What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-09 · 69 added, 135 removed, 106 unchanged (66% of the section changed)

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(“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.

pronounced “T-TEC”) is a leading global customer experience (“CX”) as a service (“CXaaS”) partner for many of the world’s most iconic companies, disruptive hypergrowth brands, and large public sector agencies.

TTEC designs, builds, orchestrates, and delivers seamless digitally enabled customer experiences that 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 CX across numerous real-time digital and live interaction channels and different 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 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 is one of the largest pure-play CX technology service providers with expertise in CX strategy, digitization, analytics, process optimization, system integration, cloud-based technology solutions, and transformation enabled by our 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.

The segment delivers omnichannel customer care, technology 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, and fraud management services.

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 62,700 consultants, technologists, and CX professionals.

Our revenue for third quarter 2022 was $592.5 million, approximately $117.9 million, or 20% which came from our TTEC Digital segment and $474.5 million, or 80%, 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.

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

During 2023, the TTEC global operating platform delivered onshore, nearshore, and offshore services in 22 countries on six continents -- the United States, Australia, Belgium, Brazil, Bulgaria, Canada, Colombia, Costa Rica, Germany, Greece, Honduras, India, Ireland, Mexico, the Netherlands, New Zealand, the Philippines, Poland, Singapore, South Africa, Thailand, and the United Kingdom with the help of 65,000 consultants, technologists, and CX professionals.

Our revenue for first quarter 2023 was $633.3 million, approximately $116.9 million, or 18% which came from our TTEC Digital segment and $516.4 million, or 82%, which came from our TTEC Engage segment.

To improve our competitive position in a rapidly changing market and to lead our clients with emerging CX methodologies, 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 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 by building and operating 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.

To this end we were highly acquisitive in the last several years, including our acquisition in April 2022 of certain public sector assets of Faneuil, Inc.

that included healthcare exchange and transportation services contracts.

The acquisition expanded our capabilities in the growing public sector market by adding the building and operating of technology-enabled citizen engagement solutions to our offerings.

We also completed an acquisition early in the second quarter of 2021 of a provider of Genesys and Microsoft cloud contact center services.

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

We serve more than 765 diverse clients globally, including many of the world’s iconic brands, Fortune 1000 companies, government agencies, and disruptive growth companies.

Cybersecurity Incident

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 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, in the fourth quarter of 2021 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 it believes to be appropriate to protect its systems and its data.

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.

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 continue to make further investments in 2022.

We anticipate the likely investment to be at least $7 million in 2022 and beyond.

The incident and any failure or perceived failure by us to comply with applicable privacy laws and cyber security regulations in connection with this incident resulted in certain government enforcement actions, regulatory investigations, fines, penalties, and private legal actions, which although significant, did not materially impact our results of operations and expenses associated with the incident.

There can be no assurances however that future regulatory enforcement action would not have a material impact on the results of operations.

In 2022, allegations were made against the Company about data privacy failures, which are typical when cybersecurity incidents result in data exfiltration.

The Company settled these allegations without material impact to operations.

We have also been notified by a state regulator that we violated certain cybersecurity regulations, which violations were subsequently remediated but will likely result in a fine.

Other actual and potential consequences of the incident included and 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 I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021.

COVID-19 Pandemic

Through the period ended September 30, 2022 the COVID-19 pandemic has not had a material adverse impact on our operational or financial results.

As of September 30, 2022 we have no continuing COVID-19 related surge work.

Our clients continue to reposition their work in the post-pandemic environment, leveraging new ways of working, and evolving the use of technology.

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.

The needs of the business and client requests now require for us to return some of our employees from remote work status to on-site work in our customer engage centers.

Some employees are reluctant to return to traditional work on-sites and it may have impacts on our ability to staff projects and deliver services.

Our Integrated Service Offerings and Business Segments

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TTEC Digital and TTEC Engage.

TTEC Digital 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 is one of the largest pure-play CX technology service providers with expertise in CX strategy, digitization, analytics, process optimization, system integration, cloud-based technology solutions, and transformation enabled by our 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:

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.

