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 27 -------------------------------------------------------------------------------- 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"), which was declared a pandemic by theWorld Health Organization inMarch 2020 . The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and labor force participation, and created significant volatility and disruption of financial markets. 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 six months endedMay 31, 2021 , almost all of our workforce was productive. We incurred net costs of approximately$10 million and$20 million associated with COVID-19 during the three and six months endedMay 31, 2021 , respectively, in comparison to approximately$53 million in the three and six months endedMay 31, 2020 . The COVID-19 related costs consist of certain out-of- pocket costs and non-productive workforce costs. 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 regions in which we operate, if or when countries or localities may experience an increase in COVID-19 cases, what additional measures may be introduced by governments or our clients in response to the pandemic generally or to an increase in COVID-19 cases in a particular country or locality, and the effect of any such additional measures on 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 and the global recovery from 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 second quarter of 2021 and 2020, approximately 84% and 79% 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 28 -------------------------------------------------------------------------------- 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 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 and six months endedMay 31, 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 . 29 --------------------------------------------------------------------------------
Results of Operations - Three and Six Months Ended
Three Months Ended Six Months Ended
May 31, 2021 May 31, 2020 May 31, 2021 May 31, 2020
($ in thousands)
Revenue $ 1,369,878 $
1,066,363
887,149 721,193 1,754,377 1,464,622
Gross profit 482,729 345,170 968,779 790,360
Selling, general and administrative expenses 354,505 321,590 705,666 678,569
Operating income 128,224 23,580 263,113 111,791
Interest expense and finance charges, net 6,745 12,928 14,448 30,513
Other expense (income), net (3,546) (1,641) 257 (4,876)
Income before income taxes 125,025 12,293 248,408 86,154
Provision for income taxes 42,121 9,823 76,693 31,367
Net income $ 82,904 $ 2,470 $ 171,715 $ 54,787
Revenue
Three Months Ended % Change Six Months Ended % Change
May 31, 2021 May 31, 2020 2021 to 2020 May 31, 2021 May 31, 2020 2021 to 2020
($ in thousands) ($ in thousands)
Industry vertical:
Technology and consumer
electronics $ 417,277 $ 327,997 27.2 % $ 830,095 $ 651,910 27.3 %
Communications and media 254,860 210,684 21.0 % 503,650 474,248 6.2 %
Retail, travel and ecommerce 231,966 168,380 37.8 % 470,967 367,294 28.2 %
Banking, financial services and
insurance 228,816 168,283 36.0 % 437,900 360,987 21.3 %
Healthcare 115,418 84,965 35.8 % 240,642 182,290 32.0 %
Other 121,541 106,053 14.6 % 239,902 218,254 9.9 %
Total $ 1,369,878 $ 1,066,363 28.5 % $ 2,723,156 $ 2,254,982 20.8 %
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 28.5% in the three months ended May 31, 2021 , compared to
the three months ended May 31, 2020 , reflecting increased volumes across all
verticals. The increase for the three months ended May 31, 2021 also reflects
certain increases over the prior period due to "shelter-in-place restrictions"
in response to COVID-19 and COVID-19 impacts on our employees' ability to work
productively despite client demand during the three months ended May 31, 2020 .
Revenue from clients in our technology and consumer electronics vertical
increased in the three months ended May 31, 2021 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 increased due to
higher volumes over the prior period, primarily as a result of prior year
impacts from COVID-19 that did not recur in the current period. 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 and
increased volumes in several travel and tourism clients. 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 increased volumes across the majority of
health insurance clients. Revenue from clients in our other vertical increased
reflecting growth with several government clients. Also contributing to the
increase in total revenue in the three months ended May 31, 2021 was a favorable
translation effect of foreign currencies of $44.8 million , or 4.2%. The positive
foreign currency translation effect on revenue was primarily due to the
strengthening of the euro, British pound and Australian dollar against the U.S.
dollar.
Our revenue increased 20.8% in the six months ended May 31, 2021 , compared to
the six months ended May 31, 2020 , reflecting increased volumes across all
verticals and the impact of the aforementioned shelter-in-place restrictions in
the prior period. Revenue from clients in our technology and consumer
electronics vertical increased in the first half of 2021 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 increased in the first half of the fiscal year due to higher volumes
over the prior period, primarily as a result of prior year
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impacts from COVID-19 that did not recur in the current period, partially offset
by our portfolio balancing 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, partially offset by a decrease in
volumes in several travel and tourism clients during the first half of the year.
