EVERTEC, Inc. Form 10-Q Summary
Reporting period: The provided filing is for the quarter ended March 31, 2016, filed May 26, 2016. This does not match the request metadata identifying “2015 Q3.” The March 31, 2015 comparative amounts are presented as restated.
Business context
EVERTEC is a Puerto Rico-based transaction-processing company operating across 18 Latin American and Caribbean countries. Its principal segments are Merchant Acquiring, Payment Processing, and Business Solutions. The company owns and operates the ATH debit network and provides payment processing, merchant acquiring, banking technology, outsourcing, and cash-processing services.
Financial performance
| Metric | Q1 2016 | Q1 2015, restated | Change |
|---|---|---|---|
| Revenue | $95.5 million | $91.5 million | 4% |
| Income from operations | $26.6 million | $27.0 million | (2%) |
| Operating margin | 27.8% | 29.5% | Down 170 bps |
| Net income | $19.2 million | $18.5 million | 3% |
| Net income attributable to EVERTEC | $19.1 million | $18.5 million | 3% |
| Net margin | 20.1% | 20.3% | Down 20 bps |
| Diluted EPS | $0.26 | $0.24 | Increase |
| Adjusted EBITDA | $46.0 million | $45.7 million | 1% |
| Adjusted net income | $31.0 million | $28.6 million | 8% |
Merchant Acquiring revenue increased 14% to $22.9 million, primarily from higher sales volumes and a merchant portfolio acquired in the fourth quarter of 2015. Payment Processing revenue increased 2% to $27.0 million, while Business Solutions revenue increased 1% to $45.6 million.
Total operating expenses increased 7% to $68.9 million. Cost of revenues increased 9%, including higher compensation, $1.6 million of additional share-based compensation, and approximately $2.1 million of severance payments. Selling, general and administrative expenses increased 41% to $10.8 million, partly due to professional fees and share-based compensation. Depreciation and amortization declined 13% to $14.7 million as certain equipment and software became fully amortized.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow was $30.2 million, compared with $30.1 million in the prior-year period.
- Investing cash flow was negative $5.7 million, including $5.9 million for the Processa acquisition and approximately $3.0 million of capital expenditures.
- Financing cash flow was negative $17.3 million, including $7.5 million of dividends, $4.8 million of long-term debt repayments, $2.5 million of share repurchases, and a $2.0 million reduction in short-term borrowings.
- Cash was $36.0 million at March 31, 2016, including $19.3 million held by foreign subsidiaries. Restricted cash was $8.6 million.
- Total debt was $662.3 million gross and $656.3 million net. The company had $15.0 million outstanding under its $100.0 million revolving facility, leaving $85.0 million available.
- The senior secured Term A and Term B loans had carrying amounts of $258.6 million and $385.4 million, respectively. Term A matures in April 2018 and Term B in April 2020.
- The senior secured leverage ratio was 3.4x at March 31, 2016, compared with a maximum covenant level of up to 6.60x.
- Management stated that operating cash flow and available revolver capacity should meet liquidity needs for the next twelve months, subject to operating performance and refinancing conditions.
- Capital expenditures are expected to be $35 million to $40 million for 2016. The company continued its $0.10 per-share quarterly dividend and repurchased $2.5 million of common stock during the quarter.
Material changes and unusual items
- The 2015 comparative period was restated for errors involving uncertain tax positions related to 2010 transaction costs and debt issuance costs, as well as other less significant accounting errors.
- A $11.8 million tax benefit was recognized in the third quarter of 2015 when the statute of limitations expired on potential tax liabilities, interest, and penalties related to certain 2010 debt issuance cost deductions. This benefit affects comparability of trailing and annual results.
- Management identified a material weakness in internal control over financial reporting concerning the completeness and monitoring of uncertain tax position analyses. Disclosure controls were therefore deemed ineffective as of March 31, 2016. Remediation plans included enhanced documentation and periodic review by finance, legal, and tax personnel.
- On March 1, 2016, the company acquired 65% of Processa S.A.S.; the transaction generated $8.0 million of goodwill and $3.4 million of noncontrolling interest. The filing does not provide a full purchase price or revenue contribution.
- The company entered into a $200 million interest-rate swap beginning in January 2017, fixing the applicable rate at 1.9225% through April 2020 on a portion of the Term B loan. The swap liability was $3.6 million at quarter-end.
- An April 2016 credit agreement amendment extended delivery deadlines for 2015 financial statements and related quarterly information. Failure to meet specified deadlines could increase borrowing rates by 50 basis points and then an additional 25 basis points, and restrict certain repurchases and dividends other than quarterly dividends of up to $0.10 per share.
Outlook and principal risks
The filing provides a 2016 capital expenditure expectation of $35 million to $40 million but does not provide clear revenue, earnings, or margin guidance. Management cited continued migration from cash to electronic payments, outsourcing demand, and expansion in Latin America as growth opportunities.
- Dependence on Popular, which generated approximately 45% of first-quarter revenue and remains a significant customer and business relationship.
- Geographic concentration in Puerto Rico, including exposure to the Puerto Rican government’s severe fiscal and liquidity challenges, potential delayed payments, economic weakness, and population migration.
- High leverage, variable-rate debt, debt maturities beginning in 2018, covenant restrictions, and refinancing risk. Management estimated that a 100-basis-point increase in applicable interest rates would increase annual interest expense by approximately $6.5 million, excluding the revolver.
- Cybersecurity, system availability, fraud, data protection, technology infrastructure, and third-party service risks.
- Regulatory oversight associated with payment processing and the company’s relationship with regulated financial institutions.
- Merchant credit risk, card-network rules and fees, customer contract renewals, foreign-exchange exposure, and political or economic instability in Latin America.
- Unresolved legal proceedings and claims were assessed by management as not expected to have a material adverse effect, although loss estimates for certain early-stage matters were not available.
Investor verification checklist
- Confirm the intended period, because the supplied filing is Q1 2016 rather than Q3 2015.
- Review the 2015 Form 10-K restatement and quantify the effect of the $11.8 million tax benefit on historical and trailing results.
- Assess remediation of the material weakness and whether subsequent filings report effective internal controls.
- Verify compliance with the amended credit agreement deadlines, any interest-rate step-ups, and restrictions on dividends or repurchases.
- Evaluate the $656.3 million net debt burden, 2018 Term A maturity, variable-rate exposure, and the effectiveness and valuation of the interest-rate swap.
- Review Processa’s operating contribution, acquisition accounting, and integration risks.
- Monitor Popular concentration, Puerto Rico government receivables, and the impact of Puerto Rico’s fiscal crisis on transaction volumes and collections.