CONCENTRIX CORPORATION The discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year endedNovember 30, 2020 , as filed with theSecurities and Exchange Commission onFebruary 16, 2021 . References to "we," "our," "us," "the Company" or "Concentrix" refer toConcentrix Corporation and its subsidiaries. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include, but are not limited to, statements regarding our expected future financial condition, results of operations, effective tax rate, cash flows, leverage, liquidity, business strategy, competitive position, demand for our services and seasonality of our business, international operations, acquisition opportunities, capital allocation and dividends, growth opportunities, spending and investments, competition and market forecasts, industry trends and statements that include words such as believe, expect, may, will, provide, could and should and other similar expressions. These forward-looking statements are inherently uncertain and involve substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Risks and uncertainties include, among other things: risks related to general economic conditions, including uncertainty related to the COVID-19 pandemic and its impact on the global economy, on our business and on the business of our clients; the level of outsourced business services; the level of business activity of our clients and the market acceptance and performance of their products and services; consolidation of our competitors; competitive conditions in our industry; currency exchange rate fluctuations; variability in demand by our clients or the early termination of our client contracts; competition in the customer experience solutions industry; political and economic stability in the countries in which we operate; the outbreak of communicable disease or other public health crises; cyberattacks on our or our clients' networks and information technology systems; the inability to protect personal and proprietary information; increases in the cost of labor; the operability of our communication services and information technology systems and networks; changes in law, regulations or regulatory guidance; investigative or legal actions; the loss of key personnel; natural disasters, adverse weather conditions, terrorist attacks, work stoppages or other business disruptions; and other risks that are described under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedNovember 30, 2020 . We do not intend to update forward-looking statements, which speak only as of the date hereof, unless otherwise required by law.Concentrix , the Concentrix Logo, and all otherConcentrix company, product and services names and slogans are trademarks or registered trademarks ofConcentrix Corporation and its subsidiaries.Concentrix and the Concentrix Logo Reg.U.S. Pat. & Tm. Off. and applicable non-U.S. jurisdictions. Other names and marks are the property of their respective owners. Overview and Basis of PresentationConcentrix is a leading global provider of technology-infused Customer Experience ("CX") solutions that help iconic and disruptive brands drive deep understanding, full lifecycle engagement, and differentiated experiences for their end-customers. We provide end-to-end capabilities, including CX process optimization, technology innovation, front- and back-office automation, analytics and business transformation services to clients in five primary industry verticals. Our differentiated portfolio of solutions supports Fortune Global 500 as well as high-growth companies across the globe in their efforts to deliver an optimized, consistent brand experience across all channels of communication, such as voice, chat, email, social media, asynchronous messaging, and custom applications. We strive to deliver exceptional services globally supported by our deep industry knowledge, technology and security practices, talented people, and digital and analytics expertise. We generate revenue from performing services that are generally tied to our clients' products and services. Any shift in business or the size of the market for our clients' products or services, or any failure of technology or failure of acceptance of our clients' products or services in the market may impact our business. The employee turnover rate in our business is high, as is the risk of losing experienced employees. High employee turnover rates may increase costs and decrease operating efficiencies and productivity. OnDecember 1, 2020 , the previously announced separation (the "separation") ofConcentrix and our technology-infused customer experience solutions business from SYNNEX was completed through a tax-free distribution of all of the issued and 24 -------------------------------------------------------------------------------- outstanding shares of our common stock to SYNNEX stockholders (the distribution and, together with the separation, the "spin-off"). SYNNEX stockholders received one share of our common stock for each share of SYNNEX common stock held as of the close of business onNovember 17, 2020 . As a result of the spin-off, we became an independent public company and our common stock commenced trading on theNasdaq Stock Market ("Nasdaq") under the symbol "CNXC" onDecember 1, 2020 . In connection with the spin-off, onNovember 30, 2020 , we entered into a separation and distribution agreement, an employee matters agreement, a tax matters agreement and a commercial agreement with SYNNEX to set forth the principal actions to be taken in connection with the spin-off and define our ongoing relationship with SYNNEX after the spin-off. InDecember 2019 , there was an outbreak of a new strain of coronavirus ("COVID-19"). InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak a pandemic. 