EVERTEC, Inc. Form 10-Q Summary
Business context and reporting period
EVERTEC provides merchant acquiring, payment processing and business solutions across 19 countries in Latin America and the Caribbean. The filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012. The company processed more than 1.8 billion transactions annually and operated more than 4,100 ATMs and 104,000 POS terminals.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $87.3 million | $82.5 million | 6% |
| Income from operations | $20.4 million | $17.8 million | 14% |
| Operating margin | 23.4% | 21.6% | Improved |
| Net income | $5.5 million | $3.5 million | 55% |
| Net margin | 6.3% | 4.3% | Improved |
| Diluted EPS | $0.07 | $0.05 | Improved |
| Cash flow from operations | $33.8 million | $30.7 million | 10% |
| Capital expenditures and acquired intangibles | $4.5 million | $3.7 million | Increased |
- Merchant acquiring revenue was $17.5 million, down 1%; management stated that revenue would have grown 8% excluding the impact of the Durbin Amendment.
- Payment processing revenue increased 5% to $24.1 million, primarily from higher transaction volumes and accounts on file.
- Business solutions revenue increased 9% to $45.8 million, driven principally by demand for network and core banking services.
- Segment operating income increased 11% to $33.3 million. Segment growth was partly offset by $12.9 million of merger-related depreciation and amortization and other unallocated expenses.
- Interest expense increased to $15.3 million from $11.2 million, primarily because of additional debt issued in May 2012.
- Income tax expense declined to $51,000 from $1.1 million, reflecting a tax grant received in October 2012 and the reversal of tax uncertainty reserves.
- Cash increased to $34.1 million at March 31, 2013 from $25.6 million at December 31, 2012. Restricted cash was $4.8 million.
- Total debt was $743.4 million at March 31, 2013, compared with $763.8 million at December 31, 2012. Debt consisted primarily of a $482.4 million senior secured term loan and $252.3 million of 11% senior notes.
- Stockholders’ equity increased to $130.6 million from $122.5 million at year-end 2012.
Material changes versus the prior comparable period
- Revenue growth accelerated in payment processing and business solutions, while merchant acquiring revenue remained broadly stable after the Durbin-related impact.
- Operating income grew faster than revenue because selling, general and administrative expense and depreciation and amortization declined modestly relative to the prior-year quarter.
- Net income benefited materially from lower income taxes, although higher interest expense limited the conversion of operating growth into net earnings.
- Operating cash flow increased by $3.1 million, but financing activities used $21.0 million, primarily for repayment of $18.3 million of short-term borrowings and $2.7 million of long-term debt.
Guidance, outlook, risks and unusual items
- Management stated that operating cash flow and available revolving credit capacity were expected to satisfy liquidity needs for the next twelve months; no formal revenue or earnings guidance was provided.
- On April 17, 2013, after quarter-end, the company completed an IPO of 28.8 million shares at $20.00 per share. EVERTEC received approximately $117.4 million of net proceeds and used them primarily to redeem debt.
- Also after quarter-end, the company entered into new $800 million senior secured credit facilities, including a $100 million revolving facility, and refinanced the previous secured facilities. Management estimated that annual interest expense would decline by approximately $29.6 million, or 55%, as a result of the refinancing.
- All outstanding 11% senior notes were redeemed by April 30, 2013, following a partial redemption of $91.0 million of principal at a premium.
- Consulting agreements with Popular and Apollo were terminated in April 2013, subject to termination fees of approximately $8.2 million and $8.5 million, respectively.
- The IPO caused Tranche B and C options to vest, resulting in approximately $4.9 million of share-based compensation expense in April 2013.
- Key risks include dependence on Popular, customer contract renewals, operational and cybersecurity failures, merchant credit exposure, regulatory and card-network changes, Puerto Rico and Latin American concentration, foreign exchange and economic conditions, high indebtedness, and the ability to generate sufficient cash for debt service.
- Popular accounted for 47% of revenue in Q1 2013, compared with 44% in Q1 2012, highlighting customer concentration and related-party exposure.
- Management reported ordinary-course legal proceedings but did not expect them to have a material adverse effect. The filing states that there were no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Confirm the post-quarter IPO proceeds, share dilution, use of proceeds and ownership changes.
- Verify completion and terms of the April 2013 debt refinancing, including the estimated interest savings and covenant requirements.
- Assess the sustainability of the unusually low Q1 tax expense and the effects of the tax grant and reserve reversals.
- Monitor Popular-related revenue, receivables, debt holdings and reimbursement arrangements, given the company’s substantial concentration.
- Reconcile reported GAAP earnings with adjusted EBITDA and adjusted net income, including merger-related amortization, management fees, transaction costs and other adjustments.
- Evaluate leverage, floating-rate exposure and liquidity after the refinancing; the March 31 senior secured leverage ratio was 2.71 to 1.00.