TTEC Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary TTEC Holdings, Inc. (“TTEC”, “the Company”, “we”, “our” or “us”) is a leading global customer experience technology and services company focused on the design, implementation and delivery of transformative customer experience outcomes for many of the world’s most iconic and disruptive brands. Since our inception in 1982, we have been helping clients deliver frictionless customer experiences, strengthen their customer relationships, brand recognition and loyalty through personalized interactions, significantly improve their Net Promoter Score, and lower their total cost to serve by enabling and delivering simplified, consistent and seamless customer experience across channels and phases of the customer lifecycle. Our customer experience thought leadership offers innovative programs that differentiate our clients from their competition. In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic. Within weeks of this announcement, travel bans, the state of emergency, quarantines, lockdowns, “shelter in place” orders, and business restrictions and shutdowns were issued in most countries where TTEC does business. The need to comply with these measures, which came into effect with little notice, has impacted our day-to-day operations and disrupted our business. Although we activated our business continuity plans, we have experienced temporary suspension of operations in some of our TTEC Engage customer experience delivery sites; and some of our employees were not able to get to work because their mobility was restricted by government restrictions. While some of our operations were deemed essential and could have continued operating, to support the health and well-being of our employees and communities and to provide a stable service delivery platform to our clients, we made a business decision to transition as many employees as was reasonably possible to a work from home environment. Between mid-March and mid-April 2020, we transitioned over 43,000 employees, or 80%, to our work from home environment. With the easing of some of the government restrictions, some of those employees returned to our brick and mortar sites by the end of the second quarter of 2020, but most continue to work from home. For those sites that continued to operate and those that re-opened since the lockdown and “shelter-in-place” restrictions eased beginning in June 2020, we have taken extensive measures to protect the health and safety of our employees, in accordance with the recommendations and guidelines provided by the World Health Organization, the U.S. and European Centers for Disease Control and Prevention, the U.S. Occupational Safety Association, and local governments in jurisdictions where our customer experience centers are located. Although our business began to experience the effects of COVID-19 at the end of the first quarter 2020, our rapid implementation of business continuity plans and our geographic diversification of delivery centers allowed us to mitigate potentially more severe impacts. Through the period ended September 30, 2020 the COVID-19 pandemic has not had a material adverse impact on our operational or financial results. Despite 20% of our business being comprised of clients in industries that have been negatively impacted by the COVID-19 pandemic, i.e. automotive, retail and travel and hospitality, the September 30, 2020 year to date revenue derived from these clients has increased approximately 15% over the prior year period. We have also seen significant surge volumes from commercial and public sector clients who have realized spikes in customer, patient and citizen engagement related to COVID-19 which has contributed an approximate 11% of the total year to date revenue for 2020. While we expect this positive trend to continue for the remainder of 2020, there is uncertainty about our COVID-19 surge volumes and our non-COVID-19 related business beyond 2020. Additionally, we cannot accurately predict the severity of the economic and operational challenges of a pro-longed COVID-19 pandemic on our clients’ businesses and its effect on the magnitude and timing of their buying decisions. Further, while to date we have been successful in managing service delivery from those of our delivery sites that could not be replaced with work from home delivery, arbitrary lockdown decisions in some jurisdictions where we do business may impact our offshore delivery capability with little notice, thus potentially impacting our results of operations in the future. 