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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 February 28, 2022
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: 001-39494
CONCENTRIX CORPORATION
(Exact name of Registrant as specified in its charter)
| | | | | | | | | | | |
Delaware | | 27-1605762 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
39899 Balentine Drive, Newark, California | | | 94560 |
(Address of Principal Executive Offices) | | (Zip Code) |
(800) 747-0583
(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 $0.0001 per share | | CNXC | | The Nasdaq Stock Market LLC |
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 Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
| | | | | | | | |
Class | | Outstanding as of March 31, 2022 |
Common Stock, $0.0001 par value | | 52,469,126 |
Concentrix Corporation
Form 10-Q
Index
| | | | | | | | |
| | Page |
PART I | | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
PART II | | |
Item 1. | | |
Item 1A. | | |
Item 6. | | |
| | |
| | |
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCENTRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
(currency and share amounts in thousands, except par value)
| | | | | | | | | | | |
| February 28, 2022 | | November 30, 2021 |
| (unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 142,157 | | | $ | 182,038 | |
Accounts receivable, net | 1,324,738 | | | 1,207,953 | |
Other current assets | 163,945 | | | 153,074 | |
Total current assets | 1,630,840 | | | 1,543,065 | |
Property and equipment, net | 416,874 | | | 407,144 | |
Goodwill | 2,942,439 | | | 1,813,502 | |
Intangible assets, net | 1,085,942 | | | 655,528 | |
Deferred tax assets | 53,474 | | | 48,413 | |
Other assets | 587,219 | | | 578,715 | |
Total assets | $ | 6,716,788 | | | $ | 5,046,367 | |
| | | |
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 118,974 | | | $ | 129,359 | |
Current portion of long-term debt | 78,750 | | | — | |
Accrued compensation and benefits | 414,971 | | | 453,434 | |
Other accrued liabilities | 376,877 | | | 351,642 | |
Income taxes payable | 46,704 | | | 33,779 | |
Total current liabilities | 1,036,276 | | | 968,214 | |
Long-term debt, net | 2,266,646 | | | 802,017 | |
Other long-term liabilities | 519,490 | | | 546,410 | |
Deferred tax liabilities | 160,111 | | | 109,471 | |
Total liabilities | 3,982,523 | | | 2,426,112 | |
Commitments and contingencies (Note 14) | | | |
| | | |
Redeemable non-controlling interest | 2,266 | | | — | |
| | | |
Stockholders’ equity: | | | |
Preferred stock, $0.0001 par value, 10,000 shares authorized and no shares issued and outstanding as of February 28, 2022 and November 30, 2021, respectively | — | | | — | |
Common stock, $0.0001 par value, 250,000 shares authorized; 52,011 and 51,927 shares issued as of February 28, 2022 and November 30, 2021, respectively, and 51,664 and 51,594 shares outstanding as of February 28, 2022 and November 30, 2021, respectively | 5 | | | 5 | |
Additional paid-in capital | 2,389,403 | | | 2,355,767 | |
Treasury stock, 348 and 333 shares as of February 28, 2022 and November 30, 2021, respectively | (60,040) | | | (57,486) | |
Retained earnings | 489,656 | | | 392,495 | |
Accumulated other comprehensive loss | (87,025) | | | (70,526) | |
Total stockholders’ equity | 2,731,999 | | | 2,620,255 | |
Total liabilities, redeemable non-controlling interest, and stockholders’ equity | $ | 6,716,788 | | | $ | 5,046,367 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONCENTRIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(currency and share amounts in thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | |
| Three Months Ended |
| February 28, 2022 | | February 28, 2021 |
Revenue | $ | 1,536,052 | | | $ | 1,353,278 | |
Cost of revenue | 997,918 | | | 867,228 | |
Gross profit | 538,134 | | | 486,050 | |
Selling, general and administrative expenses | 390,389 | | | 351,161 | |
Operating income | 147,745 | | | 134,889 | |
Interest expense and finance charges, net | 8,770 | | | 7,703 | |
Other expense (income), net | (7,616) | | | 3,803 | |
Income before income taxes | 146,591 | | | 123,383 | |
Provision for income taxes | 36,052 | | | 34,572 | |
Net income before non-controlling interest | 110,539 | | | 88,811 | |
Less: Net income attributable to non-controlling interest | 266 | | | — | |
Net income attributable to Concentrix Corporation | $ | 110,273 | | | $ | 88,811 | |
| | | |
Earnings per common share: | | | |
Basic | $ | 2.11 | | | $ | 1.72 | |
Diluted | $ | 2.09 | | | $ | 1.69 | |
Weighted-average common shares outstanding | | | |
Basic | 51,629 | | | 51,155 | |
Diluted | 52,046 | | | 51,805 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONCENTRIX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(currency in thousands)
(unaudited)
| | | | | | | | | | | |
| Three Months Ended |
| February 28, 2022 | | February 28, 2021 |
Net income before non-controlling interest | $ | 110,539 | | | $ | 88,811 | |
Other comprehensive loss: | | | |
Unrealized gains (losses) of defined benefit plans, net of taxes of $0 and $98 for the three months ended February 28, 2022 and 2021, respectively | 773 | | | (376) | |
Unrealized losses on cash flow hedges during the period, net of taxes of $947 and $2,255 for the three months ended February 28, 2022 and 2021, respectively | (2,760) | | | (7,070) | |
Reclassification of net gains on cash flow hedges to net income, net of taxes of $232 and $3,022 for the three months ended February 28, 2022 and 2021, respectively | (673) | | | (9,171) | |
Total change in unrealized gains (losses) on cash flow hedges, net of taxes | (3,433) | | | (16,241) | |
Foreign currency translation adjustments, net of taxes of $0 for the three months ended February 28, 2022 and 2021, respectively | (13,839) | | | 6,306 | |
Other comprehensive loss | (16,499) | | | (10,311) | |
Comprehensive income | 94,040 | | | 78,500 | |
Less: Comprehensive income attributable to non-controlling interests | 266 | | | — | |
Comprehensive income attributable to Concentrix Corporation | $ | 93,774 | | | $ | 78,500 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONCENTRIX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(currency and share amounts in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Concentrix Corporation Stockholders’ Equity |
