior Vice President, General Counsel and Corporate Secretary and has served in this capacity since May 2001. Mr. Leung joined us in November 2000 as Corporate Counsel. Prior to SYNNEX, Mr. Leung was an attorney at the law firm of Paul, Hastings, Janofsky & Walker LLP. Mr. Leung received a Bachelor of Arts degree from the University of California, Davis and his Juris Doctor degree from the University of Minnesota Law School.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

 

Our common stock, par value $0.001, is traded on the New York Stock Exchange, or NYSE, under the symbol “SNX.” The following table sets forth the range of high and low sales prices for our common stock for each of the periods listed, as reported by the NYSE.

 

      Price Range of
Common Stock
 
      Low      High  

Fiscal Year 2009

             

First Quarter

   $ 8.70       $ 17.98   

Second Quarter

   $ 13.23       $ 26.00   

Third Quarter

   $ 22.51       $ 32.57   

Fourth Quarter

   $ 24.98       $ 33.02   

Fiscal Year 2010

             

First Quarter

   $ 25.51       $ 32.43   

Second Quarter

   $ 25.10       $ 32.17   

Third Quarter

   $ 22.62       $ 28.04   

Fourth Quarter

   $ 23.34       $ 30.43   

 

As of January 31, 2011, our common stock was held by 944 stockholders of record. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these stockholders of record. We have not declared or paid any cash dividends since our inception. We currently intend to retain future earnings, if any, for use in our operations and the expansion of our business. If we elect to pay cash dividends in the future, payment will depend on our financial condition, results of operations and capital requirements, as well as other factors deemed relevant by our Board of Directors. In addition, our credit facilities place restrictions on our ability to pay dividends.

 

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Stock Price Performance Graph

 

The stock price performance graph below, which assumes a $100 investment on November 30, 2005, compares our cumulative total shareowner return, the NYSE Composite Index and the Standard Industrial Classification, or SIC, Code Index (SIC Code 5045—Computer and Computer Peripheral Equipment and Software) for the period beginning November 30, 2005 through November 30, 2010. The closing price per share of our common stock was $28.66 on November 30, 2010. No cash dividends have been declared on our common stock since the initial public offering. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock.

 

LOGO

 

      Fiscal Years Ended  
      11/30/2005      11/30/2006      11/30/2007      11/30/2008      11/30/2009      11/30/2010  

SYNNEX Corporation

     100.00         145.11         132.01         66.84         180.89         183.13   

NYSE Market Index

     100.00         119.92         134.59         78.50         102.30         109.65   

Computers & Peripheral Equipment

     100.00         115.40         105.86         53.65         101.82         141.30   

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Information regarding the Securities Authorized for Issuance under Equity Compensation Plans can be found under Item 12 of this Report.

 

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Item 6. Selected Consolidated Financial Data

 

The following selected consolidated financial data are qualified by reference to, and should be read together with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Report and the Consolidated Financial Statements and related Notes included in Item 8 of this Report. The selected consolidated statements of operations and cash flow data presented below for the fiscal years ended November 30, 2010, 2009 and 2008 and the consolidated balance sheet data as of November 30, 2010 and 2009 have been derived from our audited Consolidated Financial Statements included elsewhere in this Report. The consolidated statements of operations and other data for the fiscal years ended November 30, 2007 and 2006 and the consolidated balance sheet data as of November 30, 2008, 2007 and 2006 have been derived from our Consolidated Financial Statements that are not included in this Report. The amounts as of November 30, 2009 and 2008 and for the fiscal years ended November 30, 2009 and 2008 have been adjusted for the adoption of new accounting standards as explained in Note 2 to our Consolidated Financial Statements. The consolidated statements of operations data include the operating results from our acquisitions from the closing date of each acquisition. Historical operating results are not necessarily indicative of the results that may be expected for any future period. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 and Note 18 to our Consolidated Financial Statements included elsewhere in this Report for a discussion of factors, such as business combinations, that affect the comparability of the following selected consolidated financial data.

 

    Fiscal Years Ended November 30,  
    2010     2009     2008     2007     2006  
          (As Adjusted -
See Note 2)
    (As Adjusted -
See Note 2)
             

Statements of Operations Data: (in thousands, except per share amounts)

   

       

Revenue

  $ 8,614,141      $ 7,719,197      $ 7,736,726      $ 6,986,714      $ 6,343,514   

Cost of revenue

    (8,122,525     (7,296,167     (7,322,862     (6,640,295     (6,058,155
                                       

Gross profit

    491,616        423,030        413,864        346,419        285,359   

Selling, general and administrative expenses

    (292,466     (273,381     (267,498     (236,938     (189,117
                                       

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

    199,150        149,649        146,366        109,481        96,242   

Interest expense and finance charges, net

    (17,114     (18,032     (17,206     (15,054     (16,659

Other income (expense), net

    1,550        3,036        (7,812     1,429        570   
                                       

Income from continuing operations before income taxes and noncontrolling interest

    183,586        134,653        121,348        95,856        80,153   

Provision for income taxes

    (66,910     (49,028     (44,811     (35,216     (28,320
                                       

Income from continuing operations before noncontrolling interest, net of tax

    116,676        85,625        76,537        60,640        51,833   

Income from discontinued operations, net of tax

    75        5,199        6,647        2,859        —     

Gain on sale of discontinued operations, net of tax

    11,351        —          —          —          —     

Net income

    128,102        90,824        83,184        63,499        51,833   

Net income attributable to noncontrolling interest

    (154     (1,157     (693     (372     (448
                                       

Net income attributable to SYNNEX Corporation

  $ 127,948      $ 89,667      $ 82,491      $ 63,127      $ 51,385   
                                       

Amounts attributable to SYNNEX Corporation:

         

Income from continuing operations, net of tax

    116,538        85,758        76,762        60,640        51,385   

Discontinued operations:

         

Income from discontinued operations, net of tax

    59        3,909        5,729        2,487        —     

Gain on sale of discontinued operations, net of tax

    11,351        —          —          —          —     
                                       

Net income attributable to SYNNEX Corporation

  $ 127,948      $ 89,667      $ 82,491      $ 63,127      $ 51,385   
                                       

Earnings per share attributable to SYNNEX Corporation:

         

Basic:

         

Income from continuing operations

  $ 3.35      $ 2.62      $ 2.43      $ 1.96      $ 1.73   

Discontinued operations

    0.33        0.12        0.18        0.08        —     
                                       

Net income per common share—basic

  $ 3.68      $ 2.74      $ 2.61      $ 2.04      $ 1.73   
                                       

Diluted:

         

Income from continuing operations

  $ 3.26      $ 2.53      $ 2.31      $ 1.86      $ 1.61   

Discontinued operations

    0.32        0.11        0.17        0.07        —     
                                       

Net income per common share—diluted

  $ 3.58      $ 2.64      $ 2.48      $ 1.93      $ 1.61   
                                       

 

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    As of November 30,  
    2010     2009     2008     2007     2006  
          (As Adjusted -
See Note 2)
    (As Adjusted -
See Note 2)
             

Balance Sheet Data: (in thousands)

         

Cash and cash equivalents

  $ 88,038      $ 37,816      $ 35,147      $ 21,925      $ 27,881   

Working capital

    895,185        762,305        590,094        419,708        416,865   

Total assets

    2,499,861        2,099,910        2,032,386        1,887,103        1,382,734   

Current borrowings under term loans and lines of credit

    245,973        150,740        340,466        351,142        50,834   

Long-term borrowings

    140,333        136,195        131,157        37,537        47,967   

Total equity

    992,827        838,735        696,887        605,512        511,546   
     Fiscal Years Ended November 30,  
     2010     2009     2008     2007     2006  

Other Data: (in thousands)

         

Depreciation and amortization from continuing operations

  $ 16,285      $ 17,803      $ 16,811      $ 14,512      $ 9,781   

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and the Consolidated Financial Statements and related Notes included elsewhere in this Report.

 

When used in this Annual Report on Form 10-K or the Report, the words “believes,” “plans,” “estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “may,” “designed,” “will,” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about our business model and our services, our market strategy, including expansion of our product lines, our infrastructure, our investment in our IT systems, anticipated benefits of our acquisitions, anticipated increase in fourth quarter seasonality, impact of our disposition of certain assets to MiTAC International Corporation, or MiTAC International, our revenue and operating results, our gross margins, competition with Synnex Technology International Corp., our future needs for additional financing, concentration of customers, our international operations, expansion of our operations, our strategic acquisitions of businesses and assets, effects of future expansion of our operations, adequacy of our cash resources to meet our capital needs, the settlement of our convertible notes, adequacy of our disclosure controls and procedures, pricing pressures, competition, impact of our accounting policies, and statements regarding our securitization programs and revolving credit lines. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed, as well as the seasonality of the buying patterns of our customers, concentration of sales to large customers, dependence upon and trends in capital spending budgets in the IT industry, fluctuations in general economic conditions and risks set forth under Part I, Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

Overview

 

We are a Fortune 500 corporation and a leading business process services company, servicing resellers, retailers and original equipment manufacturers, or OEMs, in multiple regions around the world. Our primary business process services are distribution and business process outsourcing, or BPO. We operate in two segments: distribution services and global business services, or GBS. Our distribution services segment distributes IT systems, peripherals, system components, software, networking equipment, consumer electronics, or CE, and complementary products. We also provide contract assembly services within our distribution segment. Our GBS segment offers a range of BPO services to our customers that include customer management, renewal management, back office processing and information technology outsourcing, or ITO, on a global platform. To further enhance our BPO 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 with our BPO services to help our customers achieve greater efficiencies in time to market, cost minimization, real-time linkages in the supply chain and aftermarket product support. We distribute more than 20,000 technology products (as measured by SKUs) from more than 100 IT, CE and OEM suppliers to more than 15,000 resellers, system integrators, and retailers throughout the United States, Canada and Mexico. Our GBS segment provides outsourced services to customers in multiple, geographic locations and in multiple languages. As of November 30, 2010, we had over 8,000 full-time and temporary employees in both segments worldwide. From a geographic perspective, approximately 98% of our total revenue was from North America for each of the fiscal years ended November 30, 2010, 2009 and 2008.

