TTEC Holdings, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014, filed March 9, 2015. The filing also reports unaudited fourth-quarter results. The company, then named TeleTech Holdings, Inc., provided global customer engagement, consulting, technology, sales and customer-care services through four segments, with 46,000 employees in 24 countries.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $1,241.8 million | $1,193.2 million |
| Operating income | $96.5 million; 7.8% margin | $101.4 million; 8.5% margin |
| Net income attributable to TTEC stockholders | $72.3 million; diluted EPS $1.44 | $67.4 million; diluted EPS $1.29 |
| Cash from operations | $94.1 million | $138.0 million |
| Capital expenditures | $67.6 million | $50.4 million |
| Free cash flow (non-GAAP) | $26.4 million | $87.6 million |
| Cash and cash equivalents at year-end | $77.3 million | $158.0 million |
| Debt at year-end | $105.9 million total; $100.0 million drawn under revolving facility | $100.0 million drawn under revolving facility |
Revenue increased 4.1%; management said growth would have been 6.3% excluding a $28.0 million foreign-exchange headwind and $1.2 million of revenue lost to a 2013 typhoon. Operating income fell 4.9%, and operating margin declined 0.7 percentage points. Net income attributable to stockholders rose about 7.3%. Operating cash flow and free cash flow dropped substantially; management attributed the cash-flow decline principally to lower collections of accounts receivable and higher operating expense payments, while capital spending also increased.
The $700 million revolving credit facility matures in 2018. Remaining borrowing capacity was $596.8 million at year-end, after outstanding borrowings and letters of credit; the company reported compliance with its covenants. Management stated that cash, operating cash flow and available credit were expected to cover operating and capital needs for the next 12 months. The filing reports current assets of $445.5 million and current liabilities of $198.6 million.
Fourth-quarter results
Q4 2014 revenue was $338.2 million, compared with $318.1 million in Q4 2013. Operating income was $30.1 million versus $32.8 million; net income attributable to stockholders was $22.0 million versus $19.5 million. Diluted EPS was $0.44 versus $0.38. Q4 2014 other income included acquisition contingent-consideration fair-value benefits; the filing identifies a net $2.7 million benefit in the quarter.
Material changes and business developments
- Emerging segments—Customer Growth Services, Customer Technology Services and Customer Strategy Services—generated about $318 million, or 26% of FY2014 revenue. The remainder came primarily from Customer Management Services.
- Customer Technology Services revenue fell 8.7% and operating income fell 77.4%, mainly reflecting lower Avaya-based offerings and investment and other costs associated with the Cisco cloud solution.
- Customer Growth Services revenue rose 14.3%, with operating margin improving from 3.0% to 6.3%. Customer Strategy Services revenue rose 30.5%, and its margin improved from 5.6% to 12.4%. Customer Management Services revenue increased 3.7%, while its margin edged down from 8.5% to 8.3%.
- The company acquired Sofica, a Bulgarian customer-management provider, and rogenSi, a leadership and sales consulting company. Together, the acquisitions contributed $30.0 million of FY2014 revenue, according to selected financial data. Acquisition-related contingent consideration and integration remain relevant.
- Foreign-exchange movements reduced reported revenue by $28.0 million. The company recorded $3.7 million of restructuring and impairment charges in 2014 and a net $6.7 million benefit from fair-value adjustments to acquisition contingent consideration.
- Share repurchases totaled $57.1 million in 2014. After year-end, the board authorized an additional $25 million of repurchases and adopted a periodic dividend policy; the initial dividend was $0.18 per share, scheduled for March 16, 2015.
Outlook, risks and contingencies
Management expected 2015 capital expenditures of $70 million to $80 million, about 70% for growth and 30% for maintenance. It planned continued investment in technology-enabled services, cloud, analytics, digital marketing, global delivery capacity and strategic acquisitions; the filing provides no specific revenue or earnings guidance.
- Client concentration is significant: the top five clients represented 38% of 2014 revenue, the top ten 50%, and the largest client 11%. Contracts for the five largest clients expire between 2015 and 2017; many contracts can be terminated for convenience and do not guarantee minimum volume or profitability.
- Foreign operations generated about 51% of revenue. Currency movements, local labor costs and the limits or effectiveness of hedging may pressure results. A stronger U.S. dollar was a material headwind in 2014.
- Delivery capacity is concentrated in the Philippines and Latin America, exposing operations to severe weather, political or labor disruption, infrastructure outages and other geographic risks. Utilization at multi-client centers was 85% at year-end.
- Execution risks include integrating acquisitions, realizing returns on investments in newer services, competing effectively, managing employee turnover and capacity, and adapting to rapid technology changes. The filing also highlights cybersecurity, data privacy, regulatory and contract-performance risks.
- Goodwill was not impaired in the 2014 annual test, but Revana and WebMetro had relatively limited fair-value cushions of approximately 6% and 11%, respectively. The filing says specified adverse changes in assumptions could cause either unit to fail the initial impairment test.
- Contractual obligations totaled $329.2 million, including $136.2 million of operating leases, $53.5 million of purchase obligations and $25.7 million of contingent consideration. Management said ordinary-course legal proceedings, except amounts specifically reserved, were not expected to have a material adverse effect; some possible losses could not be reasonably estimated.
- Management and the independent auditor concluded that internal control over financial reporting was effective at year-end. The auditor excluded Sofica and rogenSi, acquired during 2014, from its internal-control audit.
Key facts for investors to verify
- Whether top-client contracts expiring in 2015–2017 renew, and on what volume, pricing and performance terms.
- Whether Customer Technology Services stabilizes after the Avaya-related decline and whether Cisco cloud investments generate sufficient revenue and margins.
- Whether operating cash flow recovers from the 2014 decline as capital expenditures and acquisition-related commitments continue.
- Whether Sofica and rogenSi meet earn-out targets and integrate as expected, and whether acquisition-related fair-value adjustments recur.
- How foreign-exchange exposure, hedge positions and the goodwill valuation cushions at Revana and WebMetro evolve.
- Whether the announced dividend and repurchase plans remain consistent with liquidity, debt covenants and investment requirements.