TTEC (TTEC) - 2018 Q4 - Annual Report

Part I Business TTEC Holdings, Inc. is a global customer experience technology and services company operating through TTEC Digital and TTEC Engage centers of excellence - TTEC is a global customer experience technology and services company organized into two centers of excellence, TTEC Digital and TTEC Engage, which encompass four business segments[17][18] Center of Excellence Revenue (2018) | Center of Excellence | 2018 Revenue | % of Total | | :--- | :--- | :--- | | TTEC Engage | $1.270 billion | 84% | | TTEC Digital | $239 million | 16% | - The company's strategy includes building deeper client relationships, pursuing new industry-leading clients, investing in sales leadership, executing strategic acquisitions, and innovating with technology-enabled platforms[31] - As of December 31, 2018, the company had 52,400 employees in 23 countries, with approximately 66% located outside the U.S. and 10% covered by collective bargaining agreements[55] - In 2018, the top five and ten clients represented 35% and 49% of total revenue, respectively, with one healthcare client accounting for 10.2% of total annual revenue[50] - The company competes with a range of firms, from large multinational corporations like Teleperformance and Accenture to smaller, specialized companies, as well as in-house operations[54] Risk Factors The company faces multiple risks including intense competition, cybersecurity threats, client concentration, and regulatory compliance - The company faces high competition from large multinational providers, offshore firms, and niche solution providers, where failure to compete effectively could lead to loss of market share[61][62] - The business is vulnerable to cyber-attacks, cyber-fraud, and unauthorized information disclosure, which could harm its reputation, cause liability, and result in service outages[66][67] - A significant portion of revenue comes from a few clients, with the top five clients accounting for 35% of revenue in 2018 and the largest single client representing 10.2%, making the business vulnerable to the loss of a major client[71] - Operations are geographically concentrated in locations like the Philippines, Mexico, and India, exposing the company to risks from natural disasters, political unrest, and other regional disruptions[76][77] - The business is subject to extensive and sometimes conflicting regulations across jurisdictions, including data privacy laws like GDPR, which could increase compliance costs and legal risks[78][83] - The Chairman and CEO, Kenneth D. Tuchman, beneficially owns approximately 68% of the company's common stock, giving him significant control over all matters requiring stockholder action, including board elections[120] Unresolved Staff Comments The company reports no unresolved written comments from the SEC staff issued 180 days or more before the 2018 fiscal year-end - There are no unresolved written comments from the SEC staff regarding the company's periodic or current reports[122] Properties TTEC's corporate headquarters are in Englewood, Colorado, and it operates 85 customer engagement centers globally, primarily leased facilities - The company's corporate headquarters are in Englewood, Colorado[124] Customer Engagement Centers by Country (as of Dec 31, 2018) | Country | Total Centers | | :--- | :--- | | United States of America | 38 | | Philippines | 19 | | Canada | 8 | | Australia | 3 | | Mexico | 3 | | Brazil | 2 | | Bulgaria | 2 | | India | 2 | | United Kingdom | 2 | | Other (6 countries) | 6 | | Total | 85 | Legal Proceedings The company is involved in ordinary course legal actions and accrues for probable losses, not expecting a material adverse effect on its financials - The company is involved in legal actions from the ordinary course of business and accrues for probable and estimable losses[129] - Management does not expect current legal proceedings to have a material adverse effect on the company's financial condition or results[130] Mine Safety Disclosures This item is not applicable to the company - Not applicable[132] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities TTEC's common stock trades on NASDAQ, the company maintains a semi-annual dividend policy, and had $26.6 million remaining for stock repurchases at year-end 2018 Common Stock Price Range | Quarter | High ($) | Low ($) | | :--- | :--- | :--- | | 2018 | | | | Q4 | 29.66 | 23.79 | | Q3 | 36.20 | 23.95 | | Q2 | 37.40 | 30.20 | | Q1 | 41.80 | 30.70 | | 2017 | | | | Q4 | 43.35 | 37.85 | | Q3 | 42.15 | 38.60 | | Q2 | 42.60 | 28.85 | | Q1 | 31.30 | 29.10 | - The company maintains a semi-annual dividend policy, with a $0.30 dividend per common share authorized on February 21, 2019, payable on April 18, 2019[136] - As of December 31, 2018, the remaining authorized amount for the stock repurchase program was $26.6 million, with no shares repurchased during the fourth