TTEC Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited and consolidated. TTEC provides global customer engagement, consulting, technology, sales and customer-care services. Figures below are in millions of dollars except per-share amounts.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $325.5 | $302.2 | +7.7% |
| Operating income | $26.1 | $24.4 | +7.3% |
| Operating margin | 8.0% | 8.1% | Down 0.1 percentage point |
| Net income | $20.0 | $21.3 | Down $1.3 |
| Net income attributable to TTEC stockholders | $18.8 | $20.2 | Down $1.4 |
| Diluted EPS | $0.38 | $0.40 | Down $0.02 |
| Operating cash flow | $3.8 | $13.5 | Down $9.7 |
| Free cash flow (non-GAAP) | $(9.2) | $(1.6) | Lower by $7.7 |
Revenue growth was 10.9% excluding an estimated $9.5 million adverse foreign-exchange impact. The effective tax rate rose to 18.0% from 11.9%; management said it would have been 21.0% excluding specified discrete tax benefits. Restructuring charges were $0.8 million versus $0.5 million.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $65.7 million at quarter-end, down from $77.3 million at December 31, 2014. Current assets were $455.5 million and current liabilities $190.6 million.
- Line-of-credit borrowings increased to $126.0 million from $100.0 million. Total debt was $131.2 million; management reported a 22.4% total-debt-to-total-capitalization ratio. The $700 million revolving facility had $570.8 million of remaining borrowing capacity after letters of credit; the company was covenant-compliant.
- Cash used in investing activities was $22.1 million, including $13.0 million of capital expenditures and a $9.0 million investment in CafeX. Financing provided $9.3 million, including $26.0 million of net line-of-credit borrowings, offset partly by $8.7 million in dividends and $5.9 million in share repurchases.
- The board adopted a dividend policy and paid an initial $0.18 per-share dividend in March. It also authorized an additional $25 million for repurchases; $30.9 million remained authorized at March 31.
- Management believes cash, operating cash generation and available credit will cover expected operating and capital needs for the next 12 months. Planned 2015 capital expenditures are $70–$80 million, approximately 70% for growth and 30% for maintenance.
Material changes and segment results
CMS revenue rose 6.6% to $243.0 million, with operating margin easing to 8.9% from 9.1%. CGS revenue declined 10.2% to $26.0 million and its operating margin fell to 0.1% from 6.1%, primarily reflecting completed programs and the ramp-up of new programs. CTS revenue increased 9.0% to $35.7 million and margin improved to 5.6% from 0.9%. CSS revenue increased 65.2% to $20.8 million, partly reflecting the rogenSi acquisition; margin was unchanged at 11.5%.
Management attributed overall operating-income growth to organic revenue growth and acquisitions, partly offset by higher amortization, new delivery-center costs, and sales and research-and-development investment. Foreign exchange reduced reported revenue, primarily due to the Australian dollar and Brazilian real. Foreign currency translation and other items drove a $14.0 million other comprehensive loss, reducing comprehensive income attributable to TTEC stockholders to $5.2 million from $16.3 million.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expects continued demand for offshore delivery and plans selective capacity retention and expansion, while investing in technology, analytics, cloud services and digital marketing.
- Operating cash flow weakened chiefly because of lower cash collections from accounts receivable; receivables increased to $295.7 million from $276.4 million. Management cited currency exposure and variable-rate debt as risks, with foreign-exchange contracts and interest-rate swaps used to mitigate exposure.
- Client concentration is material: one communications client supplied 10.9% of revenue; the five largest clients supplied 38.2%. Several major client contracts expire in 2016–2017, and some were under renewal negotiation or subject to evergreen provisions.
- Two reporting units, Revana and WebMetro, remained subject to goodwill impairment sensitivity, though estimated fair value exceeded carrying value by about 12% and 17%, respectively, at March 31. No impairment was recorded in the quarter.
- Contingent acquisition consideration was $24.0 million at quarter-end; an additional $8.1 million of payments was completed after quarter-end. A probable obligation to acquire iKnowtion’s remaining 20% interest in 2016 is tied to 2015 EBITDA targets.
- The company reported routine legal proceedings and tax audits, but management did not expect their resolution to materially affect its financial statements. No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether CGS margins recover as new programs ramp, and whether CMS growth can offset program completions and currency effects.
- Whether receivables convert to cash and operating cash flow improves after the Q1 decline; track cash, borrowings and capital spending against the $70–$80 million plan.
- Renewal outcomes and economics for major client contracts, especially those expiring in 2016–2017, and changes in client concentration.
- Progress against acquisition earn-out targets and the potential iKnowtion redemption obligation.
- Whether Revana and WebMetro continue to maintain fair-value headroom, and how foreign-exchange movements affect reported revenue and margins.