EVERTEC, Inc. 2015 Form 10-K Summary
Business context and reporting period
EVERTEC is a Puerto Rico-based transaction-processing company serving 18 countries in Latin America and the Caribbean. Its three segments are Merchant Acquiring, Payment Processing, and Business Solutions. The filing reports the fiscal year ended December 31, 2015, with restated comparable information for 2014 and 2013.
The company processes more than two billion transactions annually and operates the ATH PIN-debit network. Revenue is largely recurring, supported by multi-year contracts and mission-critical services.
Key financial metrics
| Metric | 2015 | 2014, as restated | Change |
|---|---|---|---|
| Revenue | $373.5 million | $361.8 million | Up 3% |
| Operating income | $103.4 million | $97.0 million | Up 7% |
| Net income | $85.4 million | $66.2 million | Up 29% |
| Basic and diluted EPS | $1.11 | $0.84 | Up $0.27 |
| Cash flow from operations | $162.4 million | $139.8 million | Up $22.6 million |
| Adjusted EBITDA | $186.2 million | Not clearly provided in the filing text | Not clearly provided |
| Adjusted net income | $130.5 million | Not clearly provided in the filing text | Not clearly provided |
- Operating margin was approximately 27.7%, compared with approximately 26.8% in 2014.
- Net margin was approximately 22.9%, compared with approximately 18.3% in 2014.
- Segment revenue was $85.4 million for Merchant Acquiring, $108.3 million for Payment Processing, and $179.8 million for Business Solutions.
- Segment operating income was $36.5 million, $55.4 million, and $50.2 million, respectively.
- Capital expenditures were approximately $45.6 million, including approximately $11.5 million for the FirstBank merchant portfolio and related POS equipment.
- Cash paid for interest was $21.5 million and cash paid for income taxes was $5.7 million.
- Cash was $28.7 million at year-end, including $16.4 million held by foreign subsidiaries. Restricted cash was $11.8 million.
- Total debt was approximately $669.1 million on the balance sheet, while total principal indebtedness was approximately $674 million. The company also reported $17.0 million outstanding under its revolving facility, with $83 million available.
- The senior secured leverage ratio was 3.47x. A 100-basis-point increase in applicable interest rates would have increased annual interest expense by approximately $6.7 million based on year-end debt balances.
- The company paid quarterly dividends of $0.10 per share and repurchased 3.0 million shares for approximately $54.9 million during 2015.
Material changes versus the prior comparable period
- Merchant Acquiring revenue increased 8%, driven by higher existing-merchant sales volume, the FirstBank merchant portfolio, and improved spread. Segment operating income increased 6%.
- Payment Processing revenue increased 3%, primarily from higher ATH and POS network activity, but segment operating income declined 6% because of prior repricing and lower Puerto Rico government-contract revenue.
- Business Solutions revenue increased 1%, primarily from core banking activity, including activity related to Doral Bank and new Popular projects. Segment operating income increased 4%.
- Cost of revenues increased 7%, partly because of $7.4 million of higher salaries and benefits related to severance and increased share-based compensation, higher bad-debt and operational-loss expense, FirstBank revenue-sharing costs, and card-platform development costs.
- Selling, general and administrative expense declined 10%, primarily because 2014 included $7.9 million of non-recurring CEO succession and accelerated-vesting costs and $1.1 million of costs related to a withdrawn debt offering.
- Interest expense declined by $1.5 million because of a lower loan balance and a 25-basis-point margin reduction following a lower leverage ratio.
- Net income benefited from a $11.8 million tax benefit in the third quarter after the statute of limitations expired on a previously recorded uncertain-tax-position liability.
- Cash flow from operations improved substantially, but financing cash use increased to $112.7 million because of higher share repurchases. Cash declined by $3.4 million during the year.
Restatement, outlook, risks, contingencies, and unusual items
- The company restated 2014 and 2013 annual results and quarterly information for 2014 and 2015. The principal issue involved accounting for uncertain tax positions related to 2010 transaction-cost and debt-issuance-cost deductions. The restatement reduced accumulated earnings by $20.9 million as of December 31, 2012.
- Management identified a material weakness in internal control over financial reporting related to the completeness and monitoring of uncertain tax positions. Disclosure controls were deemed ineffective as of December 31, 2015, and Deloitte issued an adverse opinion on internal control effectiveness, although it issued an unqualified opinion on the financial statements.
- The company stated that remediation efforts include enhanced documentation, monitoring, and formal reviews involving finance, legal, and tax personnel.
- Popular remained the largest customer. Products and services billed through Popular represented approximately 45% of 2015 revenue, and the 15-year Master Services Agreement runs through 2025. This concentration creates renewal, counterparty, related-party, and change-of-control risks.
- Approximately 86% of 2015 revenue was generated from Puerto Rico operations. The Puerto Rico government represented approximately 9% of revenue, and government receivables were $18.4 million at year-end. The filing reports no direct exposure to Puerto Rico government debt.
- The Puerto Rico Department of Justice announced an investigation into possible conduct affecting competition under the Puerto Rico Anti-Monopoly Act. The company responded to a formal information request in May 2016; the filing states that the investigation could result in business restrictions or material adverse effects.
- On January 9, 2016, a software glitch caused a two-hour payments-network interruption. System outages, cybersecurity incidents, fraud, data loss, and network-rule violations could result in liability, penalties, lost customers, or reputational damage.
- In December 2015, the company entered into a $200 million interest-rate swap beginning in January 2017, fixing the applicable portion of Term B debt at approximately 4.5% through April 2020. The swap had a $0.5 million liability at year-end.
- Subsequent to year-end, the company acquired 65% of Processa SAS after receiving regulatory approval. It also amended its credit agreement, extending financial-statement delivery deadlines. The amendment could increase interest rates by 50 basis points, plus an additional 25 basis points if later deadlines were missed, and restrict share repurchases and dividends above $0.10 per share until required information was delivered.
- Management stated that operating cash flow and available revolver capacity should be adequate for the next twelve months, but debt service, refinancing, covenant compliance, variable-rate exposure, and restricted payments remain important liquidity considerations.
Most important facts for an investor to verify
- Confirm that all historical comparisons use the restated 2014 and 2013 figures and understand the full impact of the uncertain-tax-position restatement.
- Review the material weakness, Deloitte’s adverse internal-control opinion, and the status and effectiveness of remediation.
- Assess dependence on Popular, including the approximately 45% revenue concentration and the remaining term and termination provisions of the Master Services Agreement.
- Evaluate debt maturities, variable-rate exposure, leverage covenants, the 2018 Term A maturity, and the 2020 Term B maturity.
- Monitor the Puerto Rico fiscal crisis, government receivables, consumer spending, migration, and the company’s geographic concentration.
- Review the Puerto Rico antitrust investigation, cybersecurity and operational incidents, and any related claims, penalties, or customer consequences.
- Reconcile GAAP net income and operating cash flow with Adjusted EBITDA and Adjusted Net Income, including the tax benefit and other adjustments excluded from non-GAAP measures.
- Verify the financial and integration impact of the Processa acquisition and the restrictions imposed by the amended credit agreement.