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 increased volumes across the
majority of health insurance clients. Revenue from clients in our other vertical
increased reflecting growth with several government clients, partially offset by
a slight decrease in revenue from a few automotive clients. Also contributing to
the increase in total revenue in the six months ended May 31, 2021 was a
favorable translation effect of foreign currencies of $70.5 million , or 3.1%.
The positive foreign currency translation effect on revenue was primarily due to
the strengthening of the euro, British pound and Australian dollar against the
U.S. dollar.
Cost of Revenue, Gross Profit and Gross Margin Percentage
Three Months Ended % Change Six Months Ended % Change
May 31, 2021 May 31, 2020 2021 to 2020 May 31, 2021 May 31, 2020 2021 to 2020
($ in thousands) ($ in thousands)
Cost of revenue $ 887,149 $ 721,193 23.0 % $ 1,754,377 $ 1,464,622 19.8 %
Gross profit 482,729 345,170 39.9 % 968,779 790,360 22.6 %
Gross margin % 35.2 % 32.4 % 35.6 % 35.0 %
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 23.0% in the three months ended May 31, 2021
compared to the three months ended May 31, 2020 , primarily due to the increase
in revenue combined with foreign currency impacts of $38.9 million on the cost
of revenue. The increases were partially offset by a decrease in COVID-19
related costs of approximately $36 million . The foreign currency impact on the
cost of revenue was caused primarily by the strengthening of the Canadian
dollar, euro, British pound and Philippine Peso against the U.S. dollar.
Our gross profit increased 39.9% and our gross margin percentage increased to
35.2% from 32.4% in the three months ended May 31, 2021 , compared to the three
months ended May 31, 2020 , primarily due to the increase in revenue, a net
favorable foreign currency impact of $5.9 million on gross profit and the
decrease in COVID-19 related costs.
Our cost of revenue increased by 19.8% in the six months ended May 31, 2021
compared to the six months ended May 31, 2020 , primarily due to the increase in
revenue combined with foreign currency impacts of $58.1 million on the cost of
revenue. The increases were partially offset by a decrease in COVID-19 related
costs of approximately $26 million . The foreign currency impact on the cost of
revenue was caused primarily by the strengthening of the Canadian dollar, euro,
British pound and Philippine Peso against the U.S. dollar.
Our gross profit increased 22.6% and our gross margin percentage increased to
35.6% from 35.0% in the six months ended May 31, 2021 compared to the six months
ended May 31, 2020 , primarily due to the increase in revenue, a net favorable
foreign currency impact of $12.4 million on gross profit and the decrease in
COVID-19 related costs. Our gross margin was also impacted by the mix of
geographies where our services were delivered.
Selling, General and Administrative Expenses
Three Months Ended % Change Six Months Ended % Change
May 31, 2021 May 31, 2020 2021 to 2020 May 31, 2021 May 31, 2020 2021 to 2020
($ in thousands) ($ in thousands)
Selling, general and $ 354,505 $ 321,590 10.2 % $ 705,666 $ 678,569 4.0 %
administrative expenses
Percentage of revenue 25.9 % 30.2 % 25.9 % 30.1 %
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
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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 increased in the three months
ended May 31, 2021 , compared to the three months ended May 31, 2020 , primarily
due to increases in expenses to support our revenue growth, foreign currency
impacts of $12.1 million , an increase in depreciation expense included in
selling, general, and administrative expenses of $5.7 million and an increase in
share-based compensation expense of $5.4 million . These increases were partially
offset by a decrease in acquisition-related and integration expenses of $3.2
million , a decrease in amortization of intangible assets included in selling,
general and administrative expenses of $1.8 million and a decrease in COVID-19
related expenses of approximately $7 million . These items and scale efficiencies
resulted in a decrease in selling, general and administrative expenses as a
percentage of revenue from 30.2% in the second fiscal quarter of 2020 to 25.9%
in the second fiscal quarter of 2021.
