Evertec(EVTC) - 2020 Q4 - Annual Report

Part I Item 1. Business EVERTEC is a leading transaction processor in Latin America and the Caribbean, operating three service lines with significant revenue from Popular, Inc Company Overview EVERTEC is a leading transaction processor in Latin America and the Caribbean, operating the ATH network and deriving significant revenue from Popular, Inc - EVERTEC is a leading transaction processing company in Latin America and the Caribbean, owning and operating the ATH network, one of the region's leading PIN debit networks[15] - The company's business model is characterized by recurring revenue, with approximately 95% of total revenues in 2020 being recurring, supported by multi-year contracts[19][28] - Popular, Inc. is EVERTEC's largest shareholder (16.2% ownership) and most significant client, generating 44% of the company's revenue in 2020 under a Master Services Agreement (MSA)[20] Industry Trends The transaction processing industry benefits from a global shift to electronic payments and technology outsourcing, accelerated by the COVID-19 pandemic - The COVID-19 pandemic has accelerated the consumer shift from cash to electronic and contactless payment methods[22][26] - Non-cash payment volumes in Latin America grew by 7.8% from 2018 to 2019, reaching 52.6 billion transactions, and are projected to continue growing at 6% through 2023 despite the pandemic's impact[23] - Financial institutions and government agencies are increasingly outsourcing technology systems and processes due to the high cost and inflexibility of legacy systems, creating opportunities for the Company[24] Our Business Segments EVERTEC's operations are structured into Merchant Acquiring, Payment Services, and Business Solutions, processing billions of transactions annually - The Merchant Acquiring business processed over 384 million transactions in 2020, enabling merchants to accept various electronic payment methods[38] - The Payment Services business, including the ATH network, processed approximately two billion transactions in 2020[41] - The Business Solutions segment provides mission-critical services such as core bank processing, network hosting, and is the only non-bank provider of cash processing services to the U.S. Federal Reserve in the Caribbean[44] People and Culture As of December 31, 2020, EVERTEC employed approximately 2,500 people, emphasizing diversity and maintaining employment during COVID-19 - The company employed approximately 2,500 people as of December 31, 2020, with 55% located in Puerto Rico and the US[53] - EVERTEC's workforce is 37% female and over 99% Hispanic, and the company has been included in the Bloomberg Gender Equality Index for three consecutive years[54][55] - In response to COVID-19, the company transitioned most employees to remote work and implemented safety measures for on-site staff, with no layoffs, furloughs, or pay reductions related to the pandemic in 2020[61] Government Regulation and Payment Network Rules EVERTEC is subject to extensive regulation by the Federal Reserve and other bodies due to its Popular, Inc. ties and financial services operations - Due to its relationship with Popular, Inc., a bank holding company, EVERTEC is subject to regulation and oversight by the Federal Reserve Board, which restricts its permissible activities to those authorized for a bank or financial holding company[64][67] - The company is subject to regulatory oversight and examination by the Federal Financial Institutions Examination Council (FFIEC) as a technology service provider to financial institutions[71] - Operations are governed by numerous laws including the Dodd-Frank Act, which imposed restrictions on debit card interchange fees (Durbin Amendment), and various privacy, anti-money laundering (AML), and anti-trust regulations[72][78][79] - As a registered member or service provider for card associations like Visa and MasterCard, the company must adhere to their network rules, including mandates for EMV chip technology[85] Geographic Concentration The company's business is highly concentrated in Puerto Rico, generating 82% of its 2020 revenues, with the remainder from Latin America and the Caribbean | Region | Revenue Contribution (FY 2020) | | :--- | :--- | | Puerto Rico | 82% | | Latin America & Caribbean | 18% | Item 1A. Risk Factors The company faces significant risks from its reliance on Popular, Inc., operational vulnerabilities, Puerto Rico's economic instability, and extensive regulations Risks Related to Our Business Key business risks include heavy dependence on Popular, Inc., system failures, cybersecurity threats, Puerto Rico's fiscal crisis, and evolving government regulations - A significant portion of revenue (44% in 2020) is derived from the relationship with Popular, Inc., and the Master Services Agreement (MSA) expires in 2025, creating renewal and pricing risk[95][99] - The business is highly dependent on its technology infrastructure; system failures, security breaches, or data theft could lead to operational disruptions, financial liability, and reputational damage[109][117] - High geographic concentration in Puerto Rico (82% of 2020 revenue) exposes the company to risks from the local economy's fiscal crisis, government instability, and natural disasters like hurricanes[149][154] - The company is subject to extensive government regulation, including banking laws (due to its affiliation with Popular), data protection laws, and antitrust scrutiny, which could result in fines or operational restrictions[132][139][147] - Failure to comply with the terms