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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, 2023
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, Suite 235, 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 September 30, 2023 |
Common Stock, $0.0001 par value | | 66,601,278 |
Concentrix Corporation
Form 10-Q
Index
| | | | | | | | |
| | Page |
PART I | | |
Item 1. | | |
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| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
PART II | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 5. | | |
Item 6. | | |
| | |
| | |
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCENTRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
(currency and share amounts in thousands, except par value)
| | | | | | | | | | | |
| August 31, 2023 | | November 30, 2022 |
| (unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 2,112,792 | | | $ | 145,382 | |
Accounts receivable, net | 1,379,437 | | | 1,390,474 | |
Other current assets | 209,736 | | | 218,476 | |
Total current assets | 3,701,965 | | | 1,754,332 | |
Property and equipment, net | 406,297 | | | 403,829 | |
Goodwill | 2,897,048 | | | 2,904,402 | |
Intangible assets, net | 873,091 | | | 985,572 | |
Deferred tax assets | 48,109 | | | 48,541 | |
Other assets | 523,032 | | | 573,092 | |
Total assets | $ | 8,449,542 | | | $ | 6,669,768 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 137,524 | | | $ | 161,190 | |
Current portion of long-term debt | — | | | — | |
Accrued compensation and benefits | 470,351 | | | 506,966 | |
Other accrued liabilities | 398,314 | | | 395,304 | |
Income taxes payable | 39,383 | | | 68,663 | |
Total current liabilities | 1,045,572 | | | 1,132,123 | |
Long-term debt, net | 3,973,467 | | | 2,224,288 | |
Other long-term liabilities | 468,161 | | | 511,995 | |
Deferred tax liabilities | 58,820 | | | 105,458 | |
Total liabilities | 5,546,020 | | | 3,973,864 | |
Commitments and contingencies (Note 14) | | | |
Stockholders’ equity: | | | |
Preferred stock, $0.0001 par value, 10,000 shares authorized and no shares issued and outstanding as of August 31, 2023 and November 30, 2022, respectively | — | | | — | |
Common stock, $0.0001 par value, 250,000 shares authorized; 52,685 and 52,367 shares issued as of August 31, 2023 and November 30, 2022, respectively, and 50,915 and 51,096 shares outstanding as of August 31, 2023 and November 30, 2022, respectively | 5 | | | 5 | |
Additional paid-in capital | 2,471,939 | | | 2,428,313 | |
Treasury stock, 1,770 and 1,271 shares as of August 31, 2023 and November 30, 2022, respectively | (241,852) | | | (190,779) | |
Retained earnings | 975,591 | | | 774,114 | |
Accumulated other comprehensive loss | (302,161) | | | (315,749) | |
Total stockholders’ equity | 2,903,522 | | | 2,695,904 | |
Total liabilities and stockholders’ equity | $ | 8,449,542 | | | $ | 6,669,768 | |
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 | | Nine Months Ended |
| August 31, 2023 | | August 31, 2022 | | August 31, 2023 | | August 31, 2022 |
Revenue | $ | 1,632,834 | | | $ | 1,579,602 | | | $ | 4,883,944 | | | $ | 4,683,755 | |
Cost of revenue | 1,039,142 | | | 1,012,754 | | | 3,128,866 | | | 3,019,857 | |
Gross profit | 593,692 | | | 566,848 | | | 1,755,078 | | | 1,663,898 | |
Selling, general and administrative expenses | 431,425 | | | 409,303 | | | 1,274,198 | | | 1,201,696 | |
Operating income | 162,267 | | | 157,545 | | | 480,880 | | | 462,202 | |
Interest expense and finance charges, net | 49,293 | | | 20,272 | | | 130,496 | | | 42,015 | |
Other expense (income), net | 6,169 | | | (12,086) | | | 19,266 | | | (22,247) | |
Income before income taxes | 106,805 | | | 149,359 | | | 331,118 | | | 442,434 | |
Provision for income taxes | 29,170 | | | 42,235 | | | 86,763 | | | 111,738 | |
Net income before non-controlling interest | 77,635 | | | 107,124 | | | 244,355 | | | 330,696 | |
Less: Net income attributable to non-controlling interest | — | | | 434 | | | — | | | 591 | |
Net income attributable to Concentrix Corporation | $ | 77,635 | | | $ | 106,690 | | | $ | 244,355 | | | $ | 330,105 | |
| | | | | | | |
Earnings per common share: | | | | | | | |
Basic | $ | 1.50 | | | $ | 2.05 | | | $ | 4.70 | | | $ | 6.32 | |
Diluted | $ | 1.49 | | | $ | 2.04 | | | $ | 4.67 | | | $ | 6.28 | |
Weighted-average common shares outstanding: | | | | | | | |
Basic | 51,059 | | | 51,193 | | | 51,130 | | | 51,461 | |
Diluted | 51,209 | | | 51,549 | | | 51,384 | | | 51,834 | |
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 | | Nine Months Ended |
| August 31, 2023 | | August 31, 2022 | | August 31, 2023 | | August 31, 2022 |
Net income before non-controlling interest | $ | 77,635 | | | $ | 107,124 | | | $ | 244,355 | | | $ | 330,696 | |
Other comprehensive income (loss): | | | | | | | |
