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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒

 

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

 

For the quarterly period ended August 31, 2020

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 pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

SNX

The New York Stock Exchange

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   ☒     No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes   ☒     No   ☐

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

 

Large accelerated filer

☒

 

Accelerated filer

☐

Non-accelerated filer

☐

 

Smaller reporting company

☐

Emerging growth company

☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.     ☐

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

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

 

Class

 

Outstanding as of October 2, 2020

Common Stock, $0.001 par value

 

51,544,234

 

Table of Contents

 

SYNNEX CORPORATION

 

FORM 10-Q

INDEX

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

 

Consolidated Balance Sheets (unaudited) as of August 31, 2020 and November 30, 2019

3

 

Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended August 31, 2020 and 2019

4

 

Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended August 31, 2020 and 2019

5

 

Consolidated Statements of Stockholders’ Equity (unaudited) for the Three and Nine Months Ended August 31, 2020 and 2019

6

 

Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended August 31, 2020 and 2019

7

 

Notes to the Consolidated Financial Statements (unaudited)

8

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

39

Item 4.

Controls and Procedures

39

 

 

 

PART II

OTHER INFORMATION

40

Item 1A.

Risk Factors

40

Item 6.

Exhibits

41

Signatures

 

42

 

2

Table of Contents

 

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

SYNNEX CORPORATION 

CONSOLIDATED BALANCE SHEETS

(currency and share amounts in thousands, except par value)

(unaudited)

 

 

 

August 31, 2020

 

 

November 30, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,452,273

 

 

$

225,529

 

Accounts receivable, net

 

 

3,580,970

 

 

 

3,926,709

 

Receivables from vendors, net

 

 

323,027

 

 

 

368,505

 

Inventories

 

 

2,832,607

 

 

 

2,547,224

 

Other current assets

 

 

375,273

 

 

 

385,024

 

Total current assets

 

 

8,564,151

 

 

 

7,452,992

 

Property and equipment, net

 

 

583,951

 

 

 

569,899

 

Goodwill

 

 

2,257,292

 

 

 

2,254,402

 

Intangible assets, net

 

 

1,031,168

 

 

 

1,162,212

 

Deferred tax assets

 

 

116,263

 

 

 

97,539

 

Other assets, net

 

 

710,283

 

 

 

160,917

 

Total assets

 

$

13,263,107

 

 

$

11,697,960

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Borrowings, current

 

$

244,114

 

 

$

298,969

 

Accounts payable

 

 

3,655,215

 

 

 

3,149,443

 

Accrued compensation and benefits

 

 

447,661

 

 

 

402,771

 

Other accrued liabilities

 

 

1,257,160

 

 

 

723,716

 

Income taxes payable

 

 

27,998

 

 

 

32,223

 

Total current liabilities

 

 

5,632,148

 

 

 

4,607,122

 

Long-term borrowings

 

 

2,609,809

 

 

 

2,718,267

 

Other long-term liabilities

 

 

722,343

 

 

 

361,911

 

Deferred tax liabilities

 

 

205,225

 

 

 

222,210

 

Total liabilities

 

 

9,169,525

 

 

 

7,909,510

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

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, 53,380 and 53,154 shares issued as of August 31, 2020 and November 30, 2019, respectively

 

 

53

 

 

 

53

 

Additional paid-in capital

 

 

1,579,026

 

 

 

1,545,421

 

Treasury stock, 2,454 and 2,399 shares as of August 31, 2020 and November 30, 2019, respectively

 

 

(178,775

)

 

 

(172,627

)

Accumulated other comprehensive income (loss)

 

 

(224,628

)

 

 

(209,077

)

Retained earnings

 

 

2,917,906

 

 

 

2,624,680

 

Total stockholders' equity

 

 

4,093,582

 

 

 

3,788,450

 

Total liabilities and equity

 

$

13,263,107

 

 

$

11,697,960

 

 

(Amounts may not add due to rounding)

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

3

Table of Contents

 

SYNNEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

5,306,361

 

 

$

5,047,968

 

 

$

13,858,313

 

 

$

13,695,725

 

Services

 

 

1,158,421

 

 

 

1,155,690

 

 

 

3,403,305

 

 

 

3,480,275

 

Total revenue

 

 

6,464,782

 

 

 

6,203,659

 

 

 

17,261,619

 

 

 

17,176,000

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

(5,008,881

)

 

 

(4,746,197

)

 

 

(13,031,113

)

 

 

(12,876,410

)

Services

 

 

(747,809

)

 

 

(731,472

)

 

 

(2,206,256

)

 

 

(2,196,212

)

Gross profit

 

 

708,092

 

 

 

725,990

 

 

 

2,024,249

 

 

 

2,103,379

 

Selling, general and administrative expenses

 

 

(498,956

)

 

 

(517,135

)

 

 

(1,514,734

)

 

 

(1,557,906

)

Operating income

 

 

209,136

 

 

 

208,855

 

 

 

509,515

 

 

 

545,473

 

Interest expense and finance charges, net

 

 

(28,749

)

 

 

(42,945

)

 

 

(99,046

)

 

 

(127,695

)

Other income (expense), net

 

 

(567

)

 

 

(1,087

)

 

 

3,280

 

 

 

19,764

 

Income before income taxes

 

 

179,819

 

 

 

164,823

 

 

 

413,748

 

 

 

437,542

 

Provision for income taxes

 

 

(45,356

)

 

 

(41,691

)

 

 

(99,740

)

 

 

(112,831

)

Net income

 

$

134,464

 

 

$

123,132

 

 

$

314,008

 

 

$

324,711

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.61

 

 

$

2.41

 

 

$

6.10

 

 

$

6.35

 

Diluted

 

$

2.60

 

 

$

2.40

 

 

$

6.07

 

 

$

6.32

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

50,890

 

 

 

50,601

 

 

 

50,851

 

 

 

50,661

 

Diluted

 

 

51,241

 

 

 

50,845

 

 

 

51,172

 

 

 

50,903

 

 

(Amounts may not add due to rounding)

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

4

Table of Contents

 

SYNNEX CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(currency in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

Net income

 

$

134,464

 

 

$

123,132

 

 

$

314,008

 

 

$

324,711

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains (losses) of defined benefit plans, net of taxes of $3,115 for the three and nine months ended August 31, 2020, and $0 for the three and nine months ended 2019

 

 

(8,985

)

 

 

—

 

 

 

(8,768

)

 

 

307

 

Unrealized gains (losses) on cash flow hedges during the period, net of taxes of $(8,220) and $7,953 for the three and nine months ended August 31, 2020, respectively, and $8,722 and $24,605 for the three and nine months ended August 31, 2019, respectively

 

 

24,641

 

 

 

(23,744

)

 

 

(24,772

)

 

 

(71,414

)

Reclassification of net (gains) losses on cash flow hedges to net income, net of tax expense (benefit) of $(563) and $(1,120) for the three and nine months ended August 31, 2020, respectively, and $1,121 and $3,241 for three and nine months ended August 31, 2019, respectively

 

 

1,824

 

 

 

(3,371

)

 

 

3,462

 

 

 

(9,387

)

Total change in unrealized gains (losses) on cash flow hedges, net of taxes

 

 

26,465

 

 

 

(27,115

)

 

 

(21,310

)

 

 

(80,801

)

Foreign currency translation adjustments, net of taxes of $(345) and $(51) for the three and nine months ended August 31, 2020, respectively, and $(31) and $(55) for the three and nine months ended August 31, 2019, respectively

 

 

95,168

 

 

 

(19,395

)

 

 

14,526

 

 

 

(26,334

)

Other comprehensive income (loss)

 

 

112,648

 

 

 

(46,510

)

 

 

(15,552

)

 

 

(106,828

)

Comprehensive income

 

$

247,112

 

 

$

76,622

 

 

$

298,456

 

 

$

217,883

 

 

(Amounts may not add due to rounding)

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

5

Table of Contents

 

SYNNEX CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(currency in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

Total Stockholders' equity, beginning balance

 

$

3,834,381

 

 

$

3,537,053

 

 

$

3,788,450

 

 

$

3,435,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and additional paid-in capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

1,566,817

 

 

 

1,527,436

 

 

 

1,545,474

 

 

 

1,512,254

 

Share-based compensation

 

 

8,829

 

 

 

6,430

 

 

 

25,041

 

 

 

19,515

 

Common stock issued for employee benefit plans

 

 

3,433

 

 

 

929

 

 

 

8,564

 

 

 

3,134

 

Stock issuance costs (related to the Convergys acquisition in fiscal year 2018)

 

 

—

 

 

—

 

 

 

—

 

 

 

(107

)

Ending balance

 

 

1,579,079

 

 

 

1,534,796

 

 

 

1,579,079

 

 

 

1,534,796

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(178,609

)

 

 

(165,601

)

 

 

(172,627

)

 

 

(149,533

)

Repurchases of common stock for tax withholdings on equity awards

 

 

(166

)

 

 

(109

)

 

 

(2,743

)

 

 

(994

)

Repurchases of common stock

 

 

—

 

 

—

 

 

 

(3,405

)

 

 

(15,184

)

Ending balance

 

 

(178,775

)

 

 

(165,710

)

 

 

(178,775

)

 

 

(165,710

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

2,783,449

 

 

 

2,363,779

 

 

 

2,624,680

 

 

 

2,198,621

 

Net income

 

 

134,464

 

 

 

123,132

 

 

 

314,008

 

 

 

324,711

 

Cash dividends declared

 

 

(7

)

 

 

(19,116

)

 

 

(20,782

)

 

 

(57,491

)

Cumulative effect of changes in accounting principles

 

 

—

 

 

—

 

 

 

—

 

 

 

1,955

 

Ending balance

 

 

2,917,906

 

 

 

2,467,795

 

 

 

2,917,906

 

 

 

2,467,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(337,276

)

 

 

(188,561

)

 

 

(209,077

)

 

 

(126,288

)

Other comprehensive income (loss)

 

 

112,648

 

 

 

(46,510

)

 

 

(15,552

)

 

 

(106,828

)

Cumulative effect of changes in accounting principles

 

 

—

 

 

—

 

 

 

—

 

 

 

(1,955

)

Ending balance

 

 

(224,628

)

 

 

(235,070

)

 

 

(224,628

)

 

 

(235,070

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders' equity, ending balance

 

$

4,093,582

 

 

$

3,601,810

 

 

$

4,093,582

 

 

$

3,601,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

—

 

 

$

0.375

 

 

$

0.400

 

 

$

1.125

 

 

(Amounts may not add due to rounding)

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

6

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SYNNEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(currency in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

314,008

 

 

$

324,711

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

251,459

 

 

 

281,392

 

Share-based compensation

 

 

25,041

 

 

 

19,515

 

Provision for doubtful accounts

 

 

48,233

 

 

 

25,496

 

Deferred income taxes

 

 

(24,070

)

 

 

(16,789

)

Contingent consideration

 

 

—

 

 

 

(19,034

)

Unrealized foreign exchange (gains) losses

 

 

12,764

 

 

 

(4,115

)

Other

 

 

7,456

 

 

 

8,595

 

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

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

280,476

 

 

 

148,128

 

Receivables from vendors, net

 

 

44,666

 

 

 

13,322

 

Inventories

 

 

(282,654

)

 

 

(390,018

)

Accounts payable

 

 

454,290

 

 

 

(119,599

)

Other operating assets and liabilities

 

 

415,428

 

 

 

(69,131

)

Net cash provided by operating activities

 

 

1,547,097

 

 

 

202,473

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(127,326

)

 

 

(93,432

)

Acquisition of businesses

 

 

(4,941

)

 

 

(8,647

)

Other

 

 

(5,248

)

 

 

(199

)

Net cash used in investing activities

 

 

(137,515

)

 

 

(102,279

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings, net of debt discount and issuance costs

 

 

3,747,096

 

 

 

5,620,134

 

Repayments of borrowings

 

 

(3,915,519

)

 

 

(5,834,258

)

Dividends paid

 

 

(20,782

)

 

 

(57,491

)

Increase (decrease) in book overdraft

 

 

(1,051

)

 

 

336

 

Repurchases of common stock

 

 

(3,405

)

 

 

(15,184

)

Proceeds from issuance of common stock

 

 

8,564

 

 

 

3,134

 

Repurchases of common stock for tax withholdings on equity awards

 

 

(2,743

)

 

 

(994

)

Settlement of contingent consideration

 

 

—

 

 

 

(13,966

)

Other

 

 

—

 

 

 

(107

)

Net cash used in financing activities

 

 

(187,841

)

 

 

(298,397

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

3,902

 

 

 

3,575

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

1,225,644

 

 

 

(194,628

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

231,149

 

 

 

462,033

 

Cash, cash equivalents and restricted cash at end of period

 

$

1,456,793

 

 

$

267,405

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Accrued costs for property and equipment purchases

 

$

13,425

 

 

$

2,905

 

 

(Amounts may not add due to rounding)

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

 

 

 

7

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION:  

SYNNEX Corporation (together with its subsidiaries, herein referred to as “SYNNEX” or the “Company”) is a business process services company headquartered in Fremont, California and has operations in North and South America, Asia-Pacific, Europe and Africa.

The Company has two reportable segments: Technology Solutions and Concentrix. The Technology Solutions segment provides a comprehensive range of distribution, logistics and integration solutions for the information technology (“IT”) industry. The Concentrix segment offers a portfolio of technology-infused strategic solutions and end-to-end global business outsourcing services focused on customer experience, process optimization, technology innovation, front and back-office automation and business transformation to clients in five primary industry verticals.

On January 9, 2020, the Company announced a plan to separate its Concentrix segment into an independent publicly-traded company. The transaction, which was delayed due to the focus on managing the economic impact of a pandemic caused by an outbreak of a new strain of coronavirus (“ COVID-19”), barring further economic disruption, is now expected to be completed in the fourth quarter of calendar year 2020. The plan is subject to current economic and capital market trends. The separation is intended to qualify as a tax-free transaction for federal income tax purposes for both the Company and its then current stockholders. Immediately following the separation, it is expected that the Company’s stockholders will own shares of both SYNNEX and Concentrix, at the same percentage ownership that they held of SYNNEX prior to the transaction. Completion of the separation will not require a stockholder vote but will be subject to customary closing conditions, including, among others, obtaining final approval from the Company’s Board of Directors, receipt of a favorable opinion with respect to the tax-free nature of the transaction for federal income tax purposes, and the effectiveness of a Form 10 registration statement with the Securities and Exchange Commission.

The accompanying interim unaudited Consolidated Financial Statements as of August 31, 2020 and for the three and nine months ended August 31, 2020 and 2019 have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission. The amounts as of November 30, 2019 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2019.

Interim results of operations are not necessarily indicative of financial results for a full year, and the Company makes no representations related thereto. Certain columns and rows may not add due to the use of rounded numbers.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  

For a discussion of the Company’s significant accounting policies, refer to the discussion in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2019. As described more fully in Note 16, as of August 31, 2020, due to the ongoing impact of the COVID-19 pandemic on the Company’s business, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, these estimates may change in future periods. Accounting pronouncements adopted during the nine months ended August 31, 2020 are discussed below.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash equivalents, accounts receivable, receivables from vendors and derivative instruments.

The Company’s cash and cash equivalents and derivative instruments are transacted and maintained with financial institutions with high credit standing, and their compositions and maturities are regularly monitored by management. Through August 31, 2020, the Company has not experienced any credit losses on such deposits and derivative instruments.  

Accounts receivable include amounts due from customers, including related party customers. Receivables from vendors, net, includes amounts due from original equipment manufacturer (“OEM”) vendors primarily in the technology industry. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. The Company also maintains allowances for potential credit losses. In estimating the required allowances, the Company takes into consideration the overall quality and aging of its receivable portfolio, the existence of a limited amount of credit insurance and specifically identified customer and vendor risks. Through August 31, 2020, such losses have been within management’s expectations.  

One customer accounted for 16% and 17% of the Company’s total revenue during the three and nine months ended August 31, 2020. The same customer accounted for 21% and 19% of the Company’s total revenue during the three and nine months ended August 31, 2019. Products

8

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

purchased from the Company’s largest OEM supplier, HP Inc., accounted for approximately 12% of total revenue during the three and nine months ended August 31, 2020 and 2019. 

As of August 31, 2020 and November 30, 2019, one customer comprised 18% and 19%, respectively, of the consolidated accounts receivable balance.

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is computed based on the weighted-average method. Inventories are comprised of finished goods and work-in-process. Finished goods include products purchased for resale, system components purchased for both resale and for use in the Company’s projects and integration-based completed systems. Work-in-process inventories are not material to the Consolidated Financial Statements.

