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SNX > SEC Filings for SNX > Form 10-Q on 8-Jul-2014All Recent SEC Filings

Show all filings for SYNNEX CORP

Form 10-Q for SYNNEX CORP


8-Jul-2014

Quarterly Report


ITEM 2. 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 the Consolidated Financial Statements and related Notes included elsewhere in this Report. When used in this Quarterly Report on Form 10-Q or the Report, the words "believes," "plans," "estimates," "anticipates," "expects," "intends," "allows," "can," "may," "designed," "will," and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about market trends, our business model and our services, our market strategy, including expansion of our product lines, our infrastructure, anticipated benefits, costs, and timing of our acquisitions, including our acquisition of the customer care business of International Business Machines Corporation, or IBM, information technology demand, our employee hiring, impact of MiTAC Holdings Corporation, or MiTAC Holdings, ownership interest in us, our revenue and operating results, our gross margins, competition with Synnex Technology International Corp., our future needs for additional financing, concentration of customers, our international operations, including our operations in Japan and Canada, expansion of our operations, including our Concentrix business, our strategic acquisitions of businesses and assets, effects of future expansion of our operations, adequacy of our cash resources to meet our capital needs, cash held by our foreign subsidiaries, adequacy of our disclosure controls and procedures, pricing pressures, competition, impact of our accounting policies, our tax rates, our anti-dilution share repurchase program, and statements regarding our securitization programs and revolving credit lines. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed herein, as well as the seasonality of the buying patterns of our customers, concentration of sales to large customers, dependence upon and trends in capital spending budgets in the information technology, or IT, and consumer electronics, or CE, industries, fluctuations in general economic conditions, our ability to successfully integrate the acquired IBM customer care business and risks set forth under Part II, Item 1A, "Risk Factors." These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview
We are a Fortune 500 corporation and a leading business process services company, offering a comprehensive range of services to resellers, retailers, original equipment manufacturers, or OEMs, financial and insurance institutions and several other industry verticals worldwide. Our primary business process services are wholesale IT distribution and business process outsourcing ("BPO") customer care service. We operate in two segments: distribution services, hereinafter referred to as Technology Solutions, and global business services, hereinafter referred to as Concentrix. Our Technology Solutions segment distributes peripherals, IT systems including data center server and storage solutions, system components, software, networking equipment, CE, and complementary products. Within our Technology Solutions services segment, we also provide systems design and integration services. Our Concentrix segment offers a portfolio of end-to-end outsourced services around process optimization, customer engagement strategy and back-office automation to clients in ten identified industry verticals.
On January 31, 2014, under the terms of a Master Asset Purchase Agreement, we completed the initial closing of our acquisition of the assets of the customer care business of International Business Machines Corporation, or IBM. On April 30, 2014, we completed the second phase of the acquisition of IBM's customer care business. The preliminary aggregate purchase price of $503.3 million is subject to certain post-closing adjustments. The countries acquired through April 30, 2014 comprise approximately 99.5% of the preliminary valuation of the customer care business. The subsequent closings are expected to occur in the third fiscal quarter of 2014, but contractually no later than June 30, 2015, and are subject to customary closing conditions. As of May 31, 2014, we are obligated to an additional amount of $40.0 million in cash at the final closing including $2.4 million towards the remaining countries. The acquisition has been integrated into our Concentrix segment. The acquisition in its entirety, including subsequent closures, is anticipated to add approximately 37,000 employees in five continents, providing business process outsourcing delivery capabilities to approximately 170 customers in 28 countries.
We combine our core strengths in distribution with our customer engagement services to help our customers achieve greater efficiencies in time to market, cost minimization, real-time linkages in the supply chain and after-market product support. We distribute more than 30,000 technology products (as measured by active SKUs) from more than 300 IT, CE and OEM suppliers to more than 20,000 resellers, system integrators, and retailers throughout the United States, Canada, Japan and Mexico. As of May 31, 2014, we had approximately 53,000 full-time, contractors and temporary employees worldwide. From a