| | | Common stock | | | | Treasury stock | | | | | | | | |
| Redeemable non-controlling interest | | Shares | | Amount | | Additional paid-in capital | | Shares | | Amount | | Retained earnings | | Former parent company investment | | Accumulated other comprehensive loss | | Total Stockholders’ Equity |
Balances, November 30, 2020 | $ | — | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | $ | 2,305,899 | | | $ | (3,814) | | | $ | 2,302,085 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10,311) | | | (10,311) | |
Reclassification of net former parent investment in Concentrix | — | | | — | | | — | | | 2,305,899 | | | — | | | — | | | — | | | (2,305,899) | | | — | | | — | |
Issuance of common stock at separation and spin-off | — | | | 51,135 | | | 5 | | | (5) | | | — | | | — | | | — | | | — | | | — | | | — | |
Share-based compensation activity | — | | | 79 | | | — | | | 9,102 | | | — | | | — | | | — | | | — | | | — | | | 9,102 | |
Repurchase of common stock for tax withholdings on equity awards | — | | | — | | | — | | | — | | | 4 | | | (409) | | | — | | | — | | | — | | | (409) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 88,811 | | | — | | | — | | | 88,811 | |
Balances, February 28, 2021 | $ | — | | | 51,214 | | | $ | 5 | | | $ | 2,314,996 | | | 4 | | | $ | (409) | | | $ | 88,811 | | | $ | — | | | $ | (14,125) | | | $ | 2,389,278 | |
| | | | | | | | | | | | | | | | | | | |
Balances, November 30, 2021 | $ | — | | | 51,594 | | | $ | 5 | | | $ | 2,355,767 | | | 333 | | | $ | (57,486) | | | $ | 392,495 | | | $ | — | | | $ | (70,526) | | | $ | 2,620,255 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (16,499) | | | (16,499) | |
Equity awards issued as acquisition purchase consideration | — | | | — | | | — | | | 15,725 | | | — | | | — | | | — | | | — | | | — | | | 15,725 | |
Acquisition of non-controlling interest in subsidiary | 2,000 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Net income attributable to non-controlling interest | 266 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Share-based compensation activity | — | | | 70 | | | — | | | 17,911 | | | — | | | — | | | — | | | — | | | — | | | 17,911 | |
Repurchase of common stock for tax withholdings on equity awards | — | | | — | | | — | | | — | | | 15 | | | (2,554) | | | — | | | — | | | — | | | (2,554) | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Dividends | — | | | — | | | — | | | — | | | — | | | — | | | (13,112) | | | — | | | — | | | (13,112) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 110,273 | | | — | | | — | | | 110,273 | |
Balances, February 28, 2022 | $ | 2,266 | | | 51,664 | | | $ | 5 | | | $ | 2,389,403 | | | 348 | | | $ | (60,040) | | | $ | 489,656 | | | $ | — | | | $ | (87,025) | | | $ | 2,731,999 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONCENTRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(currency in thousands)
(unaudited)
| | | | | | | | | | | |
| Three Months Ended |
| February 28, 2022 | | February 28, 2021 |
Cash flows from operating activities: | | | |
Net income before non-controlling interest | $ | 110,539 | | | $ | 88,811 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 36,037 | | | 35,999 | |
Amortization | 38,056 | | | 34,601 | |
Non-cash share-based compensation expense | 15,030 | | | 6,811 | |
Provision for doubtful accounts | 1,948 | | | (2,554) | |
Deferred income taxes | (10,646) | | | (8,276) | |
Unrealized foreign exchange loss | 726 | | | 6,305 | |
Other | (98) | | | 133 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | (30,188) | | | (48,099) | |
Payable to former parent | — | | | (22,825) | |
Accounts payable | (7,171) | | | (27,766) | |
Other operating assets and liabilities | (109,218) | | | (27,256) | |
Net cash provided by operating activities | 45,015 | | | 35,884 | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (45,393) | | | (41,950) | |
Acquisitions of business, net of cash acquired | (1,564,430) | | | — | |
Other investments | (1,000) | | | — | |
Net cash used in investing activities | (1,610,823) | | | (41,950) | |
Cash flows from financing activities: | | | |
Proceeds from the Credit Facility - Term Loan | 2,100,000 | | | — | |
Repayments of the Credit Facility - Prior Term Loan | (700,000) | | | (50,000) | |
Proceeds from the Securitization Facility | 508,000 | | | 399,500 | |
Repayments of the Securitization Facility | (359,000) | | | (382,000) | |
Cash paid for debt issuance costs | (8,863) | | | — | |
Proceeds from exercise of stock options | 2,882 | | | 2,291 | |
Repurchase of common stock for tax withholdings on equity awards | (2,554) | | | (409) | |
Dividends paid | (13,112) | | | — | |
Net cash provided by (used in) financing activities | 1,527,353 | | | (30,618) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1,395) | | | (471) | |
Net decrease in cash, cash equivalents and restricted cash | (39,850) | | | (37,155) | |
Cash, cash equivalents and restricted cash at beginning of year | 183,010 | | | 156,351 | |
Cash, cash equivalents and restricted cash at end of period | $ | 143,160 | | $ | 119,196 | |
| | | |
Supplemental disclosure of non-cash investing activities: | | | |
Accrued costs for property and equipment purchases | $ | 6,293 | | | $ | 6,768 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONCENTRIX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(currency and share amounts in thousands, except per share amounts)
NOTE 1—BACKGROUND AND BASIS OF PRESENTATION:
Background
Concentrix Corporation (“Concentrix,” the “CX business” or the “Company”) is a leading global provider of Customer Experience (“CX”) solutions and technology that help iconic and disruptive brands drive deep understanding, full lifecycle engagement, and differentiated experiences for their end-customers around the world. The Company provides end-to-end capabilities, including CX process optimization, technology innovation and design engineering, front- and back-office automation, analytics and business transformation services to clients in five primary industry verticals. The Company’s primary verticals are technology and consumer electronics, communications and media, retail, travel and e-commerce, banking, financial services and insurance, and healthcare.
