EVERTEC, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
EVERTEC is a transaction-processing and business-solutions provider operating across 19 countries in Latin America and the Caribbean. Its segments are Merchant Acquiring, Payment Processing and Business Solutions. The filing reports unaudited results for the three and nine months ended September 30, 2015, compared with the same periods in 2014.
The company operates the ATH debit network and provides merchant acquiring, card and payment processing, core banking, technology outsourcing and related services. Popular, Inc. remained a significant customer, generating approximately 45% of total revenue in both the quarter and nine-month period.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $92.8 million | $88.9 million | $277.4 million | $267.6 million |
| Income from operations | $20.6 million | $26.5 million | $75.2 million | $76.8 million |
| Net income | $13.4 million | $19.1 million | $52.8 million | $55.1 million |
| Diluted EPS | $0.17 | $0.24 | $0.68 | $0.70 |
| Adjusted EBITDA | $46.0 million | $44.5 million | $138.8 million | $135.3 million |
| Adjusted net income | $32.4 million | $31.4 million | $96.8 million | $95.6 million |
Revenue increased 4% year over year in both Q3 and the first nine months. Q3 operating margin was approximately 22.2%, versus 29.8% in the prior-year quarter; nine-month operating margin was approximately 27.1%, versus 28.7%. Q3 net margin was approximately 14.5%, versus 21.5%; nine-month net margin was approximately 19.0%, versus 20.6%.
- Q3 revenue by segment: Merchant Acquiring $20.8 million, Payment Processing $27.5 million and Business Solutions $44.5 million.
- Nine-month revenue growth was 6% in Merchant Acquiring, 4% in Payment Processing and 2% in Business Solutions.
- Cash flow from operations was $122.6 million for the first nine months, compared with $103.8 million in 2014.
- Cash used in investing activities was $35.2 million, including $13.3 million for intangible assets, $14.1 million for property and equipment and a $7.8 million increase in restricted cash.
- Capital expenditures and related investments were approximately $27.4 million, compared with $16.6 million in the prior-year period.
- Cash used in financing activities was $79.1 million, including $23.3 million of dividends, $35.0 million of share repurchases and $14.3 million of long-term debt repayment.
- Cash was $40.4 million at September 30, 2015, and restricted cash was $13.5 million. The company reported $82.0 million of availability under its $100.0 million revolving facility.
- Total debt was $675.0 million, consisting primarily of Term A debt of $266.1 million, Term B debt of $387.0 million and $18.0 million drawn on the revolving facility.
- The senior secured leverage ratio was 3.41 to 1.00, and the company stated that it was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue grew $3.9 million, or 4%, in Q3 and $9.7 million, or 4%, for the first nine months.
- Operating expenses increased 16% in Q3 and 6% for the first nine months, outpacing revenue growth.
- Q3 operating income declined 22%, primarily due to a $5.7 million severance charge associated with a voluntary termination program, higher share-based compensation and other operating costs.
- Nine-month operating income declined 2%, reflecting approximately $6.2 million of voluntary termination severance payments, higher costs in Payment Processing and increased unallocated merger-related depreciation and amortization.
- Payment Processing segment operating income declined 13% in Q3 and 9% for the first nine months, partly due to prior-year vendor credits and increased investment in card-issuing initiatives.
- Business Solutions segment operating income declined 19% in Q3 but increased 4% for the first nine months.
- Interest expense declined because of a 25-basis-point rate reduction tied to a lower senior secured leverage ratio and lower debt balances.
- Share count declined following the repurchase of 1.83 million shares for $35.0 million. The board increased the repurchase authorization to $100 million and extended it through September 30, 2016.
- Other intangible assets declined to $309.7 million from $334.6 million at December 31, 2014, primarily reflecting amortization. Goodwill was $368.5 million, with no impairment-triggering events identified.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management stated that operating cash flow and available revolver capacity should be adequate to meet liquidity needs for the next twelve months, while noting that future debt service, dividends, capital expenditures and operating needs depend on future performance and economic conditions.
- Management highlighted continued migration from cash and paper payments to electronic payments, lower electronic-payment penetration in the region, and outsourcing demand from financial institutions and government agencies as growth opportunities.
- Popular is the company’s largest customer and is subject to a 15-year Master Services Agreement with exclusive service provisions. This creates significant customer-concentration risk.
- Puerto Rico’s fiscal crisis is a material risk. The company had $16.2 million of receivables from the Puerto Rico government and its agencies at September 30, 2015, down from $21.4 million at year-end 2014, but no direct exposure to Puerto Rico government debt.
- The company identified dependence on processing systems, cybersecurity, fraud controls, personnel, third parties, card networks, regulatory approvals and client contract renewals as key risks.
- All senior secured debt carries variable interest rates. A 100-basis-point increase in rates above applicable floors would increase annual interest expense by approximately $6.7 million, excluding the revolver.
- The company had a $1.1 million letter of credit with a maturity of less than three months and an off-balance-sheet tax windfall benefit of approximately $10.8 million.
- Legal proceedings arose in the ordinary course of business; management believed any ultimate losses would not be material.
- The indemnification asset related to Popular reimbursements was fully repaid by September 30, 2015.
- A regular quarterly dividend of $0.10 per share was declared for payment in December 2015, subject to board approval and future adjustment.
Most important facts for investors to verify
- Whether revenue growth can continue to offset elevated labor, severance, technology and other operating costs.
- The sustainability and quality of adjusted EBITDA and adjusted net income, including the effects of excluded severance, stock compensation and other unusual items.
- Debt maturities and refinancing requirements, particularly the Term A maturity in April 2018 and the Term B maturity in April 2020.
- Compliance with leverage covenants and sensitivity to higher interest rates.
- Exposure to Popular, including the concentration of revenue and the terms and renewal economics of the Master Services Agreement.
- Collections and payment timing for Puerto Rico government receivables amid the territory’s fiscal crisis.
- Capital expenditure requirements, restricted cash increases and the company’s ability to fund dividends and share repurchases from operating cash flow.
- Cybersecurity, network reliability, fraud, regulatory and card-association risks affecting transaction-processing operations.