EVERTEC, Inc. 2018 Form 10-K Summary
Business context and reporting period
EVERTEC provides merchant acquiring, payment processing, debit-network, business-process management, core banking, cash processing and technology outsourcing services across 26 countries in Latin America and the Caribbean. The company owns and operates the ATH debit network and processed approximately two billion transactions in 2018. This Form 10-K covers the fiscal year ended December 31, 2018, with quarterly data including the quarter ended December 31, 2018.
Approximately 95% of 2018 revenue was recurring. Popular, Inc. remained EVERTEC’s largest customer and owned approximately 16.1% of its common stock at year-end. Revenue from Popular represented approximately 41% of total 2018 revenue under agreements generally extending through 2025.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $453.9 million | $407.1 million | +11% |
| Income from operations | $125.1 million | $86.1 million | +45% |
| Operating margin | 27.6% | 21.1% | +6.5 percentage points |
| Net income | $86.6 million | $55.4 million | +56% |
| Net income attributable to common stockholders | $86.3 million | $55.1 million | +57% |
| Diluted EPS | $1.16 | $0.76 | +$0.40 |
| EBITDA | $191.5 million | $153.6 million | +25% |
| Adjusted EBITDA | $212.5 million | $178.0 million | +19% |
| Cash provided by operating activities | $172.7 million | $145.8 million | +18% |
| Capital expenditures | $41.3 million | $33.5 million | +23% |
| Cash and cash equivalents | $70.0 million | $50.4 million | +39% |
| Total debt | $538.6 million | $616.7 million | -13% |
Net margin was approximately 19.1% and adjusted EBITDA margin was approximately 46.8%. Total equity increased to $215.6 million from $148.0 million. Accounts receivable, net, increased to $100.3 million from $83.3 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher ATH debit-network and card-processing volumes, increased merchant-acquiring activity, network revenue growth and a full year of revenue from the 2017 PayGroup acquisition.
- 2018 results benefited from recovery and rebuilding-related spending following Hurricanes Irma and Maria, particularly in merchant acquiring. Management expects elevated relief- and insurance-funded spending to continue through 2019, but considers the pattern temporary and uncertain.
- Operating costs increased only 2%, despite 11% revenue growth. Cost of revenues declined 2%, partly because 2017 included $12.8 million of charges related to exiting a software solution and a $5.0 million software impairment charge.
- Selling, general and administrative expense increased 22%, driven by higher share-based compensation, PayGroup-related salaries, professional fees and $3.5 million of refinancing expenses.
- The company refinanced its prior credit facilities on November 27, 2018 with a $220.0 million Term A facility, a $325.0 million Term B facility and a $125.0 million revolving facility. The refinancing resulted in a $2.6 million loss on extinguishment of debt.
- The company reinstated its quarterly dividend in 2018 at $0.05 per share after suspending it in November 2017. It paid $7.3 million of dividends in 2018 versus $21.8 million in 2017.
- 2018 stock repurchases totaled 367,403 shares costing $10.0 million, compared with 465,240 shares costing $7.7 million in 2017.
- ASC 606 revenue recognition was adopted effective January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $0.9 million; the reported 2018 impact was considered immaterial.
Segment performance
| Segment | 2018 revenue | 2018 adjusted EBITDA | Revenue change |
|---|---|---|---|
| Payment Services—Puerto Rico & Caribbean | $114.1 million | $75.1 million | +12.2% |
| Payment Services—Latin America | $80.9 million | $27.7 million | +29.0% |
| Merchant Acquiring | $99.7 million | $46.5 million | +16.2% |
| Business Solutions | $197.6 million | $87.8 million | +4.5% |
For the quarter ended December 31, 2018, revenue was $118.2 million and net income was $20.2 million, compared with fourth-quarter 2017 revenue of $99.6 million and net income of $5.9 million. The fourth quarter of 2017 was adversely affected by hurricane-related impacts and unusual charges.
Liquidity, debt and cash flow
- Operating cash flow was $172.7 million. Investing cash outflows were $41.3 million, primarily capital expenditures, and financing cash outflows were $105.1 million.
- The company had $70.0 million of cash and cash equivalents plus $16.8 million of restricted cash at December 31, 2018. Approximately $50.3 million of cash was held by subsidiaries outside Puerto Rico and was intended to remain indefinitely reinvested outside Puerto Rico.
- The revolving facility had $97.9 million of borrowing capacity available at year-end, subject to letters of credit and other limitations. Management believes operating cash flow and available revolver capacity are adequate for the next twelve months.
- Debt principal under the new facilities was $220.0 million for Term A and $325.0 million for Term B. The facilities are predominantly variable-rate debt tied to LIBOR and are secured by substantially all eligible company and subsidiary assets.
- The total secured net leverage ratio was 2.30 to 1.00 at year-end, below the applicable covenant maximum of 4.25 to 1.00. Management reported no default or event of default as of the filing date.
- Two interest-rate swaps hedge $200 million through April 2020 and $250 million from April 2020 through November 2024. A 100-basis-point increase in applicable interest rates would increase annual interest expense by approximately $3.5 million based on year-end debt balances.
Outlook, commentary, risks and unusual items
- Management expects continued opportunities from the migration from cash to electronic payments, financial inclusion, technology outsourcing and expansion in Latin America.
- Management estimates revenue attrition of approximately $3 million to $5 million in Latin America in 2019 from previously disclosed client migrations.
- Key concentration risk is the relationship with Popular: approximately 41% of 2018 revenue came from Popular, and the principal agreements expire in 2025. Renewal negotiations could require pricing or other concessions.
- Approximately 79% of 2018 revenue was generated from Puerto Rico, exposing the company to the island’s fiscal crisis, PROMESA restructuring, government payment risk, population migration, economic weakness and consumer-spending volatility. Net receivables from Puerto Rico and certain public corporations were $9.4 million at year-end.
- Other material risks include cybersecurity and system outages, fraud and merchant chargebacks, regulatory and card-network rule changes, competition, interest-rate and LIBOR-transition risk, foreign-exchange volatility, natural disasters, tax-incentive compliance, client contract renewals and acquisition integration.
- 2018 unusual items included $2.6 million of debt-extinguishment loss, $3.5 million of refinancing expenses, $1.8 million of federal hurricane-relief funds and $2.7 million of foreign-currency transaction gains. No goodwill impairment was recorded in 2018.
- The Puerto Rico tax incentive grant provides a preferential 4% rate on qualifying industrial development income but requires compliance with employment, investment and residency commitments. Revocation or reduction of the benefit could materially increase taxes.
- The company and Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether post-hurricane recovery spending persists or creates a difficult comparison and whether 2019 revenue attrition of $3 million to $5 million materializes.
- The terms, pricing and renewal prospects of the Popular MSA, ISO Agreement and ATH agreements, all of which have initial terms ending in 2025.
- Compliance with debt covenants, refinancing capacity, mandatory amortization and exposure to LIBOR or successor benchmark rates.
- The sustainability of the 2018 operating-margin expansion after excluding 2017 hurricane effects and unusual software charges.
- Puerto Rico government receivable collectability, economic conditions, PROMESA developments and the effect on transaction volumes.
- Continued eligibility for Puerto Rico tax incentives and the potential tax effect of any changes in foreign cash repatriation plans.
- Cybersecurity, operational resilience, merchant credit exposure and compliance with card-network and financial-services regulations.