quarter of 2018[137][138] Selected Financial Data For 2018, TTEC reported $1.509 billion in revenue, $35.8 million in net income attributable to stockholders, and $1.055 billion in total assets Selected Financial Data (In thousands, except per share data) | (In thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Statement of Operations Data | | | | | | | Revenue | $1,509,171 | $1,477,365 | $1,275,258 | $1,286,755 | $1,241,781 | | Income from operations | $92,054 | $100,489 | $52,752 | $90,180 | $96,475 | | Net income attributable to TTEC stockholders | $35,817 | $7,256 | $33,678 | $61,666 | $72,293 | | Diluted net income per share | $0.77 | $0.16 | $0.71 | $1.26 | $1.44 | | Dividends issued per common share | $0.55 | $0.47 | $0.385 | $0.36 | $— | | Balance Sheet Data | | | | | | | Total assets | $1,054,508 | $1,078,736 | $846,304 | $843,327 | $852,475 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, TTEC's revenue grew to $1.509 billion, while operating income declined due to increased labor and launch costs, with liquidity supported by operating cash flow and a credit facility - In 2018, revenue increased 2.2% to $1.509 billion, but income from operations decreased by $8.4 million to $92.1 million, mainly due to a decline in the CMS segment's profitability[163][164] - The company adopted the new revenue recognition standard, ASC 606, on January 1, 2018, using the modified retrospective method, resulting in a net reduction to opening retained earnings of $10.0 million[399] - Cash flows from operating activities increased to $168.3 million in 2018 from $113.2 million in 2017, primarily due to improved accounts receivable collections[247] - The company amended its credit facility in February 2019, extending the maturity to 2024 and setting the maximum commitment at $900.0 million with a $1.2 billion accordion feature[259][261] - Capital expenditures for 2019 are expected to be between $60 million and $65 million, with 65% for growth and 35% for maintenance[255] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgment in revenue recognition (ASC 606 adoption), income taxes (2017 Tax Act), impairment testing, restructuring liabilities, and derivative valuation - Effective January 1, 2018, the company adopted ASC 606, which requires deferring revenue from certain training services and amortizing it over the period of economic benefit[171][172] - The company capitalizes direct and incremental costs to obtain a contract, such as sales commissions, and amortizes them over the corresponding period of benefit[177] - The company completed its accounting for the 2017 Tax Act, which reduced the U.S. federal corporate tax rate to 21% and imposed a one-time repatriation tax, with GILTI and BEAT taxes computed in the period they are incurred[188][190] - Goodwill and indefinite-lived intangible assets are tested for impairment at least annually using a qualitative assessment (Step 0) and, if necessary, a quantitative discounted cash flow analysis (Step 1)[192][193][194] Results of Operations In 2018, TTEC Digital segments (CTS and CSS) showed strong operating income growth, while the larger TTEC Engage segment (CMS) experienced margin compression due to increased costs Segment Performance (2018 vs 2017, in millions) | Segment | 2018 Revenue (M) | 2017 Revenue (M) | % Change | 2018 Op. Income (M) | 2017 Op. Income (M) | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | CMS | $1,129.0 | $1,141.8 | (1.1)% | $49.2 | $78.2 | (37.1)% | | CGS | $141.3 | $128.7 | 9.8% | $9.8 | $7.8 | 26.1% | | CTS | $170.2 | $138.6 | 22.8% | $26.6 | $12.0 | 121.1% | | CSS | $68.6 | $68.3 | 0.4% | $6.4 | $2.4 | 163.9% | - The CMS segment's operating margin decreased from 6.8% in 2017 to 4.4% in 2018, primarily due to increased U.S. labor costs and higher launch costs for new business[211] - The CTS segment's operating margin increased significantly from 8.7% in 2017 to 15.6% in 2018, driven by growth in its higher-margin recurring cloud and systems integration businesses[215] - In 2017, CMS revenue grew 23.5% over 2016, largely due to the Atelka, Connextions, and Motif acquisitions[224] Liquidity and Capital Resources TTEC's liquidity is primarily driven by cash from operations, which generated $168.3 million in 2018, and its credit facility, with future capital expenditures projected at $60-$65 million for 2019 Cash Flow Summary (In millions) | (In millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $168.3 | $113.2 | $111.8 | | Net cash used in investing activities | $(47.6) | $(169.0) | $(100.4) | | Net cash (used in) from financing activities | $(102.1) | $71.6 | $(1.6) | Free Cash Flow (In millions) | (In millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $168.3 | $113.2 | $111.8 | | Less: Purchases of property, plant and equipment | $43.5 | $52.0 | $50.8 | | Free cash flow | $124.9 | $61.2 | $61.0 | - As of December 31, 2018, the company had $282.0 million in