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geographic perspective, approximately 82% and 84%, of our total revenue was from North America for the three and six months ended May 31, 2014, respectively, and approximately 88% and 87%, of our total revenue was from North America for the three and six months ended May 31, 2013, respectively.
In our Technology Solutions segment, we purchase peripherals, IT systems, system components, software, networking equipment, including CE and complementary products from our primary suppliers such as Hewlett-Packard Company, or HP, Lenovo, AsusTek Computer Inc., Beats Electronics LLC and Seagate Technologies LLC and sell them to our reseller and retail customers. We perform a similar function for our distribution of licensed software products. Our reseller customers include value-added resellers, or VARs, corporate resellers, government resellers, system integrators, direct marketers, and national and regional retailers. In Technology Solutions, we also provide comprehensive IT solutions in key vertical markets such as government and healthcare and we provide specialized service offerings that increase efficiencies in the areas of print management, renewals, networking, logistics services and supply chain management. Additionally, within our Technology Solutions segment, we provide our customers with systems design and integration services for data center servers and storage solutions built specific to our customers' datacenter environments.
In our Concentrix segment, our portfolio of services includes end-to-end process outsourcing to customers in various industry vertical markets delivered through omni-channels that include both voice and non-voice mediums. Critical Accounting Policies and Estimates There have been no material changes in our critical accounting policies and estimates for the three and six months ended May 31, 2014 from our disclosure in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013. For more information on all of our critical accounting policies, please see the discussion in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013 and Note 2 of the financial statements. Recent Acquisitions
We continually seek to augment our product and service offerings through both internal expansion and strategic acquisitions of businesses and assets that complement and expand our global operational capabilities. We also divest businesses that we deem no longer strategic to our ongoing operations. Our historical acquisitions have extended the geographic reach of our operations, particularly in targeted markets, and have diversified and expanded the services we provide to our OEM suppliers and customers. Our prior acquisitions have brought us new reseller and retail customers, OEM suppliers, product lines and service offerings and technological capabilities. We account for acquisitions using the purchase method of accounting and include acquired entities within our Consolidated Financial Statements from the closing date of the acquisition. Acquisitions during fiscal year 2014
IBM customer care business acquisition
On January 31, 2014, under the terms of a Master Asset Purchase Agreement, we completed the initial closing of our acquisition of the assets of the customer care business of IBM. On April 30, 2014, we completed the second phase of the acquisition of IBM's customer care business. The preliminary aggregate purchase price of $503.3 million is subject to certain post-closing adjustments. The countries acquired through April 30, 2014 comprise approximately 99.5% of the preliminary valuation of the customer care business. The subsequent closings are expected to occur in the third fiscal quarter of 2014, but contractually, no later than June 30, 2015, and are subject to customary closing conditions, including regulatory approvals. As of May 31, 2014, we were obligated to an additional amount of $40.0 million in cash at the final closing including $2.4 million towards the remaining countries. A portion of the purchase price was settled through the issuance of 1,266,357 shares of our common stock at a fair value of $71.1 million based on the closing price of our common stock on the date of issuance.
The estimated purchase price allocation consisted of $56.5 million of net tangible assets, $263.5 million of intangible assets and $181.0 million of goodwill. The purchase price allocation is preliminary, subject to finalization of valuation procedures.
The acquisition has been integrated into the Concentrix segment. It expands our service portfolio, delivery capabilities and geographic reach, and brings deep process expertise and managerial talent.


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Acquisitions during fiscal year 2013
In April 2013, we acquired substantially all of the assets of Supercom Canada Limited or Supercom Canada, a distributor of IT and consumer electronics products and services in Canada. The purchase price was approximately CAD37.6 million, or US$36.7 million, in cash, including approximately CAD4.5 million, or US$4.3 million, in deferred payments, subject to certain post-closing conditions, payable within 18 months. We have paid CAD1.8 million of the deferred amount as of May 31, 2014. Subsequent to the acquisition, we repaid debt and working capital lines in the amount of US$53.7 million. Based on the purchase price allocation, we recorded net tangible assets of US$26.9 million, goodwill of US$5.4 million and intangible assets of US$4.4 million in relation to this acquisition. The acquisition is integrated into the Technology Solutions segment and has expanded our existing product and service offerings in Canada.


