TTEC Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial statements are unaudited; amounts below are in U.S. dollars and millions unless noted. TTEC provides customer engagement, consulting, technology, sales and customer care services through four segments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $312.8 | $309.2 | $930.3 | $944.9 |
| Operating income | $12.5 | $15.6 | $46.5 | $65.1 |
| Operating margin | 4.0% | 5.1% | 5.0% | 6.9% |
| Net income attributable to TTEC stockholders | $11.5 | $11.2 | $34.3 | $44.7 |
| Diluted EPS | $0.24 | $0.23 | $0.71 | $0.91 |
| Operating cash flow | $54.1 | $30.7 | $107.1 | $116.2 |
| Free cash flow (non-GAAP) | $43.0 | $11.0 | $68.3 | $67.0 |
Q3 revenue rose 1.2% year over year, while nine-month revenue declined 1.5%. Nine-month net income attributable to shareholders fell about 23%. Q3 shareholder net income increased slightly despite lower operating income, with a reported income-tax benefit of $0.8 million versus tax expense of $1.2 million in Q3 2015.
Segments and material changes
- Customer Management Services (CMS): Q3 revenue increased 5.2% to $223.7 million; operating margin improved to 5.5% from 4.2%. For nine months, revenue declined 1.6% and margin fell to 5.4% from 6.5%, affected by foreign exchange, business mix and lower utilization.
- Customer Growth Services (CGS): Q3 revenue increased 4.3% to $35.3 million and the segment returned to a small operating profit. Nine-month revenue rose 17.0% to $105.7 million and operating margin improved to 3.9% from 2.1%.
- Customer Technology Services (CTS): Q3 revenue declined 13.2% to $36.6 million, principally due to lower Avaya offerings and product sales; operating income was essentially flat. Nine-month revenue declined 5.8%, while margin improved to 9.1%.
- Customer Strategy Services (CSS): Q3 revenue fell 15.9% to $17.3 million and the segment reported a $3.7 million operating loss, versus $3.2 million income a year earlier. Nine-month revenue fell 19.8% and the segment recorded a $3.8 million operating loss, versus $10.2 million income. Management cited weaker Middle East consulting, consultant underutilization and planned investment.
Q3 operating results included $3.7 million of restructuring charges and $5.6 million of impairment losses. The company also recorded $5.3 million of estimated losses on two business units classified as held for sale, partly offset in other income by a $4.3 million benefit from reducing acquisition-related contingent consideration to zero. The held-for-sale businesses are in CGS and CSS; TTEC anticipated completing divestitures within six to twelve months, but had not determined selling prices.
Cash, debt and liquidity
- At September 30, cash and equivalents were $61.3 million, total assets $807.3 million, and stockholders’ equity $395.1 million. Cash was $60.3 million at December 31, 2015.
- Credit-facility borrowings were $129.0 million, up from $100.0 million at year-end; TTEC reported total debt of $140.9 million in MD&A. The company had approximately $425 million of remaining borrowing capacity after letters of credit and covenant-based availability, and stated it was in compliance with covenants.
- The revolving facility matures in February 2021, has a $900 million initial commitment and an accordion feature up to $1.2 billion, subject to conditions. Financial covenants include maximum net leverage of 3.25:1 and minimum interest coverage of 2.50:1.
- Nine-month capital expenditures were $38.9 million. TTEC said 2016 capital expenditures were expected to be approximately 4.2% of revenue, with about 65% for growth and 35% for maintenance.
- TTEC repurchased $57.3 million of stock in the first nine months and paid $8.9 million in dividends. The board approved a further $25 million increase to the repurchase authorization on November 7, 2016.
Outlook, risks and unusual items
- Management said cash from operations, existing cash and available credit should be sufficient for expected operating and capital needs over the next 12 months. No specific revenue or earnings guidance was provided.
- Overall delivery-center utilization was 71%, below the company’s stated internal target of 80%–90%. Management noted client demand for offshore delivery but also regulatory pressure in some cases to move services onshore.
- One communications client accounted for 10.4% of nine-month revenue; the five largest clients accounted for 35.8%. Management warned that loss or reduction of a major client could materially affect results.
- Foreign exchange remains a significant exposure. Nine-month revenue from operations subject to the described currency risk was 33%; cash-flow hedges had a net liability of $48.5 million, and $18.9 million of settled hedge losses and related premiums was reflected in revenue during the nine months.
- On November 9, 2016, after quarter-end, TTEC acquired Atelka, a Canadian contact-center and business-process services company, for C$59 million (approximately $44 million), subject to adjustments and a C$2 million holdback.
- Control concern: Management concluded disclosure controls were not effective because material weaknesses in internal control over financial reporting identified in 2015 remained at September 30, 2016. Remediation was underway; management said the weaknesses had not caused material misstatements in the financial statements presented.
- Management reported no material changes to the risk factors in the 2015 Form 10-K. Ordinary-course legal proceedings were disclosed; management did not expect their resolution to have a material adverse effect, subject to stated limitations.
Key facts for investors to verify
- Whether the persistent internal-control material weaknesses are remediated and tested as effective.
- Performance, utilization and outlook for CSS and the underperforming Avaya and rogenSi businesses, including sensitivity of impairment valuations.
- Terms, timing and proceeds of the two planned divestitures, and whether the recorded $5.3 million estimated losses prove adequate.
- Client concentration, renewal terms for major contracts, and whether utilization can improve without weakening margins.
- Post-quarter Atelka purchase accounting, integration costs and contribution, alongside the impact of increased borrowings and ongoing repurchases.
- Cash-flow hedge exposures, covenant headroom and availability under the credit facility as operating and currency conditions change.