On December 1, 2020, the separation of the CX business (the “separation”) from SYNNEX Corporation, now known as TD SYNNEX Corporation (“TD SYNNEX” or the “former parent”) was completed through a tax-free distribution of all of the issued and outstanding shares of the Company’s common stock to TD SYNNEX stockholders (the “distribution” and, together with the separation, the “spin-off”). TD SYNNEX stockholders received one share of the Company’s common stock for each share of TD SYNNEX common stock held as of the close of business on November 17, 2020. As a result of the spin-off, the Company became an independent public company and the Company’s common stock commenced trading on the Nasdaq Stock Market (“Nasdaq”) under the symbol “CNXC” on December 1, 2020.
Basis of presentation
The accompanying interim unaudited consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The amounts as of November 30, 2021 have been derived from the Company’s annual audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2021. 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 interim consolidated 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, 2021. All intercompany balances and transactions have been eliminated in consolidation.
Risks and uncertainties related to the COVID-19 pandemic
In December 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”), which was declared a pandemic by the World Health Organization in March 2020. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and labor force participation, and created significant volatility and disruption of financial markets. The Company successfully transitioned a significant portion of its workforce to a remote working environment throughout the second quarter of 2020 and implemented a number of safety and social distancing measures in the Company’s sites to protect the health and safety of the team. During the three months ended February 28, 2022, almost all of the Company’s workforce was productive, but the Company experienced the continued effects of the COVID-19 pandemic, as variants caused new waves of COVID-19 cases around the globe.
The extent of the continued impact of the COVID-19 pandemic on the Company’s operational and financial performance, including its ability to execute business strategies and initiatives in the expected time frame, will
depend on future developments, including the duration, spread and severity of the pandemic, the evolution of the virus and the effects of mutations in its genetic code, country and state restrictions regarding virus containment, the availability and effectiveness of vaccines and treatment options, accessibility to the Company’s delivery and operations locations, its continued utilization of remote work environments in response to future health and safety restrictions, and the effect on the Company’s clients’ businesses and the demand for their products and services, all of which are uncertain and cannot be predicted. The Company is unable to predict how long the pandemic conditions will persist in regions in which the Company operates, if or when countries or localities may experience an increase in COVID-19 cases, what additional measures may be introduced by governments or the Company’s clients in response to the pandemic generally or to an increase in COVID-19 cases in a particular country or locality, and the effect of any such additional measures on the Company’s business. As a result, many of the estimates and assumptions used in preparation of these consolidated financial statements required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve with respect to the pandemic and the global recovery from the pandemic, the Company’s estimates may materially change in future periods.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
For a discussion of the Company’s significant accounting policies, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2021. Accounting pronouncements adopted during the three months ended February 28, 2022 are discussed below.
Concentration of credit risk
For the three months ended February 28, 2022 and February 28, 2021, one client accounted for 10.3% and 11.9%, respectively, of the Company’s consolidated revenue.
As of February 28, 2022 and November 30, 2021, one client comprised 12.3% and 15.3%, respectively, of the Company’s total accounts receivable balance.
Recently adopted accounting pronouncements
In December 2019, the Financial Accounting Standards Board (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. This standard became effective for fiscal year 2022 and did not have a material impact on the consolidated financial statements.
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 guidance 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 became effective for fiscal year 2021 and did not have a material impact on the consolidated financial statements.
In June 2016, the FASB issued a new credit loss standard that replaced the prior incurred loss impairment model with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. This standard became effective for fiscal year 2021 and did not have a material impact on the consolidated financial statements.
Recently issued accounting pronouncements
In March 2020, the FASB issued optional guidance to ease the potential burden for a limited time 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 this guidance.
NOTE 3—ACQUISITION:
PK Acquisition
Background
On December 27, 2021, the Company completed its acquisition of PK, a leading CX design engineering company with more than 5,000 staff in four countries. PK creates pioneering experiences that accelerate digital outcomes for their clients’ customers, partners and staff. The acquisition of PK expands the Company’s scale in the digital IT services market and supports the Company’s growth strategy of investing in digital transformation to deliver exceptional customer experiences. The addition of the PK staff and technology to the Company’s team further strengthens its capabilities in CX design and development, artificial intelligence (“AI”), intelligent automation, and customer loyalty.
Purchase price consideration
The total purchase price, net of cash acquired, was $1,581.2 million, which was funded by proceeds from the Company’s new term loan (the “Term Loan”) under its amended senior secured credit facility (the “Credit Facility”) and additional borrowings under its accounts receivable securitization facility (the “Securitization Facility”). See Note 8—Borrowings for a further discussion of the Term Loan, the Credit Facility and the Securitization Facility.
