TTEC Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless noted otherwise, amounts below are in U.S. dollars, millions. Comparisons are with the corresponding 2017 period.
Business context and reporting period
TTEC provides customer-experience services and technology through TTEC Engage and TTEC Digital. Its four reportable segments are Customer Management Services (CMS), Customer Growth Services (CGS), Customer Technology Services (CTS), and Customer Strategy Services (CSS). The company reported 49,700 employees across 24 countries. It adopted ASC 606 on January 1, 2018 using the modified retrospective method, so prior-period figures were not restated.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $364.9 | $359.0 | $1,090.0 | $1,050.7 |
| Operating income | $14.7 | $15.8 | $53.1 | $63.9 |
| Operating margin | 4.0% | 4.4% | 4.9% | 6.1% |
| Net income attributable to TTEC stockholders | $5.4 | $14.8 | $15.5 | $48.7 |
| Diluted earnings per share | $0.12 | $0.32 | $0.33 | $1.05 |
| Dividends declared per share | $0.28 | $0.25 | $0.55 | $0.47 |
For the nine months, cash from operations was $166.1 million, capital expenditures were $31.8 million, and free cash flow was $134.3 million, a non-GAAP measure. The comparable 2017 amounts were $149.6 million, $43.9 million, and $105.7 million, respectively.
At September 30, cash and cash equivalents were $93.9 million, total assets were $1,038.6 million, and stockholders’ equity was $328.9 million. The revolving credit facility balance was $272.5 million, down from $344.0 million at December 31, 2017. The company reported approximately $405 million of remaining borrowing capacity and compliance with its credit covenants. Current assets were $503.0 million and current liabilities were $243.0 million.
Segment results for Q3: CMS revenue was $262.4 million and operating margin was 1.4%; CGS was $35.9 million and 7.1%; CTS was $50.0 million and 13.6%; CSS was $16.7 million and 10.1%.
Material changes versus the prior comparable period
- Q3 revenue increased 1.6%, while operating income fell 7.2% and TTEC-attributable net income fell to $5.4 million from $14.8 million. For the nine months, revenue rose 3.7%, but operating income and attributable net income declined to $53.1 million and $15.5 million from $63.9 million and $48.7 million.
- CMS was the principal operating pressure: Q3 revenue declined 5.4% and operating income declined 60.2%. Management cited program completions, U.S. wage and healthcare costs, new-program launch costs, foreign exchange, and ASC 606 effects.
- CTS was a growth driver: Q3 revenue rose 44.6% and operating income rose 63.0%, reflecting cloud-platform and systems-integration growth and a large product sale. CGS also improved on client additions; CSS operating income improved partly because of lower losses on assets held for sale.
- Interest expense rose to $8.4 million in Q3 and $22.6 million year to date, versus $3.5 million and $8.7 million. The increase reflected higher debt utilization and rates, as well as charges related to the mandatory purchase of Motif’s remaining 30% interest.
- Reported 2018 results are affected by ASC 606: compared with prior accounting, Q3 revenue was $10.1 million lower and net income $2.9 million lower; nine-month revenue was $4.8 million higher and net income $2.8 million higher. The standard deferred certain upfront training fees and related costs.
- Nine-month comprehensive loss attributable to TTEC stockholders was $8.2 million, compared with comprehensive income of $71.8 million in 2017, largely reflecting foreign-currency translation losses.
Outlook, commentary, risks, and unusual items
- Management said operating cash, available cash, and credit were expected to cover operating and capital expenditure needs for the next 12 months. It expected 2018 capital expenditures of approximately 3.2% of revenue. No specific revenue or earnings guidance was provided in the supplied filing text.
- After quarter-end, TTEC transferred a $280 million dividend from foreign operations to its U.S. parent and used it to pay down the credit facility. The company expected a $1 million to $3 million state tax expense from the distribution in Q4 2018.
- The company recorded a $15.6 million impairment of its CaféX investment and related bridge loan, reducing their value to zero. It also recorded $2.0 million of additional estimated losses on a business unit held for sale and $4.6 million of nine-month restructuring and integration charges.
- Sears filed for bankruptcy on October 15, 2018. TTEC reported approximately $3 million of pre-petition receivables exposure and said it continued serving Sears, with assurances that current service costs would be covered through debtor-in-possession financing.
- Client concentration remains a risk: the five largest clients accounted for 34.5% of nine-month revenue, though no single client exceeded 10%. Other disclosed risks include competition, client retention and contract renewals, labor availability and costs, foreign exchange, cybersecurity and service continuity, acquisitions and integration, and variable-rate debt.
- Foreign-exchange cash-flow hedges had a net liability of $16.2 million at September 30; settled hedges and related premiums produced $14.3 million of nine-month losses recorded in revenue. The effective tax rate was 19.7% for the nine months, versus 15.0% in 2017.
Most important facts for investors to verify
- Whether CMS margins recover as new client launches mature and labor costs, program completions, and ASC 606 effects develop.
- The sustainability and mix of CTS growth, especially recurring cloud and systems-integration revenue versus product sales.
- How the $280 million post-quarter dividend and credit-facility repayment affect debt, interest costs, cash availability, and Q4 tax expense.
- The final Motif buyout obligation and acquisition-related liabilities, including the recorded $35.8 million liability for the remaining 30% interest.
- Collection of Sears receivables and the performance of assets classified as held for sale.
- Future foreign-exchange effects, tax assessments, and any changes to covenant headroom or management’s liquidity outlook.