34 Table of Contents In March 2020, we launched multiple cost reduction, optimization, and liquidity preservation initiatives to align our expenses with anticipated changes in revenue and increased costs related to COVID-19 pandemic and government mandated restriction measures. These initiatives included freezes on hiring, cuts in non-essential spending, reduction and deferral in spend on third-party service providers and vendors, suspension of merit increases, contributions to tax deferred saving plans and other retirement plans, where permitted by law, suspension of some incentive programs, staff reductions and furloughs in markets where that option is available. We also intensified our cash flow discipline, including working capital management, deferral of capital expenditures, where possible, and engaged in negotiations for rent abatement and deferral for those facilities that we are unable to use during the government restrictions related to the COVID-19 pandemic. We also took steps to strengthen our financial position during this period of heightened uncertainty including a proactive draw down on our line of credit in late March 2020, which was subsequently repaid in September 2020. Our results of operations for the first three quarters of 2020 is permitting us to reverse some of these decisions, and we are resuming strategic hiring on a limited basis, returning furloughed employees to work where it is possible, and reinstating certain incentive plans. In light of the continued COVID-19 related uncertainties, however, we remain vigilant in our cost management. With the greater adoption of our work at home solution during the COVID-19 pandemic, we are also reviewing our global real estate footprint and working to balance our commitments to physical facilities around the globe against evolving client preferences with respect to traditional physical delivery centers and work from home delivery. For further discussion of this matter, refer “Item 1A. Risk Factors” in Part II of this Form 10-Q. The Company reports its financial information based on two segments: TTEC Digital and TTEC Engage. ● TTEC Digital designs, builds and delivers tech-enabled, insight-based and outcome-driven customer experience solutions through our professional services and suite of technology offerings. These solutions are critical to enabling and accelerating digital transformation for our clients. ● TTEC Engage provides the essential technologies, human resources, infrastructure and processes to operate customer care, acquisition, and fraud detection and prevention services. TTEC Digital and TTEC Engage come together under our unified offering, Humanify ® Customer Experience as a Service ("CXaas"), which drives measurable customer results for clients through the delivery of personalized, omnichannel experiences. Our Humanify ® cloud platform provides a fully integrated ecosystem of Customer Experience ("CX") offerings, including omnichannel, messaging, artificial intelligence, machine learning, robotic process automation, analytics, cybersecurity, customer relationship management ("CRM"), knowledge management and journey orchestration. Our end-to-end platform differentiates us from many competitors by combining design, strategic consulting, best in class technology, data analytics, process optimization, system integration and operational excellence. This unified offering is value-oriented, outcome-based and delivered to large enterprise and governments on a global basis at scale. Our revenue for the three months ended September 30, 2020 was $493.0 million. Approximately $416.4 million, or 84%, came from our TTEC Engage segment and $76.6 million, or 16%, came from our TTEC Digital segment. To improve our competitive position in a rapidly changing market and stay strategically relevant to our clients, we continue to invest in innovation and service offerings for mainstream and high growth disruptive businesses, diversifying and strengthening our core customer care services with consulting, data analytics, insights, and technology-enabled, outcome-focused services. We also invest to expand our geographic footprint, broaden our product and service capabilities, increase our global client base and industry expertise, and further scale our end-to-end integrated solutions platform. To this end we have been highly acquisitive in the last several years, including an acquisition in the third quarter of 2020 of a U.S. based preferred Amazon Connect cloud contact center service provider, an acquisition in the first quarter of 2020 of a U.S. based autonomous customer experience and intelligent automation solutions provider and an acquisition in the fourth quarter of 2019 of a U.S. based provider of customer care, social media community management, content moderation, technical support and business process solutions. 35 Table of Contents We have extensive expertise in the automotive, communications, financial services, government, healthcare, logistics, media and entertainment, retail, technology, travel and transportation industries. We serve more than 300 diverse clients globally, including many iconic blue-chip brands, Fortune 1000 companies, and disruptive growth companies. Our Integrated Service Offerings and Business Segments We provide strategic value and differentiation through our two business segments: TTEC Digital and TTEC Engage. TTEC Digital designs, builds and delivers tech-enabled, insight-based and outcome-driven customer experience solutions through our professional services and suite of technology offerings. These solutions are critical to enabling and accelerating digital transformation for our clients. ● Technology Services: Our technology services design, integrate and operate highly scalable, digital omnichannel technology solutions in the cloud, on premise, or hybrid, including journey orchestration, automation and AI, knowledge management, and workforce productivity. ● Professional Services: Our management consulting practices deliver customer experience