TTEC Holdings, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. TTEC (then TeleTech Holdings) provides customer management, growth, technology, and strategy services, operating in 24 countries with approximately 44,000 employees.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $1,286.8 million | $1,241.8 million | +3.6%; +8.8% excluding a $63.7 million foreign-exchange headwind |
| Income from operations | $90.2 million | $96.5 million | Down $6.3 million |
| Operating margin | 7.0% | 7.8% | Down 0.8 percentage points |
| Net income attributable to TTEC stockholders | $61.7 million | $72.3 million | Down 14.7% |
| Diluted EPS | $1.26 | $1.44 | Down 12.5% |
| Operating cash flow | $133.8 million | $94.1 million | Up $39.7 million |
| Capital expenditures | $66.6 million | $67.6 million | Down $1.0 million |
| Free cash flow (non-GAAP) | $67.2 million | $26.4 million | Up $40.7 million |
At year-end, cash and cash equivalents were $60.3 million (down from $77.3 million), total assets were $843.3 million, and total liabilities were $398.4 million. Credit-facility borrowings were $100 million; management reported total debt of $107.3 million and a debt-to-total-capitalization ratio of 19.6%. Remaining borrowing capacity was approximately $415 million, and the company reported compliance with its credit covenants. Current assets were $415.1 million and current liabilities were $206.9 million.
FY2015 dividends were $0.36 per share. In February 2016, the board authorized a semiannual dividend of $0.185 per share and a $25 million increase to the repurchase authorization. A February 2016 credit amendment extended facility maturity to February 2021, with a $900 million initial commitment and an accordion feature up to $1.2 billion subject to conditions.
Material changes and segment performance
- Revenue growth came from the emerging Customer Growth, Customer Technology, and Customer Strategy segments, which collectively grew 17.3%; these segments contributed approximately $373 million, or 29%, of revenue. Customer Management revenue declined 1.1%, reflecting currency effects and program changes.
- Customer Management: revenue $913.3 million; operating income $58.0 million, down 24.4%.
- Customer Growth: revenue $129.0 million, up 11.8%; operating income $3.1 million, down 57.6%, primarily due to a $5.9 million WebMetro goodwill impairment, currency impacts, and program completions.
- Customer Technology: revenue $157.6 million, up 13.2%; operating income $13.3 million, compared with $4.5 million, reflecting higher cloud and managed-services revenue and lower SG&A.
- Customer Strategy: revenue $86.9 million, up 36.4%; operating income $15.7 million, up 99.1%, including rogenSi acquisition contributions and organic growth.
- Overall operating income was pressured by foreign exchange, increased sales and R&D investment, lower capacity utilization during a major client-site build-out, and $7.7 million of goodwill impairment. Annual restructuring charges and impairment losses were $9.9 million combined.
Multi-client-center utilization fell to 71% from 85%, below management’s 80%–90% internal target; the company attributed the decline primarily to a new large-client site build-out. The top five clients represented 35% of revenue and the top ten 48%; the largest client represented 10%.
Outlook, risks, and unusual items
- Management expected 2016 capital expenditures of $60–$70 million, approximately 65% for growth and 35% for maintenance. It believed cash, operating cash flow, and available credit would cover expected operating and capital needs for the next 12 months. No specific revenue or earnings guidance was provided.
- Key risks include client concentration and convenience termination rights, foreign-exchange exposure, utilization and staffing requirements, geographic concentration in offshore delivery locations, competitive and technology changes, and cyber, privacy, regulatory, and tax risks. Approximately 47% of revenue came from outside the U.S.
- Material control weakness: Management and PwC concluded internal control over financial reporting was ineffective at December 31, 2015. Identified weaknesses involved the control environment and staffing, account reconciliations, journal entries, revenue processes, and impairment reviews. Management described remediation measures but gave no assurance on timing; financial-statement audit opinion was unqualified.
- The company recorded a $1.75 million tax liability in 2015 related to prior-period tax matters and disclosed several immaterial prior-period corrections, including goodwill impairment and foreign-currency translation items. It said the aggregate adjustments were not material to previously issued or current financial statements.
- WebMetro goodwill was fully impaired, and the Latin America reporting unit’s goodwill was also fully impaired in 2015. Ordinary-course legal matters were not expected by management to have a material adverse effect, except for amounts already reserved.
Important facts for investors to verify
- Whether remediation of the disclosed material weaknesses is completed and tested effectively in subsequent filings.
- Whether utilization recovers after the large-client build-out and whether new business converts into profitable revenue.
- Renewal terms and revenue exposure for major clients, including contracts among the top five that expire between 2016 and 2020.
- Whether the 2016 capital-spending plan, cash generation, and liquidity remain consistent with management’s expectations.
- The sensitivity of margins and reported results to foreign exchange, goodwill assumptions, and further impairment charges.