TTEC Holdings, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited; dollar figures below are in millions unless stated otherwise. The company reported as TeleTech Holdings, Inc.
Business context and results
TeleTech provides business process outsourcing (BPO), consulting, technology and customer-management services. Its reporting segments are North American BPO and International BPO. The May 2011 acquisition of eLoyalty’s Integrated Contract Solutions business added consulting, systems-integration and technology capabilities.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $293.6 | $271.9 | $574.6 | $543.5 |
| Operating income | $24.6 | $19.1 | $46.1 | $38.4 |
| Operating margin | 8.4% | 7.0% | 8.0% | 7.1% |
| Net income attributable to TeleTech shareholders | $22.2 | $13.4 | $32.7 | $26.7 |
| Diluted EPS | $0.38 | $0.22 | $0.56 | $0.42 |
Q2 revenue increased 8.0%; six-month revenue rose 5.7%. International BPO revenue increased 56.1% in Q2 and 47.7% in the first half, while North American revenue declined 5.5% and 6.5%, respectively. International BPO moved from an operating loss in the comparable 2010 periods to operating income of $5.3 million in Q2 and $9.2 million in the first half. North American operating income fell to $19.3 million in Q2 and $36.9 million for the first half.
Cash flow, balance sheet and liquidity
- Cash: $194.3 at June 30, versus $119.4 at December 31, 2010.
- Debt: $118.0 outstanding on the revolving credit facility, versus none at year-end. Management reported a 21.1% total-debt-to-total-capitalization ratio and $227.4 of remaining borrowing capacity after letters of credit; the company was in compliance with covenants.
- Six-month cash flows: Operating cash flow was $48.0, down from $74.6. Investing used $53.9, including $43.9 for acquisitions; financing provided $78.1, principally reflecting net credit-line borrowings.
- Free cash flow: $35.6 for the first half, compared with $62.3 in 2010; defined by the company as operating cash flow less property and equipment purchases.
- Capital allocation: The company repurchased $43.7 of stock in the first half. Approximately $51.6 remained authorized under the repurchase program at June 30.
Material changes and unusual items
- eLoyalty was acquired on May 28 for a net purchase price of approximately $37.9; $36.0 had been paid by June 30. Preliminary purchase accounting included $24.3 of goodwill. Acquired businesses contributed $16.8 of Q2 revenue and $1.9 of Q2 operating income; these figures include acquired businesses and are not separately attributed in the filing.
- Q2 income tax expense was only $0.1, producing a 0.6% effective rate, versus 26.1% in Q2 2010. The Q2 rate reflected a $5.8 tax benefit from a mediated IRS settlement; without that benefit and other discrete items, management said the rate would have been 24.9%.
- For the first half, the company recorded a $9.1 charge after it could no longer consider collection of a Canadian tax receivable probable, and an $8.7 benefit from the IRS settlement, including tax and interest. The IRS settlement remained subject to Joint Committee on Taxation review and approval. The company said it intended to pursue available remedies concerning the Canadian claim.
- First-half restructuring charges were $0.7, down from $2.8 a year earlier; impairment losses were $0.2, versus $0.7. Q2 restructuring included a net benefit of $0.1.
- Shareholder equity declined slightly to $453.2 from $454.8 at year-end, including the effects of stock repurchases and other equity movements.
Outlook, commentary and risks
Management said cash from operations, existing cash and available credit should meet expected operating and capital needs for the next 12 months. It expected 2011 capital expenditures of approximately $40 million, dependent in part on new client contracts and delivery-capacity needs. The filing provides no specific revenue or earnings guidance and cautions that first-half results are not necessarily indicative of full-year results.
Management highlighted plans to expand integrated and higher-margin services, hosted offerings, offshore capacity and selective acquisitions, while improving margins and utilization. Multi-client center utilization was 75%, below the company’s 80%–90% internal target, though above 67% a year earlier. Offshore delivery represented 45% of Q2 revenue. Key risks include client attrition or nonrenewal, pricing pressure, labor availability and costs, capacity utilization, economic conditions, foreign exchange and variable-rate debt. The five largest clients represented 37.8% of Q2 revenue; their contracts expire between 2011 and 2012. The company reported no material changes to the risk factors in its 2010 Form 10-K and said ordinary-course legal matters were not expected to have a material adverse effect.
Management reported effective disclosure controls as of June 30, 2011, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the IRS settlement receives required approval and when the refund, including accruing interest, is collected; status and potential recovery of the Canadian tax claim.
- Post-acquisition eLoyalty performance, final purchase-price allocation and integration costs; PRG obligations include a $5.0 payment due in March 2012 and possible contingent consideration of up to $5.0.
- Renewal and pricing outcomes for major client contracts expiring in 2011–2012, and the effect of client concentration on revenue.
- Whether International BPO profitability is sustainable and utilization improves toward management’s target without margin pressure from labor, occupancy or currency movements.
- Cash conversion and leverage after acquisitions, repurchases and capital spending; the filing reports lower first-half operating cash flow and higher credit-line borrowings year over year.