 

We purchase IT systems, peripherals, system components, software, networking equipment, CE and complementary products from our primary suppliers such as Hewlett-Packard Company, or HP, Acer, Panasonic,

 

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Lenovo and Seagate 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 national and regional retailers.

 

Revenue and Cost of Revenue

 

We derive our revenue primarily through the distribution of IT systems, peripherals, system components, software, networking equipment, CE, contract assembly services and BPO. For products, we recognize revenue generally as products are shipped, if a purchase order exists, the sale price is fixed or determinable, collection of the 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. our warehouse. Provisions for sales returns are estimated based on historical data and are recorded concurrently with the recognition of revenue. We review and adjust these provisions periodically. Revenue is reduced for early payment discounts and volume incentive rebates offered to customers. We provide our BPO services in our GBS segment to customers under contracts that typically consist of a master services agreement or statement of work, which contains the terms and conditions of each program and service we offer. Our agreements are usually short-term in nature, subject to early termination by our customers or us for any reason, typically with 30 to 90 days notice. Revenue is recognized as services are performed and if collection is reasonably assured.

 

In fiscal year 2010, one customer accounted for 11% of our total revenue. None of our customers accounted for more than 10% of our total revenue in fiscal years 2009 or 2008. Approximately 38%, 36%, and 32% of our total revenue in fiscal years 2010, 2009 and 2008, respectively, was derived from the sale of HP products and services.

 

The market for IT products and services is generally characterized by declining unit prices and short product life cycles. Our overall business is also highly competitive on the basis of price. We set our sales price based on the market supply and demand characteristics for each particular product or bundle of products we distribute and services we provide. From time to time, we also participate in the incentive and rebate programs of our OEM suppliers. These programs are important determinants of the final sales price we charge to our reseller customers. To mitigate the risk of declining prices and obsolescence of our distribution inventory, our OEM suppliers generally offer us limited price protection and return rights for products that are marked down or discontinued by them. We carefully manage our inventory to maximize the benefit to us of these supplier provided protections.

 

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

 

A significant portion of our cost of revenue is the purchase price we pay our OEM suppliers for the products we sell, net of any rebates and purchase discounts received from our OEM suppliers. Cost of product distribution revenue also consists of provisions for inventory losses and write-downs, freight expenses associated with the receipt in and shipment out of our inventory, and royalties due to OEM vendors. In addition, cost of revenue includes the cost of materials, labor and overhead for our contract assembly and GBS services.

 

Margins

 

The distribution and contract assembly services industries in which we operate are characterized by low gross profit as a percentage of revenue, or gross margin, and low income from operations as a percentage of revenue, or operating margin. Our gross margin has fluctuated annually due to changes in the mix of products and services we offer, customers we sell to, incentives and rebates received from our OEM suppliers, competition, seasonality and replacement of less profitable business with investments in higher margin, more

 

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profitable lines and lower costs associated with increased efficiencies. Increased competition arising from industry consolidation and low demand for IT products may hinder our ability to maintain or improve our gross margin. Generally, when our revenue becomes more concentrated on limited products or customers, our gross margin tends to decrease due to increased pricing pressure from OEM suppliers or reseller customers. Our operating margin from continuing operations has also fluctuated annually over the past three years, based primarily on our ability to achieve economies of scale, the management of our operating expenses, changes in the relative mix of our distribution, contract assembly and BPO revenue, and the timing of our acquisitions and investments.

 

In addition, beginning in the first fiscal quarter of 2010, we recognized revenue on certain service contracts, post-contract software support services, and extended warranty contracts, where we are not a primary obligor, on a net basis, which favorably impacted our gross and operating margins.

 

Recent Acquisitions and Divestitures

 

We seek to augment our services offering expansion with strategic acquisitions of businesses and assets that complement and expand our global BPO capabilities. We also divest businesses that we deem no longer strategic to our ongoing operations. Our historical acquisitions have brought us new reseller and retail customers, OEM suppliers, and product lines, have extended the geographic reach of our operations, particularly in targeted markets, and have diversified and expanded the services we provide to our OEM suppliers and customers. We account for acquisitions using the purchase method of accounting and include acquired entities within our consolidated financial statements from the closing date of the acquisition.

 

Acquisitions during the fiscal year ended November 30, 2010

 

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 fiscal year ended November 30, 2010, we made certain adjustments to the fair value of inventories and other assets acquired, and liabilities assumed, related to this transaction. These adjustments had the impact of lowering the purchase price by $5.3 million. The total consideration, as adjusted, was $37.4 million. The net tangible assets acquired were $27.2 million and we recognized $4.5 million of intangible assets and $5.6 million in goodwill. The acquisition is fully integrated into our distribution segment and we expect it will continue to expand our CE product offerings.

 

On November 17, 2010 we acquired 100% of the stock of Aspire Technology Limited for $16.0 million, including $3.2 million in earn-out payments payable upon the achievement of certain milestones during the three years following the date of the acquisition. Aspire Technology Limited is based in the United Kingdom and provides renewal management through its proprietary software. We recognized $13.0 million in goodwill and $4.8 million in intangible assets. The determination of the fair value of the purchase price and the net assets acquired is preliminary.

 

On November 18, 2010, we acquired 100% of the stock of Encover, Inc. for $24.0 million, including $5.5 million in earn-out payments payable after one year following the acquisition date upon the achievement of certain milestones. Encover, Inc. is based in the United States and provides warranty and license renewal services and software. We recognized $9.0 million in goodwill and $7.0 million in intangible assets. The determination of the fair value of the purchase price and the net assets acquired is preliminary. The purchase price is subject to a holdback of $1.9 million for a period of twenty-four months from the purchase date.

 

Aspire Technology Limited and Encover, Inc. are being fully integrated into our GBS segment and are expected to enhance our BPO service offerings through their proprietary, scalable warranty and license renewal management capabilities and services.

 

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

 

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Acquisitions subsequent to fiscal year ended November 30, 2010

 

On December 1, 2010, we acquired 70% of the capital stock of Marubeni Infotec Corporation, a subsidiary of Marubeni Corporation, while SB Pacific Corporation Limited, or SB Pacific, our equity-method investee, acquired the remaining 30% noncontrolling interest. Please see “Related Party Transactions” section for more information on our investment in SB Pacific. Marubeni Infotec Corporation, now known as SYNNEX Infotec Corporation, is a distributor of IT equipment, electronic components and software in Japan. The aggregate consideration for the transaction was JP¥700.0 million or approximately US$8.4 million, of which our direct share was US$5.9 million. The purchase consideration is subject to certain adjustments based on SYNNEX Infotec Corporation’s balance sheet at closing, and the assumption of certain liabilities totaling JP¥10.3 billion, or approximately US$125.8 million. We own 80% of SYNNEX Infotec Corporation, inclusive of our investment in SB Pacific. This acquisition is in the distribution segment and will enable our expansion into Japan.

 

During the first quarter of fiscal year 2011, we acquired the assets of the e4e, Inc., a privately-held company that provides BPO services, for $23.0 million in cash, of which $1.0 million is payable upon the achievement of certain post closing conditions. This acquisition is in our GBS segment and is expected to bring additional BPO scale, complement our service offerings and expand our customer base and geographic presence.

 

Divestitures during the fiscal year ended November 30, 2010

 

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

 

On July 31, 2010, we sold to MiTAC International inventory and certain customer contracts primarily related to contract assembly customers jointly served by us and MiTAC International. The sale agreement includes earn-out and profit-sharing provisions, which are based on operating performance metrics, achieved over a period of twelve to eighteen months from closing date, for the defined customers included in the transaction. Also, we will provide MiTAC International certain transition services on a fee basis. Please see the section “Related Party Transactions” for a detailed discussion on this transaction.

 

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

 

Acquisitions during the fiscal year ended November 30, 2009

 

During the fiscal year ended November 30, 2009, we completed two acquisitions in our GBS segment. Through these acquisitions, we acquired web development services and complementary products for a total consideration of $6.6 million. One of the acquisitions is reported under discontinued operations. These acquisitions, individually and in the aggregate, did not meet the conditions of a material business combination and were not subject to the disclosure requirements of accounting for business combinations utilizing the purchase method of accounting.

 

Building Acquisition

 

On July 30, 2009, we completed the purchase of a previously leased administrative and warehouse facility in Fremont, California. The facility is approximately one hundred and twenty eight thousand square feet. The total purchase price for this facility was $12.2 million.

 

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. During the fiscal year ended November 30, 2010, we made

 

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payments of $0.7 million, which is included in selling, general and administrative expenses, for the remaining lease obligations on the RGC facility. During the fiscal year ended November 30, 2010, we accrued an additional $0.8 million for the remaining lease obligations on the facility. The remaining balances outstanding on facility and exit costs as of both November 30, 2010 and 2009 were $0.6 million. The lease obligations are expected to be completed by June 2011.

 

In conjunction with this restructuring program, we had recorded an impairment loss of $0.8 million for a property located in Ontario, Canada that was held for sale based on the fair value less costs to sell in accordance with Financial Accounting Standards Board, or FASB, ASC 360, “Property, Plant and Equipment,” section, “Subsequent Measurement.” In fiscal year 2009, this property was sold for $1.6 million at a loss of $.05 million.

 

Economic and Industry Trends

 

Our revenue is highly dependent on the end-market demand for IT products. 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 and overall economic growth and general business activity. A difficult and challenging economic environment may also lead to consolidation or decline in the IT distribution industry and increased price-based competition. The GBS industry is also extremely competitive. The customers’ performance measures are based on competitive pricing terms and quality of services. Accordingly, we could be subject to pricing pressure and may experience a decline in our average selling prices for our services.

