ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in millions except per share amounts)
BACKGROUND
Convergys Corporation (Convergys, the Company or we) is a global leader in customer experience outsourcing, focused on bringing value to our clients through every customer interaction. We provide global, multi-channel agent, analytics and technology solutions that we believe deliver superior business outcomes for our clients. Convergys has approximately
120,000
employees working in 33 countries, interacting with our clients’ customers in 58 languages. As a global provider in the industry, Convergys has a history of commitment and dedication to excellence in serving many of the world’s largest brands. Our business model allows us to deliver consistent, quality service, at scale in the geographies that meet our clients’ business needs. We proactively partner to solve client business challenges through our account management model. Our geographic footprint and comprehensive capabilities help leading companies create brand-differentiated customer experiences across all interaction channels to generate revenue and reduce their cost to serve. We are a well-capitalized leader in our market and are able to invest in the services, technology, and analytics that matter to our clients and their customers.
Operations and Structure
On August 1, 2016, Convergys acquired buw, a leader in the German customer care industry. The acquisition added 16 sites and approximately 6,000 employees from Germany, Hungary and Romania into Convergys’ global operations.
We believe our global clients benefit from our worldwide workforce located in key geographies, including the United States, the Philippines, Germany, the United Kingdom, India, Canada, Tunisia, Costa Rica, the Dominican Republic, Colombia, Egypt, France, Ireland, Italy, Poland, Romania, China, Malaysia, El Salvador, Honduras, Nicaragua, Bulgaria, Hungary, the Netherlands, Spain, Sweden, Australia, Brazil, Indonesia, Mauritius, Singapore, South Africa, and the United Arab Emirates.
Agent-related revenues, which accounted for
95%
of our revenues for the
six months ended
2017
, are typically recognized as services are performed based on staffing hours or the number of contacts handled by service agents using contractual rates. Remaining revenues are derived from the sale of premise-based and hosted self-care and technology solutions and provision of professional services. Revenues from the sale of these solutions and provision of services are typically recognized as services are provided over the duration of the contract using contractual rates.
Additional Information
The Company files annual, quarterly and current reports and proxy statements with the SEC. These filings are available to the public over the Internet on the SEC’s website at http://www.sec.gov and on the Company’s website at http://www.convergys.com. The Company’s website and the information contained therein are not incorporated by reference into this quarterly report. You may also read and copy any document we file with the SEC at its public reference room located at 100 F Street, N.E., Washington, DC 20549. You may call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.
FORWARD-LOOKING STATEMENTS
This report contains statements, estimates, or projections that constitute “forward-looking statements” as defined under U.S. federal securities laws. In some cases, one can identify forward looking statements by terminology such as “will,” “expect,” “estimate,” “think,” “forecast,” “guidance,” “outlook,” “plan,” “lead,” “project” or other comparable terminology. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks include, but are not limited to: (i) the loss of a significant client or significant business from a client; (ii) the future financial performance or outsourcing trends of our largest clients and the major industries that we serve; (iii) contractual provisions that may limit our profitability or enable our clients to reduce or terminate services; (iv) our failure to successfully acquire and integrate businesses, including buw; (v) our inability to protect proprietary or personally identifiable data against unauthorized access or unintended release; (vi) the effects of complying with jurisdiction-specific data privacy requirements, including increased expenses, operational and contractual changes, and diversion of resources; (vii) our inability to maintain and upgrade our technology and network equipment in a timely and cost effective manner; (viii) business and political risks, including ongoing political developments in the Philippines, uncertainty regarding the impact of Britain’s vote to leave the European Union (“Brexit”) or other similar actions by European Union member states, and economic weakness and operational disruption as a result of natural events, political unrest, war, terrorist attacks or other civil disruption; (ix) the effects of foreign currency exchange rate fluctuations; (x) the failure to meet expectations regarding our future tax liabilities, changes in tax laws or regulations that increase our future tax liabilities or the unfavorable resolution of tax contingencies; (xi) adverse effects of regulatory requirements or changes thereto, investigative and legal actions, and other commitments and contingencies; (xii) costs associated with conversions of our convertible debentures that may occur from time to time; and (xiii) those factors contained in our periodic reports filed with the SEC, included in the “Risk Factors” section of our most recent Annual Report on Form 10-K. The forward-looking information in this document is given as of the date of the particular statement and we assume no duty to update this information.
RESULTS OF OPERATIONS
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
2016
|
Change
|
%
|
|
2017
|
2016
|
Change
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Communications
|
|
$318.3
|
|
|
$348.4
|
|
(30.1
|
)
|
(9
|
)
|
|
|
$649.7
|
|
|
$713.6
|
|
(63.9
|
)
|
(9
|
)
|
Technology
|
139.5
|
|
153.9
|
|
(14.4
|
)
|
(9
|
)
|
|
289.5
|
|
318.3
|
|
(28.8
|
)
|
(9
|
)
|
Financial Services
|
60.3
|
|
51.1
|
|
9.2
|
|
18
|
|
|
126.6
|
|
106.2
|
|
20.4
|
|
19
|
|
Other
|
168.7
|
|
138.9
|
|
29.8
|
|
21
|
|
|
348.6
|
|
276.3
|
|
72.3
|
|
26
|
|
Total Revenues
|
|
$686.8
|
|
|
$692.3
|
|
(5.5
|
)
|
(1
|
)
|
|
|
$1,414.4
|
|
|
$1,414.4
|
|
—
|
|
—
|
|
Three Months Ended June 30, 2017 versus Three Months Ended June 30, 2016
Consolidated revenues for the second quarter of
2017
were
$686.8
, a
1%
decrease from
$692.3
in the same period prior year. Revenues from the acquired buw operations increased revenue by approximately 6%. Changes in currency exchange rates resulted in reduced revenues of approximately 1% in the current quarter as the U.S. dollar strengthened relative to the euro and British pound. Revenues from communications clients decreased
9%
from the second quarter of
2016
, reflecting a shift of volumes to lower-cost geographies, consolidation of certain programs with our two largest clients, volume decreases with other existing clients and unfavorable currency exchange rate impacts. These decreases were partially offset by revenues from a new client and revenues from the acquired buw operations. Revenues from technology clients decreased
9%
from the second quarter of
2016
, reflecting volume reductions and unfavorable currency exchange rate impacts. Revenues from financial services clients increased
18%
from the second quarter of
2016
, reflecting revenues from new clients and volume increases with several existing clients, as well as revenue from the acquired buw operations, partially offset by volume decreases with other clients. Revenues from all other clients increased
21%
from the second quarter of
2016
as a result of volume increases with several existing clients, as well as revenues from the acquired buw operations and revenues from new clients.
