EVERTEC, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2017; filed May 5, 2017. Financial statements are unaudited and prepared under U.S. GAAP. EVERTEC provides merchant acquiring, payment processing and business solutions across 18 Latin American and Caribbean countries, with significant operations and customer concentration in Puerto Rico.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $101.3 million | $95.5 million | +6% |
| Income from operations | $30.6 million | $26.6 million | +15% |
| Operating margin | 30.2% | 27.8% | +2.4 percentage points |
| Net income | $23.1 million | $19.2 million | +21% |
| Net income attributable to EVERTEC common stockholders | $23.0 million | $19.1 million | +20% |
| Net margin attributable to common stockholders | 22.7% | 20.1% | +2.6 percentage points |
| Diluted EPS | $0.31 | $0.26 | +19% |
| Adjusted EBITDA | $49.2 million | $46.0 million | +7% |
| Adjusted diluted EPS | $0.45 | $0.41 | +10% |
| Cash flow from operations | $25.3 million | $30.2 million | -16% |
Revenue by segment was $22.5 million for Merchant Acquiring, $30.1 million for Payment Processing and $48.7 million for Business Solutions. Payment Processing revenue increased 12%, primarily from higher ATH debit-network and card-processing volumes, a prior contract reclassification, Processa acquisition contributions and certain non-recurring revenue. Business Solutions increased 7%, while Merchant Acquiring declined 2%.
Total operating costs increased 3% to $70.7 million. Depreciation and amortization increased 7% to $15.7 million, mainly because of acquired intangible assets. Interest expense increased 20% to $7.0 million, largely due to higher LIBOR, the 2016 debt amendment and the interest-rate swap. The effective income tax rate was approximately 8.0% in Q1 2017 versus approximately 8.9% in Q1 2016.
At March 31, 2017, cash and cash equivalents were $52.1 million, including $34.9 million held by foreign subsidiaries. Total debt was $645.4 million, consisting primarily of senior secured term loans and $27.0 million of revolving borrowings. The company reported $73.0 million of additional revolving capacity and a senior secured leverage ratio of 3.29x, below the applicable covenant limit of up to 4.75x. No default or event of default had occurred as of the filing date.
Cash Flow, Capital Allocation and Liquidity
- Investing cash outflows were $6.7 million, including $3.9 million for software and $2.7 million for property and equipment.
- Financing cash outflows were $18.5 million, including $7.3 million of dividends, $3.8 million of share repurchases and $4.9 million of long-term debt repayments.
- Capital expenditures were approximately $6.5 million in Q1 2017. Management expects 2017 capital expenditures of $35 million to $45 million.
- The company believes operating cash flow and available revolver capacity will meet liquidity needs for the next 12 months, while noting dependence on future operating performance and debt refinancing capacity.
- The board declared a subsequent quarterly dividend of $0.10 per share, payable June 9, 2017.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue increased $5.8 million, led by Payment Processing and Business Solutions.
- Payment Processing segment operating income rose 39% to $17.2 million, while Merchant Acquiring segment operating income fell 18% to $6.9 million. The company attributed part of this shift to a contractual change that moved revenue and income from Merchant Acquiring to Payment Processing.
- Consolidated operating income increased $4.0 million, despite higher amortization and operating costs.
- Operating cash flow declined $4.9 million, primarily because of greater cash usage for accounts payable and accrued liabilities and prepaid maintenance contracts.
- The company adopted share-based payment guidance, recording a $4.2 million cumulative increase to retained earnings.
- Shares repurchased during the quarter totaled 228,289 at an average price of $16.48, leaving approximately $76.2 million available under the repurchase authorization.
Outlook, Unusual Items and Risks
- Management estimates approximately $3 million to $6 million of 2017 revenue attrition in Latin America from anticipated client migrations; timing may vary based on customer conversion schedules.
- EVERTEC announced a proposed acquisition of EFT Group S.A. (PayGroup) for approximately $42 million, expected to close in the second half of 2017 using cash and revolver borrowings. The transaction requires U.S. federal bank regulatory approval; failure to obtain approval by June 12, 2017 could permit termination and trigger an approximately $2 million penalty.
- The company expects to continue paying a regular quarterly dividend, but future declarations remain subject to board approval and business conditions.
- A $200 million interest-rate swap fixes the relevant portion of Term B debt at an effective rate of 4.4225% through April 2020. A 100-basis-point increase in applicable rates would increase annual interest expense by approximately $4.3 million after considering the swap.
- Following quarter-end, Puerto Rico entered Title III proceedings under PROMESA. EVERTEC had $16.1 million of net receivables from the Commonwealth and certain public corporations at March 31, 2017. Management identified potential risks to collections, government spending, consumer activity and the Puerto Rico economy.
- Additional principal risks include reliance on Popular, which generated 44% of Q1 2017 revenue; cybersecurity and system disruptions; regulatory requirements; credit and network risks; Puerto Rico economic and fiscal conditions; foreign exchange exposure; high indebtedness; and potential loss of Puerto Rico tax benefits.
- No goodwill impairment, material off-balance-sheet arrangement or material adverse legal contingency was reported. The company stated that its disclosure controls were effective.
Investor Verification Items
- Verify the collectability and aging of the $16.1 million in Puerto Rico government-related receivables after the PROMESA filing.
- Monitor customer migrations and whether the estimated $3 million to $6 million revenue attrition occurs during 2017.
- Confirm regulatory approval, funding, timing and potential penalty exposure for the proposed PayGroup acquisition.
- Assess debt maturities, amortization requirements, covenant headroom, variable-rate exposure and refinancing needs.
- Separate recurring revenue and earnings from the quarter’s identified non-recurring revenue and other adjustments.
- Track Popular-related revenue concentration, contract renewal terms and any changes in the relationship.