EVERTEC, Inc. 2022 Form 10-K Summary
Business context and reporting period
EVERTEC is a transaction-processing and payments technology company serving 26 countries in Puerto Rico, the Caribbean and Latin America. Its businesses include merchant acquiring, payment processing, the ATH debit network, digital payments, core banking, cash processing and technology outsourcing. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021. The company processes more than six billion transactions annually and had approximately 2,700 employees.
Puerto Rico remained the core market, generating 78% of 2022 revenue, compared with 80% in 2021. Popular, Inc. and Banco Popular remained the largest customer relationship, accounting for approximately 39% of 2022 revenue. Popular completed the sale of its remaining EVERTEC shares in August 2022 and no longer owned EVERTEC common stock at year-end.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $618.4 million | $589.8 million | Up 5% |
| Income from operations | $157.4 million | $196.5 million | Down 20% |
| Operating margin | 25.5% | 33.3% | Down 7.8 percentage points |
| Net income attributable to EVERTEC common stockholders | $239.0 million | $161.1 million | Up 48% |
| Diluted GAAP earnings per share | $3.45 | $2.21 | Up 56% |
| Adjusted EBITDA | $269.5 million | $294.8 million | Down 9% |
| Adjusted diluted earnings per share | $2.42 | Not provided in the filing excerpt | Not clear |
| Cash flow from operating activities | $223.4 million | $228.4 million | Down $5.1 million |
| Capital expenditures | $71.9 million | $66.9 million | Up $5.0 million |
| Cash and cash equivalents | $197.2 million | $266.4 million | Down $69.1 million |
Net income benefited substantially from a $135.6 million gain on the Popular Transaction. The resulting 2022 GAAP net income and EPS are therefore not directly indicative of recurring operating performance. Adjusted EBITDA declined despite revenue growth, reflecting higher costs, foreign currency losses and changes to the Popular commercial arrangements.
Operating costs increased 17% to $461.0 million. Cost of revenues rose 17% to $292.6 million, while selling, general and administrative expenses increased 32% to $89.8 million. Depreciation and amortization increased 5% to $78.6 million. The filing records a $4.1 million impairment charge related to multi-year software development.
Segment performance
| Segment | 2022 revenue | Revenue change | 2022 Adjusted EBITDA | 2022 margin |
|---|---|---|---|---|
| Payment Services—Puerto Rico & Caribbean | $178.5 million | Up $23.1 million | $100.8 million | 56.5% |
| Payment Services—Latin America | $128.2 million | Up $22.3 million | $36.1 million | 28.1% |
| Merchant Acquiring | $151.1 million | Up $7.1 million | $63.6 million | 42.1% |
| Business Solutions | $235.3 million | Down $8.5 million | $100.6 million | 42.7% |
Payment Services—Puerto Rico & Caribbean benefited from higher transaction volumes, ATH Movil Business growth, higher issuing services and an acquisition. Latin America revenue benefited from organic growth and the BBR acquisition, but Adjusted EBITDA declined because of a $6.6 million foreign currency remeasurement loss and higher personnel and processing costs.
Merchant Acquiring revenue increased from higher sales volume, pricing initiatives and additional months from the expanded FirstBank relationship. Its Adjusted EBITDA and margin declined because of revenue sharing with Popular and higher transaction-processing costs. Business Solutions revenue and Adjusted EBITDA declined primarily because assets were sold to Popular and a $6.3 million one-time credit was granted at closing.
Liquidity, cash flow and debt
- Operating cash flow was $223.4 million. Investing cash outflow was $133.3 million, including $44.4 million for the BBR acquisition, $10.6 million for customer relationships, $44.9 million for software and $27.1 million for property and equipment.
- Financing cash outflow was $156.8 million, including $96.6 million of share repurchases, $13.8 million of dividends, debt issuance costs and debt refinancing activity.
- At December 31, 2022, cash and cash equivalents were $197.2 million, including $119.7 million held by foreign subsidiaries. Restricted cash was $18.4 million.
- The company entered into new secured credit facilities on December 1, 2022, consisting of a $415.0 million Term Loan A and a $200.0 million revolving facility. The term loan matures in December 2027 and had a $415.0 million principal balance at year-end; $174.0 million was available under the revolver, before the impact of letters of credit.
- Total principal indebtedness was approximately $435.0 million, including $20.0 million drawn under the revolving facility. The balance-sheet carrying value of debt was $410.2 million after applicable discounts and issuance costs.