Our selling, general and administrative expenses increased in the six months
ended May 31, 2021 compared to the six months ended May 31, 2020 primarily due
to increases in expenses to support our revenue growth, foreign currency impacts
of $17.0 million , an increase in depreciation expense included in selling,
general, and administrative expenses of $9.1 million , and an increase in
share-based compensation expense of $8.3 million . These increases were partially
offset by a decrease in acquisition-related and integration expenses of $17.6
million , a decrease in amortization of intangible assets included in selling,
general and administrative expenses of $4.2 million and a decrease in COVID-19
related expenses of approximately $7 million . These items and scale efficiencies
resulted in a decrease in selling, general and administrative expenses as a
percentage of revenue from 30.1% in the in the six months ended May 31, 2020 to
25.9% in the six months ended May 31, 2021 .
Operating Income
Three Months Ended % Change Six Months Ended % Change
May 31, 2021 May 31, 2020 2021 to 2020 May 31, 2021 May 31, 2020 2021 to 2020
($ in thousands) ($ in thousands)
Operating income $ 128,224 $ 23,580 443.8 % $ 263,113 $ 111,791 135.4 %
Operating margin 9.4 % 2.2 % 9.7 % 5.0 %
Our operating income and operating margin increased during the three and six
months ended May 31, 2021 in comparison to comparable prior year periods due to
increases in gross profit and the reduction in selling, general and
administrative expenses as a percentage of revenue.
Interest Expense and Finance Charges, Net
Three Months Ended % Change Six Months Ended % Change
May 31, 2021 May 31, 2020 2021 to 2020 May 31, 2021 May 31, 2020 2021 to 2020
($ in thousands) ($ in thousands)
Interest expense and finance $ 6,745 $ 12,928 (47.8) % $ 14,448 $ 30,513 (52.6) %
charges, net
Percentage of revenue 0.5 % 1.2 % 0.5 % 1.4 %
Amounts recorded in interest expense and finance charges, net, for the three and
six months ended May 31, 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 periods related primarily to interest on
borrowings from SYNNEX. The reduction in interest expense for the three and six
months ended May 31, 2021 in comparison to comparable prior year periods
reflects the reduction of outstanding borrowings and more favorable interest
rate terms on the borrowings in the current periods in comparison to prior year
periods.
Other Expense (Income), Net
Three Months Ended % Change Six Months Ended % Change
May 31, 2021 May 31, 2020 2021 to 2020 May 31, 2021 May 31, 2020 2021 to 2020
($ in thousands) ($ in thousands)
Other expense (income), net $ (3,546) $ (1,641) 116.1 % $ 257 $ (4,876) (105.3) %
Percentage of revenue (0.3) % (0.2) % - % (0.2) %
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.
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Other expense (income), net in the three months ended May 31, 2021 resulted in
an increase in income over the prior period primarily due to favorable foreign
currency transaction changes.
Other expense (income), net in the six months ended May 31, 2021 was income of
$0.3 million , in comparison to income of $4.9 million in the six months ended
May 31, 2020 . The change in other expense (income), net was primarily due to a
favorable resolution of a previously-recognized tax indemnity obligation in the
six months ended May 31, 2020 that did not recur in the six months ended May 31,
2021 and unfavorable foreign currency transaction changes of $3.0 million
compared to the prior year period.
Provision for Income Taxes
Three Months Ended % Change Six Months Ended % Change
May 31, 2021 May 31, 2020 2021 to 2020 May 31, 2021 May 31, 2020 2021 to 2020
($ in thousands) ($ in thousands)
Provision for income taxes $ 42,121 $ 9,823 328.8 % $ 76,693 $ 31,367 144.5 %
Percentage of income before 33.7 % 79.9 % 30.9 % 36.4 %
income taxes
Income taxes consist of our current and deferred tax expense resulting from our
income earned in domestic and international jurisdictions. For the three and six
months ended May 31, 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 in the three and six months ended May
31, 2021 compared to the prior year periods, primarily due to the increase in
income before taxes for both periods and an additional expense of $9.2 million
related to the change in our indefinite reinvestment assertion during the second
quarter of 2021 for Concentrix Insurance Solutions ("CIS"). The effective tax
rate for the three months and six months ended May 31, 2021 decreased compared
to the prior year periods 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:
•Constant currency revenue growth, 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. Constant
currency revenue growth is calculated by translating the revenue of each fiscal
year in the billing currency using their comparable prior year's currency
conversion rate in comparison to prior year's revenue. 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, share-based
compensation and the income tax effect of assets held for sale.