The preliminary purchase price consideration to acquire PK consisted of the following:
| | | | | |
Cash consideration for PK stock (1) | $ | 1,177,568 | |
Cash consideration for PK vested equity awards (2) | 246,229 | |
Cash consideration for repayment of PK debt, including accrued interest (3) | 148,492 | |
Cash consideration for transaction expenses of PK (4) | 22,842 | |
Total cash consideration | 1,595,131 | |
Non-cash equity consideration for conversion of PK equity awards (5) | 15,725 | |
Total consideration transferred | 1,610,856 | |
Less: Cash acquired (6) | 29,653 | |
Total purchase price consideration | $ | 1,581,203 | |
(1) Represents the cash consideration paid for the outstanding shares of PK’s common stock, which includes a preliminary estimate of the merger consideration adjustment to be paid pursuant to the merger agreement.
(2) Represents the cash consideration paid for vested PK stock option awards and restricted stock awards.
(3) Represents the cash consideration paid to retire PK’s outstanding third-party debt, including accrued interest.
(4) Represents the cash consideration paid for expenses incurred by PK in connection with the merger and paid by Concentrix pursuant to the merger agreement. These expenses primarily related to third-party consulting services.
(5) Represents the issuance of vested Concentrix stock options that were issued in conversion of certain vested PK stock options that were assumed by Concentrix pursuant to the merger agreement.
(6) Represents the PK cash balance acquired at acquisition.
Preliminary purchase price allocation
The acquisition was accounted for as a business combination in accordance with Accounting Standards Codification Topic 805, Business Combinations. The purchase price was allocated to the assets acquired, liabilities assumed and non-controlling interest based on management’s estimate of the respective fair values at the date of
acquisition. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The factors contributing to the recognition of goodwill were the assembled workforce, comprehensive service portfolio delivery capabilities and strategic benefits that are expected to be realized from the acquisition. None of the goodwill is expected to be deductible for income tax purposes.
The following table summarizes the preliminary estimates of fair values of the assets acquired, liabilities assumed and non-controlling interest as of the acquisition date:
| | | | | |
| As of |
| December 27, 2021 |
Assets acquired: | |
Cash and cash equivalents | $ | 29,653 | |
Accounts receivable | 86,955 | |
Property and equipment | 11,335 | |
Operating lease right-of-use assets | 12,288 | |
Identifiable intangible assets | 469,300 | |
Goodwill | 1,132,017 | |
Other assets | 11,954 | |
Total assets acquired | $ | 1,753,502 | |
| |
Liabilities assumed and non-controlling interest: | |
Accounts payable and accrued liabilities | 70,269 | |
Operating lease liabilities | 12,288 | |
Deferred tax liabilities | 58,089 | |
Non-controlling interest | 2,000 | |
Total liabilities assumed and non-controlling interest | $ | 142,646 | |
| |
Total consideration transferred | $ | 1,610,856 | |
As of February 28, 2022, the purchase price allocation is preliminary. The preliminary purchase price allocation was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period (defined as the twelve months following the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the valuation of identifiable intangible assets acquired, the fair value of certain tangible assets acquired and liabilities assumed, and deferred income taxes. The Company expects to continue to obtain information for the purpose of determining the fair value of the assets acquired and liabilities assumed on the acquisition date throughout the remainder of the measurement period.
The preliminary purchase price allocation includes $469.3 million of acquired identifiable intangible assets, all of which have finite lives. The preliminary fair value of the identifiable intangible assets has been estimated using the income approach through a discounted cash flow analysis of certain cash flow projections. The cash flow projections are based on forecasts used by the Company to price the PK acquisition, and the discount rates applied were benchmarked by referencing the implied rate of return of the Company’s pricing model and the weighted average cost of capital. The intangible assets are being amortized over their estimated useful lives on either a straight-line basis or an accelerated method that reflects the economic benefit of the asset. The determination of the useful lives is based upon various industry studies, historical acquisition experience, economic factors, and future forecasted cash flows of the Company following the acquisition of PK.
Impact on results of operations
The results of the PK operations have been included in the consolidated financial statements since December 27, 2021. The following table provides the results of operations for PK included in the consolidated statement of operations from the acquisition date through February 28, 2022:
| | | | | |
Revenue | $ | 83,196 | |
Income before income taxes | 207 | |
In connection with the acquisition of PK, the Company incurred a total of $0.9 million of acquisition-related and integration expenses for the three months ended February 28, 2022. These expenses primarily include legal and professional services, and severance and retention payments to integrate the business. These acquisition-related and integration expenses were recorded within selling, general and administrative expenses.
Supplemental Pro Forma Information
The supplemental pro forma financial information presented below is for illustrative purposes only, does not include the pro forma adjustments that would be required under Regulation S-X for pro forma financial information, is not necessarily indicative of the financial position or results of operations that would have been realized if the PK acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable under the circumstances.
The supplemental pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the PK acquisition had occurred on December 1, 2020 to give effect to certain events that the Company believes to be directly attributable to the PK acquisition. These pro forma adjustments primarily include:
•An increase in amortization expense that would have been recognized due to acquired identifiable intangible assets.
•An adjustment to interest expense to reflect the additional borrowings of Concentrix on the amended credit facility and the repayment of PK’s historical debt in conjunction with the acquisition.
•The related income tax effects of the adjustments noted above.
The supplemental pro forma financial information for the periods presented is as follows:
| | | | | | | | | | | |
| Three Months Ended |
| February 28, |
| 2022 | | 2021 |
Revenue | $ | 1,569,013 | | | $ | 1,448,752 | |
Net income | 106,351 | | | 84,235 | |
NOTE 4—SHARE-BASED COMPENSATION:
In November 2020, in connection with the spin-off, TD SYNNEX, as sole stockholder of Concentrix, approved the Concentrix Corporation 2020 Stock Incentive Plan (the “Concentrix Stock Incentive Plan”) and the Concentrix Corporation 2020 Employee Stock Purchase Plan (the “Concentrix ESPP”), each to be effective upon completion of the spin-off. 4,000 shares of Concentrix common stock were reserved for issuance under the Concentrix Stock Incentive Plan, and 1,000 shares of Concentrix common stock were authorized for issuance under the Concentrix ESPP. In December 2021, 523 additional shares of Concentrix common stock were reserved for issuance under the Concentrix Stock Incentive Plan resulting from an automatic annual increase pursuant to the terms of the plan.
