TTEC Holdings, Inc. — Q1 2014 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. TTEC provides customer engagement, technology, consulting, and related services through four segments. It reported 41,000 employees across 25 countries.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $302.2 million | $288.4 million | +4.8%; +10.1% excluding $13.7 million adverse FX impact |
| Operating income / margin | $24.4 million / 8.1% | $23.0 million / 8.0% | Income +5.9% |
| Net income attributable to TTEC stockholders | $20.2 million | $18.0 million | +12.6% |
| Diluted EPS | $0.40 | $0.34 | +17.6% |
| Operating cash flow | $13.5 million | $6.5 million | Higher year over year |
| Capital expenditures | $15.1 million | $4.1 million | Increased |
| Free cash flow (non-GAAP) | $(1.6) million | $2.4 million | Lower year over year |
Revenue growth reflected primarily organic growth, with acquired businesses also contributing. TTEC reported $21.3 million consolidated net income before noncontrolling interests. The effective tax rate was 11.9%, including discrete tax benefits; management said it would have been 20.4% without specified benefits.
Segment results
- Customer Management Services: Revenue $227.9 million, up 2.4%; operating margin 9.1% versus 9.3%. Currency headwinds partly offset client-program growth.
- Customer Growth Services: Revenue $28.9 million, up 26.5%; operating margin 6.1% versus 5.6%, supported by program growth, WebMetro, and improved program mix.
- Customer Technology Services: Revenue $32.8 million, down 2.3%; operating income fell to $0.3 million from $2.9 million, and margin to 0.9% from 8.6%. Management cited lower product/system-integration sales and higher sales and R&D investment.
- Customer Strategy Services: Revenue $12.6 million, up 34.5%; operating income was $1.5 million versus a $1.9 million loss, attributed to growth and integration-related efficiencies.
Balance sheet and liquidity
- Cash and cash equivalents were $120.4 million at March 31, down from $158.0 million at year-end 2013. Current assets were $449.4 million and current liabilities $188.2 million.
- Total debt was reported as $108.4 million, including $100.0 million outstanding under the revolving credit facility. The company reported an 18.8% debt-to-total-capitalization ratio.
- The $700 million revolving facility matures in June 2018; remaining borrowing capacity was $596.5 million after letters of credit. TTEC said it was in covenant compliance and expected cash, operating cash flow, and available credit to meet requirements for the next 12 months.
- Cash declined $37.6 million during the quarter. Investing used $23.1 million, including $8.2 million for acquisitions and $15.1 million for capital expenditures; financing used $24.4 million, including $20.5 million for share repurchases.
Material developments, outlook, and risks
- TTEC acquired 100% of Sofica, a Bulgarian customer lifecycle management and outsourcing provider, for a stated total purchase price of $14.5 million, including contingent consideration. Purchase accounting was preliminary. Acquired businesses contributed $4.8 million of revenue and $0.3 million of operating income in the quarter.
- Management expected 2014 capital expenditures of $55 million to $65 million, approximately 70% for growth and 30% for maintenance. No earnings or revenue guidance was provided in the supplied filing text.
- Management cited organic growth, improved capacity utilization, and acquisitions as positives, partly offset by a $3.8 million operating-income impact from currency, acquired-intangible amortization, and investment spending. Multi-client-center utilization was 82%, within its 80%–90% internal target.
- Foreign exchange is a material exposure: management attributed $13.7 million of revenue reduction to currency movements and uses currency hedges. The quarter included a net loss on cash-flow hedge reclassifications; hedge values can fluctuate and hedging does not cover every exposure.
- Customer concentration remains important: one communications client generated 11.6% of revenue; the five largest clients generated 37.6%. Their contracts expire between 2014 and 2017, and renewal terms are not assured.
- Other items: restructuring charges were $0.5 million; no goodwill impairment indicators were identified. A previously disclosed California class action was settled for an immaterial amount. Management reported no material change in risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether organic growth and segment-margin trends persist, particularly the sharp decline in Customer Technology Services profitability.
- Major-client renewals, volume changes, and concentration exposure.
- Cash conversion and investment needs: operating cash flow was positive, but free cash flow was negative after elevated capital expenditures.
- Currency impacts, hedge effectiveness, and the assumptions underlying contingent acquisition payments and preliminary Sofica purchase accounting.
- Execution of the $55 million–$65 million 2014 capital plan and continued covenant compliance and credit availability.