Fitch Ratings has affirmed the following ratings on
Convergys Corp.:
-- Issuer Default Rating (IDR) at 'BBB-';
-- Senior unsecured debt at 'BBB-';
-- Senior unsecured bank credit facility at 'BBB-';
-- Commercial paper at 'F3'.
The Rating Outlook is changed to Stable from Negative.
The Stable Outlook and affirmation of the ratings reflect Convergys' improved credit protection measures and liquidity, higher profit margins, reduced acquisition activity, and a more diversified customer base. The company continues to generate consistent annual free cash flow in excess of $100 million from a recurring revenue base of long-term contracts and has achieved better-than-expected profit margins for all of its operating segments relative to Fitch's expectations in October 2004 when the company was downgraded with a Negative Outlook. Despite on-going customer concentration concerns, Convergys has made solid progress in growing the customer base for its various business segments, including billing and business process outsourcing (BPO), which have in total moderately lowered customer concentration.
Despite the aforementioned improvements, ratings concerns continue to mainly center on current customer concentration and challenges associated with diversifying the customer base, which Convergys has been able to accomplish the last two years. For example, Convergys' top three clients accounted for 32.8% of total revenues in 2005 compared to 36.4% in 2004. Fitch remains concerned that there may be significant customer losses in the long term; however, customer concentration risk is partially mitigated by multiple long-term contracts the company maintains with its largest customers, which have staggered expiration dates spread among the company's various operating units: Information Management Group (IMG), Customer Care, and Employee Care. Fitch expects Convergys's business segments will continue to be challenged for the intermediate term from contract renewals and aggressive competition, which could pressure margins and prevent further improvement. Although it has been reduced significantly over the last two years, Fitch remains concerned about potential increases in the company's stock repurchase plans.
Cingular Wireless is the company's largest client, representing 15.9% of total revenues for both Customer Care and IMG for fiscal 2005. Convergys has been assisting Cingular with its strategy to migrate subscribers off of the AT&T Wireless billing systems that Convergys supports onto Cingular's two in-house systems. However, in December 2005, Cingular extended its contract with Convergys and the company now expects to continue to support Cingular's in-house system by providing management and support billing services. Convergys's Customer Care segment also has a long-standing relationship with Cingular, and the company has indicated that revenues for this business stabilized in the fourth quarter of 2005. Also, in January 2006, Sprint Nextel, Convergys's third largest customer, terminated its billing relationship with the company and decided to migrate subscribers off Convergys' systems 2006 and 2007. In 2005, Convergys's IMG group generated approximately $100 million in revenue from Sprint Nextel. However, the company continues to have a relationship with Sprint Nextel on the Customer Care side through a contract between IBM and Sprint Nextel whereby Convergys serves as a subcontractor to IBM.
Convergys' total operating margins improved to 9.5% in 2005 compared with 8.7% in 2004 and 12.7% in 2003. The improvement in 2005 was mostly a result of realizing economies of scale gained from higher levels of revenue and declining expenses associated with the ramp-up of new contracts in the Employee Care and Customer Care segments and restructuring costs. For the fourth quarter ended Dec. 31, 2005, margins rose to 11.9%, compared to 10.4% in the third quarter of 2005 and 7.3% in the second quarter of 2005. Specifically, Customer Care's operating margins improved to 12.4% and IMG operating margins improved to a near record of 20.7% during the quarter.
Total debt for Convergys as of Dec. 31, 2005 was $432 million and consisted primarily of $248.5 million of 4.875% senior unsecured notes due Dec. 15, 2009 and borrowings from Canadian and U.K. unsecured credit facilities totaling approximately $112 million, which were utilized for cash repatriation efforts. The remainder of total debt included mortgage debt of $45.9 million and capital leases and international credit facilities of $26.1 million. Total adjusted leverage, measured by total debt including operating leases and amounts outstanding under the company's accounts receivable securitization program to operating EBITDAR, improved to 2.5 times (x) for fiscal year 2005 ended Dec. 31, 2005 versus 2.7x in 2004, due to improved profitability and reduced borrowings under the company's A/R securitization facility.
As of Dec. 31, 2005, Convergys' liquidity was adequate and consisted of $196 million in cash and positive free cash flow, which nearly doubled to over $200 million in 2005, from $114 million in 2004 as a result of improved profitability and lower capital expenditures. Capital spending, which represented 5.1% of total revenues in 2005, compared with 6.3% and 7.6% in 2004 and 2003, has declined due to the company's lower investment in offshore capacity and higher utilization of existing call centers. Convergys also maintains a $200 million A/R securitization facility due December 2006 and a $325 million commercial paper program, which is backed by an undrawn $325 million revolving credit facility that expires in December 2007.
Convergys has three operating segments: Customer Care, which provides various services including customer service, technical support, accounts receivable management, sales account management, business process outsourcing, and business intelligence solutions; IMG, which provides billing and information software and services that address various segments of the communications industry, including wireless, wireline, cable, cable telephony, broadband, direct broadcast satellite, and the Internet; and Employee Care, which offers a range of services, such as benefits administration, human resource administration, learning, payroll administration, and recruiting and staffing.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
-- Issuer Default Rating (IDR) at 'BBB-';
-- Senior unsecured debt at 'BBB-';
-- Senior unsecured bank credit facility at 'BBB-';
-- Commercial paper at 'F3'.
