TTEC Holdings, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. TTEC provides customer experience management, business-process outsourcing, technology, consulting, and analytics services. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $297.0 | $286.3 | $875.1 | $867.7 |
| Operating income | $26.0 | $27.4 | $68.6 | $52.6 |
| Operating margin | 8.7% | 9.6% | 7.8% | 6.1% |
| Net income attributable to TTEC stockholders | $17.6 | $28.4 | $47.9 | $49.6 |
| Diluted EPS | $0.34 | $0.52 | $0.91 | $0.89 |
| Operating cash flow | $36.4 | $14.8 | $76.6 | $63.4 |
| Free cash flow (non-GAAP) | $18.2 | $(1.0) | $44.8 | $30.3 |
At September 30, cash was $144.9 million, down from $164.5 million at year-end 2012. The company reported $118.0 million outstanding under its revolving credit facility, versus $108.0 million at December 31, 2012; remaining facility availability was $578.5 million after letters of credit. Management reported a 22.0% debt-to-total-capitalization ratio and compliance with all credit covenants. Total assets were $838.4 million and stockholders’ equity was $471.4 million.
Changes versus prior periods
- Q3 revenue increased 3.7%, but operating income declined 5.1% and attributable net income fell to $17.6 million from $28.4 million. Management cited foreign-exchange effects, typhoon-related lost revenue, acquisition amortization, and sales and R&D investment as operating headwinds; lower restructuring charges partly offset them. The higher 2013 tax provision also contributed to lower net income, while Q3 2012 included substantial tax benefits.
- Nine-month revenue rose 0.8% and operating income increased 30.6%; attributable net income declined 3.5%. Lower restructuring costs and improved utilization supported operating income, while the comparison includes a $3.7 million loss on deconsolidation of a subsidiary in 2013.
- By segment, Q3 Customer Management Services revenue declined 3.1%; Customer Growth Services declined 8.2% with operating income down sharply; Customer Technology Services revenue rose 81.9%, partly reflecting TSG; and Customer Strategy Services revenue rose 14.8%. For the nine months, Customer Strategy Services recorded an operating loss of $1.6 million, versus $1.6 million income in 2012.
- Cash from operations improved year over year for the nine months, while investing cash outflow was $40.8 million and financing cash outflow was $45.5 million. The company repurchased $51.6 million of common stock during the nine months.
Outlook, commentary, and risks
- Management said cash, operating cash generation, and available credit should cover expected operating and capital needs for the next 12 months. It expected 2013 capital expenditures of $50–$60 million, approximately 70% for growth and 30% for maintenance. No quantified revenue or earnings guidance was provided.
- Management’s strategy emphasizes growth in higher-margin technology-enabled services, deeper client relationships, new clients, and complementary acquisitions. It reported 92% client retention for the combined Customer Management and Customer Growth segments in the first nine months.
- Q3 revenue included a $6.9 million foreign-exchange reduction, $1.2 million of lost revenue from a Philippines typhoon, and $5.2 million associated with exiting Spain. The nine-month period included a $3.7 million loss from deconsolidating PRG Kuwait after TTEC concluded it could no longer exercise control; the retained interest was valued at zero.
- Acquisitions included WebMetro in August (preliminary purchase price $16.4 million, plus contingent earn-outs) and the September purchase of the remaining 20% of Peppers & Rogers Group for $425,000. Acquisition purchase-price estimates and earn-out valuations include significant assumptions.
- Risks include foreign-currency and variable-rate debt exposure, reliance on large clients, contract renewals, global operating and data-security risks, competition, and acquisition integration. One client contributed 11.7% of nine-month revenue; the five largest clients represented 40.8%. TTEC said the top five client contracts expire between 2014 and 2016. The filing reported no material change in previously disclosed risk factors or legal proceedings.
Important facts for investors to verify
- Whether the improvement in nine-month operating income is sustainable after restructuring savings and the prior-year Spain-exit costs.
- Customer Growth Services’ weak Q3 profitability and Customer Strategy Services’ nine-month operating loss, including integration and deconsolidation impacts.
- Renewal terms and revenue exposure for the largest clients, particularly contracts expiring from 2014 through 2016.
- Acquisition performance, final purchase-price allocations, and future contingent consideration obligations, reported at approximately $14.2 million in the contractual-obligations schedule.
- Cash deployment among capital spending, acquisitions, debt, and buybacks; assess foreign-exchange exposure and the $700 million credit facility’s covenant and interest-rate terms.