Unrealized gains (losses) of defined benefit plans, net of taxes of $(539) and $(719) for the three and nine months ended August 31, 2023, respectively, and $(51) for the three and nine months ended August 31, 2022, respectively | (1,739) | | | 951 | | | (1,240) | | | 1,717 | |
Unrealized gains (losses) on cash flow hedges during the period, net of taxes of $(422) and $(1,219) for the three and nine months ended August 31, 2023, respectively, and $10,392 and $15,779 for the three and nine months ended August 31, 2022, respectively | 1,266 | | | (30,299) | | | 3,659 | | | (46,003) | |
Reclassification of net losses on cash flow hedges to net income, net of taxes of $(821) and $(3,769) for the three and nine months ended August 31, 2023, respectively, and $(3,344) and $(4,190) for the three and nine months ended August 31, 2022, respectively | 2,458 | | | 9,752 | | | 11,309 | | | 12,217 | |
Total change in unrealized gains (losses) on cash flow hedges, net of taxes | 3,724 | | | (20,547) | | | 14,968 | | | (33,786) | |
Foreign currency translation, net of taxes of $0 for the three and nine months ended August 31, 2023 and 2022, respectively | (1,137) | | | (113,863) | | | (140) | | | (182,697) | |
Other comprehensive income (loss) | 848 | | | (133,459) | | | 13,588 | | | (214,766) | |
Comprehensive income (loss) | 78,483 | | | (26,335) | | | 257,943 | | | 115,930 | |
Less: Comprehensive income attributable to non-controlling interest | — | | | 434 | | | — | | | 591 | |
Comprehensive income (loss) attributable to Concentrix Corporation | $ | 78,483 | | | $ | (26,769) | | | $ | 257,943 | | | $ | 115,339 | |
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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three and Nine Months Ended August 31, 2023 |
| Common stock | | | | Treasury stock | | | | | | |
| Shares | | Amount | | Additional paid-in capital | | Shares | | Amount | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total stockholders’ equity |
Balances, May 31, 2023 | 52,619 | | | $ | 5 | | | $ | 2,459,234 | | | 1,441 | | | $ | (214,172) | | | $ | 912,204 | | | $ | (303,009) | | | $ | 2,854,262 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 848 | | | 848 | |
Share-based compensation activity | 66 | | | — | | | 12,705 | | | — | | | — | | | — | | | — | | | 12,705 | |
Repurchase of common stock for tax withholdings on equity awards | — | | | — | | | — | | | 9 | | | (680) | | | — | | | — | | | (680) | |
Repurchase of common stock | — | | | — | | | — | | | 320 | | | (27,000) | | | — | | | — | | | (27,000) | |
Dividends | — | | | — | | | — | | | — | | | — | | | (14,248) | | | — | | | (14,248) | |
Net income | — | | | — | | | — | | | — | | | — | | | 77,635 | | | — | | | 77,635 | |
Balances, August 31, 2023 | 52,685 | | | $ | 5 | | | $ | 2,471,939 | | | 1,770 | | | $ | (241,852) | | | $ | 975,591 | | | $ | (302,161) | | | $ | 2,903,522 | |
| | | | | | | | | | | | | | | |
Balances, November 30, 2022 | 52,367 | | | $ | 5 | | | $ | 2,428,313 | | | 1,271 | | | $ | (190,779) | | | $ | 774,114 | | | $ | (315,749) | | | $ | 2,695,904 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 13,588 | | | 13,588 | |
Share-based compensation activity | 318 | | | — | | | 43,626 | | | — | | | — | | | — | | | — | | | 43,626 | |
Repurchase of common stock for tax withholdings on equity awards | — | | | — | | | — | | | 68 | | | (9,132) | | | — | | | — | | | (9,132) | |
Repurchase of common stock | — | | | — | | | — | | | 431 | | | (41,941) | | | — | | | — | | | (41,941) | |
Dividends | — | | | — | | | — | | | — | | | — | | | (42,878) | | | — | | | (42,878) | |
Net income | — | | | — | | | — | | | — | | | — | | | 244,355 | | | — | | | 244,355 | |
Balances, August 31, 2023 | 52,685 | | | $ | 5 | | | $ | 2,471,939 | | | 1,770 | | | $ | (241,852) | | | $ | 975,591 | | | $ | (302,161) | | | $ | 2,903,522 | |
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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three and Nine Months Ended August 31, 2022 |
| | | Concentrix Corporation Stockholders’ Equity |
| | | Common stock | | | | Treasury stock | | | | | | |
| Redeemable non-controlling interest | | Shares | | Amount | | Additional paid-in capital | | Shares | | Amount | | Retained earnings | | Accumulated other comprehensive (loss) | | Total stockholders’ equity |
Balances, May 31, 2022 | $ | 2,157 | | | 51,342 | | | $ | 5 | | | $ | 2,404,281 | | | 716 | | | $ | (118,248) | | | $ | 589,740 | | | $ | (151,833) | | | $ | 2,723,945 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (133,459) | | | (133,459) | |
Net income attributable to non-controlling interest | 434 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Purchase of non-controlling interest | (2,591) | | | — | | | — | | | 91 | | | — | | | — | | | — | | | — | | | 91 | |
Share-based compensation activity | — | | | (326) | | | — | | | 11,496 | | | — | | | — | | | — | | | — | | | 11,496 | |
Repurchase of common stock for tax withholdings on equity awards | — | | | — | | | — | | | — | | | 2 | | | (186) | | | — | | | — | | | (186) | |
