What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-04 compared with 2020-11-04 · 93 added, 143 removed, 102 unchanged (70% of the section changed)

3 unchanged sentences

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.

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.

(“TTEC”, “the Company”, “we”, “our” or “us”) is a leading global customer experience as a service (“CXaaS”) partner for many of the world’s iconic brands, Fortune 1000 companies, government agencies, and disruptive growth companies.

TTEC helps its clients deliver frictionless customer experiences, strengthen customer relationships, brand recognition and loyalty through personalized interactions, improve their Net Promoter Score, customer satisfaction and quality assurance, and lower their total cost to serve by combining innovative digital solutions with best-in-class service capabilities to enable and deliver simplified, consistent and seamless customer experience across channels and phases of the customer lifecycle.

Our CXaaS solutions enhance our clients’ customers experience and help differentiate our clients from their competition.

In the fast expanding direct-to-customer ("DTC") channel where experiences are everything, enterprises must become increasingly more customer-centric, virtualized and digitally enabled to acquire, grow and maintain customers.

Our mission is to enable and accelerate our clients' path to virtual and digital transformation.

We are focused on improving the experience of our clients' customers by leveraging existing and emerging technologies — cloud, omnichannel, analytics, artificial intelligence ("AI"), machine learning ("ML"), robotic process automation ("RPA"), and real-time conversational messaging.

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.

● TTEC Digital provides the CX technology services and platforms to support our clients’ customer interaction delivery infrastructure.

The segment designs, builds and operates the omnichannel ecosystem in a cloud, on premise, or hybrid environment, inclusive of fully integrating, orchestrating, and administrating highly scalable, feature-rich CX technology applications.

● TTEC Engage provides the CX managed services to support our clients’ end-to-end customer interaction delivery, by providing the essential CX omnichannel and application technologies, human resources, recruiting, training and production, at-home or facility-based delivery infrastructure on a global scale, and engagement processes.

This segment provides full-service digital, omnichannel customer engagement, supporting customer care, customer acquisition, growth and retention, and fraud detection and prevention services.

TTEC Digital and TTEC Engage strategically come together under our unified offering, Humanify ® Customer Experience as a Service, which drives measurable customer results for clients through the delivery of personalized, omnichannel experiences.

Our Humanify ® cloud platform provides a fully integrated ecosystem of CX offerings, including messaging, AI, ML, RPA, analytics, cybersecurity, customer relationship management ("CRM"), knowledge management, journey orchestration and traditional voice solutions.

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.

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.

This unified offering is value-oriented, outcome-based and delivered to large enterprises, governments and disruptive growth companies on a global scale.

During 2021, the TTEC global operating platform delivered onshore, nearshore, and offshore services in 20 countries on six continents -- the United States, Australia, Belgium, Brazil, Bulgaria, Canada, Costa Rica, Germany, Greece, India, Ireland, Mexico, the Netherlands, New Zealand, the Philippines, Poland, Singapore, South Africa, Thailand, and the United Kingdom with the help of 58,500 consultants, technologists, and CX professionals.

Our revenue for first quarter 2021 was $539.2 million, approximately $63.6 million, or 12% which came from our TTEC Digital segment and $475.6 million, or 88%, which came from our TTEC Engage 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 both mainstream and high growth disruptive businesses, diversifying and strengthening our core customer care services with consulting, data analytics, insights, and technology-enabled, outcomes-focused services.

We also invest to broaden our product and service capabilities, increase our global client base and industry expertise, tailor our geographic footprint to the needs of our clients, 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 early in the second quarter of 2021 of a provider of Genesys and Microsoft cloud contact center services, an acquisition in the second half of 2020 of a preferred Amazon Connect cloud contact center service provider, an acquisition in the first quarter of 2020 of an autonomous customer experience and intelligent automation solutions provider and an acquisition in the fourth quarter of 2019 of a provider of customer care, social media community management, content moderation, technical support and business process solutions for rapidly growing businesses in early stages of their lifecycle.

We have extensive expertise in the automotive, communications, financial services, national/federal and state and local government, healthcare, logistics, media and entertainment, e-tail/retail, technology, travel and transportation industries.

We serve more than 300 diverse clients globally, including many of the world’s iconic brands, Fortune 1000 companies, government agencies, and disruptive growth companies.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic.

Early in second quarter of 2020, we transitioned approximately 80% of our employee population to a work from home environment.

Those employees who were considered essential and could not operate effectively while remote work in our brick-and-mortar sites, but most continue to work from home.

For those sites that continue to stay opened during the pandemic, 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 experienced some impacts of COVID-19 in the first half of 2020, our implementation of business continuity plans, rapid transition of employees to a work from home environment, and the geographic diversification of our delivery centers allowed us to mitigate potentially more severe impacts and positioned us to continue supporting our commercial and public sector clients without interruptions and provide them with additional support as they experienced surge volumes of customer, patient and citizen COVID-19 related engagement.

