EVERTEC, Inc. 2021 Q3 Form 10-Q Summary
Business context and reporting period
EVERTEC is a transaction-processing company serving 26 countries in Puerto Rico, the Caribbean and Latin America. Its businesses include Payment Services, Merchant Acquiring and Business Solutions, including operation of the ATH debit network. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $145.9 million | $136.5 million | $434.6 million | $376.4 million |
| Income from operations | $47.0 million | $43.8 million | $146.3 million | $102.2 million |
| Net income | $35.3 million | $34.6 million | $120.0 million | $72.5 million |
| Net income attributable to EVERTEC | $35.3 million | $34.5 million | $120.0 million | $72.2 million |
| Diluted EPS | $0.48 | $0.47 | $1.65 | $0.99 |
| Adjusted EBITDA | $69.8 million | $70.0 million | $218.9 million | $176.5 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $175.9 million | $121.2 million |
Q3 operating margin was approximately 32.2%, compared with 32.1% in the prior-year quarter. Nine-month operating margin was approximately 33.7%, compared with 27.1%. Nine-month net margin was approximately 27.6%, compared with 19.3% in 2020. Adjusted EBITDA margin was 47.8% in Q3 2021 versus 51.3% in Q3 2020, and 50.4% for the nine-month period versus 46.9%.
At September 30, 2021, cash and cash equivalents were $244.1 million, restricted cash was $18.7 million, and total cash, cash equivalents and restricted cash were $262.8 million. Total debt was $468.5 million, consisting primarily of the 2023 Term A Loan and 2024 Term B Loan. The secured revolving facility had $119.1 million of additional borrowing capacity. The secured leverage ratio was 1.47 to 1.00, and management reported no credit agreement default.
Nine-month investing cash outflows were $60.3 million, including $31.0 million of software additions, $12.4 million of property and equipment purchases, a $14.8 million customer relationship acquisition and $3.0 million of debt securities purchases. Financing cash outflows were $74.1 million, including $28.5 million of debt repayment, $24.4 million of share repurchases and $10.8 million of dividends.
Material changes versus the prior comparable period
- Q3 revenue increased 7% to $145.9 million; nine-month revenue increased 15% to $434.6 million.
- Nine-month operating income increased 43%, primarily due to higher transaction volumes, recovery from COVID-19-related disruption in the prior-year period, federal stimulus-supported consumer spending, growth in ATH Movil and ATH Movil Business, new Latin American implementations and Place to Pay expansion.
- Nine-month net income increased 66%, while diluted EPS increased to $1.65 from $0.99. The improvement included higher operating income and a lower effective tax rate of 10.8% versus 17.7%, partly reflecting reversal of a liability for uncertain tax positions.
- Q3 adjusted EBITDA declined slightly despite higher revenue, primarily because of increased operating costs. Nine-month adjusted EBITDA increased 24%.
- Q3 Business Solutions revenue decreased 8% and adjusted EBITDA decreased 21%, largely because the 2020 period included a $4.4 million one-time Puerto Rico Department of Education contract. Nine-month Business Solutions revenue increased 3% and adjusted EBITDA increased 2%.
- Q3 Payment Services–Puerto Rico & Caribbean revenue increased 16% and adjusted EBITDA increased 18%. Merchant Acquiring revenue increased 23% and adjusted EBITDA increased 21%. Payment Services–Latin America revenue increased 26%, while its adjusted EBITDA increased 5% and margin declined to 37.3% from 44.9%.
- Debt declined by approximately $28.2 million from December 31, 2020, primarily due to scheduled and mandatory repayments. Interest expense declined 8% for the nine-month period.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal numerical revenue, earnings or cash-flow guidance. Management stated that operating cash flow and available revolver capacity should be adequate for liquidity needs over the next 12 months, subject to future operating performance and other factors.
Management cited continued migration from cash to electronic payments, increased digital-payment adoption and outsourcing demand as growth opportunities. It also noted moderate seasonality around holidays and consumer spending periods.
- Popular accounted for approximately 41% of Q3 revenue and 42% of nine-month revenue. EVERTEC relies on its Master Services Agreement with Popular and on renewal of significant customer contracts.
- Key risks include cybersecurity and system disruptions, fraud and merchant credit exposure, regulatory requirements, credit-card network changes, geographic concentration in Puerto Rico, Latin American political and economic conditions, natural disasters, COVID-19 impacts and potential loss of preferential Puerto Rico tax rates.
- Debt is principally variable-rate. A 100-basis-point increase in applicable interest rates would increase annual interest expense by approximately $2.7 million based on debt outstanding at September 30, 2021. A $250 million interest-rate swap fixed part of the 2024 Term B Loan at 2.89%; the filing also discusses LIBOR discontinuation risk.
- Unusual items included a $14.8 million customer relationship acquisition, a $0.6 million software impairment charge, a $0.5 million loss on damaged POS devices and a gain from asset sales. The filing also reported $10.9 million of share-based compensation expense for the first nine months.
- The Board declared a regular $0.05 per-share quarterly dividend payable December 3, 2021. Future dividends remain subject to Board approval and business conditions.
- Management stated that legal proceedings are ordinary-course matters and are not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Assess the sustainability of transaction growth supported by federal stimulus and post-COVID recovery, particularly in Puerto Rico and Merchant Acquiring.
- Monitor concentration with Popular, including MSA renewal terms, pricing concessions and the percentage of revenue represented by the relationship.
- Reconcile adjusted EBITDA and adjusted net income to GAAP results and distinguish recurring operating performance from share-based compensation, amortization, transaction fees and other adjustments.
- Review debt maturities, mandatory excess-cash-flow repayments, variable-rate exposure, the interest-rate swap and the transition away from LIBOR.
- Evaluate cash deployment among capital expenditures, acquisitions, debt reduction, dividends and share repurchases.
- Track the effective tax rate and the durability of Puerto Rico tax benefits and discrete tax adjustments.
- Review cybersecurity, operational resilience, regulatory, geographic, government-customer and litigation exposures described in the filing.