EVERTEC, Inc. 2016 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
EVERTEC is a Puerto Rico-based transaction-processing company operating across 18 Latin American and Caribbean countries. Its three segments are Merchant Acquiring, Payment Processing and Business Solutions. The filing reports unaudited results for the three and six months ended June 30, 2016; 2015 comparative amounts are presented as restated.
Key Financial Metrics
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Revenue | $97.7 million | $193.2 million |
| Income from operations | $28.2 million | $54.8 million |
| Operating margin | 28.9% | 28.4% |
| Net income attributable to EVERTEC | $20.2 million | $39.4 million |
| Net margin | 20.7% | 20.4% |
| Diluted EPS | $0.27 | $0.53 |
| Adjusted EBITDA | $48.8 million | $94.9 million |
| Operating cash flow | Not separately provided | $69.4 million |
- Second-quarter revenue increased 5% year over year; six-month revenue increased 4%.
- Second-quarter segment revenue was $23.3 million for Merchant Acquiring, $28.2 million for Payment Processing and $46.2 million for Business Solutions.
- Six-month segment revenue was $46.2 million, $55.1 million and $91.9 million, respectively.
- Cash and restricted cash totaled $43.3 million at June 30, 2016, including $35.7 million of unrestricted cash. The company reported $24.6 million of cash held by foreign subsidiaries.
- Total debt was $654.7 million, consisting primarily of $252.3 million of Term A debt, $378.9 million of Term B debt and $20.0 million drawn on the revolving facility.
- The $100.0 million revolving credit facility had $80.0 million available at June 30, 2016.
- Capital expenditures, including software and property and equipment additions, were approximately $19.0 million for the first six months, compared with $15.4 million in the prior-year period.
- The company paid $15.0 million of dividends and repurchased $15.6 million of common stock during the first six months. The board declared another $0.10-per-share dividend payable September 2, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by the expanded FirstBank of Puerto Rico relationship, a full quarter of revenue from Processa in Colombia, higher ATH debit-network and card-processing volumes, and growth in core banking services.
- Merchant Acquiring revenue increased 10% in the quarter and 12% year to date, but segment operating income declined 9% in the quarter and 9% year to date. Management cited lower average ticket sizes, merchant mix and pricing changes, as well as revenue-sharing costs.
- Payment Processing revenue increased 5% in the quarter and 4% year to date, while segment operating income declined 2% and 5%, respectively. Government-program revenue reductions and contract-related revenue reallocations partially offset volume growth.
- Business Solutions revenue increased 2% in the quarter and 1% year to date. Segment operating income increased 14% in the quarter and 4% year to date, supported by core banking and hardware sales.
- SG&A increased 41% in both the quarter and first half, primarily because of restatement-related audit and consulting fees, higher compensation, share-based compensation and first-quarter severance.
- Depreciation and amortization declined 7% in the quarter and 10% year to date because certain software became fully amortized.
- Operating cash flow declined from $76.7 million to $69.4 million, primarily because of payments reducing accounts payable and accrued liabilities and working-capital timing.
- Investing cash outflows increased to $20.7 million from $15.9 million, mainly because of the Processa acquisition and higher software additions.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide explicit numerical revenue or earnings guidance. Management states that operating cash flow and available revolver capacity should be adequate for the next 12 months, subject to operating performance and other factors.
- During the second quarter, the company paid $3.6 million in credit-amendment fees related to its senior secured credit facilities.
- The company entered into a $200 million interest-rate swap beginning in January 2017 and maturing in April 2020, fixing the applicable Term B interest rate at 1.9225%. The swap liability was $5.1 million at June 30, 2016.
- The senior secured facilities require compliance with a maximum senior secured leverage ratio of up to 6.60 to 1.00. The reported ratio was 3.3 to 1.00 at June 30, 2016, and the company stated that it was in compliance with its covenants.
- A 100-basis-point increase in interest rates above applicable floors would increase annual interest expense by approximately $6.4 million, excluding the revolving facility.
- Management and the audit committee previously determined that prior financial statements required restatement because of errors in accounting for uncertain tax positions related to 2010 transaction costs and debt issuance costs. The 2015 comparative results in this filing are restated.
- The company recorded a $11.8 million tax benefit in the third quarter of 2015 when the statute of limitations expired on one related tax exposure.
- Disclosure controls and procedures were not effective as of June 30, 2016 because a material weakness remained in controls over the completeness, documentation and monitoring of uncertain tax positions. Remediation procedures were implemented but had not operated long enough to demonstrate effectiveness.
- Puerto Rico accounted for approximately 86% of 2015 revenue, and the Puerto Rico government accounted for approximately 9%. PROMESA creates uncertainty regarding government budgets, payment timing, contract renewals and collection of receivables.
- Other principal risks include dependence on Popular, cybersecurity and system reliability, regulatory oversight, customer concentration, Puerto Rico economic conditions, foreign-market exposure, high indebtedness, refinancing risk and potential merchant credit losses.
- Outstanding letters of credit totaled $4.5 million. Management stated that existing legal proceedings are not expected to have a material adverse effect, although loss estimates for certain early-stage matters were unavailable.
Most Important Facts for Investors to Verify
- Confirm that the restated 2015 figures are used consistently when assessing growth, profitability and tax trends.
- Monitor remediation and auditor conclusions regarding the material weakness in uncertain-tax-position controls.
- Evaluate the maturity and refinancing risk of the $255.0 million Term A principal balance due in April 2018 and the $388.0 million Term B principal balance due in April 2020.
- Assess whether revenue growth can translate into segment-margin improvement, particularly in Merchant Acquiring and Payment Processing.
- Track exposure to Popular, the Puerto Rico government and broader Puerto Rico economic and fiscal developments.
- Reconcile GAAP earnings and cash flow with management’s non-GAAP Adjusted EBITDA and Adjusted Net Income, which exclude items such as amortization, compensation, transaction fees and restatement expenses.