What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-09 · 92 added, 139 removed, 108 unchanged (68% of the section changed)

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TTEC Holdings, Inc.

(“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”, “the Company”, “we”, “our” or “us”;

pronounced “T-TEC”) is a leading global customer experience as a service (“CXaaS”) partner for many of the world’s most iconic and disruptive brands.

TTEC designs, builds, orchestrates, and delivers seamless digitally enabled customer experiences that are designed to increase brand value, customer loyalty, revenue, and profitability through personalized, outcome-based interactions.

We help clients improve their customer satisfaction while lowering their total cost to serve by combining innovative digital solutions with service capabilities that deliver a frictionless customer experience (“CX”) across different channels and phases of the customer lifecycle.

The Company operates and reports its financial results of operation through two business segments:

TTEC Digital and TTEC Engage.

● 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 enterprises, governments and disruptive growth companies on a global scale.

● TTEC Digita l is one of the largest pure-play CX technology service providers with expertise in CX strategy, digital consulting, and transformation enabled by proprietary CX applications and technology partnerships.

TTEC Digital designs, builds, and operates robust digital experiences for clients and their customers through the contextual integration and orchestration of customer relationship management (“CRM”), data, analytics, CXaaS technology, and intelligent automation to ensure high-quality, scalable CX outcomes.

● TTEC Engage provides the digitally enabled CX managed services to support our clients’ end-to-end customer interaction delivery at scale.

The segment delivers omnichannel customer care, tech support, order fulfillment, customer acquisition, growth, and retention services with industry specialization and distinctive CX capabilities for hypergrowth brands.

TTEC Engage also delivers digitally enabled back office and industry specific specialty services including artificial intelligence (“AI”) operations, content moderation, and fraud management services.

TTEC Digital and TTEC Engage strategically come together under our unified offering, Humanify ® 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 CX offerings, including messaging, AI, machine learning, robotic process automation, analytics, cybersecurity, CRM, knowledge management, journey orchestration, and traditional voice solutions.

Our end-to-end CXaaS platform differentiates us from competitors by combining design, strategic consulting, technology, data analytics, process optimization, system integration, and operational excellence along with our decades of industry know-how.

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

During 2022, 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 62,000 consultants, technologists, and CX professionals.

Our revenue for third quarter 2021 was $566.7 million, approximately $124.1 million, or 21.9% which came from our TTEC Digital segment and $442.6 million, or 78.1%, 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.

Our revenue for first quarter 2022 was $588.7 million, approximately $113.6 million, or 19% which came from our TTEC Digital segment and $475.1 million, or 81%, 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 technology-enabled, outcomes-focused services, data analytics, insights and consulting.

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.

To this end we have been highly acquisitive in the last several years, including in April 2022 the acquisition of certain citizen experience assets of Faneuil, Inc.

that include healthcare exchange and transportation services contracts, which will expand our capabilities in the growing public sector market deploying investments to achieve technology-enabled citizen engagement solutions.

We also completed an acquisition early in the second quarter of 2021 of a provider of Genesys and Microsoft cloud contact center services, which followed an acquisition in the second half of 2020 of a preferred Amazon Connect cloud contact center service provider.

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.

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Cybersecurity Incident

On September 12, 2021, TTEC experienced a ransomware incident that temporarily disrupted the Engage business segment’s client support environment.

In September 2021, TTEC experienced a ransomware incident that temporarily disrupted the Engage business segment’s client support environment.

Certain TTEC systems and data became encrypted and certain TTEC data was exfiltrated or destroyed.

TTEC Digital business segment’s information systems and client environment were not involved in the attack.

TTEC activated its incident response and business continuity protocols, notified law enforcement, took all appropriate measures to restore its systems and was able to restore operations for many impacted clients within 72 hours of the start of the incident, and by September 17, 2021, all client facing systems were fully operational.