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. We successfully transitioned a significant portion of our workforce to a remote working environment throughout the second quarter of 2020 and implemented a number of safety and social distancing measures in our sites to protect the health and safety of employees. During the first quarter of 2021, almost all of our workforce was productive. We incurred incremental costs of approximately$10 million associated with COVID-19 during the first quarter of 2021. The extent of the continued impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration, spread and severity of the pandemic, 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, our continued utilization of remote work environments in response to future health and safety restrictions, and the impact to the Company's clients' businesses and the demand for their products and services, all of which are uncertain and cannot be predicted. We are unable to predict how long the pandemic conditions will persist in the regions in which we operate, what additional measures may be introduced by governments or our clients and the effect of any such additional measures on our business. As a result, many of the estimates and assumptions involved in preparation of the consolidated financial statements included in this Quarterly Report on Form 10-Q required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve with respect to the pandemic, our estimates may materially change in future periods. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends. Revenue and Cost of Revenue We generate revenue through the provision of customer experience solutions to our clients pursuant to client contracts. Our client contracts typically consist of a master services agreement, supported in most cases by multiple statements of work, which contain the terms and conditions of each contracted solution. Our agreements can range from less than one year to over five years in term and are subject to early termination by our clients for any reason, typically with 30 to 90 days' notice. Our technology-infused customer experience solutions are generally characterized by flat unit prices. Approximately 96% of our revenue is recognized as services are performed, based on staffing hours or the number of client customer interactions handled using contractual rates. Remaining revenue from the sale of these solutions are typically recognized as the services are provided over the duration of the contract using contractual rates. Our cost of revenue consists primarily of personnel costs related to the delivery of our solutions. The costs of our revenue can be impacted by the mix of client contracts, where we deliver the customer experience solution, additional lead time for programs to be fully scalable and transition and initial set-up costs. Our cost of revenue as a percentage of revenue has also fluctuated in the past, based primarily on our ability to achieve economies of scale, the management of our operating expenses, and the timing and costs incurred related to our acquisitions and investments. In the first quarter of 2021 and 2020, approximately 83% and 77% of our revenue was generated from our non-U.S. operations, and approximately 62% and 65%, respectively, of our revenue was priced inU.S. dollars and we expect this to continue. As a result, we have certain client contracts that are priced in non-U.S. dollar currencies for which a substantial portion of the costs to deliver the services are in other currencies. Accordingly, our revenue may be earned in currencies that are different from the currencies in which we incur corresponding expenses. Fluctuations in the value of currencies, such as the Philippine Peso, the Indian Rupee, and the Canadian Dollar, against theU.S. Dollar or other currencies in which we bill our clients, and inflation in the local economies in which these delivery centers are located, can impact the operating and labor costs in these delivery centers, which can result in reduced 25 -------------------------------------------------------------------------------- profitability. As a result, our revenue growth, costs and profitability have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. Margins Our gross margins fluctuate and can be impacted by the mix of client contracts, services provided, shifts in the geography from which our customer experience services are delivered, client volume trends, and the amount of lead time that is required for programs to become fully scaled and transition and set-up costs. Our operating margin fluctuates based on changes in gross margins as well as overall volume levels, as we are able to gain scale efficiencies in our selling, general and administrative costs in periods of higher volume. Economic and Industry Trends The CX solutions industry in which we operate is competitive. Clients' performance measures are based on