TTEC Holdings, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results; the company provides customer engagement services through CMS, CGS, CTS and CSS segments.
Financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $305.9 | $297.0 | $903.6 | $875.1 |
| Operating income | $21.3 | $26.0 | $66.3 | $68.6 |
| Operating margin | 7.0% | 8.7% | 7.3% | 7.8% |
| Net income attributable to TTEC stockholders | $13.2 | $17.6 | $50.3 | $47.9 |
| Diluted EPS | $0.27 | $0.34 | $1.00 | $0.91 |
- Cash flow: Nine-month operating cash flow was $61.9 million, down from $76.6 million. Capital expenditures were $52.2 million versus $31.8 million, leaving free cash flow, a non-GAAP measure, of $9.7 million versus $44.8 million. Cash used in investing was $76.0 million; cash used in financing was $48.0 million.
- Liquidity and debt: Cash and equivalents were $87.6 million at September 30, down from $158.0 million at year-end 2013. Credit-facility borrowings were $115.0 million; management reported total debt of $121.1 million and debt-to-total-capitalization of 20.6%. Remaining facility capacity was $581.5 million, and the company was in compliance with covenants.
- Balance sheet: Total assets were $861.3 million and total liabilities $390.8 million. Current assets were $439.5 million against current liabilities of $188.9 million.
Material changes and operating drivers
- Q3 revenue grew 3.0%, but operating income fell $4.6 million. CMS, CGS and CSS together grew 5.6%; CTS revenue declined, primarily due to reduced Avaya-based offerings.
- CTS reported a Q3 operating loss of $0.3 million, versus $5.2 million operating income a year earlier. Management cited lower Avaya revenue, $1.4 million of one-time technology and managed-service costs, $1.2 million of additional investment in the Cisco cloud solution, and $0.5 million of TSG integration costs.
- CGS Q3 revenue rose 11.1% and operating margin increased to 6.3% from 2.3%, reflecting operational improvements and a shift toward higher-margin outcome-based programs. CSS revenue increased 12.7%, but margin fell to 7.8% from 16.9%, partly due to lower billable utilization; management said the utilization issue was not expected to continue.
- For the first nine months, CMS revenue rose 2.0%, CGS 21.6%, CTS fell 6.4%, and CSS rose 21.7%. Foreign-currency movements reduced nine-month CMS revenue by $20.3 million, according to management.
- Comprehensive loss attributable to TTEC stockholders was $14.0 million in Q3, versus comprehensive income of $14.9 million in Q3 2013, principally reflecting currency translation and derivative valuation losses. This differs from positive net income.
Outlook, risks and unusual items
- Management said cash from operations, existing cash and available credit should cover operating and capital needs for the next 12 months. It expected 2014 capital expenditures of $55 million to $65 million, approximately 70% for growth and 30% for maintenance. No specific revenue or earnings guidance was provided in the filing.
- 2014 acquisitions included Sofica and rogenSi; purchase-price estimates include contingent earn-outs and remain subject to adjustments. Acquisition-related contingent consideration was $27.3 million at quarter-end. Q3 included a $1.8 million expense from a higher Sofica earn-out estimate and a $1.7 million benefit from reducing WebMetro contingent consideration.
- One client contributed 11.9% of nine-month revenue; the five largest clients represented 38.3%. Their contracts expire between 2015 and 2017. The filing identifies client loss or nonrenewal as a potential material risk.
- Foreign-exchange exposure remains significant despite hedging; the company reported net cash-flow hedge liabilities of $17.1 million and noted that a 10% currency move could produce a material gain or loss on contracts, partly offset by underlying exposures. Variable-rate debt is another exposure; management said a 100-basis-point increase would not have had a material quarterly impact.
- Goodwill in the CTS TSG reporting unit had only an 8% fair-value cushion over carrying value in the June 2014 interim assessment. No Q3 impairment indicators were identified, but management said it would continue monitoring the unit.
- The company recorded a $1.3 million Q3 tax expense from settling a Netherlands tax audit. It reported that disclosure controls were effective and that there were no material changes to internal control over financial reporting or to the annual-report risk factors.
Most important facts for investors to verify
- Whether CTS stabilizes and Cisco cloud investments translate into revenue and improved margins, offsetting Avaya-related declines.
- Whether operating cash conversion and free cash flow recover as receivables, capital spending and acquisition outlays affect cash generation.
- Renewal and revenue exposure of the largest clients, particularly contracts expiring from 2015 through 2017.
- Actual acquisition performance and earn-out liabilities, including the preliminary purchase accounting for Sofica and rogenSi.
- Currency and derivative effects, and continued headroom under the credit facility and goodwill valuation assumptions for TSG.