Six Months Ended June 30, 2017 versus Six Months Ended June 30, 2016
Consolidated revenues for the six months ended June 30, 2017 were
$1,414.4
, consistent with the same period in the prior year. Revenues related to the acquired buw operations increased revenues by approximately 6%. Changes in currency exchange rates resulted in reduced revenues of approximately 1% in the current year as the U.S. dollar strengthened relative to the euro and British pound. Revenues from communications clients decreased
9%
from the first half of 2016, reflecting a shift of volumes to lower-cost geographies, volume reductions and program completions with certain existing clients, as well as unfavorable currency exchange rate impacts. These decreases were partially offset by revenues from a new client and revenues from the acquired buw operations. Revenues from technology clients decreased
9%
from the first half of 2016 due to volume reductions and unfavorable currency exchange rate impacts, partially offset by volume increases with other existing clients. Revenues from financial services clients increased
19%
from the first half of 2016, reflecting revenues from new clients and volume increases with several existing clients, as well as revenue from the acquired buw operations, partially offset by volume decreases with other clients. Other revenues increased
26%
from the first half of 2016. This increase is attributable to volume increases and new programs with existing clients, as well as revenues from the acquired buw operations and revenues from new clients.
Operating Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
2016
|
Change
|
%
|
|
2017
|
2016
|
Change
|
%
|
Operating Costs:
|
|
|
|
|
|
|
|
|
|
Cost of providing services and products sold
|
|
$426.7
|
|
|
$435.1
|
|
(8.4
|
)
|
(2
|
)
|
|
|
$876.9
|
|
|
$885.5
|
|
(8.6
|
)
|
(1
|
)
|
Selling, general and administrative
|
174.1
|
|
169.5
|
|
4.6
|
|
3
|
|
|
351.6
|
|
340.6
|
|
11.0
|
|
3
|
|
Depreciation
|
27.1
|
|
31.2
|
|
(4.1
|
)
|
(13
|
)
|
|
54.5
|
|
63.1
|
|
(8.6
|
)
|
(14
|
)
|
Amortization
|
7.3
|
|
6.9
|
|
0.4
|
|
6
|
|
|
14.5
|
|
13.8
|
|
0.7
|
|
5
|
|
Restructuring
|
1.7
|
|
1.0
|
|
0.7
|
|
70
|
|
|
16.7
|
|
2.5
|
|
14.2
|
|
NM
|
|
Transaction related expenses
|
—
|
|
1.2
|
|
(1.2
|
)
|
(100
|
)
|
|
—
|
|
1.2
|
|
(1.2
|
)
|
(100
|
)
|
Integration related expenses
|
1.1
|
|
1.1
|
|
—
|
|
—
|
|
|
2.6
|
|
1.1
|
|
1.5
|
|
NM
|
|
Total costs and expenses
|
|
$638.0
|
|
|
$646.0
|
|
(8.0
|
)
|
(1
|
)
|
|
|
$1,316.8
|
|
|
$1,307.8
|
|
9.0
|
|
1
|
|
Three Months Ended June 30, 2017 versus Three Months Ended June 30, 2016
Total operating costs and expenses for the second quarter of
2017
of
$638.0
decreased
1%
from
$646.0
in the same period in the prior year. Operating costs associated with the acquired buw operations increased total costs and expenses by approximately 6% in the second quarter. Changes in currency exchange rates reduced operating costs and expenses by approximately 3% in the second quarter. Operating costs for the prior year quarter included charges for transaction related expenses of
$1.2
related to the acquisition of buw that are not recurring in the current quarter. As a percentage of revenues, the cost of providing services and products sold was 62.1% in the second quarter of
2017
compared to 62.8% in the prior year period, primarily as a result of the timing of certain program implementations, changes in the mix of geographies where services are provided, and favorable currency exchange impacts. Selling, general and administrative expenses of
$174.1
in the second quarter of
2017
increased by
3%
compared to the prior year period as a result of expenses from the acquired buw operations, partially offset by favorable currency exchange impacts and savings realized from our 2017 company-wide restructuring program. As a percentage of revenues, selling, general, and administrative cost was 25.3% in the second quarter of
2017
compared to 24.5% in the prior year period. Depreciation expense of
$27.1
decreased
$4.1
from the prior year period, while amortization expense of
$7.3
increased
$0.4
. The decrease in depreciation expense resulted from the timing of certain assets becoming fully depreciated, as well as lower depreciation from the fair value write-up of property and equipment acquired through business combinations. The increase in amortization expense resulted from acquired intangible assets from the buw acquisition.
