TTEC Holdings, Inc. (then TeleTech Holdings, Inc.) — Q2 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. TeleTech provided customer-experience strategy, technology and business-process outsourcing services across global operations. The company reorganized its reporting structure into four segments effective January 1, 2012.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $288.8m | $293.6m | $581.5m | $574.6m |
| Operating income | $6.4m | $24.6m | $25.2m | $46.1m |
| Operating margin | 2.2% | 8.4% | 4.3% | 8.0% |
| Net income attributable to TeleTech stockholders | $5.3m | $22.2m | $21.2m | $32.7m |
| Diluted earnings per share | $0.10 | $0.38 | $0.37 | $0.56 |
- Cash flow: First-half operating cash flow was $48.7m, versus $48.0m. Capital expenditures were $17.5m versus $12.4m; reported free cash flow, a non-GAAP measure, was $31.3m versus $35.6m. Q2 operating cash flow was $34.0m and free cash flow was $23.0m.
- Balance sheet and debt: At June 30, cash and equivalents were $170.6m; current assets were $501.7m and current liabilities $184.0m. Credit-facility borrowings were $78.0m, up from $64.0m at year-end 2011. Total debt to total capitalization was 16.3%, per management.
- Liquidity: The amended revolving credit facility commitment was $500m; after $4.4m of letters of credit, $417.6m remained available. The company reported covenant compliance. Management believed cash, operating cash generation and available credit would meet operating and capital needs for the next 12 months.
Material changes and drivers
- Q2 revenue fell 1.6%; management attributed the decline primarily to foreign-exchange effects (including a $9.7m decrease) and program completions, partly offset by new client programs and acquisitions. First-half revenue increased 1.2%.
- Q2 operating income declined sharply, with $17.3m of restructuring and impairment charges compared with a $0.1m net credit in Q2 2011. The company also cited lower revenue and delivery-center underutilization. A $4.6m release of accrued Spanish salary costs and lower depreciation partly offset the pressure.
- Customer Management Services revenue declined 7.6% in Q2; Customer Technology Services revenue rose 114.0%, largely reflecting the 2011 eLoyalty acquisition. The 2012 OnState and iKnowtion acquisitions expanded hosted solutions and analytics capabilities. Acquired businesses together contributed $22.1m of Q2 revenue and $43.2m for the first half.
- Cash increased by $14.2m in the first half. Investing cash outflow narrowed to $22.0m from $53.9m, principally because 2011 included the eLoyalty acquisition. Financing cash flow shifted to a $20.5m outflow from a $78.1m inflow, reflecting lower net line-of-credit borrowings and continued share repurchases.
- The company repurchased 1.20m shares during Q2 for approximately $17.9m; $15.9m remained authorized at June 30.
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% supporting growth and 25% maintenance.
- During Q2 the company decided to cease operations in Spain following client contract terminations. It recorded $13.9m in severance liability; restructuring accruals totaled $16.9m and were expected to be paid or extinguished within 12 months.
- Other unusual items included a $1.8m impairment of the Direct Alliance trade name following its rebranding as Revana, and $1.0m of Q2 leasehold-asset impairment. A July 25, 2012 Australian tax agreement was expected to result in a $3.9m tax benefit in Q3; a potential New Zealand agreement could produce a further $1.3m benefit, but was not finalized.
- Risks include economic weakness and delayed client launches, client losses or contract nonrenewals, pricing competition, labor costs and turnover, underutilized capacity, integration of acquisitions, foreign-exchange and variable-rate debt exposure, and potential restructuring or impairment charges. The five largest clients generated 38.0% of Q2 revenue; no single client exceeded 10%.
- A Brazilian municipal court ruled against the company in a services-tax dispute concerning historical equipment rentals. TeleTech appealed, had deposited approximately $4.1m, and stated that payment was not probable; no expense was recorded for the quarter. A Canadian tax matter also remained under judicial review. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the Spain shutdown, severance payments and reduced capacity affect subsequent-quarter margins and cash flows.
- Whether the steep Q2 operating-income decline is primarily a one-time restructuring effect or reflects continuing utilization and segment-margin pressure.
- Client retention, renewal terms and volumes, especially for the largest clients and programs affected by terminations.
- Progress integrating eLoyalty, OnState and iKnowtion, and the timing and amount of iKnowtion contingent consideration.
- Realization of deferred tax assets and the expected Australian and possible New Zealand tax benefits; resolution of Brazilian and Canadian tax matters.
- First-half cash conversion, higher capital spending, share repurchases, and use of the credit facility; the filing does not provide specific full-year revenue or earnings guidance.