TTEC Holdings, Inc. — FY 2017 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017; quarterly figures are identified where relevant. TTEC provides global customer experience services and technology through four segments: Customer Management Services (CMS), Customer Growth Services (CGS), Customer Technology Services (CTS), and Customer Strategy Services (CSS). It reported 56,000 employees in 24 countries and 97 engagement centers. The company changed its name from TeleTech Holdings, Inc. to TTEC Holdings, Inc., effective January 1, 2018.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $1,477.4 million | $1,275.3 million |
| Income from operations | $100.5 million; 6.8% margin | $52.8 million; 4.1% margin |
| Net income attributable to TTEC stockholders | $7.3 million; $0.16 diluted EPS | $33.7 million; $0.71 diluted EPS |
| Operating cash flow | $113.2 million | $111.8 million |
| Capital expenditures | $52.0 million | $50.8 million |
| Free cash flow (non-GAAP) | $61.2 million | $61.0 million |
| Cash and cash equivalents at year-end | $74.4 million | $55.3 million |
| Credit Facility borrowings at year-end | $344.0 million | $217.3 million |
Revenue grew 15.8% year over year, including 0.2% from foreign exchange. Cost of services was $1,110.1 million, about 75.1% of revenue. The reported effective tax rate rose to 87.8% from 25.6%, principally because of $62.4 million of expense related to U.S. tax reform. Excluding specified discrete items, management reported an estimated 2017 effective tax rate of 24.4%.
Year-end total assets were $1,078.7 million and total liabilities were $715.9 million. The company had approximately $350 million of remaining borrowing capacity under its $1.2 billion revolving facility and was in compliance with its covenants. Management said cash, operating cash flow, and available credit should cover expected operating and capital needs for the next 12 months. The current ratio was approximately 2.7, based on reported current assets and current liabilities.
Material changes versus the prior comparable period
- Operating income increased $47.7 million, with margin rising to 6.8% from 4.1%. Management cited acquired and organic CMS growth, CTS growth, improved foreign exchange trends, higher utilization, and prior-year impairment charges; 2017 restructuring and integration costs partly offset these gains.
- CMS revenue increased 23.5% to $1,141.8 million, primarily reflecting acquisitions and program growth. CGS revenue fell 8.7% to $128.7 million; CTS revenue fell 1.9% to $138.6 million; CSS revenue was nearly flat at $68.3 million.
- Net income attributable to stockholders fell to $7.3 million from $33.7 million despite higher operating income, mainly due to the U.S. tax reform charge and higher interest expense.
- Operating cash flow was broadly stable, while investing cash outflow increased to $169.0 million from $100.4 million, mainly due to acquisitions. Net acquisition cash spending was $116.3 million.
- Credit Facility borrowings increased to $344.0 million from $217.3 million. The facility commitment was expanded to $1.2 billion in October 2017.
Outlook, management commentary, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management expected 2018 capital expenditures to be approximately 3.8% of 2018 revenue, about 70% for growth and 30% for maintenance.
- In 2017 TTEC acquired Connextions, a U.S. healthcare services provider, and Motif, a digital trust and safety company. The acquisitions contributed $172.3 million of revenue and a net loss of $0.7 million in 2017. TTEC also recorded a $27.8 million liability for the contractual purchase of Motif’s remaining 30% interest.
- Reported results included $14.7 million of restructuring and integration charges and $5.3 million of impairment losses. The company also recorded the $62.4 million tax-reform expense; its tax accounting remained provisional, and the impact of BEAT and GILTI was not yet fully determined.
- TTEC adopted the new revenue recognition standard on January 1, 2018 and expected a $9–$12 million cumulative-effect adjustment. The filing also identifies lease-accounting changes as forthcoming and under assessment.
- Key risks include client concentration and contract termination rights (the five largest clients were 35% of revenue; the largest was 9%), labor and capacity utilization, competition and automation, cybersecurity and data privacy, geographic concentration and foreign exchange, acquisition integration, and tax and regulatory uncertainty. The company’s CEO beneficially owned approximately 69% of common stock.
- Management reported that previously identified material weaknesses in revenue, impairment, and the control environment had been remediated; management and the auditor concluded internal control over financial reporting was effective at year-end. Connextions and Motif were excluded from the 2017 internal-control assessment because of their recent acquisitions.
Important facts for investors to verify
- How much of the 15.8% revenue growth reflects acquisitions versus sustainable organic growth, and whether CMS margins can be maintained as acquired operations are integrated.
- The final tax-reform accounting and ongoing effects of BEAT, GILTI, and the transition tax; the 2017 reported tax expense was highly unusual relative to pretax income.
- Debt, interest costs, covenant headroom, and cash availability, including the impact of acquisition obligations and the Motif minority-interest buyout.
- Renewal terms and profitability of major client contracts, particularly those expiring from 2018 through 2023, and the company’s exposure to client concentration.
- Progress in converting growth and technology investments into durable revenue, alongside exposure to automation, cybersecurity, labor costs, and foreign exchange.
- The sustainability of dividends and repurchases: 2017 dividends were $0.47 per share, the Board authorized a $0.27-per-share dividend for April 2018, and $26.6 million remained authorized for repurchases at year-end.