NOTES TO COMBINED FINANCIAL STATEMENTS
(currency and share amounts in thousands, except per share amounts)
NOTE 1—BACKGROUND AND BASIS OF PRESENTATION:
Background
Concentrix (“Concentrix,” the “CX business” or the “Company”) 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 around the world. 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.
Through November 30, 2020, the CX business was held entirely within certain wholly-owned subsidiaries of SYNNEX Corporation (“SYNNEX” or the “Parent”). Except for transactions described in Note 11, these wholly-owned subsidiaries did not perform activities related to any non-CX business of SYNNEX. As the separate legal entities that make up the CX business were not historically held by a single legal entity and in preparation for the separation of the CX business into an independent publicly-traded company, SYNNEX undertook a series of transactions during 2020, following which Concentrix Corporation held, directly or indirectly through its subsidiaries, the CX business.
On December 1, 2020, the separation of the CX business (the “separation”) from SYNNEX was completed through a tax-free distribution of all of the issued and outstanding shares of the Company’s common stock to SYNNEX stockholders in a tax-free distribution (the “distribution” and, together with the separation, the “spin-off”). SYNNEX stockholders received one share of the Company’s common stock for each share of SYNNEX common stock held as of the close of business on November 17, 2020. As a result of the spin-off, the Company became an independent public company and the Company’s common stock commenced trading on the Nasdaq Stock Market (“Nasdaq”) under the symbol “CNXC” on December 1, 2020.
In connection with the spin-off, on November 30, 2020, the Company 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 the Company’s ongoing relationship with SYNNEX after the spin-off.
During the year ended November 30, 2020, Concentrix recognized spin-off related expenses of $9.5 million, consisting primarily of third-party advisory costs, legal fees and regulatory fees.
Risks and uncertainties related to the COVID-19 pandemic
In March 2020, the World 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. “Shelter-in-place” restrictions by various governments around the world negatively impacted the Company’s results of operations for year ended November 30, 2020 and was most acute during the second quarter of fiscal year 2020, as many of the Company’s employees were unable to work productively during the period despite client demand. During the year ended November 30, 2020, we incurred incremental costs associated with non-productive workforce and other costs. The Company successfully transitioned a significant portion of its workforce to a remote working environment throughout the second quarter of 2020 and implemented a number of safety and social distancing measures in its sites to protect the health and safety of employees. As of the end of the third quarter of fiscal year 2020 and through year end, almost all of the Company’s workforce was productive.
The Company is unable to predict how long the pandemic conditions will persist, what additional measures may be introduced by governments or the Company’s clients and the effect of any such additional measures on the Company’s business. As a result, many of the estimates and assumptions used in preparation of these combined financial statements required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve with respect to the pandemic, the Company’s estimates may materially change in future periods.
Basis of presentation
For the purposes of the presentation of these combined financial statements and prior to December 1, 2020, the CX business was held entirely within certain wholly-owned subsidiaries of SYNNEX dedicated to the CX business. As the separate legal entities that make up the CX business were not historically held by a single legal entity, these combined financial statements of the Company were prepared in connection with the planned separation and have been derived from the SYNNEX Consolidated Financial Statements and accounting records of the Parent as if the Company had been operated on a stand-alone basis during the periods presented. These combined financial statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). All direct revenue and expenses attributable to the Concentrix business including certain allocations of Parent costs and expenses have been separately maintained in a separate ledger in the legal entities that make up the Concentrix business. As the separate legal entities that make up the Concentrix business were not historically held by a single legal entity, Parent company investment is shown in lieu of stockholders’ equity in the combined financial statements. All significant intercompany balances and transactions between the legal entities that comprise Concentrix have been eliminated.
Management of the Company and Parent consider allocations of Parent costs to be a reasonable reflection of the utilization of services by, or the benefits provided to, the Company. The allocations may not, however, reflect the expense the Company would have incurred as a stand-alone company for the periods presented. Actual costs that may have been incurred if the Company had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and other strategic decisions.
Historically, Concentrix received or provided funding for acquisitions or ongoing operations as part of SYNNEX’ centralized treasury program. Accordingly, only cash amounts specifically recorded in the separate Concentrix ledger are reflected in the combined balance sheets. The Company reflects transfers of cash from the Parent’s cash management system as loans or other accounts payable to the Parent or a reduction of accounts or loans receivable in the combined balance sheets based on the purpose for which the cash was provided by the Parent. Similarly, cash transfers to the Parent are reflected as reduction of loans or other accounts payable to the Parent or as loans receivable from the Parent. The cash payments and receipts are recorded in the combined statements of cash flows as operating or financing activities based on the nature of the transactions for which the funds were transferred between the Company and the Parent.
Through November 30, 2020, certain Concentrix legal entities in the United States jointly and severally guaranteed certain of SYNNEX’ borrowing arrangements in the United States and substantially all of the assets of these Concentrix legal entities secured SYNNEX’ obligations under the borrowing arrangements. In connection with the spin-off, the Concentrix legal entities were released as guarantors and the Concentrix legal entities’ assets were released as collateral under the SYNNEX borrowing arrangements, and the Company entered into a new Credit Facility and Securitization Facility as more fully described in Note 9. The third-party debt obligations included in these combined financial statements include only those obligations for which the legal obligor is a legal entity within the CX business and obtained funds directly from the third-party lender. Such third-party debt arrangements have continued as obligations of the Company following the separation from SYNNEX.
Through November 30, 2020, operations of Concentrix are included in the consolidated U.S. federal, and certain state and local income tax returns filed by SYNNEX, where applicable. Concentrix also files certain separate state, local and foreign tax returns. Income tax expense and other income tax related information contained in the combined financial statements are presented on a separate return basis, which requires us to estimate tax expense as
if the Company filed a separate return apart from SYNNEX. The income taxes of Concentrix as presented in the combined financial statements may not be indicative of the income taxes that Concentrix will incur in the future.
Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Additionally, $56.8 million in other accrued liabilities and $4.8 million in accrued compensation and benefits was reclassified to accounts payable at November 30, 2019 to conform to the current year presentation. This reclassification adjustment resulted in no other impacts to the Company’s combined financial statements and is not deemed material.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. The Company evaluates these estimates on a regular basis and bases them on historical experience and on various assumptions that the Company believes are reasonable. Actual results could differ from the estimates.
Principles of combination
The Company’s combined financial statements include the combined accounts of SYNNEX’ wholly-owned subsidiaries engaged in the CX business, in which no substantive participating rights are held by minority stakeholders, and variable interest entities in the core business if the Company is the primary beneficiary. All intercompany accounts and transactions within the entities included in the combined financial statements have been eliminated.
Segment reporting
Concentrix operations are based on an integrated global delivery model whereby services under a client contract in one location may be provided from delivery centers located in one or more different countries with more than half of the Company’s workforce located in Philippines and India. Given the homogeneity of technology-infused CX services and the integrated delivery model, the Company operates in a single segment, based on how the chief operating decision maker (“CODM”) views and evaluates the Company’s operations in making operational and strategic decisions and assessments of financial performance. The Company’s President and Chief Executive Officer has been identified as the CODM.
Cash equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity or remaining maturity at the date of purchase of three months or less to be cash equivalents. Cash equivalents consist principally of money market deposit accounts that are stated at cost, which approximates fair value. The Company is exposed to credit risk in the event of default by financial institutions to the extent that cash balances with financial institutions are in excess of amounts that are insured.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are comprised primarily of amounts owed to the Company by clients and are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts is an estimate to cover the losses resulting from uncertainty regarding collections from customers to make payments for outstanding balances. In estimating the required allowance, the Company takes into consideration the overall quality and aging of the accounts receivable and credit evaluations of its customers’ financial condition. The Company also evaluates the collectability of accounts receivable based on specific customer circumstances, current economic trends, historical experience with collections and the value and adequacy of any collateral received from customers.
Unbilled receivables
In the majority of service contracts, the Company performs the services prior to billing the customer, and this amount is captured as an unbilled receivable included in accounts receivable, net on the combined balance sheet. Billing usually occurs in the month after the Company performs the services or in accordance with the specific contractual provisions.
Derivative financial instruments
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of “Accumulated other comprehensive income (loss),” in Parent equity and reclassified into earnings in the same line associated with the forecasted transactions, in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.
For derivative instruments that are not designated as cash flow hedges, gains and losses on derivative instruments are reported in the combined statements of operations in the current period.
Software costs
The Company develops software platforms for internal use. The Company capitalizes costs incurred to develop software subsequent to the software product reaching the application development stage. The Company also capitalizes the costs incurred to extend life of the existing software, or the cost of significant enhancements that are added to the features of existing software. The capitalized development costs primarily comprise payroll costs and related software costs. Capitalized costs are amortized over the economic life of the software on the straight line amortization method.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based upon the shorter of the estimated useful lives of the assets, or the lease term of the respective assets, if applicable. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized. The ranges of estimated useful lives for property and equipment categories are as follows:
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Equipment and furniture
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3 - 10 years
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Software
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3 - 7 years
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Leasehold improvements
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2 - 15 years
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Buildings and building improvements
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10 - 39 years
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Leases
The Company enters into leases as a lessee for property and equipment in the ordinary course of business. When procuring services, or upon entering into a contract with its customers and clients, the Company determines whether an arrangement contains a lease at its inception. As part of that evaluation the Company considers whether there is an implicitly or explicitly identified asset in the arrangement and whether the Company, as the lessee, or the client, if the Company is the lessor, has the right to control the use of that asset. Effective December 1, 2019, when the
Company is the lessee, all leases with a term of more than 12 months are recognized as right-of-use (ROU) assets and associated lease liabilities in the combined balance sheet. Lease liabilities are measured at the lease commencement date and determined using the present value of the lease payments not yet paid, at the Company’s incremental borrowing rate, which approximates the rate at which the Company would borrow on a secured basis in the country where the lease was executed. The interest rate implicit in the lease is generally not determinable in the transactions where the Company is the lessee. The ROU asset equals the lease liability adjusted for any initial direct costs, prepaid rent and lease incentives. The Company’s variable lease payments generally relate to payments tied to various indexes, non-lease components and payments above a contractual minimum fixed amount.
Operating leases are included in other assets, net, other accrued liabilities and other long-term liabilities in the combined balance sheet. Substantially all of the Company’s leases are classified as operating leases. The lease includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company made a policy election to not recognize leases with a lease term of 12 months or less in the combined balance sheet. Lease expenses are recorded within selling, general, and administrative expenses in the combined statements of operations. Operating lease payments are presented within “Cash flows from operating activities” in the combined statements of cash flows.
For all asset classes, the Company has elected the lessee practical expedient to combine lease and non-lease components (e.g. maintenance services) and account for the combined unit as a single lease component. Variable lease payments are recognized in the period in which the obligation for those payments are incurred.
Business combinations
The purchase price is allocated to the assets acquired, liabilities assumed, and non-controlling interests in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed and non-controlling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired entity and the Company and the value of the acquired assembled workforce, neither of which qualify for recognition as an intangible asset. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available. The Company includes the results of operations of the acquired business in the combined financial statements prospectively from the date of acquisition. Acquisition-related charges are recognized separately from the business combination and are expensed as incurred. These charges primarily include direct third-party professional and legal fees, and integration-related costs.
Goodwill and intangible assets
The Company tests goodwill for impairment annually at the reporting unit level in the fiscal fourth quarter or more frequently if events or changes in circumstances indicate that it may be impaired. For purposes of the goodwill impairment test, the Company can elect to perform a quantitative or qualitative analysis. If the qualitative analysis is elected, goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. The factors that are considered in the qualitative analysis include macroeconomic conditions, industry and market considerations, cost factors such as increases in labor, or other costs that would have a negative effect on earnings and cash flows; and other relevant entity-specific events and information.