competitive pricing terms and quality of services. Accordingly, we could be subject to pricing pressure and may experience a decrease in revenue and operating income. Our business operates in over 40 countries across 6 continents. We have significant concentrations inthe Philippines ,India ,the United States , theUnited Kingdom ,Canada , throughoutEurope ,China andJapan . Accordingly, we would be impacted by economic strength or weakness in these geographies and by the strengthening or weakening of local currencies relative to theU.S. Dollar. Seasonality Our revenue and margins fluctuate with the underlying trends in our clients' businesses and trends in the level of consumer activity. As a result, our revenue and margins are typically higher in the fourth quarter of the year than in any other quarter. Critical Accounting Policies and Estimates During the three months endedFebruary 28, 2021 , there were no material changes to our critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year endedNovember 30, 2020 . 26 -------------------------------------------------------------------------------- Results of Operations - Three months endedFebruary 28, 2021 andFebruary 29, 2020 Three Months Ended February 28, February 29, 2021 2020 ($ in thousands) Revenue$ 1,353,278 $ 1,188,619 Cost of revenue 867,228 743,429 Gross profit 486,050 445,190 Selling, general and administrative expenses (351,161) (356,979) Operating income 134,889 88,211 Interest expense and finance charges, net (7,703) (17,585) Other (expense) income, net (3,803) 3,235 Income before income taxes 123,383 73,861 Provision for income taxes (34,572) (21,544) Net income$ 88,811 $ 52,317 Revenue Three Months Ended Percent Change February 28, February 29, 2021 to 2020 2021 2020 ($ in thousands) Industry vertical: Technology and consumer electronics$ 412,818 $ 323,913 27.4 % Communications and media 248,790 263,564 (5.6) % Retail, travel and ecommerce 239,001 198,914 20.2 % Banking, financial services and insurance 209,084 192,703 8.5 % Healthcare 125,224 97,325 28.7 % Other 118,361 112,201 5.5 % Total$ 1,353,278 $ 1,188,619 13.9 % We generate revenue by delivering our CX solutions to our clients categorized in the above primary industry verticals. These solutions focus on customer engagement, process optimization, and back-office automation. Our revenue increased 13.9% in the three months endedFebruary 28, 2021 , compared to the three months endedFebruary 29, 2020 , reflecting increased volumes across all verticals except communications and media. Revenue from clients in our technology and consumer electronics vertical increased as a result of increased volumes from a broad-based group of hardware and software manufacturing clients. Revenue from clients in our communications and media vertical decreased as we near the end of our portfolio rebalancing efforts. Revenue from clients in our retail, travel and ecommerce vertical increased due to an increase in volumes across the majority of our retail and ecommerce clients, which more than offset expected lower volumes from travel and tourism clients in this vertical. Revenue from clients in the banking, financial services and insurance vertical increased due to increased volumes from several banking clients. Revenue from clients in our healthcare vertical increased due to strong seasonal volumes, particularly across our health insurance clients. Revenue from clients in our other vertical increased reflecting growth with several government clients partially offset by a decrease in revenue from a few automotive clients. The increase in total revenue was also attributable to a favorable translation effect of foreign currencies of$25.7 million , or 2.2%. The positive foreign currency translation effect on revenue was primarily due to the strengthening of the euro and Australian dollar against theU.S. dollar. 27 --------------------------------------------------------------------------------
Cost of Revenue, Gross Profit and Gross Margin Percentage
Three Months Ended Percent Change
February 28, 2021 February 29, 2020 2021 to 2020
($ in thousands)
Cost of revenue $ 867,228 $ 743,429 16.7 %
Gross profit 486,050 445,190 9.2 %
Gross margin % 35.9 % 37.5 %
Cost of revenue consists primarily of personnel costs. Gross margins can be
impacted by resource location, client mix and pricing, additional lead time for
programs to be fully scalable, and transition and initial set-up costs.
Our cost of revenue increased by 16.7% in the three months ended February 28,
2021 compared to the three months ended February 29, 2020 , primarily due to the
increase in revenue, impact of approximately $10 million in COVID-19 related
costs and foreign currency impacts of $19.2 million on the cost of revenue. The
foreign currency impact on the cost of revenue was caused primarily by the
strengthening of the euro and Philippine Peso against the U.S. dollar.
Our gross profit increased 9.2% in the first quarter of 2021, compared with the
first quarter of 2020, primarily due to the increase in revenue and a net
favorable foreign currency impact of $6.5 million on gross profit. Our gross
margin percentage for the three months ended February 28, 2021 decreased to
35.9% from 37.5% in the prior year period due to the COVID-19 related impacts
and changes in the mix of geographies where our services are delivered.
