TTEC Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. TTEC provides customer experience technology and services through TTEC Digital and TTEC Engage, across four reporting segments. Figures below are in millions of U.S. dollars unless noted.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $394.4 | $375.2 | Up 5.1% reported; management cited 10.0% growth excluding foreign exchange and the prior-year ASC 606 effect. |
| Operating income | $32.1 | $24.9 | Up 28.7%; operating margin improved to 8.1% from 6.6%. |
| Net income | $20.5 | $5.9 | Net income attributable to TTEC stockholders was $19.0 vs. $4.6; diluted EPS was $0.41 vs. $0.10. |
| Operating cash flow | $80.0 | $67.4 | Increase attributed primarily to working-capital improvement. |
| Capital expenditures | $13.2 | $7.5 | Free cash flow, a non-GAAP measure, was $66.8 vs. $59.9. |
| Cash and cash equivalents | $89.0 at March 31 | $78.2 at Dec. 31 | Cash-flow statement ending cash, cash equivalents and restricted cash was $91.4. |
| Credit-facility borrowings | $242.0 at March 31 | $282.0 at Dec. 31 | Variable-rate debt; average first-quarter interest rate was 3.7%. |
| Current assets / liabilities | $522.7 / $304.9 | $526.5 / $235.4 at Dec. 31 | Current liabilities rose, including current operating lease liabilities recognized after adoption of ASC 842. |
Business and segment developments
- Customer Technology Services revenue rose 48.9% to $52.4, with operating income up 85.5% to $9.0; growth came from cloud platforms and systems integration, including a large multiyear government contract.
- Customer Growth Services revenue increased 19.6% to $38.9 and operating income rose to $4.3 from $1.4, primarily with increased client programs.
- Customer Management Services revenue declined 1.0% to $289.6, while operating income rose 10.3% to $20.1. Results included a $6.4 volume-commitment payment and currency benefit; program completions and ASC 606 effects were offsets.
- Customer Strategy Services revenue fell 9.6% to $13.4 and it recorded a $1.2 operating loss, compared with $0.5 operating income, reflecting lower revenue and impairment expense.
- The five largest clients represented 36.1% of revenue. One healthcare client accounted for 11.1%.
Liquidity, debt and significant items
- The amended revolving credit facility matures February 14, 2024, with a $900 million commitment and an accordion feature up to $1.2 billion subject to conditions. Remaining borrowing capacity was approximately $465 million; TTEC reported compliance with covenants at quarter-end.
- The facility requires a maximum net leverage ratio of 3.50:1.00 and minimum interest coverage ratio of 2.50:1.00. A 100-basis-point rate increase would add about $1.0 million in annualized interest per $100 million borrowed.
- TTEC adopted ASC 842 on January 1, 2019. At March 31 it reported $135.2 million of operating lease assets and $152.0 million of operating lease liabilities, plus $18.3 million of finance lease liabilities. Adoption produced a $0.8 million after-tax reduction to opening retained earnings and did not affect earnings or cash flows.
- Q1 2018 included a $15.6 million impairment of the CafeX investment and bridge loan, a $0.7 million bargain-purchase gain, and other items. This materially affects the year-over-year comparison of other income and net income. CafeX remained fully impaired at zero.
- TTEC declared dividends of $0.30 per share for Q1, totaling $13.9 million, reported as declared but unpaid at quarter-end. No shares were repurchased during the quarter.
Outlook, risks and contingencies
- Management expected 2019 capital expenditures of $60–$65 million, approximately 65% for growth and 35% for maintenance. It stated operating cash generation, cash balances and available credit should cover expected operating and capital needs for the next 12 months. No earnings or revenue guidance is provided in the filing text.
- Capacity utilization was 75% at quarter-end, versus 77% a year earlier. Management planned to selectively maintain and expand offshore capacity while retaining appropriate U.S. capacity; regulatory pressure to move some work onshore was noted.
- Foreign currency exposure, variable-rate debt, client concentration, demand forecasting, capacity utilization, skilled-worker availability, technology and cybersecurity, and acquisition integration were identified as risks. Hedging does not cover all exposures and cannot eliminate longer-term currency risk.
- TTEC had approximately $2.7 million of pre-petition Sears receivables, fully reserved in Q4 2018. Sears sold the served business, and TTEC signed a new contract with the buyer in April 2019.
- Tax authorities were auditing multiple jurisdictions. TTEC received initial Philippines deficiency findings for tax year 2015, disputed the amount and was working to resolve the matter; management did not expect audit resolutions to have a material financial-statement effect. Management likewise did not expect current legal proceedings to have a material adverse effect, subject to stated uncertainty.
- Disclosure controls were concluded effective at the reasonable-assurance level. The filing reported no material changes to risk factors from the 2018 Form 10-K.
Most important facts for investors to verify
- Whether reported revenue and margin growth persist after separating underlying growth from foreign exchange, ASC 606 comparison effects and the CMS volume-commitment payment.
- Whether CTS and CGS growth, and the improvement in CMS profitability, continue while CSS remains loss-making and overall utilization is below the prior-year level.
- Cash conversion and working-capital trends, especially given that the increase in operating cash flow was attributed partly to higher current liabilities.
- Debt, covenant headroom, variable-rate exposure and the effect of lease obligations on liquidity and leverage assessments.
- Renewal and volume risks for major clients, developments under the new Sears contract, and resolution of the Philippines tax findings.
- Delivery against the $60–$65 million capital-spending outlook and the associated funding needs.