Concentrix Corporation: Q1 Fiscal 2021 Form 10-Q Summary
Business context and reporting period
Concentrix provides technology-infused customer experience solutions, including customer engagement, process optimization, automation, analytics, and business transformation services. The filing covers the three months ended February 28, 2021, compared with February 29, 2020. Concentrix became an independent public company following its tax-free spin-off from SYNNEX on December 1, 2020; prior-period financial statements were prepared on a combined basis and may not reflect costs that would have been incurred as a standalone company.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $1.353 billion | $1.189 billion | 13.9% increase |
| Gross profit | $486.1 million | $445.2 million | 9.2% increase |
| Gross margin | 35.9% | 37.5% | Down 160 bps |
| Operating income | $134.9 million | $88.2 million | 52.9% increase |
| Operating margin | 10.0% | 7.4% | Up 260 bps |
| Net income | $88.8 million | $52.3 million | 69.7% increase |
| Diluted EPS | $1.69 | $1.01 | Increase |
| Adjusted EBITDA | $212.6 million | $176.5 million | 20.5% increase |
| Adjusted EBITDA margin | 15.7% | 14.8% | Up 90 bps |
| Operating cash flow | $35.9 million | $54.9 million | Decrease |
| Free cash flow | $(6.1) million | $11.0 million | Decline |
Revenue growth was led by technology and consumer electronics, healthcare, and retail, travel and ecommerce. Communications and media revenue declined 5.6% as portfolio rebalancing continued. Approximately 83% of revenue was generated from non-U.S. operations, and approximately 62% was priced in U.S. dollars.
Financial position, debt, and liquidity
- Cash and cash equivalents were $117.6 million at February 28, 2021, compared with $152.7 million at November 30, 2020. Cash, cash equivalents, and restricted cash totaled $119.2 million.
- Total debt was approximately $1.118 billion before debt discounts and issuance costs, consisting of $850.0 million under the Term Loan and $267.5 million under the accounts receivable Securitization Facility.
- The Company made a $50.0 million early Term Loan repayment during the quarter and an additional $50.0 million repayment on March 31, 2021.
- No amounts were outstanding under the $600.0 million Revolver. Management reported total liquidity of approximately $800 million, including cash, $600 million of undrawn Revolver capacity, and $82.5 million of undrawn Securitization Facility capacity.
- The Company was in compliance with all debt covenants at February 28, 2021 and stated that available liquidity should support operations for at least the next twelve months.
Material changes versus the prior comparable period
- Revenue increased 13.9%, including a favorable foreign-currency translation effect of $25.7 million, or 2.2%.
- Gross margin declined because of approximately $10 million of COVID-19-related costs and changes in the geographic mix of service delivery.
- SG&A declined 1.6% to $351.2 million, benefiting from lower acquisition-related, integration, amortization, and spin-off expenses, as well as scale efficiencies. SG&A fell to 25.9% of revenue from 30.0%.
- Interest expense declined 56.2%, primarily because third-party debt replaced higher-cost former-parent borrowings and outstanding debt and interest rates were lower.
- Q1 FY2021 included no acquisition-related or spin-off-related expenses, compared with $14.4 million and $1.0 million, respectively, in Q1 FY2020.
- Operating cash flow decreased because of a $48.1 million increase in accounts receivable and higher payments for payables, year-end payroll, and incentives.
Outlook, commentary, risks, and unusual items
The filing does not provide specific financial guidance for fiscal 2021. Management stated that almost all employees were productive during the quarter and that current cash, operating cash flow, and borrowing capacity were expected to support current and planned needs.
- COVID-19 remains a significant uncertainty. The Company incurred approximately $10 million of incremental COVID-19 costs in the quarter and warned that changing restrictions, client demand, workforce access, and operating conditions could materially affect future results.
- Key operating risks include foreign-currency fluctuations, labor costs and employee turnover, client concentration and early contract termination, cybersecurity and data-protection incidents, service and technology disruptions, competitive pricing pressure, geopolitical and economic conditions, and public-health events.
- One client represented 11.9% of Q1 revenue and 13.9% of accounts receivable at February 28, 2021.
- All outstanding debt was variable-rate debt. A hypothetical 100-basis-point increase in rates was estimated to increase annual interest expense by approximately $11.2 million.
- The Company had approximately $126.97 million of aggregate underfunding in defined benefit plans at February 28, 2021.
- Concentrix has uncapped indemnification obligations to SYNNEX under the tax matters agreement if the spin-off fails to qualify for tax-free treatment in specified circumstances. Management did not believe the disclosed contingencies would have a material adverse effect.
- The Company uses foreign-currency derivatives; the estimated potential loss in fair value from a hypothetical 10% adverse currency movement was approximately $79.1 million, substantially offset by corresponding underlying exposures.
Important facts for investors to verify
- Assess the sustainability of revenue growth after adjusting for the $25.7 million favorable currency translation effect and the post-spin-off change in reporting structure.
- Monitor whether gross-margin pressure from COVID-19 costs, delivery geography, labor inflation, and client mix persists.
- Reconcile GAAP earnings with management’s non-GAAP measures, particularly the effects of amortization, share-based compensation, and the absence of prior-year acquisition and spin-off costs.
- Track working-capital needs, accounts receivable growth, and the conversion of net income into operating and free cash flow.
- Verify debt paydown progress, variable-rate exposure, covenant headroom, and availability under the Securitization Facility.
- Review customer concentration, contract termination provisions, foreign-exchange exposure, COVID-19 developments, and the potential tax indemnification exposure to SYNNEX.