strategy, analytics, process optimization, and learning and performance services. TTEC Engage provides the essential technologies, human resources, infrastructure and processes to operate customer care, acquisition, and fraud detection and prevention services. ● Customer Acquisition Services: Our customer growth and acquisition services optimize the buying journeys for acquiring new customers by leveraging technology and analytics to deliver personal experiences that increase the quantity and quality of leads and customers. ● Customer Care Services: Our customer care services provide turnkey contact center solutions, including digital omnichannel technologies, associate recruiting and training, facilities, and operational expertise to create exceptional customer experiences across all touchpoints. ● Fraud Prevention Services: Our digital fraud detection and prevention services proactively identify and prevent fraud and provide community content moderation and compliance. Based on our clients’ preference, we provide our services on an integrated cross-business segment and/or on a discrete basis. Additional information with respect to our segments and geographic footprint is included in Part I. Item 1. Financial Statements, Note 3 to the Consolidated Financial Statements. Financial Highlights In the third quarter of 2020, our revenue increased $97.5, or 24.6%, to $493.0 million over the same period in 2019 including an increase of $2.0 million, or 0.5%, due to foreign currency fluctuations. The increase in revenue was comprised of a $99.5 million, or 31.4%, increase for TTEC Engage offset by a $2.0 million, or 2.6%, decrease for TTEC Digital. Our third quarter 2020 income from operations increased $27.4 million, or 105.5%, to $53.4 million or 10.8% of revenue, compared to $26.0 million or 6.6% of revenue in the third quarter of 2019. The change in operating income is comprised of a number of factors across the segments. The TTEC Digital operating income expanded with an 11.4% improvement over the same period last year primarily on the growth of its higher margin cloud business. The TTEC Engage operating income increased 182.7% compared to the prior year quarter based on the increase in revenue including, but not limited to, the acquisition of FCR and significant surge volumes in our commercial and public sector clients experiencing spikes in customer interactions related to COVID-19. Income from operations in the third quarter of 2020 and 2019 included $2.2 million and $0.2 million of restructuring and integration charges and asset impairments, respectively. 36 Table of Contents Our offshore customer engagement centers serve clients based in the U.S. and in other countries spanning six countries with 23,000 workstations, representing 53% of our global delivery capability. Revenue for our TTEC Engage segment provided from these offshore locations represented 26% of our revenue for the third quarter of 2020, as compared to 34% of our revenue for the corresponding period in 2019. Our seat utilization is defined as the total number of utilized workstations compared to the total number of available production workstations. As of September 30, 2020, the total production workstations for our TTEC Engage segment was 42,996 and the overall capacity utilization in our centers was 58% versus 70% in the prior year period. The utilization is lower than the previous year primarily due to COVID-19 protocols requiring the distancing of associates which has reduced the available seat capacity. Adjusted for social distancing protocols, which reduced the available workstations to approximately 21,850, and accounting for all client paid seats as utilized, whether through actual usage or contractual commitments to hold the seats, current utilization is in excess of 113%. Post COVID-19 we expect our clients to leverage a more diversified geographic footprint and an increased mix of work from home vs. brick and mortar seats. We will continue to refine our site strategy and capacity as we finalize plans with our clients and prospects. Some of our clients may be subject to regulatory pressures to serve clients onshore. We plan to continue to selectively retain and grow capacity and expand into new offshore markets, while maintaining appropriate capacity onshore. As we grow our offshore delivery capabilities and our exposure to foreign currency fluctuations increases, we will continue to actively manage this risk via a multi-currency hedging program designed to minimize operating margin volatility. Recently Issued Accounting Pronouncements Refer to Part I, Item I, Financial Statements, Note 1 to the Consolidated Financial Statements for a discussion of recently adopted and issued accounting pronouncements. Critical Accounting Policies and Estimates Management’s Discussion and Analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. We regularly review our estimates and assumptions. These estimates and assumptions, which are based upon historical experience and on various other factors believed to be reasonable under the circumstances, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Reported amounts and disclosures may have been different had management used different estimates and assumptions or if different conditions had occurred in the periods