TTEC Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; compared with Q1 2015. Unaudited consolidated results. TTEC provides customer engagement services through four segments: Customer Management Services (CMS), Customer Growth Services (CGS), Customer Technology Services (CTS), and Customer Strategy Services (CSS).
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $312.4 million | $325.5 million | Down 4.0% |
| Income from operations | $17.8 million | $26.1 million | Down 32% |
| Operating margin | 5.7% | 8.0% | Down 2.3 percentage points |
| Net income | $11.9 million | $20.0 million | Down 40.6% |
| Net income attributable to TTEC stockholders | $11.2 million | $18.8 million | Down 40.2% |
| Diluted EPS | $0.23 | $0.38 | Down $0.15 |
| Operating cash flow | $11.5 million | $3.8 million | Up $7.7 million |
| Free cash flow (non-GAAP) | $(3.4) million | $(9.2) million | Improved $5.8 million |
Amounts are in U.S. dollars. Revenue excluding the reported $10.0 million foreign-exchange headwind declined about 1.0%. Net income includes $0.68 million attributable to noncontrolling interests in 2016 and $1.26 million in 2015.
Segments and material changes
- CMS: Revenue $227.9 million, down 6.2%; operating income $15.6 million, down 28.1%. Lower utilization after staff transfers to a dedicated Philippines client site, unfilled capacity, program completions, and currency effects weighed on results.
- CGS: Revenue $33.5 million, up 29.1%; operating income $0.5 million versus $0.03 million. Growth in client programs and improved utilization supported the increase.
- CTS: Revenue $35.3 million, down 1.2%; operating income $2.8 million, up 38.4%, with improved fixed-cost utilization.
- CSS: Revenue $15.7 million, down 24.7%; operating loss $1.1 million versus operating income of $2.4 million. Lower consulting/project activity, including in EMEA and leadership and learning practices, left costs against lower revenue.
- Overall operating income was also affected by lower CMS utilization and CSS revenue against a fixed cost base. Restructuring charges fell to $0.1 million from $0.8 million.
Cash, debt, and liquidity
- Cash and cash equivalents were $75.4 million at March 31, versus $60.3 million at year-end 2015. Current assets were $441.3 million and current liabilities $196.0 million.
- Borrowings under the revolving credit facility were $133.0 million, up from $100.0 million at year-end. TTEC reported total debt of $141.7 million and a debt-to-total-capitalization ratio of 23.9%.
- The amended secured revolving facility has a $900 million commitment, matures February 2021, and includes an accordion feature up to $1.2 billion subject to conditions. Remaining borrowing capacity, after letters of credit and covenant calculations, was approximately $460 million. TTEC reported compliance with all covenants.
- Operating cash flow was $11.5 million; capital expenditures were $14.9 million, resulting in negative free cash flow of $3.4 million. Cash flow from operations improved primarily from receivable collections, partly offset by spending on prepaid assets and operating expenses.
- TTEC said cash, operating cash generation, and available credit should cover operating and capital needs for the next 12 months. It expected 2016 capital expenditures of approximately 4.5% of revenue.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management described continued investment in higher-value consulting, analytics, digital marketing, and technology services, alongside selective offshore capacity growth.
- Overall workstation utilization was 73%, below the company’s 80%–90% internal target and down from 83% a year earlier. Management attributed the decline partly to transfers to a dedicated Philippines site and capacity not yet backfilled.
- Foreign exchange reduced Q1 revenue by about $10.0 million, primarily due to the Australian dollar and Brazilian real. TTEC uses currency forwards/options and interest-rate swaps, but says exposures are not fully hedged. Variable-rate debt creates interest-rate risk.
- The five largest clients represented 35.8% of Q1 revenue, compared with 38.2% in Q1 2015. One client represented 9.6%; major client contracts expire from 2016 through 2020, and some contracts may be terminated for convenience.
- The effective tax rate was 27.6%, versus 18.0%. A $1.1 million charge for uncertain tax positions related to prior periods was recorded in Q1 2016; management said the aggregate prior-period adjustments described in the filing were not material to previously issued or current financial statements. The filing also notes ongoing tax examinations and a separate $1.75 million estimated tax liability recorded in 2015.
- Disclosure controls and procedures were deemed ineffective because material weaknesses in internal control over financial reporting persisted from 2015. Management was implementing remediation measures; it stated the weaknesses had not caused material errors in the presented statements, while acknowledging they could result in undetected material misstatements.
- Legal proceedings were described as ordinary-course matters; management did not expect their resolution, apart from specifically reserved items, to materially affect the company. No material changes to the 2015 Form 10-K risk factors were reported.
- After quarter-end, TTEC purchased the remaining 20% interest in iKnowtion in April 2016, as required under the acquisition agreement. A $0.185-per-share dividend was also paid April 15 to shareholders of record March 31.
Key facts for investors to verify
- Whether CMS utilization improves as transferred capacity is backfilled, and whether overall workstation utilization moves toward management’s 80%–90% target.
- Whether CGS and CTS growth and margins can offset continued weakness in CMS and CSS.
- Cash conversion, capital spending, and facility borrowings, including covenant headroom and the effect of variable interest rates.
- Client renewals and volume trends, especially for major clients with contracts expiring between 2016 and 2020.
- Progress and independent testing of internal-control remediation, plus the resolution and cash impact of tax audits and uncertain tax positions.
- Foreign-exchange exposures and hedge effectiveness; Q1 included a $5.9 million net loss on settled cash-flow hedges reflected in revenue.