of its preferential tax grant in Puerto Rico, which requires maintaining specific employment and investment levels, could result in the loss of its 4% preferential income tax rate[162][163] Risks Related to Our Indebtedness The company's high leverage of approximately $499.5 million exposes it to interest rate risk and restrictive debt covenants, with LIBOR phase-out adding uncertainty - As of December 31, 2020, the company had a total principal debt of approximately $499.5 million, creating high leverage that could impact its ability to raise capital and react to economic changes[174] - Debt agreements contain restrictive covenants that limit the company's ability to incur more debt, pay dividends, make investments, and sell assets[177] - The company's borrowings are predominantly at variable interest rates, exposing it to risks from interest rate increases, and the planned phase-out of LIBOR by the end of 2021 introduces uncertainty regarding future financing costs[174][180] Item 2. Properties The company's principal executive offices are leased in San Juan, Puerto Rico, with one owned property in Costa Rica and 14 leased facilities across the region - The company's main executive offices are leased in San Juan, Puerto Rico[185] - EVERTEC owns one property in Costa Rica and leases 14 other facilities across Latin America and the Caribbean[186] Item 3. Legal Proceedings The company is involved in various ordinary course legal proceedings, which management does not expect to have a material adverse financial effect - The company is a defendant in various legal proceedings arising from the ordinary course of business, which are not expected to have a material adverse effect on its financial condition[187] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities EVERTEC's common stock trades on the NYSE, with the company having a history of dividends and an authorized $100 million stock repurchase program through 2023 - The company's common stock is traded on the New York Stock Exchange (NYSE) under the ticker symbol "EVTC"[191] | Period | Total Shares Purchased | Average Price per Share | | :--- | :--- | :--- | | Mar 2020 | 336,022 | $21.725 | - On December 17, 2020, the Board approved an increase and extension of the stock repurchase program, authorizing up to $100 million in purchases through December 31, 2023[193] Item 6. Selected Financial Data Over 2016-2020, EVERTEC showed consistent revenue growth, increased net income and total assets, while reducing total debt and significantly growing total equity | (In thousands, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $510,588 | $487,374 | $453,869 | $407,144 | $389,507 | | Net income attributable to common stockholders | $104,436 | $103,469 | $86,270 | $55,054 | $75,036 | | Net income per common share—diluted | $1.43 | $1.41 | $1.16 | $0.76 | $1.01 | | Total assets | $1,072,579 | $1,011,676 | $927,292 | $902,788 | $885,662 | | Total debt | $496,779 | $527,603 | $538,606 | $616,740 | $650,759 | | Total equity | $342,429 | $271,623 | $215,606 | $147,976 | $108,175 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, EVERTEC's total revenues grew 5% to $510.6 million, driven by merchant acquiring and ATH Movil, while maintaining strong liquidity and reducing total debt Results of Operations (2020 vs. 2019) In 2020, total revenues increased 5% to $510.6 million, but operating income decreased 2% due to higher costs, while non-operating expenses decreased significantly | (In thousands) | 2020 | 2019 | Variance | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $510,588 | $487,374 | $23,214 | 5% | | Cost of revenues | $226,870 | $213,379 | $13,491 | 6% | | SG&A expenses | $70,808 | $61,411 | $9,397 | 15% | | Income from operations | $141,392 | $144,502 | ($3,110) | (2)% | - The decrease in non-operating expenses was primarily due to a $3.7 million reduction in interest expense and a $6.1 million increase in other income from the remeasurement of assets and liabilities denominated in US dollars[240] - The effective tax rate increased from 11.1% in 2019 to 15.3% in 2020, driven by discrete tax items, an uncertain tax position in a foreign jurisdiction, and a shift in business mix towards higher-taxed lines of business[242] Segment Results of Operations In 2020, Business Solutions led revenue and Adjusted EBITDA growth, while Merchant Acquiring also performed well, and Payment Services saw mixed results | Segment (in thousands) | Revenue 2020 | Revenue 2019 | Adj. EBITDA 2020 | Adj. EBITDA 2019 | | :--- | :--- | :--- | :--- | :--- | | Payment Services - PR & Caribbean | $124,771 | $125,544 | $66,947 | $78,609 | | Payment Services - Latin America | $84,641 | $84,453 | $32,778 | $30,679 | | Merchant Acquiring | $109,788 | $106,388 | $55,106 | $47,156 | | Business Solutions | $234,965 | $216,662 | $114,802 | $97,421 | - Business Solutions revenue growth was driven by a project with the Puerto Rico Department of Education and COVID-19 related services for Popular and the government[256] - Merchant Acquiring performance benefited from a higher average ticket size, which increased spreads despite lower transaction volumes[255] Liquidity and Capital Resources As of December 31, 2020, the company maintained strong liquidity with $202.6 million in cash and generated $199.1 million from operations, reducing debt and paying dividends | (In thousands) | 2020 | 2019 | | :--- | :--- | | Cash provided by operating activities | $199,089 | $179,949 | | Cash used in investing activities | ($48,634) | ($65,347) | | Cash used in financing activities | ($62,617) | ($70,227) | | Increase