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Results of Operations
The following table sets forth, for the indicated periods, data as percentages
of revenue:
Statements of Operations
Data:                              Three Months Ended                    Six Months Ended
                            May 31, 2014       May 31, 2013       May 31, 2014       May 31, 2013
Revenue                          100.00  %         100.00  %          100.00  %          100.00  %
Cost of revenue                  (91.92 )          (94.03 )           (92.51 )           (93.85 )
Gross profit                       8.08              5.97               7.49               6.15
Selling, general and
administrative expenses           (6.11 )           (3.96 )            (5.48 )            (4.01 )
Income from operations
before non-operating
items, income taxes and
noncontrolling interest            1.97              2.01               2.01               2.14
Interest expense and
finance charges, net              (0.18 )           (0.19 )            (0.16 )            (0.20 )
Other income, net                 (0.01 )            0.02               0.04               0.03
Income from operations
before income taxes and
noncontrolling interest            1.78              1.84               1.89               1.97
Provision for income taxes        (0.64 )           (0.65 )            (0.68 )            (0.70 )
Net income                         1.14              1.19               1.21               1.27
Net income attributable to
noncontrolling interest            0.00            (0.00)             (0.00)             (0.00)
Net income attributable to
SYNNEX Corporation                 1.14  %           1.19  %            1.21  %            1.27  %

Segment Information
In the first quarter of fiscal year 2014, we realigned our business segments.
Certain operations that were previously reported under the Concentrix segment
and that primarily provided inter-segment support and IT services have now been
aligned with and report into the Technology Solutions segment. The financial
information presented herein reflects the impact of the preceding segment
structure change for all periods presented.
Three and Six Months Ended May 31, 2014 and 2013
Revenue
                                   Three Months Ended                                     Six Months Ended
                              May 31, 2014     May 31, 2013     Percent  Change     May 31, 2014     May 31, 2013     Percent  Change
                                     (in thousands)                                        (in thousands)
Revenue                      $  3,453,535     $  2,591,361            33.3  %      $  6,480,519     $  5,052,200            28.3  %
Technology Solutions revenue    3,162,998        2,547,216            24.1  %         6,065,905        4,966,132            22.1  %
Concentrix revenue                293,482           46,748           527.8  %           420,447           91,098           361.5  %
Inter-segment elimination          (2,945 )         (2,603 )         (13.3 )%            (5,833 )         (5,030 )         (16.0 )%

In our Technology Solutions segment, we distribute in excess of 30,000 technology products (as measured by active SKUs) from more than 300 IT, CE and OEM suppliers to more than 20,000 resellers. The prices of our products are highly dependent on the volumes purchased within a product category. The products we sell from one period to the next are often not comparable because of rapid changes in product models and features. The revenue generated in our Concentrix segment relates to global business services process optimization, customer engagement strategy and back office automation. Inter-segment elimination represents services and transactions generated between our reportable segments that are eliminated on consolidation.


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Revenue in our Technology Solutions segment during the three and six months ended May 31, 2014 increased, as compared to the prior year periods, due to strong consumer and commercial sales growth in U.S. and Japan, strong demand for our systems design and integration services, and the April 2013 acquisition of Supercom Canada. Japan sales were exceptionally strong during the three months ended May 31, 2014 due to IT demand generated prior to the consumption tax increase, which took place in April 2014 and the refresh of Windows XP. In comparison to the prior year periods, revenue during the three and six months ended May 31, 2014 was negatively impacted by 2.0% and 2.9%, respectively, for the translation impact of foreign exchange rates, primarily from the weakening of the Japanese yen and the Canadian dollar. On a constant currency basis, revenue increased by 26.1% and 24.9%, respectively, during the three and six months ended May 31, 2014 as compared to the prior year periods. IT demand is expected to continue to be strong in the U.S. and stable in Canada. Growth rates in Japan is expected to return to normalized levels due to the aforementioned impact of consumption tax in the fiscal second quarter of 2014 and normal seasonality.
The increase in revenue in our Concentrix segment during the three and six months ended May 31, 2014, as compared to the prior year periods is primarily due to the January 31, 2014 acquisition of assets of the IBM customer care business. The acquisition added $244.1 million and $318.6 million in revenue to our consolidated results during the three and six months ended May 31, 2014, respectively. Revenues from the acquired IBM customer care business are expected to be flat during the integration period and are then expected to grow toward the end of fiscal year 2014. Revenue growth will be offset by the expiration of certain contracts that were expected to not renew at the time of acquisition.

