TTEC Holdings, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request references 2018 Q4, this 10-K reports full-year results and includes unaudited quarterly data. Amounts are U.S. dollars unless noted.
Business context and reporting period
TTEC provides customer-experience technology and services through two centers of excellence: TTEC Engage, its customer acquisition, care, growth and protection operations; and TTEC Digital, its strategy, consulting and technology services. The company reported 52,400 employees in 23 countries, 85 customer engagement centers and approximately 300 global clients. Engage generated about 84% of 2018 revenue ($1.270 billion); Digital generated about 16% ($239 million). TTEC acquired UK-based Strategic Communications Services in 2018.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1.509 billion | $1.477 billion |
| Income from operations | $92.1 million | $100.5 million |
| Operating margin | 6.1% | 6.8% |
| Net income attributable to TTEC stockholders | $35.8 million | $7.3 million |
| Diluted EPS | $0.77 | $0.16 |
| Net cash from operating activities | $168.3 million | $113.2 million |
| Capital expenditures | $43.5 million | $52.0 million |
| Free cash flow (non-GAAP) | $124.9 million | $61.2 million |
Revenue rose 2.2%, including an approximately $8.0 million unfavorable foreign-exchange effect. Operating income fell $8.4 million; cost of services increased faster than revenue. Net income improved substantially year over year, but the comparison is affected by a $62.4 million 2017 tax expense tied to U.S. tax reform. Reported effective tax rates were 29.3% in 2018 and 87.8% in 2017; excluding specified discrete items, management gave rates of 25.6% and 24.4%, respectively.
Segment results were mixed. Customer Management Services (CMS), the largest segment, had revenue of $1.129 billion, down 1.1%, and operating income of $49.2 million, down 37.1%; margin fell to 4.4% from 6.8%. Customer Growth Services revenue increased 9.8% to $141.3 million and operating margin rose to 7.0%. Customer Technology Services revenue increased 22.8% to $170.2 million and margin rose to 15.6% from 8.7%. Customer Strategy Services revenue was essentially flat at $68.6 million, while margin improved to 9.4% from 3.6%.
Fourth-quarter revenue was $419.1 million versus $426.6 million in Q4 2017; operating income was $39.0 million versus $36.6 million. Net income attributable to TTEC stockholders was $20.3 million versus a $41.5 million loss, with the prior-year quarter heavily affected by tax reform.
At December 31, 2018, cash and cash equivalents were $78.2 million, current assets were $526.5 million and current liabilities were $235.4 million. Credit Facility borrowings were $282.0 million, down from $344.0 million; remaining borrowing capacity was approximately $360 million. The company reported compliance with facility covenants. Total assets were $1.055 billion and total liabilities were $701.7 million. Management said operating cash, cash on hand and available credit should cover operating and capital requirements for the next 12 months.
Material changes versus the prior comparable period
- Revenue increased by $31.8 million, led by Customer Technology Services and Customer Growth Services; CMS revenue declined modestly.
- Operating income and margin declined, primarily because of higher U.S. labor and healthcare costs and unremunerated launch costs for new CMS business. New-business ramp activity increased in the second half.
- Operating cash flow increased by $55.2 million, aided by cash collections from accounts receivable; investing cash use fell as acquisition spending declined.
- Interest expense increased to $28.7 million from $13.7 million, reflecting facility usage, higher rates and a $9.9 million charge related to the future purchase of the remaining Motif interest.
- Cash dividends were $0.55 per share in 2018 versus $0.47 in 2017. No shares were repurchased during 2018; $26.6 million remained under the authorized repurchase allowance.
Outlook, management commentary, risks and unusual items
- Outlook: TTEC expected 2019 capital expenditures of $60–$65 million, approximately 65% for growth and 35% for maintenance. The filing does not provide a clear revenue or earnings forecast.
- Accounting change: TTEC adopted ASC 606 using the modified retrospective method. Adoption reduced opening retained earnings by $10.0 million net of tax. It increased reported 2018 revenue by $9.0 million and net income by $3.1 million compared with results without adoption; prior-year periods were not restated.
- Unusual items: TTEC recorded a $15.6 million impairment of its CaféX equity investment and related bridge loan, and a $9.9 million charge associated with the Motif buyout obligation. It also recorded a $0.7 million bargain-purchase gain and $2.0 million of royalty income related to a previously sold business unit.
- Customer and operating risks: The five largest clients accounted for 35% of revenue and the ten largest for 49%; one healthcare client represented 10.2%. Contracts may be terminable for convenience and often have no guaranteed minimum volumes. Management cited wage inflation, staffing and utilization, launch costs, automation and technology disruption, cybersecurity, privacy regulation, and foreign-exchange exposure as significant risks.
- Foreign exchange and rates: Approximately 23% of revenue was associated with foreign-currency exposure. The company hedged part, but not all, of forecast exposures. Variable-rate debt creates interest-rate sensitivity; management estimated that a 100-basis-point increase would add $1.0 million of interest expense per $100 million of outstanding borrowings.
- Debt and lease developments: In February 2019, TTEC amended its revolving facility, extending maturity to February 2024, with a $900 million commitment and an accordion feature up to $1.2 billion subject to conditions. Adoption of the new lease standard in 2019 was expected to materially increase balance-sheet assets and liabilities, but not materially affect earnings or cash flows.
- Other matters: TTEC identified no pending legal proceedings expected to materially affect its financial position, cash flows or results. The CEO beneficially owned approximately 68% of common stock, giving him significant influence over shareholder matters.
Important facts for investors to verify
- Whether CMS can recover margins as wage and benefit costs rise and new client programs ramp.
- Renewal terms and volume trends for major clients, particularly the healthcare client and contracts expiring from 2020 through 2023.
- The cash cost and timing of the Motif remaining-interest purchase, and the implications of the CaféX impairment.
- Whether the 2018 operating-cash-flow improvement is sustainable, given working-capital movements and the increase in receivables allowances, including the Sears bankruptcy-related reserve.
- 2019 capital spending, facility availability and covenant headroom, plus the balance-sheet impact of lease accounting adoption.