In January 2022, the Company granted 137 restricted stock awards and restricted stock units and 129 performance-based restricted stock units under the Concentrix Stock Incentive Plan, which included annual awards to the Company’s senior executive team and retention and new hire awards to staff who joined the Company from PK. The restricted stock awards and restricted stock units awards had a weighted average grant date fair value of $181.09 per share and vest over a service period of four years. The performance-based restricted stock units will vest, if at all, upon the achievement of certain annual financial targets during the three-year period ending November 30, 2024. The performance-based restricted stock units had a grant date weighted average fair value of $178.58 per share.
The Company recorded share-based compensation expense in the consolidated statements of operations for the three months ended February 28, 2022 and 2021 as follows:
| | | | | | | | | | | |
| Three Months Ended |
| February 28, 2022 | | February 28, 2021 |
Total share-based compensation | $ | 15,169 | | | $ | 7,118 | |
Tax benefit recorded in the provision for income taxes | (3,852) | | | (1,780) | |
Effect on net income | $ | 11,317 | | $ | 5,338 | |
Share-based compensation expense is included in selling, general and administrative expenses in the consolidated statements of operations.
NOTE 5—BALANCE SHEET COMPONENTS:
Cash, cash equivalents and restricted cash:
The following table provides a reconciliation of cash and 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 |
| February 28, 2022 | | November 30, 2021 |
Cash and cash equivalents | $ | 142,157 | | | $ | 182,038 | |
Restricted cash included in other current assets | 1,003 | | | 972 | |
Cash, cash equivalents and restricted cash | $ | 143,160 | | | $ | 183,010 | |
Restricted cash balances relate primarily to restrictions placed on cash deposits by banks as collateral for the issuance of bank guarantees and the terms of a government grant.
Accounts receivable, net:
Accounts receivable, net is comprised of the following as of February 28, 2022 and 2021:
| | | | | | | | | | | |
| As of |
| February 28, 2022 | | November 30, 2021 |
Billed accounts receivable | $ | 781,807 | | | $ | 714,032 | |
Unbilled accounts receivable | 549,835 | | | 499,342 | |
Less: Allowance for doubtful accounts | (6,904) | | | (5,421) | |
Accounts receivable, net | $ | 1,324,738 | | | $ | 1,207,953 | |
Allowance for doubtful trade receivables:
Presented below is a progression of the allowance for doubtful trade receivables:
| | | | | | | | | | | |
| Three Months Ended |
| February 28, |
| 2022 | | 2021 |
Balance at beginning of period | $ | 5,421 | | | $ | 8,963 | |
Net additions (reductions) | 1,948 | | | (2,554) | |
Write-offs and reclassifications | (465) | | | (170) | |
Balance at end of period | $ | 6,904 | | | $ | 6,239 | |
Property and equipment, net:
The following tables summarize the carrying amounts and related accumulated depreciation for property and equipment as of February 28, 2022 and November 30, 2021:
| | | | | | | | | | | |
| As of |
| February 28, 2022 | | November 30, 2021 |
Land | $ | 27,663 | | | $ | 27,677 | |
Equipment, computers and software | 512,346 | | | 488,270 | |
Furniture and fixtures | 92,202 | | | 90,442 | |
Buildings, building improvements and leasehold improvements | 376,993 | | | 364,166 | |
Construction-in-progress | 12,350 | | | 10,741 | |
Total property and equipment, gross | $ | 1,021,554 | | | $ | 981,296 | |
Less: Accumulated depreciation | (604,680) | | | (574,152) | |
Property and equipment, net | $ | 416,874 | | | $ | 407,144 | |
Shown below are the countries where 10% or more of the Company’s property and equipment, net are located as of February 28, 2022 and November 30, 2021:
| | | | | | | | | | | |
| As of |
| February 28, 2022 | | November 30, 2021 |
Property and equipment, net: | | | |
United States | $ | 113,231 | | | $ | 101,333 | |
Philippines | 84,497 | | | 87,548 | |
India | 46,430 | | | 46,167 | |
Others | 172,716 | | | 172,096 | |
Total | $ | 416,874 | | | $ | 407,144 | |
Goodwill:
The following table summarizes the changes in the Company’s goodwill for the three months ended February 28, 2022:
| | | | | |
Balance as of November 30, 2021 | $ | 1,813,502 | |
Acquisition | 1,132,017 | |
Foreign exchange translation | (3,080) | |
Balance as of February 28, 2022 | $ | 2,942,439 | |
Intangible assets, net:
The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of February 28, 2022 and November 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of February 28, 2022 | | As of November 30, 2021 |
| Gross amounts | | Accumulated amortization | | Net amounts | | Gross amounts | | Accumulated amortization | | Net amounts |
Customer relationships | $ | 1,745,122 | | | $ | (729,092) | | | $ | 1,016,030 | | | $ | 1,347,961 | | | $ | (694,701) | | | $ | 653,260 | |
Technology | 74,328 | | | (11,400) | | | 62,928 | | | 10,835 | | | (8,900) | | | 1,935 | |
Trade names | 11,721 | | | (6,807) | | | 4,914 | | | 6,724 | | | (6,391) | | | 333 | |
Non-compete agreements | 2,200 | | | (130) | | | 2,070 | | | — | | | — | | | — | |
| $ | 1,833,371 | | | $ | (747,429) | | | $ | 1,085,942 | | | $ | 1,365,520 | | | $ | (709,992) | | | $ | 655,528 | |
Estimated future amortization expense of the Company’s intangible assets is as follows:
| | | | | |
Fiscal years ending November 30, | |
2022 (remaining nine months) | $ | 124,838 | |
2023 | 154,781 | |
2024 | 140,805 | |
2025 | 129,176 | |
2026 | 113,544 | |
Thereafter | 422,798 | |
Total | $ | 1,085,942 | |
Accumulated other comprehensive income (loss):
The components of accumulated other comprehensive income (loss) (“AOCI”), net of taxes, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended February 28, 2022 and 2021 |