presented. For further information, please refer to the discussion of all critical accounting policies in Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019. Results of Operations Three months ended September 30, 2020 compared to three months ended September 30, 2019 The tables included in the following sections are presented to facilitate an understanding of Management’s Discussion and Analysis of Financial Condition and Results of Operations and present certain information by segment for the three months ended September 30, 2020 and 2019 (amounts in thousands). All inter-company transactions between the reported segments for the periods presented have been eliminated. TTEC Digital ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2020 2019 $ Change % Change ​ Revenue ​ $ 76,571 ​ $ 78,620 ​ $ (2,049) (2.6) % ​ Operating Income ​ 13,043 ​ 11,704 ​ 1,339 11.4 % ​ Operating Margin ​ 17.0 % 14.9 % ​ ​ ​ ​ ​ ​ ​ 37 Table of Contents The decrease in revenue for the TTEC Digital segment was related to significant increases in the cloud platform and the acquisitions of Serendebyte and Voice Foundry US during 2020, offset by reductions in the legacy facility based training business and the middle east consulting practice, both of which the Company has exited. Within the core Digital business and excluding a large multi-year term government contract, for the quarters ended September 30, 2020 and 2019 revenue from the cloud offering represented $20.0 million and $16.5 million, respectively, and the systems integration offering represented $10.8 million and $13.2 million, respectively. The operating income expansion is primarily attributable to the continued improved utilization of technology and people assets as the business scales its cloud and system integration revenue as well as the exit of the less profitable facilities based training and middle east consulting practices. The operating income as a percentage of revenue increased to 17.0% in the third quarter of 2020 as compared to 14.9% in the prior period. Included in the operating income was amortization expense related to acquired intangibles of $0.8 million and $0.6 million for the quarters ended September 30, 2020 and 2019, respectively. TTEC Engage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2020 2019 $ Change % Change ​ Revenue ​ $ 416,409 ​ $ 316,887 ​ $ 99,522 31.4 % ​ Operating Income ​ 40,356 ​ 14,277 ​ 26,079 182.7 % ​ Operating Margin ​ 9.7 % 4.5 % ​ ​ ​ ​ ​ ​ ​ The increase in revenue for the TTEC Engage segment was due to a net increase of $120.3 million in client programs including the acquisition of FCR in the fourth quarter of 2019 and certain surge programs for several clients in connection with the COVID-19 pandemic, offset by a decrease for program completions of $22.7 million and a $1.9 million increase due to foreign currency fluctuations. The operating income increased in line with improved revenue including the acquisition of FCR as well as continued improved profitability in our @Home, fraud prevention and detection and customer acquisition offerings and auto and hypergrowth portfolios, offset by increases in amortization for acquired intangibles. Partially offsetting these increases was a net $1.7 million in restructuring and impairment charges related to several facilities in the U.S. (see Part I. Item 1. Financial Statements, Note 9 to the Consolidated Financial Statements). As a result, the operating income as a percentage of revenue increased to 9.7% in the third quarter of 2020 as compared to 4.5% in the prior period. Included in the operating income was amortization expense related to acquired intangibles of $3.3 million and $2.0 million for the quarters ended September 30, 2020 and 2019, respectively. Interest Income (Expense) For the three months ended September 30, 2020 interest income increased to $0.6 million from $0.5 million in the same period in 2019. Interest expense decreased to $2.8 million during 2020 from $4.0 million during 2019 due to higher utilization of the line of credit, offset by lower interest rates and a $0.8 million decrease in the charge related to the future purchase of the remaining 30% interest in Motif versus the prior year period, which was finalized during the second quarter of 2020. Other Income (Expense) For the three months ended September 30, 2020 Other income (expense), net decreased to net expense of $18.7 million from net income of $2.7 million during the prior year quarter. Included in the three months ended September 30, 2020 was a $17.4 million expense related to the deconsolidation of two subsidiaries and the removal of the related Currency Translation Adjustment (see Part I. Item 1. Financial Statements, Note 2 to the Consolidated Financial Statements). Included in the three months ended September 30, 2019 was a $1.4 million gain on recovery of receivables in connection with the Consulting business that was wound down, and a $0.7 million gain on the sale of trademarks. 