 

Seasonality

 

Our operating results are affected by the seasonality of the IT and CE products industries. We have historically experienced higher sales in our fourth fiscal quarter due to patterns in the capital budgeting, federal government spending and purchasing cycles of our customers and end-users. In addition, with the addition of New Age Electronics in 2008 and Jack of All Games in 2010, which have higher concentrations of CE sales, we expect our fourth quarter seasonal spike may be larger. These patterns may not be repeated in subsequent periods.

 

Deferred Compensation Plan

 

We have a deferred compensation plan for a limited number of our directors and employees. We maintain a liability on our balance sheet for salary and bonus amounts deferred by participants and we accrue interest expense on uninvested amounts. Interest expense on the deferred amounts is classified in selling, general and administrative expenses on our consolidated statements of operations. The participant may designate one or more investments as the measure of investment return on the participant’s account. The equity securities are either classified as trading securities or cost securities. Generally, the gains (losses) on the deferred compensation securities are recorded in other income (expense), net and an equal amount is charged (or credited if losses) to selling, general and administrative expenses relating to compensation amounts which are payable to the plan participants. For the deferred compensation investments, we recorded a gain of $0.2 million, a gain of $2.7 million and a loss of $5.9 million, in the fiscal years ended 2010, 2009 and 2008, respectively.

 

Critical Accounting Policies and Estimates

 

The discussions and analyses of our consolidated financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in conformity with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we review and evaluate our estimates and assumptions, including those that relate to accounts receivable, vendor programs, inventories, goodwill and intangible assets, and income taxes. Our estimates are based on our historical experience and a variety of other assumptions that we believe to

 

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be reasonable under the circumstances, the results of which form the basis for making our judgment about the carrying values of assets and liabilities that are not readily available from other sources. Actual results could differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies are affected by our judgment, estimates and/or assumptions used in the preparation of our Consolidated Financial Statements.

 

Revenue Recognition. We generally recognize revenue as hardware and software products are shipped and as services are performed, if a purchase order exists, the sale price is fixed or determinable, collection of the 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. our 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 us. Revenue is reduced for early payment discounts and volume incentive rebates offered to customers.

 

We recognize revenue on certain service contracts, post-contract software support services, and extended warranty contracts, where we are not 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 the fiscal year ended November 30, 2010.

 

Our Mexico operation primarily focuses on projects with the Mexican government and other local agencies that are long-term in nature. Under the agreements, the payments are due on a monthly basis and are contingent upon performing certain services and meeting certain conditions. We recognize product revenue and cost of revenue on a straight-line basis over the term of the contract.

 

We provide our BPO services to our customers under contracts that typically consist of a master services agreement or statement of work, which contains the terms and conditions of each program and service we offer. These agreements are usually short-term in nature and subject to early termination by the customers or us 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.

 

Allowance for Doubtful Accounts. We provide allowances for doubtful accounts on our accounts receivable for estimated losses resulting from the inability of our customers to make payments for outstanding balances. In estimating the required allowance, we take into consideration the overall quality and aging of the accounts receivable, credit evaluations of customers’ financial condition and existence of credit insurance. We also evaluate the collectability of accounts receivable based on specific customer circumstances, current economic trends, historical experience with collections and value and adequacy of collateral received from customers.

 

OEM Supplier Programs. We receive funds from OEM suppliers for inventory price protection, product rebates, marketing and infrastructure reimbursement, and promotion programs. Product rebates are recorded as a reduction of cost of revenue. Marketing, infrastructure and promotion programs are recorded, net of direct costs, in selling, general and administrative expense. Any excess funds associated with these programs are recorded in cost of revenue. We accrue rebates based on the terms of the program and sales of qualifying products. Some of these programs may extend over one or more quarterly reporting periods. Amounts received or receivable from OEM suppliers that are not yet earned are deferred on our balance sheet. Actual rebates may vary based on volume or other sales achievement levels, which could result in an increase or reduction in the estimated amounts previously accrued. In addition, OEM suppliers may seek to change the terms of some or all of these programs or cease them altogether. Any such change could lower our gross margins on products we sell or revenue earned. We also provide reserves for receivables on OEM supplier programs for estimated losses resulting from OEM suppliers’ inability to pay, or rejections of such claims by OEM suppliers.

 

Inventories. Our inventory levels are based on our projections of future demand and market conditions. Any sudden decline in demand and/or rapid product improvements and technological changes can cause us to have

 

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excess and/or obsolete inventories. On an ongoing basis, we review for estimated obsolete or unmarketable inventories and write-down our inventories to their estimated net realizable value based upon our forecasts of future demand and market conditions. These write-downs are reflected in our cost of revenue. If actual market conditions are less favorable than our forecasts, additional inventory reserves may be required. Our estimates are influenced by the following considerations: sudden decline in demand due to economic downturns, rapid product improvements and technological changes, our ability to return to OEM suppliers a certain percentage of our purchases, and protection from loss in value of inventory under our OEM supplier agreements.

 

Goodwill and Intangible Assets. Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in an acquisition. We assess potential impairment of our goodwill and intangible assets when there is evidence that recent events or changes in circumstances have made recovery of an asset’s carrying value unlikely. We also assess potential impairment of our goodwill and intangible assets on an annual basis during our fourth quarter, regardless if there is evidence or suspicion of impairment. If indicators of impairment were present in intangible assets used in operations and future undiscounted cash flows were not expected to be sufficient to recover the assets’ carrying amount, an impairment loss would be charged to expense in the period identified. The amount of an impairment loss would be recognized as the excess of the asset’s carrying value over its fair value. Factors we consider important, which may cause impairment, include: significant changes in the manner of use of the acquired asset, negative industry or economic trends, and significant underperformance relative to historical or projected operating results. No impairment loss was recorded for the periods presented.

 

In accordance with ASC 350, “Intangible—Goodwill and Other,” a two-step impairment test is required to identify potential goodwill impairment and measure the amount of the goodwill impairment loss to be recognized. In the first step, the fair value of each reporting unit is compared to its carrying value to determine if the goodwill is impaired. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, then goodwill is not impaired and no further testing is required. If the carrying value of the net assets assigned to the reporting unit were to exceed its fair value, then the second step is performed in order to determine the implied fair value of the reporting unit’s goodwill and an impairment loss is recorded for an amount equal to the difference between the implied fair value and the carrying value of the goodwill.

 

For the purpose of goodwill analysis, we have two reporting units, as defined by ASC 350, “Intangible—Goodwill and Other.” Our distribution services business segment is comprised of one Distribution Services reporting unit and the GBS business segment is comprised of one Contact Center reporting unit. We conducted our annual impairment analysis in the fourth quarter of fiscal year 2010. Our goodwill impairment analysis did not result in an impairment charge for the fiscal years ended 2010, 2009 or 2008.

 

Determining the fair value of a reporting unit, intangible asset or a long-lived asset is judgmental and involves the use of significant estimates and assumptions. We base our fair value estimates on assumptions that we believe are reasonable but are uncertain and subject to changes in market conditions.

 

Long-lived assets. We review the recoverability of our long-lived assets, such as property and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows, undiscounted and without interest charges, of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. In the fiscal year ended November 30, 2010, we recorded an impairment of $0.2 million on our long-lived assets.

 

Income Taxes. As part of the process of preparing our Consolidated Financial Statements, we estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves estimating our current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing revenue and expenses, for tax and accounting purposes, as well as

 

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estimating foreign tax credits. These differences may result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We assess the likelihood that our deferred tax assets, which include net operating loss carry forwards and temporary differences that are expected to be deductible in future years, will be recoverable from future taxable income or other tax planning strategies. If recovery is not likely, we provide a valuation allowance based on our estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes in excess of amounts that are ultimately considered more likely than not realizable. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations by various taxing authorities. Actual results could differ from our estimates.

 

Results of Operations

 

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

 

      Fiscal Years Ended November 30,  
      2010     2009     2008  
          

(As Adjusted-

See Note 2)

   

(As Adjusted-

See Note 2)

 

Statements of Operations Data:

      

Revenue

     100.00     100.00     100.00

Cost of revenue

     (94.29     (94.52     (94.65
                        

Gross profit

     5.71        5.48        5.35   

Selling, general and administrative expenses

     (3.40     (3.54     (3.46
                        

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

     2.31        1.94        1.89   

Interest expense and finance charges, net

     (0.20     (0.24     (0.22

Other income (expense), net

     0.02        0.04        (0.10
                        

Income from continuing operations before income taxes and noncontrolling interest

     2.13        1.74        1.57   

Provision for income taxes

     (0.77     (0.63     (0.58
                        

Income from continuing operations before noncontrolling interest, net of taxes

     1.36        1.11        0.99   

Income from discontinued operations, net of tax

     —          0.07        0.09   

Gain on sale of discontinued operations, net of tax

     0.13        —          —     
                        

Net income

     1.49        1.18        1.08   
                        

Net income attributable to noncontrolling interest

     —          (0.02     (0.01
                        

Net income attributable to SYNNEX Corporation

     1.49     1.16     1.07
                        

 

Fiscal Years Ended November 30, 2010, 2009 and 2008 from Continuing Operations

 

Revenue

 

    Fiscal Years Ended November 30,     Percent Change  
    2010     2009     2008     2010 to 2009     2009 to 2008  
          (in thousands)                    

Revenue

  $ 8,614,141      $ 7,719,197      $ 7,736,726        11.6     -0.2

Distribution Revenue

    8,526,309        7,639,094        7,674,048        11.6     -0.5

GBS Revenue

    112,380        101,138        82,494        11.1     22.6

Inter-Segment Elimination

    (24,548     (21,035     (19,816     16.7     6.2

 

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In our distribution business, we sell in excess of 20,000 technology products (as measured by active SKUs) from more than 100 IT, CE and 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 support, ITO, renewal management 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 GBS 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 year over year because of the improvement in overall market conditions in both the US and Canada following the economic recession in fiscal year 2009 which had impacted our channel sales volumes. Our sales also benefitted from our acquisition of Jack of All Games, Inc., new vendors and sales initiatives. By product line, in comparison to fiscal year 2009, our networking product sales increased 37%, system component sales increased 24%, systems sales increased 19% and peripheral sales increased 12%. Our revenue from software sales benefitted from the sales of gaming products but decreased by 9% as compared to the prior year period because of the presentation of revenue generated from certain service contracts, post-contract software support services, and extended warranty contracts on a net basis beginning in fiscal first quarter of 2010. See Note 2—Revenue Recognition. Revenue also benefitted from the foreign exchange translation of our Canadian operations as compared to the prior year.

