TTEC Holdings, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited consolidated results. TTEC provides global customer engagement, consulting, technology, sales and customer-care services; it reported about 41,000 employees across 24 countries.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $309.2m | $305.9m | $944.9m | $903.6m |
| Operating income | $15.6m | $21.3m | $65.1m | $66.3m |
| Operating margin | 5.1% | 7.0% | 6.9% | 7.3% |
| Net income attributable to TTEC stockholders | $11.2m | $13.2m | $44.7m | $50.3m |
| Diluted EPS | $0.23 | $0.27 | $0.91 | $1.00 |
| Operating cash flow | $30.7m | $30.3m | $116.2m | $61.9m |
| Capital expenditures | $19.7m | $17.8m | $49.2m | $52.2m |
| Free cash flow, company-defined non-GAAP | $11.0m | $12.5m | $67.0m | $9.7m |
At September 30, cash was $86.2m, total assets were $858.2m, and total liabilities were $432.4m. Credit-facility borrowings were $115.0m; total debt, including other debt, was $122.9m. The company reported about $385m of remaining borrowing capacity and compliance with credit-facility covenants. Its debt-to-total-capitalization ratio was 22.6%.
Changes and operating trends
- Q3 reported revenue grew 1.1%; management said revenue would have grown 7.8% excluding a $20.4m foreign-exchange headwind. Nine-month revenue increased 4.6%.
- Q3 operating income fell 26.7%, and attributable net income declined 15.5%. Management cited currency effects, growth spending, lower capacity utilization during a client-site buildout and center ramps, and a $3.1m WebMetro goodwill impairment.
- CMS, the largest segment, had Q3 revenue of $212.7m, down 6.2%, and operating income of $8.9m, down 52.1%. CGS revenue rose 17.7% to $33.9m but recorded a $0.3m operating loss, including the WebMetro impairment. CTS revenue rose 19.7% to $42.1m and operating income improved to $3.8m. CSS revenue rose 35.6% to $20.5m and operating income increased to $3.2m.
- Multi-client center utilization was 69%, versus 82% a year earlier; management’s internal target was 80%–90%. It attributed the decline to a new large-client super-site buildout and ramping centers for seasonal demand.
- Cash increased to $86.2m from $77.3m at year-end 2014. Nine-month investing cash use was $59.8m, including $49.2m of capital expenditures and a $9.0m CafeX investment. Financing cash use was $27.5m, including $16.6m of share repurchases and $8.7m of dividends paid.
Outlook, risks and unusual items
- Management expected 2015 capital expenditures of $65m–$70m, approximately 70% for growth and 30% for maintenance. It said cash, operating cash generation and available credit should meet expected operating and capital needs for the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management highlighted client concentration: one communications client generated 10.8% of nine-month revenue; the five largest clients generated 35.8%. Their contracts expire between 2016 and 2017, with some renewals under negotiation or subject to automatic renewal provisions.
- Foreign exchange remains material: currency movements reduced Q3 revenue by $20.4m, and the company reported $52.3m of net derivative liabilities at quarter-end. Management warned that unhedged exposures and longer-term currency weakness could pressure margins.
- The company recorded a $3.1m goodwill impairment for WebMetro after its estimated fair value fell below carrying value. It also recorded a $1.75m tax liability for an uncertain tax position related to site compliance with tax-advantaged status. Management said identified prior-period tax and other comprehensive income corrections were not material to previously issued or current-period statements.
- Controls matter: Management concluded disclosure controls were ineffective at September 30 because of three material weaknesses: insufficient qualified financial-reporting personnel, deficiencies in account reconciliations, and inadequate review and support for journal entries at certain acquired entities. Management said the weaknesses had not caused material financial-statement errors, described remediation efforts, and stated they would not be considered remediated until tested and operating effectively.
- Other risks include demand and capacity forecasting, competition, international operations, service continuity and information security, acquisition integration, and credit-facility restrictions. Management said ordinary-course legal proceedings were not expected to have a material adverse effect; it could not reasonably estimate possible losses for some matters.
Most important facts to verify
- Progress and independent testing of remediation for the three material weaknesses, and whether subsequent filings report any related misstatements.
- Renewal outcomes and revenue exposure for the largest client contracts expiring in 2016–2017.
- Whether utilization improves as the super-site and seasonal center ramps mature, and the resulting effect on margins.
- Actual capital spending versus the $65m–$70m outlook, alongside free-cash-flow conversion and borrowings.
- WebMetro goodwill valuation assumptions and the impact of foreign exchange, hedges and tax matters on subsequent results.