38 Table of Contents Income Taxes The effective tax rate for the three months ended September 30, 2020 was 25.9%. This compares to an effective tax rate of 20.6% for the comparable period of 2019. The effective tax rate for the three months ended September 30, 2020 was influenced by earnings in international jurisdictions currently under an income tax holiday, the distribution of income between the U.S. and international tax jurisdictions and the associated U.S. tax impacts of foreign earnings. Without $2.5 million benefit related to the deconsolidation of a subsidiary, a $0.6 million benefit related to restructuring, $1.9 million of expense related to tax contingencies, and $0.1 million of other expense, the Company’s effective tax rate for the third quarter of 2020 would have been 18.3%. Results of Operations Nine months ended September 30, 2020 compared to nine months ended September 30, 2019 The tables included in the following sections are presented to facilitate an understanding of Management’s Discussion and Analysis of Financial Condition and Results of Operations and present certain information by segment for the nine months ended September 30, 2020 and 2019 (in thousands). All intercompany transactions between the reported segments for the periods presented have been eliminated. TTEC Digital ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2020 2019 $ Change % Change ​ Revenue ​ $ 231,270 ​ $ 222,992 ​ $ 8,278 3.7 % ​ Operating Income ​ 37,677 ​ 27,172 ​ 10,505 38.7 % ​ Operating Margin ​ 16.3 % 12.2 % ​ ​ ​ ​ ​ ​ ​ The increase in revenue for the TTEC Digital segment was related to significant increases in the cloud platform and the systems integration practice including a large multi-year governmental contract and the acquisitions of Serendebyte and Voice Foundry US during 2020, offset by reductions in the legacy facility based training business and the middle east consulting practice, both of which the Company has exited. Within the core Digital business and excluding the large multi-year government contract, for the nine months ended September 30, 2020 and 2019, revenue from the cloud offering represented $58.3 million and $43.3 million, respectively, and the systems integration offering represented $36.4 million and $33.6 million, respectively. The operating income expansion is primarily attributable to the increased revenue and continued improved utilization of technology and people assets as the business scales its cloud and system integration revenue, as well as the exit of the less profitable facilities based training and middle east consulting practices. The operating income increase was offset by a $2.0 million impairment of intangible and other long-lived assets for one of the consulting components in this segment (See Part I. Item 1. Financial Statements, Notes 5 and 9 to the Consolidated Financial Statements) recorded during 2019. The operating income as a percentage of revenue increased to 16.3% for the nine months ended September 30, 2020 as compared to 12.2% in the prior period. Included in the operating income was amortization expense related to acquired intangibles of $1.9 million and $1.9 million for the nine months ended September 30, 2020 and 2019, respectively. TTEC Engage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2020 2019 $ Change % Change ​ Revenue ​ $ 1,147,004 ​ $ 959,386 ​ $ 187,618 19.6 % ​ Operating Income ​ 105,400 ​ 53,774 ​ 51,626 96.0 % ​ Operating Margin ​ 9.2 % 5.6 % ​ ​ ​ ​ ​ ​ ​ The increase in revenue for the TTEC Engage segment was due to a net increase of $265.1 million in client programs including the acquisition of FCR in the fourth quarter of 2019 and certain surge programs for several clients in connection with the COVID-19 pandemic, offset by a decrease for program completions of $75.2 million and a $2.6 million decrease due to foreign currency fluctuations. 39 Table of Contents The operating income increased in line with improved revenue including the acquisition of FCR as well as continued improved profitability in our @Home, fraud prevention and detection and customer acquisition offerings and auto and hypergrowth portfolios, offset by increases in amortization for acquired intangibles. Partially offsetting these increases was a net $2.8 million in restructuring and impairment charges related to several facilities in the U.S. (see Part I. Item 1, Financial Statements, Note 9 to the Consolidated Financial Statements). As a result, the operating income as a percentage of revenue increased to 9.2% for the nine months ended September 30, 2020 as compared to 5.6% in the prior period. Included in the operating income was amortization expense related to acquired intangibles of $9.9 million and $6.0 million for the nine months ended September 30, 2020 and 2019, respectively. Interest Income (Expense) For the nine months ended September 30, 2020 interest income increased to $1.4 million from $1.3 million in the same period in 2019. Interest expense increased to $15.5 million during 2020 from $13.5 million during 2019 due to higher utilization of the line of credit offset by lower interest rates, and a $3.9 million increase period over period in the charge related to the future purchase of the remaining 30% interest in Motif, which was finalized during the second quarter of 2020. Other Income (Expense) For the nine months ended September 30, 2020 Other income (expense), net decreased to net expense of $17.0 million from net income of $5.4 million during the prior year quarter. Included in the nine months ended September 30, 2020 was a $4.4 million benefit related to the fair value adjustments