 

In fiscal year 2010, revenue in the GBS segment increased as compared to the prior year because of revenue from new customers and increased call volumes in our BPO service contact centers.

 

Our decrease in distribution revenue for the fiscal year ended November 30, 2009 from the fiscal year ended November 30, 2008 was primarily attributable to the slow economic environment which had caused a 10% to 15% decline in overall channel volumes. Revenue was also adversely impacted by the foreign exchange translation of our Canadian distribution operations. These declines were offset by market share gains and the full year impact of the New Age Electronics acquisition.

 

Our increase in GBS revenue for the fiscal year ended November 30, 2009 from the fiscal year ended November 30, 2008 was mainly due to increased business, higher call volumes in our contact centers and additional revenue generated from our smaller acquisitions.

 

Gross Profit

 

     Fiscal Years Ended November 30,     Percent Change  
     2010     2009     2008     2010 to 2009     2009 to 2008  
           (in thousands)                    

Gross Profit

   $ 491,616      $ 423,030      $ 413,864        16.2     2.2

Percentage of Revenue

     5.71     5.48     5.35    

 

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

 

Our gross profit as a percentage of revenue in fiscal year 2010 increased by 23 basis points over fiscal year 2009. Gross profit as a percentage of revenue for fiscal year 2010 was approximately 25 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. Our gross profit was impacted by the sale of inventory and customer contracts to MiTAC International, our acquisitions and changes in our mix of business.

 

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Our gross profit as a percentage of revenue increased by 13 basis points in fiscal year 2009 over 2008 primarily due to net changes in our product mix, expansion of our GBS services, greater success in maximizing our variable incentives and pricing policies, and continued focus on costs and freight management.

 

No specific customers, or changes in pricing strategy, individually or in the aggregate, contributed significantly to the change in gross profit.

 

Selling, General and Administrative Expenses

 

     Fiscal Years Ended November 30,     Percent Change  
     2010     2009     2008     2010 to 2009     2009 to 2008  
           (in thousands)                    

Selling, General and Administrative Expenses

   $ 292,466      $ 273,381      $ 267,498        7.0     2.2

Percentage of Revenue

     3.40     3.54     3.46    

 

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 in fiscal year 2010 from fiscal year 2009, due to higher headcount and increase in personnel costs of $19.8 million and higher operating overhead costs of $6.6 million. These increases were offset in part by a $4.8 million decrease in bad debt expense, a $2.3 million decrease in intangible amortization costs and a $1.0 million decrease in deferred compensation expenses. The increase in our personnel costs and operating overhead is due to the growth of our business, investments in strategic initiatives and our recent acquisitions, including of Jack of All Games, Inc. Our selling, general and administrative expenses were also adversely impacted by the fluctuations in foreign exchange rates during the year.

 

Selling, general and administrative expenses increased in fiscal year 2009 from fiscal year 2008, both on a dollar basis as well as percentage of revenue due to an increase in our deferred compensation cost accrual of $8.6 million, and an increase in depreciation and amortization expenses, mainly due to the acquisitions, and leasehold improvements of $0.9 million. These increases were offset in part by a reduction of $3.8 million for personnel and professional expenses and a reduction of $2.3 million in overhead, travel and communication costs as a result of cost control efforts.

 

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Income from Continuing Operations before Non-Operating Items, Income Taxes and Noncontrolling Interests

 

    Fiscal Years Ended November 30,     Percent Change  
    2010     2009     2008     2010 to 2009     2009 to 2008  
          (in thousands)                    

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

  $ 199,150      $ 149,649      $ 146,366        33.1     2.2

Percentage of Total Revenue

    2.31     1.94     1.89    

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

    187,478        137,724        138,826        36.1     -0.8

Percentage of Distribution Revenue

    2.20     1.80     1.81    

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

    11,672        11,925        7,540        -2.1     58.2

Percentage of GBS Revenue

    10.39     11.79     9.14    

 

Our income from continuing operations before non-operating items, income taxes and noncontrolling interest as a percentage of revenue increased to 2.31% in fiscal year 2010 from 1.94% and 1.89% in fiscal years 2009 and 2008, respectively, due to improvements in gross margins in our distribution segment, partially offset by higher selling, general and administrative expenses. These margins were also higher as a result of accounting for revenue from certain service contracts, post-contract software support services, and extended warranty contracts on a net basis beginning in fiscal year 2010.

 

Our distribution segment income from continuing operations before non-operating items, income taxes and noncontrolling interest as a percentage of distribution revenue improved 40 basis points to 2.20% in fiscal year 2010 from 1.80% in fiscal year 2009. The 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. In addition, the improvement in margins was due to higher gross profit dollars and lower selling, general and administrative costs as a percentage of revenue, due to increased leverage of fixed costs included in selling, general and administrative expenses.

 

Our distribution segment income from continuing operations before non-operating items, income taxes and noncontrolling interest as a percentage of distribution revenue decreased to 1.80% for fiscal year 2009 from 1.81% for fiscal year 2008 primarily due to higher selling, general and administrative expenses offset by higher gross profit due to changes in the mix of our business, foreign exchange impact on inventory purchases, greater success in maximizing our variable incentives, and other cost reductions.

 

Our GBS segment income from continuing operations before non-operating items, income taxes and noncontrolling interest as a percentage of GBS revenue decreased 140 basis points to 10.39% for fiscal year 2010 from 11.79% in the prior year due to the impact of fluctuations in foreign currency exchange rates on operating costs and higher administrative costs. The increase in administrative expenses was due to initiatives undertaken to support the business growth in this segment, and higher non-billable personnel costs incurred for contact center agents in their training period. In addition, we recorded a $2.1 million accrual for a statutory business expense.

 

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Our GBS segment income from continuing operations before non-operating items, income taxes and noncontrolling interest as a percentage of revenue increased 265 basis points from 9.1% in fiscal year 2008 to 11.8% in fiscal year 2009 primarily due to increased volume of business and better utilization of resources in our contact centers.

 

Interest Expense and Finance Charges, Net

 

    Fiscal Years Ended November 30,     Percent Change  
    2010     2009     2008     2010 to 2009     2009 to 2008  
          (As Adjusted -
See Note 2)
    (As Adjusted -
See Note 2)
             
          (in thousands)                    

Interest expense and finance charges, net

  $ 17,114      $ 18,032      $ 17,206        -5.1     4.8

Percentage of revenue

    0.20     0.24     0.22    

 

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

 

The decrease in interest expense and finance charges, net, in fiscal year 2010 from fiscal year 2009, was due to lower interest rates, and lower finance charges resulting from lower flooring sales. This decrease in expense was offset by $2.5 million lower interest income primarily relating to our Mexico distribution service contract.

 

The change in interest expense and finance charges, net, in fiscal year 2009 from fiscal year 2008 was mainly due to lower finance charges of $6.8 million as a result of lower borrowings, lower flooring sales, and lower interest rates. This decrease was partially offset by $5.7 million of lower interest income primarily from our Mexico operation.

 

Other Income (Expense), Net

 

     Fiscal Years Ended November 30,     Percent Change  
     2010     2009     2008     2010 to 2009     2009 to 2008  
           (in thousands)                    

Other income (expense), net

   $ 1,550      $ 3,036      $ (7,812     -48.9     138.9

Percentage of revenue

     0.02     0.04     -0.10    

 

Amounts recorded as other income (expense), net include foreign currency transaction gains and losses, investment gains and losses (including those in our deferred compensation plan) and other non-operating gains and losses.

 

The change in other income (expense), net, in fiscal year 2010 from fiscal year 2009, was primarily due to gains from our trading securities being lower by $2.0 million than in the prior year; foreign exchange losses that were $0.8 million more than in the prior year; and a charge of $0.4 million for other-than-temporary impairment on our cost method and available-for-sale investments. These reductions were offset by the gains of $0.8 million and $0.5 million recognized on the sale of the BDG division of SYNNEX Canada Limited, or SYNNEX Canada, and NDS, respectively.

 

The increase in other income, net, in fiscal year 2009 from fiscal year 2008, was primarily due to gains of $9.6 million on deferred compensation investments and foreign exchange gains of $1.0 million.

 

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Provision for Income Taxes

 

Income taxes consist of our current and deferred tax expense resulting from our income earned in domestic and foreign jurisdictions.

 

Our effective tax rate in both the fiscal years 2010 and 2009 was 36.4%. The effective tax rate in fiscal year 2010 benefitted from the release of certain tax reserves resulting from the conclusion of the Internal Revenue Service, or IRS, tax audits and the expiration of certain statute of limitations. This was offset by the loss of tax holidays in a foreign location and the changes in the mix of income in the different tax jurisdictions in which we operate. Our effective tax rate was 36.4% in fiscal year 2009 as compared with an effective tax rate of 36.9% in fiscal year 2008. The effective tax rate in fiscal year 2009 was slightly lower than in fiscal year 2008, primarily due to higher profit contributions from lower tax jurisdictions as well as certain favorable permanent differences and an impact on deferred tax assets in certain foreign jurisdictions.

 

Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and earnings being higher than anticipated in countries where we have higher statutory rates, by changes in the valuations of our deferred tax assets or liabilities, or by changes or interpretations in tax laws, regulations or accounting principles. In addition, we are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

 

Net Income Attributable to Noncontrolling Interests

 

Net income attributable to noncontrolling interests represents the share of net income attributable to others, which is recognized for the portion of subsidiaries’ equity not owned by us. In April 2007, we acquired a controlling interest in China Civilink (Cayman), which operates in China as HiChina Web Solutions. HiChina Web Solutions was sold in December 2009 and is presented in discontinued operations in our Consolidated Statements of Operations.