If we elect to perform or are required to perform a quantitative analysis, then the reporting unit’s carrying value is compared to its fair value. The fair value of the reporting unit is estimated using a market approach and an income approach (discounted cash flow approach). Under the market approach, the Company utilizes the guideline company method, which involves calculating valuation multiples based on operating data from comparable publicly traded companies. Multiples derived from these companies provide an indication of how much a knowledgeable investor in the marketplace would be willing to pay for a company. These multiples are then applied to the operating data to arrive at an indication of value. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows utilizing a market-based weighted-average cost of capital determined
separately for each reporting unit. The assumptions used in the market approach are based on the value of a business through an analysis of revenue and other multiples of guideline companies and recent sales of or offerings by a comparable entity. The assumptions used in the discounted cash flow approach are based on historical and forecasted revenue, operating costs, future economic conditions, a market-based weighted average cost of capital and other relevant factors. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value and the excess is recognized as an impairment loss.
No goodwill impairment has been identified for any of the years presented.
The values assigned to intangible assets are based on estimates and judgement regarding expectations for length of customer relationships and success of life cycle of technologies acquired in a business combination. Purchased intangible assets are amortized over the useful lives based on estimates of the use of the economic benefit of the asset or on the straight-line amortization method.
Intangible assets consist of customer relationships, technology and trade names. Amortization is based on the pattern in which the economic benefits of the intangible assets will be consumed or on a straight line basis when the consumption pattern is not apparent over the following useful lives:
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Customer relationships
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10 - 15 years
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Technology
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5 years
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Trade names
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5 years
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Impairment of long-lived assets
The Company reviews the recoverability of its long-lived assets, such as intangible assets subject to amortization, property and equipment and certain other assets, including lease right-of-use assets, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows, undiscounted and without interest charges, of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated fair value and carrying value.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash equivalents, accounts receivable and derivative instruments.
The Company’s cash and cash equivalents and derivative instruments are transacted and maintained with financial institutions with high credit standing, and their compositions and maturities are regularly monitored by management. Through November 30, 2020, the Company has not experienced any credit losses on such deposits and derivative instruments.
Accounts receivable comprise amounts due from customers. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. The Company also maintains allowances for potential credit losses. In estimating the required allowances, the Company takes into consideration the overall quality and aging of its receivable portfolio and specifically identified customer risks. Through November 30, 2020, such losses have been within management’s expectations.
In fiscal years 2020, 2019 and 2018, one customer accounted for 11.5%, 10.4% and 20.8%, respectively of the Company’s combined revenue.
As of November 30, 2020 and 2019, one customer comprised 16.2% and 11.5%, respectively, of the total accounts receivable balance.
Revenue recognition
The Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, on December 1, 2018 on a full retrospective basis to ensure a consistent basis of presentation within the Company’s combined financial statements for all periods reported.
The Company generates revenue primarily from the provision of business outsourcing services focused on customer experience solutions. The Company recognizes revenue from services contracts over time as the promised services are delivered to clients for an amount that reflects the consideration to which the Company is entitled in exchange for those services. The Company accounts for a contract with a customer when it has written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection. Revenue is presented net of taxes collected from customers and remitted to government authorities. Service contracts may be based on a fixed price or on a fixed unit-price per transaction or other objective measure of output. The Company determines whether the services performed during the initial phases of an arrangement, such as setup activities, are distinct. In most cases, the arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company records deferred revenue attributable to certain process transition, setup activities where such activities do not represent separate performance obligations. Billings related to such transition activities are classified under contract liabilities and subsequently recognized ratably over the period in which the related services are performed. The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage. As a result, revenue is generally recognized over the period the services are provided on a usage basis. This results in revenue recognition that corresponds with the benefit to the client of the services transferred to date relative to the remaining services promised. Revenue on fixed price contracts is recognized on a straight-line basis over the term of the contract as services are provided. Revenue on unit-price transactions is recognized using an objective measure of output including staffing hours or the number of transactions processed by service agents. Client contract terms can range from less than one year to more than five years. The Company generally invoices a customer after performance of services, or in accordance with specific contractual provisions. Payments are due as per contract terms and do not contain a significant financing component.
Certain customer contracts include incentive payments from the customer upon achieving certain agreed-upon service levels and performance metrics or service level agreements that could result in credits or refunds to the customer. Revenue relating to such arrangements is accounted for as variable consideration when the likely amount of revenue to be recognized can be estimated to the extent that it is probable that a significant reversal of any incremental revenue will not occur.
Cost of revenue
Recurring direct operating costs for services are recognized as incurred. Cost of services revenue consists primarily of personnel costs. Where a contract requires an up-front investment, which typically includes transition and set-up costs related to systems and processes, these amounts are deferred and amortized on a straight-line basis over the expected period of benefit, not to exceed the fixed term of the contract. The Company performs periodic reviews to assess the recoverability of deferred contract transition and setup costs. This review is done by comparing the estimated minimum remaining undiscounted cash flows of a contract to the unamortized contract costs. If such minimum undiscounted cash flows are not sufficient to recover the unamortized costs, an impairment loss is recognized for the difference between the estimated fair value and the carrying value. If a cash flow deficiency remains after reducing the carrying amount of the deferred costs, the Company evaluates any remaining long-lived assets related to that contract for impairment.
Selling, general and administrative expenses
Selling, general and administrative expenses are charged to income as incurred. Expenses of promoting and selling products and services are classified as selling expense and include such items as compensation, sales commissions and travel. General and administrative expenses include such items as compensation, cost of delivery centers, legal and professional costs, office supplies, non-income taxes, insurance and utility expenses. In addition, selling, general and administrative expenses include other operating items such as allowances for credit losses, depreciation and amortization of non-technology related intangible assets.
Advertising
Costs related to advertising and product promotion expenditures are charged to “Selling, general and administrative expenses” as incurred. To date, net costs related to advertising and promotion expenditures have not been material.
Income taxes
The Company’s operations have historically been included in the tax returns filed by the respective Parent entities of which the Company’s businesses are a part. Income tax expense and other income tax related information contained in these combined financial statements are presented on a separate return basis as if the Company filed its own tax returns.
The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse. Tax on global low-taxed intangible income is accounted for as a current expense in the period in which the income is includable in a tax return using the “period cost” method. Valuation allowances are provided against deferred tax assets that are not likely to be realized.
The Company recognizes tax benefits from uncertain tax positions only if that tax position is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in the provisions for income taxes.
Foreign currency translations
The financial statements of the legal entities included in these combined financial statements, whose functional currencies are the local currencies, are translated into U.S. dollars for combination as follows: assets and liabilities at the exchange rate as of the balance sheet date, equity at the historical rates of exchange, and income and expense amounts at the average exchange rate for the month. Translation adjustments resulting from the translation of the legal entities’ accounts are included in “Accumulated other comprehensive income (loss).” Transactions denominated in currencies other than the applicable functional currency are converted to the functional currency at the exchange rate on the transaction date. At period end, monetary assets and liabilities are remeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Gains and losses resulting from foreign currency transactions are included within “Other income, net.”
Other comprehensive income
The primary components of other comprehensive income for the Company include foreign currency translation adjustments arising from the combination of foreign legal entities engaged in the CX business, unrealized gains and losses on cash flow hedges and the changes in unrecognized pension and post-retirement benefits.
Share-based compensation
The Company’s employees have historically participated in Parent’s share-based compensation plans. Share-based compensation expense has been allocated to the Company based on the specific awards and terms previously granted to the Company’s employees. Share-based compensation cost for stock options, restricted stock awards and units, performance restricted stock units and employee stock purchase plans is determined based on the fair value at the measurement date. The Company recognizes share-based compensation cost as expense for awards other than its performance-based restricted stock units ratably on a straight-line basis over the requisite service period. The Company recognizes share-based compensation cost associated with its performance-based restricted stock units over the requisite service period if it is probable that the performance conditions will be satisfied. Effective fiscal year 2018, the Company accounts for expense reductions that result from the forfeiture of unvested awards in the period that the forfeitures occur. Prior to fiscal year 2018, the Company estimated forfeitures and only recorded compensation costs for those awards that were expected to vest.
Pension and post-retirement benefits
The funded status of the Company’s pension and other postretirement benefit plans is recognized in the combined balance sheets. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at November 30, the measurement date. For defined benefit pension plans, the benefit obligation is the projected benefit obligation (“PBO”) and, for the other postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation (“APBO”). The PBO represents the actuarial present value of benefits expected to be paid upon retirement. For active plans, the present value reflects estimated future compensation levels. The APBO represents the actuarial present value of postretirement benefits attributed to employee services already rendered. The fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants. The measurement of the benefit obligation is based on the Company’s estimates and actuarial valuations. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain key assumptions that require significant judgment, including, but not limited to, estimates of discount rates, expected return on plan assets, inflation, rate of compensation increases, interest crediting rates and mortality rates. The assumptions used are reviewed on an annual basis.
Accounting pronouncements adopted during the three-year period ended November 30, 2020
In February 2018, the Financial Accounting Standard Board (the “FASB”) issued guidance that permits the Company to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the Tax Cuts and Jobs Act of 2017 to retained earnings. The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The adoption of this new guidance did not have a material impact on the Company’s combined financial statements.
In February 2016, the FASB issued a new standard which revises various aspects of accounting for leases, with amendments in 2018 and 2019 codified as Accounting Standards Codification Topic 842, Leases (“ASC Topic 842”). The Company adopted the guidance effective December 1, 2019, applying the optional transition method, which allows an entity to apply the new standard at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, the Company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components for all asset classes. The Company made a policy election to not recognize ROU assets and lease liabilities for short-term leases for all asset classes. The most significant impact of adoption to the Company’s combined financial statements relates to the recognition of a right-of-use asset and a lease liability for virtually all of its leases other than short-term leases. The liability was equal to the present value of lease payments. The asset is based on the liability, and subject to adjustment, such as for initial direct costs. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. For income statement purposes, operating leases will result in a straight-line expense while finance leases will result in a front-loaded expense pattern. Upon adoption, the Company recorded $525,344 of ROU assets and of $571,940 of liabilities relating to its operating leases on its combined balance sheet. The adoption did not have an impact on the Company’s combined statements of operations or its combined statements of cash flows.
In May 2014, the FASB issued a comprehensive new revenue recognition standard for contracts with customers with amendments in 2015 and 2016, codified as Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. The Company adopted the guidance effective December 1, 2018 on a full retrospective basis to ensure a consistent basis of presentation within the Company’s combined financial statements for all periods reported. In addition, the Company elected the one year practical expedient for contract costs. The impact of adoption was not material and relates primarily to the capitalization of certain sales commissions that are assessed to be incremental for obtaining new contracts. Such costs are amortized over the period of expected benefit rather than being expensed as incurred as was the Company’s prior practice.
In January 2016, the FASB issued new guidance which amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. With respect to the Company’s combined financial statements, the most significant impact relates to the accounting for equity investments (other than those that are consolidated or accounted under the equity method) which are measured at fair value through earnings. The Company has elected to use the measurement alternative for non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical or similar investments of the same issuer, less impairment. The Company adopted the guidance as of December 1, 2018, with amendments related specifically to equity securities without readily determinable fair values applied prospectively. The adoption did not have a material impact on the Company’s combined financial statements.
In August 2018, the FASB issued guidance clarifying the accounting for capitalizing implementation costs incurred by a customer in a cloud computing arrangement that is a service contract. Under the new guidance, implementation costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing guidance for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments also require the customer to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. The guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company adopted this guidance prospectively in the third quarter of fiscal year 2018. The adoption did not have a material impact on the Company’s combined financial statements.
In March 2016, the FASB issued guidance that changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the combined statement of cash flows. The guidance was effective for interim and annual periods beginning after December 15, 2016 and early adoption was permitted. The Company adopted this guidance prospectively, during the first quarter of fiscal year 2018. The adoption did not have a material impact on the Company’s combined financial statements.
Recently issued accounting pronouncements not yet adopted
In March 2020, the FASB issued optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”) on financial reporting. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are elective and are effective upon issuance for all entities through December 31, 2022. The Company is currently evaluating the impact of the new guidance.
In December 2019, the FASB issued new guidance that simplifies the accounting for income taxes. The guidance is effective for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. Certain amendments should be applied prospectively, while other amendments should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of the new guidance.