Selling, General and Administrative Expenses
Three Months Ended Percent Change
February 28, 2021 February 29, 2020 2021 to 2020
($ in thousands)
Selling, general and administrative expenses
$ 356,979 (1.6) % Percentage of revenue 25.9 % 30.0 % Our selling, general and administrative expenses consist primarily of support personnel costs such as salaries, commissions, bonuses, employee benefits and share-based compensation costs. Selling, general and administrative expenses also include the cost of our global delivery facilities, utility expenses, hardware and software costs related to our technology infrastructure, legal and professional fees, depreciation on our technology and facility equipment, amortization of intangible assets resulting from acquisitions, marketing expenses, acquisition-related transaction and integration expenses and spin-off related expenses. Our selling, general and administrative expenses decreased in the three months endedFebruary 28, 2021 compared to the three months endedFebruary 29, 2020 primarily due to a decrease in acquisition-related and integration expenses of$14.3 million , a decrease in amortization of intangible assets included in selling, general and administrative expenses of$2.4 million , and a decrease in spin-off related expenses of$1.0 million . These decreases were partially offset by foreign currency impacts of$4.9 million , an increase in depreciation expense included in selling, general, and administrative expenses of$3.5 million , and an increase in share-based compensation expense of$2.9 million . These items and scale efficiencies resulted in a decrease in selling, general and administrative expenses as a percentage of revenue from 30.0% in the first fiscal quarter of 2020 to 25.9% in the first fiscal quarter of 2021. Operating Income Three Months Ended Percent Change February 28, 2021 February 29, 2020 2021 to 2020 ($ in thousands) Operating income$ 134,889 $ 88,211 52.9 % Operating margin 10.0 % 7.4 % 28
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Our operating income and operating margin increased during the three months
ended
Three Months Ended Percent Change
February 28, 2021 February 29, 2020 2021 to 2020
($ in thousands)
Interest expense and finance charges, net $ 7,703 $ 17,585 (56.2) %
Percentage of revenue 0.6 % 1.5 %
Amounts recorded in interest expense and finance charges, net, for the first
quarter of 2021 consist primarily of interest on third-party borrowings as a
result of our debt incurred in connection with the spin-off, while amounts
recorded for the prior period first quarter related primarily to interest on
borrowings from SYNNEX. The reduction in interest expense reflects the reduction
of outstanding borrowings and more favorable interest rate terms on the
borrowings for the first quarter of 2021 as compared to the prior period first
quarter.
Other (Expense) Income, Net
Three Months Ended Percent Change
February 28, 2021 February 29, 2020 2021 to 2020
($ in thousands)
Other (expense) income, net $ (3,803) $ 3,235 (217.6) %
Percentage of revenue (0.3) % 0.3 %
Amounts recorded as other (expense) income, net include foreign currency
transaction gains and losses, other than cash flow hedges, investment gains and
losses, non-service component of pension costs, and other non-operating gains
and losses.
Other (expense) income, net in the three months ended February 28, 2021 was an
expense of $3.8 million , a change from income of $3.2 million in the three
months ended February 29, 2020 . The change in other (expense) income, net was
primarily due to a favorable resolution of a previously-recognized tax indemnity
obligation in the first quarter of 2020 that did not recur in the first quarter
of 2021 and unfavorable foreign currency transaction changes of $3.9 million
compared to the prior year period.
Provision for Income Taxes
Three Months Ended Percent Change
February 28, 2021 February 29, 2020 2021 to 2020
($ in thousands)
Provision for income taxes $ 34,572 $ 21,544 60.5 %
Percentage of income before income taxes 28.0 % 29.2 %
Income taxes consist of our current and deferred tax expense resulting from our
income earned in domestic and international jurisdictions. For the first quarter
of 2020, although we were included in the consolidated tax returns of SYNNEX in
certain jurisdictions, our tax provision was recorded as if we had filed our
taxes on a stand-alone basis.
Our provision for income taxes increased during the three months ended
February 28, 2021 compared to the three months ended February 29, 2020 primarily
due to the increase in income before taxes for the first quarter of 2021. The
effective tax rate for the three months ended February 28, 2021 decreased
slightly compared to the prior year period due to the change in mix of income
earned in different tax jurisdictions between periods.