Most clients maintained connectivity, allowing us to restart our services once we restored operations, but some clients opted to suspend our access to their networks as a security precaution until they were satisfied that the incident was contained.

As of the date of this disclosure, we have returned to services with all our clients.

We recovered exfiltrated data from the unauthorized parties, and while we continue to monitor the situation, we are not currently aware of evidence that exfiltrated data was publicly released.

As of the date of this disclosure, data involved in the incident has been analyzed for impact and notice obligations, appropriate regulatory notices have been made, and notices to individuals who may be impacted are in process of being delivered, consistent with the timelines prescribed by relevant jurisdictions.

TTEC activated its incident response and business continuity protocols, notified law enforcement, took appropriate measures to restore its systems and was able to restore operations for many impacted clients within hours of the start of the incident, with all client-facing systems returning to operations within five days of the incident.

We exercised reasonable efforts to identify data that may have been exfiltrated.

We continue to monitor the situation, and we are not currently aware of evidence that exfiltrated data was publicly released.

As of the date of this report, data involved in the incident has been analyzed for impact and notice obligations, and we provided appropriate regulatory and individual notices about the incident and its potential impacts.

With support from outside forensic experts, TTEC completed its investigation of root causes and impacts of the cybersecurity incident and is working to harden the security of its information technology environment and is taking measures to move to a ‘zero trust’ environment to protect its systems and its data.

TTEC also continues to work on the restoration of certain data and systems destroyed in the incident.

The Company performed appropriate procedures to validate the accuracy and completeness of information involved in its financial reporting, and we have no indication that the accuracy and completeness of any financial information was impacted as a result of the incident.

We do not expect the temporary operational disruptions that occurred due to this incident to have a long-term impact on our operating results.

We will make additional investments in the hardening of our cybersecurity environment and the operational governance of our information technology systems during Q4 2021 and through Q2 2022 but are not yet able to provide a reasonable estimate of the investments to be made.

The incident and any failure or perceived failure by us to comply with applicable privacy laws in connection with this incident, could result in government enforcement actions, regulatory investigations, fines and penalties, which could impact our results of operations and expenses associated with the incident.

The temporary operational disruptions that occurred due to this incident did not have a long-term impact on our results of operations.

We made additional investments in the hardening of our cybersecurity environment and the operational governance of our information technology systems during the fourth quarter of 2021 and expect to make further investments in 2022.

While the total amount of likely investment has not yet been determined, we anticipate that it will be at least $6 million in 2022 and beyond.

The incident and any failure or perceived failure by us to comply with applicable privacy laws in connection with this incident could result in government enforcement actions, regulatory investigations, fines, penalties, and private legal actions, which could impact our results of operations and expenses associated with the incident.

In the first quarter of 2022, we have been served with certain lawsuits alleging data privacy failures, which are typical when cybersecurity incidents result in data exfiltration.

Other actual and potential consequences of the incident may include negative publicity, loss of client trust, reputational damage, litigation, contractual claims, financial judgement or settlements in excess of insurance, and disputes with insurance carriers concerning coverage.

See, Part II, Item 1A Risk Factors.

See, Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021.

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 September 30, 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, including as the result of the emergence of certain variant strains of the virus, 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 a 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.

Through the period ended March 31, 2022 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 only some of our COVID-19 specific surge work has transitioned to more traditional business activities for the same clients, and our clients continue to reposition their work in post-pandemic environment, leveraging new ways of working, and evolving the use of technology, in an inflationary economy with considerable labor pressures.

These changes bring more opportunities to the Company, while at the same time temporarily or permanently divert certain business volumes.

Based on currently available information, we cannot accurately predict the post-pandemic changes to our clients’ businesses and their effect on the magnitude and timing of our clients’ buying decisions.

Further, while to date we have been successful in managing service delivery from a highly disbursed employee population working remotely, 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 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.

TTEC Digita l is one of the largest pure-play CX technology service providers with expertise in CX strategy, digital consulting and transformation enabled by proprietary CX applications and technology partnerships.

