TTEC Holdings, Inc. annual report, FY2012

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TTEC Holdings, Inc. — 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. TTEC provides technology-enabled customer experience, outsourcing, consulting, growth and customer-management services to approximately 200 clients.

Financial performance and liquidity

  • Revenue: $1.163 billion in 2012, down 1.4% from $1.179 billion in 2011. Management attributed the decline mainly to exited unprofitable programs, program completions and foreign exchange, partly offset by new clients and acquisitions.
  • Profit and margins: Operating income was $78.5 million (6.8% of revenue), down 16.0% from $93.5 million (7.9%). Net income attributable to TTEC stockholders was $70.0 million, versus $74.2 million; diluted EPS was $1.26 versus $1.28.
  • Fourth quarter: Revenue was $295.3 million versus $300.5 million in Q4 2011. Operating income was $26.0 million versus $20.8 million; net income attributable to stockholders was $20.4 million versus $16.1 million, and diluted EPS was $0.38 versus $0.28.
  • Segments: Customer Management Services revenue fell 6.1% to $923.8 million and operating income fell 16.2% to $60.3 million. Customer Growth Services revenue rose 5.4% to $100.8 million, while operating income fell 64.6% to $2.3 million. Customer Technology Services revenue rose 44.6% to $96.8 million and operating income rose 15.1% to $15.7 million. Customer Strategy Services revenue rose 25.4% to $41.6 million, while operating income fell to $0.3 million from $1.5 million.
  • Cash flow: Operating cash flow was $106.9 million, down from $113.8 million. Capital expenditures were $40.5 million; free cash flow, a non-GAAP measure, was $66.4 million versus $75.5 million.
  • Cash, debt and liquidity: Year-end cash and equivalents were $164.5 million; reported total debt was $119.5 million, including $108.0 million drawn on the credit facility. The company reported $388.2 million of remaining facility capacity and compliance with its covenants. Total assets were $847.2 million and stockholders’ equity was $500.3 million.
  • Capital returns: TTEC repurchased 5.0 million shares for $81.2 million during 2012. About $25.4 million remained authorized at year-end. The company reported no expectation of paying dividends in the foreseeable future.

Changes, outlook and notable items

  • Operations were reorganized into four reporting segments in 2012. The company completed four acquisitions and said their impact on consolidated results was not material; acquisition-related purchase consideration and earn-outs remain relevant.
  • TTEC ceased operations in Spain, recording $22.9 million of restructuring charges and $3.0 million of impairment losses for 2012. Total operating income also reflected a $1.8 million impairment associated with the Revana rebranding.
  • The reported effective tax rate was approximately negative 0.1%, compared with 14.5% in 2011. Management said the 2012 rate would have been 19.9% excluding specified discrete tax benefits and items, including Australia/New Zealand transfer-pricing benefits and restructuring-related benefits.
  • Management expected cash, operating cash generation and available credit to cover operating and capital needs for the next 12 months. It forecast 2013 capital expenditures of $50–$60 million, approximately 70% for growth and 30% for maintenance. No revenue or earnings guidance was provided in the supplied filing text.
  • Management cited a 92% client retention rate for 2012 and multi-client-center utilization of 79%, below its internal 80%–90% target. Client program attrition was 8% in 2012 versus 5% in 2011.
  • Principal risks: Client concentration (top five clients accounted for 39% of revenue; one client accounted for 10%), contract termination or renegotiation, labor and utilization costs, foreign exchange exposure, cybersecurity and service interruption, regulation, and credit-facility covenants. Contracts with the five largest clients expire between 2014 and 2016.
  • Contingencies: A Brazilian services-tax dispute was not accrued because management considered payment not probable; a bank guarantee of approximately $3.5 million was provided. A California class action over recording calls on behalf of Google seeks statutory damages and fees; TTEC said the potential loss could not be reasonably estimated and that Google sought indemnification.
  • The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded internal controls were effective as of year-end.

Most important facts for investors to verify

  • Whether the decline in core Customer Management Services revenue and operating margin stabilizes, and whether utilization improves from 79%.
  • How much reported earnings depended on restructuring, impairment, tax benefits and other unusual items; compare adjusted results using the filing’s reconciliations and definitions.
  • Whether operating cash flow and free cash flow continue to weaken, particularly given capital spending, acquisitions, repurchases and working-capital movements.
  • Renewal terms and volume trends for major clients, especially the largest-client contracts expiring in 2014–2016.
  • Potential payments under acquisition earn-outs, the carrying values of goodwill and intangible assets, and developments in the Brazil tax dispute and California litigation.