Through the period ended March 31, 2021 the COVID-19 pandemic has not had a material adverse impact on our operational or financial results.

While we expect this positive trend to continue and some of our COVID-19 specific work has transitioned to more traditional business activities for the same clients, there continues to be uncertainty about our COVID-19 and non-COVID-19 related business as the pandemic continues around the globe and some locations where we deliver business are experiencing ongoing COVID-19 infection surges, related lockdown and business interruption.

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 highly disbursed employee population working remotely and our delivery sites that could not be replaced with work from home delivery, unpredictable lockdown decisions in some jurisdictions where we do business, certain seasonal weather cycles and their potential impacts on power grid and internet availability for our employees working from home may impact our delivery capability with little notice, thus potentially impacting our results of operations in the future.

Our Integrated Service Offerings and Business Segments

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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.

TTEC Digital provides the CX technology services and platforms to support our clients’ customer interaction delivery infrastructure.

The segment designs, builds and operates the omnichannel ecosystem in a cloud, on premise, or hybrid environment, and fully integrates, orchestrates, and administers highly scalable, feature-rich CX technology applications.

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.

Our technology services design, integrate and operate highly scalable, digital omnichannel technology solutions in the cloud, on premise, or hybrid environment, 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.

TTEC Engage delivers the CX managed services to support our clients’ end-to-end customer interaction delivery, by providing the essential CX omnichannel and application technologies, human resources, recruiting, training and production, at-home or facility-based delivery infrastructure on a global scale, and engagement processes.

This segment provides full-service digital, omnichannel customer engagement, supporting customer care, customer acquisition, growth and retention, and fraud detection and prevention services.

● Customer Acquisition Services:

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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.

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.

In the first quarter of 2021, our revenue increased $107.0 million, or 24.8%, to $539.2 million over the same period in 2020 including an increase of $7.1 million, or 1.7%, due to foreign currency fluctuations.

The increase in revenue was comprised of a $121.0 million, or 34.1%, increase for TTEC Engage offset by a $14.0 million, or 18.0%, 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.

Our first quarter 2021 income from operations increased $32.7 million, or 80.3%, to $73.4 million or 13.6% of revenue, compared to $40.7 million or 9.4% of revenue in the first quarter of 2020.

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.

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.

The TTEC Engage operating income expanded with a 127.3% improvement over the same period last year primarily based on the increase in revenue including volumes in our financial services, commercial and public sector clients experiencing spikes in customer interactions related to COVID-19, and grant income received to offset salaries and rent expenses.

The TTEC Digital operating income decreased 59% due to the reduction in the large multi-year government contract offset by increases from the 2020 acquisitions and continued growth in the cloud revenue platform.

Income from operations in the first quarter of 2021 and 2020 included $3.9 million and $1.2 million of restructuring charges and asset impairments, respectively.

Our offshore customer engagement centers spanning six countries, serve clients based in the U.S.

and in other countries with 23,500 workstations, representing 57% of our global delivery capability.

Revenue for our TTEC Engage segment provided from these offshore locations represented 29% of our revenue for the first quarter of 2021, as compared to 34% of our revenue for the corresponding period in 2020.

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.

As of March 31, 2021, the total production workstations for our TTEC Engage segment was 41,458 and the overall capacity utilization in our centers was 64% versus 73% 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.

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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).

Three months ended March 31, 2021 compared to three months ended March 31, 2020

All inter-company transactions between the reported segments for the periods presented have been eliminated.

Three Months Ended September 30,

Three Months Ended March 31,

Operating Income

Operating Margin

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.

Three Months Ended September 30,

The decrease in revenue for the TTEC Digital segment was related to increases in the cloud platform and the systems integration practice, including the acquisitions of Voice Foundry and Serendebyte, offset by reductions in the large multi-year government contract and in the legacy facility based training business, which the Company has exited.

Excluding the large multi-year government contract, the TTEC Digital revenue has increased 23% year over year.

The operating income decline is primarily attributable to the reduction in the large multi-year government contract offset by increases in the cloud platform and system integration practice and the exit of the legacy facility based training business.

The operating income as a percentage of revenue decreased to 6.6% in the first quarter of 2021 as compared to 13.2% in the prior period.

Included in the operating income was amortization expense related to acquired intangibles of $1.2 million and $0.6 million for the quarters ended March 31, 2021 and 2020, respectively.

Three Months Ended March 31,

Operating Income

Operating Margin

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.

The increase in revenue for the TTEC Engage segment was due to a net increase of $127.2 million in client programs including certain surge programs for several clients in connection with the COVID-19 pandemic and a $6.5 million increase due to foreign currency fluctuations, offset by a decrease for program completions of $12.7 million.

The operating income increased primarily due to the growth in revenue, revenue mix, and increased profitability in several offerings.

Included in the first quarter of 2021 is a $6.0 million increase to operating income due to grants received related to COVID-19 relief, which was offset by $3.0 million of restructuring and impairment charges related to several facilities in the U.S.

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.

