Concentrix Corporation — Fiscal 2022 Third-Quarter Form 10-Q Summary
Business context and reporting period
Concentrix provides global customer-experience solutions and technology across technology and consumer electronics, communications and media, retail, travel and e-commerce, banking and financial services, and healthcare. The filing covers the three and nine months ended August 31, 2022, compared with the corresponding 2021 periods. The company operates in more than 40 countries and completed the PK acquisition on December 27, 2021 and the ServiceSource acquisition on July 20, 2022.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | Change | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|---|
| Revenue | $1.580 billion | $1.397 billion | 13.1% | $4.684 billion | $4.120 billion |
| Gross profit | $566.8 million | $481.3 million | 17.8% | $1.664 billion | $1.450 billion |
| Gross margin | 35.9% | 34.4% | +150 bps | 35.5% | 35.2% |
| Operating income | $157.5 million | $151.4 million | 4.1% | $462.2 million | $414.5 million |
| Operating margin | 10.0% | 10.8% | -80 bps | 9.9% | 10.1% |
| Net income attributable to Concentrix | $106.7 million | $109.8 million | -2.8% | $330.1 million | $281.5 million |
| Diluted EPS | $2.04 | $2.08 | -1.9% | $6.28 | $5.35 |
| Adjusted EBITDA | $258.4 million | $214.8 million | 20.3% | $746.2 million | $635.7 million |
| Adjusted EBITDA margin | 16.4% | 15.4% | +100 bps | 15.9% | 15.4% |
Revenue growth reflected higher client volumes and acquired operations, partly offset by $58.6 million of unfavorable foreign-currency translation in the quarter and $120.9 million in the nine-month period. On an adjusted constant-currency basis, revenue increased approximately 7.5% for the quarter and 9.1% for the nine months, based on the company’s disclosed figures.
SG&A increased 24.0% in the quarter and 16.0% year to date, driven by acquired operations, higher amortization, share-based compensation, and acquisition-related and integration expenses. Interest expense increased to $20.3 million in the quarter and $42.0 million year to date, primarily because of acquisition-related borrowings and higher variable interest rates.
Cash flow, debt and liquidity
- Operating cash flow was $365.0 million for the nine months, compared with $332.1 million in the prior-year period.
- Capital expenditures were $97.3 million, producing reported free cash flow of $267.8 million versus $219.3 million in 2021.
- Investing cash flow was negative $1.804 billion, including $1.705 billion of cash paid for the PK and ServiceSource acquisitions.
- Cash, cash equivalents and restricted cash totaled $178.5 million at August 31, 2022; cash and cash equivalents alone were $176.1 million.
- Total debt, net of debt discounts and issuance costs, was approximately $2.407 billion, compared with $802.0 million at November 30, 2021. The increase primarily reflects financing for acquisitions.
- Outstanding debt included approximately $1.969 billion under the Term Loan and $440.0 million under the accounts-receivable securitization facility. No amounts were outstanding under the $1.0 billion Revolver.
- Management reported total liquidity of approximately $1.217 billion, including cash, $1.0 billion of undrawn Revolver capacity, and $40.6 million of undrawn securitization capacity.
- The company was in compliance with its debt covenants at August 31, 2022 and stated that available cash and credit capacity were sufficient for at least the next twelve months.
Material changes versus the prior comparable period
- PK contributed to the year-over-year results for the full nine-month period, while ServiceSource contributed from its July 20, 2022 acquisition date. Acquired operations contributed $142.5 million of Q3 revenue and $349.7 million of nine-month revenue.
- Goodwill increased from $1.814 billion to $2.972 billion, and net intangible assets increased from $655.5 million to $1.026 billion, primarily because of the acquisitions.
- Debt increased substantially to fund the acquisitions, resulting in a more than doubling of interest expense for the nine months.
- Gross margin improved, but operating margin declined because SG&A increased faster than revenue. Acquisition-related and integration expenses were $12.6 million in Q3 and $15.2 million year to date.
- Net income and diluted EPS declined in Q3 despite higher revenue and operating income, primarily because of higher interest expense, SG&A, and acquisition-related costs.
- Accumulated other comprehensive loss increased to $285.3 million from $70.5 million, largely due to foreign-currency translation losses and cash-flow-hedge effects.
- The company repurchased $106.8 million of common stock during the nine months and had approximately $368.1 million remaining under its authorization at August 31, 2022. A $0.275-per-share dividend was announced for payment in November 2022.
Guidance, outlook, commentary and risks
The filing does not provide a clear quantitative revenue, earnings, margin, or cash-flow guidance range. Management expects future results to remain affected by client demand, seasonality, acquisitions, labor availability and costs, inflation, foreign-exchange movements, and the geographic mix of delivery operations. Revenue and margins are typically higher in the fourth quarter.
- COVID-19 continued to affect operations and client demand, although almost all employees were productive during the reporting period. The duration and severity of future impacts remain uncertain.
- Management identified risks from the conflict in Ukraine, inflation, economic weakness, cyberattacks, data protection failures, labor-cost increases, staff turnover, client contract termination, competition, geopolitical conditions, and foreign-exchange volatility.
- All outstanding debt under the Credit Facility and Securitization Facility was variable-rate debt. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $24.2 million.
- The company hedged portions of its Philippine peso and Indian rupee exposure. A hypothetical 10% adverse movement in the underlying currencies would produce an estimated $94.7 million loss in hedge fair value, substantially mitigated by gains on the underlying exposures.
- Acquisition purchase-price allocations remained preliminary, creating potential for measurement-period adjustments. Management is also integrating the acquired companies’ operations, processes, and internal controls.
- The company has uncapped indemnification obligations to TD SYNNEX under the separation and tax matters agreements in specified circumstances, including certain failures of the spin-off to qualify for tax-free treatment. Management does not expect the disclosed commitments and contingencies to have a material adverse effect.
Investor verification checklist
- Verify the sustainability of organic revenue growth after excluding acquisition contributions and foreign-currency effects.
- Monitor operating-margin conversion as acquisition integration costs and amortization continue.
- Assess leverage, variable-rate debt exposure, required Term Loan amortization, and compliance with the 3.75-to-1 leverage and 3.00-to-1 interest-coverage covenants.
- Evaluate PK and ServiceSource integration, final purchase-price allocations, goodwill and intangible-asset impairment risk.
- Track foreign-exchange movements, hedge effectiveness, and the effect of inflation and labor costs in delivery locations.
- Confirm cash generation after acquisitions, capital expenditures, dividends, and share repurchases.
- Review the company’s next filing for formal fiscal 2022 guidance, if provided, and for updates to COVID-19, macroeconomic, legal, tax, and cybersecurity risks.