Repurchase of common stock | — | | | — | | | — | | | — | | | 359 | | | (48,986) | | | — | | | — | | | (48,986) | |
Dividends | — | | | — | | | — | | | — | | | — | | | — | | | (12,964) | | | — | | | (12,964) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 106,690 | | | — | | | 106,690 | |
Balances, August 31, 2022 | $ | — | | | 51,016 | | | $ | 5 | | | $ | 2,415,868 | | | 1,077 | | | $ | (167,420) | | | $ | 683,466 | | | $ | (285,292) | | | $ | 2,646,627 | |
| | | | | | | | | | | | | | | | | |
Balances, November 30, 2021 | $ | — | | | 51,594 | | | $ | 5 | | | $ | 2,355,767 | | | 333 | | | $ | (57,486) | | | $ | 392,495 | | | $ | (70,526) | | | $ | 2,620,255 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (214,766) | | | (214,766) | |
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 | 591 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Purchase of non-controlling interest | (2,591) | | | — | | | — | | | 91 | | | — | | | — | | | — | | | — | | | 91 | |
Share-based compensation activity | — | | | (578) | | | — | | | 44,285 | | | — | | | — | | | — | | | — | | | 44,285 | |
Repurchase of common stock for tax withholdings on equity awards | — | | | — | | | — | | | — | | | 18 | | | (3,098) | | | — | | | — | | | (3,098) | |
Repurchase of common stock | — | | | — | | | — | | | — | | | 726 | | | (106,836) | | | — | | | — | | | (106,836) | |
Dividends | — | | | — | | | — | | | — | | | — | | | — | | | (39,134) | | | — | | | (39,134) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 330,105 | | | — | | | 330,105 | |
Balances, August 31, 2022 | $ | — | | | 51,016 | | | $ | 5 | | | $ | 2,415,868 | | | 1,077 | | | $ | (167,420) | | | $ | 683,466 | | | $ | (285,292) | | | $ | 2,646,627 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONCENTRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(currency in thousands)
(unaudited)
| | | | | | | | | | | |
| Nine Months Ended |
| August 31, 2023 | | August 31, 2022 |
Cash flows from operating activities: | | | |
Net income before non-controlling interest | $ | 244,355 | | | $ | 330,696 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 114,632 | | | 110,108 | |
Amortization | 118,196 | | | 121,025 | |
Non-cash share-based compensation expense | 38,383 | | | 37,404 | |
Provision for doubtful accounts | 7,687 | | | 3,389 | |
Deferred income taxes | (43,683) | | | (4,374) | |
Unrealized foreign exchange loss | — | | | 914 | |
Unrealized loss on call options | 14,493 | | | — | |
Pension and other post-retirement benefit costs | 8,060 | | | 7,978 | |
Pension and other post-retirement plan contributions | (5,615) | | | (5,308) | |
Other | 667 | | | 325 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | (5,138) | | | (23,546) | |
Accounts payable | (22,073) | | | (23,463) | |
Other operating assets and liabilities | (21,220) | | | (190,107) | |
Net cash provided by operating activities | 448,744 | | | 365,041 | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (115,717) | | | (97,276) | |
Acquisition of business, net of cash and restricted cash acquired | — | | | (1,705,447) | |
Other investments | — | | | (1,000) | |
Net cash used in investing activities | (115,717) | | | (1,803,723) | |
Cash flows from financing activities: | | | |
Proceeds from the Prior Credit Facility - Term Loan | — | | | 2,100,000 | |
Repayments of the Prior Credit Facility - Term Loan | (25,000) | | | (125,000) | |
Repayments of the original credit facility - original term loan | — | | | (700,000) | |
Proceeds from the Securitization Facility | 1,092,500 | | | 1,451,000 | |
Repayments of the Securitization Facility | (1,449,000) | | | (1,116,000) | |
Proceeds from issuance of Senior Notes | 2,136,987 | | | — | |
Cash paid for debt issuance costs | (30,519) | | | (9,331) | |
Purchase of non-controlling interest | — | | | (2,500) | |
Proceeds from exercise of stock options | 5,243 | | | 6,881 | |
Repurchase of common stock for tax withholdings on equity awards | (9,132) | | | (3,098) | |
Repurchase of common stock | (41,941) | | | (106,836) | |
Dividends paid | (42,878) | | | (39,134) | |
Net cash provided by financing activities | 1,636,260 | | | 1,455,982 | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2,715) | | | (21,809) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 1,966,572 | | | (4,509) | |
Cash, cash equivalents and restricted cash at beginning of year | 157,463 | | | 183,010 | |
Cash, cash equivalents and restricted cash at end of period | $ | 2,124,035 | | $ | 178,501 | |
| | | |
Supplemental disclosure of non-cash investing activities: | | | |
Accrued costs for property and equipment purchases | $ | 18,814 | | | $ | 6,348 | |
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, which operates under the trade name Concentrix + Webhelp (“Concentrix + Webhelp” 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, retail, travel and e-commerce, communications and media, banking, financial services and insurance, and healthcare.