Certain non-GAAP financial information
In addition to disclosing financial results that are determined in accordance
with GAAP, we also disclose certain non-GAAP financial information, including:
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•Revenue in constant currency, which is revenue adjusted for the translation
effect of foreign currencies so that certain financial results can be viewed
without the impact of fluctuations in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of our business performance. Revenue
in constant currency is calculated by translating the revenue of each fiscal
year in the billing currency using their comparable prior year's currency
conversion rate. Generally, when the dollar either strengthens or weakens
against other currencies, the growth at constant currency rates or adjusting for
currency will be higher or lower than growth reported at actual exchange rates.
•Non-GAAP operating income, which is operating income, adjusted to exclude
acquisition-related and integration expenses, including related restructuring
costs, spin-off related expenses, amortization of intangible assets and
share-based compensation.
•Non-GAAP operating margin, which is non-GAAP operating income, as defined
above, divided by revenue.
•Adjusted earnings before interest, taxes, depreciation, and amortization, or
adjusted EBITDA, which is non-GAAP operating income, as defined above, plus
depreciation.
•Adjusted EBITDA margin, which is adjusted EBITDA, as defined above, divided by
revenue.
•Non-GAAP net income, which is net income excluding the tax effected impact of
acquisition-related and integration expenses, including related restructuring
costs, spin-off related expenses, amortization of intangible assets and
share-based compensation.
•Free cash flow, which is cash flows from operating activities less capital
expenditures. We believe that free cash flow is a meaningful measure of cash
flows since capital expenditures are a necessary component of ongoing
operations. However, free cash flow has limitations because it does not
represent the residual cash flow available for discretionary expenditures. For
example, free cash flow does not incorporate payments for business acquisitions.
•Non-GAAP diluted earnings per common share ("EPS"), which is diluted EPS
excluding the per share, tax effected impact of acquisition-related and
integration expenses, including related restructuring costs, spin-off related
expenses, amortization of intangible assets and share-based compensation.
We believe that providing this additional information is useful to the reader to
better assess and understand our base operating performance, especially when
comparing results with previous periods and for planning and forecasting in
future periods, primarily because management typically monitors the business
adjusted for these items in addition to GAAP results. Management also uses these
non-GAAP measures to establish operational goals and, in some cases, for
measuring performance for compensation purposes. These non-GAAP financial
measures exclude amortization of intangible assets. Our acquisition activities
have resulted in the recognition of intangible assets, which consist primarily
of client relationships, technology and trade names. Finite-lived intangible
assets are amortized over their estimated useful lives and are tested for
impairment when events indicate that the carrying value may not be recoverable.
The amortization of intangible assets is reflected in our statements of
operations. Although intangible assets contribute to our revenue generation, the
amortization of intangible assets does not directly relate to the services
performed for our clients. Additionally, intangible asset amortization expense
typically fluctuates based on the size and timing of our acquisition activity.
Accordingly, we believe excluding the amortization of intangible assets, along
with the other non-GAAP adjustments which neither relate to the ordinary course
of our business nor reflect our underlying business performance, enhances our
and our investors' ability to compare our past financial performance with its
current performance and to analyze underlying business performance and trends.
Intangible asset amortization excluded from the related non-GAAP financial
measure represents the entire amount recorded within our GAAP financial
statements, and the revenue generated by the associated intangible assets has
not been excluded from the related non-GAAP financial measure. Intangible asset
amortization is excluded from the related non-GAAP financial measure because the
amortization, unlike the related revenue, is not affected by operations of any
particular period unless an intangible asset becomes impaired or the estimated
useful life of an intangible asset is revised. These non-GAAP financial measures
also exclude share-based compensation expense. Given the subjective assumptions
and the variety of award types that companies can use when calculating
share-based compensation expense, management believes this additional
information allows investors to make additional comparisons between our
operating results and those of our peers. As these non-GAAP financial measures
are not calculated in accordance with GAAP, they may not necessarily be
comparable to similarly titled measures employed by other companies. These
non-GAAP financial measures should not be considered in isolation or as a
substitute for the comparable GAAP measures and should be used as a complement
to, and in conjunction with, data presented in accordance with GAAP.
