TTEC Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; comparisons are with the corresponding 2017 periods. Unless noted, amounts are in millions of U.S. dollars. TTEC provides customer-experience services and technology through four segments: Customer Management Services (CMS), Customer Growth Services (CGS), Customer Technology Services (CTS), and Customer Strategy Services (CSS).
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $349.9 | $353.4 | $725.1 | $691.7 |
| Operating income | $13.5 | $21.6 | $38.4 | $48.1 |
| Operating margin | 3.9% | 6.1% | 5.3% | 7.0% |
| Net income attributable to TTEC stockholders | $5.5 | $14.7 | $10.1 | $33.9 |
| Diluted EPS | $0.12 | $0.32 | $0.22 | $0.73 |
| Operating cash flow | — | — | $104.7 | $125.5 |
| Free cash flow | — | — | $87.8 | $95.9 |
Q2 revenue declined 1.0% year over year; first-half revenue increased 4.8%. Q2 operating income fell 37.5%, while first-half operating income fell 20.0%. First-half net income attributable to TTEC stockholders dropped about 70%. The filing’s MD&A executive summary says revenue for the six months was $349.9 million; this conflicts with the financial statements, which report $725.1 million for the six-month period. The financial statements and detailed results identify $349.9 million as Q2 revenue.
Segments and drivers
- CMS: Q2 revenue declined 2.5% to $262.2 million and operating income fell 73.2% to $3.8 million; margin contracted to 1.4% from 5.2%. Management cited completed programs, higher U.S. wage and healthcare costs, and increased launch costs. First-half revenue rose 6.5%, but operating income declined 36.6%.
- CGS: Q2 revenue rose 8.4% to $35.1 million and operating income rose 27.8% to $3.0 million, reflecting new client programs. First-half revenue increased 2.5%, while operating income declined 8.1%.
- CTS: Q2 revenue declined 2.8% to $33.8 million, but operating income rose 45.7% to $5.6 million; margin increased to 16.5%. Management attributed stronger margins to higher-margin cloud and systems integration work. First-half operating income increased 51.4%.
- CSS: Q2 revenue rose 8.8% to $18.7 million, while operating income declined 12.8% to $1.2 million. Management said results were affected by a business classified as held for sale; excluding that business, it reported improved margins.
Cash, debt and liquidity
- At June 30, 2018, cash was $71.3 million, compared with $74.4 million at December 31, 2017. Current assets were $480.5 million and current liabilities $202.2 million.
- Credit-facility borrowings were $289.0 million, down from $344.0 million at year-end. The company reported approximately $395 million of remaining borrowing capacity and compliance with its credit covenants. The secured revolving facility matures in February 2021; its maximum commitment is $1.2 billion.
- First-half operating cash flow was $104.7 million, down from $125.5 million. Capital expenditures were $16.9 million, versus $29.6 million; free cash flow, a non-GAAP measure, was $87.8 million versus $95.9 million.
- Management stated that operating cash flow, cash on hand and available credit should meet operating and capital needs for the next 12 months. It expected 2018 capital expenditures of approximately 3.8% of revenue, about 70% for growth and 30% for maintenance.
Material changes, outlook and risks
- Accounting change: TTEC adopted ASC 606 on January 1, 2018 using the modified retrospective method. It reduced opening retained earnings by $10.0 million net of tax. Adoption increased reported revenue by $2.4 million in Q2 and $14.9 million in the first half; prior-year periods were not restated, limiting direct comparability.
- Unusual items: The first half included a $15.6 million impairment of the CaféX investment and bridge loan, a $2.0 million held-for-sale asset loss, and a $0.7 million bargain-purchase gain. CaféX was written down to zero following business and financing difficulties. The company also recorded a $1.0 million tax benefit from release of an uncertain tax position.
- Acquisitions and obligations: TTEC acquired Strategic Communications Services in April 2018 and certain customer-engagement-center assets in March. It recorded a $32.8 million long-term liability for the required purchase of the remaining 30% of Motif. Higher debt utilization, interest rates and a Motif-related charge contributed to increased interest expense: $7.8 million in Q2 versus $2.9 million, and $14.2 million in the first half versus $5.2 million.
- Other exposures: TTEC recorded $2.0 million of losses relating to a business held for sale and had $9.2 million of held-for-sale assets and $3.8 million of related liabilities at quarter-end. Its largest five clients represented 34.7% of Q2 revenue and 35.6% of first-half revenue; no client exceeded 10% of first-half revenue. Certain large-client contracts expire between 2018 and 2023.
- Management cited wage inflation, client-program completions, launch costs, foreign-exchange movements and execution of acquisitions as risks. Foreign currency hedges reduce but do not eliminate exposure; the company also has variable-rate debt. No material change to the previously disclosed risk factors was reported. Management said disclosure controls were effective at a reasonable-assurance level.
- No quantified full-year revenue or earnings guidance was provided in the supplied filing text. Management’s stated outlook includes expected 2018 capital expenditures of approximately 3.8% of revenue and anticipated liquidity sufficiency for the next 12 months.
Important facts for investors to verify
- Reconcile the MD&A executive-summary revenue-period error against the financial statements and detailed results.
- Assess whether CMS wage, benefit and launch-cost pressures and program losses persist, and whether CTS and CGS growth can offset them.
- Review the effects of ASC 606 on reported growth and earnings comparability with 2017.
- Monitor the Motif remaining-interest purchase obligation, related charges and acquisition integration, as well as credit-facility utilization and interest expense.
- Track the held-for-sale business disposition and valuation, CaféX impairment implications, and the company’s client concentration and contract renewals.
- Evaluate foreign-exchange exposure and hedging outcomes, tax-rate sustainability and remaining analysis of U.S. tax reform impacts.