EVERTEC, Inc. 2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, filed February 28, 2018. EVERTEC provides merchant acquiring, payment processing, debit-network, core banking, technology outsourcing and business-process management services across 26 countries in Latin America and the Caribbean. The company owns and operates the ATH debit network and processes more than two billion transactions annually.
Approximately 94% of 2017 revenue was recurring. Puerto Rico generated approximately 81% of consolidated revenue, while Popular-related products and services represented approximately 43% of revenue. Popular’s Master Services Agreement and Banco Popular’s merchant-acquiring and ATH agreements generally run through 2025.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $407.1 million | $389.5 million | +5% |
| Income from operations | $86.1 million | $107.1 million | -20% |
| Operating margin | 21.1% | 27.5% | Down 6.4 percentage points |
| Net income attributable to EVERTEC common stockholders | $55.1 million | $75.0 million | -27% |
| Diluted EPS | $0.76 | $1.01 | -25% |
| Adjusted EBITDA | $178.0 million | $187.7 million | -5% |
| Adjusted EBITDA margin | 43.7% | 48.2% | Down 4.5 percentage points |
| Cash flow from operations | $145.8 million | $168.1 million | -13% |
| Capital expenditures | $33.5 million | $42.3 million | -21% |
| Cash and cash equivalents | $50.4 million | $51.9 million | -3% |
| Total debt | $616.7 million | $650.8 million | -5% |
Net margin attributable to common stockholders was approximately 13.5%, compared with 19.3% in 2016. Cash interest paid was $25.4 million. The company had $88.0 million available under its $100.0 million revolving credit facility. The senior secured leverage ratio was 3.34 to 1.00, compared with a maximum permitted ratio of up to 4.75 to 1.00 through September 30, 2018.
Fourth-quarter 2017 results
| Metric | Fourth quarter 2017 | Fourth quarter 2016 |
|---|---|---|
| Revenue | $99.6 million | $101.9 million |
| Income from operations | $16.7 million | $25.4 million |
| Net income | $5.9 million | $16.0 million |
| Diluted EPS | $0.08 | $0.22 |
Material changes versus the prior comparable period
- Revenue increased $17.6 million, primarily from higher ATH and card-processing volumes, the PayGroup acquisition, the Accuprint acquisition and increased core-banking revenue.
- Hurricanes Irma and Maria reduced 2017 revenue by an estimated $13 million to $14 million. Power, telecommunications and business interruptions reduced transaction volumes, particularly in merchant acquiring and Puerto Rico payment services.
- Operating costs increased 14%, substantially faster than revenue. Costs included a $12.8 million charge related to exiting a commercially unviable third-party software solution and a $5.0 million impairment of software under development.
- Interest expense increased $5.2 million to $29.9 million, primarily because of higher LIBOR, the 2016 debt amendment and the commencement of the interest-rate swap.
- Income-tax expense decreased to $4.8 million from $8.3 million, partly because a liability related to an uncertain tax position was reversed after the statute of limitations expired.
- Payment Services–Latin America revenue increased to $62.7 million from $47.2 million, primarily due to PayGroup. Merchant Acquiring revenue declined to $85.8 million from $91.2 million, reflecting hurricane-related disruption, an unfavorable merchant mix and lower average ticket sizes.
- PayGroup was acquired on July 3, 2017 for approximately $42.8 million and expanded the company into eight additional Latin American countries. Its 2017 contribution to consolidated revenue and earnings was described as insignificant.
- The company repurchased 465,240 shares for $7.7 million, compared with 2.5 million shares for $39.9 million in 2016.
- The Board declared three quarterly dividends of $0.10 per share during 2017, then temporarily suspended the dividend on November 2, 2017 because of Puerto Rico’s post-hurricane operating environment.
Guidance, outlook, commentary and risks
Management stated that operating cash flow and available revolver capacity were expected to meet liquidity needs for the next twelve months, subject to operating performance and broader economic conditions. Management also estimated $5 million to $8 million of revenue attrition in Latin America during 2018 from previously disclosed client migrations.
- Recovery of Puerto Rico and Caribbean transaction volumes after Hurricanes Irma and Maria remained uncertain; consumer spending, merchant reopenings, population migration and infrastructure restoration could affect results.
- Puerto Rico’s fiscal crisis and Title III restructuring under PROMESA could delay government payments, reduce government contracts and weaken consumer spending. Net receivables from the Commonwealth and certain public corporations were $11.8 million at year-end; the company reported no direct exposure to Puerto Rico government debt obligations.
- Customer concentration is significant: Popular represented approximately 43% of 2017 revenue and the Puerto Rico government approximately 7%. Nonrenewal or renegotiation of agreements expiring in 2025 could materially affect revenue, profitability and debt capacity.
- Debt maturities are concentrated, with approximately $58.95 million of contractual principal payments in 2018 and $540.8 million in 2020. Most debt bears variable interest rates; a 100-basis-point increase above applicable floors would increase annual interest expense by approximately $4.1 million.
- A $200 million interest-rate swap fixes a portion of Term B Loan exposure through April 2020, but creates counterparty risk.
- The company remains exposed to cybersecurity incidents, system outages, fraud, merchant chargebacks, payment-network rule changes, regulatory requirements, competition, foreign-exchange movements and potential goodwill or intangible-asset impairment.
- The Puerto Rico tax incentive grant provides preferential rates, including a 4% rate on certain industrial development income, but requires compliance with employment, investment and residency conditions. Loss or reduction of the grant could materially increase taxes.
- Management and Deloitte & Touche reported effective disclosure controls and internal control over financial reporting. PayGroup, representing approximately 6% of consolidated assets and 3% of revenue, was excluded from management’s internal-control assessment.
Most important facts for investors to verify
- Whether Puerto Rico transaction volumes, merchant activity and margins recover to pre-hurricane levels.
- The status and renewal economics of the Popular MSA, Banco Popular merchant-acquiring agreement and ATH agreements as their 2025 terms approach.
- 2018 and 2020 debt refinancing or repayment plans, covenant compliance and sensitivity to higher interest rates.
- The sustainability of revenue and earnings after excluding hurricane effects, software exit and impairment charges, acquisition effects and other adjustments.
- The basis for management’s projected $5 million to $8 million Latin American revenue attrition in 2018 and the timing of affected client migrations.
- Future dividend policy, given the temporary suspension, debt restrictions and the holding-company dependence on subsidiary distributions.
- Progress in integrating PayGroup and the economic returns from the expansion into eight additional countries.
- Potential exposure from Puerto Rico government receivables, PROMESA proceedings, tax incentive requirements and unresolved tax positions.