Six Months Ended June 30, 2017 versus Six Months Ended June 30, 2016
Total operating costs and expenses for the first half of 2017 of
$1,316.8
increased slightly from
$1,307.8
for the first half of 2016. Operating costs associated with the acquired buw operations increased total costs and expenses by approximately 6% in the current period. Changes in currency exchange rates reduced operating costs and expenses by approximately 3% for the six months ended June 30, 2017. Total operating costs and expenses for the six months ended June 30, 2017 and 2016 also included charges for integration related expenses of $2.6 and $1.1, respectively, associated with business acquisitions. Operating costs for 2016 also included charges for transaction related expenses of $1.2 related to the acquisition of buw. As a percentage of revenues, the cost of providing services and products sold was 62.0% for the first six months of 2017, compared to 62.6% in the prior year period, largely due to the timing of certain program implementations. Selling, general and administrative expenses of
$351.6
in the first half of 2017 increased by
3%
compared to the prior year period as a result of expenses from the acquired buw operations, partially offset by favorable currency exchange impacts and savings realized from our 2017 company-wide restructuring program. As a percentage of revenue, selling, general and administrative expense was 24.9% for the first six months of 2017 compared to 24.1% in the prior year period. Depreciation expense of
$54.5
decreased
$8.6
from the prior year period, while amortization expense of
$14.5
increased
$0.7
. The decrease in depreciation expense resulted from the timing of certain assets becoming fully depreciated, as well as lower depreciation from the fair value write-up of property and equipment acquired through business combinations. The increase in restructuring expense is a result of the $12.8 charge in the six months ended June 30, 2017 associated with a company-wide initiative to reduce headcount and better align the Company’s resources, principally for corporate functions.
Operating Income and Adjusted Operating Income (a non-GAAP measure)
In order to assess the underlying operational performance of the business and to have a basis to compare underlying results to prior and future periods, we provide the non-GAAP measures, Adjusted Operating Income and Adjusted Operating Margin (Adjusted Operating Income divided by Total Revenues), in the table below. For the
three and six months ended
June 30, 2017
and
2016
, Adjusted Operating Income and Adjusted Operating Margin exclude the following operating charges:
|
|
1.
|
Restructuring charges of
$12.8
for the
six months ended
June 30, 2017
, associated with a company-wide initiative to reduce headcount and better align the Company’s resources, principally for corporate functions;
|
|
|
2.
|
Depreciation of
$0.9
and
$1.9
for the
three and six months ended
June 30, 2017
, respectively, and
$2.3
and
$5.5
, respectively, in the prior year periods, resulting from the fair value write-up of property and equipment acquired through business combinations;
|
|
|
3.
|
Acquisition integration expenses of
$1.1
and
$2.6
for the
three and six months ended
June 30, 2017
, respectively, and $1.1 for the
three and six months ended
June 30, 2016
, primarily related to fees for third-party consulting services and severance expense;
|
|
|
4.
|
Amortization of acquired intangible assets of
$7.3
and
$14.5
for the
three and six months ended
June 30, 2017
, respectively, and
$6.9
and
$13.8
, respectively, in the prior year periods;
|
|
|
5.
|
Transaction expenses of $1.2 for the
three and six months ended
June 30, 2016
, associated with the acquisition of buw, primarily related to fees paid for third-party consulting services.
|
Adjustments for these items are relevant in evaluating the overall performance of the business. Limitations associated with the use of these non-GAAP measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP. Management compensates for this limitation by using both the non-GAAP measures and the GAAP measures in its evaluation of performance. These non-GAAP measures should be considered supplemental in nature and should not be construed as being more important than comparable GAAP measures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
2016
|
Change
|
%
|
|
2017
|
2016
|
Change
|
%
|
Operating Income
|
|
$48.8
|
|
|
$46.3
|
|
2.5
|
|
5
|
|
|
|
$97.6
|
|
|
$106.6
|
|
(9.0
|
)
|
(8
|
)
|
Operating Margin
|
7.1
|
%
|
6.7
|
%
|
|
|
|
6.9
|
%
|
7.5
|
%
|
|
|
Company-wide restructuring
|
—
|
|
—
|
|
—
|
|
—
|
|
|
12.8
|
|
—
|
|
12.8
|
|
100
|
|
Depreciation of property & equipment write-up
|
0.9
|
|
2.3
|
|
(1.4
|
)
|
(61
|
)
|
|
1.9
|
|
5.5
|
|
(3.6
|
)
|
(65
|
)
|
Transaction related expenses
|
—
|
|
1.2
|
|
(1.2
|
)
|
100
|
|
|
—
|
|
1.2
|
|
(1.2
|
)
|
100
|
|
Integration related expenses
|
1.1
|
|
1.1
|
|
—
|
|
—
|
|
|
2.6
|
|
1.1
|
|
1.5
|
|
NM
|
|
Amortization of acquired intangible assets
|
7.3
|
|
6.9
|
|
0.4
|
|
6
|
|
|
14.5
|
|
13.8
|
|
0.7
|
|
5
|
|
Adjusted Operating Income (a non-GAAP measure)
|
|
$58.1
|
|
|
$57.8
|
|
0.3
|
|
1
|
|
|
|
$129.4
|
|
|
$128.2
|
|
1.2
|
|
1
|
|
Adjusted Operating Margin
|
8.5
|
%
|
8.3
|
%
|
|
|
|
9.1
|
%
|
9.1
|
%
|
|
|
Three Months Ended June 30, 2017 versus Three Months Ended June 30, 2016
Operating income was
$48.8
for the second quarter of 2017 compared to operating income of
$46.3
in the prior year period. Excluding the impacts of the operating charges discussed above, adjusted operating income for the second quarter of 2017 was
$58.1
compared to
$57.8
in the same period in the prior year.
