TTEC Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results. Dollar figures below are in millions unless stated otherwise.
Business context
TTEC (then TeleTech) provided customer engagement services through four segments: Customer Management Services (CMS), Customer Growth Services (CGS), Customer Technology Services (CTS), and Customer Strategy Services (CSS). It reported 41,500 employees, operations in 24 countries, and approximately 300 global clients. Emerging Segments—CGS, CTS, and CSS—represented about 30% of Q2 revenue.
Key financial metrics and comparison
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $305.1 | $310.2 | $617.5 | $635.7 |
| Operating income | $16.2 | $23.4 | $34.0 | $49.5 |
| Operating margin | 5.3% | 7.5% | 5.5% | 7.8% |
| Net income attributable to TTEC stockholders | $11.6 | $14.7 | $22.8 | $33.5 |
| Diluted EPS | $0.24 | $0.30 | $0.47 | $0.68 |
| Operating cash flow | $41.5 | $81.7 | $53.0 | $85.5 |
| Free cash flow (non-GAAP) | $28.7 | $65.2 | $25.3 | $56.0 |
For the six months, capital expenditures were $27.7 million, down from $29.5 million. Cash and equivalents were $55.3 million at June 30, versus $60.3 million at year-end 2015. Debt was $146.2 million, including $135.0 million drawn on the revolving credit facility. The facility had approximately $420 million of remaining borrowing capacity after letters of credit and covenant-based availability; TTEC reported compliance with its covenants. Current assets were $397.5 million and current liabilities $178.0 million.
Material changes and segment performance
- Q2 revenue declined 1.6% year over year; excluding an $8.5 million foreign-exchange headwind, revenue increased 1.1%. Six-month revenue declined 2.9%.
- Q2 operating income fell 30.5%, with management citing lower capacity utilization, foreign exchange, and weaker CSS revenue. Six-month operating income declined 31.3%.
- Q2 CGS revenue rose 20.7% to $36.9 million, and operating margin improved to 9.4%. CTS revenue decreased 1.9% to $37.4 million, while margin improved to 9.0%.
- Q2 CMS revenue declined 3.0% to $212.8 million and margin fell to 3.9%. CSS revenue dropped 18.9% to $18.1 million and margin decreased to 5.7%. For the first half, CSS reported an operating loss of $0.1 million versus operating income of $7.0 million a year earlier.
- Overall center utilization was 70%, down from 77% a year earlier and below the company’s 80%–90% internal target. Management attributed the decrease partly to moving staff in the Philippines to a dedicated large-client site without fully backfilling the vacated capacity.
- Six-month operating cash flow and free cash flow declined materially. Management attributed the operating cash-flow decrease mainly to higher prepaid-asset and operating-expense payments, partly offset by increased collections of receivables.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management expected cash from operations, cash balances, and available credit to meet operating and capital needs for the next 12 months. It forecast 2016 capital expenditures at approximately 4.5% of revenue, about 65% for growth.
- Foreign exchange is a significant exposure: management said 32% of six-month revenue was associated with specified non-functional-currency exposures. TTEC uses forward contracts, options, and interest-rate swaps, but hedges are partial and forecast-dependent. A 10% move in relevant currency pairs could produce a material derivative gain or loss, partly offset by underlying exposures.
- One communications client generated 10.2% of first-half revenue; the five largest clients generated 35.5%. The filing warns that loss or reduced business from major clients could materially harm results. Contracts with the five largest clients expire between 2017 and 2020.
- TTEC disclosed that its disclosure controls were not effective because material weaknesses in internal control over financial reporting identified in 2015 remained at June 30, 2016. Management described remediation work but gave no assurance as to timing; it said the weaknesses had not caused material misstatements in the reported financial statements.
- Q2 comprehensive loss attributable to TTEC stockholders was $1.1 million despite positive net income, largely reflecting other comprehensive losses, including currency translation and derivative valuation.
- During the first half, the company recorded a $1.1 million tax expense related to prior periods; management concluded this and other previously disclosed corrections were not material to prior or current financial statements. Q2 restructuring charges were small, and no leasehold-asset impairment losses were reported.
- The company completed its purchase of iKnowtion’s remaining 20% interest in April 2016 for $4.1 million. It paid $36.1 million for treasury stock and $8.9 million in shareholder dividends during the first half.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect, while noting outcomes and possible losses for certain matters could not be reasonably estimated. Other identified risks include information-security incidents, labor and capacity issues, international operations, competition, and credit-facility restrictions.
Important facts for investors to verify
- Progress and independent testing of remediation for the material weaknesses in financial reporting controls.
- Whether CMS and CSS performance and overall workstation utilization recover, and whether CGS growth and CTS margins continue.
- Cash conversion, capital spending, share repurchases, and facility borrowings, including ongoing covenant compliance and available capacity.
- Revenue retention and contract renewals among the largest clients, particularly the client exceeding 10% of revenue.
- Foreign-exchange exposure, hedge effectiveness, and the effect of tax holidays, tax audits, and uncertain tax positions on future results.