EVERTEC, Inc. — Form 10-Q Summary
Business Context and Reporting Period
EVERTEC is a transaction-processing and payment-services company operating across 26 countries in Latin America and the Caribbean. Its businesses include payment processing, merchant acquiring, the ATH debit and ATM network, and business-process management. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Revenue | $160.6 million | $149.1 million | $310.8 million | $288.7 million |
| Income from operations | $46.6 million | $54.3 million | $92.7 million | $99.3 million |
| Net income | $33.6 million | $49.1 million | $72.4 million | $84.7 million |
| Net income attributable to common stockholders | $33.6 million | $49.2 million | $72.5 million | $84.7 million |
| Diluted EPS | $0.47 | $0.68 | $1.00 | $1.16 |
| Adjusted EBITDA | $73.4 million | $80.3 million | $148.8 million | $149.2 million |
| Cash flow from operations | Not separately provided | Not separately provided | $129.9 million | $112.0 million |
- Q2 revenue increased 8%; six-month revenue also increased 8%.
- Q2 operating margin was approximately 29.0%, versus 36.4% in the prior-year quarter. Six-month operating margin was approximately 29.8%, versus 34.4%.
- Q2 net margin was approximately 20.9%, versus 32.9%; six-month net margin was approximately 23.3%, versus 29.3%.
- Adjusted EBITDA margin was approximately 45.7% in Q2 and 47.9% for the six-month period, compared with approximately 53.8% and 51.7%, respectively, in the prior-year periods.
- Cash, cash equivalents and restricted cash totaled $310.6 million at June 30, 2022, including $288.1 million of cash and cash equivalents and $22.6 million of restricted cash.
- Total debt was $455.2 million, consisting primarily of the 2023 Term A Loan and 2024 Term B Loan. The revolving facility had $119.1 million of additional borrowing capacity.
- Capital expenditures were approximately $29.0 million for the first six months, and the Company acquired customer relationships for $10.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher payment transaction volumes, digital-payment growth, Latin America organic growth, the FirstBank relationship, a printing contract, one-time software sales, acquisitions and the Popular MSA CPI escalator.
- Cost of revenues rose 25% in Q2 and 17% for the six-month period. Drivers included a $4.1 million software-development impairment charge, higher personnel and professional costs, increased cloud and equipment expenses, and higher expected-loss provisions.
- SG&A increased 20% in Q2 and 23% for the six-month period, primarily due to higher personnel costs and professional fees related to corporate transactions.
- Income tax expense increased to $7.7 million in Q2 from $2.6 million and to $13.9 million for the six-month period from $7.3 million. The effective tax rate increased to 18.6% from 5.1% in Q2 and to 16.1% from 8.0% for the six-month period, reflecting business mix, higher-tax jurisdictions, withholding taxes and prior-year uncertain-tax-position benefits.
- Merchant Acquiring revenue increased only slightly in Q2, while its Adjusted EBITDA declined to $17.5 million from $20.5 million. Payment Services–Latin America Adjusted EBITDA declined in Q2 primarily due to foreign-currency remeasurement and higher operating expenses.
- The Company repurchased $35.2 million of common stock during the first six months and paid $7.2 million of dividends. At June 30, $114.8 million remained available under the repurchase authorization.
Outlook, Management Commentary, Risks and Unusual Items
Management expects continued opportunity from the shift from cash and paper payments to electronic, mobile and contactless payments, increased outsourcing by financial institutions and governments, and lower payment-system penetration in Latin America and the Caribbean. Management stated that operating cash flow and available revolving capacity should be adequate for the next twelve months, subject to future operating performance and market conditions.
- On July 1, 2022, the Company completed the Popular Transaction and received approximately 4.6 million shares of its own common stock. Related agreements were amended or extended, including a 10-year extension of the merchant-acquiring ISO Agreement, a five-year extension of the ATH Network Participation Agreement and a three-year extension of the MSA.
- The amended Popular arrangements include revenue sharing, a lower MSA CPI cap, a retroactive pricing credit and contractual revenue minimums through 2028. Management expects revenue and margin pressure in Merchant Acquiring, Business Solutions and, to a lesser extent, Payment Services–Puerto Rico.
- Popular historically represented approximately 42% of annual revenue and 41% of Q2 2022 revenue. Popular was required to reduce its voting ownership to 4.5% or less, creating potential risks to the customer relationship, revenue concentration and stock price.
- Also on July 1, 2022, EVERTEC acquired BBR, SpA for approximately $53 million, expanding operations into Chile and Peru.
- The Company has variable-rate debt. A 100-basis-point increase in applicable interest rates would increase annual interest expense by approximately $2.1 million based on June 30 debt balances. A $250 million interest-rate swap hedges part of the 2024 Term B Loan.
- Other principal risks include cybersecurity and system disruption, fraud and merchant credit exposure, regulatory requirements, economic weakness, inflation, rising interest rates, foreign-exchange movements, Puerto Rico’s fiscal and political environment, customer concentration, contract renewals and potential loss of Puerto Rico tax benefits.
- Unusual items included the $4.1 million software impairment charge, higher share-based compensation, foreign-currency remeasurement effects and transaction-related expenses.
- Management stated that legal proceedings are not expected to have a material adverse effect, and disclosure controls were effective as of June 30, 2022.
Investor Verification Checklist
- Verify the post-quarter financial impact of the amended Popular agreements, including revenue sharing, the CPI-cap reduction, retroactive credit and asset sale.
- Assess the sustainability of revenue growth against cost inflation, personnel increases, cloud costs and lower segment margins.
- Monitor Popular’s required reduction in voting ownership and the resulting customer, governance and revenue-concentration risks.
- Reconcile adjusted EBITDA and other non-GAAP measures to GAAP results, particularly the software impairment, share-based compensation and transaction-related adjustments.
- Review debt maturities, variable-rate exposure, covenant compliance and the effectiveness and replacement implications of the LIBOR-based interest-rate swap.
- Evaluate the integration, purchase accounting and contribution of the BBR acquisition in Chile and Peru.
- Confirm future dividend and repurchase decisions, which remain subject to Board approval, liquidity and business conditions.