Gross Profit
                             Three Months Ended                                      Six Months Ended
                       May 31, 2014      May 31, 2013     Percent  Change     May 31, 2014      May 31, 2013     Percent  Change
                               (in thousands)                                         (in thousands)
Gross profit          $     279,014     $     154,790             80.3 %     $     485,660     $     310,877             56.2 %
Percentage of revenue          8.08 %            5.97 %                               7.49 %            6.15 %

Our gross profit is affected by a variety of factors, including our sources of revenue by segments, competition, average selling prices, mix of products and services we sell, our customers, product costs along with rebate and discount programs from our suppliers, reserves or settlement adjustments, freight costs, charges for inventory losses, acquisitions and divestitures of business units and fluctuations in revenues. In addition, our margin can also be impacted by ramp-up costs, additional lead time for the programs to be fully scalable and initial set-up costs.
The increase in our gross margins in the three and six months ended May 31, 2014 as compared to the prior year periods is primarily due to the change in our segment business mix as a result of our acquisition of the IBM customer care business on January 31, 2014.
Gross profit in our Technology Solutions segment during the three and six months ended May 31, 2014 increased from the prior year periods due to growth in our systems design and integration services, strong commercial and consumer sales growth in U.S. and Japan and product and customer mix.
Gross profit in our Concentrix segment during the three and six months ended May 31, 2014 increased from the prior year periods as a result of our acquisition of the IBM customer care business on January 31, 2014. Selling, General and Administrative Expenses

                             Three Months Ended                                       Six Months Ended
                       May 31, 2014      May 31, 2013      Percent  Change     May 31, 2014      May 31, 2013     Percent  Change
                                (in thousands)                                          (in thousands)
Selling, general and
administrative
expenses              $     210,931     $     102,826             105.1 %     $     355,627     $     202,973             75.2 %
Percentage of revenue          6.11 %            3.96 %                                5.49 %            4.01 %


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Our selling, general and administrative expenses primarily consists of personnel costs such as salaries, commissions, bonuses, share-based compensation, temporary personnel costs and deferred compensation expense or income. Selling, general and administrative expenses also include costs incurred in relation to the acquisition and integration of businesses, cost of facilities, utility expenses, professional fees, depreciation on our capital equipment, bad debt expense, amortization of our intangible assets, and marketing expenses, offset in part by reimbursements from our OEM suppliers.
The increase in our selling, general and administrative expenses in the three and six months ended May 31, 2014 compared to the prior year periods is primarily the result of our January 31, 2014 acquisition of the IBM customer care business in the Concentrix segment. The acquisition added approximately 37,000 employees and contractors to our personnel resources. We also incurred approximately $15.7 million and $24.7 million in acquisition-related and integration expenses in our Concentrix segment related to the IBM customer care business acquisition during the three and six months ended May 31, 2014, respectively. The amortization of our intangible assets was approximately $13.2 million and $16.9 million higher during the three and six months ended May 31, 2014, respectively than the comparative prior year periods, which was primarily the result of the acquisition of IBM's customer care business. In addition to the increased costs related to the IBM customer care business acquisition, personnel and general operating expenses were higher than the prior year period due to the acquisition of Supercom Canada in the Technology Solutions segment in April 2013 and growth and increased business volumes in both business segments, which was partly offset by $1.9 million favorable impact of foreign currency translation.
Income from Operations before Non-Operating Items, Income Taxes and

