TTEC Holdings, Inc. (then TeleTech Holdings, Inc.) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. Financial statements are unaudited. The company provides customer experience strategy, technology and business-process outsourcing services globally.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $292.7 million | $281.0 million; up 4.3% |
| Operating income | $18.8 million; 6.4% margin | $21.5 million; 7.6% margin |
| Net income attributable to TeleTech stockholders | $15.9 million; $0.28 per diluted share | $10.5 million; $0.18 per diluted share |
| Operating cash flow | $14.7 million | $24.6 million |
| Free cash flow (company-defined, non-GAAP) | $8.3 million | $20.7 million |
| Cash and cash equivalents | $172.8 million | $156.4 million at December 31, 2011 |
| Credit-facility borrowings | $85.0 million | $64.0 million at December 31, 2011 |
| Total assets / total liabilities | $771.1 million / $290.9 million | $747.0 million / $276.7 million at December 31, 2011 |
The effective tax rate was 9.9%, versus 46.4% a year earlier. Management attributed the difference to income earned in jurisdictions with tax holidays, income distribution among jurisdictions, and discrete tax items; without a $1.6 million valuation-allowance benefit and $0.1 million of other discrete expense, the reported rate would have been 18.2%. Other comprehensive income was $16.2 million, principally reflecting currency translation and derivative valuation changes.
Cash from operations declined mainly because of timing differences in receipts and payments, including changes in receivables, prepaids, payables and accrued expenses. Investing used $11.0 million, including acquisitions and higher capital spending. Financing provided $4.2 million; the company repurchased $22.7 million of stock. Cash increased by $16.4 million, including an $8.6 million favorable effect from exchange rates.
The revolving credit commitment was increased from $350 million to $500 million in March 2012. After letters of credit, available borrowing capacity was $410.6 million at quarter-end; the company reported covenant compliance. Debt-to-total-capitalization was 16.2%. The filing states that cash, operating cash flow and available credit should be sufficient for expected operating and capital needs over the next 12 months.
Changes versus the prior comparable period
- Revenue growth reflected new clients and acquisitions, partly offset by a $3.7 million adverse foreign-currency effect. Operating income fell 12.8%, and operating margin contracted by 1.2 percentage points. Q1 2012 operating income included $3.8 million of restructuring and impairment charges, compared with $1.0 million in Q1 2011.
- Customer Management Services revenue declined 4.6% to $234.9 million; operating income fell 5.9% to $45.4 million. Management cited program completions, capacity underutilization and lower gross margin.
- Customer Growth Services revenue increased 2.8% to $22.8 million, while operating income fell 63.8% to $1.1 million, primarily due to a $1.8 million impairment of the Direct Alliance trade name following its rebranding as Revana.
- Customer Technology Services revenue rose to $25.6 million from $4.7 million, mainly reflecting the 2011 eLoyalty acquisition. Operating income increased to $3.6 million, but segment margin decreased as eLoyalty added lower-margin revenue, research and development investment, and amortization.
- Customer Strategy Services revenue increased 16.7% to $9.5 million and operating income rose to $0.9 million, supported by consulting growth and the iKnowtion acquisition.
- Operating cash flow fell $9.9 million and reported free cash flow fell $12.4 million year over year. Cash repurchases totaled 1.42 million shares for $22.7 million in the quarter.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management expected 2012 capital expenditures to be consistent with the prior year, with approximately 75% for growth and 25% for maintenance.
- Management’s strategy emphasized winning and expanding client relationships, developing higher-margin consulting, analytics, revenue-generation and managed-technology services, improving margins and utilization, and selectively pursuing acquisitions. The company reported multi-client-center utilization of 68%, below its internal target range of 80%–90%.
- OnState and iKnowtion were acquired in Q1 2012. iKnowtion includes contingent earn-out payments with a $4.3 million fair-value liability, based on significant unobservable inputs; the company expected maximum earn-out targets to be achieved. Purchase accounting for both acquisitions was preliminary. The eLoyalty-acquired businesses contributed $21.1 million of revenue and $2.4 million of operating income in Q1 2012.
- Key disclosed risks include client attrition or nonrenewal, pricing pressure and competition, labor availability and costs, underutilized delivery capacity, delays or costs in launching programs, foreign-exchange and variable-rate debt exposure, and acquisition integration. The five largest clients generated 36.7% of revenue; their contracts expire between 2012 and 2016. Historical program attrition was 6% in Q1 2012.
- The company used foreign-exchange contracts and $40 million of interest-rate swaps to manage exposures; hedging does not cover all exposures. Management reported no material expected effect from a 100-basis-point interest-rate increase during the quarter, but a 10% exchange-rate move could cause material derivative gains or losses, partly offset by underlying exposures.
- Management stated that ordinary-course legal matters were not expected to have a material adverse effect. A Canadian tax dispute remained subject to judicial review; a Philippines tax audit for 2008 was ongoing, with no material impact expected by management. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating-margin pressure and 68% center utilization improve, and whether the company’s 80%–90% utilization target is attainable.
- Client renewals and volume trends, especially among the five largest clients and contracts expiring from 2012 through 2016.
- Whether acquisitions deliver expected growth and returns, including final purchase-accounting values and iKnowtion earn-out obligations.
- Cash conversion, capital spending, stock repurchases and credit-facility borrowing levels, given the year-over-year decline in operating and free cash flow.
- Tax-rate sustainability, resolution of the Canadian tax matter and Philippines audit, and sensitivity to foreign-exchange movements.