TTEC Holdings, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; dollar amounts below are in millions except per-share data. TeleTech provides customer engagement, technology, growth and strategy services through four segments and operated in 25 countries.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $295.5 | $289.7 | $597.7 | $578.1 |
| Operating income | $20.7 | $19.7 | $45.0 | $42.7 |
| Operating margin | 7.0% | 6.8% | 7.5% | 7.4% |
| Net income attributable to TeleTech stockholders | $16.9 | $12.3 | $37.1 | $30.3 |
| Diluted earnings per share | $0.34 | $0.23 | $0.73 | $0.57 |
| Net cash from operating activities | $18.1 | $33.7 | $31.6 | $40.2 |
| Free cash flow (non-GAAP) | $(1.3) | $24.2 | $(2.9) | $26.6 |
Revenue rose 2.0% year over year in Q2; management said it would have increased 4.7% excluding a $7.7 million adverse foreign-exchange impact. Q2 net income included a $4.0 million benefit from reducing estimated acquisition contingent consideration. Prior-year Q2 included a $3.7 million loss on deconsolidation of a subsidiary.
Segments and notable changes
| Q2 2014 segment | Revenue | Operating income | Operating margin | Year-over-year context |
|---|---|---|---|---|
| Customer Management Services (CMS) | $218.7 | $16.5 | 7.5% | Revenue down 0.9%; currency and completed programs offset client-program gains and acquisitions. |
| Customer Growth Services (CGS) | $28.9 | $1.8 | 6.3% | Revenue up 28.9%; returned to profit from a prior-year loss, reflecting program improvements, mix and WebMetro. |
| Customer Technology Services (CTS) | $35.7 | $1.6 | 4.5% | Revenue down 2.5%; operating income fell from $5.8 million as Avaya sales declined and cloud and sales investments increased. |
| Customer Strategy Services (CSS) | $12.2 | $0.7 | 6.0% | Revenue up 21.9%; returned to profit, aided by business integration and absence of prior-year impairment/deconsolidation impacts. |
Cash, debt and liquidity
- Cash and cash equivalents were $97.8 million at June 30, down from $158.0 million at year-end 2013. Current assets were $431.3 million and current liabilities $161.9 million.
- Credit Agreement borrowings were $100.0 million; management reported total debt of $106.9 million. Remaining revolver capacity was $596.5 million after letters of credit. The company reported compliance with its covenants.
- Six-month operating cash flow declined to $31.6 million from $40.2 million, primarily due to weaker collections and higher operating-expense payments. Investing cash use increased to $43.1 million, including $34.5 million of capital expenditures and $8.7 million for acquisitions.
- Financing cash use was $51.1 million, including $37.0 million of stock repurchases and acquisition contingent-consideration payments. Management said available cash, operating cash generation and credit would meet expected operating and capital needs for the next 12 months.
Outlook, risks and unusual items
- No revenue or earnings guidance was provided. Management expected 2014 capital expenditures of $55–$65 million, about 70% for growth and 30% for maintenance.
- After quarter-end, the company agreed to acquire substantially all operating assets of rogenSi for $35.7 million, subject to working-capital adjustments, including $18.0 million cash at closing and earn-outs; closing was expected by August 31, 2014, subject to customary conditions.
- CTS reporting unit TSG had $23.0 million of goodwill and only an 8% estimated fair-value cushion over carrying value. The assessment assumed operational realignment and cost reductions; changed assumptions or performance could result in future impairment.
- Client concentration is material: one client represented 11.8% of six-month revenue, and the five largest represented 37.9%. Their contracts expire between 2014 and 2017; renewals and terms are not assured.
- Foreign currency movements reduced Q2 revenue and can pressure margins; hedging does not cover every exposure. Variable-rate debt is another exposure, though management said a 100-basis-point rate increase would not have had a material quarterly impact.
- Other items include ongoing restructuring (six-month charges of $1.2 million), $12.5 million of recorded acquisition contingent consideration, and $42.1 million of net deferred tax assets whose recovery depends on future profitability. Management considered the cited tax audits unlikely to have a material effect; a California class action was settled for an immaterial amount.
- Management reported effective disclosure controls as of June 30, 2014 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether operating cash conversion and free cash flow recover after the substantial year-over-year decline and elevated capital spending.
- Whether CTS/TSG performance, cost actions and assumptions support the limited 8% goodwill valuation cushion.
- Renewal status and economics of major client contracts, particularly those expiring from 2014 through 2017.
- Performance and integration of Sofica and WebMetro, the contingent-payment estimates, and the closing and earn-out terms of the rogenSi transaction.
- Whether planned capital expenditures, share repurchases and acquisition spending remain supportable given lower cash balances and continued debt usage.