Leases

The Company enters into leases as a lessee for property and equipment in the ordinary course of business. When procuring goods or services, or upon entering into a contract with its customers and clients, the Company determines whether an arrangement contains a lease at its inception. As part of that evaluation, the Company considers whether there is an implicitly or explicitly identified asset in the arrangement and whether the Company, as the lessee, or the customer, if the Company is the lessor, has the right to control the use of that asset. Effective December 1, 2019, when the Company is the lessee, all leases with a term of more than 12 months are recognized as right-of-use (“ROU”) assets and associated lease liabilities in the Consolidated Balance Sheet. Lease liabilities are measured at the lease commencement date and determined using the present value of the lease payments not yet paid, at the Company’s incremental borrowing rate, which approximates the rate at which the Company would borrow on a secured basis in the country where the lease was executed. The interest rate implicit in the lease is generally not determinable in transactions where the Company is the lessee. The ROU asset equals the lease liability adjusted for any initial direct costs, prepaid rent and lease incentives. The Company’s variable lease payments generally relate to payments tied to various indexes, non-lease components and payments above a contractual minimum fixed amount.

Operating leases are included in other assets, net, other accrued liabilities and other long-term liabilities in the Consolidated Balance Sheet. Finance leases are included in property and equipment, net, borrowings, current and long-term borrowings in the Consolidated Balance Sheet. Substantially all of the Company's leases are classified as operating leases. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company made a policy election to not recognize leases with a lease term of 12 months or less in the Consolidated Balance Sheet. Lease expenses are recorded within selling, general, and administrative expenses in the Consolidated Statements of Operations. Operating lease payments are presented within “Cash flows from operating activities” in the Consolidated Statements of Cash Flows.

For all asset classes, the Company has elected the lessee practical expedient to combine lease and non-lease components (e.g., maintenance services) and account for the combined unit as a single lease component. Variable lease payments are recognized in the period in which the obligation for those payments is incurred.

Recently adopted accounting pronouncements

In February 2018, the Financial Accounting Standard Board (the “FASB”) issued guidance that permits the Company to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the Tax Cuts and Jobs Act of 2017 to retained earnings. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The adoption of this new guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In February 2016, the FASB issued a new standard which revises various aspects of accounting for leases, with amendments in 2018 and 2019 codified as Accounting Standards Codification Topic 842, Leases. The Company adopted the guidance effective December 1, 2019, applying the optional transition method, which allows an entity to apply the new standard at the adoption date with a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, the Company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components for all asset classes. The Company made a policy election to not recognize ROU assets and lease liabilities for short-term leases for all asset classes. The most significant impact of adoption to the Company’s Consolidated Financial Statements relates to the recognition of a right-of-use asset and a lease liability for virtually all of its leases other than short-term leases. The liability was equal to the present value of lease payments. The asset is based on the liability, and subject to adjustment, such as for initial direct costs. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee depends primarily on its classification. For income statement purposes, operating leases will result in a straight-line expense while finance leases will result in a front-loaded expense pattern. Upon adoption, the Company recorded $591,129 of ROU assets and of $642,567 of liabilities relating to its operating leases on its Consolidated Balance Sheet. The adoption did not have an impact on the Company’s consolidated statements of operations or its consolidated statements of cash flows. 

9

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

 

Recently issued accounting pronouncements  

In March 2020, the FASB issued optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”) on financial reporting. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are elective and are effective upon issuance for all entities through December 31, 2022. The Company is currently evaluating the impact of the new guidance.

In December 2019, the FASB issued new guidance that simplifies the accounting for income taxes. The guidance is effective for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. Certain amendments should be applied prospectively, while other amendments should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of the new guidance.

In August 2018, the FASB issued new guidance to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The amendment requires the Company to disclose the weighted-average interest crediting rates used in cash balance pension plans. It also requires the Company to disclose the reasons for significant changes in the benefit obligation or plan assets including significant gains and losses affecting the benefit obligation for the period. This standard is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The adoption is not expected to have a material impact on the Company's Consolidated Financial Statements.

In August 2018, the FASB issued guidance to improve the effectiveness of fair value measurement disclosures by removing or modifying certain disclosure requirements and adding other requirements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Certain amendments should be applied prospectively, while all other amendments should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of the new guidance.

In June 2016, the FASB issued a new credit loss standard that replaces the incurred loss impairment methodology in current GAAP. The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. It is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption for fiscal years beginning after December 15, 2018 is permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating the impact of the new guidance.

 

NOTE 3—SHARE-BASED COMPENSATION:  

The Company recognizes share-based compensation expense for all share-based awards made to employees and directors, including employee stock options, restricted stock awards, restricted stock units, performance-based restricted stock units and employee stock purchases, based on estimated fair values.

The following table summarizes the number of share-based awards granted under the Company’s 2013 Stock Incentive Plan, as amended, during the three and nine months ended August 31, 2020 and 2019, and the measurement-date fair value of those awards:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

 

 

Shares

awarded

 

 

Fair value

of grants

 

 

Shares

awarded

 

 

Fair value

of grants

 

 

Shares

awarded

 

 

Fair value

of grants

 

 

Shares

awarded

 

 

Fair value

of grants

 

Stock options

 

 

—

 

 

$

—

 

 

 

—

 

 

$

—

 

 

 

—

 

 

$

—

 

 

 

17

 

 

$

500

 

Restricted stock awards

 

 

—

 

 

 

—

 

 

 

1

 

 

 

90

 

 

 

36

 

 

 

2,983

 

 

 

27

 

 

 

2,699

 

Restricted stock units

 

 

—

 

 

 

—

 

 

 

107

 

 

 

9,852

 

 

 

1

 

 

 

73

 

 

 

158

 

 

 

14,617

 

 

 

 

—

 

 

$

—

 

 

 

108

 

 

$

9,942

 

 

 

37

 

 

$

3,056

 

 

 

202

 

 

$

17,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

 

The Company recorded share-based compensation expense in the Consolidated Statements of Operations for the three and nine months ended August 31, 2020 and 2019 as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

Total share-based compensation (recorded in selling, general and

   administrative expenses)

 

$

8,925

 

 

$

6,461

 

 

$

25,251

 

 

$

19,616

 

Tax benefit recorded in the provision for income taxes

 

 

(2,211

)

 

 

(1,653

)

 

 

(6,271

)

 

 

(5,146

)

Effect on net income

 

$

6,714

 

 

$

4,808

 

 

$

18,980

 

 

$

14,470

 

 

 

NOTE 4—BALANCE SHEET COMPONENTS:

Cash, cash equivalents and restricted cash:

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same amounts shown in the Consolidated Statements of Cash Flows:

 

 

 

As of

 

 

 

August 31, 2020

 

 

November 30, 2019

 

Cash and cash equivalents

 

$

1,452,273

 

 

$

225,529

 

Restricted cash included in other current assets

 

 

4,520

 

 

 

5,620

 

Cash, cash equivalents and restricted cash

 

$

1,456,793

 

 

$

231,149

 

Accounts receivable, net:

 

 

As of

 

 

 

August 31, 2020

 

 

November 30, 2019

 

Accounts receivable

 

$

3,657,245

 

 

$

3,956,629

 

Less: Allowance for doubtful accounts

 

 

(76,275

)

 

 

(29,920

)

Accounts receivable, net

 

$

3,580,970

 

 

$

3,926,709

 

 

Receivables from vendors, net:

 

 

As of

 

 

 

August 31, 2020

 

 

November 30, 2019

 

Receivables from vendors

 

$

327,958

 

 

$

373,986

 

Less: Allowance for doubtful accounts

 

 

(4,931

)

 

 

(5,481

)

Receivables from vendors, net

 

$

323,027

 

 

$

368,505

 

 

 

Property and equipment, net:

 

 

 

As of

 

 

 

August 31, 2020

 

 

November 30, 2019

 

Land

 

$

47,702

 

 

$

47,494

 

Equipment, computers and software

 

 

585,195

 

 

 

503,240

 

Furniture and fixtures

 

 

116,886

 

 

 

111,408

 

Buildings, building improvements and leasehold improvements

 

 

462,716

 

 

 

428,180

 

Construction-in-progress

 

 

8,259

 

 

 

12,379

 

Total property and equipment, gross

 

$

1,220,759

 

 

$

1,102,702

 

Less: Accumulated depreciation

 

 

(636,808

)

 

 

(532,803

)

Property and equipment, net

 

$

583,951

 

 

$

569,899

 

 

11

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

Depreciation expense was $37,447 and $111,139, respectively, for the three and nine months ended August 31, 2020 and $39,124 and $123,242, respectively, for the three and nine months ended August 31, 2019.

 

Goodwill: 

 

 

 

Technology

Solutions

 

 

Concentrix

 

 

Total

 

Balance as of November 30, 2019

 

$

425,076

 

 

$

1,829,326

 

 

$

2,254,402

 

Foreign exchange translation

 

 

(3,308

)

 

 

6,198

 

 

 

2,890

 

Balance as of August 31, 2020

 

$

421,768

 

 

$

1,835,524

 

 

$

2,257,292

 

 

Intangible assets, net: 

 

 

 

As of August 31, 2020

 

 

As of November 30, 2019

 

 

 

Gross

Amounts

 

 

Accumulated

Amortization

 

 

Net

Amounts

 

 

Gross

Amounts

 

 

Accumulated

Amortization

 

 

Net

Amounts

 

Customer relationships and lists

 

$

1,563,164

 

 

$

(652,341

)

 

$

910,823

 

 

$

1,546,349

 

 

$

(522,083

)

 

$

1,024,266

 

Vendor lists

 

 

177,102

 

 

 

(78,100

)

 

 

99,002

 

 

 

178,444

 

 

 

(66,954

)

 

 

111,490

 

Technology

 

 

14,831

 

 

 

(10,523

)

 

 

4,308

 

 

 

14,720

 

 

 

(8,998

)

 

 

5,721

 

Other intangible assets

 

 

34,388

 

 

 

(17,353

)

 

 

17,035

 

 

 

35,267

 

 

 

(14,532

)

 

 

20,735

 

Total

 

$

1,789,485

 

 

$

(758,317

)

 

$

1,031,168

 

 

$

1,774,780

 

 

$

(612,567

)

 

$

1,162,212

 

 

Amortization expense was $46,828 and $140,320, respectively, for the three and nine months ended August 31, 2020 and $52,428 and $158,150, respectively, for the three and nine months ended August 31, 2019.  

Estimated future amortization expense of the Company’s intangible assets is as follows:

 

Fiscal years ending November 30,

 

 

 

 

2020 (remaining three months)

 

$

57,525

 

2021

 

 

173,532

 

2022

 

 

150,213

 

2023

 

 

131,762

 

2024

 

 

109,475

 

Thereafter

 

 

408,661

 

Total

 

$

1,031,168

 

 

Other accrued liabilities:

 

 

 

As of

 

 

 

August 31, 2020

 

 

November 30, 2019

 

Customer advances and other customer liabilities

 

$

398,571

 

 

$

108,401

 

Current operating lease liabilities

 

 

178,723

 

 

 

—

 

Derivative instruments

 

 

143,514

 

 

 

87,406

 

Other accrued expenses and payables

 

 

536,352

 

 

 

527,909

 

Total

 

$

1,257,160

 

 

$

723,716

 

 

Other accrued expenses and payables includes accrued expenses, sales and value added tax accruals, sales return reserve, and other third-party liabilities.

12

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

 

Accumulated other comprehensive income (loss): 

The components of accumulated other comprehensive income (loss) (“AOCI”), net of taxes, were as follows:

 

 

 

Unrecognized

gains (losses) on

defined benefit

plans, net

of taxes

 

 

Unrealized gains

(losses)

on cash flow

hedges, net of

taxes

 

 

Foreign currency

translation

adjustment and other,

net of taxes

 

 

Total

 

Balance as of November 30, 2019

 

$

(28,784

)

 

$

(46,932

)

 

$

(133,361

)

 

$

(209,077

)

Other comprehensive income (loss) before reclassification

 

 

(8,768

)

 

 

(24,772

)

 

 

14,526

 

 

 

(19,013

)

Reclassification of (gains) losses from Other comprehensive

   income (loss)

 

 

—

 

 

 

3,462

 

 

 

—

 

 

 

3,462

 

Balance as of August 31, 2020

 

$

(37,552

)

 

$

(68,242

)

 

$

(118,835

)

 

$

(224,628

)

 

Refer to Note 5 for the location of gains and losses reclassified from other comprehensive income (loss) to the Consolidated Statements of Operations.

 

Foreign currency translation adjustment and other, net of taxes, is comprised of foreign currency translation adjustment and unrealized gains and losses on available-for-sale debt securities. Substantially, all of the balance at both November 30, 2019 and August 31, 2020 represents foreign currency translation adjustment.

 

NOTE 5—DERIVATIVE INSTRUMENTS:

In the ordinary course of business, the Company is exposed to foreign currency risk, interest rate risk, equity risk, commodity price changes and credit risk. The Company enters into transactions, and owns monetary assets and liabilities, that are denominated in currencies other than the legal entity’s functional currency. The Company may enter into forward contracts, option contracts, swaps, or other derivative instruments to offset a portion of the risk on expected future cash flows, earnings, net investments in certain foreign subsidiaries and certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates. Generally, the Company does not use derivative instruments to cover equity risk and credit risk. The Company’s hedging program is not used for trading or speculative purposes.

All derivatives are recognized on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded in the Consolidated Statements of Operations, or as a component of AOCI in the Consolidated Balance Sheets, as discussed below.

Cash Flow Hedges

To protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries with functional currencies that are not in U.S. dollars may hedge a portion of forecasted revenue or costs not denominated in the subsidiaries’ functional currencies. These instruments mature at various dates through August 2022. The Company also uses interest rate derivative contracts to economically convert a portion of its variable-rate debt to fixed-rate debt. The swaps have maturities at various dates through October 2023. Gains and losses on cash flow hedges are recorded in AOCI until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of Revenue from Services in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of costs are recognized as a component of “Cost of revenue” for “services” and/or “Selling, general and administrative expenses” in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest payments are recognized in “Interest expense and Finance charges, net” in the same period as the related expense is recognized. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into earnings in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are recorded in earnings unless they are re-designated as hedges of other transactions.

Non-Designated Derivatives

13

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

The Company uses short-term forward contracts to offset the foreign exchange risk of assets and liabilities denominated in currencies other than the functional currency of the respective entities. These contracts, which are not designated as hedging instruments, mature or settle within twelve months. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.

 Fair Values of Derivative Instruments in the Consolidated Balance Sheets

The fair values of the Company’s derivative instruments are disclosed in Note 6 — Fair Value Measurements and summarized in the table below:

 

 

 

Value as of

 

Balance Sheet Line Item

 

August 31, 2020

 

 

November 30, 2019

 

Derivative instruments not designated as hedging instruments:

 

 

 

 

 

 

 

 

Foreign exchange forward contracts (notional value)

 

$

1,429,429

 

 

$

1,192,964

 

Other current assets

 

 

29,808

 

 

 

11,757

 

Other accrued liabilities

 

 

14,123

 

 

 

2,637

 

Interest rate swap (notional value)

 

$

100,000

 

 

$

100,000

 

Other assets, net

 

 

—

 

 

 

515

 

Other accrued liabilities

 

 

367

 

 

 

—

 

Derivative instruments designated as cash flow hedges:

 

 

 

 

 

 

 

 

Foreign exchange forward contracts (notional value)

 

$

814,879

 

 

$

563,654

 

Other current assets and other assets, net

 

 

38,288

 

 

 

14,523

 

Other accrued liabilities and other long-term liabilities

 

 

740

 

 

 

1,633

 

Interest rate swaps (notional value)

 

$

1,500,000

 

 

$

1,900,000

 

Other accrued liabilities

 

 

128,418

 

 

 

83,428

 

 

Volume of Activity

The notional amounts of foreign exchange forward contracts represent the gross amounts of foreign currency, including, principally, the Philippine Peso, Indian Rupee, the Euro, Canadian Dollar, British Pound, the Chinese Yuan, the Japanese Yen and the Brazilian Real that will be bought or sold at maturity. The term and notional amount of interest rate swaps are determined based on management’s assessment of future interest rates and other factors such as debt maturities. The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change.