TTEC Digital designs, builds, and operates robust digital experiences for clients and their customers through the contextual integration and orchestration of CRM, data, analytics, CXaaS technology, and intelligent automation to ensure high-quality, scalable CX outcomes.

● Technology Services:

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Our management consulting practices deliver customer experience strategy, analytics, process optimization, and learning and performance 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:

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.

TTEC Engage provides the digitally enabled CX managed services to support our clients’ end-to-end customer interaction delivery at scale.

TTEC Engage also delivers digitally enabled back office and industry specific specialty services including AI operations, content moderation, and fraud management services.

● Customer Acquisition, Growth, and Retention 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 we believe increase the quantity and quality of leads and customers.

● Customer Care, Tech Support, and Order Fulfillment Services:

Our customer care, technical support, and order fulfillment 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.

● Digitally Enabled Back Office and Specialty Services:

Our digital AI operations, content moderation, and fraud detection and prevention services provide clients with data tagging and annotation capabilities to train and enable AI platforms, community content moderation, and compliance to meet client content standards, and proactive fraud solutions to assist our clients in the detection and prevention of fraud.

Based on our clients’ preference, we provide our services on an integrated cross-business segment and/or on a discrete basis.

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Financial Highlights

In the third quarter of 2021, our revenue increased $73.8 million, or 15.0%, to $566.7 million over the same period in 2020 including an increase of $3.1 million, or 0.8%, due to foreign currency fluctuations.

The increase in revenue was comprised of a $26.2 million, or 6.3%, increase for TTEC Engage and a $47.5 million, or 62.1%, increase for TTEC Digital.

Our third quarter 2021 income from operations decreased $27.3 million, or 51.1%, to $26.1 million or 4.6% of revenue, compared to $53.4 million or 10.8% of revenue in the third quarter of 2020.

The change in operating income is comprised of a number of factors across the segments.

The TTEC Engage operating income decreased with a 56.8% decline over the same period last year primarily related to the cybersecurity incident during September 2021 which caused outages in operations for several of our Engage clients.

The TTEC Digital operating income decreased 33.5% due to a reduction in a large multi-year government contract and increased amortization of acquisition related intangible assets, partially offset by the 2021 and 2020 acquisitions which accelerated growth in the cloud revenue platform.

Income from operations in the third quarter of 2021 and 2020 included $0.2 million and $2.2 million of restructuring charges and asset impairments, respectively.

In the first quarter of 2022, our revenue increased $49.5 million, or 9.2%, to $588.7 million over the same period in 2021 including a decrease of $5.2 million, or 1.0%, due to foreign currency fluctuations.

The increase in revenue was comprised of a $50.0 million, or 78.6%, increase for TTEC Digital offset by a decrease of $0.5 million, or 0.1%, for TTEC Engage.

Our first quarter 2022 income from operations decreased $25.1 million, or 34.2%, to $48.3 million or 8.2% of revenue, compared to $73.4 million or 13.6% of revenue in the first quarter of 2021.

The decrease in operating income is comprised of a number of factors across the segments.

The TTEC Digital operating income increased 51.0% due to the acquisition of Avtex and growth in the cloud revenue platform offset by increased amortization of acquisition related intangible assets.

The TTEC Engage operating income decreased 39.4% over the same period last year primarily related to the ramp of several new programs, change in revenue mix away from COVID-surge programs, increased sales and marketing expenses and expenses of $3.8 million related to the cybersecurity event from the third quarter of 2021.

Income from operations in the first quarter of 2022 and 2021 included $1.7 million and $3.9 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 22,800 workstations, representing 63% of our global delivery capability.

Revenue for our TTEC Engage segment provided from these offshore locations represented 31% of our revenue for the third quarter of 2021, as compared to 26% of our revenue for the corresponding period in 2020.

Revenue for our TTEC Engage segment provided from these offshore locations represented 28% of our revenue for the first quarter of 2022, as compared to 29% of our revenue for the corresponding period in 2021.