In August 2018, the FASB issued new guidance to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The amendment requires the Company to disclose the weighted-average interest crediting rates used in cash balance pension plans. It also requires the Company to disclose the reasons for significant changes in the benefit obligation or plan assets including significant gains and losses affecting the benefit obligation for the period. This standard is effective for fiscal years ending after
December 15, 2020 and early adoption is permitted. The adoption is not expected to have a material impact on the Company’s combined financial statements.
In August 2018, the FASB issued guidance to improve the effectiveness of fair value measurement disclosures by removing or modifying certain disclosure requirements and adding other requirements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Certain amendments should be applied prospectively, while all other amendments should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of the new guidance.
In June 2016, the FASB issued a new credit loss standard that replaces the incurred loss impairment methodology in current GAAP. The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. It is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption for fiscal years beginning after December 15, 2018 is permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. As a result of the Company’s assessment of its accounts receivable, the Company does not expect this guidance to have a material impact on the combined financial statements.
NOTE 3—ACQUISITIONS:
Convergys Acquisition
On October 5, 2018, SYNNEX acquired 100% of Convergys Corporation (“Convergys”), an Ohio Corporation, a customer experience outsourcing company, for a purchase price of $2,269,527, pursuant to a merger agreement dated June 28, 2018. The acquisition was related to the Concentrix business and added scale, diversified the revenue base, expanded the Company’s service delivery footprint and strengthened the Company’s leadership position as a top global provider of CX services.
The acquisition has been accounted for as a business combination. The purchase price was comprised of cash, Parent stock and Convergys stock awards assumed with an estimated fair value of $70,221 on the closing date. Of the equity awards assumed, $43,779 relating to the pre-combination service period was allocated to the purchase consideration, and the remainder of the estimated fair value and payments in excess of fair value are being expensed over the remaining service periods on a straight-line basis.
The purchase price for the acquisition was allocated to the net tangible and intangible assets based on their fair values at the acquisition date. The excess of the purchase price over the net tangible assets and intangible assets was recorded as goodwill and is attributed to the assembled workforce and the expected revenue and cost synergies due to the diversified revenue base and comprehensive service portfolio delivery capabilities resulting from the acquisition. Goodwill was not deductible for tax purposes. During fiscal year 2019, the Company recorded measurement period adjustments of $32,698 to goodwill. These adjustments comprised of an increase of $49,771 in tax liabilities and an increase of $17,073 to the fair value of other acquired net tangible assets, resulting in a final purchase price allocation as follows:
|
|
|
|
|
|
Purchase price allocation:
|
Fair value
|
Cash, cash equivalents and restricted cash
|
$
|
169,988
|
|
Short-term investments
|
13,038
|
|
Accounts receivable, net (Gross accounts receivable: $558,888)
|
554,777
|
|
Other current assets
|
87,115
|
|
Property and equipment
|
232,528
|
|
Goodwill
|
1,394,127
|
|
Intangible assets
|
927,000
|
|
Deferred tax assets
|
31,547
|
|
Other assets
|
33,645
|
|
Borrowings, current
|
(321,865)
|
|
Accounts payable
|
(59,720)
|
|
Accrued compensation and benefits
|
(216,626)
|
|
Other accrued liabilities
|
(252,101)
|
|
Income taxes payable
|
(32,570)
|
|
Other long-term liabilities
|
(137,789)
|
|
Deferred tax liabilities
|
(153,567)
|
|
Purchase consideration
|
$
|
2,269,527
|
|
The Company’s combined statement of operations for the year ended November 30, 2018 included approximately $439,400 of revenue from Convergys from the acquisition date. Earnings contributed by the acquired business are not separately identifiable due to the integration activities of the Company.
The following unaudited pro forma financial information combines the unaudited combined results of operations as if the acquisition of Convergys had occurred at the beginning of fiscal year 2017 and Convergys had been included in the Company’s combined results of operations for the year ended November 30, 2018. Pro forma adjustments include only the effects of events directly attributable to transactions that are factually supportable. The pro forma results contained in the table below include pro forma adjustments for amortization of acquired intangibles, interest expense incurred on borrowings to fund the acquisition, useful lives of property and equipment, removal of certain non-recurring transaction costs primarily comprising legal and banking fees of $74,298 in fiscal year 2018 and the related tax effects of the pro forma adjustments.
The unaudited pro forma financial information, as presented below, is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition and any borrowings undertaken to finance the acquisition had taken place at the beginning of fiscal year 2017.
|
|
|
|
|
|
|
Year Ended November 30, 2018
|
Revenue
|
$
|
4,695,634
|
|
Net income
|
65,177
|
|
Acquisition-related and integration expenses related to the Convergys acquisition were $27,982, $70,473 and $37,490 during the years ended November 30, 2020, 2019 and 2018, respectively. These costs included $17,670 of acquisition costs in fiscal year 2018. Substantially all of the acquisition-related and integration expenses are recorded in “Selling, general and administrative expenses” and are comprised of legal and professional services, restructuring charges, right-of-use asset impairment charges, severance and lease termination payments, accelerated depreciation, bridge financing commitment fees and other costs incurred to complete the acquisition and retention payments to integrate this business.
The following table presents the activity related to liability for restructuring charges related to the Convergys acquisition through November 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
Severance and benefits
|
|
Facility and exit costs
|
|
Total
|
Accrued balance as of November 30, 2018
|
$
|
11,138
|
|
|
$
|
6,606
|
|
|
$
|
17,744
|
|
Additional accrual during fiscal year 2019
|
6,678
|
|
|
12,334
|
|
|
19,012
|
|
Cash payments
|
(14,988)
|
|
|
(4,776)
|
|
|
(19,764)
|
|
Accrued balance as of November 30, 2019
|
$
|
2,828
|
|
|
$
|
14,164
|
|
|
$
|
16,992
|
|
(Release of)/additional accrual during fiscal year 2020
|
(584)
|
|
|
12,155
|
|
|
11,571
|
|
Cash payments
|
(2,244)
|
|
|
(8,509)
|
|
|
(10,753)
|
|
Accrued balance as of November 30, 2020
|
$
|
—
|
|
|
$
|
17,810
|
|
|
$
|
17,810
|
|
NOTE 4—SHARE-BASED COMPENSATION:
Prior to the spin-off, certain of the Company’s employees received share-based awards under a long-term incentive plan sponsored by SYNNEX. The Company recognized share-based compensation expense for all share-based awards made to Concentrix employees, including employee stock options, restricted stock awards, restricted stock units, performance-based restricted stock units and employee stock purchases, based on estimated fair values.
Under the SYNNEX stock incentive plan, qualified employees were eligible for the grant of incentive stock options to purchase shares of common stock. Qualified employees and consultants were eligible for the grant of non-qualified stock options, stock appreciation rights, restricted stock grants and restricted stock units. The outstanding stock options and restricted stock awards generally vest over a five-year period and the stock options have a contractual term of ten years. Certain restricted stock awards and units granted to employees of the CX business vest over a four-year period with 67% of the award scheduled to vest on the third anniversary of the grant date and the remaining 33% scheduled to vest on the fourth anniversary. The holders of restricted stock awards are entitled to the same voting, dividend and other rights as the SYNNEX common stockholders. Certain restricted stock units could vest subject to the achievement of individual, Concentrix or SYNNEX performance goals. The majority of the performance-based restricted stock units vest at the end of three-year requisite service periods, subject to the achievement of certain SYNNEX financial performance goals approved by the SYNNEX Compensation Committee.
Prior to spin-off, certain of the Company’s employees were eligible to participate in the SYNNEX employee stock purchase plan, which provided four offering periods of three months each in a calendar year. Eligible employees in the United States could choose to have a fixed percentage deducted from their bi-weekly compensation to purchase SYNNEX’ common stock at a discount of 5%. The maximum number of shares a participant could purchase was 0.625 during a single accumulation period, subject to a maximum purchase limit of $10 in a calendar year. Employees at associate vice president level and above were not eligible to participate in the plan.
The Company recorded share-based compensation expense in the combined statements of operations for fiscal years 2020, 2019 and 2018 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended November 30,
|
|
2020
|
|
2019
|
|
2018
|
Total share-based compensation
|
$
|
15,914
|
|
|
$
|
10,554
|
|
|
$
|
7,740
|
|
Tax benefit recorded in the provision for income taxes
|
(3,979)
|
|
|
(2,417)
|
|
|
(2,005)
|
|
Effect on net income
|
$
|
11,935
|
|
|
$
|
8,137
|
|
|
$
|
5,735
|
|
Substantially all of the share-based compensation expense was recorded in “Selling, general and administrative expenses” in the combined statements of operations.
Valuation Assumptions
The Company estimates the fair value of share-based payment awards on the measurement date and recognizes as expense over the requisite service period in the Company’s combined financial statements.
The Company uses the Black-Scholes valuation model to estimate the fair value of stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility assumption was determined using historical volatility of the Parent’s common stock.
The fair value of stock awards was determined based on the SYNNEX stock price at the date of grant. For grants that do not accrue dividends or dividend equivalents, the fair value was the SYNNEX stock price reduced by the present value of estimated dividends to be paid by SYNNEX over the vesting period. For performance-based restricted stock units, the grant-date fair value assumed that the targeted performance goals will be achieved. Over the performance period, the number of awards will be adjusted higher or lower based on the probability of achievement of performance goals.
The Company accounts for expense reductions that result from the forfeiture of unvested awards in the period that the forfeitures occur.
The following assumptions were used in the Black-Scholes valuation model in fiscal years 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended November 30,
|
|
2019
|
|
2018
|
Stock option plan:
|
|
|
|
Expected life (years)
|
6.1
|
|
6.0
|
Risk free interest rate
|
1.59
|
%
|
|
3.09
|
%
|
Expected volatility of SYNNEX stock
|
33.69
|
%
|
|
30.85
|
%
|
SYNNEX dividend yield
|
1.36
|
%
|
|
1.84
|
%
|
The Company’s employees did not receive a grant of options in fiscal year 2020.
A summary of the activities under the Parent’s stock incentive plan is set forth below:
Employee Stock Options
The weighted-average grant-date fair values of the stock options granted during fiscal years 2019 and 2018 were $33.27 and $21.83, respectively. As of November 30, 2020, 122 options were outstanding with a weighted-average life of 7.15 years, a weighted-average exercise price of $92.68 per option and an aggregate pre-tax intrinsic value of $8,249. As of November 30, 2020, 65 options were vested and exercisable with a weighted-average life of 6.31 years, a weighted-average exercise price of $90.04 per share and an aggregate pre-tax intrinsic value of $4,575.
A summary of the changes in the employee stock options during fiscal years 2018, 2019 and 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Number of
SYNNEX shares (in thousands)
|
|
Weighted-
average exercise
price per SYNNEX share
|
Balance as of November 30, 2017
|
46
|
|
$
|
97.66
|
|
Options granted
|
46
|
|
76.01
|
Balance as of November 30, 2018
|
92
|
|
86.87
|
Options granted
|
30
|
|
110.44
|
Balance as of November 30, 2019
|
122
|
|
92.68
|
Options granted
|
—
|
|
|
—
|
|
Balance as of November 30, 2020
|
122
|
|
$
|
92.68
|
|
SYNNEX settles employee stock option exercises with newly issued SYNNEX shares. The Company’s employees did not exercise any options during fiscal years 2018, 2019 or 2020.
As of November 30, 2020, the unamortized share-based compensation expense related to unvested stock options under the SYNNEX stock incentive plan was $1,560 which will be recognized over an estimated weighted-average amortization period of 3.15 years.