•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.
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•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, share-based compensation and the
income tax effect of assets held for sale.
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 Six Months Ended
May 31, 2021 May 31, 2020 May 31, 2021 May 31, 2020
($ in thousands except per share amounts)
Revenue $ 1,369,878 $
1,066,363
(44,766) - (70,480) -
Revenue in constant currency $ 1,325,112 $
1,066,363
Operating income$ 128,224 $ 23,580 $ 263,113 $ 111,791 Acquisition-related and integration expenses - 3,198 - 17,550 Spin-off related expenses - 506 - 1,506 Amortization of intangibles 34,597 36,379 69,198 73,357 Share-based compensation 9,283 3,840 16,401 8,102 Non-GAAP operating income$ 172,104 $ 67,503 $ 348,712 $ 212,306 Net income$ 82,904 $ 2,470 $ 171,715 $ 54,787 Interest expense and finance charges, net 6,745 12,928 14,448 30,513 Provision for income taxes 42,121 9,823 76,693 31,367 Other expense (income), net (3,546) (1,641) 257 (4,876) Acquisition-related and integration expenses - 3,198 - 17,550 Spin-off related expenses - 506 - 1,506 Amortization of intangibles 34,597 36,379 69,198 73,357 Share-based compensation 9,283 3,840 16,401 8,102 Depreciation (excluding accelerated depreciation included in acquisition-related and integration expenses above) 36,226 30,161 72,225 61,822 Adjusted EBITDA$ 208,330 $ 97,664 $ 420,937 $ 274,128 Operating margin 9.4 % 2.2 % 9.7 % 5.0 % Non-GAAP operating margin 12.6 % 6.3 % 12.8 % 9.4 % Adjusted EBITDA margin 15.2 % 9.2 % 15.5 % 12.2 % Net income$ 82,904 $ 2,470 $ 171,715 $ 54,787 Acquisition-related and integration expenses - 3,198 - 17,550 Spin-off related expenses - 506 - 1,506 Amortization of intangibles 34,597 36,379 69,198 73,357 Share-based compensation 9,283 3,840 16,401 8,102 Income taxes related to the above(1) (11,107) (11,125) (21,674) (24,594) Income tax effect of assets held for sale(2) 9,247 - 9,247 - Non-GAAP net income$ 124,924 $
35,268
Diluted earnings per common share ("EPS")
- 0.06 - 0.34
Spin-off related expenses - 0.01 - 0.03
Amortization of intangibles 0.66 0.70 1.31 1.42
Share-based compensation 0.18 0.07 0.31 0.16
Income taxes related to the above(1) (0.22) (0.21) (0.41) (0.48)
Income tax effect of assets held for sale(2) 0.18 - 0.18 -
Non-GAAP Diluted EPS $ 2.37 $ 0.68 $ 4.65 $ 2.53
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(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.
(2)In the second quarter of fiscal year 2021, we announced a definitive
agreement to sell our CIS business and, therefore, we are no longer indefinitely
reinvested with respect to our investment in this subsidiary. This amount
represents the income tax impact of the change in this reinvestment assertion.
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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 May 31, 2021 or
November 30, 2020 .
The Credit Facility matures on November 30, 2025 . Beginning May 31, 2021 , the
outstanding principal amount of the Term Loan is payable in quarterly
installments of $11.25 million 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 and six months ended
May 31, 2021 , we paid $150 million and $200 million of the principal balance on
the Term Loan, respectively.
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 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, (i) a consolidated
leverage ratio (as defined in the Credit Facility) not to exceed 3.75 to 1.0 and
(ii) a consolidated interest coverage ratio (as defined in the Credit Facility)
equal to or greater than 3.00 to 1.0. The Credit Facility also contains various
customary events of default, including payment defaults, defaults under certain
other indebtedness, and a change of control of Concentrix .
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The Securitization Facility has a termination date of October 28, 2022 . Under
the Securitization Facility, Concentrix and certain of its U.S. based
subsidiaries (the "Originators") 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 $350 million . Borrowing availability
under the Securitization Facility may be limited by our accounts receivables
balances, changes in the credit ratings of our clients comprising the
receivables, client concentration levels in the receivables, and certain
characteristics of the accounts receivable being transferred (including factors
tracking performance of the accounts receivable over time). In May 2021 , we
amended the Securitization Facility to remove CIS as an Originator.