of contingent consideration for an acquisition, offset by a $19.9 million expense related to the deconsolidation of three subsidiaries and the related removal of the Currency Translation Adjustments (see Part I. Item 1. Financial Statements, Notes 2 and 7 to the Consolidated Financial Statements). Included in the nine months ended September 30, 2019 was a $2.4 million benefit related to the fair value adjustment of contingent consideration for an acquisition, a $1.4 million gain on recovery of receivables in connection with the Consulting business that was wound down, and a $0.7 million gain on the sale of trademarks. Income Taxes The effective tax rate for the nine months ended September 30, 2020 was 26.5%. This compared to an effective tax rate of 27.0% for the comparable period of 2019. The effective tax rate for the nine months ended September 30, 2020 was influenced by earnings in international jurisdictions currently under an income tax holiday, the distribution of income between the U.S. and international tax jurisdictions and associated U.S. tax impacts of foreign earnings. Without a $1.0 million benefit from restructuring expenses, $0.5 million of expense related to provision to return adjustments, a $0.6 million benefit related to changes in valuation allowances, $1.2 million of expense related to changes to contingent consideration, a $2.5 million benefit related to the deconsolidation of subsidiaries, $2.2 million of expense related to tax contingencies, and $0.1 million of other expense, the Company’s effective tax rate for the 2020 would have been 21.7%. Liquidity and Capital Resources Our principal sources of liquidity are our cash generated from operations, our cash and cash equivalents, and borrowings under our Credit Facility. During the nine months ended September 30, 2020, we generated positive operating cash flows of $186.8 million. We believe that our cash generated from operations, existing cash and cash equivalents, and available credit will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months. We manage a centralized global treasury function in the United States with a focus on concentrating and safeguarding our global cash and cash equivalents. The majority of our cash is in U.S. dollars, primarily held in the U.S. and to a lesser extent outside of the U.S., in addition to cash held in local currencies of our foreign subsidiaries. We expect to use our cash to support working capital, global operations and strategic investments. While there are no assurances, we believe our global cash is protected given our cash management practices, banking partners and utilization of diversified, high quality investments. 40 Table of Contents We have global operations that expose us to foreign currency exchange rate fluctuations that may positively or negatively impact our liquidity. We are also exposed to higher interest rates associated with our variable rate debt. To mitigate these risks, we enter into foreign exchange forward and option contracts through our cash flow hedging program. Please refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk, for further discussion. During the first quarter 2020, we borrowed $350.0 million under our revolving credit facility as a precautionary measure to provide additional liquidity during the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic. During September 2020, this additional borrowing was repaid. Although we expect that current cash and cash equivalent balances and cash flows that are generated from operations will be sufficient to meet our domestic and international working capital needs and other capital and liquidity requirements for at least the next 12 months, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be adversely impacted. The following discussion highlights our cash flow activities during the nine months ended September 30, 2020 and 2019. Cash and Cash Equivalents We consider all liquid investments purchased within 90 days of their original maturity to be cash equivalents. Our cash and cash equivalents totaled $135.3 million and $82.4 million as of September 30, 2020 and December 31, 2019, respectively. We diversify the holdings of such cash and cash equivalents considering the financial condition and stability of the counterparty institutions. We reinvest our cash flows to grow our client base, expand our infrastructure, for investment in research and development, for strategic acquisitions and to pay dividends. Cash Flows from Operating Activities For the nine months ended September 30, 2020 and 2019, net cash flows provided by operating activities was $186.8 million and $184.4 million, respectively. The increase is primarily due to a $55.0 million increase in net cash income from operations offset by a $52.6 million reduction in net working capital. Cash Flows from Investing Activities For the nine months ended September 30, 2020 and 2019, net cash flows used in investing activities was $86.6 million and $44.1 million, respectively. The increase was due to a $3.4 million increase in capital expenditures and a $38.7 million increase related to acquisitions. Cash Flows from Financing Activities For the nine months ended September 30, 2020 and 2019, net cash flows used in financing activities was $48.9 million and $119.6 million, respectively. The change in net cash flows from 2019 to 2020 was primarily due to a $118.0 million net million additional draw on the line of credit, offset by a $42.8 million increase related to payments of contingent consideration and hold-back payments related to several acquisitions. Free Cash Flow Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) decreased slightly for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to an increase in net cash from operations offset by a decrease in working capital and higher outflow related to capital expenditures. Free cash flow was $139.0 million and $140.0 million for the nine months ended September 30, 2020 and 2019, respectively. 