TTEC Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited; amounts below are in U.S. dollars unless otherwise noted. TTEC provides customer-experience strategy, technology and business-process outsourcing services through four segments. Segment reporting was reorganized effective January 1, 2012, with comparative information recast.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $286.3 million | $304.2 million | $867.7 million | $878.9 million |
| Income from operations | $27.4 million | $26.6 million | $52.6 million | $72.7 million |
| Operating margin | 9.6% | 8.7% | 6.1% | 8.3% |
| Net income attributable to TTEC stockholders | $28.4 million | $25.4 million | $49.6 million | $58.1 million |
| Diluted EPS | $0.52 | $0.44 | $0.89 | $1.00 |
| Operating cash flow | Q3: $14.8 million, versus $(8.5) million | $63.4 million | $39.5 million |
- Q3 revenue declined 5.9%; management cited foreign-exchange effects, completed programs and exits from unprofitable work, partly offset by new client programs and acquisitions. Q3 operating income rose 3.0% and margin improved, while nine-month operating income fell 27.7%.
- Q3 results included $2.6 million of restructuring and impairment charges. Nine-month restructuring charges were $20.7 million and impairment losses were $3.0 million, contributing to the year-to-date operating-profit decline.
- Nine-month capital expenditures were $33.3 million. Free cash flow, a company-defined non-GAAP measure, was $30.3 million versus $18.3 million in 2011.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $170.4 million, total assets $805.6 million, current assets $510.4 million and current liabilities $161.6 million.
- Credit-facility borrowings were $88.0 million, up from $64.0 million at December 31, 2011. TTEC reported $407.6 million of remaining borrowing capacity after letters of credit and compliance with all facility covenants. Management said cash, operating cash generation and available credit should cover operating and capital needs for the next 12 months.
- Management reported a total-debt-to-total-capitalization ratio of 16.8%. The company repurchased $55.2 million of stock during the first nine months; $26.5 million remained authorized at September 30.
- Expected 2012 capital expenditures were $40–$45 million. Contractual obligations totaled $216.9 million, including operating leases of $84.8 million.
Segments and material changes
- Customer Management Services: Q3 revenue declined 9.9% to $224.0 million, while operating income increased 8.7% to $47.2 million. Nine-month revenue declined 7.4% and operating income declined 14.5%; restructuring, program exits and completions, and lower realized hedge gains weighed on results.
- Customer Growth Services: Q3 revenue rose 9.3% to $28.2 million and operating income rose 15.9% to $5.8 million. Nine-month revenue rose 5.5%, but operating income declined 11.8%, reflecting rebranding-related costs, a $1.8 million trade-name impairment and higher employee expenses.
- Customer Technology Services: Q3 revenue fell 2.3% to $22.3 million and operating income fell 23.7% to $3.3 million, reflecting a less favorable revenue mix. Nine-month revenue increased 85.9% to $72.9 million, primarily following the 2011 eLoyalty acquisition; margins were lower due to the changed mix, investment and acquired-asset amortization.
- Customer Strategy Services: Q3 revenue grew 69.9% to $11.7 million and moved to $0.8 million operating income from a loss, supported by consulting growth and iKnowtion. Nine-month revenue rose 23.4% to $31.2 million; operating income increased 15.2% to $1.7 million.
Outlook, risks and unusual items
- No specific revenue or earnings forecast was provided. Management expects 2012 capital expenditures of $40–$45 million, with about 70% for growth and 30% for maintenance, and described long-term growth opportunities in integrated customer-experience, analytics, technology and outsourcing services.
- Management highlighted risks from economic weakness, client renewals and program volumes, pricing competition, labor costs and turnover, program ramp delays, capacity utilization, acquisitions, foreign exchange, interest rates, and political or regulatory changes. Multi-client center utilization was 77%, below the company’s 80%–90% internal target. The five largest clients contributed 39.8% of Q3 revenue and 38.1% for the nine-month period.
- TTEC decided to cease operations in Spain in 2012, recording a $13.9 million severance liability; $11.9 million was paid by September 30. A separate $4.6 million employee-cost estimate reduction was recorded following a Spanish ruling.
- Reported effective tax rates were unusually favorable: (13.8)% for Q3 and (6.1)% year to date. Key discrete benefits included Australian transfer-pricing matters and releases of uncertain tax positions. Excluding the specified Australian and uncertain-tax-position benefits, management said the effective rates would have been 21.1% for Q3 and 20.4% year to date. A possible additional $0.6 million New Zealand tax benefit was expected if an agreement were signed.
- After quarter-end, TTEC acquired Guidon Performance Solutions for $5.6 million, subject to working-capital adjustment and earn-outs. A California class action filed October 12 alleges undisclosed recording of calls made on Google’s behalf; Google seeks indemnification, and the potential loss could not be estimated. TTEC also disclosed a Brazilian services-tax dispute backed by a $4.1 million bank guarantee; it recorded no expense because management considers payment not probable.
- Disclosure controls were assessed as effective as of September 30, 2012. The filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the revenue decline and lower nine-month operating income are stabilizing, and how much improvement depends on restructuring, one-time settlements or tax benefits.
- Client retention, renewals and concentration, particularly the five largest clients’ contract expirations from 2012 through 2016.
- Capacity utilization, the economics of exiting Spain and other programs, and whether acquisitions can deliver expected growth and margins.
- Cash conversion, capital spending, share repurchases and rising credit-facility borrowings, alongside covenant headroom and contractual commitments.
- Developments in the Brazilian tax assessment and California litigation, and the eventual value and timing of contingent acquisition payments.