Concentrix Corporation 10-Q Summary
Business context and reporting period
Concentrix provides technology-enabled customer experience, process optimization, automation, analytics, and business transformation services across technology and consumer electronics, communications and media, retail, travel and ecommerce, banking, financial services and insurance, healthcare, and other markets. The filing covers the three and six months ended May 31, 2021. Concentrix became an independent public company following its December 1, 2020 tax-free spin-off from SYNNEX.
Key financial metrics
| Metric | Three months ended May 31, 2021 | Three months ended May 31, 2020 | Six months ended May 31, 2021 | Six months ended May 31, 2020 |
|---|---|---|---|---|
| Revenue | $1,369.9 million | $1,066.4 million | $2,723.2 million | $2,255.0 million |
| Gross profit | $482.7 million | $345.2 million | $968.8 million | $790.4 million |
| Gross margin | 35.2% | 32.4% | 35.6% | 35.0% |
| Operating income | $128.2 million | $23.6 million | $263.1 million | $111.8 million |
| Operating margin | 9.4% | 2.2% | 9.7% | 5.0% |
| Net income | $82.9 million | $2.5 million | $171.7 million | $54.8 million |
| Diluted EPS | $1.57 | $0.05 | $3.26 | $1.06 |
| Adjusted EBITDA | $208.3 million | $97.7 million | $420.9 million | $274.1 million |
Second-quarter revenue increased 28.5%, while first-half revenue increased 20.8%. Management attributed growth to higher volumes across all verticals, favorable foreign-currency translation, and easier comparisons with the prior-year COVID-19 period. Second-quarter adjusted EBITDA margin was 15.2%, compared with 9.2% in the prior-year quarter.
Net cash provided by operating activities was $239.1 million in the first six months, compared with $297.2 million in the prior-year period. Capital expenditures were $70.8 million, producing free cash flow of $168.4 million versus $228.0 million previously. Cash, cash equivalents, and restricted cash totaled $132.5 million at May 31, 2021, compared with $156.4 million at November 30, 2020.
At May 31, 2021, total debt was approximately $962.5 million before unamortized debt discounts and issuance costs, consisting of $700.0 million under the term loan and $262.5 million under the receivables securitization facility. No revolving credit borrowings were outstanding. Total liquidity was approximately $819 million, including cash, $600 million of undrawn revolving capacity, and $87.5 million of undrawn securitization capacity. The company stated that available liquidity and expected operating cash flow should support operations for at least the next twelve months.
Material changes versus the prior comparable period
- Revenue growth was broad-based, with second-quarter increases ranging from 14.6% in Other markets to 37.8% in Retail, travel and ecommerce. Technology and consumer electronics increased 27.2%.
- Gross margin expanded by 280 basis points in the second quarter and 60 basis points for the first half, helped by lower COVID-19-related costs, revenue growth, favorable foreign exchange, and operating mix.
- SG&A increased 10.2% in the quarter but declined to 25.9% of revenue from 30.2%, reflecting scale efficiencies and lower COVID-19, acquisition-related, and spin-off-related costs.
- Interest expense declined 47.8% in the quarter and 52.6% for the first half, primarily because current-period debt replaced higher-cost borrowings from SYNNEX and outstanding debt was reduced.
- Concentrix repaid $150 million of term-loan principal during the quarter and $200 million during the first six months.
- In May 2021, Concentrix agreed to sell its Concentrix Insurance Solutions insurance third-party administration operations and software platform. The sale closed in July 2021; the business was classified as held for sale at May 31 and was not treated as discontinued operations.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear numerical revenue, earnings, or margin outlook. Management expects cash flows from operations, cash balances, and borrowing facilities to fund current and planned working-capital and investment needs, but notes that longer-term results depend on business conditions and access to financing.
- COVID-19-related costs were approximately $10 million in the second quarter and $20 million in the first six months, compared with approximately $53 million in the prior-year periods. Almost all of the workforce was productive during the first six months of 2021.
- Management continues to identify uncertainty from the duration and severity of COVID-19, government restrictions, vaccine effectiveness, remote-work requirements, employee productivity, and effects on clients.
- Foreign exchange remains material: approximately 84% of second-quarter revenue was generated from non-U.S. operations, while approximately 62% was priced in U.S. dollars. A hypothetical 10% adverse currency movement would have produced an estimated $82 million loss in the fair value of certain hedges, substantially offset by underlying exposures.
- All outstanding debt was variable-rate debt. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $9.6 million.
- The company was in compliance with its debt covenants at May 31, 2021. Credit Facility covenants include a maximum consolidated leverage ratio of 3.75 to 1.0 and a minimum interest coverage ratio of 3.00 to 1.0.
- A $9.2 million second-quarter tax expense resulted from a change in the indefinite-reinvestment assertion for the CIS business. Unrecognized tax benefits totaled $63.1 million, and management expected that approximately $11 million to $28 million could reverse during the following twelve months, although actual results may differ.
- Key operating risks include client concentration, early termination or reduced demand under client contracts, labor costs and turnover, pricing competition, cybersecurity and data protection, foreign exchange, geopolitical and public-health disruptions, and dependence on international delivery locations.
- The company reported no new material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of May 31, 2021.
Important facts for investors to verify
- Whether revenue growth and margin expansion persist after easier COVID-19 comparisons and after the CIS divestiture.
- The effect of foreign-exchange movements, labor inflation, employee turnover, and delivery-location mix on gross margin.
- Term-loan repayment requirements, variable-rate exposure, leverage covenant headroom, and refinancing needs before the November 2025 maturity.
- The sustainability of operating cash flow and free cash flow after working-capital investment and capital expenditures.
- Client concentration and receivables exposure, including one client representing 11.2% of quarterly revenue and 14.0% of accounts receivable at May 31, 2021.
- Potential tax and indemnification obligations associated with the SYNNEX separation and tax matters agreements, which are not subject to a stated maximum amount.