EVERTEC, Inc. 2017 Second-Quarter Form 10-Q Summary
Business context and reporting period
EVERTEC is a Puerto Rico-based transaction-processing company providing merchant acquiring, payment processing and business solutions across Latin America and the Caribbean. The filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The financial statements are unaudited and prepared under U.S. GAAP.
On July 3, 2017, after quarter-end, EVERTEC completed the approximately $46 million acquisition of Chile-based PayGroup, consisting of approximately $38.5 million in cash and $7.5 million of assumed debt and other liabilities. Following the acquisition, the company serves 27 countries.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $103.5 million | $97.7 million | $204.8 million | $193.2 million |
| Income from operations | $30.0 million | $28.2 million | $60.6 million | $54.8 million |
| Operating margin | 29.0% | 28.9% | 29.6% | 28.4% |
| Net income | $20.2 million | $20.2 million | $43.4 million | $39.4 million |
| Net income attributable to EVERTEC common stockholders | $20.1 million | $20.2 million | $43.1 million | $39.4 million |
| Diluted EPS | $0.27 | $0.27 | $0.59 | $0.53 |
| Adjusted EBITDA | $50.1 million | $48.8 million | $99.3 million | $94.9 million |
| Adjusted diluted EPS | $0.44 | $0.43 | $0.89 | $0.84 |
Six-month cash flow from operating activities was $71.1 million, compared with $69.4 million in the prior-year period. Capital investment was approximately $15.5 million, including $10.0 million for software and $5.5 million for property and equipment. Cash used in investing activities was $15.5 million, while cash used in financing activities was $14.4 million.
Cash and cash equivalents were $93.1 million at June 30, 2017, compared with $51.9 million at December 31, 2016. Restricted cash was $8.2 million. Management stated that operating cash flow and available revolver capacity are expected to be adequate for the next 12 months.
Total debt was $662.1 million at June 30, 2017, including $612.0 million of senior secured term loans and $48.0 million drawn under the revolving facility. The revolving facility had $52.0 million of additional borrowing capacity. The senior secured leverage ratio was 3.35 to 1.00, below the maximum applicable covenant of up to 4.75 to 1.00. The company reported no default or event of default.
Revenue and operating trends
| Segment | Q2 2017 revenue | Year-over-year change | Six-month 2017 revenue | Year-over-year change |
|---|---|---|---|---|
| Merchant Acquiring, net | $23.5 million | 1% | $46.0 million | Approximately flat |
| Payment Processing | $30.7 million | 9% | $60.8 million | 10% |
| Business Solutions | $49.3 million | 7% | $98.0 million | 7% |
| Total | $103.5 million | 6% | $204.8 million | 6% |
Revenue growth was led by Payment Processing, reflecting higher ATH debit-network and card-processing volumes, POS rental income and government-program revenue. Business Solutions benefited from the Accuprint acquisition and higher core-banking revenue. Merchant Acquiring growth was limited by a client contract change that shifted revenue and income to Payment Processing.
Q2 operating expenses increased 6%, including a 16% increase in selling, general and administrative expense. Management attributed the increase primarily to costs associated with the separation of an officer and higher withholding taxes in Latin America. Depreciation and amortization increased due to higher depreciation and amortization of software and acquired intangibles.
Q2 net income was essentially unchanged despite higher operating income because interest expense increased 21% to $7.4 million and income tax expense increased to $4.1 million. The tax increase primarily reflected a $1.3 million tax charge on a one-time foreign-earnings repatriation used to help fund PayGroup.
Guidance, outlook, risks and unusual items
- Management expects 2017 capital expenditures of approximately $35 million to $45 million. Approximately $39 million was used to fund the PayGroup acquisition after quarter-end.
- Management estimates Latin American revenue attrition of approximately $1 million to $3 million in 2017 and $5 million to $7 million in 2018 from anticipated client migrations. Timing may change based on customer conversion schedules.
- The company expects to adopt the new revenue-recognition standard on January 1, 2018 using the cumulative-effect transition method. Management had not yet estimated the financial impact and identified potentially significant changes involving implementation fees, upfront activities, professional services and disclosures.
- Interest-rate exposure remains material. A 100-basis-point increase in rates, after considering the interest-rate swap, would increase annual interest expense by approximately $4.2 million based on June 30 debt balances. A $200 million Term B loan swap fixes the related rate at 4.4225% through April 2020.
- Key risks include dependence on Popular, which generated approximately 43% of revenue in the first half of 2017; Puerto Rico’s fiscal crisis and economic conditions; client contract renewals and migrations; cybersecurity and system availability; regulatory requirements; credit-card-network rules; foreign exchange; high leverage and refinancing needs; and uncertainty surrounding Puerto Rico’s PROMESA debt-restructuring process.
- The company was involved in ordinary-course legal proceedings but stated that potential aggregate losses are not expected to materially affect its business, financial condition, results or cash flows.
- No off-balance-sheet arrangements were reported. Disclosure controls and procedures were deemed effective as of June 30, 2017, with no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether PayGroup delivers the expected growth and synergies without materially increasing leverage or integration risk.
- The effect of anticipated client migrations on 2017 and 2018 revenue, particularly within Latin America.
- Popular’s continuing contribution to revenue and the terms and renewal outlook of the master services agreement.
- Debt maturities, refinancing capacity and compliance with leverage covenants, particularly the 2018 Term A maturity and variable-rate exposure.
- The eventual impact of the 2018 revenue-recognition adoption on reported revenue timing, retained earnings, controls and disclosures.
- The sustainability of quarterly dividends and share repurchases while funding capital expenditures, acquisitions and debt service.
- The impact of Puerto Rico’s fiscal and economic conditions, including government-related business, taxes and potential loss of preferential tax treatment.