| Unrecognized gains (losses) on defined benefit plan, net of taxes | | Unrealized gains (losses) on cash flow hedges, net of taxes | | Foreign currency translation adjustments, net of taxes | | Total |
Balance, November 30, 2020 | $ | (38,584) | | | $ | 29,239 | | | $ | 5,531 | | | $ | (3,814) | |
Other comprehensive income (loss) before reclassification | (376) | | | (7,070) | | | 6,306 | | | (1,140) | |
Reclassification of gains from other comprehensive income (loss) | — | | | (9,171) | | — | | | (9,171) |
Balances at February 28, 2021 | $ | (38,960) | | | $ | 12,998 | | | $ | 11,837 | | | $ | (14,125) | |
| | | | | | | |
Balance, November 30, 2021 | $ | (22,745) | | | $ | (1,403) | | | $ | (46,378) | | | $ | (70,526) | |
Other comprehensive income (loss) before reclassification | 773 | | | (2,760) | | (13,839) | | | (15,826) | |
Reclassification of gains from other comprehensive income (loss) | — | | | (673) | | — | | | (673) | |
Balances at February 28, 2022 | $ | (21,972) | | | $ | (4,836) | | | $ | (60,217) | | | $ | (87,025) | |
Refer to Note 6 for the location of gains and losses on cash flow hedges reclassified from other comprehensive income (loss) to the consolidated statements of operations. Reclassifications of amortization of actuarial (gains) losses of defined benefit plans is recorded in “Other expense (income), net” in the consolidated statement of operations.
Restructuring:
The following table presents the activity related to liabilities for restructuring charges of previous acquisitions for the three months ended February 28, 2022 and 2021:
| | | | | |
| Three Months Ended |
| February 28, 2022 and 2021 |
Restructuring costs | Facility and exit costs |
Accrued balance as of November 30, 2020 | $ | 17,810 | |
Cash payments | (2,004) | |
Accrued balance as of February 28, 2021 | $ | 15,806 | |
| |
Accrued balance as of November 30, 2021 | $ | 12,406 | |
Additional accrual during the period | 47 | |
Cash payments | (1,002) | |
Accrued balance as of February 28, 2022 | $ | 11,451 | |
NOTE 6—DERIVATIVE INSTRUMENTS:
In the ordinary course of business, the Company is exposed to foreign currency risk 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, or other
derivative instruments to offset a portion of the risk on expected future cash flows, earnings, net investments in certain non-U.S. legal entities 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 consolidated balance sheets at their fair values. 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 mitigate the risk of fluctuations in foreign currency exchange rates on gross margins, certain of the Company’s legal entities with functional currencies that are not U.S. dollars may hedge a portion of forecasted revenue or costs not denominated in the entities’ functional currencies. These instruments mature at various dates through February 2024. 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” in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of foreign currency costs are recognized as a component of “Cost of revenue” or “Selling, general and administrative expenses” in the same period as the related costs are 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
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 Company’s legal entities that own the asset or liability. 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 7 and summarized in the table below: | | | | | | | | | | | | | | |
| | Value as of |
Balance Sheet Line Item | | February 28, 2022 | | November 30, 2021 |
Derivative instruments not designated as hedging instruments: | | | | |
Foreign exchange forward contracts (notional value) | | $ | 1,456,904 | | | $ | 1,415,447 | |
Other current assets | | 9,745 | | | 10,058 | |
Other accrued liabilities | | 6,300 | | | 12,542 | |
Derivative instruments designated as cash flow hedges: | | | | |
Foreign exchange forward contracts (notional value) | | $ | 921,264 | | | $ | 918,097 | |
Other current assets and other assets | | 5,228 | | | 7,851 | |
Other accrued liabilities and other long-term liabilities | | 11,723 | | | 9,736 | |
Volume of activity
The notional amounts of foreign exchange forward contracts represent the gross amounts of foreign currency, including, principally, the Philippine peso, the Indian rupee, the euro, the British pound, the Canadian dollar and the Japanese yen, that will be bought or sold at maturity. 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 exchange rates change.
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:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| Locations of gain (loss) in statement of operations | | February 28, 2022 | | February 28, 2021 |
Derivative instruments designated as cash flow hedges | | | | | |
Losses recognized in OCI: | | | | | |
Foreign exchange forward contracts | | | $ | (3,707) | | | $ | (9,325) | |
| | | | | |
Gains reclassified from AOCI into income: | | | | | |
Foreign exchange forward contracts | | | | | |
Gain reclassified from AOCI into income | Cost of revenue for services | | $ | 415 | | | $ | 8,835 | |
Gain reclassified from AOCI into income | Selling, general and administrative expenses | | 490 | | | 3,358 | |
Total | | | $ | 905 | | | $ | 12,193 | |
| | | | | |
Derivative instruments not designated as hedging instruments: | | | | | |
Loss recognized from foreign exchange forward contracts, net(1) | Other expense (income), net | | $ | (1,012) | | | $ | (2,767) | |
(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 $6,376.
Offsetting of Derivatives
In the consolidated balance sheets, the Company does not offset derivative assets against liabilities in master netting arrangements.