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, 2021, the total production workstations for our TTEC Engage segment was 39,900 and the overall capacity utilization in our centers was 62% versus 58% in the prior year period.

The utilization is higher than the previous year, however continues to be relatively low primarily due to COVID-19 protocols requiring the distancing of associates which has reduced the available seat capacity.

As of March 31, 2022, the total production workstations for our TTEC Engage segment was 36,500 and the overall capacity utilization in our centers was 70% versus 64% in the prior year period.

While utilization has increased, it continues to be lower than the previous years primarily due to COVID-19 protocols requiring the distancing of employees which has reduced the available seat capacity.

Adjusted for social distancing protocols, which reduced the available workstations to approximately 19,800, 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 129%.

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 delivery centers.

Post COVID-19 we expect our clients to leverage a more diversified geographic footprint and an increased mix of work from home versus brick and mortar seats.

We will continue to refine our site strategy and capacity as we finalize plans with our clients and prospects.

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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.

As we grow our offshore delivery capabilities and our exposure to foreign currency fluctuation 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

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Results of Operations

Three months ended September 30, 2021 compared to three months ended September 30, 2020

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, 2021 and 2020 (amounts in thousands).

Three months ended March 31, 2022 compared to three months ended March 31, 2021

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 increase in revenue for the TTEC Digital segment was driven by increases in the cloud platform and the systems integration practice, including the acquisitions of Avtex and VoiceFoundry, offset by reductions in a large multi-year government contract.

Excluding this large multi-year government contract, the TTEC Digital revenue has increased 126% year over year.

The operating income decrease is primarily attributable to the reduction in a large multi-year government contract, and additional amortization of acquisition related intangible assets, partially offset by the acquisitions of Avtex and VoiceFoundry which drove increases in the cloud platform and system integration practice.

Operating income as a percentage of revenue decreased to 7.0% in the third quarter of 2021 as compared to 17.0% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $6.0 million and $0.8 million for the quarters ended September 30, 2021 and 2020, respectively.

Three Months Ended September 30,

The increase in revenue for the TTEC Digital segment was driven by the acquisition of Avtex and increases in the cloud platform and the systems integration practice.

The operating income increase is primarily attributable to the increase in revenue offset by additional amortization of acquisition related intangible assets.

Operating income as a percentage of revenue decreased to 5.6% in the first quarter of 2022 as compared to 6.6% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $6.3 million and $1.2 million for the quarters ended March 31, 2022 and 2021, 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 $45.3 million in client programs and a $2.7 million increase due to foreign currency fluctuations, offset by a decrease for program completions of $21.8 million.

The operating income decreased primarily due to the cybersecurity incident during September 2021 which caused outages in operations for several of our Engage clients;

total cybersecurity incident-related costs were $19.3 million.

This decrease was partially offset by growth in revenue and increased profitability in several offerings.

As a result, operating income as a percentage of revenue decreased to 3.9% in the third quarter of 2021 as compared to 9.7% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $3.3 million and $3.3 million for the quarters ended September 30, 2021 and 2020, respectively.

The slight decrease in revenue for the TTEC Engage segment was due to a net increase of $38.5 million in client programs, offset by a decrease for program completions of $34.1 million and a $4.9 million decrease due to foreign currency fluctuations,.

The operating income decreased primarily due to the ramp of several new programs, change in revenue mix away from COVID-surge programs, increased sales and marketing expenses, and expenses of $3.8 million related to the cybersecurity event from the third quarter of 2021.

As a result, operating income as a percentage of revenue decreased to 8.8% in the first quarter of 2022 as compared to 14.6% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $3.2 million and $3.3 million for the quarters ended March 31, 2022 and 2021, respectively.

Interest Income (Expense)

For the three months ended September 30, 2021 interest income decreased to $0.2 million from $0.6 million in the same period in 2020.