14

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

The Effect of Derivative Instruments on AOCI and the Consolidated Statements of Operations

The following table shows the gains and losses, before taxes, of the Company’s derivative instruments designated as cash flow hedges and not designated as hedging instruments in Other Comprehensive Income (“OCI”), and the Consolidated Statements of Operations for the periods presented:

 

 

 

Location of Gain (Loss)

 

Three Months Ended August 31,

 

 

Nine Months Ended August 31,

 

 

 

in Income

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue for services

 

 

 

$

1,158,421

 

 

$

1,155,690

 

 

$

3,403,305

 

 

$

3,480,275

 

Cost of revenue for services

 

 

 

 

(747,809

)

 

 

(731,472

)

 

 

(2,206,256

)

 

 

(2,196,212

)

Selling, general and administrative expenses

 

 

 

 

(498,956

)

 

 

(517,135

)

 

 

(1,514,734

)

 

 

(1,557,906

)

Interest expense and finance charges, net

 

 

 

 

(28,749

)

 

 

(42,945

)

 

 

(99,046

)

 

 

(127,695

)

Other income (expense), net

 

 

 

 

(567

)

 

 

(1,087

)

 

 

3,280

 

 

 

19,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) recognized in OCI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

 

 

$

34,764

 

 

$

1,592

 

 

$

35,795

 

 

$

8,304

 

Interest rate swaps

 

 

 

 

(1,902

)

 

 

(34,058

)

 

 

(68,520

)

 

 

(104,323

)

Total

 

 

 

$

32,862

 

 

$

(32,466

)

 

$

(32,725

)

 

$

(96,020

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) reclassified from AOCI into income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) reclassified from AOCI into income

 

Revenue for services

 

$

—

 

 

$

73

 

 

$

—

 

 

$

89

 

Gain (loss) reclassified from AOCI into income

 

Cost of revenue for

services

 

 

5,568

 

 

 

4,586

 

 

 

13,322

 

 

 

12,034

 

Gain (loss) reclassified from AOCI into income

 

Selling, general and

administrative expenses

 

 

2,350

 

 

 

1,888

 

 

 

5,805

 

 

 

5,041

 

Gain (loss) reclassified from AOCI into income

 

Other income

(expense), net

 

 

—

 

 

 

10

 

 

 

—

 

 

 

10

 

Interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) reclassified from AOCI into income

 

Interest expense and

finance charges, net

 

 

(10,305

)

 

 

(2,065

)

 

 

(23,710

)

 

 

(4,545

)

Total

 

 

 

$

(2,387

)

 

$

4,492

 

 

$

(4,583

)

 

$

12,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) recognized from foreign exchange forward contracts, net(1)

 

Other income

(expense), net

 

$

24,972

 

 

$

(1,286

)

 

$

32,512

 

 

$

8,657

 

Gains (losses) recognized from interest rate swaps, net

 

Interest expense and

finance charges, net

 

 

222

 

 

 

(807

)

 

 

(882

)

 

 

(2,984

)

Total

 

 

 

$

25,194

 

 

$

(2,093

)

 

$

31,630

 

 

$

5,673

 

 

 

(1)

The gains and losses largely offset the currency gains and losses that resulted from changes in the assets and liabilities denominated in nonfunctional currencies.

 

There were no material gain or loss amounts excluded from the assessment of effectiveness. Existing net losses in AOCI that are expected to be reclassified into earnings in the normal course of business within the next twelve months are $9,002.

Offsetting of Derivatives

The Company’s derivative instruments are generally governed by standard International Swaps and Derivatives Association, Inc. master agreements, which generally do not require the Company to post any collateral, and specify netting rights, and other customary provisions including events of defaults and termination rights. In the Consolidated Balance Sheets, the Company does not offset derivative assets against liabilities in master netting arrangements. If derivative exposures covered by a qualifying master netting agreement had been netted in the

15

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

Consolidated Balance Sheet, the total derivative asset and liability positions would have been reduced by $12,458 each as of August 31, 2020 and $6,003 each as of November 30, 2019.

Credit exposure for derivative financial instruments is limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the Company’s obligations to the counterparties. The Company manages the potential risk of credit losses through careful evaluation of counterparty credit standing and selection of counterparties from a limited group of financial institutions

 

NOTE 6—FAIR VALUE MEASUREMENTS:  

The Company’s fair value measurements are classified and disclosed in one of the following three categories:  

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

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

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

The following table summarizes the valuation of the Company’s investments and financial instruments that are measured at fair value on a recurring basis:  

 

 

 

As of August 31, 2020

 

 

As of November 30, 2019

 

 

 

 

 

 

 

Fair value measurement category

 

 

 

 

 

 

Fair value measurement category

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

50,019

 

 

$

50,019

 

 

$

—

 

 

$

—

 

 

$

37,760

 

 

$

37,760

 

 

$

—

 

 

$

—

 

Marketable equity securities

 

 

3,192

 

 

 

3,192

 

 

 

—

 

 

 

—

 

 

 

2,834

 

 

 

2,834

 

 

 

—

 

 

 

—

 

Foreign government bond

 

 

1,378

 

 

 

1,378

 

 

 

—

 

 

 

—

 

 

 

1,228

 

 

 

1,228

 

 

 

—

 

 

 

—

 

Forward foreign currency exchange contracts

 

 

68,096

 

 

 

—

 

 

 

68,096

 

 

 

—

 

 

 

26,280

 

 

 

—

 

 

 

26,280

 

 

 

—

 

Interest rate swaps

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

515

 

 

 

—

 

 

 

515

 

 

 

—

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange contracts

 

$

14,863

 

 

$

—

 

 

$

14,863

 

 

$

—

 

 

$

4,270

 

 

$

—

 

 

$

4,270

 

 

$

—

 

Interest rate swaps

 

 

128,785

 

 

 

—

 

 

 

128,785

 

 

 

—

 

 

 

83,428

 

 

 

—

 

 

 

83,428

 

 

 

—

 

 

The Company’s cash equivalents consist primarily of highly liquid investments in money market funds and term deposits with maturity periods of three months or less. The carrying values of cash equivalents approximate fair value since they are near their maturity. Investments in marketable equity securities, primarily comprising investments in other companies’ equity securities as per local customary business practice, are recorded at fair value based on quoted market prices. Investment in foreign government bond classified as available-for-sale debt security is recorded at fair value based on quoted market prices. The fair values of forward exchange contracts are measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. Fair values of long-term foreign currency exchange contracts are measured using valuations based upon quoted prices for similar assets and liabilities in active markets and are valued by reference to similar financial instruments, adjusted for terms specific to the contracts. Fair values of interest rate swaps are measured using standard valuation models using inputs that are readily available in public markets, or can be derived from observable market transactions, including LIBOR spot and forward rates. The effect of nonperformance risk on the fair value of derivative instruments was not material as of August 31, 2020 and November 30, 2019.      

The carrying values of accounts receivable, accounts payable and short-term debt approximate fair value due to their short maturities and interest rates which are variable in nature. The carrying value of the Company’s term loans approximate their fair value since they bear interest rates that are similar to existing market rates.

During the nine months ended August 31, 2020, there were no transfers between the fair value measurement category levels.

 

16

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 7—ACCOUNTS RECEIVABLE ARRANGEMENTS:  

The Company has an uncommitted supply-chain financing program with a global financial institution under which trade accounts receivable of certain customers and their affiliates may be acquired, without recourse, by the financial institution. Available capacity under this program is dependent on the level of the Company’s trade accounts receivable with these customers and the financial institution’s willingness to purchase such receivables. As of August 31, 2020 and November 30, 2019, accounts receivable sold to and held by the financial institution under this program were $17,957 and $32,472, respectively. Discount fees related to the sale of trade accounts receivable under this facility are included in “Interest expense and finance charges, net” in the Consolidated Statements of Operations. During the three and nine months ended August 31, 2020 and 2019, discount fees were not material to the Company’s results of operations.

SYNNEX Japan, the Company’s Japanese Technology Solutions subsidiary, has arrangements with financial institutions for the sale and financing of approved accounts receivable and notes receivable. The amounts outstanding under these arrangements that were sold, but not collected, as of August 31, 2020 and November 30, 2019 were $5,760 and $2,856, respectively.

The Company also has other financing agreements in North America with financial institutions (“Flooring Companies”) to allow certain customers of the Company to finance their purchases directly with the Flooring Companies. Under these agreements, the Flooring Companies pay to the Company the selling price of products sold to various customers, less a discount, within approximately 15 to 30 days from the date of sale. The Company is contingently liable to repurchase inventory sold under flooring agreements in the event of any default by its customers under the agreement and such inventory being repossessed by the Flooring Companies. See Note 15 — Commitments and Contingencies for further information.

The following table summarizes the net sales financed through flooring agreements and the flooring fees incurred:  

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

Net sales financed

 

$

584,901

 

 

$

521,341

 

 

$

1,512,429

 

 

$

1,424,081

 

Flooring fees(1)

 

 

3,690

 

 

 

3,584

 

 

 

9,563

 

 

 

9,410

 

 

 

 

(1)

Flooring fees are included within “Interest expense and finance charges, net.”

As of August 31, 2020 and November 30, 2019, accounts receivable subject to flooring agreements were $58,567 and $69,637, respectively.

NOTE 8—BORROWINGS:  

Borrowings consist of the following:

 

 

 

As of

 

 

 

August 31, 2020

 

 

November 30, 2019

 

SYNNEX United States accounts receivable securitization arrangement

 

$

—

 

 

$

108,000

 

SYNNEX Japan credit facility - revolving line of credit component

 

 

72,696

 

 

 

5,936

 

SYNNEX United States credit agreement - revolving line of credit component

 

 

—

 

 

 

25,800

 

SYNNEX United States credit agreement - current portion

   of term loan component

 

 

60,000

 

 

 

60,000

 

SYNNEX United States term loan credit agreement - current portion

 

 

90,000

 

 

 

90,000

 

Other borrowings

 

 

21,418

 

 

 

9,233

 

Borrowings, current

 

$

244,114

 

 

$

298,969

 

 

 

 

 

 

 

 

 

 

SYNNEX Japan credit facility - term loan component

 

$

66,088

 

 

$

63,921

 

SYNNEX United States credit agreement - term loan component

 

 

975,000

 

 

 

1,020,000

 

SYNNEX United States term loan credit agreement

 

 

1,575,000

 

 

 

1,642,500

 

Other term debt

 

 

95

 

 

 

298

 

Long-term borrowings, before unamortized debt discount

   and issuance costs

 

$

2,616,183

 

 

$

2,726,719

 

Less: unamortized debt discount and issuance costs

 

 

(6,374

)

 

 

(8,452

)

Long-term borrowings

 

$

2,609,809

 

 

$

2,718,267

 

 

17

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

SYNNEX United States accounts receivable securitization arrangement

In the United States, the Company has an accounts receivable securitization program to provide additional capital for its operations (the “U.S. AR Arrangement”). Prior to the amendment in May 2020 that is described in this paragraph, under the terms of the U.S. AR Arrangement, the Company’s subsidiary that is the borrower under this facility could borrow up to a maximum of $850,000 based upon eligible trade accounts receivable. The effective borrowing cost under the U.S. AR Arrangement is a blended rate based upon the composition of the lenders, that includes prevailing dealer commercial paper rates and a rate based upon LIBOR. In addition, prior to the May 2020 amendment, a program fee of 0.75% per annum based on the used portion of the commitment, and a facility fee of 0.35% per annum, was payable on the adjusted commitment of the lenders. In May 2020, the U.S. AR Arrangement was amended to revise the maximum borrowing amount to $650,000 and to extend the maturity date of the U.S. AR Arrangement to May 2022. The program fee payable on the used portion of the lenders’ commitment, was modified to accrue at 1.25% per annum in the case of lender groups who fund their advances based on prevailing commercial paper rates, and 1.30% per annum in the case of lender groups who fund their advances based on LIBOR (subject to a 0.50% per annum floor). The amendment also modified the facility fee payable on the adjusted commitment of the lenders, to accrue at different tiers ranging between 0.35% per annum and 0.45% per annum depending on the amount of outstanding advances from time to time. In addition, the U.S. AR Arrangement includes an accordion feature to allow requests for an increase in the lenders' commitment by an additional $150,000.

Under the terms of the U.S. Arrangement, the Company and two of its U.S. subsidiaries sell, on a revolving basis, their receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in the receivables acquired by the Company's bankruptcy-remote subsidiary as security. Any amounts received under the U.S. AR Arrangement are recorded as debt on the Company's Consolidated Balance Sheets.

SYNNEX Canada accounts receivable securitization arrangement

SYNNEX Canada Limited (“SYNNEX Canada”), the Company's Technology Solutions subsidiary in Canada, has an accounts receivable securitization program with a bank to provide additional capital for its operations. In March 2020, SYNNEX Canada renewed this agreement to mature in May 2023. Under the terms of this program, SYNNEX Canada can borrow up to CAD100,000, or $76,628, in exchange for the transfer of eligible trade accounts receivable, on an ongoing revolving basis. The program includes an accordion feature that allows SYNNEX Canada to request an increase in the bank's commitment up to an additional CAD50,000, or $38,314. Any amounts received under this arrangement are recorded as debt on the Company's Consolidated Balance Sheets and are secured by pledging all of the rights, title and interest in the receivables to the bank. The effective borrowing cost is based on the weighted-average of the Canadian Dollar Offered Rate plus a margin of 1.00% per annum and the prevailing lender commercial paper rates. In addition, prior to an event of termination, SYNNEX Canada is obligated to pay a program fee of 0.75% per annum based on the used portion of the commitment. After an event of termination, the program fee shall be the sum of the base rate and 2.50% per annum, based on the used portion of the commitment. SYNNEX Canada pays a fee of 0.40% per annum for any unused portion of the commitment up to CAD60,000, or $45,977, and when the unused portion exceeds CAD60,000, or $45,977, a fee of 0.55% per annum of the unused portion of the commitment. As of both August 31, 2020 and November 30, 2019, there was no outstanding balance under this arrangement.

The Company has guaranteed the performance obligations of SYNNEX Canada under this facility.

SYNNEX Japan credit facility

SYNNEX Japan has a credit agreement with a group of banks for a maximum commitment of JPY15,000,000 or $141,616. The credit agreement is comprised of a JPY7,000,000, or $66,088, term loan and a JPY8,000,000, or $75,529, revolving credit facility and expires in November 2021. The interest rate for the term loan and revolving credit facility is based on the Tokyo Interbank Offered Rate, plus a margin, which is based on the Company’s consolidated leverage ratio, and currently equals 0.70% per annum. The unused line fee on the revolving credit facility is currently 0.10% per annum based on the Company's consolidated current leverage ratio. The term loan can be repaid at any time prior to the expiration date without penalty. The Company has guaranteed the obligations of SYNNEX Japan under this facility.     

Concentrix India revolving lines of credit facilities

The Company's Indian subsidiaries have credit facilities with a financial institution to borrow up to an aggregate amount of $22,000. The interest rate under these facilities is the higher of the bank's minimum lending rate or LIBOR, plus a margin of 0.9% per annum. The Company guarantees the obligations under these credit facilities. These credit facilities can be terminated at any time by the Company’s Indian subsidiaries or the financial institution. There were no borrowings outstanding under these credit facilities as of either August 31, 2020 or November 30, 2019.

18

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

SYNNEX United States credit agreement

In the United States, the Company has a senior secured credit agreement (as amended, the "U.S. Credit Agreement") with a group of financial institutions. The U.S. Credit Agreement includes a $600,000 commitment for a revolving credit facility and a term loan in the original principal amount of $1,200,000. The Company may request incremental commitments to increase the principal amount of the revolving line of credit or term loan by $500,000, plus an additional amount which is dependent upon the Company's pro forma first lien leverage ratio, as calculated under the U.S. Credit Agreement. The U.S. Credit Agreement matures in September 2022. The outstanding principal amount of the term loan is repayable in quarterly installments of $15,000, with the unpaid balance due in full on the September 2022 maturity date. The term loan can be repaid at any time prior to the maturity date without penalty. Interest on borrowings under the U.S. Credit Agreement can be based on LIBOR or a base rate at the Company's option, plus a margin. The margin for LIBOR loans ranges from 1.25% to 2.00% and the margin for base rate loans ranges from 0.25% to 1.00%, provided that LIBOR shall not be less than zero. The base rate is a variable rate which is the highest of (a) the Federal Funds Rate, plus a margin of 0.5%, (b) the rate of interest announced, from time to time, by the agent, Bank of America, N.A., as its “prime rate,” and (c) the Eurodollar Rate, plus 1.0%. The unused revolving credit facility commitment fee ranges from 0.175% to 0.30% per annum. The margins above the applicable interest rates and the revolving commitment fee for revolving loans are based on the Company’s consolidated leverage ratio, as calculated under the U.S. Credit Agreement. The Company’s obligations under the U.S. Credit Agreement are secured by substantially all of the parent company’s and its United States domestic subsidiaries’ assets on a pari passu basis with the interests of the lenders under the U.S. Term Loan Credit Agreement (defined below) pursuant to an intercreditor agreement and are guaranteed by certain of the Company's United States domestic subsidiaries.  

