EVERTEC, Inc. 2021 Form 10-K Summary
Business Context and Reporting Period
EVERTEC is a transaction-processing and financial technology company serving 26 countries in Puerto Rico, the Caribbean and Latin America. Its businesses include merchant acquiring, payment processing, the ATH debit network, electronic benefits transfer services, core banking, technology outsourcing and other business process management solutions.
The filing covers the fiscal year ended December 31, 2021, with comparisons primarily to the year ended December 31, 2020. The filing is an annual report, not a standalone fourth-quarter report.
- Approximately 95% of 2021 revenue was recurring.
- Puerto Rico generated 80% of total revenue; Latin America and the Caribbean generated the remaining 20%.
- Popular generated approximately 42% of revenue and owned approximately 16.2% of EVERTEC at year-end.
- The Company processed more than three billion transactions in 2021, including over 474 million merchant-acquiring transactions.
Financial Results and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $589.8 million | $510.6 million | 16% |
| Income from operations | $196.5 million | $141.4 million | 39% |
| Operating margin | 33.3% | 27.7% | Up 5.6 percentage points |
| Net income attributable to EVERTEC common stockholders | $161.1 million | $104.4 million | 54% |
| Diluted EPS | $2.21 | $1.43 | 54% |
| Net margin | 27.3% | 20.5% | Up 6.8 percentage points |
| Adjusted EBITDA | $294.8 million | $240.5 million | 23% |
| Adjusted EBITDA margin | 50.0% | 47.1% | Up 2.9 percentage points |
| Cash provided by operating activities | $228.4 million | $199.1 million | 15% |
| Capital expenditures and acquisitions | $81.7 million | $48.6 million | Higher by $33.1 million |
Interest expense declined to $22.8 million from $25.1 million, while the effective tax rate decreased to 11.3% from 15.3%, primarily due to the reversal of a liability for uncertain tax positions after the expiration of a statute of limitations.
At December 31, 2021, cash and cash equivalents were $266.4 million, including $96.3 million held by foreign subsidiaries. Total cash, cash equivalents and restricted cash were $285.9 million. Accounts receivable were $113.3 million, including $38.1 million due from affiliates.
Total debt had a carrying value of $465.3 million, consisting primarily of a $170.9 million Term A Loan and a $293.7 million Term B Loan. The filing also reports approximately $467.5 million of principal indebtedness. The Company had $119.1 million available under its $125.0 million revolving facility and a total secured net leverage ratio of 1.4x, versus a covenant maximum of 4.0x.
Net cash used in investing activities was $83.8 million, including $41.8 million of software additions, $25.1 million of property and equipment purchases and a $14.8 million customer-relationship acquisition. Net cash used in financing activities was $81.3 million, including $32.0 million of debt repayments, $24.4 million of share repurchases and $14.4 million of dividends.
Segment Performance
| Segment | 2021 Revenue | 2020 Revenue | 2021 Adjusted EBITDA Margin |
|---|---|---|---|
| Payment Services - Puerto Rico & Caribbean | $155.4 million | $124.8 million | 57.9% |
| Payment Services - Latin America | $106.0 million | $84.6 million | 40.1% |
| Merchant Acquiring | $144.0 million | $109.8 million | 51.3% |
| Business Solutions | $243.8 million | $235.0 million | 47.8% |
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher transaction volumes, federal pandemic stimulus payments, increased adoption of ATH Movil and ATH Business, the expanded FirstBank relationship, new Latin American implementations and growth of the Place to Pay gateway.
- All four operating segments increased revenue. Business Solutions growth was partly offset by the absence of a $4.4 million prior-year one-time Puerto Rico Department of Education contract; 2021 included approximately $3.0 million of one-time hardware and software sales.
- Cost of revenue increased 10%, primarily due to personnel, technology services, professional services and sales-related costs. Selling, general and administrative expense declined 4%.
- Cash generation improved, but investing outflows increased substantially because of higher software and property investments and the customer-relationship acquisition.
- The Company repurchased 614,288 shares for $24.4 million, compared with 336,022 shares for $7.3 million in 2020.
- Goodwill declined to $393.3 million from $397.7 million, primarily due to foreign currency translation. No goodwill impairment was recorded.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal numerical revenue, earnings or cash-flow guidance. Management expects continued opportunities from the migration to digital payments, contactless transactions, e-commerce, technology outsourcing and expansion in Latin America. Management stated that operating cash flow and available revolver capacity should be adequate for the next twelve months, subject to business and macroeconomic conditions.
On February 24, 2022, after year-end, EVERTEC announced an agreement to sell certain assets to Banco Popular for approximately $197 million payable in EVERTEC stock. The parties also agreed to modify and extend key commercial agreements: the ISO Agreement by 10 years, the ATH Network Participation Agreement by five years and the MSA by three years. The MSA would eliminate exclusivity, establish annual minimums through 2028 and modify the CPI pricing escalator. The transaction was expected to close in mid-2022 and remained subject to customary and regulatory conditions. Management warned that the transaction would reduce revenue and income, primarily in Business Solutions, and would not provide cash at closing.
The Company also announced an agreement to acquire BBR SpA, a Chilean payment-solutions company with operations in Peru, for approximately $60 million, subject to regulatory approval and expected to close in the second or third quarter of 2022.
- Customer concentration: Popular represented approximately 42% of revenue, creating significant renewal, pricing and counterparty risk.
- Geographic concentration: Puerto Rico represented approximately 80% of revenue and is exposed to fiscal, political, economic and natural-disaster risks.
- Leverage and interest-rate risk: Debt is predominantly variable-rate and indexed to LIBOR or successor rates. A 100-basis-point increase in rates would increase annual interest expense by approximately $4.7 million based on year-end debt balances.
- Cybersecurity and operational risk: The Company relies on payment-processing systems, technology infrastructure, employees and third-party providers and may be liable for service failures, fraud, chargebacks or data breaches.
- Regulatory risk: Operations are subject to banking, payments, privacy, anti-money-laundering, sanctions, antitrust and foreign-corrupt-practices requirements.
- Tax risk: The Puerto Rico tax incentive grant provides a preferential 4% rate for qualifying income but requires compliance with employment, investment and residency conditions.
- Unusual items affecting adjusted results included share-based compensation, severance, transaction and refinancing fees, a software impairment charge, elimination of non-cash equity earnings and a gain on asset sales.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021.
Important Facts for Investors to Verify
- Closing conditions, accounting treatment and post-closing revenue impact of the Popular asset sale and commercial-agreement modifications.
- The durability of Popular-related revenue, annual MSA minimums and the effect of eliminating exclusivity and changing revenue-sharing terms.
- Performance of the BBR acquisition, including regulatory approval, purchase-price funding and contribution to revenue and earnings.
- Debt refinancing or repayment plans before the 2023 Term A Loan and revolving facility maturity and the 2024 Term B Loan maturity.
- Transition from LIBOR, including effects on the secured credit facilities and the $250 million interest-rate swap.
- Puerto Rico government receivables, including $14.1 million of net receivables disclosed at year-end, and broader Puerto Rico fiscal and economic conditions.
- Whether transaction volumes remain elevated after the normalization of pandemic-related stimulus effects.
- Goodwill and intangible-asset valuation assumptions, particularly for Payment Services - Latin America, where goodwill was $48.4 million and valuation was identified as a critical audit matter.