Our technology services design, build, 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, among others.

● Professional Services:

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

Our management consulting practices deliver customer experience strategy, analytics, process optimization, and system integration, among others.

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.

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

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

Our customer care, technology 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.

Our digital AI operations, 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 2022, our revenue increased $25.7 million, or 4.5%, to $592.5 million over the same period in 2021 including a decrease of $14.1 million, or 2.5%, due to foreign currency fluctuations.

The increase in revenue was comprised of an ($6.1) million, or 5.0%, decrease for TTEC Digital and an increase of $31.9 million, or 7.2%, for TTEC Engage.

Our third quarter 2022 income from operations increased $9.6 million, or 36.8%, to $35.6 million or 6.0% of revenue, compared to $26.1 million or 4.6% of revenue in the third quarter of 2021.

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

The TTEC Digital operating income decreased 6.9% due to decreased amortization expense offset by a continued investment in sales and marketing, product engineering, and geographic expansion.

The TTEC Engage operating income increased 58.7% over the same period last year primarily related to the acquisition of Faneuil and other revenue increases offset by the ramp of several new programs, change in revenue mix away from COVID-surge programs, increased sales and marketing expenses, increased amortization of acquisition related intangible assets, and impairments of internally developed software and real estate leases.

Income from operations in the third quarter of 2022 and 2021 included $4.1 million and $0.2 million of restructuring charges and asset impairments, respectively.

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

In the first quarter of 2023, our revenue increased $44.6 million, or 7.6%, to $633.3 million over the same period in 2022 including a decrease of $6.1 million, or 1.0%, due to foreign currency fluctuations.

The increase in revenue was comprised of a $5.5 million, or 4.9%, increase for TTEC Digital and an increase of $39.0 million, or 8.2%, for TTEC Engage.

Our first quarter 2023 income from operations decreased $3.9 million, or (8.1)%, to $44.4 million or 7.0% of revenue, compared to $48.3 million or 8.2% of revenue in the first quarter of 2022.

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

The TTEC Digital operating income decreased 87.3% due to impairments of real estate, a continued investment in sales and marketing, and product engineering, and one-time contractual cost acceleration.

The TTEC Engage operating income increased 3.6% over the same period last year primarily related to the acquisition of Faneuil and other revenue increases offset by the ramp of several new programs, geographic expansion, increased amortization of acquisition related intangible assets, and impairments of real estate leases.

Income from operations in the first quarter of 2023 and 2022 included $6.4 million and $1.7 million of restructuring charges and asset impairments, respectively.

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

and in other countries with 20,600 workstations, representing 62% of our global delivery capability.

Revenue for our TTEC Engage segment provided from these offshore locations represented 28% of our revenue for the third quarter of 2022, as compared to 31% of our revenue for the corresponding period in 2021.

Revenue for our TTEC Engage segment provided in these offshore locations represented 29% of our revenue for the first quarter of 2023, as compared to 30% of our revenue for the corresponding period in 2022.

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, 2022, the total production workstations for our TTEC Engage segment was 34,100 and the overall capacity utilization in our centers was 72% versus 62% in the prior year period.

As of March 31, 2023, the total production workstations for our TTEC Engage segment was 33,250 and the overall capacity utilization in our centers was 76% versus 70% in the prior year period.

This significant improvement was driven by the Company’s site optimization strategy as more and more clients are adopting the @Home operational platform on a permanent basis.

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

We plan to continue to selectively retain and grow capacity and expand into new offshore markets, while maintaining appropriate capacity onshore, as some of our clients may be subject to regulatory pressures to serve clients onshore.

We plan to continue to selectively retain and grow capacity and expand into new offshore markets, while maintaining appropriate capacity onshore.

As we grow our offshore delivery capabilities and our exposure to foreign currency fluctuation increases, we will continue to actively manage this risk via a multi-currency hedging program designed to minimize operating margin volatility.

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Results of Operations

Three months ended September 30, 2022 compared to three months ended September 30, 2021

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, 2022 and 2021 (amounts in thousands).