SYNNEX United States term loan credit agreement

The Company has a secured term loan credit agreement (the “U.S. Term Loan Credit Agreement”) with a group of financial institutions in the original principal amount of $1,800,000. The U.S. Term Loan Credit Agreement matures in October 2023. The outstanding principal amount of the term loans is payable in quarterly installments of $22,500, with the unpaid balance due in full on the maturity date. The term loan can be repaid at any time prior to the expiration date without penalty. Interest on borrowings under the U.S. Term Loan Credit Agreement can be based on LIBOR or a base rate at the Company’s option, plus a margin. The margin for LIBOR loans ranges from 1.25% to 1.75% and the margin for base rate loans ranges from 0.25% to 0.75%, provided that LIBOR shall not be less than zero. The base rate is a variable rate which is the highest of (a) 0.5% plus the greater of (x) the Federal Funds Rate in effect on such day and (y) the overnight bank funding rate in effect on such day, (b) the Eurodollar Rate plus 1.0% per annum, and (c) the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the U.S. During the period in which the term loans were available to be drawn, the Company paid term loan commitment fees. The margins above the Company's applicable interest rates are, and the term loan commitment fee were, based on the Company's consolidated leverage ratio as calculated under the U.S. Term Loan Credit Agreement. The Company's obligations under the U.S. Term Loan Credit Agreement are secured by substantially all of the Company’s and certain of its domestic subsidiaries’ assets on a pari passu basis with the interests of the lenders under the existing U.S. Credit Agreement pursuant to an intercreditor agreement, and are guaranteed by certain of its domestic subsidiaries.     

SYNNEX Canada revolving line of credit

SYNNEX Canada has an uncommitted revolving line of credit with a bank under which it can borrow up to CAD50,000, or $38,314. Borrowings under the facility are secured by eligible inventory and bear interest at a base rate plus a margin ranging from 0.50% to 2.25% depending on the base rate used. The base rate could be a Banker's Acceptance Rate, a Canadian Prime Rate, LIBOR or U.S. Base Rate. As of both August 31, 2020 and November 30, 2019, there were no borrowings outstanding under this credit facility.

Other borrowings and term debt

Other borrowings and term debt include lines of credit with financial institutions at certain locations outside the United States, factoring of accounts receivable with recourse provisions, capital leases, a building mortgage and book overdrafts. As of August 31, 2020, commitments for these revolving credit facilities aggregated $83,335. Interest rates and other terms of borrowing under these lines of credit vary by country, depending on local market conditions. Borrowings under these lines of credit facilities are guaranteed by the Company or secured by eligible accounts receivable.

The maximum commitment amounts for local currency credit facilities have been translated into United States Dollars at August 31, 2020 exchange rates.

19

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

Future principal payments

As of August 31, 2020, future principal payments under the above loans are as follows:

 

Fiscal Years Ending November 30,

 

 

 

 

2020 (remaining three months)

 

$

131,519

 

2021

 

 

216,274

 

2022

 

 

1,050,004

 

2023

 

 

1,462,500

 

Total

 

$

2,860,297

 

Interest expense and finance charges

The total interest expense and finance charges for the Company's borrowings were $31,021 and $105,017, respectively, for the three and nine months ended August 31, 2020, and $44,401 and $132,111, respectively, for the three and nine months ended August 31, 2019. The variable interest rates ranged between 0.74% and 4.95% during the three months ended August 31, 2020, and between 0.74% and 8.41% during the nine months ended August 31, 2020. During the three months ended August 31, 2019, the variable interest rate ranged between 0.87% and 10.74%, and between 0.70% and 11.38% during the nine months ended August 31, 2019.  

Covenant compliance

The Company's credit facilities have a number of covenants and restrictions that, among other things, require the Company to maintain specified financial ratios and satisfy certain financial condition tests. The covenants also limit the Company’s ability to incur additional debt, make or forgive intercompany loans, pay dividends and make other types of distributions, make certain acquisitions, repurchase the Company’s stock, create liens, cancel debt owed to the Company, enter into agreements with affiliates, modify the nature of the Company’s business, enter into sale-leaseback transactions, make certain investments, transfer and sell assets, cancel or terminate any material contracts and merge or consolidate. As of August 31, 2020, the Company was in compliance with all material covenants for the above arrangements.

 

NOTE 9—EARNINGS PER COMMON SHARE:  

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

134,464

 

 

$

123,132

 

 

$

314,008

 

 

$

324,711

 

Less: net income allocated to participating securities(1)

 

 

(1,491

)

 

 

(1,070

)

 

 

(3,623

)

 

 

(2,894

)

Net income attributable to common stockholders

 

$

132,973

 

 

$

122,062

 

 

$

310,385

 

 

$

321,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares - basic

 

 

50,890

 

 

 

50,601

 

 

 

50,851

 

 

 

50,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

2.61

 

 

$

2.41

 

 

$

6.10

 

 

$

6.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

134,464

 

 

$

123,132

 

 

$

314,008

 

 

$

324,711

 

Less: net income allocated to participating securities(1)

 

 

(1,481

)

 

 

(1,066

)

 

 

(3,602

)

 

 

(2,883

)

Net income attributable to common stockholders

 

$

132,983

 

 

$

122,066

 

 

$

310,406

 

 

$

321,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares - basic

 

 

50,890

 

 

 

50,601

 

 

 

50,851

 

 

 

50,661

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock units

 

 

351

 

 

 

244

 

 

 

321

 

 

 

242

 

Weighted-average number of common shares - diluted

 

 

51,241

 

 

 

50,845

 

 

 

51,172

 

 

 

50,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

2.60

 

 

$

2.40

 

 

$

6.07

 

 

$

6.32

 

Anti-dilutive shares excluded from diluted earnings per share calculation

 

 

41

 

 

 

121

 

 

 

83

 

 

 

120

 

 

 

(1)

Restricted stock awards granted to employees by the Company are considered participating securities.

20

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 10—SEGMENT INFORMATION:

Summarized financial information related to the Company’s reportable business segments for the periods presented is shown below:

 

 

 

Technology

Solutions

 

 

Concentrix

 

 

Inter-Segment

Elimination

 

 

Consolidated

 

Three months ended August 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,306,361

 

 

$

1,163,694

 

 

$

(5,273

)

 

$

6,464,782

 

External revenue

 

 

5,306,361

 

 

 

1,158,421

 

 

 

 

 

 

 

6,464,782

 

Operating income

 

 

132,373

 

 

 

76,763

 

 

 

—

 

 

 

209,136

 

Three months ended August 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,047,970

 

 

$

1,160,928

 

 

$

(5,240

)

 

$

6,203,659

 

External revenue

 

 

5,047,968

 

 

 

1,155,690

 

 

 

 

 

 

 

6,203,659

 

Operating income

 

 

138,830

 

 

 

70,025

 

 

 

—

 

 

 

208,855

 

Nine months ended August 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

13,858,313

 

 

$

3,418,676

 

 

$

(15,371

)

 

$

17,261,619

 

External revenue

 

 

13,858,313

 

 

 

3,403,305

 

 

 

—

 

 

 

17,261,619

 

Operating income

 

 

320,962

 

 

 

188,554

 

 

 

—

 

 

 

509,515

 

Nine months ended August 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

13,695,729

 

 

$

3,495,076

 

 

$

(14,805

)

 

$

17,176,000

 

External revenue

 

 

13,695,725

 

 

 

3,480,275

 

 

 

—

 

 

 

17,176,000

 

Operating income

 

 

352,594

 

 

 

192,879

 

 

 

—

 

 

 

545,473

 

Total assets as of August 31, 2020

 

$

11,164,679

 

 

$

5,110,950

 

 

$

(3,012,522

)

 

$

13,263,107

 

Total assets as of November 30, 2019

 

$

10,312,512

 

 

$

4,645,475

 

 

$

(3,260,027

)

 

$

11,697,960

 

 

Inter-segment elimination represents services and other transactions, principally intercompany investments and loans, between the Company's reportable segments that are eliminated on consolidation.

Geographic information

The Company attributes revenues from external customers to the country from where Technology Solutions products are delivered and the country of domicile of the Concentrix legal entity that is party to the client contract. Shown below are the countries that accounted for 10% or more of the Company’s revenue and property and equipment, net, for the periods presented:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

4,650,397

 

 

$

4,181,667

 

 

$

11,576,670

 

 

$

11,327,961

 

Others

 

 

1,814,385

 

 

 

2,021,992

 

 

 

5,684,948

 

 

 

5,848,039

 

Total

 

$

6,464,782

 

 

$

6,203,659

 

 

$

17,261,619

 

 

$

17,176,000

 

 

 

 

As of

 

 

 

August 31, 2020

 

 

November 30, 2019

 

Property and equipment, net:

 

 

 

 

 

 

 

 

United States

 

$

279,008

 

 

$

287,679

 

Philippines

 

 

69,315

 

 

 

63,421

 

Others

 

 

235,628

 

 

 

218,799

 

Total

 

$

583,951

 

 

$

569,899

 

 

21

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 11—RELATED PARTY TRANSACTIONS: 

The Company has a business relationship with MiTAC Holdings Corporation (“MiTAC Holdings”), a publicly-traded company in Taiwan, which began in 1992 when MiTAC Holdings became the Company's primary investor through its affiliates. As of both August 31, 2020 and November 30, 2019, MiTAC Holdings and its affiliates beneficially owned approximately 18% of the Company’s outstanding common stock. Mr. Matthew Miau, Chairman Emeritus of the Company’s Board of Directors and a director, is the Chairman of MiTAC Holdings and a director or officer of MiTAC Holdings’ affiliates.

Beneficial ownership of the Company’s common stock by MiTAC Holdings  

As noted above, MiTAC Holdings and its affiliates in the aggregate beneficially owned approximately 18% of the Company’s outstanding common stock as of August 31, 2020. These shares are owned by the following entities:  

 

 

 

 

 

As of August 31, 2020

 

MiTAC Holdings(1)

 

 

5,300

 

Synnex Technology International Corp.(2)

 

 

3,860

 

Total

 

 

9,160

 

_________________________

(1)

 

Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC Holdings. Excludes 190 shares held directly by Mr. Miau, 217 shares indirectly held by Mr. Miau through a charitable remainder trust, and 190 shares held by his spouse.

(2)

 

Synnex Technology International Corp. (“Synnex Technology International”) is a separate entity from the Company and is a publicly-traded corporation in Taiwan. Shares are held via Peer Development Ltd., a wholly-owned subsidiary of Synnex Technology International. MiTAC Holdings owns a noncontrolling interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a noncontrolling interest of 14.9% in Synnex Technology International. Neither MiTAC Holdings nor Mr. Miau is affiliated with any person(s), entity, or entities that hold a majority interest in MiTAC Incorporated.

 

MiTAC Holdings generally has significant influence over the Company regarding matters submitted to stockholders for consideration, including any merger or acquisition of the Company. Among other things, this could have the effect of delaying, deterring or preventing a change of control over the Company.

The following table presents the Company's transactions with MiTAC Holdings and its affiliates for the periods indicated:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

Purchases of inventories and services

 

$

53,365

 

 

$

41,989

 

 

$

151,929

 

 

$

120,093

 

Sale of products to MiTAC Holdings and affiliates

 

 

285

 

 

 

142

 

 

 

882

 

 

 

546

 

Rent and overhead costs incurred for use of facilities of MiTAC Holdings and affiliates

 

 

27

 

 

 

—

 

 

 

91

 

 

 

—

 

 

The following table presents the Company’s receivable from and payable to MiTAC Holdings and its affiliates for the periods presented:

 

 

 

August 31, 2020

 

 

November 30, 2019

 

Receivable from related parties (included in Accounts receivable, net)

 

$

15,841

 

 

$

4,405

 

Payable to related parties (included in Accounts payable)

 

 

28,761

 

 

 

23,179

 

 

 

The Company’s business relationship with MiTAC Holdings and its affiliates has been informal and is generally not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments. The Company negotiates pricing and other material terms on a case-by-case basis with MiTAC Holdings and affiliates. The Company has adopted a policy requiring that material transactions with MiTAC Holdings or its related parties be approved by its Audit Committee, which is composed solely of independent directors. In addition, Mr. Miau’s compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors.

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

 

NOTE 12—PENSION AND EMPLOYEE BENEFITS PLANS:  

The Company has 401(k) plans in the United States under which eligible employees may contribute up to the maximum amount as provided by law. Employees become eligible to participate in these plans on the first day of the month after their employment date. The

22

Table of Contents

 

SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

Company may make discretionary contributions under the plans. Employees in most of the Company's foreign subsidiaries are covered by government-mandated defined contribution plans. During the three and nine months ended August 31, 2020, the Company contributed $18,874 and $51,487, respectively, to defined contribution plans. During the three and nine months ended August 31, 2019, the Company contributed $11,052 and $34,596, respectively, to defined contribution plans.

The Company has a deferred compensation plan for certain directors and officers. Distributions under the plan are subject to Section 409A of the United States Tax Code. The Company may invest balances in the plan in trading securities reported on recognized exchanges. As of August 31, 2020 and November 30, 2019, the deferred compensation liability balance was $5,511 and $5,389, respectively.

Defined Benefit Plans

The Company has defined benefit pension or retirement plans for eligible employees in certain foreign subsidiaries. Benefits under these plans are primarily based on years of service and compensation during the years immediately preceding retirement or termination of participation in the plans. In addition, the Company has a frozen defined benefit pension plan, which includes both a qualified and non-qualified portion, for all eligible employees in the U.S. (“the cash balance plan”). The pension benefit formula for the cash balance plan is determined by a combination of compensation, age-based credits and annual guaranteed interest credits. The qualified portion of the cash balance plan has been funded through contributions made to a trust fund. The plan assumptions are evaluated annually and are updated as deemed necessary.

During the three and nine months ended August 31, 2020, net periodic pension costs were $3,995 and $10,171, respectively, and the Company’s contribution was $239 and $636, respectively. During the three and nine months ended August 31, 2019, net periodic pension costs were $6,204 and $11,678, respectively, and the Company’s contribution was $2,225 and $5,437, respectively. The plans were underfunded by $135,313 and $116,675 as of August 31, 2020 and November 30, 2019, respectively.

 

NOTE 13—EQUITY:

Share repurchase program

In June 2020, the Board of Directors authorized a three-year $400,000 share repurchase program, effective July 1, 2020, pursuant to which the Company may repurchase its outstanding common stock from time to time in the open market or through privately negotiated transactions. As of August 31, 2020, the Company had not repurchased any shares under this program. 

In June 2017, the Board of Directors authorized a three-year $300,000 share repurchase program, effective July 1, 2017, pursuant to which the Company could repurchase its outstanding common stock from time to time in the open market or through privately negotiated transactions. Through the expiration of this program in June 2020, the Company had repurchased 875 shares at a total cost of $84,577. The share purchases were made on the open market and the shares repurchased by the Company are held in treasury for general corporate purposes.

Dividends

On March 24, 2020, as a result of the unpredictable economic environment due to the impact of the COVID-19 pandemic, the Company announced the suspension of its quarterly dividend.

 

 

NOTE 14—LEASES:

The Company leases certain of its facilities and equipment under operating lease agreements, which expire in various periods through 2034. The Company’s finance leases are not material.

The following table presents the various components of lease costs. 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2020

 

Operating lease cost

 

$

61,354

 

 

$

182,374

 

Short-term lease cost

 

 

1,753

 

 

 

8,574

 

Variable lease cost

 

 

11,941

 

 

 

31,500

 

Sublease income

 

 

(52

)

 

 

(193

)

Total operating lease cost

 

$

74,996

 

 

$

222,255

 

The following table presents a maturity analysis of expected undiscounted cash flows for operating leases on an annual basis for the next five years and thereafter as of August 31, 2020:

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

Fiscal Years Ending November 30,

 

 

 

 

2020 (remaining three months)

 

$

56,407

 

2021

 

 

200,153

 

2022

 

 

158,322

 

2023

 

 

111,850

 

2024

 

 

78,311

 

Thereafter

 

 

80,229

 

Total payments

 

$

685,272

 

Less: imputed interest*

 

 

91,428

 

Total present value of lease payments

 

$

593,844

 

*Imputed interest represents the difference between undiscounted cash flows and discounted cash flows.

During the three and nine months ended August 31, 2019, rent expense was $66,749 and $197,645, respectively. Sublease income was immaterial.

