EVERTEC, Inc. — Q1 2020 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 services, merchant acquiring, the ATH debit network, business-process management, core banking, technology outsourcing and cash processing. This unaudited quarterly report covers the three months ended March 31, 2020, with comparison to the three months ended March 31, 2019.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $121.9 million | $118.8 million | 3% |
| Income from operations | $32.8 million | $37.4 million | (12%) |
| Operating margin | 26.9% | 31.5% | Down 4.6 points |
| Net income | $22.3 million | $26.7 million | (17%) |
| Net income attributable to common stockholders | $22.2 million | $26.6 million | (17%) |
| Diluted EPS | $0.30 | $0.36 | (17%) |
| Adjusted EBITDA | $56.3 million | $57.6 million | (2%) |
| Adjusted EBITDA margin | 46.2% | 48.5% | Down 2.3 points |
| Cash flow from operations | $33.9 million | $29.3 million | 16% |
| Capital expenditures | $9.4 million | $14.0 million | (32%) |
Cash and cash equivalents were $103.5 million at March 31, 2020, compared with $111.0 million at December 31, 2019. Including restricted cash, total cash was $125.1 million. Total debt was $506.6 million, consisting primarily of the 2023 Term A Loan and 2024 Term B Loan. Additional borrowing capacity under the $125 million revolving facility was $116.9 million at quarter-end. The secured leverage ratio was 1.99 to 1.00, and the company reported no defaults or covenant violations.
Net cash used in financing activities was $31.4 million, including $20.6 million of long-term debt repayments and $7.3 million of share repurchases. The company declared a $0.05 per-share quarterly dividend, paid April 3, 2020, and declared another $0.05 per-share dividend payable June 5, 2020.
Material changes versus the prior comparable period
- Revenue increased 3%, but operating costs rose 10%, driven by higher compensation, professional services, cloud services and depreciation and amortization.
- Operating income declined $4.6 million, and net income declined $4.5 million. The effective tax rate increased to 16.9% from 12.5%, partly due to COVID-19-related changes in the income mix and an approximately $0.5 million discrete tax item.
- Payment Services–Puerto Rico & Caribbean revenue declined to $29.9 million from $32.0 million and adjusted EBITDA declined to $16.1 million from $21.3 million, reflecting the absence of a prior-year one-time project benefit, lower transaction volumes and higher project-related costs.
- Payment Services–Latin America revenue increased to $21.6 million from $20.8 million, primarily from the December 2019 PlaceToPay acquisition and organic growth, while adjusted EBITDA was essentially unchanged at $8.2 million.
- Merchant Acquiring revenue declined to $25.1 million from $26.0 million, and adjusted EBITDA declined to $11.3 million from $12.0 million, due to lower sales volumes and spreads late in March.
- Business Solutions revenue increased to $55.9 million from $51.4 million, and adjusted EBITDA increased to $27.4 million from $23.0 million, supported by new services and approximately $1.5 million of one-time project implementations.
- Foreign currency translation losses and cash-flow-hedge losses drove other comprehensive loss of $20.2 million. Accumulated other comprehensive loss increased to $50.2 million from $30.0 million.
Guidance, outlook, risks and unusual items
Management expects approximately $3 million to $4 million of revenue attrition in Latin America during 2020 from previously disclosed client migrations. Timing remains dependent on customer conversion schedules.
COVID-19 began affecting transaction volumes in the final weeks of March. Management expects a more significant revenue impact in the quarter ending June 30, 2020. Identified risks include lower merchant sales and payment volumes, reduced consumer spending, customer and project disruption, workforce absenteeism, increased credit losses, potential asset impairments, supply constraints and cybersecurity exposure from remote work. The filing does not provide a quantified full-year COVID-19 outlook.
EVERTEC activated its business-continuity plan, moved most employees to remote work, implemented enhanced safety measures for critical on-site personnel and suspended non-essential travel. On April 8, 2020, it drew $30 million on its revolving facility to preserve liquidity. Beginning May 1, it expected to defer approximately $2.7 million of payroll taxes under the CARES Act.
The company performed a COVID-19-related goodwill assessment and recognized no impairment as of March 31, 2020. It adopted the current expected credit loss standard effective January 1, 2020; the cumulative-effect adjustment was immaterial. Interest-rate swaps had a $27.4 million liability at quarter-end, and the company expected to reclassify $4.7 million of hedge losses into interest expense over the following 12 months.
Popular generated approximately 45% of total revenue in Q1 2020, underscoring customer concentration. EVERTEC’s master services agreement with Popular runs through 2025, and future extension negotiations may require pricing or other concessions. Management stated that operating cash flow and available revolving capacity should satisfy liquidity needs for the next 12 months, but future performance remains exposed to COVID-19, economic conditions, debt service and refinancing requirements.
Important facts for investors to verify
- Track second-quarter and subsequent transaction volumes, particularly in Merchant Acquiring and Payment Services–Puerto Rico & Caribbean.
- Assess the effect of COVID-19 on revenue, margins, receivables, expected credit losses, goodwill and other intangible assets.
- Monitor cash balances after the $30 million revolver draw, debt repayments, dividends and share repurchases.
- Review debt covenant compliance, variable-rate exposure, swap valuations and upcoming 2023 and 2024 loan maturities.
- Evaluate dependence on Popular, including the 2025 master services agreement extension and any pricing concessions.
- Consider the $3 million to $4 million expected Latin American revenue attrition and the integration and performance of PlaceToPay.
- Verify the sustainability of the dividend and repurchase program given heightened economic uncertainty and liquidity needs.