Restricted Stock Awards and Restricted Stock Units
A summary of the changes in the non-vested restricted stock awards and stock units during fiscal years 2018, 2019 and 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
SYNNEX shares
(in thousands)
|
|
Weighted-average,
grant-date
fair value per SYNNEX share
|
Non-vested as of November 30, 2017
|
239
|
|
|
$
|
109.51
|
|
Awards granted
|
109
|
|
|
80.42
|
Units granted(1)
|
48
|
|
|
78.50
|
Awards and units vested
|
(55)
|
|
|
98.53
|
Awards and units cancelled/forfeited(2)
|
(18)
|
|
|
108.25
|
Non-vested as of November 30, 2018
|
324
|
|
|
97.53
|
Awards granted
|
205
|
|
|
110.39
|
Units granted(1)
|
181
|
|
|
97.33
|
Awards and units vested
|
(61)
|
|
|
94.36
|
Awards and units cancelled/forfeited(2)
|
(57)
|
|
|
96.78
|
Non-vested as of November 30, 2019
|
591
|
|
|
102.12
|
Awards granted
|
7
|
|
|
78.47
|
Units granted(1)
|
1
|
|
|
83.88
|
Awards and units vested
|
(110)
|
|
|
102.77
|
Awards and units cancelled/forfeited(2)/employees transferred to Parent
|
(31)
|
|
|
102.04
|
Non-vested as of November 30, 2020
|
458
|
|
|
$
|
101.57
|
|
(1)For performance-based restricted stock units, the maximum number of shares that can be awarded upon full vesting of the grants is included.
(2)For performance-based restricted stock units, the difference between maximum awards and the actual number of shares issued upon full vesting is included.
As of November 30, 2020, there was $35,174 of total unamortized share-based compensation expense related to non-vested restricted stock awards and stock units granted under the SYNNEX stock incentive plan. That cost is expected to be recognized over an estimated weighted-average amortization period of 3.04 years.
Share-based compensation expense related to the SYNNEX employee stock purchase plan was immaterial during fiscal years 2020, 2019 and 2018.
In November 2020, in connection with the spin-off, SYNNEX, as sole stockholder of Concentrix, approved the Concentrix Corporation 2020 Stock Incentive Plan (the “Concentrix Stock Incentive Plan”) and the Concentrix Corporation 2020 Employee Stock Purchase Plan (the “Concentrix ESPP”), each to be effective upon completion of the spin-off. 4,000 shares of Concentrix common stock have been reserved for issuance under the Concentrix Stock Incentive Plan, and 1,000 shares of Concentrix common stock have been authorized for issuance under the Concentrix ESPP.
In connection with the completion of the spin-off and pursuant to the employee matters agreement with SYNNEX, each outstanding SYNNEX share-based award as of the distribution date was converted into either (a) SYNNEX and Concentrix share-based awards, each with the same number of shares as the original SYNNEX award, or (b) a share-based award of only SYNNEX common stock or only Concentrix common stock, with an adjustment to the number of shares to preserve the value of the award. As a result of the conversion of awards, on December 1, 2020, 827 restricted stock awards and restricted stock units and 684 stock options were issued under the Concentrix Incentive Plan. Following the conversion, it was determined that the share-based awards were modified in accordance with the applicable accounting guidance. As a result, the fair value of the share-based awards immediately before and after the modification was assessed in order to determine if the modification resulted in any incremental compensation cost related to the awards. Based on the analysis performed, including consideration of the anti-dilution feature contained in the SYNNEX stock incentive plan, it was determined that the conversion resulted in an immaterial amount of incremental compensation cost for the outstanding awards that will be expensed over the remaining service period after December 1, 2020.
On January 20, 2021, the Company granted 431 restricted stock awards and restricted stock units and 26 stock options under the Concentrix Incentive Plan, representing annual employee stock awards for fiscal year 2020 and pro-rated non-employee director stock awards for the 2020-2021 service year. The employee grants were delayed from October 2020 to January 2021 due to the pending spin-off.
NOTE 5—BALANCE SHEET COMPONENTS:
Cash, cash equivalents and restricted cash:
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the combined balance sheets that sum to the total of the same amounts shown in the combined statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30,
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
$
|
152,656
|
|
|
$
|
79,656
|
|
Restricted cash included in other current assets
|
3,695
|
|
|
3,858
|
|
Cash, cash equivalents and restricted cash
|
$
|
156,351
|
|
|
$
|
83,514
|
|
Restricted cash balances relate primarily to restrictions placed by banks as collateral for the issuance of bank guarantees and the terms of a government grant.
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30,
|
|
2020
|
|
2019
|
Billed accounts receivable
|
$
|
642,373
|
|
|
$
|
536,450
|
|
Unbilled accounts receivable
|
445,655
|
|
|
400,687
|
|
Less: Allowance for doubtful accounts
|
(8,963)
|
|
|
(6,055)
|
|
Accounts receivable, net
|
$
|
1,079,065
|
|
|
$
|
931,082
|
|
Allowance for doubtful trade receivables:
|
|
|
|
|
|
Balance at November 30, 2017
|
$
|
2,600
|
|
Additions
|
201
|
|
Write-offs and reclassifications
|
(1,802)
|
|
Balance at November 30, 2018
|
1,000
|
|
Additions
|
5,134
|
|
Write-offs and reclassifications
|
(79)
|
|
Balance at November 30, 2019
|
6,055
|
|
Additions
|
8,140
|
|
Write-offs and reclassifications
|
(5,232)
|
|
Balance at November 30, 2020
|
$
|
8,963
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30,
|
|
2020
|
|
2019
|
Land
|
$
|
29,000
|
|
|
$
|
28,873
|
|
Equipment, computers and software
|
476,243
|
|
|
379,091
|
|
Furniture and fixtures
|
90,944
|
|
|
83,247
|
|
Buildings, building improvements and leasehold improvements
|
336,194
|
|
|
280,379
|
|
Construction-in-progress
|
10,115
|
|
|
9,943
|
|
Total property and equipment, gross
|
$
|
942,496
|
|
|
$
|
781,533
|
|
Less: Accumulated depreciation
|
(490,847)
|
|
|
(370,068)
|
Property and equipment, net
|
$
|
451,649
|
|
|
$
|
411,465
|
|
Shown below are countries where 10% or more of the Company’s property and equipment, net are located:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30,
|
|
2020
|
|
2019
|
Property and equipment, net:
|
|
|
|
United States
|
$
|
149,903
|
|
|
$
|
162,955
|
|
Philippines
|
87,686
|
|
|
63,421
|
|
India
|
46,642
|
|
|
39,000
|
|
Others
|
167,418
|
|
|
146,089
|
|
Total
|
$
|
451,649
|
|
|
$
|
411,465
|
|
Accumulated other comprehensive income (loss):
The components of accumulated other comprehensive income (loss) (“AOCI”), net of taxes, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
gains (losses) on
defined benefit
plan, net
of taxes
|
|
Unrealized gains
(losses)
on cash flow
hedges, net of
taxes
|
|
Foreign currency
translation
adjustment and other,
net of taxes
|
|
Total
|
Balance, November 30, 2018
|
$
|
(3,442)
|
|
|
$
|
19,442
|
|
|
$
|
(55,199)
|
|
|
$
|
(39,199)
|
|
Other comprehensive income (loss) before reclassification
|
(28,289)
|
|
|
15,574
|
|
|
17,534
|
|
|
4,819
|
|
Reclassification of (gains) losses from other comprehensive income (loss)
|
1,791
|
|
|
(17,493)
|
|
|
—
|
|
|
(15,702)
|
|
Balance, November 30, 2019
|
$
|
(29,940)
|
|
|
$
|
17,523
|
|
|
$
|
(37,665)
|
|
|
$
|
(50,082)
|
|
Other comprehensive income (loss) before reclassification
|
(8,644)
|
|
|
34,508
|
|
|
43,196
|
|
|
69,060
|
|
Reclassification of (gains) losses from other comprehensive income (loss)
|
—
|
|
|
(22,792)
|
|
|
—
|
|
|
(22,792)
|
|
Balance, November 30, 2020
|
$
|
(38,584)
|
|
|
$
|
29,239
|
|
|
$
|
5,531
|
|
|
$
|
(3,814)
|
|
Refer to Note 7 for the location of gains and losses from cash flow hedges reclassified from other comprehensive income (loss) to the combined statements of operations. Reclassifications of amortization of actuarial (gains) losses of defined benefit plans is recorded in “Other income, net” in the combined statement of operations.
Foreign currency translation adjustment and other, net of taxes, is comprised of foreign currency translation adjustment and unrealized gains and losses on available-for-sale debt securities. Substantially, all of the balance at November 30, 2018, 2019 and 2020 represents foreign currency translation adjustment.
NOTE 6—GOODWILL AND INTANGIBLE ASSETS:
Goodwill
The Company tests goodwill for impairment annually as of the fourth quarter of its fiscal year and at other times if events have occurred or circumstances exist that indicate the carrying value of goodwill may no longer be recoverable. Goodwill impairment testing is performed at the reporting unit level. Based on our current year assessment, we concluded that no impairment charges were necessary for our reporting unit. We have not recorded any impairment charges related to goodwill during the three-year period ended November 30, 2020.
Below is a progression of goodwill for fiscal years 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended November 30,
|
|
2020
|
|
2019
|
Balance, beginning of year
|
$
|
1,829,328
|
|
|
$
|
1,775,541
|
|
Additions/adjustments from Convergys acquisition
|
—
|
|
|
32,698
|
|
Foreign exchange translation
|
6,722
|
|
|
21,089
|
|
Balance, end of year
|
$
|
1,836,050
|
|
|
$
|
1,829,328
|
|
Other Intangible Assets
The Company’s other intangible assets, primarily acquired through business combinations, are subject to amortization and are evaluated periodically if events or circumstances indicate a possible inability to recover their
carrying amounts. No impairment charges were recognized in any period presented. As of November 30, 2020 and 2019, the Company’s other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30, 2020
|
|
As of November 30, 2019
|
|
Gross
amounts
|
|
Accumulated
amortization
|
|
Net
amounts
|
|
Gross
amounts
|
|
Accumulated
amortization
|
|
Net
amounts
|
Customer relationships
|
$
|
1,389,341
|
|
|
$
|
(595,024)
|
|
|
$
|
794,317
|
|
|
$
|
1,368,966
|
|
|
$
|
(441,866)
|
|
|
$
|
927,100
|
|
Technology
|
14,830
|
|
|
(11,045)
|
|
|
3,785
|
|
|
14,720
|
|
|
(8,998)
|
|
|
5,722
|
|
Trade names
|
6,846
|
|
|
(5,989)
|
|
|
857
|
|
|
6,662
|
|
|
(5,361)
|
|
|
1,301
|
|
|
$
|
1,411,017
|
|
|
$
|
(612,058)
|
|
|
$
|
798,959
|
|
|
$
|
1,390,348
|
|
|
$
|
(456,225)
|
|
|
$
|
934,123
|
|
Amortization expense for intangible assets was $147,283, $166,606, and $74,324 for the years ended November 30, 2020, 2019 and 2018, respectively, and the related estimated expense for the five subsequent fiscal years is as follows:
|
|
|
|
|
|
Fiscal years ending November 30,
|
|
2021
|
$
|
136,936
|
|
2022
|
116,551
|
|
2023
|
102,222
|
|
2024
|
84,553
|
|
2025
|
74,520
|
|
Thereafter
|
284,177
|
|
Total
|
$
|
798,959
|
|
The remaining weighted average amortization period for customer relationships and other intangible assets is approximately 12 years.
NOTE 7—DERIVATIVE INSTRUMENTS:
In the ordinary course of business, the Company is exposed to foreign currency risk and credit risk. The Company enters into transactions, and owns monetary assets and liabilities, that are denominated in currencies other than the legal entity’s functional currency. The Company may enter into forward contracts, option contracts, or other derivative instruments to offset a portion of the risk on expected future cash flows, earnings, net investments in certain non-U.S. legal entities and certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates. Generally, the Company does not use derivative instruments to cover equity risk and credit risk. The Company’s hedging program is not used for trading or speculative purposes.
All derivatives are recognized on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded in the combined statements of operations, or as a component of AOCI in the combined balance sheets, as discussed below.
