TTEC Holdings, Inc. — 2019 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; it was signed March 4, 2020. TTEC provides customer-experience technology and outsourced services globally. From the second quarter, it reported two segments: TTEC Digital, which designs and implements technology and consulting solutions, and TTEC Engage, which provides customer care, acquisition and fraud-prevention services. The filing also presents fourth-quarter results.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $1,643.7 million | $1,509.2 million |
| Income from operations | $123.7 million; 7.5% margin | $92.1 million; 6.1% margin |
| Net income attributable to TTEC stockholders | $77.2 million; diluted EPS $1.65 | $35.8 million; diluted EPS $0.77 |
| Operating cash flow | $238.0 million | $168.3 million |
| Capital expenditures | $60.8 million | $43.5 million |
| Free cash flow (non-GAAP) | $177.2 million | $124.9 million |
- Revenue grew 8.9%. Digital revenue rose 27.9% to $305.3 million, with a 12.7% operating margin versus 13.8%. Engage revenue increased 5.4% to $1,338.4 million, and its operating margin improved to 6.3% from 4.6%.
- Attributable net income more than doubled. The effective tax rate was 23.3%, down from 29.3% in 2018. Results include various tax adjustments and other unusual items.
- Fourth-quarter revenue was $461.3 million, versus $419.1 million in Q4 2018. Operating income was $42.8 million versus $39.0 million, and attributable net income was $28.3 million versus $20.3 million.
- Cash and cash equivalents were $82.4 million at year-end. Current assets were $549.8 million and current liabilities $363.3 million. The company reported $290.0 million drawn on its revolving credit facility and approximately $530.0 million of remaining borrowing capacity; it was in compliance with covenants. The facility matures in February 2024.
- Operating lease liabilities totaled $172.6 million at year-end; finance lease liabilities were $16.4 million. Adoption of the lease standard added $129.9 million of net lease assets and $148.3 million of lease liabilities at transition.
- Dividends paid during 2019 totaled $0.62 per common share. The board authorized a $0.34-per-share dividend in February 2020. No shares were repurchased in 2018 or 2019.
Material changes versus the prior comparable period
- Operating income increased $31.7 million, reflecting growth and improved Engage profitability, including lower healthcare costs and improved performance in selected offerings. Currency movements benefited Engage operating income by about $6.7 million.
- Operating cash flow improved by $69.6 million, which management attributed to higher operating cash income and a $45.7 million improvement in working capital.
- Investing cash outflow increased to $162.9 million, mainly because acquisition spending rose. TTEC paid $107.0 million, net of cash acquired, for a 70% interest in First Call Resolution (FCR), acquired in October 2019.
- The company reorganized its segment reporting from four segments to Digital and Engage. It also adopted the new lease accounting standard in 2019; prior-year balance sheet amounts were not recast.
- Overall customer-engagement workstation utilization fell to 74% from 80%, as TTEC expanded and shifted capacity to meet client-specific needs.
Outlook, commentary, risks and unusual items
- Outlook: No revenue or earnings guidance is provided in the supplied filing text. Management expected 2020 capital expenditures of 3.6%–3.8% of revenue, approximately 65% for growth and 35% for maintenance, and said available cash, operating cash flow and credit capacity should cover expected needs for the next 12 months.
- Strategy: Management emphasized digital transformation, cloud platforms, AI, analytics, automation, integrated services and strategic acquisitions as growth priorities. The company expects continued demand for offshore delivery, while noting that some clients may face pressure to move services onshore.
- Acquisition and valuation: FCR contributed $21.5 million of 2019 revenue after acquisition. Its purchase accounting was preliminary, included $97.0 million of goodwill, and included potential contingent consideration; the sellers retained a 30% interest subject to future purchase/sale options. Total goodwill reached $301.7 million. Management reported that Digital Consulting’s estimated fair value exceeded carrying value by 26%, but said that cushion could fall to zero or below if performance does not improve as expected.
- Other unusual items: 2019 included $5.5 million of restructuring and impairment charges, benefits from acquisition contingent-consideration remeasurement and other recoveries, and foreign-exchange hedge losses of $4.2 million recognized in revenue. In 2018, TTEC recorded a $15.6 million impairment of an equity investment and related bridge loan.
- Principal risks: Client concentration (top five clients generated 37% of revenue; top ten, 50%), contract termination or volume reductions, labor costs and turnover, capacity utilization, competition and technology disruption, cybersecurity and privacy requirements, foreign-exchange exposure, and dependence on international delivery locations. The CEO beneficially owned approximately 61% of common stock, giving him control over stockholder matters.
- The company disclosed ordinary-course legal proceedings and stated that, except for amounts specifically reserved, it did not expect their resolution to materially affect its financial position, cash flows or results. Management and the auditor reported effective internal control over financial reporting; FCR was excluded from the 2019 control assessment because it had recently been acquired.
Important facts for investors to verify
- Whether Digital’s strong revenue growth translates into improved margins, and whether the flagged Digital Consulting valuation cushion is maintained.
- FCR’s integration, actual performance against contingent-payment targets, and the eventual cost of acquiring the remaining 30% interest.
- Renewal terms for major-client contracts expiring between 2020 and 2023, and the impact of client concentration or lower volumes.
- Whether workstation utilization recovers and whether wage, staffing, and capacity costs can be passed through to clients.
- Cash conversion and acquisition-related spending, including the company’s ability to maintain dividends while meeting debt, lease and investment needs.
- Cybersecurity, privacy compliance, foreign-exchange and interest-rate exposures, and the effects of any changes in tax holidays or tax rules.