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, 2022 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, 2022. 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, 2022. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the consolidated financial statements related to the prior years have been reclassified to conform to the current year’s presentation.
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, 2022. Recently adopted accounting pronouncements are discussed below.
Concentration of credit risk
For the three and nine months ended August 31, 2023 and 2022, no client accounted for more than 10% of the Company’s consolidated revenue.
As of August 31, 2023, no client comprised more than 10% of the Company’s total accounts receivable balance. As of November 30, 2022, one client comprised 12.4% 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 simplified the accounting for income taxes. The guidance was effective for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. This standard became effective for the Company in fiscal year 2022 and did not have a material impact on the consolidated financial statements.
No other new accounting pronouncements recently adopted or issued had or are expected to have a material impact on the consolidated financial statements.
NOTE 3—ACQUISITIONS:
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 expanded the Company’s scale in the digital IT services market and supported 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 strengthened its capabilities in CX design and development, artificial intelligence (“AI”), intelligent automation, and customer loyalty.
Purchase price consideration
The total purchase price consideration, net of cash and restricted cash acquired, for the acquisition of PK was $1,573.3 million, which was funded by proceeds from the Company’s term loan under its prior senior secured credit facility (the “Prior Credit Facility”) and additional borrowings under its accounts receivable securitization facility (the “Securitization Facility”). See Note 8—Borrowings for a further discussion of the Company’s term loan, senior credit facility and the Securitization Facility.
The purchase price consideration to acquire PK consisted of the following:
| | | | | |
Cash consideration for PK stock (1) | $ | 1,177,342 | |
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 | 1,594,905 | |
Non-cash equity consideration for conversion of PK equity awards (5) | 15,725 | |
Total consideration transferred | 1,610,630 | |
Less: Cash and restricted cash acquired (6) | 37,310 | |
Total purchase price consideration | $ | 1,573,320 | |
(1) Represents the cash consideration paid for the outstanding shares of PK common stock, which includes the final settlement of the merger consideration adjustment paid pursuant to the merger agreement.
(2) Represents the cash consideration paid for certain 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 and restricted cash balance acquired at the acquisition.
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 deductible for income tax purposes.
The following table summarizes the final 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 | $ | 30,798 | |
Accounts receivable | 85,367 | |
Property and equipment | 11,158 | |
Operating lease right-of-use assets | 12,288 | |
Identifiable intangible assets | 469,300 | |
Goodwill | 1,119,068 | |
Other assets | 26,449 | |
Total assets acquired | 1,754,428 | |
| |
Liabilities assumed and non-controlling interest: | |
Accounts payable and accrued liabilities | 78,092 | |
Operating lease liabilities | 12,288 | |
Deferred tax liabilities | 51,418 | |
Non-controlling interest | 2,000 | |
Total liabilities assumed and non-controlling interest | 143,798 | |
| |
Total consideration transferred | $ | 1,610,630 | |
The purchase price allocation includes $469,300 of acquired identifiable intangible assets, all of which have finite lives. The fair value of the identifiable intangible assets has been estimated by 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.
The amounts allocated to intangible assets are as follows:
| | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Weighted-Average Useful Life | | Amortization Method |
Customer relationships | $ | 398,600 | | | 15 years | | Accelerated |
Technology | 63,500 | | | 5 years | | Straight-line |
Trade name | 5,000 | | | 3 years | | Straight-line |
Non-compete agreements | 2,200 | | | 3 years | | Straight-line |
Total | $ | 469,300 | | | | | |
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 December 1, 2020, 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 the Company believes 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 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 under the Prior 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 prior period nine months ended August 31, 2022 is as follows:
| | | | | | | | |
| | Nine Months Ended |
| | August 31, 2022 |
Revenue | | $ | 4,716,716 | |
Net income | | 327,701 | |
ServiceSource Acquisition
Background
On July 20, 2022, the Company completed its acquisition of ServiceSource International, Inc. (“ServiceSource”), a global outsourced go-to-market services provider, delivering business-to-business (“B2B”) digital sales and customer success solutions that complemented Concentrix’ offerings in this area.
Purchase price consideration
The total purchase price consideration, net of cash acquired, for the acquisition of ServiceSource was $141.5 million, which was primarily funded by cash on the Company’s balance sheet, as well as borrowings under the Company’s Securitization Facility.
The purchase price consideration to acquire ServiceSource consisted of the following:
| | | | | |
Cash consideration for ServiceSource stock (1) | $ | 150,392 | |
Cash consideration for ServiceSource vested and unvested equity awards (2) | 6,704 | |
Cash consideration for repayment of ServiceSource debt, including accrued interest (3) | 10,063 | |
Total consideration transferred | 167,159 | |
Less: Cash and restricted cash acquired (4) | 25,652 | |
Total purchase price consideration | $ | 141,507 | |
(1) Represents the cash consideration paid for the outstanding shares of ServiceSource common stock.
(2) Represents the cash consideration paid or to be paid for vested and unvested ServiceSource stock option awards, restricted stock units and performance stock units.
