EVERTEC, Inc. 2014 Form 10-K Summary
Business context and reporting period
EVERTEC filed its annual report for the fiscal year ended December 31, 2014. The company provides merchant acquiring, payment processing, business process management, core banking, cash processing, and technology outsourcing services across 19 Latin American and Caribbean countries. It owns and operates the ATH PIN-debit network and processes more than two billion transactions annually.
Revenue is generated through three segments: Merchant Acquiring, Payment Processing, and Business Solutions. Approximately 89% of 2014 revenue was recurring. Puerto Rico represented approximately 87% of total revenue, and Popular, Inc. represented approximately 45% of total revenue under a 15-year master services agreement running through 2025.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $361.1 million | $358.0 million | Up 1% |
| Income from operations | $97.3 million | $85.8 million | Up 14% |
| Operating margin | 27.0% | 24.0% | Up approximately 300 bps |
| Net income | $67.5 million | $(24.6) million | Returned to profitability |
| Basic diluted EPS | $0.86 / $0.86 | $(0.31) / $(0.31) | Improved materially |
| Adjusted EBITDA | $182.8 million | Not clearly provided in the filing text excerpt | 2014 margin 50.6% |
| Cash provided by operating activities | $139.9 million | $62.9 million | Up $77.1 million |
| Capital expenditures | $25.9 million | $28.5 million | Down $2.6 million |
| Cash balance | $32.1 million | $22.5 million | Up $9.6 million |
| Total debt | $693.9 million | $735.9 million | Down $42.0 million |
Segment revenue was $79.1 million for Merchant Acquiring, $105.4 million for Payment Processing, and $176.6 million for Business Solutions. Segment income from operations was $34.3 million, $59.9 million, and $47.6 million, respectively.
Cash used in investing activities was $26.2 million and cash used in financing activities was $104.1 million. Financing uses included $47.5 million of debt repayments, $31.4 million of dividends, and $26.2 million of share repurchases. The company had $77.0 million available under its $100.0 million revolving credit facility at year-end.
Material changes versus the prior comparable period
- Revenue increased only modestly because growth in Merchant Acquiring and Payment Processing was largely offset by lower Business Solutions revenue. Merchant Acquiring revenue rose 7% and Payment Processing revenue rose 5%, while Business Solutions revenue declined 4%.
- Business Solutions revenue declined primarily because hardware and software sales decreased by $10.3 million; core banking and other service revenue increased by $2.7 million.
- Operating costs declined 3% to $263.8 million. Cost of revenues declined 4%, while selling, general and administrative expense increased 6%.
- Operating income increased 14%, supported by lower operating costs and lower depreciation and amortization.
- Net income improved from a 2013 loss to 2014 profit. The 2013 result included a $58.5 million debt-extinguishment charge and a $16.7 million charge related to termination of consulting agreements with Apollo and Popular.
- Interest expense declined to $26.1 million from $37.9 million following the 2013 refinancing.
- Operating cash flow more than doubled, partly because 2013 included payments related to debt redemption and termination of consulting agreements.
- The company repurchased 1,201,194 shares for $26.2 million during the fourth quarter and paid quarterly dividends of $0.10 per share throughout 2014.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal quantitative revenue, earnings, or cash-flow guidance. Management expects continued opportunity from the migration to electronic payments, technology outsourcing, cross-selling, new products, and expansion in Latin America. Management stated that cash flow from operations and available revolving credit capacity should be adequate to meet liquidity needs for the next twelve months, subject to operating performance and other external factors.
- Leverage and interest-rate risk: Approximately $695 million of debt was variable-rate debt. Management estimated that a 100-basis-point increase in rates would increase annual interest expense by approximately $6.7 million to $6.9 million. Year-end senior secured leverage was 3.63x versus a maximum permitted ratio of up to 6.60x.
- Customer concentration: Popular accounted for approximately 45% of revenue, while the Government of Puerto Rico accounted for approximately 10%. Loss or unfavorable renegotiation of the Popular relationship could materially affect results.
- Geographic concentration: Approximately 87% of revenue was generated in Puerto Rico, which was experiencing recessionary conditions and fiscal stress. The company reported no direct exposure to Puerto Rico government debt.
- Operational and cyber risk: The business depends on secure, reliable processing systems and third-party infrastructure. System failures, fraud, cybersecurity incidents, privacy breaches, or payment-network rule changes could result in service interruptions, liability, fines, or customer losses.
- Regulatory and sanctions matters: The company disclosed historical voluntary self-disclosures to OFAC concerning potentially prohibited Cuba-related transactions. The ultimate outcome and potential penalties remained uncertain, although Popular had agreed to specified indemnification obligations subject to contractual limitations.
- Internal controls: Management and PwC identified a material weakness in internal control over financial reporting related to inadequate segregation of duties and the ability of certain individuals to prepare and post journal entries without independent review. Management stated that no improper journal entries were identified and initiated remediation.
- Unusual 2014 expenses: SG&A included approximately $7.9 million of costs associated with CEO succession, accelerated vesting of stock options, and a withdrawn debt offering, along with other non-recurring items. Adjusted EBITDA excluded several unusual and non-cash items and should not be treated as a GAAP liquidity measure.
- Contingencies: The company was involved in ordinary-course litigation and had a $1.0 million letter of credit outstanding. Management did not expect these matters to have a material adverse effect, but some legal claims were at an early stage and the potential loss range was not estimable.
Most important facts for an investor to verify
- Confirm the sustainability of operating-margin expansion and whether revenue growth can offset the decline in Business Solutions hardware and software sales.
- Review the terms, renewal protections, and concentration implications of the Popular master services agreement and related Banco Popular arrangements.
- Assess debt maturities, variable-rate exposure, covenant compliance, refinancing requirements, and available revolver capacity.
- Monitor remediation of the material weakness and whether subsequent filings report effective internal controls.
- Evaluate exposure to Puerto Rico economic and government-payment conditions, including the Government of Puerto Rico customer concentration.
- Review the status and potential financial impact of the OFAC voluntary self-disclosures and related indemnification rights.
- Distinguish GAAP net income and operating cash flow from Adjusted EBITDA and Adjusted Net Income, including the exclusions used in those non-GAAP measures.
- Verify future dividend and share-repurchase capacity against debt covenants, subsidiary cash availability, and holding-company liquidity.