Six Months Ended June 30, 2017 versus Six Months Ended June 30, 2016
Operating income was
$97.6
for the first half of 2017 compared to operating income of
$106.6
in the prior year period. Excluding the impacts of the operating charges discussed above, adjusted operating income for the first half of 2017 was
$129.4
compared to
$128.2
in the same period in the prior year.
Non-Operating Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
2016
|
Change
|
%
|
|
2017
|
2016
|
Change
|
%
|
Operating Income
|
|
$48.8
|
|
|
$46.3
|
|
2.5
|
|
5
|
|
|
|
$97.6
|
|
|
$106.6
|
|
(9.0
|
)
|
(8
|
)
|
Other income (expense), net
|
1.6
|
|
(0.8
|
)
|
2.4
|
|
NM
|
|
|
2.9
|
|
(2.0
|
)
|
4.9
|
|
NM
|
|
Interest expense
|
(4.3
|
)
|
(4.5
|
)
|
0.2
|
|
(4
|
)
|
|
(9.6
|
)
|
(9.0
|
)
|
(0.6
|
)
|
7
|
|
Income before Income Taxes
|
|
$46.1
|
|
|
$41.0
|
|
5.1
|
|
12
|
|
|
|
$90.9
|
|
|
$95.6
|
|
(4.7
|
)
|
(5
|
)
|
Three Months Ended June 30, 2017 versus Three Months Ended June 30, 2016
Other income increased by
$2.4
compared to the same period in the prior year primarily due to a $1.8 foreign currency exchange gain in the second quarter of 2017. Interest expense decreased by
$0.2
compared to the same period in the prior year primarily due to a decrease in the total debt outstanding.
Six Months Ended June 30, 2017 versus Six Months Ended June 30, 2016
Other income increased by
$4.9
compared to the same period in the prior year primarily due to a $3.5 foreign currency exchange gain in the first half of 2017. Interest expense increased by
$0.6
compared to the same period in the prior year due to a $1.0 extinguishment loss resulting from the repayment of the outstanding borrowings under the Credit Agreement and the entrance into the New Credit Agreement.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
2016
|
Change
|
%
|
|
2017
|
2016
|
Change
|
%
|
Income before Income Taxes
|
|
$46.1
|
|
|
$41.0
|
|
5.1
|
|
12
|
|
|
|
$90.9
|
|
|
$95.6
|
|
(4.7
|
)
|
(5
|
)
|
Income tax expense
|
6.3
|
|
7.8
|
|
(1.5
|
)
|
(19
|
)
|
|
13.2
|
|
17.9
|
|
(4.7
|
)
|
(26
|
)
|
Net Income
|
|
$39.8
|
|
|
$33.2
|
|
6.6
|
|
20
|
|
|
|
$77.7
|
|
|
$77.7
|
|
—
|
|
—
|
|
Three Months Ended June 30, 2017 versus Three Months Ended June 30, 2016
The effective tax rate on net income was 13.7% for the three months ended June 30, 2017 compared to an effective tax rate of 19.0% in the same period last year. The effective tax rates for both periods were largely impacted by the geographic mix of worldwide income and certain discrete items.
Six Months Ended June 30, 2017 versus Six Months Ended June 30, 2016
The effective tax rate on net income was 14.5% for the six months ended June 30, 2017 compared to an effective tax rate of 18.7% in the same period last year. The effective tax rates for both periods were largely impacted by the geographic mix of worldwide income and certain discrete items.
Net Income; Earnings per Diluted Share; Adjusted Net Income (a non-GAAP measure); Adjusted Earnings per Diluted Share (a non-GAAP measure)
In order to assess the underlying operational performance of the business, we provide non-GAAP measures in the tables below that exclude the operating charges discussed above.
We use net income and earnings per share data excluding the operating charges discussed above and the income tax impact from these charges to assess the underlying operational performance of the business and to have a basis to compare underlying results to prior and future periods. Adjustments for these items are relevant in evaluating the overall performance of the business. Limitations associated with the use of these non-GAAP measures include that these measures do not present all of the amounts associated with our results as determined in accordance with GAAP. Management compensates for these limitations by using the non-GAAP measures, net income and diluted earnings per share excluding these items, and the GAAP measures, net income and diluted earnings per share, in its evaluation of performance. These non-GAAP measures should be considered supplemental in nature and should not be construed as being more important than comparable GAAP measures.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
2016
|
Change
|
%
|
|
2017
|
2016
|
Change
|
%
|
Net Income
|
|
$39.8
|
|
|
$33.2
|
|
6.6
|
|
20
|
|
|
|
$77.7
|
|
|
$77.7
|
|
—
|
|
—
|
Total operating charges from above
|
9.3
|
|
11.5
|
|
(2.2
|
)
|
(19
|
)
|
|
31.8
|
|
21.6
|
|
10.2
|
|
47
|
Income tax impact from total operating charges
|
(3.0
|
)
|
(3.1
|
)
|
0.1
|
|
(3
|
)
|
|
(11.3
|
)
|
(6.1
|
)
|
(5.2
|
)
|
85
|
Adjusted Net Income (a non-GAAP measure)
|
|
$46.1
|
|
|
$41.6
|
|
4.5
|
|
11
|
|
|
|
$98.2
|
|
|
$93.2
|
|
5.0
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common Share:
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|
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|
|
|
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|
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|
Diluted Earnings per Common Share
|
|
$0.40
|
|
|
$0.32
|
|
0.08
|
|
25
|
|
|
|
$0.77
|
|
|
$0.75
|
|
0.02
|
|
3
|
Impact of net charges above, net of tax
|
0.06
|
|
0.09
|
|
(0.03
|
)
|
(33
|
)
|
|
0.21
|
|
0.16
|
|
0.05
|
|
31
|
Adjusted diluted earnings per common share (a non-GAAP measure)
|
|
$0.46
|
|
|
$0.41
|
|
0.05
|
|
12
|
|
|
|
$0.98
|
|
|
$0.91
|
|
0.07
|
|
8
|
Three Months Ended June 30, 2017 versus Three Months Ended June 30, 2016
Net income for the second quarter of
2017
was
$39.8
compared to
$33.2
for the same period in
2016
, while income per diluted share for the second quarter in
2017
was
$0.40
compared to
$0.32
for the same period in
2016
. Excluding the operating charges discussed above and the income tax impact from these charges, adjusted net income for the second quarter of
2017
was
$46.1
, or
$0.46
per diluted share, compared to
$41.6
, or
$0.41
per diluted share for the same period in
2016
.