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 7—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 that 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 February 28, 2022 | | As of November 30, 2021 |
| | | 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 | $ | 80,885 | | | $ | 80,885 | | | $ | — | | | $ | — | | | $ | 77,332 | | | $ | 77,332 | | | $ | — | | | $ | — | |
Foreign government bond | 1,704 | | | 1,704 | | | — | | | — | | | 1,446 | | | 1,446 | | | — | | | — | |
Forward foreign currency exchange contracts | 14,973 | | | — | | | 14,973 | | | — | | | 17,909 | | | — | | | 17,909 | | | — | |
Liabilities: | | | | | | | | | | | | | | | |
Forward foreign currency exchange contracts | $ | 18,023 | | | $ | — | | | $ | 18,023 | | | $ | — | | | $ | 22,278 | | | $ | — | | | $ | 22,278 | | | $ | — | |
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. Investment in foreign government bond classified as an 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 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. The effect of nonperformance risk on the fair value of derivative instruments was not material as of February 28, 2022 and November 30, 2021.
The carrying values of term deposits with maturities less than one year, accounts receivable and accounts payable approximate fair value due to their short maturities and interest rates that are variable in nature. The carrying values of the outstanding balance on the Term Loan under the Company’s Credit Facility and the outstanding balance on the Securitization Facility approximate their fair values since they bear interest rates that are similar to existing market rates.
During the three months ended February 28, 2022 and 2021, there were no transfers between the fair value measurement category levels.
NOTE 8—BORROWINGS:
Borrowings consist of the following:
| | | | | | | | | | | |
| As of |
| February 28, 2022 | | November 30, 2021 |
Credit Facility - current portion of Term Loan component | $ | 78,750 | | | $ | — | |
Current portion of long term debt | 78,750 | | | — | |
| | | |
Credit Facility - Term Loan component | $ | 2,021,250 | | | $ | — | |
Credit Facility - Prior Term Loan component | — | | | 700,000 | |
Securitization Facility | 254,000 | | | 105,000 | |
Long-term debt, before unamortized debt discount and issuance costs | 2,275,250 | | | 805,000 | |
Less: unamortized debt discount and issuance costs | (8,604) | | | (2,983) | |
Long-term debt, net | $ | 2,266,646 | | | $ | 802,017 | |
Credit Facility
On December 27, 2021, in connection with the closing of the acquisition of PK, Concentrix entered into an amendment of its senior secured credit facility (the “Credit Facility”) (i) to refinance the previously existing term loan (the “Prior Term Loan”) with a new term loan, which was fully advanced, in the aggregate outstanding principal amount of $2,100,000 (the “Term Loan”), (ii) to increase the revolving credit facility to $1,000,000 (the “Revolver”), (iii) to extend the maturity of the Credit Facility from November 30, 2025 to December 27, 2026, (iv) to replace LIBOR with SOFR (the Secured Overnight Financing Rate) as the primary reference rate used to calculate interest on the loans under the Credit Facility, and (v) to modify the commitment fee on the unused portion of the Revolver and the margins in excess of the reference rates at which the loans under the Credit Facility bear interest. The proceeds from the Term Loan and additional borrowings on the Securitization Facility were used to repay the principal amounts outstanding on the Prior Term Loan and to finance the acquisition of PK, including the repayment of certain indebtedness of PK and the payment of fees and expenses in connection with the acquisition of PK.
As amended, borrowings under the Credit Facility bear interest, in the case of SOFR rate loans, at a per annum rate equal to the applicable SOFR rate (but not less than 0.0%), plus an adjustment of between 0.10% and 0.25% depending on the interest period of each SOFR loan, plus an applicable margin, which ranges from 1.25% to 2.00%, based on Concentrix’ consolidated leverage ratio. Borrowings under the Credit Facility that are not SOFR rate loans bear interest at a per annum rate equal to (i) the greatest of (a) the Federal Funds Rate in effect on such day plus ½ of 1.00%, (b) the rate of interest last publicly announced by Bank of America as its “prime rate” and (c) the term SOFR rate plus 1.00%, plus (ii) an applicable margin, which ranges from 0.25% to 1.00%, based on Concentrix’ consolidated leverage ratio. As amended, the commitment fee on the unused portion of the Revolver ranges from 22.5 to 30 basis points, based on Concentrix’ consolidated leverage ratio.
Beginning August 31, 2022, the outstanding principal of the Term Loan will be payable in quarterly installments of $26.25 million, with the unpaid balance due in full on the maturity date.
Concentrix may request, subject to obtaining commitments from any participating lenders and certain other conditions, incremental commitments to increase the amount of the Revolver or the Term Loan available under the Credit Facility in an aggregate principal amount of up to $450,000, plus an additional amount, so long as after giving effect to the incurrence of such additional amount, the Company’s pro forma first lien leverage ratio (as defined in the Credit Facility) would not exceed 3.00 to 1.00.
Obligations under the Credit Facility are secured by substantially all of the assets of Concentrix and certain of its U.S. subsidiaries and are guaranteed by certain of its U.S. subsidiaries.
The Credit Facility contains various loan covenants that restrict the ability of Concentrix and its subsidiaries to take certain actions, including, incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of assets, repurchase or redemption of capital stock, making certain investments, entering into certain transactions with affiliates or changing the nature of their business. In addition, the Credit Facility contains financial covenants that require Concentrix to maintain at the end of each fiscal quarter, (i) a consolidated leverage ratio (as defined in the Credit Facility) not to exceed 3.75 to 1.0 and (ii) a consolidated interest coverage ratio (as defined in the Credit Facility) equal to or greater than 3.00 to 1.0. The Credit Facility also contains various customary events of default, including payment defaults, defaults under certain other indebtedness, and a change of control of Concentrix.