borrowings under its Credit Facility and a remaining borrowing capacity of approximately $360.0 million[242] - In October and December 2018, the company paid dividends from its foreign operations to its U.S. parent totaling $310 million, which were used to pay down the Credit Facility[240] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk on variable-rate debt and significant foreign currency risk, primarily from the Philippine and Mexican pesos, mitigated by a cash flow hedging program - The company is exposed to interest rate risk on its variable-rate debt, where a 100 basis point increase in the Prime Rate or LIBOR would increase annual interest expense by $1.0 million for every $100.0 million of outstanding borrowing[273] - Foreign currency risk is a key exposure, with 23% of consolidated revenue in 2018 associated with this risk, primarily involving the U.S. dollar/Philippine peso, U.S. dollar/Mexican peso, and Australian dollar/Philippine peso[272][275] Foreign Currency Hedges (As of Dec 31, 2018, in thousands) | As of Dec 31, 2018 (in thousands) | Local Currency Notional Amount | U.S. Dollar Notional Amount | | :--- | :--- | :--- | | Philippine Peso Hedges | 6,710,000 | $130,957 | | Mexican Peso Hedges | 1,091,500 | $57,708 | | Total | | $188,665 | - The fair value of the company's cash flow hedges was a net liability of $11.3 million as of December 31, 2018[282] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018, including balance sheets, income statements, and cash flow statements, along with the independent auditor's report - The Report of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP, provides an opinion that the financial statements are presented fairly and that the company maintained effective internal control over financial reporting[325] Consolidated Balance Sheets (In thousands) | (In thousands) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Assets | | | | Total current assets | $526,477 | $541,409 | | Total long-term assets | $528,031 | $537,327 | | Total assets | $1,054,508 | $1,078,736 | | Liabilities & Equity | | | | Total current liabilities | $235,418 | $201,778 | | Total long-term liabilities | $466,241 | $514,113 | | Total stockholders' equity | $352,849 | $362,845 | | Total liabilities and stockholders' equity | $1,054,508 | $1,078,736 | Consolidated Statements of Operations (In thousands) | (In thousands) | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--- | :--- | :--- | | Revenue | $1,509,171 | $1,477,365 | | Income from operations | $92,054 | $100,489 | | Net income attributable to TTEC stockholders | $35,817 | $7,256 | | Diluted EPS | $0.77 | $0.16 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[287] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[291] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[295] - The effectiveness of internal control over financial reporting has been audited by PricewaterhouseCoopers LLP[296] - There were no changes in internal control over financial reporting during the most recent quarter that materially affected, or are reasonably likely to materially affect, these controls[297] Other Information There is no information to report for this item - None[299] Part III Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance practices is incorporated by reference from its 2019 Definitive Proxy Statement - Information required by this item is incorporated by reference from the registrant's 2019 Definitive Proxy Statement[301][303] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2019 Definitive Proxy Statement - Information required by this item is incorporated by reference from the registrant's 2019 Proxy Statement[305] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners, management, and related stockholder matters is incorporated by reference from the company's 2019 Definitive Proxy Statement - Information required by this item is incorporated by reference from the registrant's 2019 Proxy Statement[306] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2019 Definitive Proxy Statement - Information required by this item is incorporated by reference from the registrant's 2019 Proxy Statement[307] Principal Accountants Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2019 Definitive Proxy Statement - Information required by this item is incorporated by reference from the registrant's 2019 Proxy Statement[308] Part IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including consolidated financial statements and an index of all exhibits - This section contains the index to the Consolidated Financial Statements and a list of all exhibits filed with the Form 10-K[310][311] - All financial statement schedules have been omitted because the required information is not present, not in sufficient amounts, or is included in the Consolidated Financial Statements or notes[310] Form 10-K Summary No summary is provided for this item - None[318]