EVERTEC, Inc. — Form 10-Q Summary
Business context and reporting period
EVERTEC is a Puerto Rico-based transaction-processing company serving 26 countries in Latin America and the Caribbean. Its businesses include payment processing, merchant acquiring, the ATH debit network, core banking, technology outsourcing and business-process management. This report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The financial statements are unaudited and presented under U.S. GAAP.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $110.3 million | $101.3 million | +9% |
| Income from operations | $33.6 million | $30.6 million | +10% |
| Operating margin | 30.4% | 30.2% | Approximately stable |
| Net income | $23.1 million | $23.1 million | Approximately flat |
| Net income attributable to EVERTEC | $23.0 million | $23.0 million | Approximately flat |
| Diluted EPS | $0.31 | $0.31 | Flat |
| Adjusted EBITDA | $54.0 million | $49.2 million | +10% |
| Adjusted EBITDA margin | 48.9% | 48.5% | Improved |
| Cash flow from operations | $30.4 million | $25.3 million | +$5.1 million |
| Capital expenditures | $9.4 million | $6.5 million | +$2.8 million |
Operating costs increased 9% to $76.7 million. Cost of revenues rose 7% to $47.4 million, while selling, general and administrative expense increased 24% to $13.4 million, primarily due to higher share-based compensation and PayGroup-related expenses. Interest expense increased to $7.7 million from $7.0 million. Income tax expense increased 95% to $3.9 million, producing a 13.8% effective tax rate; management cited a discrete tax expense of approximately $0.5 million.
Cash and cash equivalents were $53.5 million at March 31, 2018, and restricted cash was $10.5 million. Total assets were $916.8 million. Total debt was $600.6 million, consisting primarily of senior secured term loans; total liabilities were $737.5 million and total equity was $179.3 million. The senior secured leverage ratio was 3.16 to 1.00 versus a maximum permitted ratio of up to 4.75 to 1.00 at the reporting date.
Material changes versus the prior comparable period
- Revenue growth was driven by the PayGroup acquisition, stronger Puerto Rico sales volumes following Hurricanes Irma and Maria, and increased transaction processing.
- Payment Services—Latin America revenue increased to $20.4 million from $13.0 million, and segment Adjusted EBITDA increased to $7.0 million from $5.5 million, primarily due to PayGroup. Management noted that the acquired revenue carried a lower margin.
- Payment Services—Puerto Rico & Caribbean revenue increased 3% to $27.2 million, while Adjusted EBITDA increased to $17.3 million.
- Merchant Acquiring revenue increased 4% to $23.4 million, supported by higher sales volume, a higher average ticket and non-transactional fees. Adjusted EBITDA increased to $10.9 million.
- Business Solutions revenue was approximately flat at $47.9 million, while Adjusted EBITDA increased to $23.2 million due to expense reductions.
- Net cash increased $3.6 million during the quarter. Operating cash flow improved, partly offset by higher capital expenditures and debt repayments.
- EVERTEC adopted ASC 606 effective January 1, 2018, using the modified retrospective method. Opening retained earnings increased by approximately $0.9 million; the reported quarterly income statement and cash-flow impact was described as immaterial.
- The quarterly common-stock dividend remained suspended. The board had suspended dividends in November 2017 because of the difficult operating environment in Puerto Rico.
Guidance, outlook, commentary and risks
- Management expects 2018 capital expenditures of approximately $35 million to $40 million.
- Management expects Latin American revenue attrition of approximately $4 million to $6 million during 2018 from previously disclosed client migrations. Timing may vary based on customer conversion schedules.
- Management expects elevated Puerto Rico and Virgin Islands sales volumes to continue through the remainder of 2018 as hurricane-related insurance and relief funds are received, but characterized post-hurricane economic activity and consumer spending as erratic.
- Management believes operating cash flow and the available revolving facility will be adequate for liquidity needs over the next 12 months. The company had $100 million of revolving capacity at March 31, 2018.
- On April 17, 2018, EVERTEC repaid the $26.1 million 2018 Term A Loan at maturity. At the same time, $35 million of revolving capacity expired, leaving $65 million available.
- A $200 million interest-rate swap fixes a portion of Term B exposure at an effective rate of 4.4225% through April 2020. Management estimated that a 100-basis-point increase in applicable interest rates would increase annual interest expense by approximately $4.1 million after the swap.
- Principal risks include concentration of revenue and business relationships with Popular, geographic concentration in Puerto Rico, Puerto Rico’s fiscal crisis and PROMESA restructuring, hurricane and natural-disaster exposure, cybersecurity and systems risks, regulatory requirements, customer contract renewals, client credit risk, foreign exchange exposure, high indebtedness and refinancing risk.
- Popular-related revenue represented 41% of total revenue in Q1 2018, compared with 44% in Q1 2017.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements and no debt default or event of default as of the filing date. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
Important facts for investors to verify
- Whether hurricane-recovery-driven merchant volumes persist or normalize, and the resulting effect on revenue and margins.
- The timing and full financial effect of the $4 million to $6 million expected Latin American client attrition.
- PayGroup’s sustained revenue contribution, integration costs and lower-margin profile.
- Compliance with debt covenants, maturity and refinancing plans for the remaining term loans due in 2020, and the reduced revolving capacity.
- The sustainability of cash generation relative to planned $35 million to $40 million of 2018 capital expenditures and debt service.
- Future dividend decisions and whether Puerto Rico’s fiscal and economic conditions continue to affect government receivables, consumer spending and customer volumes.
- The effect of ASC 606 on contract balances, revenue timing and future disclosures, including $245.8 million of estimated remaining performance obligations at March 31, 2018.
- Reliance on Popular, which accounted for 41% of quarterly revenue, and the renewal and operating terms of the related master services agreement.