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Three Months Ended
February 28, 2021 February 29, 2020
($ in thousands)
Revenue $ 1,353,278 $ 1,188,619
Foreign currency translation (25,714) 7,519
Revenue in constant currency $
1,327,564
Operating income $ 134,889 $ 88,211 Acquisition-related and integration expenses - 14,352 Spin-off related expenses - 1,000 Amortization of intangibles 34,601 36,978 Share-based compensation 7,118 4,262 Non-GAAP operating income $ 176,608 $ 144,803 Net income $ 88,811 $ 52,317 Interest expense and finance charges, net 7,703 17,585 Provision for income taxes 34,572 21,544 Other expense (income), net 3,803 (3,235) Acquisition-related and integration expenses - 14,352 Spin-off related expenses - 1,000 Amortization of intangibles 34,601 36,978 Share-based compensation 7,118 4,262
Depreciation (excluding accelerated depreciation included in acquisition-related and integration expenses above)
35,999 31,661
Adjusted EBITDA $ 212,607 $ 176,464
Operating margin 10.0 % 7.4 %
Non-GAAP operating margin 13.1 % 12.2 %
Adjusted EBITDA margin 15.7 % 14.8 %
Net income $ 88,811 $ 52,317
Acquisition-related and integration expenses - 14,352
Spin-off related expenses - 1,000
Amortization of intangibles 34,601 36,978
Share-based compensation 7,118 4,262
Income taxes related to the above(1) (10,567) (13,469)
Non-GAAP net income $ 119,963 $ 95,440
Diluted earnings per common share ("EPS") $ 1.69 $ 1.01
Acquisition-related and integration expenses - 0.28
Spin-off related expenses - 0.02
Amortization of intangibles 0.66 0.72
Share-based compensation 0.14 0.08
Income taxes related to the above(1) (0.20) (0.26)
Non-GAAP Diluted EPS $ 2.29 $ 1.85
(1)The tax effect of taxable and deductible non-GAAP adjustments was calculated using the tax deductible portion of the expenses and applying the entity specific, statutory tax rates applicable to each item during the respective fiscal years.
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Liquidity and Capital Resources
Our primary uses of cash are working capital, capital expenditures to expand our
delivery footprint and enhance our technology solutions, and debt repayments.
Our financing needs for these uses of cash have been a combination of operating
cash flows, third-party debt arrangements entered into in connection with the
spin-off and, prior to the spin-off, related party borrowings from SYNNEX. Our
working capital needs are primarily to finance accounts receivable. When our
revenue is increasing, our net investment in working capital typically
increases. Conversely, when revenue is decreasing, our net investment in working
capital typically decreases. To increase our market share and better serve our
clients, we may further expand our operations through investments or
acquisitions. We expect that such expansion would require an initial investment
in working capital, personnel, facilities, and operations. These investments or
acquisitions would likely be funded primarily by our existing cash and cash
equivalents, available liquidity, including capacity on our debt arrangements,
or the issuance of securities.
Debt Arrangements
In connection with the spin-off, we entered into two third-party debt
arrangements. On October 16, 2020 , we entered into a senior secured credit
facility, which provides for the extension of revolving loans of up to $600
million (the "Revolver") and term loan borrowings of up to $900 million (the
"Term Loan" and, together with the Revolver, the "Credit Facility"). On October
30, 2020 , we entered into a $350 million 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, we incurred $900 million
of initial Term Loan borrowings under the Credit Facility and $250 million of
borrowings under the Securitization Facility. Substantially all of the proceeds
from such indebtedness, net of debt issuance costs, were transferred to SYNNEX
on November 30, 2020 to eliminate debt owed by the Company to SYNNEX and in
exchange for the contribution of certain Company trademarks from SYNNEX to the
Company. We had no outstanding borrowings on the Revolver as of February 28,
2021 or November 30, 2020 .
