EVERTEC, Inc. 2013 Form 10-K Summary
Business context and reporting period
EVERTEC provides merchant acquiring, payment processing, business solutions and ATH debit-network services across 19 countries in Latin America and the Caribbean. The filing covers the fiscal year ended December 31, 2013. Although the request identifies 2013 Q4, this is an annual Form 10-K; fourth-quarter data are included where disclosed.
Operations remain highly concentrated in Puerto Rico: approximately 87% of 2013 revenue was generated there. Popular, Inc. was the largest customer, representing approximately 46% of total revenue, while the Government of Puerto Rico represented approximately 11%.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $357.2 million | $341.7 million | 5% |
| Income from operations | $85.8 million | $79.6 million | 8% |
| Operating margin | 24.0% | 23.3% | Improved |
| Net income | $(24.6) million | $77.4 million | Declined materially |
| Diluted EPS | $(0.31) | $1.01 | Declined materially |
| Adjusted EBITDA | $177.7 million | Not clearly provided in the filing text | Not stated |
| Adjusted net income | $121.3 million | Not clearly provided in the filing text | Not stated |
| Cash flow from operations | $62.9 million | $82.7 million | Down $19.8 million |
| Capital expenditures | $28.5 million | $27.5 million | Increased |
| Cash at period-end | $22.5 million | $25.6 million | Declined |
| Total debt | $735.9 million | $763.8 million | Declined |
Gross margin improved to 54.6% from 53.5%. Segment revenue was $73.6 million for merchant acquiring, $99.3 million for payment processing and $184.3 million for business solutions. Segment operating income was $35.4 million, $54.4 million and $42.4 million, respectively.
Fourth-quarter 2013 revenue was $93.3 million, operating income was $26.6 million and net income was $20.0 million. Fourth-quarter diluted EPS was $0.24.
Liquidity included $22.5 million of cash and $50.0 million of availability under the $100.0 million revolving credit facility. The company stated that operating cash flow and available revolver capacity were expected to meet liquidity needs for the following twelve months.
Material changes versus the prior comparable period
- Revenue increased 5%, with growth across all three segments. Merchant acquiring benefited from higher transaction volumes and sales volume; business solutions benefited from higher network and core-banking demand.
- Income from operations increased 8%, while segment operating income increased 4%. Excluding identified non-recurring expenses, management stated that operating income would have increased 15%.
- SG&A increased 22%, primarily due to stock-option vesting costs, secondary-offering expenses and payroll taxes related to option exercises.
- Net income turned into a loss because of $58.5 million of debt-extinguishment costs and $16.7 million of expenses related to terminating consulting agreements with Apollo and Popular. The 2012 result also benefited from a $66.4 million deferred-tax-liability reduction following a Puerto Rico tax grant.
- In April 2013, EVERTEC completed its IPO and refinanced its debt. The new facilities consisted of a $300 million Term A loan, a $400 million Term B loan and a $100 million revolving facility. The 11% senior notes were redeemed.
- In December 2013, the company repurchased 3.69 million shares for approximately $75.0 million, funded with $25.0 million of cash and $50.0 million of revolver borrowings.
- EVERTEC initiated a regular quarterly dividend of $0.10 per share and paid $16.4 million of cash dividends during 2013.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal numerical revenue, earnings or cash-flow guidance. Management emphasized continued migration from cash to electronic payments, technology outsourcing, cross-selling, geographic expansion and new products as growth opportunities.
- Customer concentration: Popular-related products and services represented approximately 46% of revenue, and the Master Services Agreement extends through 2025. Loss or unfavorable renewal of this relationship could materially affect results.
- Leverage and interest-rate risk: Debt is primarily variable-rate and secured by substantially all of the operating assets. A 100-basis-point increase in rates was estimated to increase annual interest expense by approximately $6.9 million. The reported senior secured leverage ratio was 4.04 to 1.00 versus a covenant maximum of up to 6.60 to 1.00, and the company reported compliance with its covenants.
- Puerto Rico exposure: The Puerto Rico economy was in recession, and government debt was downgraded to non-investment grade in February 2014. The company had no direct exposure to Puerto Rico government debt, but economic weakness could reduce transaction volumes and delay government payments.
- Operational and cybersecurity risk: Processing outages, fraud, data breaches, technology defects, privacy violations or failures of third-party providers could lead to liability, regulatory penalties, customer losses and reputational damage.
- Regulatory risk: EVERTEC remains subject to Federal Reserve, FFIEC, payment-network, privacy, anti-money-laundering, sanctions, FCPA and EMV requirements. The filing describes voluntary OFAC disclosures involving potentially prohibited Cuba-related transactions and states that penalties or further investigations remain possible.
- Tax incentives: Puerto Rico tax grants provide preferential tax rates but require employment and investment commitments. Failure to meet those requirements could reduce or revoke the benefits.
- Other unusual items: The company recorded no goodwill impairment in 2013. Legal proceedings were described as ordinary-course matters that management did not expect to have a material effect, although loss ranges for some early-stage claims could not be estimated.
Important facts for investors to verify
- Reconcile GAAP net loss of $24.6 million with Adjusted EBITDA of $177.7 million and Adjusted net income of $121.3 million, including all excluded items.
- Review the sustainability of revenue and cash flow given the 46% Popular concentration and 87% Puerto Rico geographic concentration.
- Confirm current debt balances, amortization requirements, covenant headroom, variable-rate exposure and revolver availability.
- Assess whether the $62.9 million of operating cash flow adequately covers capital expenditures, dividends, debt service and share repurchases.
- Monitor Puerto Rico economic and fiscal conditions, government receivables and the effect of any changes to tax incentives.
- Review the status and potential exposure from OFAC disclosures, sanctions compliance matters, legal proceedings and indemnification obligations.
- Evaluate the effect of competition, EMV adoption, alternative payment methods, network-rule changes and cybersecurity incidents on transaction volumes and margins.