Borrowings under the Securitization Facility bear interest with respect to loans
that are funded through the issuance of commercial paper at the applicable
commercial paper rate plus a spread of 1.05% and, otherwise, at a per annum rate
equal to the applicable LIBOR rate plus a spread of 1.15%. We are also obligated
to pay a monthly undrawn fee that ranges from 30 to 37.5 basis points based on
the portion of the Securitization Facility that is undrawn. The Securitization
Facility contains various affirmative and negative covenants, including a
consolidated leverage ratio covenant that is consistent with the Credit Facility
and customary events of default, including payment defaults, defaults under
certain other indebtedness, a change in control of Concentrix , and certain
events negatively affecting the overall credit quality of the transferred
accounts receivable.
As of
Cash Flows - Six Months Ended
Six Months Ended
May 31, 2021 May 31, 2020
($ in thousands)
Net cash provided by operating activities $ 239,115 $ 297,201
Net cash used in investing activities (73,773) (66,384)
Net cash used in financing activities (182,586) (212,936)
Effect of exchange rate changes on cash, cash equivalents and (6,626)
(3,178)
restricted cash
Net (decrease) increase in cash, cash equivalents and $ (23,870) $ 14,703
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
Operating Activities Net cash provided by operating activities was$239.1 million for the six months endedMay 31, 2021 , primarily generated from our net income of$171.7 million and adjustments for non-cash items of$153.6 million , partially offset by an increase in accounts receivable of$10.9 million and a total net change in accounts payable, payable to former parent, and other operating assets and liabilities of$75.3 million . The adjustments for non-cash items primarily consist of depreciation, amortization and share-based compensation expenses, partially offset by the provision for doubtful accounts and deferred tax impacts. Net cash provided by operating activities was$297.2 million for the six months endedMay 31, 2020 , primarily generated from our net income of$54.8 million , adjustments for non-cash items of$142.1 million , a decrease in accounts receivable of$41.4 million and a total net change in accounts payable, payable to former parent, and other operating assets and liabilities of$58.9 million . The adjustments for non-cash items primarily consist of depreciation, amortization, hypothetical current tax expense recorded for separate tax return basis presentation, share-based compensation expenses and the provision for doubtful accounts, partially offset by deferred tax impacts. 38 --------------------------------------------------------------------------------
Investing Activities
Net cash used in investing activities for the six months endedMay 31, 2021 was$73.8 million , resulting primarily from$70.8 million of capital expenditures to support our growth and$3.0 million in payments related to an acquisition. Net cash used in investing activities for the six months endedMay 31, 2020 was$66.4 million , primarily resulting from$69.2 million of capital expenditures to support our growth, less a$5.5 million repayment received 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 for the six months endedMay 31, 2021 was$182.6 million , consisting primarily of principal payments of$200.0 million under the Credit Facility partially offset by net third-party borrowings of$12.5 million under the Securitization Facility and proceeds from the exercise of stock options and employee stock purchase plan of$5.4 million . Net cash used by financing activities for the six months endedMay 31, 2020 was$212.9 million , consisting entirely of repayments on borrowings from SYNNEX. We believe our current cash balances and credit availability are enough to support our operating activities for at least the next twelve months. Free Cash Flow (a non-GAAP measure) Six Months EndedMay 31, 2021 May 31, 2020 ($ in thousands)
Net cash provided by operating activities
(70,758) (69,241)
Free cash flow (a non-GAAP measure)
Our free cash flow was$168.4 million for the six months endedMay 31, 2021 compared to$228.0 million for the six months endedMay 31, 2020 . The decrease in free cash flow for the six months endedMay 31, 2021 as compared to the six months endedMay 31, 2020 primarily reflects the increase in accounts receivable as a result of our strong growth in the first half of 2021, along with higher payroll and incentive payments for the six months endedMay 31, 2021 as compared to the six months endedMay 31, 2020 . Capital Resources As ofMay 31, 2021 , we had total liquidity of approximately$819 million , which includes undrawn capacity of$600 million on the Credit Facility, undrawn capacity of$87.5 million on the Securitization Facility and cash and cash equivalents. Our cash and cash equivalents totaled$131.2 million and$152.7 million as ofMay 31, 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 ofMay 31, 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 39
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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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