Six Months Ended June 30, 2017 versus Six Months Ended June 30, 2016
Net income for the first half of
2017
was
$77.7
compared to
$77.7
for the same period in
2016
, while income per diluted share for the first half of
2017
was
$0.77
compared to
$0.75
for the same period in
2016
. Excluding the operating charges discussed above and the income tax impact from these charges, adjusted net income for the first half of
2017
was
$98.2
, or
$0.98
per diluted share, compared to
$93.2
, or
$0.91
per diluted share for the same period in
2016
.
EBITDA and Adjusted EBITDA (non-GAAP measures)
Management uses EBITDA, EBITDA margin (EBITDA divided by Total Revenues), Adjusted EBITDA, Adjusted EBITDA margin (Adjusted EBITDA divided by Total Revenues) and the GAAP measure, net income, to monitor and evaluate the underlying performance of the business and believes the presentation of these measures enhances investors’ ability to analyze trends in the business and evaluate our underlying performance relative to other companies in the industry. EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for net income or other income statement data prepared in accordance with GAAP, and our presentation of EBITDA and adjusted EBITDA may not be comparable to similarly-titled measures used by other companies. These non-GAAP measures should be considered supplemental in nature and should not be construed as being more important than comparable GAAP measures.
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|
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|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
2016
|
|
2017
|
2016
|
Net Income
|
|
$39.8
|
|
|
$33.2
|
|
|
|
$77.7
|
|
|
$77.7
|
|
Depreciation and Amortization
|
34.4
|
|
38.1
|
|
|
69.0
|
|
76.9
|
|
Interest expense
|
4.3
|
|
4.5
|
|
|
9.6
|
|
9.0
|
|
Income tax expense
|
6.3
|
|
7.8
|
|
|
13.2
|
|
17.9
|
|
EBITDA (a non-GAAP measure)
|
84.8
|
|
83.6
|
|
|
169.5
|
|
181.5
|
|
Company-wide restructuring
|
—
|
|
—
|
|
|
12.8
|
|
—
|
|
Transaction related expenses
|
—
|
|
1.2
|
|
|
—
|
|
1.2
|
|
Integration related expenses
|
1.1
|
|
1.1
|
|
|
2.6
|
|
1.1
|
|
Adjusted EBITDA (a non-GAAP measure)
|
|
$85.9
|
|
|
$85.9
|
|
|
|
$184.9
|
|
|
$183.8
|
|
EBITDA Margin
|
12.3
|
%
|
12.1
|
%
|
|
12.0
|
%
|
12.8
|
%
|
Adjusted EBITDA Margin
|
12.5
|
%
|
12.4
|
%
|
|
13.1
|
%
|
13.0
|
%
|
RESTRUCTURING CHARGES
As discussed in Note 7 of the Notes to Consolidated Financial Statements, we recorded the following restructuring charges:
2017 Restructuring
Company-wide restructuring program
The Company recorded restructuring expenses of
$12.8
for the six months ended June 30, 2017, related to a company-wide initiative to reduce headcount and better align the Company’s resources, principally for corporate functions. The 2017 restructuring actions impacted approximately
315
employees. This expense is included in Restructuring charges on the Consolidated Statements of Income and is expected to be substantially paid in cash by March 31, 2018. The total remaining liability under these restructuring actions, which is included in Payables and other current liabilities on the Consolidated Balance Sheet, was $8.2 as of June 30, 2017 and
$10.2
as of March 31, 2017.
Other Severance
The Company recorded other severance expense of $1.7 and
$3.9
, respectively, for the three and six months ended June 30, 2017, primarily related to headcount reductions resulting from certain client program completions. These actions impacted approximately
250
employees. This severance expense is included in Restructuring charges on the Consolidated Statements of Income and is expected to be substantially paid in cash by December 31, 2017. The total remaining liability under these severance-related actions, which is included in Payables and other current liabilities on the Consolidated Balance Sheet, was $0.8 as of June 30, 2017 and
$1.4
as of March 31, 2017.
buw integration
The Company recorded severance expense totaling $0.1 and
$1.0
, respectively, for the three and six months ended June 30, 2016, related to the elimination of certain redundant positions as a result of the integration of the buw business. This severance expense was included in Transaction and integration costs on the Consolidated Statements of Income and is expected to be substantially paid in cash by December 31, 2017. The total remaining liability under these severance-related actions, which is included in Payables and other current liabilities on the Consolidated Balance Sheet, was
$0.5
as of June 30, 2017 and March 31, 2017.
2016 Restructuring
During 2016, the Company recorded severance charges of
$3.7
related to the Company’s ongoing efforts to refine its operating model and reduce costs, as well as headcount reductions resulting from certain client program completions. The 2016 actions impacted approximately
760
employees. These severance-related charges were fully paid in cash by June 30, 2017.
