EVERTEC, Inc. 2019 First-Quarter 10-Q Summary
Business context and reporting period
EVERTEC is a transaction-processing company serving 26 countries in Latin America and the Caribbean. Its businesses include payment services, merchant acquiring, the ATH debit network, core banking, technology outsourcing and business process management. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $118.8 million | $110.3 million | 8% |
| Income from operations | $37.4 million | $33.6 million | 11% |
| Net income | $26.7 million | $23.1 million | 16% |
| Net income attributable to common stockholders | $26.6 million | $23.0 million | 16% |
| Diluted EPS | $0.36 | $0.31 | 16% |
| Adjusted EBITDA | $57.6 million | $54.0 million | 7% |
| Operating cash flow | $29.3 million | $30.4 million | Down $1.0 million |
| Capital expenditures | $14.0 million | $9.4 million | Up $4.6 million |
Derived margins were approximately 31.5% for operating income, 22.5% for net income, 45.5% for EBITDA and 48.5% for Adjusted EBITDA in Q1 2019. The effective tax rate was 12.5%, compared with 14.5% in the prior-year quarter.
Cash and cash equivalents were $73.2 million at March 31, 2019, compared with $70.0 million at December 31, 2018. Including restricted cash, total cash was $86.5 million. Total debt was $556.7 million, including $535.0 million of term loans, $15.0 million drawn on the revolving facility and $6.7 million of notes payable. Additional revolving-facility availability was $82.9 million. The secured leverage ratio was 2.31 to 1.00, and the company reported no default or event of default.
Material changes versus the prior comparable period
- Revenue growth reflected higher Puerto Rico transaction volumes, increased core banking activity, new managed-services projects and approximately $2.7 million of one-time electronic-benefits contract revenue.
- Payment Services–Puerto Rico & Caribbean revenue increased 18% to $32.0 million and Adjusted EBITDA increased 23% to $21.3 million.
- Payment Services–Latin America revenue increased 2% to $20.8 million; Adjusted EBITDA increased 18% to $8.3 million, primarily from intercompany software and service revenue.
- Merchant Acquiring revenue increased 11% to $26.0 million and Adjusted EBITDA increased 10% to $12.0 million, driven by higher sales volumes and transaction fees.
- Business Solutions revenue increased 7% to $51.4 million, but Adjusted EBITDA declined slightly to $23.0 million because of higher application support, maintenance and infrastructure costs.
- Cost of revenues increased 5%, selling, general and administrative expenses increased 13%, and depreciation and amortization increased 3%.
- Operating cash flow declined modestly, while investing cash use increased because of higher software and property-and-equipment spending.
- Financing activity included a $15.0 million revolving-facility draw, $17.5 million of share repurchases, $3.6 million of dividends and $3.6 million of long-term debt repayment.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing approximately $36.2 million of operating lease liabilities and corresponding right-of-use assets at adoption.
Outlook, commentary, risks and unusual items
Management expects 2019 capital expenditures of approximately $40 million to $45 million and believes operating cash flow plus available revolving capacity will meet liquidity needs for the next twelve months. Management also estimates approximately $3 million to $4 million of Latin American revenue attrition in 2019 from previously disclosed client migrations; timing depends on customer conversion schedules.
Revenue benefited from a one-time electronic-benefits contract item and comparisons against hurricane-impacted results in early 2018. Management stated that Puerto Rico government receivables and payment volumes had not been significantly affected by the Puerto Rico debt crisis as of the filing, but remains cautious.
Key risks include dependence on Popular, which represented 41% of revenue in each comparable quarter; renewal and pricing risk under the Popular master services agreement; concentration in Puerto Rico and exposure to its fiscal crisis and PROMESA restructuring; cybersecurity and processing-system disruptions; regulatory requirements; client credit risk; variable-rate debt; foreign-exchange exposure; possible loss of Puerto Rico tax benefits; and economic, political and natural-disaster risks in Latin America and the Caribbean. The company reported no material changes to the risk factors in its 2018 Form 10-K.
The company declared a subsequent quarterly dividend of $0.05 per share, payable June 7, 2019. Legal proceedings are described as ordinary-course matters and are not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the revenue benefit from the approximately $2.7 million electronic-benefits contract is nonrecurring and how much of the reported growth reflects post-hurricane normalization.
- Progress and timing of the expected $3 million to $4 million Latin American client attrition.
- Popular relationship concentration, master services agreement renewal terms and any required pricing concessions.
- Debt-service capacity, refinancing needs, covenant compliance and sensitivity to higher interest rates; management estimates a 100-basis-point rate increase would add approximately $3.4 million to annual interest expense.
- Execution of the $40 million to $45 million capital-expenditure plan and its effect on free cash flow.
- Exposure to Puerto Rico government customers, PROMESA-related developments, cybersecurity events and regulatory changes.
- Use of non-GAAP Adjusted EBITDA and Adjusted EPS, including the reconciliation and excluded compensation, transaction and amortization items.