TTEC Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited consolidated results. The company provides technology-enabled customer experience services through four segments: Customer Management Services (CMS), Customer Growth Services (CGS), Customer Technology Services (CTS), and Customer Strategy Services (CSS).
Financial performance and liquidity
- Revenue: $338.3 million, up 8.3% from $312.4 million. Excluding a $1.0 million favorable foreign-exchange effect, revenue grew 7.9%; management cited the Atelka acquisition and organic growth across all four segments.
- Operating income: $26.5 million, up 49.2% from $17.8 million. Operating margin increased to 7.8% from 5.7%.
- Net income attributable to TTEC stockholders: $19.2 million, versus $11.2 million. Diluted earnings per share were $0.42, versus $0.23.
- Cash flow: Operating cash flow was $74.9 million, versus $12.8 million. Capital expenditures were $12.0 million; company-defined free cash flow was $62.9 million, versus negative $2.2 million. Management attributed the improvement mainly to working-capital movements, including stronger receivable collections and deferred-revenue collections.
- Cash and debt: Cash and equivalents were $66.5 million at quarter-end. Credit-facility borrowings were $182.0 million, down from $217.3 million at year-end; management reported total debt of $197.6 million, including other debt. Average borrowing interest was approximately 1.8% in the quarter.
- Liquidity: Remaining borrowing capacity was approximately $420 million, and the company was compliant with credit-facility covenants. Management said cash, operating cash generation, and available credit should cover expected operating and capital needs for the next 12 months.
- Capital returns: The company repurchased 386,340 shares for approximately $11.7 million during the quarter. A $0.22-per-share dividend was declared in February and paid April 14, 2017.
Segments and changes versus prior year
| Segment | Revenue | Operating income | Operating margin |
|---|---|---|---|
| CMS | $252.1 million; +10.6% | $20.6 million; +32.1% | 8.2%, up from 6.8% |
| CGS | $33.7 million; +0.4% | $2.4 million, versus $0.5 million | 7.2%, up from 1.5% |
| CTS | $35.7 million; +1.2% | $3.1 million; +10.0% | 8.6%, up from 7.9% |
| CSS | $16.8 million; +7.3% | $0.4 million, versus a $1.1 million loss | 2.5%, versus negative 7.1% |
Management linked stronger operating results to higher CMS and CGS volumes, prior-year cost rationalization, improved utilization and a favorable $4.0 million foreign-exchange effect on operating income. CGS benefited from lower digital-marketing losses and pricing improvements; CSS benefited from consultant utilization and reduced losses at a business held for sale. CTS revenue included higher Cisco product sales, partly offset by the Avaya business wind-down.
Outlook, risks, contingencies, and unusual items
- Capital spending outlook: 2017 capital expenditures were expected to be approximately 4.6% of revenue, with about 70% supporting growth and 30% maintenance. The filing provides no specific earnings or revenue guidance.
- Acquisition: On April 3, 2017, after quarter-end, TTEC acquired Connextions, a healthcare technology and customer service provider, for $80.0 million in cash, subject to customary adjustments. The parties also entered long-term service agreements.
- Divestitures: Two business units remained classified as held for sale. Assets were $13.0 million and related liabilities $2.4 million at March 31. Previously recorded impairment losses of $5.3 million remained management’s best estimate; sale prices had not been determined.
- Operating capacity and client risk: Center utilization was 78%, below the company’s 80%–90% internal target. The five largest clients represented 34.1% of revenue; one client represented 9.6%. Major client contracts expire from 2017 through 2020, and renewal or volume reductions could affect results.
- Market and currency risks: Variable-rate debt exposes the company to rising interest rates; foreign operations and hedges expose results to currency movements. Management noted hedges do not cover every exposure and forecasts may differ from actual results.
- Controls: Management concluded disclosure controls were not effective because material weaknesses in internal control over financial reporting persisted at March 31, 2017, involving revenue, impairment processes, and the control environment. Remediation work was underway; management nevertheless stated the financial statements fairly presented results in all material respects.
- Other items: The effective tax rate fell to 21.1% from 27.6%, influenced by international tax holidays and the geographic mix of earnings. The filing reports ongoing tax audits but says management does not expect their resolution to have a material effect. Management also reported no material change to the risk factors in the 2016 Form 10-K.
Key facts for investors to verify
- Whether operating-margin gains and improved cash flow persist after the quarter’s favorable working-capital movements and foreign-exchange effects.
- Integration, returns, and funding implications of the $80.0 million Connextions acquisition, including the related long-term agreements.
- Progress and final proceeds from the two held-for-sale businesses, and whether further impairment charges arise.
- Remediation and testing of the disclosed material weaknesses in financial reporting controls.
- Renewal and volume trends for large clients, capacity utilization relative to the 80%–90% target, and the impact of currency and interest-rate movements.