Cash Flow Hedges
To protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s legal entities with functional currencies that are not in U.S. dollars may hedge a portion of forecasted revenue or costs not
denominated in the entities’ functional currencies. These instruments mature at various dates through November 2022. Gains and losses on cash flow hedges are recorded in AOCI until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of “Revenue” in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of costs are recognized as a component of “Cost of revenue” and/or “Selling, general and administrative expenses” in the same period as the related costs are recognized. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into earnings in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are recorded in earnings unless they are re-designated as hedges of other transactions.
Non-Designated Derivatives
The Company uses short-term forward contracts to offset the foreign exchange risk of assets and liabilities denominated in currencies other than the functional currency of the respective entities. These contracts, which are not designated as hedging instruments, mature or settle within twelve months. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.
See Note 9—Borrowings, for the accounting for the embedded derivative in the 5.75% Junior Subordinated Convertible Debentures assumed by the CX business, as part of the Convergys acquisition.
Fair Values of Derivative Instruments in the Combined Balance Sheets
The fair values of the Company’s derivative instruments are disclosed in Note 8—Fair Value Measurements and summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value as of
|
Balance Sheet Line Item
|
|
November 30, 2020
|
|
November 30, 2019
|
Derivative instruments not designated as hedging instruments:
|
|
|
|
|
Foreign exchange forward contracts (notional value)
|
|
$
|
1,153,352
|
|
|
$
|
907,621
|
|
Other current assets
|
|
15,666
|
|
|
8,667
|
|
Other accrued liabilities
|
|
6,215
|
|
|
2,105
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
Foreign exchange forward contracts (notional value)
|
|
$
|
814,731
|
|
|
$
|
563,654
|
|
Other current assets and other assets
|
|
38,212
|
|
|
14,523
|
|
Other accrued liabilities and other long-term liabilities
|
|
309
|
|
|
1,633
|
|
Volume of activity
The notional amounts of foreign exchange forward contracts represent the gross amounts of foreign currency, including, principally, the Philippine Peso, the Indian Rupee, the Euro, the British Pound, the Canadian Dollar, and the Japanese Yen that will be bought or sold at maturity. The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The Company’s exposure to credit loss and market risk will vary over time as currency rates change.
The Effect of Derivative Instruments on AOCI and the Combined Statements of Operations
The following table shows the gains and losses, before taxes, of the Company’s derivative instruments designated as cash flow hedges and not designated as hedging instruments in other comprehensive income (“OCI”), and the combined statements of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended November 30,
|
|
Location of gain (loss) in income
|
|
2020
|
|
2019
|
|
2018
|
Revenue
|
|
|
$
|
4,719,534
|
|
|
$
|
4,707,912
|
|
|
$
|
2,463,151
|
|
Cost of revenue
|
|
|
3,058,009
|
|
|
2,959,464
|
|
|
1,525,599
|
|
Selling, general and administrative expenses
|
|
|
(1,352,764)
|
|
|
(1,454,116)
|
|
|
(792,791)
|
|
Other income, net
|
|
|
7,447
|
|
|
2,280
|
|
|
4,386
|
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
Gains (losses) recognized in OCI:
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
|
$
|
45,986
|
|
|
$
|
20,772
|
|
|
$
|
27,212
|
|
|
|
|
|
|
|
|
|
Gains (losses) reclassified from AOCI into income:
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
|
|
|
|
|
|
(Gain) loss reclassified from AOCI into income
|
Revenue for services
|
|
$
|
—
|
|
|
$
|
127
|
|
|
$
|
(237)
|
|
Gain (loss) reclassified from AOCI into income
|
Cost of revenue for services
|
|
21,532
|
|
|
16,454
|
|
|
1,036
|
|
Gain (loss) reclassified from AOCI into income
|
Selling, general and administrative expenses
|
|
8,841
|
|
|
6,767
|
|
|
449
|
|
Gain (loss) reclassified from AOCI into income
|
Other income, net
|
|
—
|
|
|
36
|
|
|
—
|
|
Total
|
|
|
$
|
30,373
|
|
|
$
|
23,384
|
|
|
$
|
1,248
|
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as hedging instruments:
|
|
|
|
|
|
|
|
Gain (loss) recognized from foreign exchange forward contracts, net(1)
|
Cost of revenue for services and Selling, general and administrative expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,378
|
|
Gain (loss) recognized from foreign exchange forward contracts, net(1)
|
Other income, net
|
|
32,150
|
|
|
20,833
|
|
|
6,415
|
|
Total
|
|
|
$
|
32,150
|
|
|
$
|
20,833
|
|
|
$
|
9,793
|
|
(1) The gains and losses largely offset the currency gains and losses that resulted from changes in the assets and liabilities denominated in nonfunctional currencies.
There were no material gain or loss amounts excluded from the assessment of effectiveness. Existing net gains in AOCI that are expected to be reclassified into earnings in the normal course of business within the next twelve months are $32,142.
Offsetting of Derivatives
In the combined balance sheets, the Company does not offset derivative assets against liabilities in master netting arrangements.
Credit exposure for derivative financial instruments is limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the Company’s obligations to the counterparties. The Company manages the potential risk of credit losses through careful evaluation of counterparty credit standing and selection of counterparties from a limited group of financial institutions.
NOTE 8—FAIR VALUE MEASUREMENTS:
The Company’s fair value measurements are classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following table summarizes the valuation of the Company’s investments and financial instruments that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30, 2020
|
|
As of November 30, 2019
|
|
|
Fair value measurement category
|
|
|
Fair value measurement category
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
60,242
|
|
|
60,242
|
|
|
—
|
|
|
—
|
|
|
$
|
26,041
|
|
|
26,041
|
|
|
—
|
|
|
—
|
|
Foreign government bond
|
$
|
1,355
|
|
|
1,355
|
|
|
—
|
|
|
—
|
|
|
$
|
1,228
|
|
|
1,228
|
|
|
—
|
|
|
—
|
|
Forward foreign currency exchange contracts
|
$
|
53,878
|
|
|
—
|
|
|
53,878
|
|
|
—
|
|
|
$
|
23,190
|
|
|
—
|
|
|
23,190
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign currency exchange contracts
|
$
|
6,524
|
|
|
—
|
|
|
6,524
|
|
|
—
|
|
|
$
|
3,738
|
|
|
—
|
|
|
3,738
|
|
|
—
|
|
The Company’s cash equivalents consist primarily of highly liquid investments in money market funds and term deposits with maturity periods of three months or less. The carrying values of cash equivalents approximate fair value since they are near their maturity. Investment in foreign government bond classified as available-for-sale debt security is recorded at fair value based on quoted market prices. The fair values of forward exchange contracts are measured based on the foreign currency spot and forward rates. Fair values of long-term foreign currency exchange contracts are measured using valuations based upon quoted prices for similar assets and liabilities in active markets and are valued by reference to similar financial instruments, adjusted for terms specific to the contracts. The effect of nonperformance risk on the fair value of derivative instruments was not material as of November 30, 2020 and 2019.
The carrying values of term deposits with maturities less than one year, accounts receivable and accounts payable approximate fair value due to their short maturities and interest rates which are variable in nature. Long-term non-marketable equity securities consist primarily of investments in equity securities of private entities. The fair value of non-marketable equity investments is based on an internal valuation of the investees based on the best available information at the measurement date. It is not practicable to determine the fair value of the Company’s
loans payable to and receivable from the Parent as these cash transfers are part of the centralized treasury program of SYNNEX as described in Note 1. The carrying values of the outstanding balance on the Term Loan under the Company’s Credit Facility and the outstanding balance on the Securitization Facility approximate their fair value since they bear interest rates that are similar to existing market rates.
During fiscal years 2020, 2019 and 2018, there were no transfers between the fair value measurement category levels.
NOTE 9—BORROWINGS:
Borrowings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30,
|
|
2020
|
|
2019
|
Loans payable to Parent
|
$
|
—
|
|
|
$
|
1,981,385
|
|
Credit Facility - current portion of Term Loan component
|
33,750
|
|
|
—
|
|
Borrowings, current
|
$
|
33,750
|
|
|
$
|
1,981,385
|
|
|
|
|
|
Credit Facility - Term Loan component
|
$
|
866,250
|
|
|
$
|
—
|
|
Securitization Facility
|
250,000
|
|
|
—
|
|
Long-term debt, before unamortized debt discount and issuance costs
|
1,116,250
|
|
|
—
|
|
Less: unamortized debt discount and issuance costs
|
(4,888)
|
|
|
—
|
|
Long-term debt, net
|
$
|
1,111,362
|
|
|
$
|
—
|
|
Credit Facility
On October 16, 2020, Concentrix entered into a new senior secured credit facility, which provides for the extension of revolving loans of up to $600,000 (the “Revolver”) and term loan borrowings of up to $900,000 (the “Term Loan” and, together with the Revolver, the “Credit Facility”). On November 30, 2020, in connection with the spin-off, the Company incurred $900,000 of initial Term Loan borrowings under the Credit 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 Concentrix to SYNNEX and in exchange for the contribution of certain Concentrix trademarks from SYNNEX to Concentrix.
The Credit Facility matures on November 30, 2025. The outstanding principal amount of the Term Loan is payable in quarterly installments of $11,250 commencing on May 31, 2021, with the unpaid balance due in full on the maturity date. Concentrix may prepay the loans under the Credit Facility at any time without penalty, other than breakage fees. Concentrix 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 $450,000, 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 Concentrix’ 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 Concentrix’ 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 Concentrix’ 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 their business. In addition, the Credit Facility contains financial covenants that require Concentrix to maintain at the end of each fiscal quarter commencing with the quarter ending 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. 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.
At November 30, 2020, no amount was outstanding under the Revolver.
Securitization Facility
On October 30, 2020, Concentrix entered into a new $350,000 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, the Company incurred $250,000 of borrowings under the Securitization Facility. Substantially all of the proceeds from such indebtedness were transferred to SYNNEX on November 30, 2020 to eliminate debt owed by Concentrix to SYNNEX and in exchange for the contribution of certain Concentrix trademarks from SYNNEX to Concentrix.
Under the Securitization Facility, Concentrix and certain of its subsidiaries sell or otherwise transfer all of their accounts receivable to a special purpose bankruptcy-remote subsidiary of Concentrix (the “Borrower”) that grants a security interest in the receivables to the lenders in exchange for available borrowings of up to $350,000. The amount received under the Securitization Facility is recorded as debt on the Company’s combined balance sheet. Borrowing availability under the Securitization Facility may be limited by our accounts receivables balances, changes in the credit ratings of the 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). The Securitization Facility has an initial termination date of October 28, 2022.
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%. Concentrix is 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.
The Borrower’s sole business consists of the purchase or acceptance through capital contributions of the receivables and related security from Concentrix and its subsidiaries and the subsequent retransfer of or granting of a security interest in such receivables and related security to the administrative agent under the Securitization Facility for the benefit of the lenders. The Borrower is a separate legal entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of the Borrower’s assets prior to any assets or value in the Borrower becoming available to the Borrower’s equity holders, and the assets of the Borrower are not available to pay creditors of Concentrix and its subsidiaries.
Covenant compliance
As of November 30, 2020, Concentrix was in compliance with all covenants for the above arrangements.
Future principal payments
As of November 30, 2020, future principal payments under the above loans for fiscal years are as follows:
|
|
|
|
|
|
|
Amount
|
Fiscal Years Ended November 30,
|
|
2021
|
$
|
33,750
|
|
2022
|
295,000
|
|
2023
|
45,000
|
|
2024
|
45,000
|
|
2025
|
731,250
|
|
Total
|
$
|
1,150,000
|
|
SYNNEX Debt Agreements
Through November 30, 2020, certain Concentrix legal entities in the United States jointly and severally guaranteed SYNNEX’ obligations under SYNNEX’ senior secured credit agreement (the “SYNNEX Credit Agreement”) and SYNNEX’ secured term loan credit agreement (the “SYNNEX Term Loan Credit Agreement”) and substantially all of the assets of these legal entities secured SYNNEX’ obligations under the SYNNEX Credit Agreement and the SYNNEX Term Loan Credit Agreement. In connection with the spin-off, the Concentrix legal entities were released as guarantors and the Concentrix legal entities’ assets were released as collateral from the SYNNEX Credit Agreement and the SYNNEX Term Loan Credit Agreement, and thereafter serve as security for the Credit Facility or, in the case of receivables and related assets generated by the Company and certain of its subsidiaries in the United States, as security for the Securitization Facility.
