TTEC Holdings, Inc. annual report, FY2010

TTEC Holdings, Inc. — FY2010 Form 10-K

Reporting period: Fiscal year ended December 31, 2010. The filing also reports unaudited fourth-quarter results. TeleTech (now TTEC) provided business-process outsourcing, customer management, consulting and hosted technology services through two segments: North American BPO and International BPO.

Financial performance and position

Metric	FY2010	FY2009
Revenue	$1,094.9 million	$1,167.9 million
Income from operations / operating margin	$73.7 million / 6.7%	$100.7 million / 8.6%
Net income attributable to TeleTech shareholders	$49.9 million	$71.8 million
Diluted EPS	$0.81	$1.12
Net cash from operating activities	$134.5 million	$160.7 million
Free cash flow (non-GAAP)	$107.7 million	$136.5 million

Cost of services was 72.1% of revenue, versus 70.3% in 2009. Selling, general and administrative expense was 15.1% of revenue, versus 15.4%.
Cash and cash equivalents were $119.4 million at year-end; total debt was reported as $4.9 million and debt-to-capitalization was 1.1%. There were no borrowings under the revolving credit facility; $345.4 million of capacity remained available after letters of credit.
Capital expenditures were $26.8 million. Total assets were $660.6 million and total liabilities were $205.8 million.
North American BPO revenue was $824.3 million, down 7.0%; segment operating income fell to $83.8 million from $111.5 million. International BPO revenue was $270.6 million, down 3.7%; the segment reported a $10.0 million operating loss, modestly improved from a $10.8 million loss.

Material changes and fourth-quarter results

Annual revenue declined 6.3%; operating income fell 26.8% and shareholder-attributable net income fell 30.5%. Management cited weaker client volumes and delayed purchasing decisions amid the global slowdown, program completions, offshore migration and exit of underperforming business and geographies.
Foreign currency movements contributed a net $43.3 million increase to 2010 revenue, according to management. Cash-flow hedge settlements produced a $9.8 million gain in 2010, compared with an $18.3 million loss in 2009.
Restructuring charges increased to $13.5 million from $5.1 million; impairment charges declined to $2.0 million from $4.6 million. The 2010 restructuring primarily reflected workforce and capacity reductions.
Fourth-quarter revenue was $280.4 million, versus $280.8 million a year earlier. Operating income was $15.3 million versus $29.3 million; net income attributable to TeleTech shareholders was $4.5 million versus $20.0 million, and diluted EPS was $0.07 versus $0.31. Fourth-quarter 2010 included $7.1 million of restructuring charges and $1.0 million of impairments.
The effective tax rate rose to 34.7% from 26.7%, reflecting foreign-earnings repatriation, deferred-tax valuation allowances and other items. Management stated the rate would have been 19.3% excluding specified items.

Outlook, risks and unusual items

Management expressed a long-term expectation for revenue growth, supported by outsourcing demand, broader industry adoption, integrated front- and back-office services, hosted technology and professional-services offerings. The filing gives no quantified revenue or earnings guidance.
Management expected approximately $40 million of 2011 capital expenditures, with about 65% for delivery-platform growth and 35% for maintenance and technology. It stated that cash, operating cash flow and available credit should cover expected operating and capital needs for the next 12 months.
Multi-client center utilization was 70% at year-end, below the company’s 80%–90% internal target. Offshore delivery capacity was 72% of total capacity, while offshore-delivered revenue was 45% of revenue.
Client concentration remains significant: the top five clients generated 39% of revenue and the top ten 63%. Contracts with the ten largest clients were scheduled to expire between 2011 and 2012. Client volume changes, contract renewals, pricing and utilization could affect results.
Other principal risks include economic weakness, labor and wage costs, competition, international operating and foreign-exchange exposure, data-security incidents, service interruptions, and legal or regulatory changes. The company hedges some, but not all, currency exposure.
Unusual items include a $5.9 million gain from settlement of a Newgen legal claim, partly offset by related tax expense; and the November 2010 acquisition of an 80% interest in Peppers & Rogers Group. The acquisition included a further $5.0 million payment due in 2012 and possible contingent consideration of up to $5.0 million.
After year-end, the Canadian Revenue Agency issued an adverse decision concerning a tax recovery claim. The company expected to reverse an $8.9 million income-tax receivable through tax expense in first-quarter 2011, while pursuing available remedies.
The company repurchased $80.3 million of shares during 2010. It reported an additional $24.8 million of repurchases through February 24, 2011. The CEO beneficially owned approximately 54.5% of common stock.
Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2010. The auditor issued an unqualified opinion on the financial statements and internal controls.

Important facts for investors to verify

Whether major client contracts expiring in 2011–2012 renewed, and the resulting revenue, pricing and margin effects.
Whether utilization improved from 70% and whether lower revenue and restructuring costs continued to pressure operating margins.
The actual 2011 effect of the expected $8.9 million Canadian tax-receivable reversal, and the outcome of the company’s challenge.
Performance and integration of Peppers & Rogers Group, including acquisition-related payments and any contingent consideration.
Cash generation, repurchase pace, capital spending and covenant compliance under the $350 million revolving facility.
International currency, labor-cost and operational risks, including exposure not covered by hedges.