EVERTEC, Inc. Form 10-Q Summary
Business context and reporting period
EVERTEC is a transaction-processing and technology-services company serving 18 countries in Latin America and the Caribbean. Its businesses are Merchant Acquiring, Payment Processing, and Business Solutions, including operation of the ATH debit network and technology outsourcing for financial institutions, merchants, corporations, and government agencies. This report covers the three and nine months ended September 30, 2016; prior-period information is presented as restated.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $94.5 million | $92.9 million | $287.6 million | $277.8 million |
| Income from operations | $27.0 million | $21.5 million | $81.8 million | $75.9 million |
| Operating margin | 28.6% | 23.1% | 28.4% | 27.3% |
| Net income | $19.7 million | $25.3 million | $59.1 million | $63.4 million |
| Net income attributable to EVERTEC | $19.7 million | $25.3 million | $59.1 million | $63.4 million |
| Diluted EPS | $0.26 | $0.33 | $0.79 | $0.82 |
| Adjusted EBITDA | $45.1 million | $46.9 million | $140.0 million | $139.6 million |
Q3 revenue increased 2%, while nine-month revenue increased 4%. Q3 operating margin expanded primarily because of lower merger-related depreciation and amortization and lower prior-year severance costs. Net income declined because Q3 2015 included an $11.8 million tax benefit from the reversal of a liability related to uncertain 2010 tax positions after expiration of the statute of limitations. The effective tax expense was $1.6 million in Q3 2016 versus a $9.3 million benefit in Q3 2015.
- Merchant Acquiring: Revenue increased 6% in Q3 and 10% for the nine months, principally due to the expanded FirstBank relationship and the related portfolio acquired in November 2015. Segment operating income declined 21% in Q3 and 13% for the nine months, partly reflecting revenue-sharing costs.
- Payment Processing: Revenue was essentially flat in Q3 and increased 3% for the nine months. Results benefited from higher ATH and card-processing activity and the Processa acquisition, but were affected by a delayed project and the loss of a government lottery tax contract.
- Business Solutions: Revenue increased 1% in Q3 and 1% for the nine months. Segment operating income increased 35% in Q3 and 13% for the nine months, supported by core banking, hardware sales, and IT consulting.
For the nine months, cash provided by operating activities was $124.6 million, compared with $124.3 million in the prior-year period. Cash used in investing activities was $33.9 million, including $31.5 million of purchases of property, equipment, and software and $5.9 million for acquisitions. Cash used in financing activities was $74.5 million, including $22.4 million of dividends, $29.7 million of share repurchases, $16.1 million of long-term debt repayments, and $3.6 million of credit-amendment fees. Cash increased to $45.0 million from $28.7 million at December 31, 2015.
At September 30, 2016, total debt was $644.3 million, including $247.0 million of Term A debt, $378.5 million of Term B debt, $16.0 million drawn on the revolving facility, and $2.8 million of notes payable. The company had $84.0 million available under its $100.0 million revolving facility. Its senior secured leverage ratio was 3.26x versus a covenant maximum of up to 6.60x, and management reported compliance with applicable covenants. A $200 million interest-rate swap is scheduled to begin in January 2017, fixing the related Term B exposure at a 1.9225% fixed rate plus applicable terms.
Material changes versus the prior comparable period
- Revenue growth was led by Merchant Acquiring, while Payment Processing and Business Solutions were largely stable in Q3.
- Operating income improved despite modest revenue growth, reflecting lower depreciation and amortization and lower severance costs.
- SG&A increased 27% for the nine months, driven by restatement-related professional fees, higher compensation, and share-based compensation.
- Net income and EPS declined because the prior-year period benefited from a material tax-liability reversal; the 2016 period includes normal tax expense.
- Shares outstanding declined to 73.3 million from 75.0 million at December 31, 2015 after 1.9 million shares were repurchased for $29.7 million. The company declared quarterly dividends of $0.10 per share.
- Accumulated other comprehensive loss increased to $14.7 million, including $9.7 million of unfavorable foreign-currency translation adjustments and a $5.0 million interest-rate-swap liability.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal earnings guidance in the filing. It expects revenue attrition of approximately $7 million to $10 million in Latin America during 2017 from anticipated client migrations. Management stated that the Puerto Rico fiscal crisis had not materially affected operations or government-related business through the reporting date and believed operating cash flow plus available revolver capacity would meet liquidity needs for the next twelve months.
The company received lender commitments to refinance or extend maturities on $219 million of Term A debt and $65 million of revolving commitments to January 2020, subject to final documentation expected in November 2016. The remaining $31 million of Term A debt and $35 million of revolving commitments were expected to mature in April 2018. The proposed refinancing would increase the applicable rate to LIBOR plus 250 basis points and reduce certain leverage covenant thresholds.
- The company’s 2015 and earlier financial information was restated for errors involving uncertain tax positions related to 2010 deductions. Investors should treat the restated comparatives as the appropriate basis for analysis.
- Disclosure controls and procedures remained ineffective as of September 30, 2016 because of a material weakness in controls over the completeness, assessment, and monitoring of uncertain tax positions. Remediation had begun but had not operated long enough to demonstrate effectiveness.
- Popular, Inc. accounted for approximately 45% of revenue in each presented period. The company relies on a 15-year Master Services Agreement and its relationship with Banco Popular to support portions of its business.
- Key risks include Puerto Rico’s fiscal and economic conditions, client concentration and contract renewals, cybersecurity and system availability, regulatory oversight, credit-card network rules, high leverage, refinancing risk, variable interest rates, foreign exchange, and exposure to merchant credit losses.
- Legal proceedings were described as ordinary-course matters that management did not expect to have a material adverse effect. An outstanding letter of credit was $0.3 million with a maturity of less than three months.
- The Puerto Rico Department of Justice closed its antitrust investigation and concluded that EVERTEC had not violated the Puerto Rico Anti-Monopoly Act.
Important facts for investors to verify
- Whether the planned debt refinancing was completed on the proposed terms and whether the April 2018 maturities were extended.
- Progress in remediating the material weakness over uncertain tax positions and the results of subsequent control testing.
- The timing and magnitude of the anticipated $7 million to $10 million of 2017 Latin American revenue attrition.
- Revenue concentration with Popular and the continuing economic and fiscal developments in Puerto Rico.
- Performance of Merchant Acquiring margins after the FirstBank expansion and related revenue-sharing costs.
- Cash generation after dividends, repurchases, capital expenditures, acquisitions, and scheduled debt amortization.
- Exposure to floating-rate debt, including the effect of the interest-rate swap beginning in January 2017.