Convertible Debentures and other borrowings related to the Convergys acquisition
In connection with the Convergys acquisition, the CX business became the obligor under Convergys’ $124,963 aggregate principal amount of 5.75% Junior Subordinated Convertible Debentures due September 2029. The CX business determined that the embedded conversion feature included in the Convertible Debentures required liability treatment because a portion was convertible into a fixed dollar amount based on a variable conversion rate, and was recorded at fair value in other accrued liabilities in the combined balance sheets. The CX business was entitled to redeem the Convertible Debentures on or after September 15, 2019. At the date of acquisition, the Convertible Debentures were convertible at the option of the holders on or after September 15, 2028 and prior to that date only under certain circumstances, including a stock sales price condition at an implied conversion ratio of approximately 90.7697 per one thousand dollars in principal amount of debentures, and the occurrence of a fundamental change, such as the acquisition. As a result, holders of the convertible debentures were permitted, for a specified period after the Convergys acquisition, to convert their convertible debentures at a temporarily increased conversion rate determined in accordance with the indenture. Upon conversion, the aggregate principal amount of the Convertible Debentures had to be settled in cash and the remainder, if any, of the conversion obligation in excess of the aggregate principal amount, could be settled in cash, or in the same combination of cash and common stock of the Parent that was received by the Convergys shareholders as consideration for their shares in the acquisition. As the Convertible Debentures were convertible into common shares of SYNNEX due to the sales price condition being met prior to the acquisition, the Convertible Debentures and the conversion spread liability were classified as current borrowings and other accrued liabilities, respectively, in the combined balance sheets. Through November 30, 2018,
$55,681 of the principal amount of Convertible Debentures had been settled for $118,425 in cash under the fundamental change provision. During fiscal year ended November 30, 2019, the remaining $69,282 of the principal amount was settled in cash for $148,047.
In connection with the Convergys acquisition, the Parent caused certain revolving debt facilities of Convergys to be repaid. These facilities were terminated on the acquisition date and the outstanding amount of $195,421 was repaid with funds from the initial draw of the SYNNEX Term Loan Credit Agreement.
Interest expense and finance charges
The total interest expense and finance charges for external borrowings of Concentrix was not material for fiscal years 2020, 2019 and 2018.
NOTE 10—REVENUE:
Disaggregated revenue
In the following tables, the Company’s revenue is disaggregated by primary industry verticals and geographic location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended November 30,
|
|
2020
|
|
2019
|
|
2018
|
Industry vertical:
|
|
|
|
|
|
Technology and consumer electronics
|
$
|
1,422,817
|
|
|
$
|
1,283,084
|
|
|
$
|
880,958
|
|
Communications and media
|
954,234
|
|
|
1,142,242
|
|
|
345,455
|
|
Retail, travel and ecommerce
|
796,324
|
|
|
763,265
|
|
|
376,622
|
|
Banking, financial services and insurance
|
712,469
|
|
|
676,246
|
|
|
350,322
|
|
Healthcare
|
392,686
|
|
|
369,187
|
|
|
184,376
|
|
Other
|
441,004
|
|
|
473,888
|
|
|
325,418
|
|
Total
|
$
|
4,719,534
|
|
|
$
|
4,707,912
|
|
|
$
|
2,463,151
|
|
The Company attributes revenues from external customers to the country of domicile of the Concentrix legal entity that is party to the customer contract. Shown below are the countries that accounted for 10% or more of the Company’s revenue for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended November 30,
|
|
2020
|
|
2019
|
|
2018
|
Revenue by geography:
|
|
|
|
|
|
United States
|
$
|
1,017,384
|
|
|
$
|
1,135,710
|
|
|
$
|
764,733
|
|
Philippines
|
868,009
|
|
|
809,252
|
|
|
262,986
|
|
Great Britain
|
402,543
|
|
|
448,061
|
|
|
254,650
|
|
India
|
351,001
|
|
|
330,980
|
|
|
229,824
|
|
Others
|
2,080,597
|
|
|
1,983,909
|
|
|
950,958
|
|
Total
|
$
|
4,719,534
|
|
|
$
|
4,707,912
|
|
|
$
|
2,463,151
|
|
Deferred revenue contract liabilities and deferred costs to obtain or fulfill a contract are not material.
NOTE 11—RELATED PARTY TRANSACTIONS:
The Company provides certain services related to its core business to SYNNEX which are reported as Revenue from customer experience services to Parent in the combined statements of operations. The cost associated with such services is reported as cost of revenue related to services to Parent in the combined statements of operations. The Company purchases certain products from SYNNEX and records compensation expense for share-based awards granted by SYNNEX to Concentrix employees. Prior to November 30, 2020, the Company received allocations of corporate expenses by way of a monthly management fee and received financing for acquisition and operations under the terms of intra-SYNNEX group borrowing arrangements.
The following table presents the Company’s transactions with SYNNEX for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended November 30,
|
|
2020
|
|
2019
|
|
2018
|
Revenue from customer experience services to Parent
|
$
|
20,855
|
|
|
$
|
20,585
|
|
|
$
|
18,284
|
|
Purchases from Parent and its non-Concentrix subsidiaries
|
—
|
|
|
4
|
|
|
85
|
|
Interest expense on borrowings from Parent
|
50,615
|
|
|
95,395
|
|
|
39,652
|
|
Interest income on borrowings made to Parent
|
2,065
|
|
|
2,066
|
|
|
846
|
|
Corporate allocations
|
1,574
|
|
|
1,574
|
|
|
1,574
|
|
Share-based compensation
|
15,914
|
|
|
10,554
|
|
|
7,740
|
|
The majority of the loans payable to and receivable from Parent as reported on the combined balance sheets were lines of credits that were subject to auto-renewal after expiration of the original terms. The interest rates on these loans ranged from approximately 1% to 9% for fiscal years 2020, 2019 and 2018. In fiscal year 2018, the Company and SYNNEX amended the interest rate on one of the loans from LIBOR + 2.75% to the lowest of the applicable federal rates (“AFR”) in effect for the current month and the preceding two months as published by the Internal Revenue Service (“IRS”). The AFR is the safe harbor interest rate that the IRS deems would not result in additional taxable event for loans between related parties.
As of November 30, 2020 and 2019, the receivable from and payable to Parent and its non-Concentrix subsidiaries included on the combined balance sheets are primarily trade in nature.
Prior to the spin-off, SYNNEX had issued guarantees to certain of the Company’s clients to guarantee the performance obligations of the Company’s legal entities. These SYNNEX guarantees were released or replaced by Concentrix guarantees on or prior to the spin-off.
As disclosed in Note 9, certain Concentrix legal entities in the United States jointly and severally guaranteed certain of SYNNEX’ borrowing arrangements and substantially all of the assets of these Concentrix legal entities secured SYNNEX’ obligations under the borrowing arrangements. In connection with the spin-off, the Concentrix legal entities were released as guarantors and the Concentrix legal entities’ assets were released as collateral under the SYNNEX borrowing arrangements.
Prior to the spin-off, Concentrix’ U.S. subsidiaries were part of SYNNEX’ U.S. consolidated group for U.S. tax purposes and were in a tax-sharing arrangement with SYNNEX.
In connection with the spin-off, Concentrix entered into new third-party debt as described in Note 9. Substantially all of the proceeds from such indebtedness were transferred to SYNNEX on November 30, 2020. Outside of certain trade receivables from Parent and payables to Parent that remained on our balance sheet as of November 30, 2020, after the application of the proceeds from the indebtedness paid to SYNNEX, the remaining outstanding balance on the loans payable to Parent and a portion of the net trade payable to Parent was settled for $594,320 and treated as a capital contribution from SYNNEX to Concentrix in our statement of parent equity.
In connection with the spin-off, on November 30, 2020, the Company 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 the Company’s ongoing relationship with SYNNEX after the spin-off.
NOTE 12—PENSION AND EMPLOYEE BENEFITS PLANS:
The Company has 401(k) plans in the United States under which eligible employees may contribute up to the maximum amount as provided by law. Employees become eligible to participate in these plans on the first day of the month after their employment date. The Company may make discretionary contributions under the plans. Employees in most of the Company’s non-U.S. legal entities are covered by government mandated defined contribution plans. During fiscal years 2020, 2019 and 2018, the Company contributed $64,286, $43,963 and $35,594, respectively, to defined contribution plans.
Defined Benefit Plans
The Company has defined benefit pension or retirement plans for eligible employees in certain non-U.S. legal entities. Benefits under these plans are primarily based on years of service and compensation during the years immediately preceding retirement or termination of participation in the plans. In addition, as part of the Convergys acquisition, the Company acquired a frozen defined benefit pension plan, which includes both a qualified and non-qualified portion, for all eligible employees in the U.S. (“the cash balance plan”) and unfunded defined benefit plans for certain eligible employees in the Philippines, Malaysia and France. The pension benefit formula for the cash balance plan is determined by a combination of compensation, age-based credits and annual guaranteed interest credits. The qualified portion of the cash balance plan has been funded through contributions made to a trust fund. The plan assumptions are evaluated annually and are updated as deemed necessary. Net benefit costs related to defined benefit plans were $13,602, $9,731 and $3,415, during fiscal years 2020, 2019 and 2018, respectively.
The Company’s measurement date for all defined benefit plans and other postretirement benefits is November 30 and the plan assumptions are evaluated annually and are updated as deemed necessary.
Components of pension cost for the Company’s defined benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended November 30,
|
|
2020
|
|
2019
|
|
2018
|
Service cost
|
$
|
7,498
|
|
|
$
|
5,797
|
|
|
$
|
2,122
|
|
Interest cost on projected benefit obligation
|
8,385
|
|
|
10,266
|
|
|
723
|
|
Expected return on plan assets
|
(6,403)
|
|
|
(9,091)
|
|
|
(164)
|
|
Amortization and deferrals, net
|
2,851
|
|
|
822
|
|
|
687
|
|
Settlement charge
|
1,271
|
|
|
1,937
|
|
|
47
|
|
Total pension cost
|
$
|
13,602
|
|
|
$
|
9,731
|
|
|
$
|
3,415
|
|
The status of employee benefit plans is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
2020
|
|
2019
|
Change in Benefit Obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
261,028
|
|
|
$
|
239,744
|
|
Service cost
|
7,498
|
|
|
5,797
|
|
Interest cost
|
8,385
|
|
|
10,266
|
|
Actuarial loss
|
23,776
|
|
|
33,696
|
|
Benefits paid
|
(12,906)
|
|
|
(15,982)
|
|
Settlements
|
(7,579)
|
|
|
(13,140)
|
|
Foreign currency adjustments
|
1,755
|
|
|
647
|
|
Projected obligation at end of year
|
$
|
281,957
|
|
|
$
|
261,028
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
145,645
|
|
|
$
|
159,184
|
|
Actual return on assets
|
13,718
|
|
|
5,358
|
|
Settlements
|
(7,579)
|
|
|
(13,140)
|
|
Employer contributions
|
3,152
|
|
|
1,872
|
|
Benefits paid
|
(7,149)
|
|
|
(7,436)
|
|
Foreign currency adjustments
|
(229)
|
|
|
(193)
|
|
Fair value of plan assets at end of year
|
$
|
147,558
|
|
|
$
|
145,645
|
|
|
|
|
|
Funded Status of Plans:
|
|
|
|
Unfunded status
|
$
|
134,399
|
|
|
$
|
115,383
|
|
Amounts recognized in the combined balance sheet and recorded within other accrued liabilities and other long-term liabilities as of November 30, 2020 and 2019 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30,
|
|
2020
|
|
2019
|
Current liability
|
$
|
10,451
|
|
|
$
|
9,189
|
|
Non-current liability
|
123,948
|
|
|
106,194
|
|
Total
|
$
|
134,399
|
|
|
$
|
115,383
|
|
The following weighted-average rates were used in determining the benefit obligations at November 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Discount rate
|
0.3% - 4.7%
|
|
0.6% - 7.6%
|
Expected return on plan assets
|
1.8% - 7.5%
|
|
6.2% - 7.5%
|
Expected rate of future compensation growth
|
1.8% - 8.5%
|
|
1.8% - 10.0%
|
The following weighted-average rates were used in determining the pension costs at November 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Discount rate
|
0.6% - 6.0%
|
|
0.6% - 7.4%
|
Expected return on plan assets
|
4.5% - 7.5%
|
|
4.5% - 7.5%
|
Expected rate of future compensation growth
|
1.8% - 8.5%
|
|
1.8% - 10.0%
|
For the cash balance plan, the discount rate reflects the rate at which benefits could effectively be settled and is based on current investment yields of high-quality corporate bonds. The Company uses an actuarially-developed yield curve approach to match the timing of cash flows of expected future benefit payments by applying specific spot rates along the yield curve to determine the assumed discount rate.
