Concentrix Corp - 10-Q filing on 2022-07-08

ACQUISITION

6 Months Ended

May 31, 2022

Business Combination and Asset Acquisition [Abstract]

ACQUISITIONS:

PK Acquisition

Background

On December 27, 2021, the Company completed its acquisition of PK, a leading CX design engineering company with more than 5,000 staff in four countries. PK creates pioneering experiences that accelerate digital outcomes for their clients’ customers, partners and staff. The acquisition of PK expanded the Company’s scale in the digital IT services market and supported the Company’s growth strategy of investing in digital transformation to

deliver exceptional customer experiences. The addition of the PK staff and technology to the Company’s team further strengthened its capabilities in CX design and development, artificial intelligence (“AI”), intelligent automation, and customer loyalty.

Purchase price consideration

The total purchase price consideration, net of cash acquired, was $1,581.0 million, which was funded by proceeds from the Company’s new term loan (the “Term Loan”) under its amended senior secured credit facility (the “Credit Facility”) and additional borrowings under its accounts receivable securitization facility (the “Securitization Facility”). See Note 8—Borrowings for a further discussion of the Term Loan, the Credit Facility and the Securitization Facility.

The preliminary purchase price consideration to acquire PK consisted of the following:


Cash consideration for PK stock (1)	$	1,177,342
Cash consideration for PK vested equity awards (2)	246,229
Cash consideration for repayment of PK debt, including accrued interest (3)	148,492
Cash consideration for transaction expenses of PK (4)	22,842
Total cash consideration	1,594,905
Non-cash equity consideration for conversion of PK equity awards (5)	15,725
Total consideration transferred	1,610,630
Less: Cash acquired (6)	29,653
Total purchase price consideration	$	1,580,977

(1) Represents the cash consideration paid for the outstanding shares of PK’s common stock, which includes the final settlement of the merger consideration adjustment paid pursuant to the merger agreement.

(2) Represents the cash consideration paid for vested PK stock option awards and restricted stock awards.

(3) Represents the cash consideration paid to retire PK’s outstanding third-party debt, including accrued interest.

(4) Represents the cash consideration paid for expenses incurred by PK in connection with the merger and paid by Concentrix pursuant to the merger agreement. These expenses primarily related to third-party consulting services.

(5) Represents the issuance of vested Concentrix stock options that were issued in conversion of certain vested PK stock options that were assumed by Concentrix pursuant to the merger agreement.

(6) Represents the PK cash balance acquired at acquisition.

Preliminary purchase price allocation

The acquisition was accounted for as a business combination in accordance with Accounting Standards Codification Topic 805, Business Combinations. The purchase price was allocated to the assets acquired, liabilities assumed and non-controlling interest based on management’s estimate of the respective fair values at the date of acquisition. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The factors contributing to the recognition of goodwill were the

assembled workforce, comprehensive service portfolio delivery capabilities and strategic benefits that are expected to be realized from the acquisition. None of the goodwill is expected to be deductible for income tax purposes.

The following table summarizes the preliminary estimates of fair values of the assets acquired, liabilities assumed and non-controlling interest as of the acquisition date:


	As of
	December 27, 2021
Assets acquired:
Cash and cash equivalents	$	29,653
Accounts receivable	86,955
Property and equipment	11,198
Operating lease right-of-use assets	12,288
Identifiable intangible assets	469,300
Goodwill	1,126,111
Other assets	11,954
Total assets acquired	$	1,747,459

Liabilities assumed and non-controlling interest:
Accounts payable and accrued liabilities	68,438
Operating lease liabilities	12,288
Deferred tax liabilities	54,103
Non-controlling interest	2,000
Total liabilities assumed and non-controlling interest	$	136,829

Total consideration transferred	$	1,610,630

As of May 31, 2022, the purchase price allocation is preliminary. The preliminary purchase price allocation was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period (not to exceed twelve months following the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the valuation of identifiable intangible assets acquired, the fair value of certain tangible assets acquired and liabilities assumed, and deferred income taxes. The Company expects to continue to obtain information for the purpose of determining the fair value of the assets acquired and liabilities assumed on the acquisition date throughout the remainder of the measurement period. The Company made immaterial measurement period adjustments during the second quarter of fiscal year 2022.

The preliminary purchase price allocation includes $469.3 million of acquired identifiable intangible assets, all of which have finite lives. The preliminary fair value of the identifiable intangible assets has been estimated using the income approach through a discounted cash flow analysis of certain cash flow projections. The cash flow projections are based on forecasts used by the Company to price the PK acquisition, and the discount rates applied were benchmarked by referencing the implied rate of return of the Company’s pricing model and the weighted average cost of capital. The intangible assets are being amortized over their estimated useful lives on either a straight-line basis or an accelerated method that reflects the economic benefit of the asset. The determination of the useful lives is based upon various industry studies, historical acquisition experience, economic factors, and future forecasted cash flows of the Company following the acquisition of PK.

The preliminary amounts allocated to intangible assets are as follows:


	Gross Carrying Amount		Weighted-Average Useful Life
Customer relationships	$	398,600	15 years
Technology	63,500		5 years
Trade name	5,000		3 years
Non-compete agreements	2,200		3 years
Total	$	469,300

Impact on results of operations

The results of the PK operations have been included in the consolidated financial statements since December 27, 2021. The following table provides the results of operations for PK included in the consolidated statement of operations from the acquisition date through May 31, 2022:


	Three Months Ended		Six Months Ended
	May 31, 2022		May 31, 2022
Revenue	$	123,963	$	207,159
Income before income taxes	2,773		2,980

In connection with the acquisition of PK, the Company incurred a total of $1.7 million and $2.6 million of acquisition-related and integration expenses for the three and six months ended May 31, 2022, respectively. These expenses primarily include legal and professional services, and severance and retention payments to integrate the business. These acquisition-related and integration expenses were recorded within selling, general and administrative expenses in the consolidated statement of operations.

Supplemental Pro Forma Information

The supplemental pro forma financial information presented below is for illustrative purposes only, does not include the pro forma adjustments that would be required under Regulation S-X for pro forma financial information, is not necessarily indicative of the financial position or results of operations that would have been realized if the PK acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable under the circumstances.

The supplemental pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the PK acquisition had occurred on December 1, 2020 to give effect to certain events that the Company believes to be directly attributable to the PK acquisition. These pro forma adjustments primarily include:

•An increase in amortization expense that would have been recognized due to acquired identifiable intangible assets.

•An adjustment to interest expense to reflect the additional borrowings of Concentrix on the amended credit facility and the repayment of PK’s historical debt in conjunction with the acquisition.

•The related income tax effects of the adjustments noted above.

The supplemental pro forma financial information for the periods presented is as follows:


	Three Months Ended				Six Months Ended
	May 31,				May 31,
	2022		2021		2022		2021
Revenue	$	1,568,101	$	1,479,640	$	3,137,114	$	2,928,392
Net income	113,438		81,618		219,789		165,853

ServiceSource Pending Acquisition

In May 2022, the Company announced a definitive agreement to acquire ServiceSource International, Inc. (“ServiceSource”), a global market leader in B2B digital sales, for $1.50 per share in an all-cash transaction valued at approximately $131 million, inclusive of ServiceSource’s net cash. ServiceSource is a global outsourced go-to-market services provider, delivering B2B digital sales and customer success solutions that are expected to complement the Company’s existing offerings in this area. The transaction is expected to close in the second half of fiscal year 2022, subject to customary closing conditions, including approval by ServiceSource’s stockholders and regulatory requirements. ServiceSource has established a special meeting date of July 20, 2022 for its stockholders to consider approval of the transaction.