EVERTEC, Inc. — 2013 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. EVERTEC provides merchant acquiring, payment processing, and business solutions across 19 Latin American and Caribbean countries. The company processes more than 1.8 billion transactions annually and manages more than 4,100 ATMs and 104,000 POS terminals.
2013 included the April initial public offering, a September secondary offering, and a major debt refinancing. Popular remained the largest customer and owned approximately 21.3% of common stock after the September offering.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | YTD 2013 | YTD 2012 |
|---|---|---|---|---|
| Revenue | $87.4 million | $83.8 million | $263.9 million | $250.7 million |
| Operating income | $21.9 million | $17.9 million | $59.2 million | $54.0 million |
| Operating margin | 25.0% | 21.3% | 22.4% | 21.5% |
| Net income (loss) | $14.8 million | $2.3 million | $(44.7) million | $3.8 million |
| Basic EPS | $0.18 | $0.03 | $(0.57) | $0.05 |
| Cash flow from operations | Not separately provided | Not separately provided | $13.7 million | $69.1 million |
- Q3 revenue increased 4%, with merchant acquiring up 8%, payment processing up 6%, and business solutions up 2%.
- Q3 operating income increased 22%; operating expenses declined 1% despite a 20% increase in selling, general and administrative expense.
- Q3 net income benefited from substantially lower interest expense following the refinancing.
- Adjusted EBITDA was $43.4 million for Q3 and $128.6 million for the first nine months. These are non-GAAP measures and include substantial adjustments.
- Cash was $28.0 million at September 30, 2013, including $5.1 million of restricted cash. Approximately $10.3 million of cash was held by foreign subsidiaries.
- Capital expenditures and software investments totaled approximately $17.0 million for the first nine months.
- Total debt reported on the balance sheet was $695.3 million, including $670.2 million of long-term debt, $19.0 million of current maturities, and $6.1 million of short-term borrowings.
- The company had an undrawn $100.0 million revolving credit facility and reported a senior secured leverage ratio of 3.73 to 1.00 versus a maximum covenant level of up to 6.60 to 1.00.
Material changes versus the prior comparable period
- Revenue increased $3.6 million, or 4%, in Q3 and $13.2 million, or 5%, year to date.
- Business solutions segment operating income increased 45% in Q3 and 19% year to date; payment processing segment operating income was essentially flat year to date.
- Interest expense declined $8.4 million in Q3 and $7.8 million year to date due to the April refinancing.
- Year-to-date net loss resulted primarily from a $58.5 million loss on extinguishment of debt and a $16.7 million charge for terminating consulting agreements with Apollo and Popular.
- Year-to-date operating results included approximately $4.9 million of non-cash share-based compensation from vesting of Tranche B and C options and approximately $1.6 million of secondary-offering expenses.
- Operating cash flow fell $55.4 million year to date, principally because of debt redemption payments and consulting-agreement termination payments.
- The April refinancing replaced prior facilities and 11% senior notes with Term A and Term B senior secured loans. Outstanding principal at September 30 was approximately $296.3 million for Term A and $399.0 million for Term B.
- The company initiated a quarterly dividend of $0.10 per share; approximately $8.2 million was paid in September, and a similar payment was expected in December.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management describes opportunities from increasing electronic-payment adoption, outsourcing of technology systems, and expansion in Latin America and the Caribbean. Management stated that operating cash flow and the available revolver should be adequate for liquidity needs over the following twelve months, subject to operating performance and other factors.
- Material customer concentration exists: Popular-related revenues represented 46% of revenue in both Q3 and the first nine months of 2013.
- The business is geographically concentrated in Puerto Rico and exposed to economic, political, regulatory, currency, and competitive conditions in Latin America and the Caribbean.
- Key operational risks include processing-system outages, cybersecurity and fraud, technology changes, dependence on third parties and card networks, merchant credit risk, and contract renewals.
- Variable-rate debt creates interest-rate exposure; a 100-basis-point increase in rates over applicable floors would increase annual interest expense by approximately $7.0 million based on September 30 balances.
- Debt agreements restrict additional borrowings, liens, dividends, affiliate transactions, and other corporate actions. The company reported compliance with covenants at September 30.
- Puerto Rico Act 40 increased the maximum corporate tax rate from 30% to 39% for fully taxable operations and imposed a gross-receipts tax component. The company also benefits from a tax grant reducing the marginal rate on certain industrial development income to 4%.
- Goodwill was assessed qualitatively in the third quarter; no impairment was recorded.
- Ordinary-course litigation was not expected by management to have a material adverse effect, although loss estimates were unavailable for some early-stage matters.
- The filing includes Section 13(r) disclosure regarding small Iran-related transactions by CEVA, an entity potentially under common control with Apollo; the activities did not involve EVERTEC or its management.
Investor verification points
- Reconcile GAAP net loss with Adjusted EBITDA and Adjusted Net Income, particularly the debt-extinguishment, consulting-termination, share-compensation, and offering-related adjustments.
- Assess Popular concentration, the 15-year master services agreement, related-party revenue, and the continuing commercial relationship with Popular.
- Review debt maturities, variable-rate exposure, covenant definitions, mandatory amortization, and refinancing requirements.
- Evaluate the sharp decline in operating cash flow relative to operating income and the company’s ability to fund debt service, dividends, and capital expenditures.
- Monitor Puerto Rico tax legislation, tax-grant durability, NOL utilization, and the $57.0 million off-balance-sheet windfall tax benefit.
- Confirm the sustainability of the quarterly dividend given credit-agreement restrictions and future cash requirements.