TTEC Holdings, Inc. annual report, FY2016

Full document

TTEC Holdings, Inc. — FY 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. TTEC (then TeleTech) provides technology-enabled customer experience services through four segments: Customer Management Services (CMS), Customer Growth Services (CGS), Customer Technology Services (CTS), and Customer Strategy Services (CSS). The company reported approximately 48,000 employees, 82 customer engagement centers, and operations in 23 countries.

Financial performance and liquidity

  • Revenue: $1.275 billion, down 0.9% from $1.287 billion in 2015. Foreign exchange reduced revenue by $20.2 million; excluding that effect, revenue increased 0.7%. Emerging segments CGS, CTS, and CSS contributed approximately $351 million, or 27.5% of revenue.
  • Operating results: Operating income fell to $52.8 million from $90.2 million; operating margin declined to 4.1% from 7.0%. Net income attributable to TTEC stockholders was $33.7 million ($0.71 diluted EPS), compared with $61.7 million ($1.26 diluted EPS).
  • Cash flow: Operating cash flow was $107.9 million, down from $133.8 million. Capital expenditures were $50.8 million; company-defined free cash flow was $57.1 million, versus $67.2 million in 2015.
  • Balance sheet and liquidity: Cash and equivalents were $55.3 million, total debt was $229.6 million, and the reported debt-to-total-capitalization ratio was 39.0%. Credit-facility borrowings were $217.3 million, with approximately $370 million of remaining borrowing capacity; TTEC reported compliance with covenants. Current assets were $433.7 million and current liabilities $180.0 million.
  • Capital returns: TTEC paid $0.385 per share in dividends during 2016 and repurchased $74.7 million of stock. The Board authorized a $0.22-per-share dividend for April 2017 and a $25 million increase to the repurchase authorization.

Material changes versus 2015

  • CMS revenue grew 1.2% to $924.3 million, but operating margin declined to 5.5% from 6.4%, affected by software and goodwill impairments and a shift toward onshore business.
  • CGS revenue increased 9.3% to $141.0 million and operating margin improved to 4.9% from 2.4%.
  • CTS revenue declined 10.4% to $141.3 million and operating margin fell to 0.7% from 8.5%, primarily due to lower Avaya activity and reduced product sales.
  • CSS revenue decreased 20.9% to $68.7 million; the segment moved from $15.7 million operating income to a $5.7 million operating loss, reflecting lower consulting demand, consultant underutilization, impairments, and investment spending.
  • Operating expenses included $32.1 million of impairment losses and $4.4 million of restructuring charges, versus $8.1 million and $1.8 million, respectively, in 2015. Impairments included internally developed software, goodwill, fixed assets, and intangible assets.

Outlook, risks, and unusual items

  • Management stated that cash, operating cash generation, and available credit should cover expected operating and capital needs for the next 12 months. It expected 2017 capital expenditures of approximately 4.2% of revenue; the filing provides no clear revenue or earnings forecast.
  • Q4 2016 included $26.4 million of impairment losses and $0.5 million of restructuring charges; TTEC reported a $0.6 million net loss attributable to stockholders for the quarter.
  • TTEC acquired Canadian customer-management provider Atelka in November 2016 for approximately $48.8 million. Two business units were classified as held for sale, with $5.3 million of estimated losses recorded.
  • Customer concentration is significant: the five largest clients contributed 35% of revenue and the ten largest 51%; one client contributed 10%. Contracts can generally be terminated for convenience, and the largest-client contracts expire from 2017 through 2020.
  • Foreign currency, offshore delivery concentration, labor costs and retention, competition, technology changes, cybersecurity, and the success of the diversification strategy are key risks. TTEC disclosed that approximately 46% of revenue came from outside the U.S.
  • Controls: Management and the auditor concluded that internal control over financial reporting was ineffective at year-end due to material weaknesses in the control environment, revenue controls, and impairment-review controls. The auditor nevertheless gave an unqualified opinion on the financial statements. Management described remediation work, with further testing planned in 2017.
  • CEO Kenneth Tuchman beneficially owned approximately 68% of common stock, giving him control over matters requiring stockholder approval.

Important facts for investors to verify

  • Whether revenue and margins recover in CTS and CSS, and whether the impairments indicate continuing weakness in those businesses.
  • Progress in remediating the disclosed internal-control material weaknesses, particularly revenue recognition and impairment testing.
  • Renewal terms and revenue exposure for major client contracts expiring from 2017 to 2020.
  • Debt, covenant headroom, cash generation, and the impact of continued dividends, repurchases, acquisitions, and planned capital spending.
  • Completion and proceeds of the planned divestitures, and the performance and integration of the Atelka acquisition.