TTEC Holdings, Inc. (TeleTech) — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. This is an annual report, not a standalone quarterly filing.
Business context
TeleTech provided customer-experience consulting, technology and business-process outsourcing services. It supported more than 450 programs for about 175 clients, with approximately 42,300 employees across 24 countries. Its reporting segments were North American BPO and International BPO. The 2011 results include eLoyalty, acquired in May, and Peppers & Rogers Group (PRG), acquired in November 2010.
Key financial metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $1,179.4 million | $1,094.9 million |
| Income from operations | $93.5 million; 7.9% margin | $73.7 million; 6.7% margin |
| Net income attributable to TeleTech stockholders | $74.2 million | $49.9 million |
| Diluted EPS | $1.28 | $0.81 |
| Operating cash flow | $113.8 million | $134.5 million |
| Free cash flow (non-GAAP) | $75.5 million | $107.7 million |
| Capital expenditures | $38.7 million | $26.8 million |
At year-end, cash and cash equivalents were $156.4 million, total debt was $66.4 million, and debt-to-capitalization was 12.4%. The company reported $281.5 million of remaining borrowing capacity under its revolving facility and compliance with its covenants. Current assets were $478.3 million and current liabilities were $170.0 million. No common-stock dividend was paid or expected in the foreseeable future.
Fourth-quarter revenue was $300.5 million versus $280.4 million in Q4 2010; operating income was $20.8 million versus $15.3 million; net income attributable to stockholders was $16.1 million versus $4.5 million; and diluted EPS was $0.28 versus $0.07.
Material changes versus the prior comparable period
- Annual revenue rose 7.7%, reflecting growth in existing programs, 41 new clients, acquisitions and favorable foreign-exchange effects. The filing attributes $80.0 million of 2011 revenue to PRG and eLoyalty together.
- North American BPO revenue increased 1.0% to $832.4 million; International BPO revenue increased 28.2% to $347.0 million. International BPO moved from a $10.0 million operating loss to $10.8 million of operating income; North American operating income edged down to $82.7 million from $83.8 million.
- Operating margin improved to 7.9% from 6.7%, while SG&A rose to $188.8 million from $165.8 million, partly reflecting acquisitions and higher employee-related costs. Restructuring charges fell to $3.7 million from $13.5 million.
- Net income attributable to stockholders increased 48.7%, aided in part by a lower effective tax rate of 14.5% versus 34.7%. The 2011 rate included significant discrete tax items.
- Operating cash flow declined by $20.7 million and free cash flow by $32.2 million, primarily due to lower working-capital cash contribution and higher capital expenditures. Investing cash outflow increased to $86.9 million, including the eLoyalty acquisition.
- Cash increased to $156.4 million from $119.4 million, while year-end revolving-credit borrowings rose from zero to $64.0 million. The company repurchased $63.7 million of shares in 2011.
Outlook, commentary and risks
- Management said available cash, operating cash generation and credit availability should cover expected operating and capital needs for the next 12 months. It expected 2012 capital expenditures to be consistent with 2011, with about 75% supporting growth and 25% maintenance. No specific revenue or earnings guidance was provided.
- Management’s strategy emphasizes expanding existing client relationships, adding clients, growing higher-margin consulting and technology services, improving utilization and margins, scaling work-from-home services, and selectively pursuing acquisitions. It also said it may consider business-unit dispositions or other strategic transactions.
- Material risks include client and contract concentration (top five clients generated 37% of 2011 revenue), renewal and termination risk, economic weakness, labor costs and turnover, underutilized delivery capacity, competition, cybersecurity and data privacy, service interruptions, international operations, and unhedged foreign-exchange exposure. Contracts with the ten largest clients were reported to expire between 2012 and 2015.
- Tax matters included an adverse Canadian Revenue Agency decision, for which TeleTech sought judicial review, and an IRS-mediated settlement that produced an $11.7 million tax benefit; the company expected to collect the related refund in Q1 2012. The PRG contingent consideration was valued at zero at year-end because management considered achievement of its earnings target unlikely; the potential undiscounted payment range was zero to $5.0 million.
- Ordinary-course legal claims were not expected by management to have a material adverse effect. Management and the independent auditor concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Whether 2011 revenue and margin improvement persist after separating acquired-business contribution, foreign-exchange effects and tax benefits.
- Renewal terms and profitability of major-client contracts, especially those expiring during 2012–2015, and the company’s exposure to its largest clients.
- Whether International BPO profitability and multi-client-center utilization improve; utilization was 72% at year-end, below management’s 80%–90% target range.
- Cash-flow conversion, capital-spending needs, debt and credit-facility covenant headroom, including the effects of acquisitions and share repurchases.
- Resolution and collection of tax claims, the Canadian tax dispute, and integration and performance of eLoyalty and PRG.