Savings from Restructuring Plans
The 2017 company-wide restructuring program is expected to result in cost reductions of approximately $21.0 and cash savings of approximately $19.0 on an annualized basis. The impact of these cost reductions will be spread across our operating expenses, primarily in the selling, general and administrative expense caption of our Consolidated Statements of Income. The impact on liquidity was not material for any of our restructuring plans. Savings associated with the 2016 severance actions were not material.
CLIENT CONCENTRATION
During the first six months of 2017, our three largest clients accounted for 30.9% of our revenues, compared to 36.3% in the same period of 2016. Our largest client, AT&T, accounted for 17.8% of revenues in the first
six
months of 2017 and 20.9% of revenue in the same period in the prior year. No other client accounted for more than 10% of our consolidated revenues for the first half of 2017 and 2016. Revenues with our three largest clients are earned under multiple contracts and are subject to variation based on, among other things, general economic conditions, client outsourcing trends, geographical mix of where services are provided and seasonal patterns in our clients’ businesses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Cash Flows
We believe that we have adequate liquidity from cash on hand and expected future cash flows to fund operations, invest in the business, make required debt payments and pay dividends at the discretion of the Board of Directors for the next twelve months. We also believe that available borrowings under existing credit facilities provide additional liquidity that can be used to invest in the business.
Cash flows from operating activities generally provide us with a significant source of funding for our investing and financing activities. Cash flows from operating activities totaled
$122.4
in the first
six
months of 2017 compared to
$156.3
in the same period last year. The first
six
months of 2017 and 2016 reflected
$2.8
of payments for transaction and integration related expenses. Excluding these items, cash flows provided by operating activities totaled $125.2 and $159.1 for the six months ended
June 30, 2017
and
2016
, respectively. This decrease was primarily a result of decreased cash flow from working capital in 2017, largely due to the timing of payments on accounts payable and other current liabilities.
Cash flows used in investing activities were
$27.2
during the first
six
months of 2017, resulting from $27.9 of capital expenditures during that period partially offset by $0.7 of net proceeds from the sale of a joint venture interest previously acquired in the buw acquisition. Cash flows used in investing activities were $35.1 during the first
six
months of 2016, resulting from $34.3 of capital expenditures and $0.8 for the purchase of short-term and other investments during that period.
Cash flows used in financing activities were
$71.3
during the first
six
months of 2017 compared to
$83.2
during the first
six
months of 2016. Activity in the current year included net repayments of long-term debt of $116.0 and net proceeds of amounts drawn under the asset securitization facility of $105.0. Additionally, we settled in cash the repurchase of 1.9 of the Company’s common shares for
$43.7
. We also paid
$17.0
in cash dividends and received proceeds of $0.4 from the exercise of stock options. During the first
six
months of
2016
, we had long-term debt repayments of $2.0 and net repayments of amounts drawn under the asset securitization facility of $29.0. Additionally, we settled in cash the repurchase of 1.5 of the Company's common shares for $38.0. We also paid $15.5 in cash dividends and received $1.0 of excess tax benefits from share-based payment arrangements and $0.3 from the exercise of stock options.
Free Cash Flow and Adjusted Free Cash Flow (non-GAAP measures)
We use free cash flow and adjusted free cash flow, which are non-GAAP measures, to assess the financial performance of the Company. We define free cash flow as cash flows from operating activities less capital expenditures, and adjusted free cash flow as free cash flow less acquisition related items. A reconciliation of the GAAP measure, net cash provided by operating activities, to the non-GAAP measures, free cash flow and adjusted free cash flow, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
2016
|
|
2017
|
2016
|
Net cash flow provided by operating activities under U.S. GAAP
|
|
$89.5
|
|
|
$79.7
|
|
|
|
$122.4
|
|
|
$156.3
|
|
Capital expenditures, net of proceeds from disposal of assets
|
(19.0
|
)
|
(23.3
|
)
|
|
(27.9
|
)
|
(34.3
|
)
|
Free cash flow (a non-GAAP measure)
|
|
$70.5
|
|
|
$56.4
|
|
|
|
$94.5
|
|
|
$122.0
|
|
Acquisition - cash paid for integration related expenses
(A)
|
1.1
|
|
1.4
|
|
|
2.8
|
|
2.8
|
|
Adjusted free cash flow (a non-GAAP measure)
|
|
$71.6
|
|
|
$57.8
|
|
|
|
$97.3
|
|
|
$124.8
|
|
|
|
(A)
|
Payments associated with investment activity for acquisition related items.
|
Adjusted free cash flow was
$71.6
and
$97.3
for the three and six months ended
June 30, 2017
, compared to
$57.8
and
$124.8
for the corresponding periods in
2016
. The decrease of $27.6 from the six month period in the prior year is primarily a result of decreased cash flow from working capital in 2017, largely due to the timing of payments on accounts payable and other current liabilities.
We believe that free cash flow and adjusted free cash flow are useful to investors because they present the operating cash flow of the Company, excluding the capital that is spent to continue to improve business operations, such as investment in the Company’s existing business. Further, free cash flow and adjusted free cash flow provide an indication of the ongoing cash that is available for debt repayment, returning capital to shareholders and other opportunities. We also believe the presentation of these measures enhances investors’ ability to analyze trends in the business and evaluate the Company’s underlying performance relative to other companies in the industry. Limitations associated with the use of free cash flow and adjusted free cash flow include that they do not represent the residual cash flow available for discretionary expenditures as they do not incorporate certain cash payments, including payments made on capital lease obligations or cash payments for business acquisitions. Management compensates for these limitations by utilizing the non-GAAP measures, free cash flow and adjusted free cash flow, and the GAAP measure, cash flows from operating activities, in its evaluation of performance.