(3) Represents the cash consideration paid to retire ServiceSource’s outstanding third-party debt, including accrued interest.
(4) Represents the ServiceSource cash and restricted cash balance acquired at the acquisition.
Purchase price allocation
The purchase price was allocated to the assets acquired and liabilities assumed 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, high-value service delivery capabilities and strategic benefits that are expected to be realized from the acquisition. None of the goodwill is deductible for income tax purposes.
The following table summarizes the final fair values of the assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| As of |
| July 20, 2022 |
Assets acquired: | |
Cash and cash equivalents | $ | 24,355 | |
Accounts receivable | 40,097 | |
Property and equipment | 8,112 | |
Operating lease right-of-use assets | 29,487 | |
Identifiable intangible assets | 40,200 | |
Goodwill | 34,910 | |
Net deferred tax assets | 32,701 | |
Other assets | 19,649 | |
Total assets acquired | 229,511 | |
| |
Liabilities assumed: | |
Accounts payable and accrued liabilities | 32,865 | |
Operating lease liabilities | 29,487 | |
Total liabilities assumed | 62,352 | |
| |
Total consideration transferred | $ | 167,159 | |
The purchase price allocation includes $40,200 of acquired identifiable intangible assets, all of which have finite lives. The 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 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 ServiceSource. During the measurement period included in the three months ended August 31, 2023, measurement period adjustments were recorded to finalize net deferred tax assets at the acquired value as disclosed in the table above, resulting in a corresponding decrease to goodwill. The purchase price allocation is now final.
The amounts allocated to intangible assets are as follows:
| | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Weighted-Average Useful Life | | Amortization Method |
Customer relationships | $ | 31,370 | | | 15 years | | Accelerated |
Technology | 5,640 | | | 5 years | | Straight-line |
Trade name | 3,190 | | | 3 years | | Straight-line |
Total | $ | 40,200 | | | | | |
Webhelp Combination
On September 25, 2023, the Company completed its acquisition (the “Webhelp Combination”) of all of the issued and outstanding capital stock (the “Shares”) of Marnix Lux SA, a public limited liability company (société anonyme) incorporated under the laws of the Grand Duchy of Luxembourg (“Webhelp Parent”) and the parent company of the Webhelp business (“Webhelp”), from the holders thereof (the “Sellers”). The Webhelp Combination was completed pursuant to the terms and conditions of the Share Purchase and Contribution Agreement, dated as of June 12, 2023, as amended by the First Amendment to the Share Purchase and Contribution Agreement, dated as of July 14, 2023 (the “SPA”) by and among Concentrix, OSYRIS S.à r.l., a private limited liability company (société à responsabilité limitée) incorporated under the laws of the Grand Duchy of Luxembourg and a direct wholly owned subsidiary of Concentrix Corporation (“Purchaser”), Webhelp Parent, the Sellers, and certain representatives of the Sellers.
Webhelp is a leading provider of CX solutions, including sales, marketing, and payment services, with significant operations and client relationships in Europe, Latin America, and Africa. Following the closing of the Webhelp Combination, the Company will operate under the trade name “Concentrix + Webhelp” while it finalizes its permanent name.
The aggregate consideration for the acquisition of the Shares was approximately $4 billion and consisted of the following:
•€500,000 in cash, subject to adjustment as set forth in the SPA (the “Closing Cash Payment”);
•a promissory note issued by Concentrix Corporation in the aggregate principal amount of €700,000 to certain Sellers, with a term of two years and bearing interest at a rate of 2% per annum on the unpaid principal outstanding from time to time;
•14,862 shares of common stock, par value $0.0001 per share, of Concentrix Corporation (the “Concentrix common stock”); and
•the repayment of approximately $1.6 billion of indebtedness, net of Webhelp cash on hand.
In addition, the Company granted Sellers the contingent right to earn an additional 750 shares of Concentrix common stock (the “Earnout Shares”) if certain conditions set forth in the SPA occur, including the share price of Concentrix common stock reaching $170.00 per share within seven years from the closing of the Webhelp Combination (the “Closing Date”) (based on daily volume weighted average prices measured over a specified period). Prior to the Closing Date, Concentrix and certain Sellers entered into stock restriction agreements (the “Stock Restriction Agreements”), pursuant to which such Sellers (the “Restricted Stock Participants”) agreed to contribute in kind to the Company, and the Company agreed to receive, certain of the Restricted Stock Participants’ Shares in exchange for the issuance of shares of Concentrix common stock with certain restrictions thereon (the “Restricted Shares”) in lieu of such Sellers’ right to a portion of the Earnout Shares. On the Closing Date, the Company issued approximately 80 Restricted Shares in exchange for certain of the Restricted Stock Participants’ Shares. The Restricted Shares are non-transferable and non-assignable and are not entitled to any dividends or distributions unless and until the restrictions lapse, as set forth in the Stock Restriction Agreements. The Restricted Shares will be automatically cancelled by the Company for no consideration in the event that the restrictions on the
Restricted Shares do not lapse. The Restricted Stock Participants have waived any and all rights as a holder of Restricted Shares to vote on any matter submitted to the holders of Common Stock.