Concentrix initially entered into the Credit Facility on October 16, 2020, and the Credit Facility initially provided for the extension of revolving loans of up to $600,000 and term loan borrowings of up to $900,000. On November 30, 2020, in connection with the spin-off, the Company incurred $900,000 of term loan borrowings under the Credit Facility. Substantially all of the proceeds from such indebtedness, net of debt issuance costs, were transferred to TD SYNNEX on November 30, 2020 to eliminate debt owed by Concentrix to TD SYNNEX and in exchange for the contribution of certain Concentrix trademarks from TD SYNNEX to Concentrix.
Beginning May 31, 2021, the outstanding principal of the Prior Term Loan was payable in quarterly installments of $11,250, with the unpaid balance due in full on the maturity date. During the fiscal year ended November 30, 2021, the Company paid $200,000 of the principal balance on the Prior Term Loan, including $166,250 of voluntary prepayments, without penalty.
At February 28, 2022 and November 30, 2021, no amounts were outstanding under the Revolver.
Securitization Facility
On October 30, 2020, Concentrix entered into a $350,000 accounts receivable securitization facility (the “Securitization Facility”) pursuant to certain agreements, including a Receivables Financing Agreement and a Receivables Purchase Agreement. On November 30, 2020, in connection with the spin-off, the Company incurred $250,000 of borrowings under the Securitization Facility. Substantially all of the proceeds from such indebtedness were transferred to TD SYNNEX on November 30, 2020 to eliminate debt owed by Concentrix to TD SYNNEX and in exchange for the contribution of certain Concentrix trademarks from TD SYNNEX to Concentrix.
Under the Securitization Facility, Concentrix and certain of its subsidiaries (the “Originators”) sell or otherwise transfer all of their accounts receivable to a special purpose bankruptcy-remote subsidiary of Concentrix (the “Borrower”) that grants a security interest in the receivables to the lenders in exchange for available borrowings of up to $350,000. The amount received under the Securitization Facility is recorded as debt on the Company’s consolidated balance sheets. Borrowing availability under the Securitization Facility may be limited by the Company’s accounts receivable balances, changes in the credit ratings of the clients comprising the receivables, client concentration levels in the receivables, and certain characteristics of the accounts receivable being transferred (including factors tracking performance of the accounts receivable over time). The Securitization Facility has a termination date of October 28, 2022. Amounts drawn under this Securitization Facility have been classified as long-term debt within the consolidated balance sheet based on the Company’s ability and intent to refinance on a long-term basis as of February 28, 2022.
Borrowings under the Securitization Facility bear interest with respect to loans that are funded through the issuance of commercial paper at the applicable commercial paper rate plus a spread of 1.05% and, otherwise, at a per annum rate equal to the applicable LIBOR rate plus a spread of 1.15%. Concentrix is also obligated to pay a monthly undrawn fee that ranges from 30 to 37.5 basis points based on the portion of the Securitization Facility that is undrawn.
The Securitization Facility contains various affirmative and negative covenants, including a consolidated leverage ratio covenant that is consistent with the Credit Facility and customary events of default, including payment
defaults, defaults under certain other indebtedness, a change in control of Concentrix, and certain events negatively affecting the overall credit quality of the transferred accounts receivable.
The Borrower’s sole business consists of the purchase or acceptance through capital contributions of the receivables and related security from the Originators and the subsequent retransfer of or granting of a security interest in such receivables and related security to the administrative agent under the Securitization Facility for the benefit of the lenders. The Borrower is a separate legal entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of the Borrower’s assets prior to any assets or value in the Borrower becoming available to the Borrower’s equity holders, and the assets of the Borrower are not available to pay creditors of Concentrix and its subsidiaries.
Covenant compliance
As of February 28, 2022, Concentrix was in compliance with all covenants for the above arrangements.
NOTE 9—EARNINGS PER SHARE:
Basic and diluted earnings per common share (“EPS”) are computed using the two-class method, which is an earnings allocation formula that determines EPS for each class of common stock and participating security. The Company’s restricted stock awards are considered participating securities because they are legally issued at the grant date and holders have a non-forfeitable right to receive dividends.
| | | | | | | | | | | |
| Three Months Ended |
| February 28, 2022 | | February 28, 2021 |
Basic earnings per common share: | | | |
Net income | $ | 110,273 | | | $ | 88,811 | |
Less: net income allocated to participating securities(1) | (1,554) | | | (1,060) | |
Net income attributable to common stockholders | $ | 108,719 | | | $ | 87,751 | |
| | | |
Weighted-average number of common shares - basic | 51,629 | | | 51,155 | |
| | | |
Basic earnings per common share | $ | 2.11 | | | $ | 1.72 | |
| | | |
Diluted earnings per common share: | | | |
Net income | $ | 110,273 | | | $ | 88,811 | |
Less: net income allocated to participating securities(1) | (1,542) | | | (1,047) | |
Net income attributable to common stockholders | $ | 108,731 | | | $ | 87,764 | |
| | | |
Weighted-average number of common shares - basic | 51,629 | | | 51,155 | |
Effect of dilutive securities: | | | |
Stock options and restricted stock units | 417 | | | 650 | |
Weighted-average number of common shares - diluted | 52,046 | | | 51,805 | |
| | | |
Diluted earnings per common share | $ | 2.09 | | | $ | 1.69 | |
(1)Restricted stock awards granted to employees by the Company are considered participating securities.
NOTE 10—REVENUE:
Disaggregated revenue
In the following table, the Company’s revenue is disaggregated by primary industry verticals:
| | | | | | | | | | | |
| Three Months Ended |
| February 28, 2022 | | February 28, 2021 |
Industry vertical: | | | |
Technology and consumer electronics | $ | 470,199 | | | $ | 412,818 | |
Communications and media | 260,643 | | | 248,790 | |
Retail, travel and ecommerce | 284,917 | | | 239,001 | |
Banking, financial services and insurance | 243,246 | | | 209,084 | |
Healthcare | 150,136 | | | 125,224 | |
Other | |