Capital Resources, Off-Balance Sheet Arrangements and Contractual Commitments
At
June 30, 2017
, total capitalization was
$1,713.9
, consisting of
$289.9
of short-term and long-term debt and capital lease obligations,
$1,363.6
of equity and
$60.4
of temporary equity associated with the convertible debentures conversion feature. At
December 31, 2016
, total capitalization was
$1,676.0
, consisting of
$298.8
of short-term and long-term debt and capital lease obligations,
$1,315.9
of equity and
$61.3
of temporary equity associated with the convertible debentures conversion feature. The total debt-to-capital ratio at
June 30, 2017
was
16.9%
, compared to
17.8%
at
December 31, 2016
. This decrease is primarily due to a decrease in total debt outstanding as a result of decreased borrowings under the Company’s term loan.
On
January 11, 2017
(the Effective Date), the Company entered into a new credit agreement (New Credit Agreement) and repaid all amounts outstanding and terminated all commitments under its previously existing credit agreement (Credit Agreement) using initial borrowings under the New Credit Agreement as well as borrowings under the Company’s asset securitization facility. The New Credit Agreement consists of a
$215.0
unsecured term loan facility (New Term Loan), maturing on
March 3, 2019
, and a
$300.0
unsecured revolving credit facility (New Revolving Credit Facility), maturing on
January 11, 2022
. On the Effective Date, the Company drew
$100.0
in initial borrowings under the New Term Loan. A $1.0 extinguishment loss was recognized on the Effective Date and is included in interest expense on the Consolidated Statement of Income.
The New Revolving Credit Facility may be extended for two additional one-year periods, subject to the satisfaction of certain conditions set forth in the New Credit Agreement. In addition, aggregate borrowing capacity under the New Credit Agreement may be increased by up to an additional $250 million by increasing the amount of the Revolving Credit Facility or by incurring additional term loans, in each case subject to the satisfaction of certain conditions set forth in the New Credit Agreement, including the receipt of additional commitments for such increase. Borrowings outstanding under the New Credit Agreement may be repaid from time to time without premium or penalty, other than customary breakage costs, if any. Borrowings outstanding under the New Credit Agreement bear interest at a fluctuating rate per annum equal to, at the Company’s option, either (a) the applicable adjusted LIBOR plus a spread based on the Company’s total net leverage ratio, or (b) a base rate (equal to the higher of the Administrative Agent’s prime rate, the federal fund rate plus 0.50%, and the one-month adjusted LIBOR plus 1.0%) plus a spread based on the Company’s total net leverage ratio. The Company is also obligated to pay a commitment fee on a quarterly basis on the unused portion of the commitments under the New Revolving Credit Facility based on the Company’s total net leverage ratio, which fee is currently 25 basis points. While amounts borrowed and repaid under the New Revolving Credit Facility can be re-borrowed, amounts repaid under the New Term Loan cannot be borrowed again under the New Credit Agreement. The New Credit Agreement contains certain affirmative and negative covenants, as well as terms and conditions that are customary for credit facilities of this type, including financial covenants for leverage and interest coverage ratios. The Company was in compliance with all covenants at
June 30, 2017
. Total borrowing capacity remaining under the New Revolving Credit Facility was $300.0, with $100.0 outstanding on the New Term Loan, as of
June 30, 2017
. The carrying value of the New Term Loan at
June 30, 2017
reflects a discount of $0.9 related to fees paid directly to the lenders at issuance. This discount is being amortized over the life of the New Term Loan using the effective interest rate method (
3.3%
as of
June 30, 2017
), and is included in interest expense in the Consolidated Statements of Income.
The Company established the Credit Agreement on February 28, 2014 in the aggregate amount of
$650.0
. The Credit Agreement consisted of unsecured term loans (Term Loan) in the initial aggregate amount of
$350.0
, and an unsecured revolving credit facility (Revolving Credit Facility) in the amount of
$300.0
. The Term Loan and the Revolving Credit Facility were scheduled to mature on
March 3, 2019
. Outstanding amounts were subject to interest at the applicable rate described in the Credit Agreement.
During 2009, Convergys issued
$125.0
aggregate principal amount of
5.75%
Junior Subordinated Convertible Debentures due September 2029 (2029 Convertible Debentures) in exchange for
$122.5
of
4.875%
Unsecured Senior Notes due December 15, 2009, pursuant to an exchange offer. The entire balance of the 2029 Convertible Debentures remained outstanding and was convertible at the option of the holders as of
June 30, 2017
and December 31, 2016.
During January 2017, the Company amended the terms of its asset securitization facility collateralized by accounts receivable of certain of the Company’s subsidiaries. The amendment resulted in an increased purchase limit of
$225.0
, with
$90.0
and
$135.0
expiring in January 2018 and January 2020, respectively. As of December 31, 2016, the asset securitization facility had a purchase limit of
$150.0
expiring in
January 2017
. The asset securitization program is conducted through Convergys Funding Inc., a wholly-owned bankruptcy remote subsidiary of the Company. As of
June 30, 2017
and December 31, 2016, Convergys had drawn
$125.0
and
$20.0
, respectively, in available funding from qualified receivables. Amounts drawn under this facility have been classified as long-term debt within the Consolidated Balance Sheets, based on the Company’s ability and intent to refinance on a long-term basis as of
June 30, 2017
.