Immediately after the closing of the Webhelp Combination, there were approximately 66.6 million shares of Concentrix common stock outstanding, with Concentrix’ stockholders prior to the Wehbhelp Combination holding approximately 77.6% of such outstanding shares, and the Sellers holding approximately 22.4% of such shares.
Given the short period of time from the Closing Date to the filing of this Quarterly Report on Form 10-Q, the Company is in the process of compiling the initial accounting for the Webhelp Combination, including the determination of the fair values of tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income and non-income based taxes, residual goodwill and the amount of goodwill that will be deductible for tax purposes.
Acquisition-related and integration expenses
In connection with the acquisitions of PK and ServiceSource and the Webhelp Combination, the Company incurred $18,494 and $31,470 of acquisition-related and integration expenses for the three and nine months ended August 31, 2023, respectively, and $12,565 and $15,213 for the three and nine months ended August 31, 2022. These expenses primarily include legal and professional services, cash-settled awards, severance and retention payments and costs associated with lease terminations to integrate the businesses. These acquisition-related and integration expenses were recorded within selling, general and administrative expenses in the consolidated statement of operations.
NOTE 4—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 and performance-based restricted stock units based on estimated fair values.
In January 2023, the Company granted 53 restricted stock awards and restricted stock units and 52 performance-based restricted stock units under the Concentrix Stock Incentive Plan, which included annual awards to the Company’s senior executive team. The restricted stock awards and restricted stock units had a weighted average grant date fair value of $138.79 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, 2025. The performance-based restricted stock units had a grant date weighted average fair value of $136.19 per share.
The Company recorded share-based compensation expense in the consolidated statements of operations for the three and nine months ended August 31, 2023 and 2022 as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| August 31, 2023 | | August 31, 2022 | | August 31, 2023 | | August 31, 2022 |
Total share-based compensation | $ | 10,740 | | | $ | 9,862 | | | $ | 38,683 | | | $ | 37,678 | |
Tax benefit recorded in the provision for income taxes | (2,685) | | | (2,505) | | | (9,671) | | | (9,569) | |
Effect on net income | $ | 8,055 | | $ | 7,357 | | | $ | 29,012 | | $ | 28,109 | |
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, 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, 2023 | | November 30, 2022 |
Cash and cash equivalents | $ | 2,112,792 | | | $ | 145,382 | |
Restricted cash included in other current assets | 11,243 | | | 12,081 | |
Cash, cash equivalents and restricted cash | $ | 2,124,035 | | | $ | 157,463 | |
Restricted cash balances relate primarily to funds held for clients, restrictions placed on cash deposits by banks as collateral for the issuance of bank guarantees and the terms of a government grant, and letters of credit for leases.
As of August 31, 2023, the Company held approximately $1,889,000 of proceeds from the senior notes issued on August 2, 2023 (see Note 8 for further details) in money market funds that were classified as cash and cash equivalents on the balance sheet. As described in Note 3, the Company used the balance of these funds in connection with the completion of the Webhelp Combination.
Accounts receivable, net:
Accounts receivable, net is comprised of the following as of August 31, 2023 and November 30, 2022:
| | | | | | | | | | | |
| As of |
| August 31, 2023 | | November 30, 2022 |
Billed accounts receivable | $ | 795,096 | | | $ | 782,049 | |
Unbilled accounts receivable | 595,186 | | | 613,222 | |
Less: Allowance for doubtful accounts | (10,845) | | | (4,797) | |
Accounts receivable, net | $ | 1,379,437 | | | $ | 1,390,474 | |
Allowance for doubtful trade receivables:
Presented below is a progression of the allowance for doubtful trade receivables:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| August 31, 2023 | | August 31, 2022 | | August 31, 2023 | | August 31, 2022 |
Balance at beginning of period | $ | 8,774 | | | $ | 6,994 | | | $ | 4,797 | | | $ | 5,421 | |
Net additions (reductions) | 2,857 | | | (1,033) | | | 7,687 | | | 3,389 | |
Write-offs and reclassifications | (786) | | | (825) | | | (1,639) | | | (3,674) | |
Balance at end of period | $ | 10,845 | | | $ | 5,136 | | | $ | 10,845 | | | $ | 5,136 | |
Property and equipment, net:
The following table summarizes the carrying amounts and related accumulated depreciation for property and equipment as of August 31, 2023 and November 30, 2022:
| | | | | | | | | | | |
| As of |
| August 31, 2023 | | November 30, 2022 |
Land | $ | 27,193 | | | $ | 27,336 | |
Equipment, computers and software | 595,366 | | | 542,209 | |
Furniture and fixtures | 90,810 | | | 89,167 | |
Buildings, building improvements and leasehold improvements | 406,117 | | | 362,218 | |
Construction-in-progress | 2,785 | | | 14,975 | |
Total property and equipment, gross | $ | 1,122,271 | | | $ | 1,035,905 | |
Less: Accumulated depreciation | (715,974) | | | (632,076) | |
