TTEC Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
TeleTech Holdings, Inc. (now TTEC Holdings, Inc.) filed this unaudited quarterly report for the quarter and six months ended June 30, 2013. The company provides customer management, sales and marketing, technology, consulting and analytics services across multiple industries and countries.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $289.7 million | $288.8 million | $578.1 million | $581.5 million |
| Operating income | $19.7 million | $6.4 million | $42.7 million | $25.2 million |
| Net income attributable to TeleTech stockholders | $12.3 million | $5.3 million | $30.3 million | $21.2 million |
| Diluted earnings per share | $0.23 | $0.10 | $0.57 | $0.37 |
| Operating margin | 6.8% | 2.2% | 7.4% | 4.3% |
At June 30, cash and cash equivalents were $150.6 million, down from $164.5 million at year-end 2012. Credit-facility borrowings were $110.0 million, versus $108.0 million at year-end; remaining borrowing capacity was $586.2 million, net of letters of credit. The company reported a 20.6% total-debt-to-total-capitalization ratio and compliance with credit covenants. It generated $40.2 million of operating cash flow in the first half and reported $26.6 million of free cash flow, down from $31.3 million a year earlier. Capital expenditures were $13.7 million.
Total assets were $810.6 million and stockholders’ equity was $473.7 million. Accumulated other comprehensive income moved from $23.0 million at December 31, 2012 to a $5.2 million loss, largely reflecting currency translation and derivative valuation changes.
Material changes versus the prior period
- Q2 revenue was nearly flat year over year; first-half revenue declined 0.6%.
- Operating income improved substantially, mainly reflecting the exit of unprofitable programs, lower restructuring charges and improved capacity utilization. Q2 restructuring and impairment expenses totaled $3.8 million, compared with $17.3 million in Q2 2012.
- Customer Technology Services revenue increased 46.8% in Q2, primarily due to the TSG acquisition. Customer Management Services revenue fell 3.8%; Customer Growth Services revenue fell 8.2%; Customer Strategy Services revenue was essentially flat.
- Cash from operations declined $8.4 million in the first half, to $40.2 million, and free cash flow fell to $26.6 million from $31.3 million.
Outlook, commentary, risks and unusual items
- Management said cash, operating cash generation and available credit should meet operating and capital needs for the next 12 months. It forecast 2013 capital expenditures of $50–$60 million; no numerical earnings or revenue guidance was provided.
- Multi-client center utilization was 75%, below the company’s stated 80%–90% internal target. Management reported 91% client retention for the Customer Management and Customer Growth segments during the first half.
- The company recorded a $3.7 million loss after deconsolidating PRG Kuwait because it could no longer conclude it controlled the subsidiary. Negotiations and potential legal action remain unresolved, with timing uncertain.
- A $1.1 million impairment was recorded against the PRG trade name. The company also reported that the implied fair value of goodwill for the affected reporting unit exceeded its goodwill carrying value by more than 50%, so no goodwill impairment was recorded.
- After quarter-end, TeleTech entered a conditional agreement to acquire WebMetro for $16.4 million, subject to working-capital adjustment and earn-outs that could bring the maximum purchase price to $21.7 million. The agreement remained subject to final negotiations.
- Client concentration is material: one client represented 11.8% of first-half revenue, and the five largest clients represented 41.0%. Management identified client retention, economic conditions, foreign exchange, data security, service disruptions, labor costs, competition and acquisition integration among relevant risks.
- A California class-action complaint concerning alleged undisclosed recording of calls names a TeleTech subsidiary and Google; TeleTech agreed to indemnify Google for related costs. The company could not estimate a possible loss and said it believed any loss was adequately insured. A separate Brazilian services-tax dispute remained under appeal; management said payment was not probable. The company discontinued further action after an adverse Canadian tax ruling, with no quarter-specific charge recorded.
- TeleTech repurchased approximately 937,000 shares for about $20–$22 per share during the quarter; the broader six-month cash-flow statement reports $31.0 million of treasury-stock purchases.
Important facts for investors to verify
- Whether improved operating margins persist after restructuring costs decline and exited programs cease affecting comparisons.
- Progress in raising utilization toward the 80%–90% target and performance of the Customer Growth and Customer Strategy segments.
- Renewal and volume outlook for the largest clients, including contracts expiring between 2014 and 2016.
- Cash conversion, capital spending and leverage following acquisitions, repurchases and the new $700 million revolving credit facility.
- Resolution and financial effects, if any, of the PRG Kuwait dispute, the California litigation and other disclosed contingencies.
- Completion terms and integration results for WebMetro, if the conditional acquisition proceeds.