The following amounts were recorded in the Company's Consolidated Balance Sheet as of August 31, 2020:

Operating leases

 

Balance sheet location

 

August 31, 2020

 

Operating lease ROU assets

 

Other assets, net

 

$

540,990

 

Current operating lease liabilities

 

Other accrued liabilities

 

 

178,723

 

Non-current operating lease liabilities

 

Other long-term liabilities

 

 

415,121

 

The following table presents supplemental cash flow information related to the Company's operating leases for the nine months ended August 31, 2020. Cash payments related to variable lease costs and short-term leases are not included in the measurement of operating lease liabilities, and, as such, are excluded from the amounts below:

 

 

 

 

Nine months ended

 

Cash flow information

 

 

 

August 31, 2020

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

$

168,954

 

Non-cash ROU assets obtained in exchange for lease liabilities (subsequent to initial adoption)

 

 

 

 

77,506

 

The weighted-average remaining lease term and discount rate as of August 31, 2020 were as follows:

Operating lease term and discount rate

 

 

 

Operating Leases

 

Weighted-average remaining lease term (years)

 

 

 

 

4.13

 

Weighted-average discount rate

 

 

 

7.01%

 

Future minimum contractually required cash payment obligations under non-cancellable lease agreements as of November 30, 2019 were as follows:

Fiscal Years Ending November 30,

 

 

 

 

2020

 

$

213,649

 

2021

 

 

174,611

 

2022

 

 

132,778

 

2023

 

 

96,084

 

2024

 

 

66,753

 

Thereafter

 

 

71,351

 

Total minimum lease payments

 

$

755,226

 

 

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SYNNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For the three and nine months ended August 31, 2020 and 2019

(currency and share amounts in thousands, except per share amounts)

(unaudited)

 

NOTE 15— COMMITMENTS AND CONTINGENCIES:

The Company was contingently liable as of August 31, 2020 under agreements to repurchase repossessed inventory acquired by flooring companies as a result of default on floor plan financing arrangements by the Company's customers. These arrangements are described in Note 7 and do not have expiration dates. As the Company does not have access to information regarding the amount of inventory purchased from the Company, still on hand with the customer at any point in time, the Company’s repurchase obligations relating to inventory cannot be reasonably estimated. Losses, if any, would be the difference between the repossession cost and the resale value of the inventory. There have been no repurchases through August 31, 2020 under these agreements and the Company is not aware of any pending customer defaults or repossession obligations. The Company believes that, based on historical experience, the likelihood of a material loss pursuant to these inventory repurchase obligations is remote.

From time to time, the Company receives notices from third parties, including customers and suppliers, seeking indemnification, payment of money or other actions in connection with claims made against them. Also, from time to time, the Company has been involved in various bankruptcy preference actions where the Company was a supplier to the companies now in bankruptcy. In addition, the Company is subject to various other claims, both asserted and unasserted, that arise in the ordinary course of business. The Company evaluates these claims and records the related liabilities. It is possible that the ultimate liabilities could differ from the amounts recorded.

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

 

NOTE 16— RISKS AND UNCERTAINTIES RELATED TO THE COVID-19 PANDEMIC:

On March 11, 2020, the World Health Organization characterized the COVID-19 outbreak as a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and work force participation and created significant volatility and disruption of financial markets. These disruptions, which were most acute during the second quarter of fiscal year 2020, have impacted the Company’s business including Concentrix’ ability to support customer demand due to decreased workforce productivity and limiting the Technology Solutions segment’s ability to support end market demand due to supply chain disruptions. As a result, many of the estimates and assumptions used in preparation of these interim financial statements required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve with respect to the pandemic, the Company’s estimates may materially change in future periods.

 

 

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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. Amounts in certain tables may not add or compute due to rounding.

When used in this Quarterly Report on Form 10-Q, or this “Report”, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “allows,” “can,” “may,” “could,” “designed,” “will,” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about the impact of COVID-19, market trends, our business model and our services, our business and market strategy, our proposed separation of SYNNEX and Concentrix, including the timing and impact thereof, future growth, including expansion of our product and service lines, our employee hiring, retention of the ownership interest of MiTAC Holdings Corporation (“MiTAC Holdings”), in us and its impact, our revenue, including our products revenue, sources of revenue, our gross margins, our operating costs and results, timing of payment, the value of our inventory, our competition, including with Synnex Technology International Corp., our future needs for additional financing, the likely sources for such funding and the impact of such funding, concentration of customers and suppliers, customer and supplier contract terms, customer forecasts and its impact on us, relationships with our suppliers, adequacy of our facilities, productivity, our data center and contact center operations, use of technology at contact centers, ability to manage and communicate with international resources, scalability of customer management solutions, ability to meet demand, managing inventory and our shipping costs, our operations and trends related thereto, our international operations, foreign currency exchange rates and hedging activities, the withdrawal of the UK from the EU, expansion of our operations and related effects, our strategic acquisitions and divestitures of businesses and assets, seasonality of sales, changes in share price, adequacy of our cash resources to meet our capital needs, our debt and financing arrangements, cash held by our foreign subsidiaries and repatriation, changes in fair value of derivative instruments, our tax liabilities, adequacy of our disclosure controls and procedures, dependency on personnel, pricing pressures, impact of economic and industry trends, changes to the markets in which we compete, impact of our accounting policies and recently issued accounting pronouncements, our estimates and assumptions, impact of inventory repurchase obligations and commitments and contingencies, our effective tax rates, our share repurchase and dividend program, our securitization programs, term loans and revolving credit lines, and our investments in working capital and personnel. 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 and risks related to the impact of COVID-19 or coronavirus, or other pandemics, and the impact of related governmental, individual and business responses, including the ability of our staff to travel to work, our ability to maintain adequate inventories, delivery capabilities, the impact on our customers and supply chain, and the impact on demand in general, the proposed separation, 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, and consumer electronics (“CE”), industries, fluctuations in general economic and market conditions, change in the market for our customers' products, employee turnover, changes in value of foreign currencies and interest rates and other risk factors contained below under Part I, Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. We do not intend 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, except as may be required by law.

In the sections of this Report entitled “Business” 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 its 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, and all other SYNNEX company, product and services names and slogans are trademarks or registered trademarks of SYNNEX Corporation. SYNNEX, the SYNNEX Logo, and CONCENTRIX Reg. U.S. Pat. & Tm. Off. Other names and marks are the property of their respective owners.

Overview

We are a Fortune 200 corporation and a leading business process services company, providing a comprehensive range of distribution, logistics and integration services for the technology industry and providing outsourced services focused on customer experience to a broad range of enterprises. We are organized to provide our products and services through two reportable business segments: Technology Solutions and Concentrix. Our Technology Solutions segment sells peripherals, information technology (“IT”) systems including data center server and storage solutions, system components, software, networking, communications and security equipment, consumer electronics (“CE”) and complementary products. Our Concentrix segment offers a portfolio of technology-infused strategic solutions and end-to-end business services focused on customer experience, process optimization, technology innovation, front and back-office automation and business transformation to clients in five primary industry verticals.

In our Technology Solutions segment, we distribute more than 40,000 technology products (as measured by active SKUs) from more than 400 IT, CE and OEM, suppliers, to more than 25,000 resellers, system integrators, and retailers throughout the United States, Canada, Japan, Mexico and Central and South America. We purchase peripherals, IT systems, system components, software, networking, communications and, security equipment, CE and complementary products from our suppliers 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 (“VARs”), corporate resellers, government resellers, system integrators, direct marketers, and national and regional retailers. We combine our core strengths in distribution with demand generation, supply chain management and design and integration solutions 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 also provide comprehensive IT solutions in key vertical markets such as government and healthcare, and we provide specialized service

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offerings that increase efficiencies in the areas of print management, renewals, logistics services and supply chain management. Additionally, we provide our customers with systems design and integration solutions for data center servers and networking solutions built specific to our customers' workloads and data center environments.

Our Technology Solutions business is 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 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 Technology Solutions segment, we are highly dependent on the end-market demand for IT and CE products, and on our partners’ strategic initiatives and business models. 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, trends toward cloud computing, 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.

In our Concentrix segment, we provide a comprehensive range of strategic services and solutions to enhance our clients' customer life cycles to acquire, support and renew customer relationships, to automate and optimize processes, to maximize the value of every customer experience and to improve business outcomes. 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 media and in more than 70 languages. Our portfolio of solutions and services support our clients and their customers globally.

Our Concentrix segment generates revenue from performing services that are generally tied to our clients’ products and services and how they are received in the marketplace. Any shift in business or size of the market for our clients’ products, any failure of technology or failure of acceptance of our clients’ products in the market may impact our business. The employee turnover rate in this business and the risk of losing experienced employees is high. Higher turnover rates can increase costs and decrease operating efficiencies and productivity.

We have been in business since 1980 and are headquartered in Fremont, California. We have significant operations in North and South America, Asia-Pacific, Europe and Africa. 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. As of August 31, 2020, we had over 252,000 full-time and temporary employees worldwide.

In December 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”). In March 2020, the World Health Organization characterized COVID-19 as a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, including our own, and created significant volatility and disruption of financial markets. The impact of the COVID-19 pandemic on our business is discussed below and at other appropriate places in the discussion of the results of our operations for the three and nine months ended August 31, 2020:

‒The disruptions due to COVID-19 have impacted our business including logistics operations in our Technology Solutions segment and limited the productive ability of many of our associates in our Concentrix segment, particularly during the second quarter of fiscal year 2020. We have successfully transitioned a significant portion of our workforce in both segments to a remote working environment and implemented a number of safety and social distancing measures within our premises to protect the health and safety of associates who are required to be on-premise to support our business. As of August 31, 2020, the majority of our workforce across both segments was productive. During the three months ended August 31, 2020, we incurred net incremental costs associated with COVID-19 of approximately $21 million, of which Concentrix incurred net costs of approximately $13 million and Technology Solutions incurred net costs of approximately $8 million. During the nine months ended August 31, 2020, we incurred net incremental costs associated with COVID-19 of approximately $110 million, of which Concentrix incurred net costs of approximately $65 million and Technology Solutions incurred net costs of approximately $45 million. We are unable to predict how long these conditions will persist, what additional measures may be introduced by governments, vendors or customers and the effect of any such additional measures on our business. As a result, many of the estimates and assumptions involved in the preparation of the financial statements included in this report on Form 10-Q, required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve with respect to the pandemic, our estimates may materially change in future periods.

 

‒In March 2020, we announced the suspension of share repurchases and our quarterly dividends. In June 2020, our board of directors approved a new three-year $400 million share repurchase program effective July 1st, 2020. We view this as the “first step” in the return to the capital allocation program we had in place pre-pandemic. The focus of this new repurchase program will be anti-dilutive, similar to our historical approach, albeit at a more measured pace to start given the current environment and opportunistic buying when available.

 

‒On January 9, 2020, we announced a plan to separate our Concentrix segment into an independent publicly-traded company. The transaction, which was delayed due to the economic impact of the COVID-19 pandemic, is now expected to be completed in the fourth quarter of calendar year 2020, subject to market conditions. The separation is intended to qualify as a tax-free transaction for federal income tax purposes. Immediately following the separation, it is expected that our stockholders will own shares of both SYNNEX and Concentrix, at the same percentage ownership that they held prior to the transaction. Completion of the separation will not require a stockholder vote but will be subject to customary closing conditions, including, among others, obtaining final approval from our Board of

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Directors, receipt of a favorable opinion with respect to the tax-free nature of the transaction for federal income tax purposes, and the effectiveness of a Form 10 registration statement with the Securities and Exchange Commission.

Critical Accounting Policies and Estimates

During the three and nine months ended August 31, 2020, there were no material changes to our critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019.

See Note 2 to our Consolidated Financial Statements for impact of adoption of Accounting Standards Codification Topic 842, Leases, which revises various aspects of accounting for lease arrangements.

As of August 31, 2020, the impact of COVID-19 on our business continued to unfold. As a result, many of our estimates and assumptions carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change in future periods.

Acquisitions

We continually seek to augment organic growth in both our business segments with strategic acquisitions of businesses and assets that complement and expand our existing capabilities. We also divest businesses that we deem no longer strategic to our ongoing operations. In our Technology Solutions business, we seek to acquire new OEM relationships, enhance our supply chain and integration capabilities, the services we provide to our customers and OEM suppliers, and expand our geographic footprint. In our Concentrix segment, we seek to enhance our capabilities and domain expertise in our key verticals, expand our geographic footprint and further expand into higher value service offerings. We are also strategically focused on further increasing our scale to support our customers.

Results of Operations  

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Statements of Operations Data:

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

Products revenue

 

 

82.08

%

 

 

81.37

%

 

 

80.28

%

 

 

79.74

%

Services revenue

 

 

17.92

 

 

 

18.63

 

 

 

19.72

 

 

 

20.26

 

Total revenue

 

 

100.00

 

 

 

100.00

 

 

 

100.00

 

 

 

100.00

 

Cost of products revenue

 

 

(77.48

)

 

 

(76.51

)

 

 

(75.49

)

 

 

(74.97

)

Cost of services revenue

 

 

(11.57

)

 

 

(11.79

)

 

 

(12.78

)

 

 

(12.79

)

Gross profit

 

 

10.95

 

 

 

11.70

 

 

 

11.73

 

 

 

12.25

 

Selling, general and administrative expenses

 

 

(7.72

)

 

 

(8.34

)

 

 

(8.78

)

 

 

(9.07

)

Operating income

 

 

3.24

 

 

 

3.37

 

 

 

2.95

 

 

 

3.18

 

Interest expense and finance charges, net

 

 

(0.44

)

 

 

(0.69

)

 

 

(0.57

)

 

 

(0.74

)

Other income (expense), net

 

 

(0.01

)

 

 

(0.02

)

 

 

0.02

 

 

 

0.12

 

Income before income taxes

 

 

2.78

 

 

 

2.66

 

 

 

2.40

 

 

 

2.55

 

Provision for income taxes

 

 

(0.70

)

 

 

(0.67

)

 

 

(0.58

)

 

 

(0.66

)

Net income

 

 

2.08

%

 

 

1.98

%

 

 

1.82

%

 

 

1.89

%

With the announcement of a plan to separate the Concentrix segment into a separate publicly-traded company in a transaction expected to be completed in the fourth calendar quarter of 2020, subject to market conditions, our services revenue and cost of services revenue which represent revenue and cost of revenue of our Concentrix segment are expected to be discontinued following the separation. Further, selling, general and administrative expenses, interest expense and finance charges, net, other income (expense), net and provision for income-taxes are expected to decrease by amounts related to the Concentrix segment or impacted by the proposed separation, with related reductions in gross profit, operating income and net income. Additionally, our gross margin and operating margin are expected to decrease due to the discontinuance of the higher margins earned in the Concentrix segment.

Due to the ongoing impact the COVID-19 pandemic, current results and financial condition discussed herein may not be indicative of future operating results and trends.

 

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Certain non-GAAP financial information

In addition to disclosing financial results that are determined in accordance with GAAP, we also disclose certain non-GAAP financial information, including:

 

•

Revenue in constant currency, which is revenue adjusted for the translation effect of foreign currencies so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of our business performance. Revenue in constant currency is calculated by translating the revenue for the three and nine months ended August 31, 2020 in the billing currency using their comparable prior period currency conversion rate. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates.

 

•

Non-GAAP operating income, which is operating income adjusted to exclude acquisition-related and integration expenses, restructuring costs and amortization of intangible assets.

 

•

Non-GAAP operating margin, which is non-GAAP operating income, as defined above, divided by revenue.

 

•

Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) which excludes other income (expense), net and acquisition-related and integration expenses.

 

•

Non-GAAP diluted earnings per common share (“EPS”), which is diluted EPS excluding the per share, tax effected impact of (i) acquisition-related and integration expenses, (ii) amortization of intangible assets and (iii) a gain recorded in fiscal year 2019 upon the settlement of contingent consideration related to the acquisition of Westcon-Comstor Americas in fiscal year 2017.

We believe that providing this additional information is useful to the reader to better assess and understand our base operating performance, especially when comparing results with previous periods and for planning and forecasting in future periods, primarily because management typically monitors the business adjusted for these items in addition to GAAP results. Management also uses these non-GAAP measures to establish operational goals and, in some cases, for measuring performance for compensation purposes. These non-GAAP financial measures also exclude amortization of intangible assets. Our acquisition activities have resulted in the recognition of intangible assets which consist primarily of customer relationships, vendor lists and technology. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in our statements of operations within each segment. Although intangible assets contribute to our revenue generation, the amortization of intangible assets does not directly relate to the sale of our products and the services performed for our clients. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of our acquisition activity. Accordingly, we believe excluding the amortization of intangible assets, along with the other non-GAAP adjustments which neither relate to the ordinary course of our business nor reflect our underlying business performance, enhances our and our investors’ ability to compare our past financial performance with current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within our GAAP financial statements, and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised. As these non-GAAP financial measures are not calculated in accordance with GAAP, they may not necessarily be comparable to similarly titled measures employed by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for the comparable GAAP measures and should be used as a complement to, and in conjunction with data presented in accordance with GAAP.