As a result, the operating income as a percentage of revenue increased to 14.6% in the first quarter of 2021 as compared to 8.6% in the prior period.

Included in the operating income was amortization expense related to acquired intangibles of $3.3 million and $3.3 million for the quarters ended March 31, 2021 and 2020, 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.

For the three months ended March 31, 2021, interest income decreased to $0.2 million from $0.4 million in the same period in 2020.

Interest expense decreased to $1.8 million during 2021 from $9.6 million during 2020 due to higher utilization of the line of credit, offset by lower interest rates and a $6.5 million decrease in the charge related to the future purchase of the remaining 30% interest in Motif, Inc.

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.

For the three months ended March 31, 2021, Other income (expense), net decreased to net expense of $0.8 million from net income of $3.4 million during the prior year quarter.

Included in the three months ended March 31, 2021 and 2020 were a $0.9 million expense and a $3.3 million benefit, respectively, related to the fair value adjustment of contingent consideration for two acquisitions (see Part I.

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.

The effective tax rate for the three months ended September 30, 2020 was 25.9%.

The effective tax rate for the three months ended March 31, 2021 was 22.5%.

This compares to an effective tax rate of 29.2% for the comparable period of 2020.

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.

The effective tax rate for the three months ended March 31, 2021 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.

Nine Months Ended September 30,

Operating Income

Operating Margin

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.

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.

Nine Months Ended September 30,

Operating Income

Operating Margin

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.

Partially offsetting these increases was a net $2.8 million in restructuring and impairment charges related to several facilities in the U.S.

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.

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.

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%.

Without a $1.0 million benefit related to restructuring, $2.4 million of expense related to changes in valuation allowances, a $2.8 million benefit related to equity compensation, and a $1.2 million benefit related to the amortization of purchased intangibles, the Company’s effective tax rate for the first quarter of 2021 would have been 23.7%.

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.

During the three months ended March 31, 2021, we generated positive operating cash flows of $69.8 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.

We manage a centralized global treasury function in the United States with a focus on safeguarding and optimizing the use of our global cash and cash equivalents.

Our cash is held in the U.S.

dollars, and outside of the U.S.

dollars and foreign currencies.

We expect to use our cash to fund working capital, global operations, dividends, acquisitions, and other strategic activities.

While there are no assurances, we believe our global cash is well protected given our cash management practices, banking partners and utilization of diversified bank deposit accounts and other high quality investments.

We have global operations that expose us to foreign currency exchange rate fluctuations that may positively or negatively impact our liquidity.

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Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk, for further discussion.

In early April 2021, we drew down approximately $500 million of the availability on the Credit Facility in order to provide funding for the acquisition of Avtex Solutions, Holdings LLC.

During the first quarter 2020, we borrowed $350 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.

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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.

The following discussion highlights our cash flow activities during the three months ended March 31, 2021 and 2020.

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.

Our cash and cash equivalents totaled $144.2 million and $132.9 million as of March 31, 2021 and December 31, 2020, respectively.

We diversify the holdings of such cash and cash equivalents considering the financial condition and stability of the counterparty institutions.

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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.

For the three months ended March 31, 2021 and 2020, net cash flows provided by operating activities was $ 69.8 million and $62.2 million, respectively.

The increase is primarily due to a $25.8 million increase in net cash income from operations offset by a $18.1 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.

For the three months ended March 31, 2021 and 2020, net cash flows used in investing activities was $11.8 million and $22.0 million, respectively.

The decrease was due to a $5.2 million decrease in capital expenditures and a $5.0 million decrease 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.

For the three months ended March 31, 2021 and 2020, net cash flows (used in) provided by financing activities was $(54.2) million and $403.7 million, respectively.

The change in net cash flows from 2020 to 2021 was primarily due to a $456.0 million net million reduction in the line of credit.

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.

Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) increased slightly for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to an increase in net cash from operations offset by a decrease in working capital and lower capital expenditures.

Free cash flow was $58.2 million and $45.4 million for the three months ended March 31, 2021 and 2020, respectively.

Presentation of Non-GAAP Measurements

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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,

Three Months Ended March 31,

Net cash provided by operating activities

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Future Capital Requirements

We currently expect total capital expenditures in 2020 to be between $58 million and $62 million.

We expect total capital expenditures in 2021 to be between 3.1% and 3.3% of revenue.

Approximately 60% of these expected capital expenditures are to support growth in our business and 40% 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 anticipated level of 2021 capital expenditures is primarily driven by new client contracts and the corresponding requirements for additional customer engagement 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.

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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.

During the three months ended March 31, 2021, one of our clients represented more than 10% of our total revenue.

Our five largest clients, collectively, accounted for 41.8% and 36.0% of our consolidated revenue for the three months ended March 31, 2021 and 2020, respectively.

We have had long-term relationships with our top five TTEC Engage clients, ranging from 8 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.

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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.

Some contracts with our five largest clients expire between 2021 and 2023, but most of our largest clients 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis