EVERTEC, Inc. 2020 Form 10-K Summary
Business context and reporting period
EVERTEC is a transaction-processing and payments technology company serving 26 countries in Puerto Rico, the Caribbean and Latin America. Its businesses include merchant acquiring, payment services and business process management, including operation of the ATH debit network. This Form 10-K covers the fiscal year ended December 31, 2020, with fourth-quarter data included in the selected quarterly financial information. The filing was dated March 1, 2021.
The business is geographically concentrated in Puerto Rico, which generated 82% of 2020 revenue. Approximately 95% of revenue was recurring in nature. Popular, Inc. remained the largest shareholder, with approximately 16.2% ownership, and represented approximately 44% of revenue.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $510.6 million | $487.4 million | +5% |
| Income from operations | $141.4 million | $144.5 million | -2% |
| Operating margin | 27.7% | 29.6% | Down |
| Net income | $104.9 million | $103.7 million | +1% |
| Net income attributable to common stockholders | $104.4 million | $103.5 million | +1% |
| Diluted EPS | $1.43 | $1.41 | +1% |
| Adjusted EBITDA | $240.5 million | $226.2 million | +6% |
| Adjusted EBITDA margin | 47.1% | 46.4% | Up |
| Cash provided by operating activities | $199.1 million | $179.9 million | +11% |
| Capital expenditures and other investing cash uses | $48.6 million | $65.3 million | Lower use |
Operating costs increased 8% to $369.2 million. Cost of revenues rose 6%, selling, general and administrative expenses rose 15%, and depreciation and amortization rose 5%. The effective tax rate increased to 15.3% from 11.1%, primarily due to discrete tax items, a foreign uncertain tax position and a shift toward higher-taxed Puerto Rico business.
At December 31, 2020, cash and cash equivalents were $202.6 million, including $80.0 million held outside Puerto Rico. Total debt was $496.8 million on a carrying-value basis, while total principal indebtedness was approximately $499.5 million. The company had $117.0 million of additional revolving-facility availability and reported a total secured net leverage ratio of 1.86x versus a 4.00x covenant limit.
Total assets were $1.07 billion and total equity was $342.4 million. Goodwill was $397.7 million and other intangible assets were $219.9 million. No goodwill impairment was recorded.
Segment performance
| Segment | 2020 revenue | Revenue change | 2020 Adjusted EBITDA margin |
|---|---|---|---|
| Payment Services—Puerto Rico & Caribbean | $124.8 million | -1% | 53.7% |
| Payment Services—Latin America | $84.6 million | Flat | 38.7% |
| Merchant Acquiring | $109.8 million | +3% | 50.2% |
| Business Solutions | $235.0 million | +8% | 48.9% |
Business Solutions was the principal revenue growth contributor, benefiting from Puerto Rico Department of Education revenue and COVID-19-related projects for Popular and the Puerto Rico government. Merchant Acquiring benefited from higher spreads and average ticket sizes despite lower transaction volumes. Puerto Rico and Caribbean Payment Services declined because of lower ATH and POS volumes and the absence of a prior-year one-time project. Latin America revenue was affected by foreign currency, client attrition and lower license sales.
Fourth-quarter results
Fourth-quarter 2020 revenue was $134.2 million, compared with $127.2 million in the fourth quarter of 2019. Fourth-quarter operating income was $39.2 million, net income was $32.4 million, and diluted EPS was $0.44, compared with $0.34 in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue increased $23.2 million, led primarily by Business Solutions, merchant acquiring spreads, digital ATH Movil activity and COVID-19-related services.
- Operating income declined $3.1 million because operating expenses grew faster than revenue.
- Net income increased modestly as lower interest expense and favorable foreign-currency remeasurement offset higher operating costs and taxes.
- Operating cash flow increased $19.1 million to $199.1 million, while investing cash use declined because 2019 included substantial infrastructure purchases and the PlacetoPay acquisition.
- Debt declined by approximately $30.8 million on a carrying-value basis, including scheduled and excess-cash-flow repayments.
- Share repurchases declined to $7.3 million for 336,022 shares from $31.8 million for 1.1 million shares in 2019.
- The company maintained quarterly dividends of $0.05 per share and authorized a $100 million share-repurchase program through December 31, 2023.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific quantitative revenue, earnings or margin guidance. Management expects continued opportunity from electronic-payment adoption, contactless payments, e-commerce, digital wallets, QR-code payments and technology outsourcing in Latin America and the Caribbean. Management also expects the effects of COVID-19 to continue affecting operations and financial results, while noting increased demand for digital and contactless payment solutions.
Management stated that cash flows from operations and available revolving-credit capacity should be adequate to meet liquidity needs for the next twelve months, subject to operating performance and broader economic conditions. The company had no reported debt default as of the filing date.
- The Popular MSA, ISO Agreement and ATH agreements have initial terms ending in 2025. Renewal negotiations could require pricing or other concessions and represent a material concentration risk.
- COVID-19 may reduce merchant activity, consumer spending, transaction volumes and demand for certain Business Solutions services, while increasing chargeback, operational and cybersecurity risks.
- Puerto Rico’s fiscal crisis, government payment delays, economic weakness, migration and natural disasters could affect revenue, receivables and payment volumes. Net receivables from the Puerto Rico government and public corporations were $13.9 million at year-end.
- The company is exposed to cybersecurity incidents, payment fraud, merchant credit risk, regulatory changes, card-network rules, foreign exchange volatility and political or economic instability in Latin America.
- Debt is predominantly variable-rate and indexed to LIBOR. A 100-basis-point increase in applicable rates would increase annual interest expense by approximately $5.0 million based on year-end balances. The company had a $250 million interest-rate swap outstanding through November 2024.
- The Puerto Rico tax exemption provides a preferential 4% rate for qualifying income but requires compliance with employment, investment and residency conditions. Loss or reduction of the benefit could materially increase taxes.
- Unusual or non-GAAP adjustments included share-based compensation, transaction and refinancing fees, impairment-related items and elimination of non-cash equity earnings. Adjusted EBITDA and adjusted net income are not GAAP measures.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Goodwill valuation for the Latin America reporting unit was identified as the critical audit matter.
Most important facts for investors to verify
- Terms, pricing and renewal prospects for the Popular MSA and related agreements expiring in 2025.
- Sustainability of the 44% revenue concentration with Popular and the 82% concentration in Puerto Rico.
- COVID-19 effects on transaction volumes, merchant credit losses, chargebacks and government-related revenue.
- Debt maturity schedule, variable-rate exposure, LIBOR replacement provisions, interest-rate swap performance and covenant compliance.
- Ability to preserve the Puerto Rico preferential tax rate and the potential effect of any tax-rate or tax-benefit change.
- Goodwill and intangible-asset carrying values, especially the $52.8 million of Latin America goodwill and the assumptions supporting impairment testing.
- Cash availability at the parent and subsidiary levels, including restrictions on repatriation, dividends and share repurchases.
- Legal, regulatory, cybersecurity and data-privacy developments that could affect payment processing operations.