Three months ended March 31, 2023 compared to three months ended March 31, 2022

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 driven by decreases in the systems integration practice.

The operating income decrease is primarily attributable to a decrease in amortization expense and increased program gross margins offset by a continued investment in sales and marketing, product engineering and geographic expansion.

Operating income as a percentage of revenue increased to 6.8% in the third quarter of 2022 as compared to 7.0% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.4 million and $6.0 million for the quarters ended September 30, 2022 and 2021, respectively.

Three Months Ended September 30,

The increase in revenue for the TTEC Digital segment was driven by an increase in professional services.

The operating income decrease is primarily attributable to $3.9 million of restructuring and impairment charges, continued investment in sales and marketing, product engineering, and one-time contractual cost acceleration, offset by a decrease in amortization expense.

Operating income as a percentage of revenue decreased to 0.7% in the first quarter of 2023 as compared to 5.6% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.4 million and $6.3 million for the quarters ended March 31, 2023 and 2022, respectively.

Three Months Ended March 31,

Operating Income

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The increase in revenue for the TTEC Engage segment was due to a net increase of $71.8 million in client programs including the acquisition of Faneuil, offset by a decrease for program completions of $27.3 million and a $5.5 million decrease due to foreign currency fluctuations.

The prior year revenue for the same period was impacted by the cybersecurity incident and reduced revenue by approximately $15.0 million.

The operating income increased primarily due to increased revenue and a net reimbursement from insurance of $5.1 million from the cybersecurity incident.

These were offset by the change in revenue mix away from COVID-surge programs, ramp costs for the new programs, incremental growth-oriented investments, integration-related costs associated with the Faneuil acquisition, increased amortization of acquisition related intangible assets, $3.8 million of restructuring and impairment charges related to real estate leases and internally developed software that will not be used in the future, and $2.1 million of accelerated amortization of software.

Prior year operating income for the same period was impacted by the cybersecurity incident which reduced the operating income by $19.5 million.

As a result, operating income as a percentage of revenue increased to 5.8% in the third quarter of 2022 as compared to 3.9% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.6 million and $3.3 million for the quarters ended September 30, 2022 and 2021, respectively.

These were offset by the ramp costs for the new programs, incremental growth-oriented investments, geographic expansion, increased amortization of acquisition related intangible assets, and $2.4 million of restructuring and impairment charges.

As a result, operating income as a percentage of revenue decreased slightly to 8.4% in the first quarter of 2023 as compared to 8.8% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.7 million and $3.2 million for the quarters ended March 31, 2023 and 2022, respectively.

Interest Income (Expense)

For the three months ended September 30, 2022 interest income increased to $0.5 million from $0.2 million in the same period in 2021.

For the three months ended March 31, 2023 interest income increased to $1.2 million from $0.2 million in the same period in 2022.

Interest expense increased to $17.4 million during 2023 from $3.8 million during 2022 due to higher utilization of the line of credit and higher interest rates.

Other Income (Expense)

For the three months ended September 30, 2022 Other income (expense), net increased to net income of $3.9 million from net income of $3.3 million during the prior year quarter.

Included in the three months ended September 30, 2022 was a gain of $2.0 million due to insurance recovery related to property damages and a net $2.1 million expense related to the fair value adjustments of contingent consideration accruals and receivables for one acquisition.

The effective tax rate for the three months ended September 30, 2022 was 15.2%.

For the three months ended March 31, 2023 Other income (expense), net decreased to income of $0.7 million from income of $1.3 million during the prior year quarter.

Included in the three months ended March 31, 2023 was a $3.2 million expense related to the fair value adjustments of contingent consideration for the Faneuil acquisition (see Part I.

Financial Statements, Note 2 to the Consolidated Financial Statements).

The effective tax rate for the three months ended March 31, 2023 was 27.5%.

This compares to an effective tax rate of 17.5% for the comparable period of 2022.