The Credit Facility matures on November 30, 2025 . The outstanding principal
amount of the Term Loan is payable in quarterly installments of $11.25 million
commencing on May 31, 2021 , with the unpaid balance due in full on the maturity
date. We may prepay the loans under the Credit Facility at any time without
penalty, other than breakage fees. During the three months ended February 28,
2021 , we made $50 million of early principal payments on the Term Loan. We made
additional early principal payments of $50 million on March 31, 2021 .
We may request, subject to obtaining commitments from any participating lenders
and certain other conditions, incremental commitments to increase the amount of
the Revolver or Term Loan available under the Credit Facility in an aggregate
principal amount equal to $450.0 million , plus an additional amount, so long as
after giving effect to the incurrence of such additional amount, our 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. Borrowings under the Revolver and the Term
Loan bear interest, in the case of LIBOR rate loans, at a per annum rate equal
to the applicable LIBOR rate (but not less than 0.25%), plus an applicable
margin, which ranges from 1.25% to 2.25%, based on our consolidated leverage
ratio. Borrowings under the Credit Facility that are not LIBOR 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 1/2 of 1.0%, (b) the rate of interest last
publicly announced by Bank of America as its "prime rate" and (c) the LIBOR rate
plus 1.0%, plus (ii) an applicable margin, which ranges from 0.25% to 1.25%,
based on our consolidated leverage ratio. Commitments under the Revolver are
subject to a commitment fee on the unused portion of the Revolver, which fee
ranges from 25 to 45 basis points, based on our consolidated leverage ratio.
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 our
business. In addition, the Credit Facility contains financial covenants that
require us to maintain at the end of each fiscal quarter commencing with the
quarter ended February 28, 2021 , (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.
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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 .
The Securitization Facility has an initial termination date of October 28, 2022 .
Under the Securitization Facility, Concentrix and certain of its U.S. based
subsidiaries sell or otherwise transfer all of their accounts receivable to a
special purpose bankruptcy-remote subsidiary of Concentrix that grants a
security interest in the receivables to the lenders in exchange for available
borrowings of up to $350 million . Borrowing availability under the
Securitization Facility may be limited by our accounts receivables balances,
changes in the credit ratings of our clients comprising the receivables, client
concentration levels in the receivables, and certain characteristics of the
accounts receivable being transferred (including factors tracking performance of
the accounts receivable over time).
Borrowings under the Securitization Facility bear interest with respect to loans
that are funded through the issuance of commercial paper at the applicable
commercial paper rate plus a spread of 1.05% and, otherwise, at a per annum rate
equal to the applicable LIBOR rate plus a spread of 1.15%. We are also obligated
to pay a monthly undrawn fee that ranges from 30 to 37.5 basis points based on
the portion of the Securitization Facility that is undrawn. The Securitization
Facility contains various affirmative and negative covenants, including a
consolidated leverage ratio covenant that is consistent with the Credit Facility
and customary events of default, including payment defaults, defaults under
certain other indebtedness, a change in control of Concentrix , and certain
events negatively affecting the overall credit quality of the transferred
accounts receivable.
As of
Cash Flows - Three months endedFebruary 28, 2021 andFebruary 29, 2020 The following summarizes our cash flows for the three months endedFebruary 28, 2021 andFebruary 29, 2020 , as reported in our consolidated statement of cash flows in the accompanying consolidated financial statements.