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Non-GAAP Financial Information:  

The following table provides the reconciliations of our most comparable GAAP measures to our non-GAAP measures presented:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

 

 

(in thousands, except per share amounts)

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,464,782

 

 

$

6,203,659

 

 

$

17,261,619

 

 

$

17,176,000

 

Foreign currency translation

 

 

35,239

 

 

 

 

 

 

 

111,756

 

 

 

 

 

Revenue in constant currency

 

$

6,500,021

 

 

$

6,203,659

 

 

$

17,373,375

 

 

$

17,176,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

209,136

 

 

$

208,855

 

 

$

509,515

 

 

$

545,473

 

Acquisition-related and integration expenses

 

 

4,163

 

 

 

9,200

 

 

 

22,701

 

 

 

53,582

 

Amortization of intangibles

 

 

46,828

 

 

 

52,428

 

 

 

140,320

 

 

 

158,149

 

Non-GAAP operating income

 

$

260,127

 

 

$

270,483

 

 

$

672,536

 

 

$

757,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating margin

 

 

3.24

%

 

 

3.37

%

 

 

2.95

%

 

 

3.18

%

Non-GAAP operating margin

 

 

4.02

%

 

 

4.36

%

 

 

3.90

%

 

 

4.41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

134,464

 

 

$

123,132

 

 

$

314,008

 

 

$

324,711

 

Interest expense and finance charges, net

 

 

28,749

 

 

 

42,945

 

 

 

99,046

 

 

 

127,695

 

Provision for income taxes

 

 

45,356

 

 

 

41,691

 

 

 

99,740

 

 

 

112,831

 

Depreciation (excluding accelerated depreciation included in acquisition-related and integration expenses below)

 

 

37,446

 

 

 

38,597

 

 

 

110,981

 

 

 

119,004

 

Amortization of intangibles

 

 

46,828

 

 

 

52,428

 

 

 

140,320

 

 

 

158,149

 

EBITDA

 

$

292,843

 

 

$

298,793

 

 

$

764,095

 

 

$

842,390

 

Other (income) expense, net (excluding amounts included in acquisition-related and integration expenses below)

 

 

567

 

 

 

1,087

 

 

 

(3,798

)

 

 

(19,593

)

Acquisition-related and integration expenses

 

 

4,163

 

 

 

9,200

 

 

 

23,219

 

 

 

53,411

 

Adjusted EBITDA

 

$

297,573

 

 

$

309,080

 

 

$

783,516

 

 

$

876,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

2.60

 

 

$

2.40

 

 

$

6.07

 

 

$

6.32

 

Acquisition-related and integration expenses

 

 

0.08

 

 

 

0.18

 

 

 

0.45

 

 

 

1.04

 

Amortization of intangibles

 

 

0.90

 

 

 

1.02

 

 

 

2.71

 

 

 

3.08

 

Contingent consideration

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(0.37

)

Income taxes related to the above (1)

 

 

(0.25

)

 

 

(0.30

)

 

 

(0.80

)

 

 

(1.08

)

Non-GAAP diluted EPS

 

$

3.33

 

 

$

3.30

 

 

$

8.43

 

 

$

8.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,306,361

 

 

$

5,047,970

 

 

$

13,858,313

 

 

$

13,695,729

 

Foreign currency translation

 

 

32,798

 

 

 

 

 

 

 

79,488

 

 

 

 

 

Revenue in constant currency

 

$

5,339,159

 

 

$

5,047,970

 

 

$

13,937,801

 

 

$

13,695,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

132,373

 

 

$

138,830

 

 

$

320,962

 

 

$

352,594

 

Acquisition-related and integration expenses

 

 

—

 

 

 

—

 

 

 

—

 

 

 

981

 

Amortization of intangibles

 

 

9,995

 

 

 

10,999

 

 

 

30,130

 

 

 

32,968

 

Non-GAAP operating income

 

$

142,368

 

 

$

149,829

 

 

$

351,092

 

 

$

386,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating margin

 

 

2.49

%

 

 

2.75

%

 

 

2.32

%

 

 

2.57

%

Non-GAAP operating margin

 

 

2.68

%

 

 

2.97

%

 

 

2.53

%

 

 

2.82

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

85,531

 

 

$

87,778

 

 

$

204,237

 

 

$

236,080

 

Interest expense and finance charges, net

 

 

19,747

 

 

 

17,775

 

 

 

59,531

 

 

 

55,725

 

Provision for income taxes

 

 

27,119

 

 

 

29,739

 

 

 

56,189

 

 

 

77,873

 

Depreciation

 

 

5,937

 

 

 

5,875

 

 

 

17,650

 

 

 

16,719

 

Amortization of intangibles

 

 

9,995

 

 

 

10,999

 

 

 

30,130

 

 

 

32,968

 

EBITDA

 

$

148,329

 

 

$

152,166

 

 

$

367,737

 

 

$

419,365

 

Other (income) expense, net

 

 

(25

)

 

 

3,538

 

 

 

1,004

 

 

 

(17,083

)

Acquisition-related and integration expenses

 

 

—

 

 

 

—

 

 

 

—

 

 

 

981

 

Adjusted EBITDA

 

$

148,304

 

 

$

155,704

 

 

$

368,741

 

 

$

403,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

Table of Contents

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

August 31, 2020

 

 

August 31, 2019

 

 

 

(in thousands, except per share amounts)

 

Concentrix

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,163,694

 

 

$

1,160,928

 

 

$

3,418,676

 

 

$

3,495,076

 

Foreign currency translation

 

 

2,441

 

 

 

 

 

 

 

32,268

 

 

 

 

 

Revenue in constant currency

 

$

1,166,135

 

 

$

1,160,928

 

 

$

3,450,944

 

 

$

3,495,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

76,763

 

 

$

70,025

 

 

$

188,554

 

 

$

192,879

 

Acquisition-related and integration expenses

 

 

4,163

 

 

 

9,200

 

 

 

22,701

 

 

 

52,601

 

Amortization of intangibles

 

 

36,833

 

 

 

41,429

 

 

 

110,190

 

 

 

125,181

 

Non-GAAP operating income

 

$

117,759

 

 

$

120,654

 

 

$

321,445

 

 

$

370,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating margin

 

 

6.60

%

 

 

6.03

%

 

 

5.52

%

 

 

5.52

%

Non-GAAP operating margin

 

 

10.12

%

 

 

10.39

%

 

 

9.40

%

 

 

10.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

48,933

 

 

$

35,354

 

 

$

109,771

 

 

$

88,631

 

Interest expense and finance charges, net

 

 

9,002

 

 

 

25,170

 

 

 

39,515

 

 

 

71,970

 

Provision for income taxes

 

 

18,236

 

 

 

11,952

 

 

 

43,551

 

 

 

34,958

 

Depreciation (excluding accelerated depreciation included in acquisition-related and integration expenses below)

 

 

31,509

 

 

 

32,722

 

 

 

93,331

 

 

 

102,285

 

Amortization of intangibles

 

 

36,833

 

 

 

41,429

 

 

 

110,190

 

 

 

125,181

 

EBITDA

 

$

144,513

 

 

$

146,627

 

 

$

396,358

 

 

$

423,025

 

Other (income) expense, net (excluding amounts included in acquisition-related and integration expenses below)

 

 

592

 

 

 

(2,450

)

 

 

(4,802

)

 

 

(2,510

)

Acquisition-related and integration expenses

 

 

4,163

 

 

 

9,200

 

 

 

23,219

 

 

 

52,430

 

Adjusted EBITDA

 

$

149,268

 

 

$

153,377

 

 

$

414,775

 

 

$

472,945

 

 

 

(1)

The tax effect of taxable and deductible non-GAAP adjustments was calculated using the effective year-to-date tax rate during the respective periods.

Three and Nine Months Ended August 31, 2020 and 2019

Revenue  

 

 

 

Three Months Ended

 

 

Percent

 

 

Nine Months Ended

 

 

Percent

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

 

(in thousands)

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Revenue

 

$

6,464,782

 

 

$

6,203,659

 

 

 

4.2

%

 

$

17,261,619

 

 

$

17,176,000

 

 

 

0.5

%

Technology Solutions revenue

 

 

5,306,361

 

 

 

5,047,970

 

 

 

5.1

%

 

 

13,858,313

 

 

 

13,695,729

 

 

 

1.2

%

Concentrix revenue

 

 

1,163,694

 

 

 

1,160,928

 

 

 

0.2

%

 

 

3,418,676

 

 

 

3,495,076

 

 

 

(2.2

)%

Inter-segment elimination

 

 

(5,273

)

 

 

(5,240

)

 

 

 

 

 

 

(15,371

)

 

 

(14,805

)

 

 

 

 

 

Our revenue includes sales of products and services. In our Technology Solutions segment, we distribute a comprehensive range of products for the technology industry and design and integrate data center equipment. 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 due to changes in product models, features and customer demand requirements. The revenue generated by our Concentrix segment relates to business outsourcing services focused on customer experience, process optimization and back office automation. Inter-segment elimination represents services generated between our reportable segments that are eliminated on consolidation. Substantially all of the inter-segment revenue represents services provided by the Concentrix segment to the Technology Solutions segment.

Revenue in our Technology Solutions segment increased during the three and nine months ended August 31, 2020, compared to the prior year periods, due to a demand for technology equipment as COVID-19 related government mandated shelter-in-place restrictions during the second and third quarters of fiscal year 2020 led to increased needs for work-at-home, learn-at-home and related solutions. The increase in Technology Solutions revenue during the nine months ended August 31, 2020, compared to the prior year period was partially offset by a decline in integration-based server solutions in the first half of fiscal year 2020.

Revenue in our Concentrix segment during the three months ended August 31, 2020 increased slightly due to growth with technology, retail and e-commerce clients, partially offset by lower demand from media, communications, travel, tourism and automotive clients. Revenue for the nine months ended August 31, 2020 decreased compared to the prior period primarily due to the impact of COVID-19 related government mandated shelter in place restrictions in several countries in the world. These restrictions adversely impacted our revenue due to the inability of a significant number of our associates to work despite client demand. This impact was most acute in the second quarter of 2020.

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Table of Contents

 

Our revenue for the nine months ended August 31, 2020 was also adversely impacted by lower demand from media, communications, travel, tourism and automotive clients, partially offset by an increase in demand from technology, financial services, retail, e-commerce and government clients. In addition, revenue during the three and nine months ended August 31, 2020 decreased compared to prior periods due to adverse translation effects of foreign currencies.

Gross Profit

 

 

 

Three Months Ended

 

 

Percent

 

 

Nine Months Ended

 

 

Percent

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

 

(in thousands)

 

 

 

 

 

 

(in thousands)

 

 

 

Gross profit

 

$

708,092

 

 

$

725,990

 

 

 

(2.5

)%

 

$

2,024,249

 

 

$

2,103,379

 

 

 

(3.8

)%

Gross margin

 

 

10.95

%

 

 

11.70

%

 

 

 

 

 

 

11.73

%

 

 

12.25

%

 

 

 

 

Technology Solutions gross profit

 

$

297,480

 

 

$

301,774

 

 

 

(1.4

)%

 

$

827,201

 

 

$

819,319

 

 

 

1.0

%

Technology Solutions gross margin

 

 

5.61

%

 

 

5.98

%

 

 

 

 

 

 

5.97

%

 

 

5.98

%

 

 

 

 

Concentrix gross profit

 

$

412,533

 

 

$

426,181

 

 

 

(3.2

)%

 

$

1,202,893

 

 

$

1,290,017

 

 

 

(6.8

)%

Concentrix gross margin

 

 

35.45

%

 

 

36.71

%

 

 

 

 

 

 

35.19

%

 

 

36.91

%

 

 

 

 

Inter-segment elimination

 

$

(1,922

)

 

$

(1,964

)

 

 

 

 

 

$

(5,845

)

 

$

(5,957

)

 

 

 

 

 

Our Technology Solutions gross margin is affected by a variety of factors, including competition, selling prices, mix of products and services, product costs along with rebate and discount programs from our suppliers, reserves or settlement adjustments, freight costs, inventory losses, acquisition of business units and fluctuations in revenue. Concentrix margins, which are higher than those in our Technology Solutions segment, can be impacted by resource location, client mix and pricing, additional lead time for programs to be fully scalable, and transition and initial set-up costs.

Technology Solutions gross profit and margin decreased during the three months ended August 31, 2020, as compared to the prior year period, primarily due to lower margins driven by the product mix from our projects and integration-based server solutions.

Technology Solutions gross profit increased, during the nine months ended August 31, 2020, as compared to the prior year period, driven by strong demand for technology products as COVID-19 related government mandated shelter-in-place restrictions during the second and third quarters of fiscal year 2020 led to a greater need for work-at-home, learn-at-home and related solutions. This increase was partially offset by lower margins driven by product mix from our projects and integration-based server solutions.

Our Concentrix segment’s gross profit and margin decreased during the three and nine month periods ended August 31, 2020 as compared to the prior periods due to a decrease in revenue and an incremental impact of $9 million and $55 million, respectively, related to COVID-19 related non-productive workforce costs. In addition, gross margin was temporarily impacted by decreased productivity as we transitioned our workforce to work-from-home.

Selling, General and Administrative Expenses

 

 

 

Three Months Ended

 

 

Percent

 

 

Nine Months Ended

 

 

Percent

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

 

(in thousands)

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Selling, general and administrative

   expenses

 

$

498,956

 

 

$

517,135

 

 

 

(3.5

)%

 

$

1,514,734

 

 

$

1,557,906

 

 

 

(2.8

)%

Percentage of revenue

 

 

7.72

%

 

 

8.34

%

 

 

 

 

 

 

8.78

%

 

 

9.07

%

 

 

 

 

Technology Solutions selling, general and

   administrative expenses

 

$

165,107

 

 

$

162,944

 

 

 

1.3

%

 

$

506,239

 

 

$

466,725

 

 

 

8.5

%

Percentage of Technology Solutions revenue

 

 

3.11

%

 

 

3.23

%

 

 

 

 

 

 

3.65

%

 

 

3.41

%

 

 

 

 

Concentrix selling, general and

   administrative expenses

 

$

335,770

 

 

$

356,155

 

 

 

(5.7

)%

 

$

1,014,339

 

 

$

1,097,139

 

 

 

(7.5

)%

Percentage of Concentrix revenue

 

 

28.85

%

 

 

30.68

%

 

 

 

 

 

 

29.67

%

 

 

31.39

%

 

 

 

 

Inter-segment elimination

 

$

(1,922

)

 

$

(1,964

)

 

 

 

 

 

$

(5,845

)

 

$

(5,957

)

 

 

 

 

 

Our selling, general and administrative expenses consist primarily of personnel costs such as salaries, commissions, bonuses, share-based compensation and temporary personnel costs. Selling, general and administrative expenses also include cost of warehouses, delivery centers and other non-integration facilities, utility expenses, legal and professional fees, depreciation on certain of our capital equipment, bad debt expense, amortization of our non-technology related intangible assets, and marketing expenses, offset in part by reimbursements from our OEM suppliers.

During the three and nine months ended August 31, 2020, selling, general and administrative expenses in our Technology Solutions segment increased in absolute dollars compared to the prior year period, primarily due to an increase in allowance for doubtful accounts and higher salaries and employee related expenses due to COVID-19, partially offset by a decrease in amortization of intangible assets and

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Table of Contents

 

acquisition-related and integration expenses. Incremental costs related to COVID-19 were approximately $8 million and $45 million for the three and nine months ended August 31, 2020.

Concentrix segment selling, general and administrative expenses for the three and nine month periods ended August 31, 2020 decreased in absolute dollars and as a percentage of revenue, compared to the prior year periods, due to lower facility and employee costs pursuant to Convergys acquisition-related integration and facility rationalization under taken in fiscal year 2019, a decrease in the amortization of intangible assets of $4.6 million and $14.0 million for the three and nine month periods ended August 31, 2020, compared to the respective prior periods and a decrease in acquisition-related and integration expenses of $5.0 million and $29.2 million for these same periods. These decreases were offset by incremental COVID-19 cost of $4 million and $10 million for these same periods.

