EVERTEC, Inc. 2020 Q3 Form 10-Q Summary
Business context and reporting period
EVERTEC is a Puerto Rico-based transaction-processing company serving 26 countries in Latin America and the Caribbean. Its businesses include payment processing, merchant acquiring, the ATH debit and ATM network, core banking, technology outsourcing, and business-process management. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
The company remained substantially operational during COVID-19, with most employees working remotely and critical operations maintained on-site. Popular, Inc. remained a significant customer, representing 42% of quarterly revenue and 44% of nine-month revenue.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $136.5 million | $118.8 million | +15% |
| Income from operations | $43.8 million | $34.8 million | +26% |
| Operating margin | 32.1% | 29.3% | Improved |
| Net income | $34.6 million | $24.8 million | +40% |
| Net income attributable to EVERTEC | $34.5 million | $24.8 million | +39% |
| Diluted EPS | $0.47 | $0.34 | +$0.13 |
| Adjusted EBITDA | $70.0 million | $55.5 million | +26% |
| Metric | Nine months 2020 | Nine months 2019 | Change |
|---|---|---|---|
| Revenue | $376.4 million | $360.2 million | +4% |
| Income from operations | $102.2 million | $109.9 million | -7% |
| Operating margin | 27.2% | 30.5% | Declined |
| Net income | $72.5 million | $78.7 million | -8% |
| Net income attributable to EVERTEC | $72.2 million | $78.5 million | -8% |
| Diluted EPS | $0.99 | $1.07 | -$0.08 |
| Adjusted EBITDA | $176.5 million | $170.9 million | +3% |
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $121.2 million, down from $136.2 million, primarily because of lower customer collections and lower net income.
- Investing cash outflow was $36.9 million, including $23.5 million for software and $13.4 million for property and equipment, compared with $49.9 million in the prior-year period.
- Financing cash outflow was $50.8 million, including $27.7 million of long-term debt repayment, $10.8 million of dividends, and $7.3 million of share repurchases.
- Cash, cash equivalents and restricted cash increased to $162.2 million at September 30, 2020, including $144.1 million of unrestricted cash and $18.0 million of restricted cash.
- Total debt was $500.0 million at September 30, 2020, down from $527.6 million at December 31, 2019. The term loans had unpaid principal balances of $192.8 million and $310.3 million, maturing in 2023 and 2024, respectively.
- The $125.0 million revolving facility had $101.7 million of additional borrowing capacity. The secured leverage ratio was 1.93 to 1.00, and the company reported no debt covenant default.
- Management stated that operating cash flow and available revolver capacity should be adequate for the next twelve months, subject to operating performance and broader economic conditions.
Material changes versus the prior comparable period
- Third-quarter revenue growth reflected higher transaction volumes and spreads, ATH Movil and ATH Movil Business revenue, the Place to Pay acquisition, and $4.4 million of revenue from services to the Puerto Rico Department of Education.
- Nine-month revenue growth was more modest because COVID-19 reduced transaction volumes, foreign currency movements weakened results, and prior-year one-time projects and hardware sales did not recur.
- Third-quarter performance improved across all segments. Business Solutions revenue increased $10.1 million and Merchant Acquiring revenue increased $4.2 million.
- For the nine-month period, Payment Services - Puerto Rico and Caribbean revenue declined $2.3 million and Adjusted EBITDA declined $12.1 million, primarily due to COVID-19 volume declines, the absence of a prior-year one-time project, and higher post-implementation and service costs.
- Nine-month Business Solutions revenue increased $15.0 million and Adjusted EBITDA increased $12.1 million, supported by Puerto Rico Department of Education revenue, higher Popular services, and network services.
- Interest expense declined by $3.4 million for the nine-month period due to scheduled debt amortization and lower interest rates. Other income improved by $3.4 million, primarily from foreign-currency remeasurement.
- The effective tax rate increased to 15.8% in the quarter from 13.0% and to 17.7% for the nine-month period from 11.3%, mainly because of discrete tax items and changes in the jurisdictional mix of taxable income.
- Accumulated other comprehensive loss increased to $52.4 million from $30.0 million at year-end 2019, reflecting foreign-currency translation losses and cash-flow hedge losses.
Guidance, outlook, commentary and risks
- Management estimated approximately $3 million to $4 million of Latin American revenue attrition in 2020 from previously announced client migrations, although timing depends on customer conversion schedules.
- Management reported increased adoption of digital, contactless, and card-not-present payments during the pandemic and is investing in contactless solutions and its Latin American gateway product.
- COVID-19 remains a material uncertainty affecting consumer spending, transaction volumes, customer credit quality, staffing, liquidity, asset valuations, and expected credit losses. The company deferred $1.7 million of payroll taxes through September 30, 2020 and anticipated total permitted deferrals of approximately $2.9 million.
- Key concentration risk remains the relationship with Popular and the need to renew or extend the master services agreement as the 2025 timeframe approaches. Management cautioned that renewal discussions could require pricing or other concessions.
- Other principal risks include Puerto Rico’s fiscal and debt-restructuring process under PROMESA, government receivables, geographic and foreign-currency exposure, cybersecurity and system availability, regulatory requirements, client credit risk, high indebtedness, refinancing risk, and potential loss of preferential Puerto Rico tax treatment.
- The company has a $250 million interest-rate swap extending through November 2024. The derivative liability increased to $27.4 million, and the company expects to reclassify approximately $6.8 million of hedge losses into interest expense over the next twelve months.
- The Board declared a regular quarterly dividend of $0.05 per share payable December 4, 2020. Future dividends remain subject to Board approval and business conditions.
- Management reported that legal proceedings arising in the ordinary course are not expected to have a material adverse effect, although loss estimates for some early-stage matters are not available.
Most important facts for investors to verify
- Whether COVID-19-related volume pressure, especially in Puerto Rico and Latin America, persists or reverses.
- The sustainability of third-quarter margin expansion and the extent to which one-time or unusual items contributed to Adjusted EBITDA.
- Progress and economics of the Popular master services agreement renewal and the company’s customer concentration exposure.
- Debt amortization requirements, variable-rate exposure, hedge performance, covenant headroom, and refinancing needs through the 2023 and 2024 maturities.
- Collection trends for government and other receivables, including the adequacy of the $3.1 million expected-credit-loss allowance.
- The durability of the Puerto Rico tax exemption and the impact of higher effective tax rates.
- Future transaction volumes, foreign-currency movements, Latin American client attrition, and integration of Place to Pay.