The range of discount rates utilized in determining the pension cost and projected benefit obligation of the Company’s defined benefit plans reflects a lower prevalent rate applicable to the frozen cash balance plan for eligible employees in U.S. and a higher applicable rate for the unfunded defined benefit plan for certain eligible employees in the Philippines, France and Malaysia. The plans outside the U.S. represented approximately 24% and 22%, respectively, of the Company’s total projected benefit obligation for all plans as of November 30, 2020 and 2019.
Plan Assets
As of November 30, 2020 and 2019, plan assets for the cash balance plan consisted of common/collective trusts (of which approximately 61% are invested in equity backed funds and approximately 37% are invested in funds in fixed income instruments) and a private equity fund. The Company’s targeted allocation was 60% equity and 40% fixed income. The investment objectives for the plan assets are to generate returns that will enable the plan to meet its future obligations. The Company’s expected long-term rate of return was determined based on the asset mix of the plan, projected returns, past performance and other factors. The following table sets forth by level within the fair value hierarchy, total plan assets at fair value as of November 30, 2020 and 2019, including the cash balance plan and other funded benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
As of November 30, 2020
|
|
As of Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
As of Significant Other Observable Inputs (Level 2)
|
|
As of Significant Unobservable Inputs (Level 3)
|
Cash and cash equivalents
|
$
|
3,404
|
|
|
$
|
3,404
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common/collective trusts:
|
|
|
|
|
|
|
|
Fixed Income
|
50,986
|
|
|
—
|
|
|
50,986
|
|
|
—
|
|
U.S. large cap
|
43,020
|
|
|
—
|
|
|
43,020
|
|
|
—
|
|
U.S. small cap
|
9,662
|
|
|
—
|
|
|
9,662
|
|
|
—
|
|
International equity
|
31,892
|
|
|
—
|
|
|
31,892
|
|
|
—
|
|
Governmental bonds
|
3,094
|
|
|
—
|
|
|
3,094
|
|
|
—
|
|
Corporate bonds
|
5,232
|
|
|
—
|
|
|
5,232
|
|
|
—
|
|
Investment funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Limited partnership
|
268
|
|
|
—
|
|
|
—
|
|
|
268
|
|
Total investments
|
$
|
147,558
|
|
|
$
|
3,404
|
|
|
$
|
143,886
|
|
|
$
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
As of November 30, 2019
|
|
As of Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
As of Significant Other Observable Inputs (Level 2)
|
|
As of Significant Unobservable Inputs (Level 3)
|
Cash and cash equivalents
|
$
|
3,460
|
|
|
$
|
3,460
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common/collective trusts:
|
|
|
|
|
|
|
|
Fixed Income
|
58,670
|
|
|
—
|
|
|
58,670
|
|
|
—
|
|
U.S. large cap
|
48,293
|
|
|
—
|
|
|
48,293
|
|
|
—
|
|
U.S. small cap
|
9,025
|
|
|
—
|
|
|
9,025
|
|
|
—
|
|
International equity
|
23,441
|
|
|
—
|
|
|
23,441
|
|
|
—
|
|
Governmental bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investment funds
|
2,335
|
|
|
—
|
|
|
2,335
|
|
|
—
|
|
Limited partnership
|
421
|
|
|
—
|
|
|
—
|
|
|
421
|
|
Total investments
|
$
|
145,645
|
|
|
$
|
3,460
|
|
|
$
|
141,764
|
|
|
$
|
421
|
|
The Company’s cash balance plan holds level 2 investments in common/collective trust funds that are public investment vehicles valued using a net asset value (NAV) provided by the manager of each fund. The NAV is based on the underlying net assets owned by the fund, divided by the number of shares outstanding. The NAV’s unit price is quoted on a private market that may not be active. However, the NAV is based on the fair value of the underlying securities within the fund, which are traded on an active market, and valued at the closing price reported on the active market on which those individual securities are traded. The significant investment strategies of the funds are as described in the financial statements provided by each fund. There are no restrictions on redemptions from these funds. Level 3 investments are equity based funds that primarily invest in domestic early stage capital funds.
Benefit Payments
The following table details expected benefit payments for the assumed cash balance plan and other benefit plans:
|
|
|
|
|
|
Fiscal Years Ending November 30,
|
|
2021
|
$
|
28,081
|
|
2022
|
26,031
|
|
2023
|
24,897
|
|
2024
|
23,705
|
|
2025
|
23,354
|
|
Thereafter (2025-2029)
|
97,028
|
|
Total
|
$
|
223,096
|
|
No plan assets are expected to be returned to the Company during 2021. The Company expects to make approximately $13,293 in contributions during fiscal year 2021. The Company also expects approximately $4,620 of actuarial loss included in AOCI will be recognized during fiscal year 2021.
NOTE 13—LEASES:
The Company leases certain of its facilities and equipment under operating lease agreements, which expire in various periods through 2034. The Company’s finance leases are not material.
The following table presents the various components of lease costs.
|
|
|
|
|
|
For the year ended November 30, 2020
|
Operating lease cost
|
$
|
202,852
|
|
Short-term lease cost
|
9,917
|
|
Variable lease cost
|
41,060
|
|
Sublease income
|
(1,668)
|
|
Total operating lease cost
|
$
|
252,161
|
|
The following table presents a maturity analysis of expected undiscounted cash flows for operating leases on an annual basis for the next five years and thereafter as of November 30, 2020:
|
|
|
|
|
|
Fiscal Years Ended November 30,
|
|
2021
|
$
|
198,678
|
|
2022
|
159,769
|
|
2023
|
115,713
|
|
2024
|
81,615
|
|
2025
|
49,108
|
|
Thereafter
|
28,944
|
|
Total payments
|
633,827
|
|
Less: imputed interest*
|
(97,131)
|
|
Total present value of lease payments
|
$
|
536,696
|
|
*Imputed interest represents the difference between undiscounted cash flows and discounted cash flows.
Rent expense for the years ended November 30, 2019 and 2018 amounted to $216,730 and $100,769, respectively. Sublease income was immaterial for the years ended November 30, 2019 and 2018.
The following amounts were recorded in the combined balance sheet as of November 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Balance sheet location
|
|
November 30, 2020
|
Operating lease ROU assets
|
|
Other assets, net
|
|
$
|
506,368
|
|
Current operating lease liabilities
|
|
Other accrued liabilities
|
|
163,052
|
|
Non-current operating lease liabilities
|
|
Other long-term liabilities
|
|
373,644
|
|
The Company decided to cease-use, sublease or abandon leases prior to the end of their lease terms at certain of its sites and recorded impairment losses during the year ended November 30, 2020 related to the exit of leased facilities. These losses are recorded as a component of selling, general and administrative expenses. As the fair value of the ROU assets was less than the carrying value, the Company recognized an impairment of ROU assets of approximately $9.3 million, reducing the carrying value of the ROU assets to its estimated fair value. The fair value of the ROU assets where the Company intends to sublease was estimated using level 3 inputs such as market comparables to estimate future cash flows expected from sublease income over the remaining lease terms.
The following table presents supplemental cash flow information related to the Company’s operating leases. Cash payments related to variable lease costs and short-term leases are not included in the measurement of operating lease liabilities, and, as such, are excluded from the amounts below:
|
|
|
|
|
|
|
|
|
Cash flow information
|
|
November 30, 2020
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
206,585
|
|
Non-cash ROU assets obtained in exchange for lease liabilities (subsequent to initial adoption)
|
|
147,292
|
|
The weighted-average remaining lease term and discount rate as of November 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
Operating lease term and discount rate
|
|
November 30, 2020
|
Weighted-average remaining lease term (years)
|
|
3.97
|
|
Weighted-average discount rate
|
|
6.97
|
%
|
NOTE 14—INCOME TAXES:
The sources of income before the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended November 30,
|
|
2020
|
|
2019
|
|
2018
|
United States
|
$
|
(64,491)
|
|
|
$
|
(121,886)
|
|
|
$
|
(80,649)
|
|
Foreign
|
332,386
|
|
|
326,302
|
|
|
191,557
|
|
|
$
|
267,895
|
|
|
$
|
204,416
|
|
|
$
|
110,908
|
|
Provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended November 30,
|
|
2020
|
|
2019
|
|
2018
|
Current tax provision (benefit):
|
|
|
|
|
|
Federal
|
$
|
22,336
|
|
|
$
|
34,076
|
|
|
$
|
19,305
|
|
State
|
10
|
|
|
(6,260)
|
|
|
(294)
|
|
Foreign
|
100,588
|
|
|
75,717
|
|
|
55,003
|
|
|
$
|
122,934
|
|
|
$
|
103,533
|
|
|
$
|
74,014
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
Federal
|
49
|
|
|
(19,139)
|
|
|
(1,593)
|
|
State
|
(336)
|
|
|
362
|
|
|
(2,344)
|
|
Foreign
|
(19,563)
|
|
|
2,496
|
|
|
(7,440)
|
|
|
$
|
(19,850)
|
|
|
$
|
(16,281)
|
|
|
$
|
(11,377)
|
|
Total tax provision
|
$
|
103,084
|
|
|
$
|
87,252
|
|
|
$
|
62,637
|
|
On December 22, 2017, Public Law 115-97, informally referred to as the Tax Cuts and Jobs Act (the “TCJA”) was enacted into law. The TCJA provided for significant changes to the U.S. Internal Revenue Code of 1986, as amended, that impacted corporate taxation requirements. The TCJA significantly revised the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs (e.g., interest expense), among other things. During fiscal year 2018, the Company accounted for the impact of the TCJA resulting in additional income tax expense of $22,626. The significant components of this expense were (i) the one-time deemed repatriation tax on unremitted non-U.S. earnings and profits that were previously tax deferred and other tax impacts of the TCJA, which resulted in an increase in income tax expense, net of deductions
and credits, of $30,484 and (ii) the remeasurement of net deferred tax liabilities at the lower enacted U.S. federal corporate tax rate, which resulted in a decrease of $7,858 in income tax expense.
Provision for income taxes for fiscal years 2020 and 2019 was increased by an adjustment of $26,823 ($17,203 current tax expense plus $9,600 deferred tax expense) and $23,807 ($33,407 current tax expense offset by $9,600 deferred tax benefit), respectively, to reflect the hypothetical tax impact if Concentrix was not part of SYNNEX’ U.S. consolidated group and thereby suffered a much higher U.S. foreign tax credit limitation. The offset to the hypothetical tax expense is reflected in the parent company investment, a component of equity on the combined balance sheet. The hypothetical tax expense was applied only to the Company’s provision for income taxes in fiscal years 2020 and 2019 because it relates to changes to tax law under the TCJA that were not applicable to the Company’s provision for income taxes in fiscal year 2018.