Operating Income

 

 

 

Three Months Ended

 

 

Percent

 

 

Nine Months Ended

 

 

Percent

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

 

(in thousands)

 

 

 

 

 

 

(in thousands)

 

 

 

Operating income

 

$

209,136

 

 

$

208,855

 

 

 

0.1

%

 

$

509,515

 

 

$

545,473

 

 

 

(6.6

)%

Operating margin

 

 

3.24

%

 

 

3.37

%

 

 

 

 

 

 

2.95

%

 

 

3.18

%

 

 

 

 

Technology Solutions operating income

 

$

132,373

 

 

$

138,830

 

 

 

(4.7

)%

 

$

320,962

 

 

$

352,594

 

 

 

(9.0

)%

Technology Solutions operating margin

 

 

2.49

%

 

 

2.75

%

 

 

 

 

 

 

2.32

%

 

 

2.57

%

 

 

 

 

Concentrix operating income

 

$

76,763

 

 

$

70,025

 

 

 

9.6

%

 

$

188,554

 

 

$

192,879

 

 

 

(2.2

)%

Concentrix operating margin

 

 

6.60

%

 

 

6.03

%

 

 

 

 

 

 

5.52

%

 

 

5.52

%

 

 

 

 

 

Operating income and margin in our Technology Solutions segment decreased during the three and nine months ended August 31, 2020, compared to the prior year periods, primarily due to product mix, as well as COVID-19 related incremental costs associated with allowances for doubtful accounts and higher salary and employee related costs.

Operating income and margin in our Concentrix segment increased during the three month period ended August 31, 2020 primarily due to lower acquisition-related and integration expenses and lower amortization of intangible assets partially offset by the impact of COVID-19 related revenue decreases and incremental costs. Operating income decreased during the nine months ended August 31, 2020 compared to the comparable prior period reflecting the decrease in revenue and COVID-19 related incremental costs as discussed above. Operating margin was unchanged across the two periods as the decrease in gross profit was offset by a reduction in selling, general and administrative expenses as a percent of revenue as discussed above.

 

Interest Expense and Finance Charges, Net

 

 

 

Three Months Ended

 

 

Percent

 

 

Nine Months Ended

 

 

Percent

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

 

(in thousands)

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Interest expense and finance charges, net

 

$

28,749

 

 

$

42,945

 

 

 

(33.1

)%

 

$

99,046

 

 

$

127,695

 

 

 

(22.4

)%

Percentage of revenue

 

 

0.44

%

 

 

0.69

%

 

 

 

 

 

 

0.57

%

 

 

0.74

%

 

 

 

 

 

Amounts recorded in interest expense and finance charges, net, consist primarily of interest expense paid on our lines of credit and term loans, 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.

During the three and nine months ended August 31, 2020, our interest expense and finance charges, net, decreased compared to the prior year period, due to lower interest expense as a result of reduction of approximately $700 million in our average borrowings during fiscal year 2020, as compared to the prior year periods, as well as a lower interest rate environment. Approximately 56% of our outstanding borrowings at August 31, 2020 have been economically converted to fixed-rate debt through interest rate swaps.

Other Income (Expense), Net

 

 

 

Three Months Ended

 

 

Percent

 

 

Nine Months Ended

 

 

Percent

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

 

(in thousands)

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Other income (expense), net

 

$

(567

)

 

$

(1,087

)

 

 

47.8

%

 

$

3,280

 

 

$

19,764

 

 

 

83.4

%

Percentage of revenue

 

 

(0.01

)%

 

 

(0.02

)%

 

 

 

 

 

 

0.02

%

 

 

0.12

%

 

 

 

 

 

Amounts recorded as other income (expense), net include foreign currency transaction gains and losses, investment gains and losses, non-service component of pension costs, and other non-operating gains and losses, such as settlements received from class actions lawsuits.

 

Other income (expense), net, which was a net expense during the three months ended August 31, 2020, was consistent with the prior year period.

33

Table of Contents

 

 

Other income (expense), net, which was a net income during the nine months ended August 31, 2020, decreased compared to the prior year period, primarily due to a $19.0 million gain recorded in fiscal year 2019 upon the settlement of contingent consideration related to our acquisition of Westcon-Comstor Americas in fiscal year 2017. This decrease was partially offset by a $3.5 million gain recorded in fiscal year 2020, upon reversal of certain tax indemnification provisions set up at the time of disposition of a subsidiary in a prior year.

 

Provision for Income Taxes

 

 

 

Three Months Ended

 

 

Percent

 

 

Nine Months Ended

 

 

Percent

 

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

August 31, 2020

 

 

August 31, 2019

 

 

Change

 

 

 

(in thousands)

 

 

 

 

 

 

(in thousands)

 

 

 

Provision for income taxes

 

$

45,356

 

 

$

41,691

 

 

 

8.8

%

 

$

99,740

 

 

$

112,831

 

 

 

(11.6

)%

Percentage of income before income taxes

 

 

25.22

%

 

 

25.29

%

 

 

 

 

 

 

24.11

%

 

 

25.79

%

 

 

 

 

 

Income taxes consist of our current and deferred tax expense resulting from our income earned in domestic and foreign jurisdictions. Income taxes for the interim periods presented have been included in the accompanying Consolidated Financial Statements on the basis of an estimated annual effective tax rate.

 

During the three months ended August 31, 2020, our income tax expense increased due to an increase in our income before income taxes. The effective tax rate was consistent with the prior year period. 

During the nine months ended August 31, 2020, our income tax expense decreased compared to the prior year period primarily due to a decrease in our income before income taxes as a result of the economic impact of COVID-19 during the first half of fiscal year 2020, as well as a lower effective tax rate. The effective tax rate for the nine months ended August 31, 2020, was lower compared to the prior year period, due to the benefit from exercising of employee stock options and reversal of uncertain tax positions. The comparative decrease in the effective tax rate for the nine months ended August 31, 2020 was partially offset by the favorable impact of a nontaxable contingent consideration gain recorded in the prior year period related to the fiscal year 2017 Westcon-Comstor Americas acquisition.

Liquidity and Capital Resources

Cash Conversion Cycle

 

 

 

 

 

Three Months Ended

 

 

 

 

 

August 31, 2020

 

 

November 30, 2019

 

 

August 31, 2019

 

 

 

 

 

(Amounts in thousands)

 

Days sales outstanding ("DSO")

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (products and services)

 

(a)

 

$

6,464,782

 

 

$

6,581,293

 

 

$

6,203,659

 

Accounts receivable

 

(b)

 

 

3,580,970

 

 

 

3,926,709

 

 

 

3,452,976

 

Days sales outstanding

 

(c) = (b)/((a)/the number of days during the period)

 

 

51

 

 

 

54

 

 

 

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days inventory outstanding ("DIO")

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (products and services)

 

(d)

 

$

5,756,690

 

 

$

5,786,754

 

 

$

5,477,669

 

Inventories

 

(e)

 

 

2,832,607

 

 

 

2,547,224

 

 

 

2,787,159

 

Days inventory outstanding

 

(f) = (e)/((d)/the number of days during the period)

 

 

45

 

 

 

40

 

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days payable outstanding ("DPO")

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (products and services)

 

(g)

 

$

5,756,690

 

 

$

5,786,754

 

 

$

5,477,669

 

Accounts payable

 

(h)

 

 

3,655,215

 

 

 

3,149,443

 

 

 

2,932,046

 

Days payable outstanding

 

(i) = (h)/((g)/the number of days during the period)

 

 

58

 

 

 

50

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash conversion cycle ("CCC")

 

(j) = (c)+(f)-(i)

 

 

38

 

 

 

44

 

 

 

49

 

 

Cash Flows

Our Technology Solutions business is working capital intensive. Our working capital needs are primarily to finance accounts receivable and inventory. We rely heavily on term loans, accounts receivable arrangements, our securitization programs, and our revolver programs for

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our working capital needs. We have financed our growth and cash needs to date primarily through cash generated from operations and financing activities. As a general rule, when sales volumes are increasing, our net investment in working capital dollars typically increases, which generally results in decreased cash flow generated from operating activities. Conversely, when sales volume decreases, our net investment in working capital dollars typically decreases, which generally results in increases in cash flows generated from operating activities. Concentrix working capital is primarily comprised of accounts receivable. Our cash conversion cycle was 38 days and 49 days as of August 31, 2020 and 2019, respectively. The decrease was primarily due to faster turnover of our inventories and the timing of payments of accounts payables.

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 working capital, personnel, facilities and operations. These investments or acquisitions would likely be funded primarily by our existing cash and cash equivalents, additional borrowings, or the issuance of securities.

Net cash provided by operating activities was $1.547 billion during the nine months ended August 31, 2020, primarily due to net income of $314.0 million, adjustments for non-cash items of $320.9 million, decreases in accounts receivable of $280.5 million and receivables from vendors of $44.7 million, an increase in accounts payable of $454.3 million and a net change of $415.4 million in other operating assets and liabilities. These cash inflows were partially offset by an increase in inventories of $282.7 million. The decrease in accounts receivable and vendor receivables is primarily due to lower revenue in both segments during the three months ended August 31, 2020 compared to a seasonally high fourth quarter of fiscal year 2019 as well as an improvement in our collections. Notwithstanding the current economic uncertainties due to the impact of COVID-19, DSO in our Technology Solutions segment also decreased by approximately 3 days from the end of fiscal year 2019. The increase in accounts payable and cash inflow from changes in other operating assets and liabilities reflects primarily efficient working capital management and prepayments from customers received in our Technology Solutions segment. The increase in inventories was driven by purchases related to larger projects in the second fiscal quarter which were transacted in the third fiscal quarter, with further shipments expected in subsequent quarters. The adjustments for non-cash items consist primarily of amortization and depreciation, provision for doubtful accounts, share-based compensation expense, unrealized foreign exchange losses and a deferred tax benefit.

Net cash provided by operating activities was $202.5 million during the nine months ended August 31, 2019, primarily due to net income of $324.7 million, adjustments for non-cash items of $295.1 million, and a decrease in accounts receivable of $148.1 million. These cash inflows were partially offset by an increase in inventories of $390.0 million, a decrease in accounts payable of $119.6 million, and a net change in other operating assets and liabilities of $69.1 million. The decrease in accounts receivable and accounts payable was primarily due to timing of collections and payments, respectively. Accounts receivable was also lower due to lower days’ sales outstanding compared to the fourth quarter of fiscal year 2018. The increase in inventories was primarily due to strong demand for our systems design and integration solutions business, where we carry higher levels of inventories, and higher anticipated seasonal demand in the fourth quarter. The adjustments for non-cash items consist primarily of amortization and depreciation, provision for doubtful accounts, stock-based compensation expense, a $19.0 million gain recorded upon the settlement of contingent consideration related to our Westcon-Comstor Americas acquisition in fiscal year 2017, and deferred tax benefit.

Net cash used in investing activities during the nine months ended August 31, 2020 was $137.5 million, primarily due to capital expenditures of $127.3 million related to infrastructure investments to support growth in both of our business segments and $4.9 million of cash paid related to the settlement of employee stock-based awards assumed under the Convergys acquisition, being paid in accordance with the original vesting schedule.

Net cash used in investing activities during the nine months ended August 31, 2019 was $102.3 million, primarily due to capital expenditures of $93.4 million related to infrastructure investments to support growth in both of our business segments and $8.6 million of cash paid related to the settlement of employee stock-based awards assumed under the Convergys acquisition.

Net cash used in financing activities during the nine months ended August 31, 2020 was $187.8 million, representing primarily a pay down of our revolving lines of credit with cash generated from operations and scheduled quarterly repayments of our term loans aggregating $168.4 million. In addition, we paid dividends of $20.8 million in January 2020, prior to suspension of our dividends program due to the COVID-19 related economic uncertainties in March 2020.

Net cash used in financing activities during the nine months ended August 31, 2019 was $298.4 million primarily due to net repayments under our borrowing arrangements of $214.1 million. Cash generated from operations was used to pay down revolving lines of credit. During the nine months ended August 31, 2019, the Company drew the last tranche of $250.0 million under a term loan facility obtained in fiscal year 2018 for the Convergys acquisition for the settlement of the remaining amount of convertible debentures assumed as part of the acquisition and the remainder was used for working capital. The Company also returned cash to stockholders in the form of $57.5 million of dividend payments and $15.2 million of repurchases of our common stock, and $14.0 million of cash was used to pay the contingent consideration related to our Westcon-Comstor Americas acquisition.

Capital Resources

Our cash and cash equivalents totaled $1.452 billion and $225.5 million as of August 31, 2020 and November 30, 2019, respectively. Of our total cash and cash equivalents, the cash held by our foreign subsidiaries was $397.5 million and $219.7 million as of August 31, 2020 and November 30, 2019, respectively. Our cash and cash equivalents held by foreign subsidiaries are no longer subject to U.S. federal tax on repatriation into the United States. Repatriation of some foreign balances is restricted by local laws. Historically, we have fully utilized and reinvested all foreign cash to fund our foreign operations and expansion. If in the future our intentions change, and we repatriate the cash back to the United States, we will report in our Consolidated Financial Statements the impact of state and withholding taxes depending upon the

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planned timing and manner of such repatriation. Presently, we believe we have sufficient resources, cash flow and liquidity within the United States to fund current and expected future working capital, investment and other general corporate funding requirements.

We believe that our available cash and cash equivalents balances, cash flows from operations and our existing sources of liquidity will be sufficient to satisfy our current and planned working capital and investment needs for the next twelve months in all geographies. We also believe that our longer-term working capital, planned capital expenditures, anticipated stock repurchases, dividend payments and other general corporate funding requirements will be satisfied through cash flows from operations and, to the extent necessary, from our borrowing facilities and future financial market activities.

Historically, we have renewed our accounts receivable securitization programs and our credit facility agreements described below on, or prior to, their respective expiration dates. We have no reason to believe that these and other arrangements will not be renewed or replaced as we continue to be in good credit standing with the participating financial institutions. We have had similar borrowing arrangements with various financial institutions throughout our years as a public company.

On-Balance Sheet Arrangements  

In the United States, we have an accounts receivable securitization program to provide additional capital for our operations (the “U.S. AR Arrangement”). Prior to the amendment in May 2020 described in this paragraph, under the terms of the U.S. AR Arrangement, which had a maturity date of May 2020, our subsidiary, which is the borrower under this facility, could borrow up to a maximum of $850.0 million based upon eligible trade accounts receivable. The effective borrowing cost under the U.S. AR Arrangement is a blended rate based upon the composition of the lenders that included prevailing dealer commercial paper rates and a rate based upon LIBOR. In addition, prior to the May 2020 amendment, a program fee of 0.75% per annum based on the used portion of the commitment, and a facility fee of 0.35% per annum was payable on the adjusted commitment of the lenders. In May 2020, the U.S. AR Arrangement was amended to revise the maximum borrowing amount to $650,000 and to extend the maturity date of the U.S. AR Arrangement to May 2022. The program fee payable on the used portion of the lenders’ commitment, was modified to accrue at 1.25% per annum in the case of lender groups who fund their advances based on prevailing commercial paper rates, and 1.30% per annum in the case of lender groups who fund their advances based on LIBOR (subject to a 0.50% per annum floor). The amendment also modified the facility fee payable on the adjusted commitment of the lenders, to accrue at different tiers ranging between 0.35% per annum and 0.45% per annum depending on the amount of outstanding advances from time to time. In addition, the U.S. AR Arrangement includes an accordion feature to allow requests for an increase in the lenders' commitment by an additional $150.0 million.

Under the terms of the U.S. AR Arrangement, we and two of our U.S. subsidiaries sell, on a revolving basis, our receivables to a wholly-owned, bankruptcy-remote subsidiary. The borrowings are funded by pledging all of the rights, title and interest in the receivables acquired by our bankruptcy-remote subsidiary as security. Any amounts received under the U.S. AR Arrangement are recorded as debt on our Consolidated Balance Sheets. As of August 31, 2020, there were no borrowings outstanding under this facility. As of November 30, 2019, $108.0 million was outstanding under the U.S. AR Arrangement.