The Rating Outlook is changed to Stable from Negative.
The Stable Outlook and affirmation of the ratings reflect Convergys' improved credit protection measures and liquidity, higher profit margins, reduced acquisition activity, and a more diversified customer base. The company continues to generate consistent annual free cash flow in excess of $100 million from a recurring revenue base of long-term contracts and has achieved better-than-expected profit margins for all of its operating segments relative to Fitch's expectations in October 2004 when the company was downgraded with a Negative Outlook. Despite on-going customer concentration concerns, Convergys has made solid progress in growing the customer base for its various business segments, including billing and business process outsourcing (BPO), which have in total moderately lowered customer concentration.
Despite the aforementioned improvements, ratings concerns continue to mainly center on current customer concentration and challenges associated with diversifying the customer base, which Convergys has been able to accomplish the last two years. For example, Convergys' top three clients accounted for 32.8% of total revenues in 2005 compared to 36.4% in 2004. Fitch remains concerned that there may be significant customer losses in the long term; however, customer concentration risk is partially mitigated by multiple long-term contracts the company maintains with its largest customers, which have staggered expiration dates spread among the company's various operating units: Information Management Group (IMG), Customer Care, and Employee Care. Fitch expects Convergys's business segments will continue to be challenged for the intermediate term from contract renewals and aggressive competition, which could pressure margins and prevent further improvement. Although it has been reduced significantly over the last two years, Fitch remains concerned about potential increases in the company's stock repurchase plans.
Cingular Wireless is the company's largest client, representing 15.9% of total revenues for both Customer Care and IMG for fiscal 2005. Convergys has been assisting Cingular with its strategy to migrate subscribers off of the AT&T Wireless billing systems that Convergys supports onto Cingular's two in-house systems. However, in December 2005, Cingular extended its contract with Convergys and the company now expects to continue to support Cingular's in-house system by providing management and support billing services. Convergys's Customer Care segment also has a long-standing relationship with Cingular, and the company has indicated that revenues for this business stabilized in the fourth quarter of 2005. Also, in January 2006, Sprint Nextel, Convergys's third largest customer, terminated its billing relationship with the company and decided to migrate subscribers off Convergys' systems 2006 and 2007. In 2005, Convergys's IMG group generated approximately $100 million in revenue from Sprint Nextel. However, the company continues to have a relationship with Sprint Nextel on the Customer Care side through a contract between IBM and Sprint Nextel whereby Convergys serves as a subcontractor to IBM.
Convergys' total operating margins improved to 9.5% in 2005 compared with 8.7% in 2004 and 12.7% in 2003. The improvement in 2005 was mostly a result of realizing economies of scale gained from higher levels of revenue and declining expenses associated with the ramp-up of new contracts in the Employee Care and Customer Care segments and restructuring costs. For the fourth quarter ended Dec. 31, 2005, margins rose to 11.9%, compared to 10.4% in the third quarter of 2005 and 7.3% in the second quarter of 2005. Specifically, Customer Care's operating margins improved to 12.4% and IMG operating margins improved to a near record of 20.7% during the quarter.
Total debt for Convergys as of Dec. 31, 2005 was $432 million and consisted primarily of $248.5 million of 4.875% senior unsecured notes due Dec. 15, 2009 and borrowings from Canadian and U.K. unsecured credit facilities totaling approximately $112 million, which were utilized for cash repatriation efforts. The remainder of total debt included mortgage debt of $45.9 million and capital leases and international credit facilities of $26.1 million. Total adjusted leverage, measured by total debt including operating leases and amounts outstanding under the company's accounts receivable securitization program to operating EBITDAR, improved to 2.5 times (x) for fiscal year 2005 ended Dec. 31, 2005 versus 2.7x in 2004, due to improved profitability and reduced borrowings under the company's A/R securitization facility.
As of Dec. 31, 2005, Convergys' liquidity was adequate and consisted of $196 million in cash and positive free cash flow, which nearly doubled to over $200 million in 2005, from $114 million in 2004 as a result of improved profitability and lower capital expenditures. Capital spending, which represented 5.1% of total revenues in 2005, compared with 6.3% and 7.6% in 2004 and 2003, has declined due to the company's lower investment in offshore capacity and higher utilization of existing call centers. Convergys also maintains a $200 million A/R securitization facility due December 2006 and a $325 million commercial paper program, which is backed by an undrawn $325 million revolving credit facility that expires in December 2007.
Convergys has three operating segments: Customer Care, which provides various services including customer service, technical support, accounts receivable management, sales account management, business process outsourcing, and business intelligence solutions; IMG, which provides billing and information software and services that address various segments of the communications industry, including wireless, wireline, cable, cable telephony, broadband, direct broadcast satellite, and the Internet; and Employee Care, which offers a range of services, such as benefits administration, human resource administration, learning, payroll administration, and recruiting and staffing.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.