TTEC Holdings, Inc. — Q3 2017 Form 10-Q
Business context and period. TTEC (then TeleTech Holdings) 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). This unaudited report covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Amounts below are in millions of dollars except per-share data.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $359.0 | $312.8 | $1,050.7 | $930.3 |
| Operating income; margin | $15.8; 4.4% | $12.5; 4.0% | $63.9; 6.1% | $46.5; 5.0% |
| Net income attributable to TTEC shareholders | $14.8 | $11.5 | $48.7 | $34.3 |
| Diluted earnings per share | $0.32 | $0.24 | $1.05 | $0.71 |
| Operating cash flow | $24.2 | $55.8 | $149.6 | $110.8 |
| Capital expenditures | $14.3 | $11.1 | $43.9 | $38.9 |
| Free cash flow (non-GAAP) | $9.8 | $44.7 | $105.7 | $72.0 |
- At September 30, cash and cash equivalents were $78.8, versus $55.3 at December 31, 2016. Credit Agreement borrowings were $255.0, up from $217.3; total debt was reported as $270.8.
- Current assets were $468.2 and current liabilities $220.0. The company reported approximately $390.0 of remaining borrowing capacity under covenant calculations and compliance with all credit-facility covenants.
- Nine-month operating cash flow improved by $38.8. Management attributed the increase principally to lower operating-expense payments and higher deferred-revenue collections, partly offset by lower receivables collections. Free cash flow is a company-defined non-GAAP measure and is not residual cash available for discretionary spending.
Material changes versus the prior period
- Q3 revenue rose 14.8% (14.2% excluding the stated $1.7 foreign-exchange contribution). Management attributed growth mainly to the Atelka and Connextions acquisitions and organic growth in CMS and CTS. CMS revenue grew 24.0%; CGS, CTS and CSS revenue declined 12.7%, 5.5% and 5.7%, respectively.
- Q3 operating income increased 26.1%, but CMS margin declined to 3.3% from 5.5%, reflecting Connextions integration and restructuring costs and preparation for seasonal volumes. Overall operating income included $6.0 of restructuring and integration charges; $5.6 related to Connextions integration.
- Nine-month CMS revenue increased 20.2% and operating income 21.0%. CGS revenue fell 8.3% while operating income increased; CTS revenue fell 3.8% as the Avaya business was wound down and sold, while its operating income improved. CSS returned to operating profit, partly reflecting the absence of $4.5 of prior-year trade-name impairment charges.
- Connextions was acquired in April 2017 for an estimated net purchase price of $77.7. The 2016 Atelka acquisition also contributed to year-over-year growth. Acquired businesses contributed $101.9 of revenue and a $6.3 net loss, including acquired-intangible amortization, in the first nine months of 2017.
- Interest expense rose to $3.5 in Q3 and $8.7 year to date, from $2.0 and $5.8, respectively, due to higher average borrowings and interest rates. The effective tax rate was 11.7% for Q3 and 15.0% year to date; the filing identifies tax holidays and other discrete items as influences.
Outlook, commentary, risks and unusual items
- Management expects 2017 capital expenditures of approximately 4.4% of revenue, mainly to support new client contracts, delivery-center capacity and technology infrastructure. It states cash generation, existing cash and available credit should meet operating and capital needs for the next 12 months. No specific revenue or earnings guidance is provided.
- Utilization of production workstations was 78% at September 30, up from 71% a year earlier, below the company’s stated 80%–90% internal target. Management plans selective capacity growth, including offshore markets, while maintaining U.S. capacity.
- After quarter-end, the company amended its credit facility, increasing the commitment from $900 to $1.2 billion. Also after quarter-end, it agreed to acquire 70% of Motif for $46.9, with the remaining 30% subject to a contingent buyout by no later than May 2020.
- Unusual items include a $3.2 gain on liquidation of a Spanish subsidiary, a $3.2 year-to-date loss estimate for a business held for sale, and $5.6 of Q3 Connextions integration costs. Two business units remained classified as held for sale; the filing records an aggregate $8.5 allowance against their assets.
- Risks highlighted include client concentration and contract renewal or volume changes, competition, economic conditions, cyber and service-continuity risks, international operations and foreign exchange, variable-rate debt, staffing, and acquisition integration. The five largest clients represented 34.3% of nine-month revenue; the largest individual client represented 9.5%. The company’s interest-rate swap expired in May 2017, leaving variable-rate debt exposure.
- Disclosure controls were concluded to be ineffective because material weaknesses in internal control over financial reporting continued. The revenue-process weakness was remediated; impairment controls and the control environment remained under remediation. Management nevertheless concluded the reported financial statements fairly present the company’s position and results. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much reported growth reflects acquired revenue versus sustainable organic growth, particularly in CMS, and whether Connextions integration costs and expected benefits develop as planned.
- Whether CMS margins recover after seasonal hiring and integration spending, and whether declining revenue in CGS, CTS and CSS stabilizes.
- Cash conversion and working-capital trends, including the sharp Q3 year-over-year decline in operating cash flow and the sustainability of year-to-date free cash flow.
- Debt levels, borrowing costs, covenant headroom and the consequences of the increased $1.2 billion facility commitment; confirm the effect of the expired interest-rate hedge.
- Motif’s final purchase terms and contingent 30% buyout exposure, along with the timing and proceeds of the held-for-sale business-unit divestitures.
- Progress in remediating the remaining internal-control material weaknesses and any resulting financial-reporting risk.
- Client retention and renewal outcomes, foreign-exchange hedge performance, and exposure to tax-holiday changes or tax audits.