The effective tax rate for the three months ended September 30, 2022 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, 2023 was impacted 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 $1.7 million benefit related to equity compensation, a $0.4 million of expense from changes to valuation allowances and the related recording of a deferred tax liability, a $2.4 million benefit related to the amortization of purchased intangibles, a $1.0 million benefit related to restructuring and impairments, $2.0 million benefit related to tax contingencies, $0.7 million benefit related to tax rate changes, $1.8 million of expense related to the cybersecurity incident, and a $1.1 million benefit related to other items, the Company’s normalized tax rate for the third quarter of 2022 was 24.2%.

Results of Operations

Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

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, 2022 and 2021 (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 increases in the cloud platform and the systems integration practice including the acquisition of Avtex.

The operating income increase is primarily attributable to the increased revenue from the acquisition of Avtex and other revenue partially offset by increased amortization of acquisition related intangible assets and continued investment in sales and marketing, product engineering and geographic expansion.

Operating income as a percentage of revenue decreased to 7.3% for the nine months ended September 30, 2022 as compared to 7.6% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $15.5 million and $12.8 million for the nine months ended September 30, 2022 and 2021, 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 $233.9 million in client programs including the acquisition of Faneuil, and offset by a $27.9 million decrease due to foreign currency fluctuations and a decrease for program completions of $133.8 million.

Operating income decreased due to the change in revenue mix away from COVID-surge programs, ramp costs for the new programs replacing COVID related work, incremental growth-oriented investments, integration-related costs associated with the Faneuil acquisition, increased amortization of acquisition related intangible assets, $17.2 million of restructuring and impairment charges related to real estate leases and internally developed software that will not be used in the future, and $2.1 million of accelerated amortization for software.

These were partially offset by the acquisition of Faneuil, other revenue increases, a reduction in total facility costs and a net reimbursement from insurance of $3.2 million from the cybersecurity incident.

Prior year operating income for the same period was impacted by the cybersecurity incident which reduced the operating income by $19.5 million.

As a result, operating income as a percentage of revenue decreased to 6.6% for the nine months ended September 30, 2022 as compared to 10.5% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $12.6 million and $9.9 million for the nine months ended September 30, 2022 and 2021, respectively.

Interest Income (Expense)

For the nine months ended September 30, 2022 interest income increased to $1.0 million from $0.6 million in the same period in 2021.

Interest expense increased to $20.5 million during 2022 from $8.7 million during 2021 due to higher utilization of the line of credit and higher interest rates.

Other Income (Expense)

For the nine months ended September 30, 2022 Other income (expense), net increased to net income of $11.3 million from net income of $3.5 million during the prior year period.

Included in the nine months ended September 30, 2022 was a gain of $4.1 million due to insurance recovery related to property damages and a net $2.1 million expense related to the fair value adjustments of contingent consideration accruals and receivables for one acquisition.

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.

The effective tax rate for the nine months ended September 30, 2022 was 17.7%.

This compared to an effective tax rate of 21.9% for the comparable period of 2021.

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

tax impacts of foreign earnings.

Without a $4.5 million benefit from restructuring and impairment expenses, a $0.8 million benefit related to the cybersecurity incident, a $1.5 million benefit related to changes in valuation allowances and the related recording of a deferred tax liability, a $7.3 million benefit related to the amortization of purchased intangibles, a $4.7 million benefit related to equity-based compensation, $1.7 million of expense related to tax contingencies, a $0.7 million benefit related to tax rate changes, and a $0.6 million benefit related to other items, the Company’s normalized tax rate for 2022 was 23.2%.

Without a $1.1 million benefit related to equity compensation, a $2.3 million benefit related to the amortization of purchased intangibles, a $1.6 million benefit related to restructuring and impairments, $0.2 million of expense related to tax contingencies, a $0.4 million benefit related to foreign exchange, $0.8 million of expense related to the cybersecurity incident, and a $0.8 million benefit from earnouts related to acquisitions, the Company’s normalized tax rate for the first quarter of 2023 was 26.0%.

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, 2022, we generated positive operating cash flows of $118.8 million.

During the three months ended March 31, 2023, we generated positive operating cash flows of $49.1 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.