 

In March 2008, we acquired a controlling interest in Nihon Daikou Shouji Co., Ltd., or NDS, which operates in Japan. On August 31, 2010, we sold our controlling interest in NDS to SB Pacific Corporation Limited, a newly formed company led by our founder and former Chairman Robert Huang, and in which we own a noncontrolling interest.

 

On September 30, 2010, we acquired a controlling interest in Occidental Business Services, S.A., which provides call center services in Costa Rica.

 

The above noncontrolling interests are contained within our GBS segment.

 

Discontinued Operations

 

On December 28, 2009, China Civilink (Cayman), which operates in China as HiChina Web Solutions, was sold to Alibaba.com Limited. HiChina Web Solutions provides domain name registration, web site hosting and design. HiChina Web Solution was a subsidiary of SYNNEX Investment Holdings Corporation, a wholly-owned, subsidiary company of SYNNEX Corporation. Under the terms of the agreement, we received $65.4 million for our estimated 79% controlling ownership in HiChina Web Solutions. The total gain recorded on the sale was $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 $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 conjunction with the sale of HiChina Web Soution, we recorded a contingent liability of $3.1 million.

 

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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. Accordingly, we have excluded results of HiChina Web Solution’s operations from our consolidated statements of continuing operations for the fiscal years ended November 30, 2010, 2009 and 2008 to present this business in discontinued operations.

 

The following table shows the results of operations of HiChina Web Solutions for fiscal years ended November 30, 2010, 2009 and 2008, which are included in the earnings from discontinued operations:

 

    Fiscal Years Ended November 30,  
    2010*     2009     2008  
    (in thousands)  

Revenue

  $ 2,959      $ 37,081      $ 31,504   

Cost of revenue

    (1,706     (16,078     (13,450
                       

Gross profit

    1,253        21,003        18,054   

Selling, general and administrative expenses

    (1,199     (15,736     (12,573
                       

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

    54        5,267        5,481   
                       

Interest income (expense and finance charges), net

    17        413        575   

Other income (expense), net

    5        (7     (19
                       

Income before income taxes and noncontrolling interest

    76        5,673        6,037   

(Provision for) benefit from income taxes

    (1     (474     610   
                       

Income from discontinued operations

    75        5,199        6,647   

Income from discontinued operations attributable to noncontrolling interest

    (16     (1,290     (918
                       

Income from discontinued operations attributable to SYNNEX Corporation

  $ 59      $ 3,909      $ 5,729   
                       

 

* 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:

 

    As of 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   
       

Noncontrolling interest

  $ 7,403   
       

 

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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 program and our revolver program 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 $65.9 million in fiscal year 2010 compared to net cash provided by operating activities of $262.0 million in fiscal year 2009. Net cash used in operating activities in the fiscal year ended November 30, 2010 was mainly due to the purchase of inventory as business levels increased resulting in $240.1 million higher inventory; higher accounts receivable of $156.8 million due to higher sales year over year in the U.S. and Canada; and higher vendor receivable balance of $29.6 million due to higher volume and the timing of payments. The above increases were partially offset by higher accounts payable of $220.2 million; net income of $128.1 million; and collections on our receivables from affiliates of $12.9 million.

 

Net cash provided by operating activities was $262.0 million in fiscal year 2009. Cash provided by operating activities in fiscal year 2009 was primarily due to an increase in accounts payable of $103.0 million; net income of $90.8 million; decrease in other assets of $44.7 million, which was mainly due to a decrease in deferred costs of the multi-year contracts from our Mexico operation; offset by decrease in deferred liabilities of $24.8 million; and an increase in accounts receivable of $6.5 million.

 

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 provided by operating activities was $52.6 million in fiscal year 2008. Cash provided by operating activities in fiscal year 2008 was primarily due to $83.1 million of net income; a decrease in other assets of $41.6 million; offset by an increase in accounts receivable of $45.0 million; increase in inventories of $16.4 million; decrease in accounts payable of $36.6 million; and a decrease in deferred liabilities of $29.2 million. The decrease in other assets and deferred liabilities resulted from the decrease in deferred revenue and deferred costs of the multi-year contracts from our Mexico operation.

 

Net cash provided by investing activities was $1.1 million in fiscal year 2010, which includes $37.8 million cash received from the sale of our businesses; $9.7 million in proceeds from our held-to-maturity term deposits, net of purchases; and a $15.2 million decrease in our restricted cash; partially offset by $47.4 million cash used for the acquisition of Jack of All Games and the fourth quarter acquisitions in our GBS segment and $12.7 million investment in capital expenditures. Cash received from the sales of our businesses includes $33.1 million from the sale of HiChina Web Solutions, $3.2 million from the sale of the BDG division of SYNNEX Canada, and $1.5 million from the sale of NDS.

 

Net cash used in investing activities was $69.6 million and $65.7 million in fiscal years 2009 and 2008, respectively. Cash used in investing activities in fiscal year 2009 was primarily for capital expenditures of $25.0 million, which includes the purchase of a previously leased administrative and warehouse building in Fremont,

 

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California for $12.2 million, increase in restricted cash of $15.7 million which primarily relates to lockbox collections under our borrowing arrangements, and also for our future payments to our vendors relating to the long-term projects at our Mexico operation and purchase of short-term investments net of proceeds of $12.7 million. Cash used in investing activities in fiscal year 2008 was primarily for the acquisition of New Age Electronics and others for $28.0 million in total (net of cash acquired of $16.9 million) and capital expenditures of $33.5 million, which was primarily for the construction of a new logistics facility in Olive Branch, Mississippi and the expansion of our sales and marketing headquarters in Greenville, South Carolina.

 

In 2009, investments with maturities from the date of purchase greater than three months and less than one year were corrected to classify such amounts as short-term investments rather than cash equivalents. The impact as of November 30, 2008 was a $3.0 million reduction in cash and a corresponding increase in short-term investments. The impact to cash flow from investing activities for fiscal year 2008 was not material; accordingly, no amounts were revised. We concluded that the correction was not material to prior period annual consolidated financial statements and to the interim consolidated financial statements for fiscal 2009 based on SEC Staff Accounting Bulletin No. 99: Materiality. We presented corrected consolidated statements of cash flows for each of the interim periods in fiscal 2009 in the fiscal 2010 comparative interim consolidated financial statements.

 

Net cash provided by financing activities was $93.8 million in fiscal year 2010, consisting primarily of net receipts from our securitization arrangements and our revolving line of credit, proceeds from the issuance of common stock, and the excess tax benefit from share-based compensation which was partially offset by lower book overdraft. Net cash used by financing activities was $183.3 million in the fiscal year 2009 and was primarily related to net payments on our securitization arrangements, bank loans and our revolving line of credit, partially offset by proceeds from the issuance of common stock.

 

Our consolidated statements of cash flow for the fiscal years 2009 and 2008 include the cash balances and cash-flow activities of our discontinued operations.

 

We believe the unused portions of the lines of credit on our arrangements are sufficient to support our operating activities.

 

Interest paid in fiscal years 2010, 2009 and 2008 was $13.5 million, $18.0 million and $9.6 million, respectively. It increased by $8.4 million from 2008 to 2009 due to all financing arrangements being treated as on-balance sheet arrangements in 2009.

 

Capital Resources

 

Our cash and cash equivalents totaled $88.0 million and $37.8 million as of November 30, 2010 and 2009, respectively. We believe we will have sufficient resources to meet our present and future working capital requirements for the next twelve months, based on our financial strength and performance, existing sources of liquidity, available cash resources and funds available under our various borrowing arrangements.

 

In May 2008, we issued $143.8 million of aggregate principal amount of our 4.0% Convertible Senior Notes due 2018, or the Notes, in a private placement. However, under certain circumstances we may redeem the Notes, in whole or in part, for cash on or after May 20, 2013, at a redemption price equal to 100% of principal amount plus any accrued and unpaid interest. In addition, if certain triggering events are met, the Notes can be converted into shares of common stock at any time before their maturity. Because we currently intend to settle the Notes using cash at some future date, we maintain within our Amended and Restated U.S. Arrangement and the Amended and Restated Revolver ongoing features that allow us to utilize cash from these facilities to cash settle the Notes, if desired. (See On-Balance Sheet Arrangements). 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 14.

 

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On-Balance Sheet Arrangements

 

We primarily finance our U.S. operations with an accounts receivable securitization program, or the U.S. Arrangement. On November 12, 2010, we amended and restated the U.S. Arrangement replacing the lenders and the lead agent, or the Amended and Restated U.S. Arrangement. We can now pledge up to a maximum of $400.0 million in U.S. trade accounts receivable, or the U.S. Receivables, as compared to a maximum of $350.0 million under the previous agreement. The maturity date of the Amended and Restated U.S. Arrangement is November 12, 2013. The effective borrowing cost under the Amended and Restated U.S. Arrangement is a blend of the prevailing dealer commercial paper rates plus a program fee of 0.60% per annum based on the used portion of the commitment, and a facility fee of 0.60% per annum payable on the aggregate commitment of the lenders. Prior to the amendment, the effective borrowing cost was a blend of the prevailing dealer commercial paper rates, plus a program fee of 0.65% per annum based on the used portion of the commitment and a facility fee of 0.65% per annum payable on the aggregate commitment. The balance outstanding on the Amended and Restated U.S. Arrangement as of November 30, 2010 was $209.1 million. The balance outstanding under the U.S. Arrangement as of November 30, 2009 was $119.0 million.

