TTEC Holdings, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited. Amounts below are in U.S. dollars; millions unless stated otherwise.
Business context and reporting period
TTEC (then TeleTech Holdings) provided global business process outsourcing, customer management, consulting, and technology services through North American and International BPO segments. It reported results for the quarter and nine months ended September 30, 2011, compared with the same 2010 periods. The eLoyalty assets were acquired in May 2011; Peppers & Rogers Group (PRG), acquired in November 2010, contributed to the current-year comparison.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $304.2 | $271.0 | $878.9 | $814.5 |
| Income from operations | $26.6 | $20.1 | $72.7 | $58.4 |
| Operating margin | 8.7% | 7.4% | 8.3% | 7.2% |
| Net income | $26.4 | $19.8 | $61.0 | $48.2 |
| Net income attributable to TTEC shareholders | $25.4 | $18.7 | $58.1 | $45.4 |
| Diluted EPS | $0.44 | $0.31 | $1.00 | $0.73 |
- Revenue and segments: Q3 revenue rose 12.3%; nine-month revenue rose 7.9%. Q3 North American BPO revenue increased 7.3% and International BPO increased 27.7%. For the nine months, North American revenue declined 2.0%, while International revenue grew 40.7%.
- Cash flow: Nine-month operating cash flow was $39.5, down from $120.0 in 2010; free cash flow, a non-GAAP measure, was $18.3 versus $102.6. Q3 operating cash flow was negative $8.5 versus positive $45.3.
- Balance sheet and debt: Cash and equivalents were $169.8 at September 30, up from $119.4 at December 31, 2010. Credit facility borrowings were $130.3 versus none at year-end; remaining capacity was $215.2 after letters of credit. Management reported a 22.5% total-debt-to-total-capitalization ratio and compliance with credit covenants.
- Liquidity: Current assets were $524.5 and current liabilities $157.5. Management believed cash, operating cash generation, and available credit would cover expected operating and capital needs for at least 12 months.
- Other metrics: Nine-month capital expenditures were $21.2. The company repurchased $58.4 of stock during the nine months; $37.0 remained authorized at quarter-end.
Material changes versus prior periods
- Operating income improved in both comparison periods, and consolidated operating margin increased. Management cited higher client volumes, new programs, acquisitions, and a $2.8 reduction in variable incentive compensation expense in Q3; lower restructuring and impairment charges also benefited comparisons.
- International BPO returned to operating profitability: Q3 operating income was $3.6 versus a $2.0 loss; nine-month operating income was $12.9 versus an $8.5 loss. North American BPO operating income declined for the nine-month period to $59.8 from $67.0.
- Nine-month operating cash flow fell substantially, primarily due to less cash collected from receivables and increased payments of accounts payable and accrued expenses. Investing outflows increased, including $45.8 for acquisitions and related payments.
- Other income and expense moved from net income of $7.3 in Q3 2010 to net expense of $0.6 in Q3 2011, and from net income of $7.4 to net expense of $2.2 for the nine-month periods. The prior-year figures included a $5.9 gain from a Newgen legal settlement.
- Share count decreased year over year, reflecting repurchases; nine-month weighted-average basic shares were 56.8 million versus 60.9 million.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no earnings or revenue guidance. Management expected 2011 capital expenditures of approximately $35 million and stated liquidity sources should be adequate for at least the next 12 months. It cautioned that nine-month results are not necessarily indicative of full-year results.
- Management priorities: Growth strategy emphasized expanding client relationships and offerings, technology and hosted services, offshore delivery, margin improvement, and selective acquisitions.
- Tax items: The company recorded a $9.1 charge after Canada’s tax authority declined its double-taxation relief request. IRS refund settlement benefits totaled $11.8, including a $3.1 Q3 benefit; the refund was expected within 12 months. The reported effective tax rate was 13.4% for nine months, versus 26.9% in 2010; management said the 2011 rate would have been 20.8% excluding specified discrete items.
- Acquisitions and commitments: eLoyalty’s net purchase price was $37.9, with preliminary goodwill of $21.6. PRG has a $5.0 payment due in March 2012 and potential contingent consideration of up to $5.0 in 2013, currently valued at zero. Total disclosed contractual obligations were $253.2.
- Operating and market risks: Risks include client attrition and contract renewals, macroeconomic weakness, competition and pricing pressure, labor costs and turnover, delivery-center utilization, acquisition integration, and foreign-exchange and variable-rate debt exposure. The five largest clients represented 36.4% of Q3 revenue and 37.7% of nine-month revenue. Multi-client center utilization was 74%, below the company’s 80%–90% target.
- Contingencies and controls: Management said ordinary-course legal matters were not expected to have a material adverse effect. It reported no material change in risk factors and concluded disclosure controls were effective as of September 30, 2011.
Important facts for investors to verify
- Whether the increase in earnings and International BPO profitability can be sustained without relying on tax benefits, acquisition contributions, or lower incentive compensation.
- Whether operating cash flow recovers after the sharp year-over-year decline, and how receivable collections and working capital develop.
- The drivers and repayment plan for $130.3 of revolving-credit borrowings, alongside continued share repurchases and acquisition spending.
- Revenue and margin trends excluding acquisitions and currency effects; the filing attributes part of growth to both.
- Client renewals and concentration, as well as progress in raising multi-client center utilization from 74% toward the company’s stated target.
- The resolution of the Canadian tax claim, receipt of the IRS refund, and any changes to the PRG purchase obligations or contingent consideration.