The following presents the breakdown of net deferred tax liabilities after netting by taxing jurisdiction:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30,
|
|
2020
|
|
2019
|
Deferred tax assets
|
$
|
47,423
|
|
|
$
|
64,879
|
|
Deferred tax liabilities
|
(153,560)
|
|
|
(188,572)
|
|
Total net deferred tax liabilities
|
$
|
(106,137)
|
|
|
$
|
(123,693)
|
|
Net deferred tax liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30,
|
|
2020
|
|
2019
|
Assets:
|
|
|
|
Net operating losses
|
$
|
75,799
|
|
|
$
|
67,059
|
|
Accruals and other reserves
|
43,973
|
|
|
42,799
|
|
Depreciation and amortization
|
7,762
|
|
|
16,712
|
|
U.S. interest limitation carry forward
|
—
|
|
|
9,620
|
|
Share-based compensation expense
|
3,964
|
|
|
7,793
|
|
Deferred revenue
|
2,421
|
|
|
3,922
|
|
Tax credits
|
1,817
|
|
|
3,058
|
|
Foreign tax credit
|
5,829
|
|
|
296
|
|
Operating lease liability
|
104,429
|
|
|
—
|
|
Other
|
8,271
|
|
|
10,256
|
|
Gross deferred tax assets
|
$
|
254,265
|
|
|
$
|
161,515
|
|
Valuation allowance
|
(45,026)
|
|
|
(44,892)
|
|
Total deferred tax assets
|
$
|
209,239
|
|
|
$
|
116,623
|
|
Liabilities:
|
|
|
|
Intangible assets
|
$
|
(183,970)
|
|
|
$
|
(211,490)
|
|
Unremitted non-US earnings
|
(28,882)
|
|
|
(27,771)
|
|
Lease right-of-use assets
|
(99,604)
|
|
|
—
|
|
Other
|
(2,920)
|
|
|
(1,055)
|
|
Total deferred tax liabilities
|
$
|
(315,376)
|
|
|
$
|
(240,316)
|
|
Net deferred tax liabilities
|
$
|
(106,137)
|
|
|
$
|
(123,693)
|
|
The valuation allowance relates primarily to certain state and foreign net operating loss carry forward, foreign deferred items and state credits. The Company’s assessment is that it is not more likely than not that these deferred tax assets will be realized.
A reconciliation of the statutory United States federal income tax rate to the Company’s effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended November 30,
|
|
2020
|
|
2019
|
|
2018
|
Federal statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
22.2
|
%
|
State taxes, net of federal income tax benefit
|
(0.2)
|
%
|
|
(2.2)
|
%
|
|
(2.6)
|
%
|
International rate difference
|
1.3
|
%
|
|
(1.9)
|
%
|
|
(0.3)
|
%
|
Withholding taxes
|
0.8
|
%
|
|
1.2
|
%
|
|
2.8
|
%
|
Uncertain tax benefits
|
0.9
|
%
|
|
5.0
|
%
|
|
5.6
|
%
|
Changes in valuation allowance
|
0.5
|
%
|
|
2.7
|
%
|
|
(1.7)
|
%
|
Contingent debentures
|
—
|
%
|
|
(0.2)
|
%
|
|
1.9
|
%
|
Adjustments related to the TCJA
|
3.3
|
%
|
|
8.4
|
%
|
|
24.1
|
%
|
Hypothetical current tax expense recorded for separate return basis presentation
|
10.0
|
%
|
|
11.6
|
%
|
|
—
|
Other
|
0.9
|
%
|
|
(2.9)
|
%
|
|
4.5
|
%
|
Effective income tax rate
|
38.5
|
%
|
|
42.7
|
%
|
|
56.5
|
%
|
The Company’s United States business has sufficient cash flow and liquidity to fund its operating requirements and the Company expects and intends that profits earned outside the United States will be fully utilized and reinvested outside of the United States with the exception of earnings of certain previously acquired non-U.S. entities. The Company recorded deferred tax liabilities related to non-U.S. withholding taxes related to the earnings likely to be repatriated in the future.
As of November 30, 2020, the Company had approximately $1,021,872 of undistributed earnings of its non-U.S. subsidiaries for which it has not provided for non-U.S. withholding taxes and state taxes because such earnings are intended to be reinvested indefinitely in international operations. It is not practicable to determine the amount of applicable taxes that would be due if such earnings were distributed. Accordingly, the Company has not provisioned U.S. state taxes and non-U.S. withholding taxes on non-U.S. legal entities for which the earnings are permanently reinvested.
As of November 30, 2020, the Company had net operating loss carry forwards of approximately $41,744 and $36,590 for federal and state purposes, respectively. The federal net operating loss carry forward and the state net operating loss carry forward will both start expiring in fiscal year ending November 30, 2021, if not used. The Company also had approximately $159,148 of foreign net operating loss carry forward that will also start expiring in fiscal year ending November 30, 2021 if not used. In addition, the Company has approximately $7,646 of various federal and state income tax credit carry forwards that if not used, will begin expiring in fiscal year ending November 30, 2021. Utilization of the acquired loss carry forwards may be limited pursuant to Section 382 of the Internal Revenue Code of 1986.
The Company enjoys tax holidays in certain jurisdictions, primarily China, Costa Rica, Nicaragua and the Philippines. The tax holidays provide for lower or zero rates of taxation and require various thresholds of investment and business activities in those jurisdictions. Certain tax holidays begin to expire in fiscal year 2021. The estimated tax benefits from the above tax holidays for fiscal years 2020, 2019, and 2018 were approximately $12,850, $8,247, and $3,999, respectively.
The aggregate changes in the balances of gross unrecognized tax benefits, excluding accrued interest and penalties, during fiscal years 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
Balance as of November 30, 2017
|
$
|
19,176
|
|
Additions based on tax positions related to the current year
|
6,046
|
|
Reductions for tax positions of prior years
|
14,704
|
|
Lapse of statute of limitations
|
(1,251)
|
|
Changes due to translation of foreign currencies
|
—
|
|
Balance as of November 30, 2018
|
38,675
|
|
Additions based on tax positions related to the current year
|
10,753
|
|
Additions for tax positions of prior years and acquisition
|
5,166
|
|
Reductions for tax positions of prior years
|
(968)
|
|
Lapse of statute of limitations
|
(4,698)
|
|
Changes due to translation of foreign currencies
|
—
|
|
Balance as of November 30, 2019
|
48,928
|
|
Additions based on tax positions related to the current year
|
5,081
|
|
Additions for tax positions of prior years and acquisition
|
4,108
|
|
Reductions for tax positions of prior years
|
—
|
|
Settlements
|
(144)
|
|
Lapse of statute of limitations
|
(10,061)
|
|
Changes due to translation of foreign currencies
|
1
|
|
Balance as of November 30, 2020
|
$
|
47,913
|
|
The Company conducts business globally and files income tax returns in various U.S. and non-U.S. jurisdictions. The Company is subject to continuous examination and audits by various tax authorities. Significant audits are underway in the Unites States and India. The Company is not aware of any material exposures arising from these tax audits or in other jurisdictions not already provided for.
Although timing of the resolution of audits and/or appeals is highly uncertain, the Company believes it is reasonably possible that the total amount of unrecognized tax benefits as of November 30, 2020 could decrease between $13,000 and $27,000 in the next twelve months. The Company is no longer subject to U.S. federal income tax audit for returns covering years through fiscal year 2016. The Company is no longer subject to non-U.S. or U.S. state income tax audits for returns covering years through fiscal year 2011 and fiscal year 2013, respectively.
The liability for unrecognized tax benefits was $62,315 and $61,739 at November 30, 2020 and November 30, 2019, respectively, and is included in other long-term liabilities in the accompanying combined balance sheets. As of November 30, 2020 and 2019, $54,910 and $54,463 of the total unrecognized tax benefits, net of federal benefit, would affect the effective tax rate, if realized. The Company’s policy is to include interest and penalties related to income taxes, including unrecognized tax benefits, within the provision for income taxes. As of November 30, 2020 and 2019, the Company had accrued $14,402 and $12,852, respectively, in income taxes payable related to accrued interest and penalties.
Under the tax matters agreement with SYNNEX, the Company generally has liability and is required to indemnify SYNNEX for (1) any taxes incurred in the ordinary course of the Company’s business by the Company or its subsidiaries and (2) a portion of the taxes for tax periods that ended on or prior to the distribution related to transactions between Concentrix and SYNNEX or their respective subsidiaries, or other transactions in which both Concentrix and SYNNEX or their respective subsidiaries received a financial benefit.
NOTE 15—COMMITMENTS AND CONTINGENCIES:
From time to time, the Company receives notices from third parties, including clients and suppliers, seeking indemnification, payment of money or other actions in connection with claims made against them. Also, from time to time, the Company has been involved in various bankruptcy preference actions where the Company was a supplier to the companies now in bankruptcy. In addition, the Company is subject to various other claims, both asserted and unasserted, that arise in the ordinary course of business. The Company evaluates these claims and records the related liabilities when probable and estimable. It is possible that the ultimate liabilities could differ from the amounts recorded.
Under the separation and distribution agreement with SYNNEX, the Company agreed to indemnify SYNNEX, each of its subsidiaries and each of their respective directors, officers and employees from and against all liabilities allocated to Concentrix under the agreement, which are generally those liabilities that relate to the CX business and the Company’s business activities, whether incurred prior to or after the spin-off.
Under the tax matters agreement with SYNNEX, if the spin-off fails to qualify for tax-free treatment, the Company is generally required to indemnify SYNNEX for any taxes resulting from the spin-off (and related costs and other damages) to the extent such amounts result from (1) an acquisition of all or a portion of the Company’s equity securities or assets by any means, (2) any action or failure to act by the Company after the distribution affecting the voting rights of the Company’s stock, (3) other actions or failures to act by the Company, or (4) certain breaches of the Company’s agreements and representations in the tax matters agreement.
The Company’s indemnification obligations to SYNNEX and its subsidiaries, officers, directors and employees are not limited by any maximum amount.
The Company does not believe that the above commitments and contingencies will have a material adverse effect on the Company’s results of operations, financial position or cash flows.
NOTE 16—EARNINGS PER SHARE:
Basic earnings per share is generally computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is generally computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. There were no Concentrix Corporation equity awards outstanding prior to the spin-off, thus the computation of basic and diluted earnings per common share (EPS) for all periods disclosed was calculated using the shares issued in connection with the spin-off of 51.6 million shares.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
2020
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
Net income
|
$
|
164,811
|
|
|
117,164
|
|
|
48,271
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted average common shares (basic and diluted)
|
51,602
|
|
|
51,602
|
|
|
51,602
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
Basic and diluted earnings per share
|
$
|
3.19
|
|
|
$
|
2.27
|
|
|
$
|
0.94
|
|
NOTE 17—UNAUDITED QUARTERLY FINANCIAL INFORMATION:
The following is a summary of the combined results of operations for each of the quarters in the fiscal years ended November 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
2020
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,188,619
|
|
|
$
|
1,066,363
|
|
|
$
|
1,163,694
|
|
|
$
|
1,300,858
|
|
Gross profit
|
445,190
|
|
|
345,170
|
|
|
412,533
|
|
|
458,632
|
|
Net income
|
52,317
|
|
|
2,470
|
|
|
45,397
|
|
|
64,627
|
|
Earnings per share - basic and diluted
|
$
|
1.01
|
|
|
$
|
0.05
|
|
|
$
|
0.88
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
2019
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,173,271
|
|
|
$
|
1,160,877
|
|
|
$
|
1,160,928
|
|
|
$
|
1,212,836
|
|
Gross profit
|
433,309
|
|
|
430,527
|
|
|
426,181
|
|
|
458,431
|
|
Net income
|
33,724
|
|
|
21,239
|
|
|
30,331
|
|
|
31,870
|
|
Earnings per share - basic and diluted
|
$
|
0.65
|
|
|
$
|
0.41
|
|
|
$
|
0.59
|
|
|
$
|
0.62
|
|
Basic and diluted earnings per common share (EPS) for all periods disclosed was calculated using the shares issued in connection with the spin-off of 51.6 million shares. The sum of EPS for each of the four quarters may not equal EPS for the fiscal year.