 

Under the terms of the Amended and Restated U.S. Arrangement, we sell, on a revolving basis, our U.S. Receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in and to the U.S. Receivables as security. Any borrowings under the Amended and Restated U.S. Arrangement are recorded as debt on our consolidated balance 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 financial institution. On November 12, 2010, we amended and restated the revolver, or the Amended and Restated Revolver, to remove one of the lenders and increase the maximum commitment of the remaining lender from $80.0 million to $100.0 million. The Amended and Restated Revolver retains an accordion feature to increase the maximum commitment by an additional $50.0 million to $150.0 million at our request, in the event the current lender consents to such increase or another lender participates in the Revolver. Interest on borrowings under the Amended and Restated Revolver is based on a base rate or LIBOR rate, at our option. The margin on our LIBOR rate is determined in accordance with our fixed charge coverage ratio under the Revolver and is currently 2.25%. Our base rate is determined based on the higher of (i) the financial institution’s prime rate, (ii) the overnight federal funds rate plus 0.50% or (iii) one month LIBOR plus 1.0%. An unused line fee of 0.50% per annum is payable if the outstanding principal amount of the Amended and Restated Revolver is less than half of the lender’s commitment, however, that fee is reduced to 0.35% if the outstanding principal amount of the Revolver is greater than half of the lender’s commitment. The Amended and Restated Revolver is secured by our inventory and other assets and expires on November 12, 2013. It would be an event of default under the Amended and Restated Revolver if (1) a lender under the Amended and Restated U.S. Arrangement declines to extend the maturity date at any point within 60 days prior to the maturity date of the Amended and Restated U.S. Arrangement, unless availability under the Amended and Restated Revolver exceeds $60.0 million or we have a binding commitment in place to renew or replace the Amended and Restated U.S. Arrangement or (2) at least 20 days prior to the maturity date of the Amended and Restated U.S. Arrangement we do not have in place a binding commitment to renew or replace the Amended and Restated U.S. Arrangement on substantially similar terms and conditions, unless we have no amounts outstanding under the Amended and Restated Revolver at such time. There was no borrowing outstanding as of November 30, 2010 and 2009, respectively.

 

SYNNEX Canada replaced its C$30.0 million revolving line of credit arrangement, or Canadian Arrangement, and replaced its C$110.0 million accounts receivable securitization program with a secured revolving credit arrangement, or the Canadian Revolving Arrangement in May 2009, having a maximum commitment of C$125.0 million. The Canadian Revolving Arrangement provides a sublimit of $5.0 million for

 

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the issuance of standby letters of credit. As of November 30, 2010, there were outstanding standby letters of credit totaling $3.3 million. 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, 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 equal to (i) a minimum rate of 2.5% plus a margin of 1.25% for a Base Rate Loan in Canadian Dollars, (ii) a minimum rate of 3.25% plus a margin of 2.50% for a Base Rate Loan in U.S. Dollars, and (iii) a minimum of 1.0% plus a margin of 2.75% for a BA (Bankers Acceptance) Rate Loan. A fee of 0.375% per annum is payable with respect to the unused portion of the commitment. The balances outstanding under our Canadian Revolving Arrangement as of November 30, 2010 and 2009 were $36.2 million and $29.1 million, respectively.

 

SYNNEX Canada had a credit facility with a financial institution in Canada which allowed SYNNEX Canada to issue documentary letters of credit. The limit on this facility was C$0.4 million with 180 days validity. The limit had been reduced in February 2010, as a result of the sale of the BDG division from C$30.0 million to C$0.4 million. In connection with this credit facility, we had 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. The facility was terminated on October 5, 2010 and we were released from the guarantee on January 5, 2011.

 

As of November 30, 2010, we had outstanding letters of credit amounting to $0.8 million under a letter of credit facility and as of November 30, 2009, we had $2.1 million borrowings outstanding under other lines of credit.

 

We also have a term loan and mortgage facility in Canada with a financial institution with balances of $9.7 million and $10.0 million as of November 30, 2010 and 2009, respectively, which expires in 2017. Future principal payments due after November 30, 2010 under our borrowing arrangements, the term loan and mortgage in Canada, and payments due under our operating lease arrangements are as follows (in thousands):

 

    Payments Due by Period  
    Total     Less than
1 Year
    1 - 3
Years
    3 - 5 Years     > 5
Years
 
    (in thousands)  

Contractual Obligations:

         

Principal debt payments

  $ 255,017      $ 245,973      $ 1,372      $ 1,526      $ 6,146   

Interest on debt

    3,828        1,075        893        739        1,121   

Non-cancelable operating leases

    43,146        16,566        19,826        6,754        —     
                                       

Total

  $ 301,991      $ 263,614      $ 22,091      $ 9,019      $ 7,267   
                                       

 

Due to the uncertainty of the timing and amount that may be settled in cash, the convertible senior notes described in Note 14 have not been included in the table above.

 

We have also issued guarantees to certain vendors and lenders of our subsidiaries for an aggregate amount of $108.5 million as of November 30, 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. As of November 30, 2010 we had a liability of $10.5 million for unrecognized tax benefits under certain tax positions. As we are unable to reasonably predict the timing of settlement of these liabilities, the table above excludes such liabilities.

 

Off-Balance Sheet Arrangements

 

Our Canadian subsidiary, SYNNEX Canada, replaced our accounts receivable securitization program in Canada, with a secured revolving credit arrangement, or the Canadian Revolving Arrangement, in May 2009. Prior to its replacement, the Canadian accounts receivable securitization program was accounted for as an off-balance sheet transaction because we funded the advances by selling our rights, title and interest in U.S. and

 

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Canadian trade receivables, or Canadian Receivables, to the financial institution on a fully-serviced basis. The Canadian Revolving Arrangement is accounted for as an on-balance sheet transaction.

 

Covenants Compliance

 

In relation to our Amended and Restated U.S. 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 Notes, as defined below, subject to certain liquidity tests. As of November 30, 2010, we were in compliance with all material covenants for the above arrangements.

 

Convertible Debt

 

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

 

Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date for such Notes under the following circumstances: (1) during any fiscal quarter after the fiscal quarter ended August 31, 2008 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the conversion price of the Notes on the last day of such preceding fiscal quarter, (2) during the five business-day period after any five consecutive trading-day period, or the Measurement Period, in which the trading price per $1,000 principal amount of the Notes for each day of that Measurement Period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate of the Notes on each such day; (3) if we have called the particular Notes for redemption, until the close of business on the business day prior to the redemption date; or (4) upon the occurrence of certain corporate transactions. In addition, holders may also convert their Notes at their option at any time beginning on November 15, 2017, and ending at the close of business on the business day immediately preceding the maturity date for the Notes, without regard to the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of the common stock or a combination thereof at our election. The initial conversion rate for the Notes will be 33.9945 shares of common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of $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.

 

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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, net 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 $9.2 million. Underlying debt issuance costs of $3.6 million associated with the Notes were allocated between the liability and equity components of the debt in accordance with the provisions of the new standard.

 

As of November 30, 2010, the remaining amortization period is approximately 29 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 $6.5 million, $6.6 million and $3.6 million during the fiscal years ended November 30, 2010, 2009 and 2008, respectively. Based on an effective rate of 8.0%, we recorded non-cash interest expense of $4.5 million, $4.0 million and $2.2 million during the fiscal years ended November 30, 2010, 2009 and 2008, respectively. As of both November 30, 2010 and 2009, the carrying value of the equity component of the Notes, net of allocated issuance costs, was $22.8 million. As of November 30, 2010, the if-converted value of the Notes did not exceed the principal balance.

 

Related Party Transactions

 

We have a business relationship with MiTAC International Corporation, or MiTAC International, a publicly-traded company in Taiwan that began in 1992 when it became our primary investor through its affiliates. As of November 30, 2010, MiTAC International and its affiliates beneficially owned approximately 29% of our common stock. In addition, Matthew Miau, the Chairman Emeritus of our Board of Directors, is the Chairman of MiTAC International and a director or officer of MiTAC International’s affiliates. As a result,

 

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MiTAC International generally has significant influence over us and over the outcome of all matters submitted to stockholders for consideration, including any of our mergers or acquisitions. Among other things, this could have the effect of delaying, deterring or preventing a change of control over us with the loss of any premium that stockholders otherwise might receive in connection with such a transaction.

 

Until July 31, 2010, we worked with MiTAC International on OEM outsourcing and jointly marketed MiTAC International’s design and electronic manufacturing services and our contract assembly capabilities. This relationship enabled us to build relationships with MiTAC International’s customers. On July 31, 2010, MiTAC International purchased certain assets related to our contract assembly business including inventory and customer contracts, primarily related to customers then being jointly served by MiTAC International and us. The value of the inventory sold was $68.1 million. No gain or loss was recognized on this transaction during the fiscal year ended November 30, 2010. As part of this transaction, we provide MiTAC International certain transition services for the business for a fee of $0.3 million per month over a period of twelve months. During the fiscal year ended November 30, 2010, we received $1.0 million in service fees. In addition, during the fiscal year ended November 30, 2010, we received $1.0 million in reimbursements for facilities and overhead costs. The sale agreement also includes earn-out and profit sharing provisions, which are based on operating performance metrics, achieved over twelve to eighteen months from the closing date, for the defined customers included in this transaction.

 

We purchased inventories, including notebook computers, motherboards and other peripherals, from MiTAC International and its affiliates totaling $157.1 million, $312.4 million and $261.6 million during fiscal years 2010, 2009 and 2008, respectively. Our sales to MiTAC International and its affiliates during fiscal years 2010, 2009 and 2008 totaled $5.6 million, $2.8 million and $2.0 million, respectively. Most of these purchases and sales were pursuant to our Master Supply Agreement with MiTAC International and Sun Microsystems, formerly 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 were covered by this Master Supply Agreement.

 

Our business relationship with MiTAC International had been informal and was not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments.

 

During the period of time that we worked with MiTAC International, we negotiated manufacturing, pricing and other material terms on a case-by-case basis with MiTAC International and 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, Matthew 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 the business and operations may decrease as well.

