EVERTEC, Inc. 2019 Form 10-K Summary
Business context and reporting period
EVERTEC is a transaction-processing company serving 26 countries in Latin America and the Caribbean. Its businesses include merchant acquiring, payment processing, the ATH debit network, core banking technology, cash processing and IT outsourcing. The filing covers the fiscal year ended December 31, 2019; it is an annual filing rather than a standalone fourth-quarter filing. EVERTEC processed approximately 2.4 billion transactions during 2019, including more than 440 million merchant-acquiring transactions.
Approximately 94% of 2019 revenue was recurring. Puerto Rico accounted for approximately 81% of consolidated revenue, and Popular, Inc. accounted for approximately 43% of revenue under agreements that generally run through 2025.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $487.4 million | $453.9 million | Up 7% |
| Income from operations | $144.5 million | $125.1 million | Up 15% |
| Operating margin | 29.6% | 27.6% | Up 2.0 percentage points |
| Net income | $103.7 million | $86.6 million | Up 20% |
| Net income attributable to common stockholders | $103.5 million | $86.3 million | Up 20% |
| Diluted earnings per share | $1.41 | $1.16 | Up 22% |
| Adjusted EBITDA | $226.2 million | $212.5 million | Up 6% |
| Adjusted EBITDA margin | 46.4% | 46.8% | Down 0.4 percentage points |
| Cash flow from operations | $179.9 million | $172.7 million | Up 4% |
| Capital expenditures | $59.9 million | $41.3 million | Up 45% |
| Cash and cash equivalents | $111.0 million | $70.0 million | Up $41.1 million |
| Total debt | $527.6 million | $538.6 million | Down $11.0 million |
Net margin was approximately 21.3%, compared with 19.1% in 2018. The company reported total assets of $1.01 billion and total equity of $271.6 million at year-end. The filing presents no separate consolidated quarterly cash-flow statement.
Segment performance and material changes
- Payment Services—Puerto Rico & Caribbean: Revenue increased 10% to $125.5 million; Adjusted EBITDA increased to $78.6 million. Results benefited from higher transaction volumes, new transaction fees and approximately $2.7 million of one-time electronic-benefits revenue.
- Payment Services—Latin America: Revenue increased 4% to $84.5 million; Adjusted EBITDA increased 11% to $30.7 million. Growth from intercompany software sales and development services offset anticipated client attrition.
- Merchant Acquiring: Revenue increased 7% to $106.4 million; Adjusted EBITDA increased 1% to $47.2 million. Higher sales volume and pricing actions were partly offset by higher processing costs resulting from a declining average transaction size.
- Business Solutions: Revenue increased 10% to $216.7 million; Adjusted EBITDA increased 11% to $97.4 million, driven by higher volumes, new services to Popular and the Puerto Rico government, and hardware and software sales.
Operating costs increased 4%, slower than revenue growth. Selling, general and administrative expense declined 11%, primarily because 2018 included transaction due-diligence and refinancing costs that did not recur. Other expense was $1.2 million in 2019, compared with $2.6 million of other income in 2018, mainly due to foreign-exchange losses in 2019.
In December 2019, EVERTEC acquired PlacetoPay, a Colombia-based payment gateway and service provider, for approximately $6.3 million. The acquisition was not material to 2019 consolidated results and contributed insignificant revenue and earnings during the year.
Liquidity, debt and capital allocation
- Operating cash flow was $179.9 million. Investing cash use was $65.3 million, including $59.9 million of capital expenditures and $5.6 million of acquisition spending net of cash acquired.
- Financing cash use was $70.2 million, including $31.8 million of share repurchases, $14.4 million of dividends and $14.3 million of long-term debt repayment.
- The company had $116.9 million available under its $125.0 million revolving credit facility at December 31, 2019.
- Senior secured term loans had principal balances of approximately $209.0 million and $321.8 million, maturing in 2023 and 2024, respectively. Total principal indebtedness was approximately $530.9 million.
- The total secured net leverage ratio was 2.07-to-1.00, below the applicable maximum of 4.25-to-1.00. Management reported no default or event of default as of the filing date.
- The company paid quarterly dividends of $0.05 per share during 2019 and repurchased 1.1 million shares for $31.8 million.
Most debt bears variable interest rates. Management estimated that a 100-basis-point increase in applicable rates would increase annual interest expense by approximately $3.3 million. Two interest-rate swaps hedge portions of the variable-rate debt, with a combined notional amount of $450 million.
Guidance, outlook, commentary and risks
Management expects revenue attrition of approximately $3 million to $5 million in Latin America during 2020 from previously announced client migrations. The company expects operating cash flow and available revolver capacity to satisfy liquidity needs for the next twelve months, but notes that debt service, capital expenditures, dividends, acquisitions and refinancing depend on future operating performance.
- Popular concentration: The MSA with Popular, the merchant referral and sponsorship agreement with Banco Popular, and ATH-related agreements have initial terms ending in 2025. Renewal could require pricing or other concessions, and nonrenewal could materially reduce revenue, profitability and cash flow.
- Puerto Rico exposure: The fiscal crisis, PROMESA restructuring, government spending, migration, earthquakes and hurricane-related disruption could reduce consumer spending, transaction volumes and government collections. Net receivables from Puerto Rico and public corporations were $8.9 million at year-end.
- Leverage and interest rates: Debt covenants restrict dividends, acquisitions, additional debt and other corporate actions. LIBOR replacement could affect borrowing costs and the effectiveness of interest-rate swaps.
- Operational and cybersecurity risk: The company depends on payment systems, technology infrastructure, employees, suppliers and third parties. A system failure, cybersecurity breach, fraud event or service-level failure could result in financial losses, penalties and reputational harm.
- Regulatory and tax risk: EVERTEC is subject to extensive payment, privacy, anti-money-laundering, banking and foreign regulatory requirements. Its Puerto Rico tax incentives provide a preferential 4% rate but require compliance with employment, investment and residency conditions.
- Coronavirus disclosure: The filing notes potential POS-device delivery delays in early 2020 but states that the outbreak had not caused major operational disruption as of the filing date. A wider pandemic could affect employees, customers and suppliers.
- Accounting and contingencies: No goodwill impairment was recorded in 2019. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. The company is involved in ordinary-course legal proceedings, but management does not expect material losses.
Most important facts for investors to verify
- Progress and economics of renewal negotiations for the Popular MSA, Banco Popular agreements and ATH-related contracts before 2025.
- Whether revenue growth remains durable after excluding the $2.7 million one-time EBT item and considering expected Latin American attrition.
- Cash conversion after elevated 2019 capital expenditures, acquisition spending, dividends and share repurchases.
- Debt maturities, variable-rate exposure, LIBOR-transition terms and compliance with leverage covenants.
- Exposure to Puerto Rico government customers, PROMESA developments, economic conditions and natural disasters.
- Cybersecurity, payment-system resilience, merchant chargeback exposure and regulatory compliance.
- Continued eligibility for Puerto Rico tax incentives and the potential effect of any tax-rate or regulatory changes.