- The facilities carry predominantly variable interest rates based on SOFR or applicable alternative rates. A 100-basis-point increase in rates was estimated to increase annual interest expense by approximately $1.9 million on year-end debt balances.
- The secured facilities require compliance with a maximum total net leverage ratio of 4.50 to 1.00 through September 30, 2024 and 4.00 to 1.00 thereafter. The reported total secured net leverage ratio was 0.99 to 1.00 at year-end, and management reported no default.
The company repurchased 2.8 million shares for $96.6 million during 2022. Approximately $78.2 million remained available under the repurchase authorization at year-end. Quarterly dividends were $0.05 per share, and the board declared another $0.05 dividend in February 2023.
Material changes, outlook and unusual items
- The July 2022 Popular Transaction exchanged certain assets for 4.6 million EVERTEC shares held by Popular and resulted in a $135.6 million gain. Popular also sold its remaining EVERTEC shares in August 2022.
- The amended Popular MSA includes minimum revenue commitments through September 2028, eliminates exclusivity, reduces the CPI pricing cap from 5% to 1.5%, provides a 10% discount on certain services beginning in October 2025 and includes a retroactive pricing credit. These changes are expected to pressure revenue and margins in Business Solutions and, to a lesser extent, Payment Services—Puerto Rico.
- The amended merchant-acquiring agreement with Banco Popular includes revenue sharing, which reduced and is expected to continue reducing Merchant Acquiring Adjusted EBITDA and margin. The related agreement extends to 2035; the MSA extends to 2028 and the ATH network agreement extends to 2030.
- EVERTEC acquired BBR SpA, a Chile-based payment and technology solutions company with operations in Chile and Peru, for approximately $53 million of consideration. The filing states that its 2022 revenue and earnings contribution was not material.
- After year-end, on February 16, 2023, EVERTEC acquired paySmart in Brazil for approximately $25 million. The acquisition expands issuer-processing and BIN-sponsorship capabilities in Brazil.
- Management expects operating cash flow and the available revolver to meet liquidity needs for at least the next twelve months, but notes that future funding depends on operating performance and economic conditions.
Principal risks and contingencies
- Customer concentration is significant: Popular generated approximately 39% of 2022 revenue, and the Government of Puerto Rico represented 7%. The company had $41.6 million of receivables from Popular and $9.4 million of net receivables from the Puerto Rico government and certain public corporations at year-end.
- Operations are highly concentrated in Puerto Rico and exposed to the territory’s fiscal challenges, political and economic conditions, consumer spending, infrastructure, electricity costs and government payment timing.
- Cybersecurity incidents, system outages, fraud, chargebacks, merchant credit risk and failures by suppliers or counterparties could create financial, regulatory and reputational losses.
- The company is subject to extensive payment-network, privacy, cybersecurity, anti-money-laundering, antitrust, consumer-protection and other regulatory requirements across multiple jurisdictions.
- Variable-rate debt exposes earnings and cash flow to higher interest rates. Debt covenants restrict dividends, repurchases, acquisitions, investments, additional borrowing and other corporate activities.
- Foreign exchange losses were $7.6 million in 2022, compared with a $1.9 million gain in 2021. Inflation and higher personnel, cloud, processing and administrative costs may pressure margins.
- The company relies on a Puerto Rico preferential tax exemption, including a 4% rate on qualifying industrial development income. Failure to satisfy employee, investment or residency requirements could reduce or revoke the benefits.
- Management reported various ordinary-course legal proceedings but does not expect aggregate liabilities to have a material adverse effect. The filing does not provide a clear aggregate potential loss amount for matters where an estimate is unavailable.
Important facts for investors to verify
- Whether revenue growth and transaction-volume trends offset the continuing margin effects of the amended Popular agreements.
- The recurring impact of Popular revenue sharing, the 1.5% CPI cap, the 10% service discount beginning in 2025 and the assets transferred to Popular.
- The sustainability of earnings excluding the $135.6 million Popular Transaction gain and other adjustments included in non-GAAP measures.
- Interest-rate sensitivity, debt amortization and compliance with the secured credit facility’s leverage and distribution covenants.
- Cash availability and potential tax or other restrictions on the $119.7 million held by foreign subsidiaries.
- Integration, performance and purchase accounting for BBR and the subsequent paySmart acquisition.
- Exposure to Puerto Rico government receivables, Popular concentration, cybersecurity events, merchant losses, foreign exchange movements and the preferential tax grant.