Three Months Ended
February 28, 2021 February 29,
2020
($ in thousands)
Net cash provided by operating activities $ 35,884 $ 54,886
Net cash used in investing activities (41,950) (34,669)
Net cash used in financing activities (30,618) (17,238)
Effect of exchange rate changes on cash, cash equivalents and (471) 346
restricted cash
Net (decrease) increase in cash, cash equivalents and $ (37,155) $ 3,325
restricted cash
Cash, cash equivalents and restricted cash at beginning of year 156,351 83,514
Cash, cash equivalents and restricted cash at the end of the $ 119,196
Operating Activities Net cash provided by operating activities was$35.9 million in the first fiscal quarter of 2021, primarily generated from our net income of$88.8 million and adjustments for non-cash items of$73.0 million , partially offset by an increase in accounts receivable of$48.1 million and a total net change in accounts payable, payable to former parent, and other operating assets and liabilities of$77.8 million . The adjustments for non-cash items primarily consist of depreciation, amortization and share-based compensation expenses, partially offset by deferred tax impacts. Net cash provided by operating activities was$54.9 million in the first fiscal quarter of 2020, primarily generated from our net income of$52.3 million and adjustments for non-cash items of$66.8 million , partially offset by an increase in accounts receivable of$44.7 million and a total net change in accounts payable, payable to former parent, and other operating assets and liabilities of$19.5 million . The adjustments for non-cash items primarily consist of depreciation, amortization, hypothetical current tax expense recorded for separate tax return basis presentation and share-based compensation expenses, partially offset by deferred tax impacts. 33 --------------------------------------------------------------------------------
Investing Activities
Net cash used in investing activities in the first fiscal quarter of 2021 was$42.0 million , resulting from capital expenditures to support our growth. Net cash used in investing activities in the first fiscal quarter of 2020 was$34.7 million , primarily resulting from$43.9 million of capital expenditures to support our growth, less repayment of a loan of$9.2 million related to a loan from a non-Concentrix subsidiary of the former parent as part of its centralized treasury operation. Financing Activities Net cash used by financing activities in the first fiscal quarter of 2021 was$30.6 million , consisting primarily of principal payments of$50.0 million under the Credit Facility partially offset by net third-party borrowings of$17.5 million under the Securitization Facility. Net cash used by financing activities in the first fiscal quarter of 2020 was$17.2 million , consisting entirely of repayments on borrowings from SYNNEX. We believe our current cash balances and credit availability are enough to support our operating activities for at least the next twelve months. Free Cash Flow (a non-GAAP measure) Three Months Ended February 28, 2021 February 29, 2020 ($ in thousands) Net cash provided by operating activities $ 35,884 $
54,886
Purchases of property and equipment (41,950)
(43,888)
Free cash flow (a non-GAAP measure) $ (6,066) $
10,998
Our free cash flow was a use of$6.1 million in the first fiscal quarter of 2021 compared to proceeds of$11.0 million in the first fiscal quarter of 2020. The decrease in free cash flow in the first fiscal quarter of 2021 primarily reflects the increase in accounts receivables as a result of our strong first quarter growth, along with higher first quarter payments related to payables, year-end payroll and incentive payments for the first quarter of 2021 as compared to the first quarter of 2020. Capital Resources As ofFebruary 28, 2021 , we had total liquidity of approximately$800 million , which includes undrawn capacity of$600 million on the Credit Facility, undrawn capacity of$82.5 million on the Securitization Facility and cash and cash equivalents. Our cash and cash equivalents totaled$117.6 million and$152.7 million as ofFebruary 28, 2021 andNovember 30, 2020 , respectively. Of our total cash and cash equivalents, 98% and 89% were held by our non-U.S. legal entities as ofFebruary 28, 2021 andNovember 30, 2020 , respectively. Our cash and cash equivalents held by our non-U.S. legal entities are no longer subject toU.S. federal tax on repatriation intothe United States . Repatriation of some non-U.S. balances is restricted by local laws. Historically, we have fully utilized and reinvested all non-U.S. cash to fund our international operations and expansion; however, the Company has recorded deferred tax liabilities related to non-U.S. withholding taxes on the earnings of certain previously acquired non-U.S. entities that are likely to be repatriated in the future. If in the future our intentions change, and we repatriate the cash back tothe United States , we will report in our consolidated financial statements the impact of the state and withholding taxes depending upon the planned timing and manner of such repatriation. Presently, we believe we have sufficient resources, cash flow and liquidity withinthe United States to fund current and expected future working capital, investment and other general corporate funding requirements. We believe that our available cash and cash equivalents balances, the cash flows expected to be generated from operations, and our sources of liquidity will be sufficient to satisfy our current and planned working capital and investment needs for the next twelve 34
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months. We also believe that our longer-term working capital, planned capital expenditures and other general corporate funding requirements will be satisfied through cash flows from operations and, to the extent necessary, from our borrowing facilities and future financial market activities.
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