Business context and reporting period
TeleTech Holdings, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2011. The company provides global business process outsourcing (BPO), consulting, technology and customer-management services. Comparisons below are with the three months ended March 31, 2010 unless otherwise noted; dollar amounts are in millions.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Revenue | $281.0 | $271.5; up 3.5% |
| Operating income / margin | $21.5 / 7.6% | $19.3 / 7.1% |
| Net income | $11.4 | $14.0 |
| Net income attributable to TeleTech shareholders | $10.5; diluted EPS $0.18 | $13.3; diluted EPS $0.21 |
| Operating cash flow | $24.6 | $51.4 |
| Free cash flow, company-defined non-GAAP | $20.7 | $44.8 |
| Cash and cash equivalents at quarter-end | $189.7 | $119.4 at December 31, 2010 |
| Credit-facility borrowings at quarter-end | $79.5 | None at December 31, 2010 |
Revenue growth included approximately $6.7 million, or 2.5%, from foreign-exchange movements. North American BPO revenue fell 7.6% to $192.0 million, while International BPO revenue rose 39.9% to $88.9 million. Segment operating margins were 9.1% for North America (9.5% prior year) and 4.4% for International (a loss of $0.5 million prior year). The filing attributes international growth partly to new and expanded client programs, currency effects and the inclusion of Peppers & Rogers Group (PRG), acquired in November 2010.
Cost of services was $199.1 million, or 70.9% of revenue, compared with $194.6 million, or 71.7%. SG&A rose 10.1% to $47.8 million. Restructuring charges declined to $0.7 million from $1.5 million; Q1 2011 also included $0.2 million of impairment losses. Interest expense increased to $1.4 million from $0.8 million, reflecting higher credit-facility borrowings.
Total assets were $710.5 million and total liabilities $273.2 million at March 31, 2011. Current assets of $480.3 million exceeded current liabilities of $160.2 million. The company reported a 15.8% total-debt-to-total-capitalization ratio and $265.9 million of remaining borrowing capacity after letters of credit. It was in compliance with credit-agreement covenants. Q1 capital expenditures were $3.9 million.
Material changes versus the prior comparable period
- Operating income improved despite lower North American revenue, primarily alongside substantially improved International BPO operating results.
- Shareholder-attributable net income and EPS declined, mainly amid a higher reported tax rate. The effective tax rate was 46.4%, versus 26.5% a year earlier; management said it would have been 18.8% absent specified discrete tax items.
- Operating cash flow fell by $26.8 million and free cash flow by $24.1 million. Management cited higher tax payments and changes in accounts payable and accrued liabilities; cash taxes paid were $11.9 million, compared with $1.2 million.
- The company repurchased 1.61 million shares for $33.8 million during the quarter. At March 31, approximately $61.5 million remained authorized under the repurchase program.
- Cash increased while revolving-credit debt rose from zero at year-end to $79.5 million at quarter-end.
Outlook, management commentary, risks and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided. Management expected cash from operations, existing cash and available credit to meet expected operating and capital needs for the next 12 months. Estimated 2011 capital expenditures were approximately $40 million.
- In March 2011, TeleTech agreed to acquire certain eLoyalty business assets and assume certain liabilities for $40.9 million, subject to shareholder approval and other closing conditions. The company anticipated closing in Q2 2011.
- Q1 tax items included a $9.0 million Canadian tax receivable write-off after the Canada Revenue Agency declined to consider the company’s treaty-relief request; TeleTech said it intended to pursue available remedies. TeleTech also recorded a $10.2 million U.S. tax refund claim and a $7.3 million reserve for uncertain tax positions, a net $2.9 million tax benefit. IRS mediation was scheduled for May 2011, and the eventual outcome could differ from the recorded benefit.
- PRG acquisition terms include a further $5.0 million payment due in March 2012 and possible contingent consideration of up to $5.0 million in 2013, dependent on PRG achieving a specified 2012 EBITDA target. The contingent consideration’s acquisition-date fair value was zero. The agreement also includes options concerning the remaining 20% interest.
- Management cited competition and pricing pressure, client volume changes and contract renewals, execution and ramp-up of new programs, labor availability and costs, delivery-center utilization, foreign-exchange movements, and possible restructuring or impairments as risks. Multi-client-center utilization was 76%, below the company’s 80%–90% internal target. The top five clients represented 39.1% of revenue; their contracts expire between 2011 and 2012.
- Management said ordinary-course legal claims were not expected to materially affect results. A Philippines tax and payroll-tax audit was ongoing; management did not expect a material effect. The filing reported no material change to previously disclosed risk factors. Disclosure controls were judged effective as of quarter-end.
- Q1 2010 revenue included a $2.0 million reduction related to disputed service-delivery issues from 2009, a comparability item. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether the eLoyalty transaction closed on the expected terms and how it affected subsequent debt, cash and results.
- Renewal outcomes for major-client contracts expiring in 2011–2012, client volumes and the sustainability of International BPO growth and margins.
- Subsequent developments in the Canadian tax claim and U.S. refund mediation, including any cash or earnings impact.
- Operating cash-flow recovery, working-capital movements, capital spending versus the $40 million estimate, and use of the revolver.
- Delivery-center utilization and progress toward the 80%–90% internal target, alongside restructuring and impairment costs.
- PRG’s performance against the contingent-payment EBITDA target and the implications of its purchase, payment and ownership-option terms.