Property and equipment, net | $ | 406,297 | | | $ | 403,829 | |
Shown below are the countries where 10% or more of the Company’s property and equipment, net are located as of August 31, 2023 and November 30, 2022:
| | | | | | | | | | | |
| As of |
| August 31, 2023 | | November 30, 2022 |
Property and equipment, net: | | | |
United States | $ | 121,392 | | | $ | 123,184 | |
Philippines | 72,887 | | | 76,361 | |
India | 44,442 | | | 42,698 | |
Others | 167,576 | | | 161,586 | |
Total | $ | 406,297 | | | $ | 403,829 | |
Goodwill:
The following table summarizes the changes in the Company’s goodwill for the nine months ended August 31, 2023 and 2022:
| | | | | | | | | | | |
| Nine Months Ended |
| August 31, 2023 | | August 31, 2022 |
Balance at beginning of period | $ | 2,904,402 | | | $ | 1,813,502 | |
Acquisitions | — | | | 1,195,039 | |
Acquisition measurement period adjustments | (10,592) | | | — | |
Foreign exchange translation | 3,238 | | | (36,721) | |
Balance at end of period | $ | 2,897,048 | | | $ | 2,971,820 | |
Intangible assets, net:
The following tables summarize the carrying amounts and related accumulated amortization for intangible assets as of August 31, 2023 and November 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of August 31, 2023 | | As of November 30, 2022 |
| Gross amounts | | Accumulated amortization | | Net amounts | | Gross amounts | | Accumulated amortization | | Net amounts |
Customer relationships | $ | 1,745,849 | | | $ | (925,036) | | | $ | 820,813 | | | $ | 1,731,610 | | | $ | (811,727) | | | $ | 919,883 | |
Technology | 79,695 | | | (32,601) | | | 47,094 | | | 79,728 | | | (21,820) | | | 57,908 | |
Trade names | 14,461 | | | (10,247) | | | 4,214 | | | 14,552 | | | (8,291) | | | 6,261 | |
Non-compete agreements | 2,200 | | | (1,230) | | | 970 | | | 2,200 | | | (680) | | | 1,520 | |
| $ | 1,842,205 | | | $ | (969,114) | | | $ | 873,091 | | | $ | 1,828,090 | | | $ | (842,518) | | | $ | 985,572 | |
Estimated future amortization expense of the Company’s intangible assets is as follows:
| | | | | |
Fiscal years ending November 30, | |
2023 (remaining three months) | $ | 39,426 | |
2024 | 146,580 | |
2025 | 134,443 | |
2026 | 117,877 | |
2027 | 87,559 | |
Thereafter | 347,206 | |
Total | $ | 873,091 | |
Accumulated other comprehensive income (loss):
The components of accumulated other comprehensive income (loss) (“AOCI”), net of taxes, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended August 31, 2023 and 2022 |
| 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 |
Balances at May 31, 2022 | $ | (21,979) | | | $ | (14,642) | | | $ | (115,212) | | | $ | (151,833) | |
Other comprehensive income (loss) before reclassification | 951 | | | (30,299) | | | (113,863) | | | (143,211) | |
Reclassification of gains from other comprehensive income (loss) | — | | | 9,752 | | | — | | | 9,752 | |
Balances at August 31, 2022 | $ | (21,028) | | | $ | (35,189) | | | $ | (229,075) | | | $ | (285,292) | |
| | | | | | | |
Balances at May 31, 2023 | $ | (7,972) | | | $ | (8,670) | | | $ | (286,367) | | | $ | (303,009) | |
Other comprehensive income (loss) before reclassification | (1,739) | | | 1,266 | | | (1,137) | | | (1,610) | |
Reclassification of gains from other comprehensive income (loss) | — | | | 2,458 | | — | | | 2,458 | |
Balances at August 31, 2023 | $ | (9,711) | | | $ | (4,946) | | | $ | (287,504) | | | $ | (302,161) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended August 31, 2023 and 2022 |
| 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 |
Balances at November 30, 2021 | $ | (22,745) | | | $ | (1,403) | | | $ | (46,378) | | | $ | (70,526) | |
Other comprehensive income (loss) before reclassification | 1,717 | | | (46,003) | | | (182,697) | | | (226,983) | |
Reclassification of gains from other comprehensive income (loss) | — | | | 12,217 | | | — | | | 12,217 | |
Balances at August 31, 2022 | $ | (21,028) | | | $ | (35,189) | | | $ | (229,075) | | | $ | (285,292) | |
| | | | | | | |
Balances at November 30, 2022 | $ | (8,471) | | | $ | (19,914) | | | $ | (287,364) | | | $ | (315,749) | |
Other comprehensive income (loss) before reclassification | (1,240) | | | 3,659 | | | (140) | | | 2,279 | |
Reclassification of gains from other comprehensive income (loss) | — | | | 11,309 | | — | | | 11,309 | |
Balances at August 31, 2023 | $ | (9,711) | | | $ | (4,946) | | | $ | (287,504) | | | $ | (302,161) | |
Refer to Note 6—Derivative Instruments 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.
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 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 protect gross margins from fluctuations in foreign currency exchange rates, 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 August 2025. 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 currencies of the Company’s legal entities that own the assets or liabilities. 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.
During the second quarter of 2023, the Company entered into short-term foreign exchange forward call option contracts to offset the foreign exchange risk associated with the cash payment required in euros upon closing of the Webhelp Combination. These derivatives are not designated as hedging instruments and are adjusted to fair value through earnings and included in other expense (income), net in the consolidated statement of operations.
