TTEC Holdings, Inc. — FY 2013 Form 10-K
Business and reporting period. The filing covers the fiscal year ended December 31, 2013; fourth-quarter figures are unaudited. TTEC provides customer management, growth, technology and strategy services, with 41,000 employees across 24 countries. About 25% of FY 2013 revenue came from strategy, growth or technology services; the balance was primarily customer management.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $1,193.2 million | $1,163.0 million |
| Income from operations / margin | $101.4 million / 8.5% | $78.5 million / 6.8% |
| Net income attributable to TTEC stockholders | $67.4 million | $70.0 million |
| Diluted EPS | $1.29 | $1.26 |
| Operating cash flow | $138.0 million | $106.9 million |
| Capital expenditures | $50.4 million | $40.7 million |
| Free cash flow, company-defined non-GAAP | $87.6 million | $66.4 million |
- Revenue increased 2.6%; management said growth excluding foreign exchange, the Philippines typhoon and the Spain exit was $81.1 million, reflecting organic growth and acquisitions.
- Operating income improved 29.1%, mainly with better capacity utilization, acquisition contributions, organic growth and lower restructuring costs. FY 2013 included $4.4 million in restructuring charges and $1.2 million in impairment losses, compared with $22.9 million and $3.0 million, respectively, in 2012.
- Net income attributable to stockholders declined despite higher operating income, in part amid a higher reported tax provision and a $3.7 million loss on deconsolidating a subsidiary. The reported effective tax rate was 22.4%, versus (0.1)% in 2012; the filing attributes the prior-year rate largely to discrete tax benefits.
- At December 31, 2013, cash and cash equivalents were $158.0 million; management reported total debt of $109.8 million and a debt-to-total-capitalization ratio of 18.8%. The company had $596.5 million of remaining capacity under its revolving credit facility and was in compliance with its covenants.
Fourth-quarter snapshot
Q4 2013 revenue was $318.1 million, operating income $32.8 million and net income attributable to TTEC stockholders $19.5 million; diluted EPS was $0.38. In Q4 2012, the corresponding figures were $295.3 million, $26.0 million, $20.4 million and $0.38.
Segments and material changes
- Customer Management Services: revenue decreased 3.6% to $890.9 million; operating margin rose to 8.5% from 6.5%. Revenue was affected by Spain’s exit, currency movements, a typhoon-related interruption and client program changes.
- Customer Growth Services: revenue was nearly flat at $101.0 million; operating margin improved to 3.0% from 2.2%. WebMetro, acquired in 2013, contributed to the business.
- Customer Technology Services: revenue rose 57.4% to $152.5 million, while margin fell to 13.1% from 16.2%, reflecting integration, sales and marketing investment, and acquisition-related amortization.
- Customer Strategy Services: revenue rose 17.3% to $48.8 million; margin improved to 5.6% from 0.7%, with integration and cost savings contributing. The segment recorded a $1.1 million PRG trade-name impairment.
- The company acquired WebMetro and bought the remaining 20% of Peppers & Rogers Group. It also deconsolidated PRG Kuwait, recording a $3.7 million loss. In 2012 it had exited Spain, which had generated substantial restructuring costs.
- Share repurchases were $56.5 million in 2013; 2.5 million shares were repurchased. The company had $18.9 million remaining under the program at year-end and authorized an additional $25 million in February 2014.
Outlook, risks and contingencies
- No revenue or earnings forecast is provided. Management expected 2014 capital expenditures of $55–$65 million, approximately 70% for growth and 30% for maintenance, and believed cash, operating cash generation and available credit would cover anticipated needs for the next 12 months.
- Management plans to continue investing in technology-enabled, analytics and higher-margin services, offshore capacity and acquisitions. A January 2014 agreement provided for transferring Argentina assets, operations and employees to Globant; TTEC also entered into an agreement to acquire Bulgarian BPO provider Sofica after year-end.
- Key risks include concentration among large clients (the top five represented 40% of revenue and the largest 12%); top-five contracts expiring in 2014–2016; termination-for-convenience provisions; pricing and performance terms; foreign exchange exposure; dependence on offshore delivery, particularly the Philippines and Latin America; labor costs and utilization; cybersecurity and privacy; and credit-facility covenants.
- Legal matters include a Brazilian services-tax assessment for which management said payment was not probable and recorded no expense, and a California call-recording class action involving an indemnity to Google. The outcome and potential loss of the class action could not be reasonably estimated; management considered any loss adequately insured.
- The company’s foreign-exchange hedging portfolio had a net derivative liability of $14.5 million at year-end, compared with a net asset of $15.1 million in 2012. Management cautioned that hedges may not fully offset currency movements.
- CEO Kenneth D. Tuchman beneficially owned approximately 62.5% of the common stock, giving him control over matters requiring stockholder approval. TTEC reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Reconcile the filing’s 2012 total-assets figures: selected financial data reports $847.2 million, while the consolidated balance sheet reports $851.6 million.
- Review client renewal and pricing outcomes for the largest accounts, particularly contracts expiring from 2014 through 2016, and the progression of client concentration.
- Assess whether growth in technology and strategy segments translates into durable margins after acquisition integration and amortization costs.
- Verify execution of 2014 capital spending and liquidity plans, continued covenant compliance, and the balance between acquisitions, debt and share repurchases.
- Monitor foreign-currency exposure and hedging results, delivery-center concentration and the resolution of disclosed legal and tax matters.