 

Beneficial Ownership of Our Common Stock by MiTAC International

 

As noted above, MiTAC International and our affiliates in the aggregate beneficially owned approximately 29% of our common stock as of November 30, 2010. These shares are owned by the following entities:

 

     November 30, 2010  
     (shares in thousands)  

MiTAC International (1)

     6,178   

Synnex Technology International Corp. (2)

     4,427   
        

Total

     10,605   
        

 

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(1)

Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC International. Excludes 786 thousand shares (of which 389 thousand shares are directly held and 397 thousand shares are subject to exercisable options) held by Matthew Miau.

(2)

Synnex Technology International Corp., or Synnex Technology International, is a separate entity from us and is a publicly-traded corporation in Taiwan. Shares are held via Peer Development Ltd, a wholly-owned subsidiary of Synnex Technology International. MiTAC International owns a noncontrolling interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a noncontrolling interest of 14.6% in Synnex Technology International. Neither MiTAC International nor Mr. Miau is affiliated with any person(s), entity, or entities that hold a majority interest in MiTAC Incorporated.

 

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

 

During fiscal years 2007 and 2008, we 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 November 30, 2010, the value of the investment was $0.9 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 our potential competitor. Neither MiTAC International nor Synnex Technology International is restricted from competing with us.

 

Others

 

On August 31, 2010, we sold our controlling interests in Nihon Daikou Shouji Co., Ltd., or NDS for $3.1 million to SB Pacific, a newly formed company, led by our founder and former Chairman, Robert Huang. Concurrently, we acquired a 33.3% noncontrolling interest in SB Pacific. A gain of $0.5 million was recorded on the sale of NDS in Other income (expense), net during the fiscal year ended November 30, 2010. On December 1, 2010, we and SB Pacific acquired 70% and 30%, respectively, of the capital stock of Marubeni Infotec Corporation, now known as SYNNEX Infotec Corporation, for an aggregate of US$8.4 million subject to certain post closing adjustments. This acquisition is in the distribution segment and is expected to enable expansion into Japan. Mr. Huang is the Chief Executive Officer of SYNNEX Infotec Corporation.

 

Our investment in SB Pacific, which was accounted for as an equity-method investment, was included in “Other assets.” We regard SB Pacific to be a variable interest entity and as of November 30, 2010, our maximum exposure was limited to $1.1 million. During the 2010 fiscal year, we paid $0.2 million in management fees to SB Pacific.

 

Recent Accounting Pronouncements

 

In October 2009, the 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. The guidance is not expected to have a material impact on 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

 

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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. The guidance is not expected to have a material impact on our consolidated financial statements.

 

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

 

In December 2007, the FASB issued a new accounting pronouncement for business combinations which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling 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 noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling 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 noncontrolling owners. This standard is effective as of the beginning of an entity’s fiscal years 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 14.

 

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The following financial statement line items for the fiscal years ended November 30, 2009 and 2008 and as of November 30, 2009, were impacted as a result of applying the new standard retrospectively:

 

    Fiscal Year Ended November 30, 2009  
    As previously reported     As adjusted     Effect of Change
increase /(decrease)
 
    (in thousands except per share amounts)  

Consolidated Statement of Operations:

   

Interest expense and finance charges, net

  $ (13,983   $ (18,032   $ 4,049   
                       

Income from continuing operations before income taxes and noncontrolling interest

    138,702        134,653        (4,049

Provision for income taxes

    (50,656     (49,028     1,628   
                       

Income from continuing operations before noncontrolling interest, net of tax

    88,046        85,625        (2,421

Net income attributable to SYNNEX Corporation

    92,088        89,667        (2,421
                       

Earnings per share attributable to SYNNEX Corporation:

     
                       

Net income per common share-basic

  $ 2.82      $ 2.74      $ (0.08
                       

Net income per common share-diluted

  $ 2.70      $ 2.64      $ (0.06
                       
    Fiscal Year Ended November 30, 2008  
    As previously reported     As adjusted     Effect of Change
increase / (decrease)
 
    (in thousands except per share amounts)  

Consolidated Statement of Operations:

   

Interest expense and finance charges, net

  $ (15,006   $ (17,206   $ 2,200   
                       

Income from continuing operations before income taxes and noncontrolling interest

    123,548        121,348        (2,200

Provision for income taxes

    (45,705     (44,811     894   
                       

Income from continuing operations before noncontrolling interest, net of tax

    77,843        76,537        (1,306

Net income attributable to SYNNEX Corporation

    83,797        82,491        (1,306
                       

Earnings per share attributable to SYNNEX Corporation:

     
                       

Net income per common share-basic

  $ 2.65      $ 2.61      $ (0.04
                       

Net income per common share-diluted

  $ 2.52      $ 2.48      $ (0.04
                       
    As of November 30, 2009  
    As previously reported     As adjusted     Effect of Change
increase / (decrease)
 
    (in thousands)  

Consolidated Balance Sheet:

     

Other current assets

  $ 40,352      $ 39,974      $ (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 fiscal year ended November 30, 2010 and as of November 30, 2010, were impacted as a result of applying the new standard:

 

    Fiscal Year Ended November 30, 2010  
    Amounts as currently
reported
    Amounts as would have
been reported prior
to adoption of new
standard
    Effect of adoption -
increase / (decrease) on
current period
 
    (in thousands except per share amounts)  

Consolidated Statement of Operations:

     

Income from continuing operations before income taxes and noncontrolling interest

  $ 183,586      $ 187,976      $ (4,390

Net income attributable to SYNNEX Corporation

    127,948        130,576        (2,628

Earnings per share attributable to SYNNEX Corporation:

     
                       

Net income per common share-basic

  $ 3.68      $ 3.76      $ (0.08
                       

Net income per common share-diluted

  $ 3.58      $ 3.65      $ (0.07
                       
    As of November 30, 2010  
    Amounts as
currently reported
    Amounts as would
have been reported
prior to adoption of
new standard
    Effect of Change
increase / (decrease)
 
    (in thousands)  

Consolidated Balance Sheet:

     

Other current assets

  $ 40,030      $ 40,292      $ (262

Convertible debt

    131,289        143,750        (12,461

Deferred tax liabilities

    3,262        (1,612     4,874   

Additional paid-in capital

    285,406        271,727        13,679   

Retained earnings

    679,193        685,548        (6,355

 

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

 

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

 

In November 2008, the FASB ratified the standard that applies to defensive assets that are acquired intangible assets which the acquirer does not intend to actively use, but intends to hold to prevent its competitors from obtaining access to the asset. This standard clarifies that defensive intangible assets are separately identifiable and should be accounted for as a separate unit of accounting in accordance with ASC 805, “Business Combinations” and ASC 820, “Fair Value Measurements and Disclosures.” This standard is effective for intangible assets acquired in fiscal years beginning on or after December 15, 2008 and was adopted by us in the first quarter of fiscal year 2010. Intangible assets acquired in fiscal year 2010 and later will be accounted for in accordance with this standard. The ratification of this standard did not have a material impact on our consolidated results of operations and financial condition. We did not hold any defensive assets as of November 30, 2010.

 

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In November 2008, the FASB ratified the standard that clarifies whether a financial instrument for which the payoff to the counterparty is based, in whole or in part, on the stock of an entity’s consolidated subsidiary is indexed to the reporting entity’s own stock. This standard is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years and was adopted by us in the first quarter of fiscal year 2010. We did not have any such financial instruments as of November 30, 2010.

 

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

 

In June 2009, the FASB issued a new accounting pronouncement to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest. This new standard will be effective as of the beginning of the annual reporting period commencing after November 15, 2009 and was adopted by us in the first quarter of fiscal year 2010.

 

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

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Foreign Currency Risk

 

We are exposed to foreign currency risk in the ordinary course of business. We hedge cash flow exposures for our major countries using a combination of forward contracts. Principal currencies hedged are the Canadian dollar, Chinese Renminbi, Japanese Yen, Philippines peso, Mexican peso and British pound. These instruments are generally short-term in nature, with typical maturities of less than one year. We do not hold or issue derivative financial instruments for trading purposes.

 

The following table presents the hypothetical changes in fair values of our outstanding derivative instruments as of November 30, 2010 and 2009, arising from an instantaneous strengthening or weakening of the U.S. dollar by 5%, 10% and 15% (in thousands).

 

    Loss on Derivative Instruments Given a
Weakening of U.S.  dollar by X Percent
    Gain (Loss)
Assuming No
Change in
Exchange Rate
    Gain on Derivative Instruments Given a
Strengthening of U.S.  dollar by X Percent
 
    15%     10%     5%       5%     10%     15%  

Forward contracts at November 30, 2010

  $ (9,168   $ (5,636   $ (2,476   $ 367      $ 2,940      $ 5,279      $ 7,415   

Forward contracts at November 30, 2009

  $ (13,865   $ (8,967   $ (4,571   $ (69   $ 3,010      $ 6,311      $ 9,347   

 

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We do not apply hedge accounting to our forward contracts, our foreign exchange contracts are marked-to-market and any material gains and losses on our hedge contracts resulting from a hypothetical, instantaneous change in the strength of the U.S. dollar would be significantly offset by mark-to-market gains and losses on the corresponding assets and liabilities being hedged.

 

Interest Rate Risk

 

During the last two years, the majority of our debt obligations have been short-term in nature and the associated interest obligations have floated relative to major interest rate benchmarks. While we have not used derivative financial instruments to alter the interest rate characteristics of our investment holdings or debt instruments in the past, we may do so in the future.

 

A 1.5% increase or decrease in rates as of November 30, 2010 would not result in any material change in the fair value of our obligations. The following tables present the hypothetical interest expense related to our outstanding borrowings for the years ended November 30, 2010 and 2009, arising from hypothetical parallel shifts in the respective countries’ yield curves, of plus or minus 5%, 10% and 15% (in thousands).