Interest expense increased to $3.5 million during 2021 from $2.8 million during 2020 due to higher utilization of the line of credit.

For the three months ended March 31, 2022 interest income was $0.2 million and $0.2 million in the same period in 2021.

Interest expense increased to $3.8 million during 2022 from $1.8 million during 2021 due to higher utilization of the line of credit and higher interest rates.

Other Income (Expense)

For the three months ended September 30, 2021 Other income (expense), net increased to net income of $3.3 million from net expense of $18.7 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, 2022 Other income (expense), net increased to net income of $1.3 million from net expense of $0.8 million during the prior year quarter.

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

Financial Statements, Note 7 to the Consolidated Financial Statements).

The effective tax rate for the three months ended September 30, 2021 was 30.6%.

The effective tax rate for the three months ended March 31, 2022 was 17.6%.

This compares to an effective tax rate of 22.5% for the comparable period of 2021.

The effective tax rate for the three months ended September 30, 2021 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, 2022 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 a $5.0 million benefit related to the cybersecurity incident, a $3.1 million benefit related to equity compensation, a $2.4 million benefit related to the amortization of purchased intangibles, $6.4 million of expense related to changes in valuation allowances, and $0.4 million of expense related to other items, the Company’s normalized tax rate for the third quarter of 2021 was 19.6%.

Results of Operations

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

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, 2021 and 2020 (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 driven by significant increases in the cloud platform and the systems integration practice including acquisitions of Avtex and VoiceFoundry, offset by reductions in a large multi-year government contract, and the legacy facility based training business and Middle East consulting practice, both of which the Company has exited.

Excluding this large multi-year government contract, the TTEC Digital revenue has increased 86% year over year.

The operating income reduction is primarily attributable to the reduction in a large multi-year government contract and increased amortization of acquisition related intangible assets, partially offset by the increased revenue due to the acquisitions and other revenue increases as well as the exit of the less profitable facilities based training and Middle East consulting practices.

Operating income as a percentage of revenue decreased to 7.6% for the nine months ended September 30, 2021 as compared to 16.3% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $12.8 million and $1.9 million for the nine months ended September 30, 2021 and 2020, 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 $262.7 million in client programs including certain COVID-19 pandemic related programs for several clients, and a $18.4 million increase due to foreign currency fluctuations offset by a decrease for program completions of $63.0 million.

Operating income increased due to growth in revenue, revenue mix, and increased profitability in several offerings and an $8.0 million increase due to grants received related to COVID-19 relief.

Partially offsetting these increases were costs of $19.3 million related to the cybersecurity incident during September 2021 which caused outages in operations for several Engage clients, and a net $6.1 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, operating income as a percentage of revenue increased to 10.5% for the nine months ended September 30, 2021 as compared to 9.2% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $9.9 million and $9.9 million for the nine months ended September 30, 2021 and 2020, respectively.

Interest Income (Expense)

For the nine months ended September 30, 2021 interest income decreased to $0.6 million from $1.4 million in the same period in 2020.

Interest expense decreased to $8.7 million during 2021 from $15.5 million during 2020 due to higher utilization of the line of credit offset by lower interest rates, and a $6.3 million decrease 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, 2021 Other income (expense), net increased to net income of $3.5 million from net expense of $17.0 million during the prior year period.

Included in the nine months ended September 30, 2021 was a $0.7 million expense related to the fair value adjustments of contingent consideration for two acquisitions.

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 Accumulated other comprehensive income (loss).

Financial Statements, Note 2 to the Consolidated Financial Statements.

The effective tax rate for the nine months ended September 30, 2021 was 21.9%.

This compared to an effective tax rate of 26.5% for the comparable period of 2020.

The effective tax rate for the nine months ended September 30, 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 associated U.S.

tax impacts of foreign earnings.