Noncontrolling Interest
                              Three Months Ended                                      Six Months Ended
                         May 31, 2014     May 31, 2013     Percent  Change     May 31, 2014      May 31, 2013      Percent  Change
                                (in thousands)                                         (in thousands)
Income from operations
before non-operating
items, income taxes and
noncontrolling interest $    68,083      $     51,964             31.0  %     $    130,033      $     107,904             20.5  %
Percentage of total
revenue                        1.97  %           2.01 %                               2.01  %            2.14 %
Technology Solutions
income from operations
before non-operating
items, income taxes and
noncontrolling interest      70,134            48,686             44.1  %          133,665            102,222             30.8  %
Percentage of
Technology Solutions
revenue                        2.22  %           1.91 %                               2.20  %            2.06 %
Concentrix income
(loss) from operations
before non-operating
items, income taxes and
noncontrolling interest      (2,169 )           3,266           (166.4 )%           (3,948 )            5,690           (169.4 )%
Percentage of
Concentrix revenue            (0.74 )%           6.99 %                              (0.94 )%            6.25 %
Inter-segment
eliminations                    118                12            883.3  %              316                 (8 )           40.5  %

The operating margins in our Technology Solutions segment during the three and six months ended May 31, 2014 improved from the prior year periods primarily due to the growth in our U.S. business and efficient management of our operating expenses. Additionally, operating margins in Japan benefitted from strong demand in advance of the April 2014 consumption tax increase and the refresh of Windows XP.
The operating margin of our Concentrix segment in the three and six months ended May 31, 2014 was adversely affected by $15.7 million and $24.7 million, respectively, in acquisition and integration expenses incurred in relation to our acquisition of the IBM customer care business. In addition, the amortization expense of our intangible assets was approximately $13.2 million and $16.9 million higher than the comparative prior year periods as a result of the acquisition. Excluding these factors, the operating margin of the Concentrix segment benefitted from the acquisition of the IBM customer care business.


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Interest Expense and Finance Charges, Net
                          Three Months Ended                                    Six Months Ended
                    May 31, 2014      May 31, 2013    Percent  Change     May 31, 2014     May 31, 2013     Percent  Change
                            (in thousands)                                       (in thousands)
Interest expense
and finance
charges, net       $      6,160      $      4,863             26.7 %     $     10,658     $     10,356              2.9 %
Percentage of
revenue                    0.18 %            0.19 %                              0.16 %           0.20 %

Amounts recorded in interest expense and finance charges, net, consist primarily of interest expense paid on our lines of credit and other debt, fees associated with third party accounts receivable flooring arrangements, and the sale or pledge of accounts receivable through our securitization facilities, offset by income earned on our cash investments and financing income from our multi-year contracts in our Mexico operation. Interest expense recorded in the three and six months ended May 31, 2013 also includes non-cash interest expense incurred on our convertible debt.
The increase in our interest expense during the three months ended May 31, 2014 as compared to the prior year period is primarily the result of the increase in borrowing levels to fund the acquisition of the IBM customer care business on January 31, 2014, to infuse working capital into the newly acquired business and to invest in growing our systems design and integration services, partially offset by savings associated with the retirement of our convertible debt in August 2013. Interest expense also included higher flooring fees and finance charges as a result of our higher business volumes and investments in our Technology Solutions business.
The slight increase in our interest expense during the six months ended May 31, 2014 as compared to the prior year period is primarily the result of the increase in borrowing levels primarily to fund the acquisition of the IBM customer care business on January 31, 2014, to infuse working capital into the newly acquired business and to invest in growing our Technology Solutions business. This increase was partially offset by the settlement of the convertible debt in August 2013 and the beneficial impact of translation of the yen. The prior period interest expense includes approximately $5.3 million in cash and non-cash interest expense components related to the convertible debt. Other Income, Net
Three Months Ended Six Months Ended May 31, 2014 May 31, 2013 Percent Change May 31, 2014 May 31, 2013 Percent Change

(in thousands) (in thousands)

Other income
(expense), net $ (197 ) $ 528 (137.3 )% $ 2,771 $ 1,789 54.9 % Percentage of
revenue (0.01 )% 0.02 % 0.04 % 0.03 % . . .
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