in cash | $89,984 | $44,375 | - As of December 31, 2020, cash and cash equivalents were $202.6 million, with $117.0 million available for borrowing under the Revolving Facility[257][258] - In 2020, the company repurchased 336,022 shares of common stock for $7.3 million and paid quarterly dividends of $0.05 per share[268][270] Financial Obligations As of December 31, 2020, total principal debt was $499.5 million, subject to variable interest rates and restrictive covenants, with an interest rate swap in place | Facility | Unpaid Principal (Dec 31, 2020) | | :--- | :--- | | 2023 Term A Loan | $190.0 million | | 2024 Term B Loan | $309.5 million | | Total | $499.5 million | - The company must maintain a maximum total secured net leverage ratio, which was 4.00 to 1.00 for the quarter ended December 31, 2020, with the company's actual ratio at 1.86 to 1.00[282][292] - The company uses an interest rate swap to convert a portion of its variable-rate 2024 Term B Loan to a fixed rate of 2.89% on a notional amount of $250 million, effective until November 2024[287][295] Non-GAAP Financial Measures For FY2020, the company reported Adjusted EBITDA of $240.5 million and Adjusted Net Income of $151.4 million, providing alternative performance metrics Reconciliation of Net Income to Adjusted EBITDA and Adjusted Net Income (FY 2020, in thousands) | (In thousands) | Amount | | :--- | :--- | | Net income (GAAP) | $104,851 | | Income tax expense | $19,002 | | Interest expense, net | $23,572 | | Depreciation and amortization | $71,518 | | EBITDA | $218,943 | | Adjustments (Equity income, Compensation, Other fees) | $21,524 | | Adjusted EBITDA | $240,467 | | Further Adjustments (Operating D&A, Cash interest, etc.) | ($89,107) | | Adjusted net income | $151,360 | | Per Share Data (FY 2020) | Amount | | :--- | :--- | | Diluted EPS (GAAP) | $1.43 | | Adjusted Diluted EPS (Non-GAAP) | $2.07 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from floating-rate debt, partially mitigated by swaps, and foreign currency exchange risk from Latin American operations - The company's floating-rate debt creates interest rate risk; a 100 basis point (1%) increase in interest rates would increase annual interest expense by approximately $5.0 million[307] - Foreign currency exchange risk from Latin American operations resulted in an unfavorable cumulative translation adjustment of $24.8 million in accumulated other comprehensive loss as of December 31, 2020[311] Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements for FY2020, including quarterly data showing revenue and net income fluctuations Selected Quarterly Financial Data 2020 (in thousands) | Quarter | Revenues | Income from operations | Net income | | :--- | :--- | :--- | :--- | | Q1 2020 | $121,942 | $32,763 | $22,275 | | Q2 2020 | $117,937 | $25,590 | $15,625 | | Q3 2020 | $136,507 | $43,844 | $34,581 | | Q4 2020 | $134,202 | $39,195 | $32,370 | Selected Quarterly Financial Data 2019 (in thousands) | Quarter | Revenues | Income from operations | Net income | | :--- | :--- | :--- | :--- | | Q1 2019 | $118,836 | $37,405 | $26,734 | | Q2 2019 | $122,548 | $37,688 | $27,137 | | Q3 2019 | $118,804 | $34,802 | $24,786 | | Q4 2019 | $127,186 | $34,607 | $25,043 | Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, confirmed by external auditors - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[319] - Management assessed internal control over financial reporting based on the COSO criteria and found it to be effective as of December 31, 2020[324] Part III Part III incorporates information by reference from the 2021 proxy statement, covering directors, executive compensation, security ownership, and related party transactions Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2021 proxy statement - The required information for this item will be included in the company's proxy statement and is incorporated by reference[329] Item 11. Executive Compensation Details concerning executive compensation are incorporated by reference from the 2021 proxy statement - The required information for this item will be included in the company's proxy statement and is incorporated by reference[330] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related stockholder matters is incorporated by reference from the 2021 proxy statement - The required information for this item will be included in the company's proxy statement and is incorporated by reference[331] Item 13. Certain Relationships and Related Party Transactions and Director Independence Disclosures regarding related party transactions and director independence are incorporated by reference from the 2021 proxy statement - The required information for this item will be included in the company's proxy statement and is incorporated by reference[332] Item 14. Principal Accounting Fees and Services Information about principal accounting fees and services is incorporated by reference from the 2021 proxy statement - The required information for this item will be included in the company's proxy statement and is incorporated by reference[333] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists financial statements and exhibits filed with the Form 10-K, including key organizational and contractual agreements - This item includes the consolidated financial statements of EVERTEC, Inc. and the Report of Independent Registered Public Accounting Firm[335] - A list of exhibits filed with the report is provided, including key agreements such as the Amended and Restated Master Service Agreement with Popular, Inc. and the 2018 Credit Agreement[337][338]