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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.

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, 2022 and 2021.

The following discussion highlights our cash flow activities during the three months ended March 31, 2023 and 2022.

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 $172.3 million and $158.2 million as of September 30, 2022 and December 31, 2021, respectively.

Our cash and cash equivalents totaled $151.4 million and $153.4 million as of March 31, 2023 and December 31, 2022, 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, 2022 and 2021, net cash flows provided by operating activities was $118.8 million and $175.1 million, respectively.

The decrease is primarily due to a $13.7 million decrease in net cash income from operations and a $42.5 million reduction in net working capital.

For the three months ended March 31, 2023 and 2022, net cash flows provided by operating activities was $49.1 million and $13.7 million, respectively.

The increase is primarily due to an $8.1 million decrease in net cash income from operations offset by a $43.4 million increase in net working capital.

Cash Flows from Investing Activities

For the nine months ended September 30, 2022 and 2021, net cash flows used in investing activities was $206.8 million and $522.5 million, respectively.

The decrease was due to a decrease related to acquisitions of $339.3 million offset by a $23.8 million increase in capital expenditures.

For the three months ended March 31, 2023 and 2022, net cash flows used in investing activities was $13.6 million and $16.7 million, respectively.

The decrease was due to a $3.0 million decrease in capital expenditures.

Cash Flows from Financing Activities

For the nine months ended September 30, 2022 and 2021, net cash flows provided by financing activities was $111.8 million and $362.5 million, respectively.

The change in net cash flows from 2021 to 2022 was primarily due to a $256.0 million net change in the line of credit and a $3.4 million increase in dividends to shareholders, offset by a $4.4 million decrease in tax payments related to restricted stock units, and a $2.7 million decrease in payments on other debt.

For the three months ended March 31, 2023 and 2022, net cash flows used in financing activities was $43.6 million and $3.8 million, respectively.

The change in net cash flows from 2022 to 2023 was primarily due to a $42.0 million net change in the line of credit offset by a $1.0 million decrease in tax payments related to restricted stock units.

Free Cash Flow

Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) decreased for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to a decrease in net cash from operations, a decrease in working capital and higher capital expenditures.

Free cash flow was $54.2 million and $134.3 million for the nine months ended September 30, 2022 and 2021, respectively.

Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) increased for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily due to a decrease in net cash from operations, an increase in working capital and lower capital expenditures.

Free cash flow was $35.4 million and ($3.0) million for the three months ended March 31, 2023 and 2022, 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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Obligations and Future Capital Requirements

There were no material changes to the Company’s contractual obligations and future capital requirements outside the normal course of business from the date of our 2021 Form 10-K filing on March 3, 2022 through the filing of this report.

There were no material changes to the Company’s contractual obligations and future capital requirements outside the normal course of business from the date of our 2022 Form 10-K filing on February 28, 2023 through the filing of this report.

Future Capital Requirements

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Approximately 65% of these expected capital expenditures are to support growth in our business and 35% relate to the maintenance for existing assets.

The anticipated level of 2022 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 anticipated level of 2023 capital expenditures is primarily driven by new client contracts and the corresponding requirements for additional customer experience 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, 2022, one of our clients represented more than 10% of our total revenue.

Our five largest clients, collectively, accounted for 34.3% and 36.2% of our consolidated revenue for the three months ended September 30, 2022 and 2021, respectively and 35.3% and 38.1% of our consolidated revenue for the nine months ended September 30, 2022 and 2021, respectively.

During the three months ended March 31, 2023, one of our clients represented 10% of our total revenue.

Our five largest clients, collectively, accounted for 34.6% and 37.0% of our consolidated revenue for the three months ended March 31, 2023 and 2022, respectively.

We have had long-term relationships with our top five TTEC Engage clients, ranging from 17 to 23 years, with all of these clients having completed multiple contract renewals with us.

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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 2022 and 2023, but most of our largest clients have multiple contracts with us with different expiration dates for different lines of work.

Some contracts with our five largest clients expire between 2023 and 2025, but many 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