In Canada, we have an accounts receivable securitization program with a bank to provide additional capital for operations. Under the terms of this program, as renewed in March 2020, SYNNEX Canada Limited (“SYNNEX Canada”) can borrow up to CAD100.0 million, or $76.6 million, in exchange for the transfer of eligible trade accounts receivable, on an ongoing revolving basis through May 2023. The program includes an accordion feature that allows us to request an increase in the bank's commitment by an additional CAD50.0 million, or $38.3 million. Any amounts received under this arrangement are recorded as debt on our Consolidated Balance Sheets and are secured by pledging all of the rights, title and interest in the receivables to the bank. We guarantee the performance obligations of SYNNEX Canada under this arrangement. The effective borrowing cost is based on the weighted-average of the Canadian Dollar Offered Rate plus a margin of 1.00% per annum and the prevailing lender commercial paper rates. In addition, prior to an event of termination, SYNNEX Canada is obligated to pay a program fee of 0.75% per annum based on the used portion of the commitment. After an event of termination, the program fee shall be the sum of the base rate and 2.50% per annum, based on the used portion of the commitment. SYNNEX Canada pays a fee of 0.40% per annum for any unused portion of the commitment up to CAD60.0 million, or $46.0 million, and when the unused portion exceeds CAD60.0 million, or $46.0 million, a fee of 0.55% per annum on the remaining unused commitment. As of both August 31, 2020 and November 30, 2019, there was no outstanding balance under this arrangement.

SYNNEX Japan has a credit agreement with a group of banks for a maximum commitment of JPY15.0 billion or $141.6 million. The credit agreement is comprised of a JPY7.0 billion, or $66.1 million, term loan and a JPY8.0 billion, or $75.5 million, revolving credit facility and expires in November 2021. The interest rate for the term loan and revolving credit facility is based on the Tokyo Interbank Offered Rate, plus a margin, which is based on our consolidated leverage ratio, and currently equals 0.70% per annum. The unused line fee on the revolving credit facility is currently 0.10% per annum based on our consolidated current leverage ratio. The term loan can be repaid at any time prior to the expiration date without penalty. We have guaranteed the obligations of SYNNEX Japan under this facility. As of August 31, 2020 and November 30, 2019, the balances outstanding under the term loan component of these facilities were $66.1 million and $63.9 million, respectively. As of August 31, 2020 and November 30, 2019, $72.7 million and $5.9 million, respectively, was outstanding under the revolving credit facility.

Indian subsidiaries of our Concentrix segment have credit facilities with a financial institution to borrow up to an aggregate amount of $22.0 million. The interest rate under these facilities is the higher of the bank's minimum lending rate or LIBOR, plus a margin of 0.9% per annum. We guarantee the obligations under these credit facilities. These credit facilities can be terminated at any time by our Indian subsidiaries or the financial institution. There were no borrowings outstanding under these credit facilities as of either August 31, 2020 or November 30, 2019.

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In the United States, we have a senior secured credit agreement (as amended, the "U.S. Credit Agreement") with a group of financial institutions. The U.S. Credit Agreement includes a $600.0 million commitment for a revolving credit facility and a term loan in the original principal amount of $1.2 billion. We can request incremental commitments to increase the principal amount of the revolving line of credit or term loan by $500.0 million, plus an additional amount which is dependent upon our pro forma first lien leverage ratio, as calculated under the U.S. Credit Agreement. The U.S. Credit Agreement matures in September 2022. The outstanding principal amount of the term loan is repayable in quarterly installments of $15.0 million, with the unpaid balance due in full on the September 2022 maturity date. The term loan can be repaid at any time prior to the maturity date without penalty. Interest on borrowings under the U.S. Credit Agreement can be based on LIBOR or a base rate at our option, plus a margin. The margin for LIBOR loans ranges from 1.25% to 2.00% and the margin for base rate loans ranges from 0.25% to 1.00%, provided that LIBOR shall not be less than zero. The base rate is a variable rate which is the highest of (a) the Federal Funds Rate, plus a margin of 0.50%, (b) the rate of interest announced, from time to time, by the agent, Bank of America, N.A., as its “prime rate,” and (c) the Eurodollar Rate, plus 1.00%. The unused revolving credit facility commitment fee ranges from 0.175% to 0.30% per annum. The margins above the applicable interest rates and the revolving commitment fee for revolving loans are based on our consolidated leverage ratio, as calculated under the U.S. Credit Agreement. Our obligations under the U.S. Credit Agreement are secured by substantially all of the parent company’s and its United States domestic subsidiaries’ assets on a pari passu basis with the interests of the lenders under the U.S. Term Loan Credit Agreement (defined below) pursuant to an intercreditor agreement and are guaranteed by certain of our United States domestic subsidiaries. As of August 31, 2020 and November 30, 2019, the balance outstanding under the term loan component of the U.S. Credit Agreement was $1.0 billion and $1.1 billion, respectively. There were no borrowings outstanding under the revolving line of credit under the U.S. Credit Agreement as of August 31, 2020. As of November 30, 2019, the balance outstanding under the revolving line of credit component of the U.S. Credit Agreement was $25.8 million.

We have a secured term loan credit agreement (the “U.S. Term Loan Credit Agreement”) with a group of financial institutions, in the original principal amount of $1.8 billion. The U.S. Term Loan Credit Agreement matures in October 2023.The outstanding principal amount of the term loans is payable in quarterly installments of $22.5 million, with the unpaid balance due in full on the maturity date. The term loan can be repaid at any time prior to the maturity date without penalty. Interest on borrowings under the U.S. Term Loan Credit Agreement can be based on LIBOR or a base rate at our option, plus a margin. The margin for LIBOR loans ranges from 1.25% to 1.75% and the margin for base rate loan ranges from 0.25% to 0.75%, provided that LIBOR shall not be less than zero. The base rate is a variable rate which is the highest of (a) 0.5% plus the greater of (x) the Federal Funds Rate in effect on such day and (y) the overnight bank funding rate in effect on such day, (b) the Eurodollar Rate plus 1.0% per annum, and (c) the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the U.S. During the period in which the term loans were available to be drawn, we paid term loan commitment fees. The margins above our applicable interest rates are, and the term loan commitment fee were, based on our consolidated leverage ratio as calculated under the U.S. Term Loan Credit Agreement. Our obligations under the U.S. Term Loan Credit Agreement are secured by substantially all of the parent company and certain of its domestic subsidiaries’ assets on a pari passu basis with the interests of the lenders under the existing U.S. Credit Agreement pursuant to an intercreditor agreement, and are guaranteed by certain of our domestic subsidiaries. As of both August 31, 2020 and November 30, 2019, the balance outstanding under the U.S. Term Loan Credit Agreement was $1.7 billion.

SYNNEX Canada has an uncommitted revolving line of credit with a bank under which it can borrow up to CAD50.0 million, or $38.3 million. Borrowings under the facility are secured by eligible inventory and bear interest at a base rate plus a margin ranging from 0.50% to 2.25% depending on the base rate used. The base rate could be a Banker's Acceptance Rate, a Canadian Prime Rate, LIBOR or U.S. Base Rate. As of both August 31, 2020 and November 30, 2019, there were no borrowings outstanding under this credit facility.

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Other borrowings and term debt include lines of credit with financial institutions at certain locations outside the United States, factoring of accounts receivable with recourse provisions, capital leases, a building mortgage and book overdrafts. As of August 31, 2020, commitments for these revolving credit facilities aggregated $83.3 million. Interest rates and other terms of borrowing under these lines of credit vary by country, depending on local market conditions. Borrowings under these facilities are generally guaranteed by us or secured by eligible accounts receivable. As of August 31, 2020 and November 30, 2019, the balances outstanding under these revolving credit facilities were $19.2 million and $6.0 million, respectively.

The maximum commitment amounts for local currency credit facilities have been translated into United States Dollars at August 31, 2020 exchange rates.

Off-Balance Sheet Arrangements

We have financing programs in the United States and Japan under which trade accounts receivable of certain customers may be sold to financial institutions. Available capacity under these programs is dependent upon the level of our trade accounts receivable eligible to be sold into these programs and the financial institutions’ willingness to purchase such receivables. At August 31, 2020 and November 30, 2019, we had a total of $23.7 million and $35.3 million, respectively, of trade accounts receivable sold to and held by the financial institutions under these programs.

Covenant Compliance

Our credit facilities have a number of covenants and restrictions that, among other things, require us to maintain specified financial ratios and satisfy certain financial condition tests. They also limit our ability to incur additional debt, make intercompany loans, pay dividends and make other types of distributions, make certain acquisitions, repurchase our stock, create liens, cancel debt owed to us, enter into agreements with affiliates, modify the nature of our business, enter into sale-leaseback transactions, make certain investments, enter into new real estate leases, transfer and sell assets, cancel or terminate any material contracts and merge or consolidate. As of August 31, 2020, we were in compliance with all material covenants for the above arrangements, and we do not believe we are at material risk of not meeting such covenants. 

Contractual Obligations

Our contractual obligations consist of future payments due under our loans, payments for our operating lease commitments and repatriation tax under the TCJA which are already recorded on our Consolidated Balance Sheet. In addition, our contractual obligations include interest on our debt. As of August 31, 2020, there have been no material changes from our disclosure in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019. For more information on our future minimum rental obligations under non-cancellable lease agreements as of August 31, 2020, see Note 14 to the Consolidated Financial Statements.

Guarantees

We are contingently liable under agreements, without expiration dates, to repurchase repossessed inventory acquired by flooring companies as a result of default on floor plan financing arrangements by our customers. There have been no repurchases through August 31, 2020 under these agreements and we are not aware of any pending customer defaults or repossession obligations. As we do not have access to information regarding the amount of inventory purchased from us still on hand with the customer at any point in time, our repurchase obligations relating to inventory cannot be reasonably estimated. As of August 31, 2020 and November 30, 2019, accounts receivable subject to flooring arrangements was $58.6 million and $69.6 million, respectively. For more information on our third-party revolving short-term financing arrangements, see Note 7 to the Consolidated Financial Statements.

Related Party Transactions  

We have a business relationship with MiTAC Holdings, a publicly-traded company in Taiwan, which began in 1992 when MiTAC Holdings became our primary investor through its affiliates. As of both August 31, 2020 and November 30, 2019, MiTAC Holdings and its affiliates beneficially owned approximately 18% of our outstanding common stock. Mr. Matthew Miau, the Chairman Emeritus of our Board of Directors and a director, is the Chairman of MiTAC Holdings' and a director or officer of MiTAC Holdings' affiliates.

The shares owned by MiTAC Holdings are held by the following entities:

 

 

 

As of August 31, 2020

 

 

 

(in thousands)

 

MiTAC Holdings(1)

 

 

5,300

 

Synnex Technology International Corp.(2)

 

 

3,860

 

Total

 

 

9,160

 

 

(1)

 

Shares are held via Silver Star Developments Ltd., a wholly-owned subsidiary of MiTAC Holdings. Excludes 190 thousand shares held directly by Mr. Miau, 217 thousand shares indirectly held by Mr. Miau through a charitable remainder trust, and 190 thousand shares held by his spouse.

(2)

 

Synnex Technology International Corp. (“Synnex Technology International”) is a separate entity from us and is a publicly-traded corporation in Taiwan. Shares are held via Peer Development Ltd., a wholly-owned subsidiary of Synnex Technology International. MiTAC Holdings owns a noncontrolling interest of 8.7% in MiTAC Incorporated, a privately-held Taiwanese company, which in turn holds a noncontrolling interest of 14.9% in Synnex Technology International. Neither MiTAC Holdings nor Mr. Miau is affiliated with any person(s), entity, or entities that hold a majority interest in MiTAC Incorporated.

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MiTAC Holdings generally has significant influence over us regarding matters submitted to stockholders for consideration, including any merger or acquisition of ours. Among other things, this could have the effect of delaying, deterring or preventing a change of control over us.  

We purchased inventories and services from MiTAC Holdings and its affiliates totaling $53.4 million and $151.9 million during the three and nine months ended August 31, 2020, respectively, and totaling $42.0 million and $120.1 million, respectively, during the three and nine months ended August 31, 2019. Our sales to MiTAC Holdings and its affiliates totaled $0.3 million and $0.9 million during the three and nine months ended August 31, 2020, respectively, and totaled $0.1 million and $0.5 million, respectively, during the three and nine months ended August 31, 2019. In addition, we paid rent and overhead costs for the use of the facilities of MiTAC Holdings and its affiliates amounting to $27.0 thousand and $91.0 thousand during the three and nine months ended August 31, 2020. There were no rent and overhead costs during the three and nine months ended August 31, 2019.

As of August 31, 2020 and November 30, 2019, our payables to MiTAC Holdings and its affiliates were $28.8 million and $23.2 million, respectively. As of August 31, 2020 and November 30, 2019, our receivables from MiTAC Holdings and its affiliates were $15.8 million and $4.4 million, respectively.

Our business relationship with MiTAC Holdings and its affiliates has been informal and is generally not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments. We negotiate pricing and other material terms on a case-by-case basis with MiTAC Holdings. We have adopted a policy requiring that material transactions with MiTAC Holdings or its related parties be approved by our Audit Committee, which is composed solely of independent directors. In addition, Mr. Miau’s compensation is approved by the Nominating and Corporate Governance Committee, which is also composed solely of independent directors.

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. MiTAC Holdings and its affiliates are not restricted from competing with us.

Recently Issued Accounting Pronouncements  

For a summary of recent accounting pronouncements and the anticipated effects on our Consolidated Financial Statements, see Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk  

There have been no material changes in our quantitative and qualitative disclosures about market risk during the nine months ended August 31, 2020 from our Annual Report on Form 10-K for the fiscal year ended November 30, 2019. For a discussion of the Company's exposure to market risk, reference is made to disclosures set forth in Part II, Item 7A of our above-mentioned Annual Report on Form 10-K.

ITEM 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with management’s evaluation during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

ITEM 1A. Risk Factors  

You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Part I-Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019. In addition, the risk to our business from the impact of the COVID-19 pandemic and the United Kingdom’s withdrawal from the European Union are set forth below:

The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, could adversely affect our business, results of operations and financial condition. 

We could be negatively impacted by the widespread outbreak of an illness or any other communicable disease, or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains. In December 2019, there was an outbreak of a new strain of coronavirus, COVID-19. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation due to “shelter-in-place” restrictions by various governments worldwide and created significant volatility and disruption of financial markets. This has adversely impacted our results of operations during the nine months ended August 31, 2020. The extent of the impact of the COVID-19 pandemic on our future operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transports, the effect on our customers and clients and demand for our products and services; our ability to sell and provide our products and services, including as a result of travel restrictions and people working from home; the ability of our clients to pay for our services and solutions; and any closures of our and our customers’ and clients’ offices and facilities all of which are uncertain and cannot be predicted. We could also face legal, reputational and financial risks if we fail to protect customer and internal data from security breaches or cyberattacks.

An extended period of global supply chain and economic disruption could materially affect our business, our plans to separate our Concentrix segment into an independent public company, our results of operations, our access to sources of liquidity, the carrying value of our goodwill and intangible assets, our financial condition and our stock price.

The United Kingdom’s withdrawal from the European Union (“EU”) could adversely impact our business, results of operations and financial condition.

On January 31, 2020, the United Kingdom left the EU (“Brexit”). The United Kingdom and EU are now in a transitional period during which the United Kingdom will maintain access to the EU single market and to the global trade deals negotiated by the EU on behalf of its members, and remain subject to EU law, until December 31, 2020.

The uncertainty regarding the status of Brexit has negatively impacted the United Kingdom’s and the EU’s economies. This negative impact will likely continue until the United Kingdom and EU reach and implement a definitive resolution on their future trading relationship. Any additional impact of Brexit will depend on the terms of such resolution. Even if the United Kingdom maintains access to the EU single market and trade deals following the transition period, Brexit could result in further economic downturn globally. If the United Kingdom ultimately loses access to the EU single market and trade deals, significant market and economic disruption could occur, our customer experience, service quality and international operations could be negatively impacted, and the demand for our services could be depressed. Additionally, we may face new regulations regarding trade, tax, security and employees, among others, in the United Kingdom. Compliance with such regulations could be costly, negatively impacting our business, results of operations and financial condition. Brexit could also adversely affect European and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the Euro and the British Pound.

 

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ITEM 6. Exhibits

 

 

 

 

 

Exhibit

Number

 

Description of Document

 

 

 

10.1

 

Forms of incentive award agreements related to the 2020 SYNNEX Corporation Stock Incentive Plan.

 

 

31.1

 

Rule 13a-14(a) Certification of Chief Executive Officer.

 

 

31.2

 

Rule 13a-14(a) Certification of Chief Financial Officer.

 

 

32.1*

 

Statement of the Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

 

* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: October 9, 2020

SYNNEX CORPORATION

 

 

 

 

 

 

By:

 

/s/ Dennis Polk

 

 

 

Dennis Polk

 

 

 

President and Chief Executive Officer

 

 

 

(Duly authorized officer and principal executive officer)

 

 

 

 

 

 

 

By:

 

/s/ Marshall W. Witt

 

 

 

Marshall W. Witt

 

 

 

Chief Financial Officer

 

 

 

(Duly authorized officer and principal financial officer)

 

 

 

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