Fair Values of Derivative Instruments in the Consolidated Balance Sheets
The fair values of the Company’s derivative instruments are disclosed in Note 7—Fair Value Measurements and summarized in the table below: | | | | | | | | | | | | | | |
| | Value as of |
Balance Sheet Line Item | | August 31, 2023 | | November 30, 2022 |
Derivative instruments not designated as hedging instruments: | | | | |
Foreign exchange forward contracts (notional value) | | $ | 1,478,168 | | | $ | 1,465,853 | |
Other current assets | | 4,461 | | | 22,839 | |
Other accrued liabilities | | 16,035 | | | 14,934 | |
Foreign exchange call options contracts (notional value) | | $ | 2,012,475 | | | $ | — | |
Other current assets | | 136 | | | — | |
Derivative instruments designated as cash flow hedges: | | | | |
Foreign exchange forward contracts (notional value) | | $ | 995,422 | | | $ | 963,844 | |
Other current assets and other assets | | 6,774 | | | 6,389 | |
Other accrued liabilities and other long-term liabilities | | 13,366 | | | 32,935 | |
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, the Japanese yen and the Australian dollar, 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 | | Nine Months Ended |
| Locations of gain (loss) in statement of operations | | August 31, 2023 | | August 31, 2022 | | August 31, 2023 | | August 31, 2022 |
Derivative instruments designated as cash flow hedges | | | | | | | | | |
Gains (losses) recognized in OCI: | | | | | | | | | |
Foreign exchange forward contracts | | | $ | 1,688 | | | $ | (40,691) | | | $ | 4,878 | | | $ | (61,782) | |
| | | | | | | | | |
Losses reclassified from AOCI into income: | | | | | | | | | |
Foreign exchange forward contracts | | | | | | | | | |
Loss reclassified from AOCI into income | Cost of revenue for services | | $ | (2,457) | | | $ | (9,909) | | | $ | (11,179) | | | $ | (12,920) | |
Loss reclassified from AOCI into income | Selling, general and administrative expenses | | (822) | | | (3,187) | | | (3,899) | | | (3,487) | |
Total | | | $ | (3,279) | | | $ | (13,096) | | | $ | (15,078) | | | $ | (16,407) | |
| | | | | | | | | |
Derivative instruments not designated as hedging instruments: | | | | | | | | | |
Loss recognized from foreign exchange forward contracts, net(1) | Other expense (income), net | | $ | (2,170) | | | $ | (39,367) | | | $ | (7,005) | | | $ | (56,527) | |
Loss recognized from foreign exchange call options contracts, net | Other expense (income), net | | (2,064) | | | — | | | (14,493) | | | — | |
Total | | | $ | (4,234) | | | $ | (39,367) | | | $ | (21,498) | | | $ | (56,527) | |
(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 $5,183.
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 with high credit standing.
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 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, 2023 | | As of November 30, 2022 |
| | | Fair value measurement category | | | | Fair value measurement category |
| Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets measured at fair value: | | | | | | | | | | | | | | | |
Cash equivalents | $ | 2,028,565 | | | $ | 2,028,565 | | | $ | — | | | $ | — | | | $ | 89,932 | | | $ | 89,932 | | | $ | — | | | $ | — | |
Foreign government bond | 1,811 | | | 1,811 | | | — | | | — | | | 1,529 | | | 1,529 | | | — | | | — | |
Forward foreign currency exchange contracts | 11,235 | | | — | | | 11,235 | | | — | | | 29,228 | | | — | | | 29,228 | | | — | |
Foreign currency call options contracts | 136 | | | — | | | 136 | | | — | | | — | | | — | | | — | | | — | |
Liabilities measured at fair value: | | | | | | | | | | | | | | | |
Forward foreign currency exchange contracts | 29,401 | | | — | | | 29,401 | | | — | | | 47,869 | | | — | | | 47,869 | | | — | |
Liabilities measured at other than fair value: | | | | | | | | | | | | | | | |
Long term debt (senior notes) | | | | | | | | | | | | | | | |
Fair value | 2,110,841 | | | 2,110,841 | | | — | | | — | | | — | | | — | | | — | | | — | |
Carrying amount | 2,130,982 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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. 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 fair value of the foreign exchange forward call options contracts is measured using market standard option models and foreign currency spot rates. The effect of nonperformance risk on the fair value of derivative instruments was not material as of August 31, 2023 and November 30, 2022.
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 senior 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. The fair values of the 2026 Notes, 2028 Notes, and 2033 Notes (as defined in Note 8) were based on quoted prices in active markets and are classified within Level 1 of the fair value hierarchy. The Company does not adjust the quoted market prices for such financial instruments.
During the three and nine months ended August 31, 2023 and 2022, there were no transfers between the fair value measurement category levels.
NOTE 8—BORROWINGS:
Borrowings consist of the following:
| | | | | | | | | | | |
| As of |
| August 31, 2023 | | November 30, 2022 |
| | | |
| | | |
| | | |
6.650% Senior Notes due 2026 | $ | 800,000 | | | $ | — | |
6.600% Senior Notes due 2028 | 800,000 | | | — | |
6.850% Senior Notes due 2033 | |