EVERTEC, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
EVERTEC is a transaction-processing company headquartered in Puerto Rico, providing merchant acquiring, payment processing and business solutions across 19 Latin American and Caribbean countries. It operates the ATH debit network and processes more than 2.1 billion transactions annually. This unaudited quarterly report covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $87.2 million | $87.3 million | Flat |
| Income from operations | $24.9 million | $20.4 million | +22% |
| Operating margin | 28.5% | 23.4% | +5.1 percentage points |
| Net income | $18.2 million | $5.5 million | +233% |
| Net margin | 20.9% | 6.3% | +14.6 percentage points |
| Diluted earnings per share | $0.23 | $0.07 | +$(0.16) |
| Cash flow from operations | $30.0 million | $33.8 million | -11% |
| Capital expenditures | Approximately $2.5 million | Approximately $4.5 million | Lower |
| Cash balance | $27.2 million | $34.1 million at Q1 2013 end | See liquidity below |
Revenue mix was $19.3 million from Merchant Acquiring, $25.0 million from Payment Processing and $42.9 million from Business Solutions. Operating costs declined 7% to $62.3 million, including cost of revenues of $37.6 million, selling, general and administrative expense of $8.1 million, and depreciation and amortization of $16.6 million.
Adjusted EBITDA was $45.2 million for the quarter. Adjusted net income was $32.0 million, or $0.41 basic and $0.40 diluted per share; these are non-GAAP measures and exclude or adjust for specified items, including merger-related amortization and other unusual items.
Debt and liquidity
- Total debt was $720.8 million at March 31, 2014, consisting principally of Term A debt of $288.4 million, Term B debt of $391.7 million and $40.0 million drawn on the revolving facility.
- The revolving credit facility has total capacity of $100.0 million, leaving $60.0 million available at quarter-end.
- Cash was $27.2 million, including $15.8 million held by foreign subsidiaries for local operations and potential investments.
- Debt repayments during the quarter included $3.8 million on Term A, $1.0 million on Term B and $10.0 million on the revolving facility.
- The senior secured leverage ratio was 3.84 to 1.00 versus a permitted maximum of up to 6.60 to 1.00, and the company reported compliance with applicable debt covenants.
- Management stated that operating cash flow and available revolver capacity should meet liquidity needs for the next twelve months, subject to future operating performance and other conditions.
Material changes versus the prior comparable period
- Merchant Acquiring revenue increased 10% to $19.3 million, primarily from higher transaction volumes, although segment operating income declined 9% to $8.4 million.
- Payment Processing revenue increased 4% to $25.0 million, driven by new Latin American customer accounts, higher ATH and POS activity, and additional services; segment operating income increased 15% to $14.7 million.
- Business Solutions revenue declined 6% to $42.9 million, principally because hardware and software sales decreased by $3.5 million. Segment operating income nevertheless increased 8% to $11.4 million, supported by higher demand for core banking products and services.
- Operating expenses declined partly because of lower hardware and software sales costs, the absence of consulting fees paid to Apollo and Popular after the 2013 IPO, and lower software amortization.
- Interest expense fell $8.4 million to $6.9 million following the second-quarter 2013 debt refinancing and redemption of senior notes.
- Other income increased to $2.0 million, including a non-recurring currency translation gain related to an intercompany loan with EVERTEC Costa Rica.
- Income tax expense increased to $2.2 million from $51,000, mainly because of higher taxable income.
- Operating cash flow decreased $3.8 million, primarily because of cash used to reduce accounts payable and accrued liabilities. Financing cash outflows increased due largely to $7.8 million of dividends paid in Q1 2014.
Outlook, commentary, risks and unusual items
Management emphasized continued migration from cash and paper payments to electronic payments, increased technology outsourcing by financial institutions and government agencies, and opportunities from lower electronic-payment penetration in Latin America. The filing does not provide formal quantitative revenue or earnings guidance.
Popular remains a significant customer and relationship counterparty. Revenue from Popular represented approximately 46% of total revenue in Q1 2014. EVERTEC operates under a 15-year Master Services Agreement with Popular, but this concentration creates customer and related-party risk.
- Key risks include reliance on Popular, contract renewals, payment-network competition and rules, fraud and merchant credit exposure, cybersecurity and system outages, regulatory changes, Puerto Rico and Latin American economic conditions, foreign exchange, sanctions compliance, and execution of geographic expansion and acquisition strategies.
- All senior secured debt bears variable interest rates. Management estimated that a 100-basis-point increase in rates above applicable floors would increase annual interest expense by approximately $6.8 million, excluding the revolver.
- Foreign currency translation generated a $7.7 million unfavorable other comprehensive income adjustment during the quarter, reducing accumulated other comprehensive income to a $7.3 million loss.
- The company held a $1.1 million letter of credit with maturity of less than three months and reported $55.4 million of unused tax windfall benefits available to offset future taxable income.
- Legal proceedings were described as arising in the ordinary course of business; management does not expect them to have a material adverse effect.
- The board declared a $0.10 per-share quarterly dividend paid in March and declared another $0.10 per-share dividend payable June 6, 2014. Future dividends remain subject to board approval and business conditions.
Important facts for investors to verify
- Whether revenue growth in Merchant Acquiring and Payment Processing offsets the decline in Business Solutions hardware and software sales.
- The sustainability of the large year-over-year improvement in net income, given the benefit from refinancing-related interest savings and non-recurring currency-related income.
- Popular-related revenue concentration, the terms and renewal outlook of the Master Services Agreement, and related-party balances.
- Variable-rate debt exposure, scheduled amortization, covenant compliance and the company’s ability to refinance or repay substantial maturities.
- Foreign exchange trends and the effect of Latin American economic, political and regulatory conditions on results.
- The sustainability of quarterly dividends while the company carries approximately $720.8 million of debt.
- The effect of cybersecurity, fraud, network outages, payment-association rules and regulatory changes on operations and liabilities.