EVERTEC, Inc. 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a quarterly filing; fourth-quarter results are included in the annual and selected quarterly data.
Business context
EVERTEC is a transaction-processing and business-solutions provider operating across 18 countries in Latin America and the Caribbean. Its businesses comprise Merchant Acquiring, Payment Processing and Business Solutions. The company operates the ATH debit network and processes more than two billion transactions annually. Approximately 89% of 2016 revenue was recurring.
Puerto Rico remains the core market: approximately 84% of 2016 revenue was generated from Puerto Rico. Popular, Inc. was the largest customer, contributing approximately 45% of total revenue under a Master Services Agreement extending through 2025.
Financial highlights
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $389.5 million | $373.5 million | +4% |
| Operating income | $107.1 million | $103.4 million | +4% |
| Operating margin | 27.5% | 27.7% | Down approximately 20 bps |
| Net income attributable to EVERTEC common stockholders | $75.0 million | $85.4 million | -12% |
| Net margin | 19.3% | 22.9% | Down approximately 360 bps |
| Diluted EPS | $1.01 | $1.11 | -9% |
| Adjusted EBITDA | $187.6 million | The filing text does not provide a clear comparable value in the supplied excerpt | 2016 margin: 48.2% |
| Cash flow from operations | $168.1 million | $162.4 million | +3% |
| Cash and cash equivalents | $51.9 million | $28.7 million | +$23.2 million |
| Total debt | $650.8 million | $662.7 million | -$11.9 million |
Segment performance
| Segment | 2016 revenue | Revenue mix | 2016 operating income | Change in operating income |
|---|---|---|---|---|
| Merchant Acquiring, net | $91.2 million | 23.4% | $31.1 million | -15% |
| Payment Processing | $111.5 million | 28.6% | $52.1 million | -6% |
| Business Solutions | $186.8 million | 47.9% | $56.8 million | +13% |
Cash flow, liquidity and debt
- Operating cash flow was $168.1 million. Investing cash use was $54.1 million, including $23.8 million for software and customer relationships, $18.5 million for property and equipment, and $15.6 million for acquisitions.
- Financing cash use was $90.8 million, including $96.7 million of debt repayments, $39.9 million of share repurchases and $29.7 million of dividends, partly offset by new borrowings.
- The company had $72.0 million available under its $100.0 million revolving credit facility at year-end.
- Senior secured debt principal consisted primarily of approximately $29.5 million of 2018 Term A debt, $216.0 million of 2020 Term A debt and $386.0 million of Term B debt. Contractual principal payments were $50.2 million in 2017, $47.0 million in 2018, $24.9 million in 2019 and $540.8 million in 2020.
- The senior secured leverage ratio was 3.38x versus a covenant maximum of up to 4.75x through September 30, 2018. A 100-basis-point increase in applicable interest rates would increase annual interest expense by approximately $4.6 million.
- A $200 million interest-rate swap begins January 1, 2017 and fixes a portion of Term B exposure at an effective rate of 4.4225% through April 2020.
Material changes versus 2015
- Revenue increased 4%, led by Merchant Acquiring growth from the FirstBank merchant portfolio, higher ATH transaction activity, Processa-related revenue and increased core-banking activity.
- Merchant Acquiring and Payment Processing segment profitability declined despite revenue growth. Management cited lower-margin FirstBank activity, lower average ticket and merchant-mix changes, a customer contract shift, a delayed project reducing revenue by approximately $4.5 million, and higher depreciation and amortization.
- Business Solutions operating income rose 13%, primarily from higher core-banking revenue while operating expenses remained relatively stable.
- SG&A increased 26% due largely to higher salaries and benefits, share-based compensation and professional fees, including costs related to the company’s restatement.
- Depreciation and amortization declined 8% as certain merger-related software assets became fully amortized.
- Net income declined because 2015 benefited from a $3.3 million tax benefit related to the reversal of an uncertain tax position, whereas 2016 recorded $8.3 million of tax expense. 2016 also included a $1.5 million loss on debt extinguishment.
- The company acquired 65% of Processa SAS in Colombia and certain assets of Accuprint, Inc. in Puerto Rico. It also amended its credit agreement, extending approximately $219 million of Term A debt and $65 million of revolving capacity to January 2020.
- The company repurchased 2.5 million shares for $39.9 million, compared with 3.0 million shares for $54.9 million in 2015.
- Management stated that the 2015 material weakness related to uncertain tax positions had been remediated as of December 31, 2016. Management and Deloitte issued effective and unqualified assessments of internal control over financial reporting.
Outlook, commentary, risks and unusual items
Management expects liquidity from operating cash flow and the revolving facility to be adequate for the next twelve months, but provides no specific revenue, earnings or margin guidance in the supplied filing text. The stated growth strategy emphasizes cross-selling, new products, geographic expansion, partnerships and selective acquisitions.
- Puerto Rico exposure: The government’s fiscal crisis, PROMESA oversight, possible payment delays, reduced spending and weaker consumer activity could affect revenue, receivables and transaction volumes. Government receivables were $18.0 million at year-end 2016, and the government represented approximately 7% of revenue.
- Customer concentration: Popular represented approximately 45% of revenue. Loss, renegotiation or non-renewal of the Popular relationship could materially reduce cash flow and profitability.
- Leverage and refinancing: Debt is substantial, predominantly variable-rate, and subject to restrictive covenants. A large portion of principal is scheduled for repayment in 2020.
- Technology and cybersecurity: Processing outages, fraud, cyberattacks, privacy breaches or failures involving third parties could result in service credits, liability, regulatory action and customer losses. The payments network experienced a two-hour interruption on January 9, 2016.
- Regulatory and tax matters: EVERTEC is subject to Federal Reserve, FFIEC, CFPB, card-network and foreign regulatory oversight. Its Puerto Rico tax incentive grant provides a preferential 4% rate but requires compliance with employment, investment and residency conditions.
- Legal and sanctions contingencies: The company remains subject to ordinary-course litigation and disclosed historical OFAC voluntary self-disclosures involving Cuba-related transactions; the ultimate outcome of the OFAC review was not clear in the filing.
- Subsequent event: In February 2017, EVERTEC agreed to acquire 100% of Chile-based PayGroup for approximately $42 million, subject to customary conditions and U.S. federal regulatory approval. If approval was not obtained by June 12, 2017, the sellers could terminate and EVERTEC could owe an approximately $2 million penalty.
Important facts for investors to verify
- Whether Popular maintains its current service relationship and approximately 45% revenue contribution through the 2025 contract term.
- The refinancing plan for the approximately $540.8 million of contractual principal payments scheduled for 2020 and the company’s compliance with leverage covenants.
- The effect of Puerto Rico’s fiscal restructuring on government receivables, contract renewals, consumer spending and transaction volumes.
- Underlying margins and volume trends in Merchant Acquiring and Payment Processing, particularly following the FirstBank portfolio integration and the delayed project.
- Actual 2017 performance relative to management’s liquidity expectations and any future formal guidance, which the filing does not provide.
- Regulatory approval, purchase price adjustments and integration progress for the proposed PayGroup acquisition.
- Potential changes to the Puerto Rico tax incentive grant and the approximately $12.2 million of unrecognized tax benefits.
- Cybersecurity, system availability, merchant chargeback exposure and the financial impact of any future outages or network-rule changes.