TTEC Holdings, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Unless otherwise noted, amounts are in U.S. dollars. The filing reports consolidated results for TeleTech Holdings, Inc. and subsidiaries.
Business context
TTEC provided business process outsourcing, customer management, technology, sales and marketing, and customer strategy services across multiple countries. It reported four segments: Customer Management Services, Customer Growth Services, Customer Technology Services, and Customer Strategy Services. Management highlighted a strategy of expanding higher-margin, technology-enabled offerings and reported 93% client retention in Customer Management and Customer Growth Services.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $288.4 million | $292.7 million | Down 1.5% |
| Income from operations | $23.0 million | $18.8 million | Up 22.7% |
| Operating margin | 8.0% | 6.4% | Up 1.6 percentage points |
| Net income attributable to TTEC stockholders | $18.0 million | $15.9 million | Up 13.1% |
| Diluted earnings per share | $0.34 | $0.28 | Up $0.06 |
| Net cash provided by operating activities | $6.5 million | $14.7 million | Down $8.2 million |
| Free cash flow (non-GAAP) | $2.4 million | $8.3 million | Down $5.9 million |
Operating cash flow and free cash flow declined mainly amid cash outflows from accounts payable and accrued expenses, deferred revenue, and other liabilities. Capital expenditures were $4.1 million, versus $6.5 million in Q1 2012. Cash and cash equivalents were $170.6 million at March 31, 2013, compared with $164.5 million at year-end 2012.
At March 31, 2013, the company had $115.0 million drawn under its revolving credit facility, $3.8 million of letters of credit, and $381.2 million of remaining borrowing capacity. It reported compliance with credit-facility covenants. Current assets were $500.3 million and current liabilities were $157.7 million. Management said cash, operating cash generation, and available credit should cover expected operating and capital needs for the next 12 months. The filing does not provide a consolidated gross margin figure.
Material changes and segment trends
- Revenue fell by $4.3 million year over year. Management cited a $16.3 million reduction from exiting unprofitable programs, including Spain, and program completions, partly offset by new client programs, acquisitions, and foreign-exchange effects.
- Customer Management Services revenue declined 5.2% to $222.6 million, while operating income rose 24.1% to $20.7 million; improved utilization and exiting unprofitable work supported its margin.
- Customer Growth Services revenue was nearly flat at $22.9 million, but the segment returned to operating income of $1.3 million from a $2.1 million loss, helped by operational improvements, higher-margin program mix, and the absence of the prior-year $1.8 million trade-name impairment.
- Customer Technology Services revenue increased 31.3% to $33.6 million, primarily reflecting the TSG acquisition; operating income fell 21.2% to $2.9 million amid integration and investment costs and increased acquired-intangible amortization.
- Customer Strategy Services revenue was nearly flat at $9.4 million, while the segment recorded a $1.9 million operating loss versus $0.5 million of income a year earlier. Management cited integration, geographic consolidation, and right-sizing.
- One client contributed 11.9% of Q1 revenue, compared with 9.4% in Q1 2012. The five largest clients together contributed 40.7%, up from 36.7%.
Outlook, risks, and unusual items
- Capital spending: Management expected 2013 capital expenditures of $50 million to $60 million, with approximately 70% for growth and 30% for maintenance. The filing gives no specific revenue or earnings guidance.
- Restructuring and impairment: Q1 restructuring charges were $0.9 million, down from $2.0 million; no impairment losses were recorded, versus $1.8 million in Q1 2012. A $2.8 million restructuring accrual remained at quarter-end. Spain closure costs included $1.0 million remaining payable.
- Acquisition-related obligations: Contingent consideration fair value was $12.9 million, with expected future payments stated as $14.5 million. TSG’s purchase-price allocation remained preliminary; the company also expected to pay an estimated $0.6 million TSG working-capital adjustment in Q2 2013.
- Goodwill sensitivity: A reporting unit’s estimated fair value exceeded carrying value by only 4% at March 31. The assessment relied on assumptions including a 7.0% perpetuity growth rate and a 25.5% discount rate; management noted that differing assumptions or business-plan outcomes could lead to future impairment.
- Contingencies: A Brazilian services-tax assessment was under appeal; the company had provided a bank guarantee of approximately $3.5 million and had not accrued the tax, judging payment not probable. A California call-recording class action involving TeleTech and Google remained unresolved; Google sought indemnification, and the potential loss could not be reasonably estimated.
- Tax and market risks: The effective tax rate was 11.4%, versus 9.9% a year earlier, influenced by international tax holidays, jurisdictional income mix, and discrete tax benefits. The company also cited foreign-exchange exposure, variable-rate debt, client concentration, economic conditions, data security, and acquisition integration risks.
- Management said disclosure controls were effective as of March 31, 2013, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating improvement and utilization gains can continue as revenue remains pressured and client concentration increases.
- Whether the sharp decline in operating cash flow and free cash flow reverses, including the timing of working-capital movements.
- Integration progress and profitability of TSG and the other acquired businesses, alongside contingent consideration and acquisition-related cash requirements.
- Whether the goodwill reporting unit maintains sufficient fair-value headroom, given its 4% cushion and sensitive valuation assumptions.
- Developments in the Brazilian tax dispute and California class action, including any change in the company’s assessment of potential exposure.
- Actual 2013 capital spending compared with the $50 million–$60 million outlook and the company’s ability to maintain liquidity and covenant compliance.