41 Table of Contents Presentation of Non-GAAP Measurements Free Cash Flow Free cash flow is a non-GAAP liquidity measurement. We believe that free cash flow is useful to our investors because it measures, during a given period, the amount of cash generated that is available for debt obligations and investments other than purchases of property, plant and equipment. Free cash flow is not a measure determined by GAAP and should not be considered a substitute for “income from operations,” “net income,” “net cash provided by operating activities,” or any other measure determined in accordance with GAAP. We believe this non-GAAP liquidity measure is useful, in addition to the most directly comparable GAAP measure of “net cash provided by operating activities,” because free cash flow includes investments in operational assets. Free cash flow does not represent residual cash available for discretionary expenditures, since it includes cash required for debt service. Free cash flow also includes cash that may be necessary for acquisitions, investments and other needs that may arise. The following table reconciles net cash provided by operating activities to free cash flow for our consolidated results (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ 2020 2019 2020 2019 ​ Net cash provided by operating activities ​ $ 81,506 ​ $ 63,131 ​ $ 186,784 ​ $ 184,397 ​ Less: Purchases of property, plant and equipment ​ 15,912 ​ 16,010 ​ 47,827 ​ 44,438 ​ Free cash flow ​ $ 65,594 ​ $ 47,121 ​ $ 138,957 ​ $ 139,959 ​ ​ Obligations and Future Capital Requirements There were no material changes to the Company’s contractual obligations and future capital requirements outside the normal course of business from the date of our 2019 Form 10-K filing on March 4, 2020 through the filing of this report. Future Capital Requirements We currently expect total capital expenditures in 2020 to be between $58 million and $62 million. Approximately 70% of these expected capital expenditures are to support growth in our business and 30% relate to the maintenance for existing assets. The anticipated level of 2020 capital expenditures is primarily driven by new client contracts and the corresponding requirements for additional delivery center capacity as well as enhancements to our technological infrastructure. The amount of capital required over the next 12 months will depend on our levels of investment in infrastructure necessary to maintain, upgrade or replace existing assets. Our working capital and capital expenditure requirements could also increase materially in the event of acquisitions or joint ventures, among other factors. These factors could require that we raise additional capital through future debt or equity financing. We can provide no assurance that we will be able to raise additional capital upon commercially reasonable terms acceptable to us. 42 Table of Contents Client Concentration During the nine months ended September 30, 2020, one of our clients represented more than 10% of our total revenue. Our five largest clients, collectively, accounted for 42.6% and 37.1% of our consolidated revenue for the three months ended September 30, 2020 and 2019, respectively and 39.1% and 36.9% of our consolidated revenue for the nine months ended September 30, 2020 and 2019, respectively. We have had long-term relationships with our top five Engage clients, ranging from 14 to 21 years, with all of these clients having completed multiple contract renewals with us. The relative contribution of any single client to consolidated earnings is not always proportional to the relative revenue contribution on a consolidated basis and varies greatly based upon specific contract terms. In addition, clients may adjust business volumes served by us based on their business requirements. We believe the risk of this concentration is mitigated, in part, by the long-term contracts we have with our largest clients. Although certain client contracts may be terminated for convenience by either party, we believe this risk is mitigated, in part, by the service level disruptions and transition/migration costs that would arise for our clients if they terminated our contract for convenience. Some contracts with our five largest clients expire between 2020 and 2023, but most of our largest clients may have multiple contracts with us with different expiration dates for different lines of work. We have historically renewed most of our contracts with our largest clients, but there can be no assurance that future contracts will be renewed or, if renewed, will be on terms as favorable as the existing contracts.