Without a $1.6 million benefit from restructuring expenses, a $5.0 million benefit related to the cybersecurity incident, $8.8 million of expense related to changes in valuation allowances, a $5.9 million benefit related to the amortization of purchased intangibles, a $8.4 million benefit related to equity-based compensation, and $0.7 million of expense related to other items, the Company’s normalized tax rate for 2021 was 21.8%.

Without a $1.5 million benefit related to equity compensation, a $2.5 million benefit related to the amortization of purchased intangibles, a $1.3 million benefit related to changes in valuation allowances, $0.8 million of expense related to other items, a $0.4 million benefit related to restructuring, and a $1.0 million benefit related to the cybersecurity event from the third quarter of 2021,the Company’s normalized tax rate for the first quarter of 2022 was 21.5%.

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, 2021, we generated positive operating cash flows of $175.1 million.

During the three months ended March 31, 2022, we generated positive operating cash flows of $13.7 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, however, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be adversely impacted.

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.

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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 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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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.

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, 2021 and 2020.

The following discussion highlights our cash flow activities during the three months ended March 31, 2022 and 2021.

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 $148.9 million and $132.9 million as of September 30, 2021 and December 31, 2020, respectively.

Our cash and cash equivalents totaled $156.8 million and $158.2 million as of March 31, 2022 and December 31, 2021, 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, 2021 and 2020, net cash flows provided by operating activities was $175.1 million and $186.8 million, respectively.

For the three months ended March 31, 2022 and 2021, net cash flows provided by operating activities was $13.7 million and $69.8 million, respectively.

The decrease is primarily due to a $16.4 million increase in net cash income from operations offset by a $39.7 million reduction in net working capital.

Cash Flows from Investing Activities

For the nine months ended September 30, 2021 and 2020, net cash flows used in investing activities was $522.5 million and $86.6 million, respectively.

The increase was due to a $443.0 million increase related to acquisitions offset by a $7.0 million decrease in capital expenditures.

For the three months ended March 31, 2022 and 2021, net cash flows used in investing activities was $16.7 million and $11.8 million, respectively.

The increase was due to a $5.1 million increase in capital expenditures.

Cash Flows from Financing Activities

For the nine months ended September 30, 2021 and 2020, net cash flows provided by (used in) financing activities was $362.5 million and $(48.9) million, respectively.

The change in net cash flows from 2020 to 2021 was primarily due to a $385.0 million net increase in the line of credit and a $37.2 million decrease in payments of contingent consideration offset by a $4.3 million increase in shareholder dividends and a $6.9 million increase in tax payments related to restricted stock units.

For the three months ended March 31, 2022 and 2021, net cash flows used in financing activities was $3.8 million and $54.2 million, respectively.

The change in net cash flows from 2021 to 2022 was primarily due to a $58.0 million net increase in the line of credit, and a $2.4 million increase in tax payments related to restricted stock units offset by a $9.6 million increase in payments of contingent consideration.

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, 2021 compared to the nine months ended September 30, 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 $134.3 million and $139.0 million for the nine months ended September 30, 2021 and 2020, respectively.

Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) decreased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to an increase in net cash from operations offset by a decrease in working capital and higher capital expenditures.

Free cash flow was $(3.0) million and $58.2 million for the three months ended March 31, 2022 and 2021, 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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Client Concentration

During the nine months ended September 30, 2021, one of our clients represented more than 10% of our total revenue.

Our five largest clients, collectively, accounted for 36.2% and 42.6% of our consolidated revenue for the three months ended September 30, 2021 and 2020, respectively and 38.1% and 39.1% of our consolidated revenue for the nine months ended September 30, 2021 and 2020, respectively.

During the three months ended March 31, 2022, one of our clients represented more than 10% of our total revenue.

Our five largest clients, collectively, accounted for 37.0% and 41.8% of our consolidated revenue for the three months ended March 31, 2022 and 2021, respectively.

We have had long-term relationships with our top five TTEC Engage clients, ranging from 16 to 22 years, with all of these clients having completed multiple contract renewals with us.

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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