The Company repurchased
1.0
and
1.9
of its common shares during the three and six months ended
June 30, 2017
for a total of
$22.0
and
$43.8
, respectively. Based upon timing of transactions,
$0.9
of the shares repurchased in December 2016 settled during the first quarter of 2017. Additionally,
$1.0
of the shares repurchased during June 2017 had not settled as of
June 30, 2017
. These shares are excluded from outstanding shares at the end of the second quarter and were settled in cash during the third quarter of 2017. As of
June 30, 2017
, the Company had the authority to repurchase
$99.3
of outstanding common shares pursuant to the Board of Directors’ August 2015 increase of its then-existing authorization of share repurchases to
$250.0
in the aggregate. The timing and terms of any future share repurchases will depend on a number of considerations including market conditions, our available liquidity and capital needs, and limits on share repurchases that may be applicable under the covenants in our existing credit agreement.
At
June 30, 2017
, we had outstanding letters of credit and bond obligations of approximately
$22.4
related to performance guarantees. We believe that any guarantee obligation that may arise related to performance and payment guarantees of continuing operations will not be material. The Company also has future purchase commitments with telecommunications and transportation providers of
$8.4
at
June 30, 2017
.
During
2016
and
2017
, our Board of Directors declared the following dividends per common share, which were paid by the Company on the payment dates listed below:
|
|
|
|
|
Announcement Date
|
Record Date
|
Dividend Amount
|
Payment Date
|
February 23, 2016
|
March 24, 2016
|
$0.08
|
April 8, 2016
|
May 9, 2016
|
June 24, 2016
|
$0.09
|
July 8, 2016
|
August 8, 2016
|
September 23, 2016
|
$0.09
|
October 7, 2016
|
November 8, 2016
|
December 23, 2016
|
$0.09
|
January 6, 2017
|
February 22, 2017
|
March 24, 2017
|
$0.09
|
April 7, 2017
|
May 8, 2017
|
June 23, 2017
|
$0.10
|
July 7, 2017
|
On
August 8, 2017
, the Company announced that its Board of Directors declared a quarterly cash dividend of
$0.10
per common share to be paid on
October 6, 2017
to shareholders of record as of
September 22, 2017
.
The Board expects that future cash dividends will be paid on a quarterly basis. However, any decision to pay future cash dividends will be subject to Board approval, and will depend on our future earnings, cash flow, financial condition, financial covenants and other relevant factors. We intend to continue to use cash dividends as a means of returning capital to our shareholders, subject to our Board’s determination that cash dividends are in the best interests of our shareholders.
MARKET RISK
We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. Our risk management strategy includes the use of derivative instruments to reduce the effects on our operating results and cash flows from fluctuations caused by volatility in currency exchange rates. In using derivative financial instruments to hedge exposures to changes in exchange rates, we expose ourselves to counterparty credit risk. We manage exposure to counterparty credit risk by entering into derivative financial instruments with investment grade-rated institutions that can be expected to perform fully under the terms of the agreements and by diversifying the number of financial institutions with which we enter into such agreements.
Interest Rate Risk
At
June 30, 2017
, Convergys had $225.0 of variable rate debt outstanding under the New Term Loan and Asset Securitization Facility, which exposes Convergys to changes in interest rates. Holding other variables constant, including the total amount of outstanding indebtedness, a one hundred basis point increase in interest rates on our variable-rate debt would cause an estimated increase in interest expense of approximately $2.3 per year.
Foreign Currency Exchange Rate Risk
While most of our contracts are priced in U.S. dollars, we recognize a substantial amount of revenue under contracts that are denominated in Australian dollars, British pounds and euros. A significant increase in the value of the U.S. dollar relative to these currencies may have a material adverse impact on the value of those revenues when translated to U.S. dollars.
We serve many of our U.S.-based clients using contact center capacity outside of the U.S. Although the contracts with these clients are typically priced in U.S. dollars, a substantial portion of the costs incurred to deliver services under these contracts are denominated in the local currency of the country where services are provided, which represents a foreign exchange exposure. Additionally, we have certain client contracts that are priced in Australian dollars, for which a substantial portion of the costs to deliver services are denominated in other currencies. As of
June 30, 2017
, we have hedged a portion of our exposure related to the anticipated cash flow requirements denominated in certain foreign currencies by entering into hedging contracts with several financial institutions to acquire a total of PHP
36,765.0
at a fixed price of
$745.4
at various dates through
March 2020
, INR
12,435.0
at a fixed price of
$171.0
at various dates through
March 2020
and CAD
54.8
at a fixed price of
$41.5
at various dates through
December 2019
and COP
28,200.0
at a fixed price of
$8.9
at various dates through
December 2018
, and to sell a total of AUD
18.0
at a fixed price of
$13.4
at various dates through
March 2018
. The fair value of these derivative instruments as of
June 30, 2017
is presented in Note 12 of the Notes to Consolidated Financial Statements. The potential loss in fair value at
June 30, 2017
for such contracts resulting from a hypothetical 10% adverse change in the underlying foreign currency exchange rates is approximately
$96.5
. This loss would be substantially mitigated by corresponding gains on the underlying foreign currency exposures.
Other foreign currency exposures arise from transactions denominated in a currency other than the functional currency. We periodically enter into hedging contracts that are not designated as hedges. The purpose of these derivative instruments is to protect the Company against foreign currency exposure pertaining to receivables, payables and intercompany transactions that are denominated in currencies different from the functional currencies of the Company or its respective subsidiaries. As of
June 30, 2017
, the fair value of these derivatives not designated as hedges was a
$3.0
payable.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
See “ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report for the year ended
December 31, 2016
on Form 10-K for a discussion of our critical accounting policies and estimates.
There have been no material changes to our critical accounting policies and estimates in
2017
.