 

    Interest Expense Given an Interest
Rate Decrease by X Percent
    Actual Interest
Expense Assuming
No Change in
Interest Rate
    Interest Expense Given an Interest
Rate Increase by X Percent
 
    15%     10%     5%       5%     10%     15%  

SYNNEX US

  $ 4,143      $ 4,386      $ 4,630      $ 4,874      $ 5,117      $ 5,361      $ 5,605   

SYNNEX Canada

    1,566        1,658        1,750        1,843        1,935        2,027        2,119   
                                                       

Total for the year ended November 30, 2010

  $ 5,709      $ 6,044      $ 6,380      $ 6,717      $ 7,052      $ 7,388      $ 7,724   
                                                       
    Interest Expense Given an Interest
Rate Decrease by X Percent
    Actual Interest
Expense Assuming
No Change in
Interest Rate
    Interest Expense Given an Interest
Rate Increase by X Percent
 
    15%     10%     5%       5%     10%     15%  

SYNNEX US

  $ 5,805      $ 6,146      $ 6,488      $ 6,829      $ 7,171      $ 7,512      $ 7,853   

SYNNEX Canada

    1,242        1,315        1,388        1,461        1,534        1,607        1,680   
                                                       

Total for the year ended November 30, 2009

  $ 7,047      $ 7,461      $ 7,876      $ 8,290      $ 8,705      $ 9,119      $ 9,533   
                                                       

 

Equity Price Risk

 

The equity price risk associated with our marketable equity securities as of November 30, 2010 and 2009 is not material in relation to our consolidated financial position, results of operations or cash flow. Marketable equity securities include shares of common stock. The investments are classified as either trading or available-for-sale securities. Securities classified as trading are recorded at fair market value, based on quoted market prices and unrealized gains and losses are included in results of operations. Securities classified as available-for-sale are recorded at fair market value, based on quoted market prices and unrealized gains and losses are included in other comprehensive income. Realized gains and losses, which are calculated based on the specific identification method, are recorded in operations as incurred.

 

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Item 8. Financial Statements and Supplementary Data

 

INDEX

 

     Page  

Consolidated Financial Statements of SYNNEX Corporation

  

Management’s Report on Internal Control over Financial Reporting

     56   

Report of Independent Registered Public Accounting Firm

     57   

Consolidated Balance Sheets as of November 30, 2010 and 2009

     58   

Consolidated Statements of Operations for the Fiscal Years ended November 30, 2010, 2009 and 2008

     59   

Consolidated Statements of Comprehensive Income for the Fiscal Years ended November  30, 2010, 2009 and 2008

     60   

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Fiscal Years ended November 30, 2010, 2009 and 2008

     61   

Consolidated Statements of Cash Flows for the Fiscal Years ended November 30, 2010, 2009 and 2008

     62   

Notes to Consolidated Financial Statements

     63   

Selected Quarterly Consolidated Financial Data (Unaudited)

     108   

Financial Statement Schedule

  

Schedule II: Valuation and Qualifying Accounts for the Fiscal Years ended November  30, 2010, 2009 and 2008

     109   

 

Financial statement schedules not listed above are either omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or in the Notes thereto.

 

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Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of ours are being made only in accordance with authorizations of management and directors of us; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concludes that, as of November 30, 2010, our internal control over financial reporting was effective based on those criteria.

 

The effectiveness of our internal control over financial reporting as of November 30, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears in Item 8 of this Annual Report on Form 10-K.

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of SYNNEX Corporation:

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of SYNNEX Corporation and its subsidiaries at November 30, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of November 30, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

As discussed in Notes 2 and 7 to the consolidated financial statements, the Company changed the manner in which it accounts for business combinations, noncontrolling interests, and convertible instruments that may be settled in cash upon conversion in 2010, and for uncertain tax positions in 2008.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

 

PricewaterhouseCoopers LLP

San Jose, California

February 11, 2011

 

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SYNNEX CORPORATION

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value)

 

    November 30,
2010
    November 30,
2009
 
          (As Adjusted -
See Note 2)
 

ASSETS

   

Current assets:

   

Cash and cash equivalents

  $ 88,038      $ 37,816   

Short-term investments

    11,419        21,219   

Accounts receivable, net

    986,917        820,633   

Receivable from vendors, net

    132,409        99,610   

Receivable from affiliates

    5,080        5,144   

Inventories

    912,237        713,813   

Current deferred tax assets

    33,063        27,787   

Other current assets

    40,030        39,974   

Assets held for sale

    —          74,185   
               

Total current assets

    2,209,193        1,840,181   

Property and equipment, net

    91,995        94,725   

Goodwill

    139,580        107,563   

Intangible assets, net

    28,271        18,066   

Deferred tax assets

    605        2,849   

Other assets

    30,217        36,526   
               

Total assets

  $ 2,499,861      $ 2,099,910   
               

LIABILITIES AND EQUITY

   

Current liabilities:

   

Borrowings under securitization, term loans and lines of credit

  $ 245,973      $ 150,740   

Accounts payable

    896,401        687,432   

Payables to affiliates

    3,195        82,728   

Accrued liabilities

    166,861        136,397   

Income taxes payable

    1,578        2,431   

Liabilities related to assets held for sale

    —          18,148   
               

Total current liabilities

    1,314,008        1,077,876   

Long-term borrowings

    9,044        9,410   

Convertible debt

    131,289        126,785   

Long-term liabilities

    49,431        39,027   

Deferred tax liabilities

    3,262        8,077   
               

Total liabilities

    1,507,034        1,261,175   
               

Commitments and contingencies (Note 21)

   

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, 35,570 and 33,602 shares issued and outstanding

    36        34   

Additional paid-in capital

    285,406        249,892   

Accumulated other comprehensive income

    28,035        27,151   

Retained earnings

    679,193        551,245   
               

Total SYNNEX Corporation stockholders’ equity

    992,670        828,322   

Noncontrolling interest

    157        10,413   
               

Total equity

    992,827        838,735   
               

Total liabilities and equity

  $ 2,499,861      $ 2,099,910   
               

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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SYNNEX CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

 

    Fiscal Years Ended November 30,  
    2010     2009     2008  
          (As Adjusted -
See Note 2)
    (As Adjusted -
See Note 2)
 

Revenue

  $ 8,614,141      $ 7,719,197      $ 7,736,726   

Cost of revenue

    (8,122,525     (7,296,167     (7,322,862
                       

Gross profit

    491,616        423,030        413,864   

Selling, general and administrative expenses

    (292,466     (273,381     (267,498
                       

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

    199,150        149,649        146,366   

Interest expense and finance charges, net

    (17,114     (18,032     (17,206

Other income (expense), net

    1,550        3,036        (7,812
                       

Income from continuing operations before income taxes and noncontrolling interest

    183,586        134,653        121,348   

Provision for income taxes

    (66,910     (49,028     (44,811
                       

Income from continuing operations before noncontrolling interest, net of tax

    116,676        85,625        76,537   

Income from discontinued operations, net of tax

    75        5,199        6,647   

Gain on sale of discontinued operations, net of tax

    11,351        —          —     
                       

Net income

  $ 128,102      $ 90,824      $ 83,184   

Net income attributable to noncontrolling interest

    (154     (1,157     (693
                       

Net income attributable to SYNNEX Corporation

  $ 127,948      $ 89,667      $ 82,491   
                       

Amounts attributable to SYNNEX Corporation:

     

Income from continuing operations, net of tax

  $ 116,538      $ 85,758      $ 76,762   

Discontinued operations:

     

Income from discontinued operations, net of tax

    59        3,909        5,729   

Gain on sale of discontinued operations, net of tax

    11,351        —          —     
                       

Net income attributable to SYNNEX Corporation

  $ 127,948      $ 89,667      $ 82,491   
                       

Earnings per share attributable to SYNNEX Corporation:

     

Basic:

     

Income from continuing operations

  $ 3.35      $ 2.62      $ 2.43   

Discontinued operations

    0.33        0.12        0.18   
                       

Net income per common share—basic

  $ 3.68      $ 2.74      $ 2.61   
                       

Diluted:

     

Income from continuing operations

  $ 3.26      $ 2.53      $ 2.31   

Discontinued operations

    0.32        0.11        0.17   
                       

Net income per common share—diluted

  $ 3.58      $ 2.64      $ 2.48   
                       

Weighted-average common shares outstanding—basic

    34,737        32,711        31,619   
                       

Weighted-average common shares outstanding—diluted

    35,757        34,013        33,263   
                       

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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SYNNEX CORPORATION

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     Fiscal Years Ended November 30,  
     2010     2009     2008  
           (As Adjusted -
See Note 2)
    (As Adjusted -
See Note 2)
 

Net income

   $ 128,102      $ 90,824      $ 83,184   

Other comprehensive income (loss):

      

Unrealized gain on available-for-sale securities

     62        24        578   

Foreign currency translation adjustment

     4,732        21,997        (20,150
                        

Total other comprehensive income (loss):

     4,794        22,021        (19,572
                        

Comprehensive income:

     132,896        112,845        63,612   

Comprehensive income attributable to noncontrolling interest

     (154     (5,394     (693
                        

Comprehensive income attributable to SYNNEX Corporation

   $ 132,742      $ 107,451      $ 62,919   
                        

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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SYNNEX CORPORATION

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (in thousands)

 

    SYNNEX Corporation Shareholders     Noncontrolling
interest
    Comprehensive
income
    Total equity  
    Common stock     Additional
paid-in
capital
    Accumulated
other
comprehensive
income (loss)
    Retained
earnings
       
    Shares     Amount              
                (As adjusted -
See Note 2)
          (As adjusted -
See Note 2)
                (As adjusted -
See Note 2)
 

Balances, November 30, 2007

    31,328      $ 31      $ 196,128      $ 28,939      $ 379,456      $ 958      $ —        $ 605,512   

Share-based compensation

    —          —          6,637        —          —          —          —          6,637   

Tax benefits from exercise of non-qualified stock options

    —          —          2,091        —          —          —          —          2,091   

Issuance of common stock on exercise of options and restricted stock

    587        1        3,149        —          —          —