Business Context and Reporting Period
EVERTEC, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company provides merchant acquiring, payment processing, ATH network, business process management and technology outsourcing services across 26 countries in Latin America and the Caribbean, with significant operations and customer concentration in Puerto Rico.
On July 1, 2022, EVERTEC completed the Popular Transaction, selling certain software and prepaid assets to Banco Popular in exchange for 4.6 million EVERTEC shares valued at $169.2 million and assuming related contractual arrangements. Popular subsequently sold its remaining EVERTEC shares on August 15, 2022 and ceased to be a related party and controlling shareholder.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $145.8 million | $145.9 million | $456.6 million | $434.6 million |
| Income from operations | $23.8 million | $47.0 million | $116.5 million | $146.3 million |
| Operating margin | 16.3% | 32.2% | 25.5% | 33.7% |
| Net income attributable to EVERTEC | $137.8 million | $35.3 million | $210.3 million | $120.0 million |
| Diluted EPS | $2.06 | $0.48 | $2.98 | $1.65 |
| Adjusted EBITDA | $52.4 million | $69.8 million | $201.1 million | $218.9 million |
| Adjusted diluted EPS | $0.40 | $0.62 | $1.77 | $2.02 |
| Cash flow from operations | Not separately provided | Not separately provided | $159.0 million | $175.9 million |
Q3 GAAP net income included a $135.6 million gain on the sale of a business to Popular. The nine-month effective tax rate was 9.8%, compared with 10.8% in the prior-year period; Q3's effective tax rate was 6.2%, compared with 16.8%.
At September 30, 2022, cash and cash equivalents were $225.0 million, restricted cash was $18.7 million and total debt was $455.5 million. The company had $119.1 million of available capacity under its $125.0 million revolving facility. The secured leverage ratio was 1.41x, and management reported no defaults or covenant violations.
Capital expenditures and other capital investments totaled approximately $44.6 million during the first nine months, while investing cash outflows also included the $44.4 million BBR acquisition, net of cash acquired. Financing cash outflows included $72.5 million of share repurchases, $10.5 million of dividends and $9.9 million of debt repayments.
Material Changes Versus the Prior Comparable Period
- Revenue was flat in Q3 but increased 5% for the first nine months. Growth in Payment Services and Latin America was offset by reductions in Business Solutions and the effects of the Popular Transaction.
- Operating expenses increased 23% in Q3 and 18% for the first nine months. Cost of revenues increased due to revenue sharing with Popular, personnel costs, hardware sales, cloud services and inflationary increases in printing supplies. SG&A increased partly because of transaction-related professional fees.
- Adjusted EBITDA declined 25% in Q3 and 8% for the first nine months. Q3 adjusted EBITDA margin declined to 35.9% from 47.8%; nine-month margin declined to 44.1% from 50.4%.
- Payment Services—Puerto Rico & Caribbean revenue increased 15% in Q3 and 15% for the first nine months, while its nine-month adjusted EBITDA margin declined to 55.6% from 58.3%.
- Payment Services—Latin America revenue increased 26% in Q3 and 20% for the first nine months, but nine-month adjusted EBITDA declined 19%. Q3 results included a $7.8 million foreign-currency remeasurement loss.
- Merchant Acquiring revenue declined 2% in Q3 but increased 4% for the first nine months. Adjusted EBITDA declined 28% in Q3 and 12% for the first nine months, primarily due to Popular revenue sharing, lower average transaction sizes and Hurricane Fiona.
- Business Solutions revenue declined 15% in Q3 and 2% for the first nine months. Management estimates that assets sold to Popular will reduce annual revenue by approximately $30 million; the segment also incurred pressure from the one-time Popular credit and higher operating costs.
- Shares outstanding declined to 65.6 million from 72.0 million at December 31, 2021, reflecting repurchases and the retirement of 4.6 million shares received in the Popular Transaction.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantitative full-year revenue or earnings guidance. Management states that recurring, mission-critical services, increased electronic-payment adoption and growth in Latin America support long-term expansion. Management also believes operating cash flow and available revolver capacity will satisfy liquidity needs for the next twelve months.
- The amended Popular agreements extend certain relationships but eliminate exclusivity, introduce revenue sharing, reduce the CPI pricing cap from 5% to 1.5%, provide for a one-time credit and include contractual minimums through 2028. These changes are expected to reduce revenue and margins in Merchant Acquiring, Business Solutions and, to a lesser extent, Payment Services—Puerto Rico.
- Inflation, rising interest rates, recession risk, foreign-exchange volatility and reduced consumer spending may pressure costs, funding expense and transaction volumes. A 100-basis-point increase in applicable interest rates would increase annual interest expense by approximately $2.1 million based on debt outstanding at September 30, 2022.
- Debt includes variable-rate Term A and Term B loans, partly hedged by a $250 million interest-rate swap. The Term A loan matures in 2023 and the Term B loan in 2024.
- Key business risks include dependence on Banco Popular, concentration in Puerto Rico, regulatory and tax changes, cybersecurity and system outages, credit and fraud exposure, network and card-association risks, political and economic instability in Latin America and the Caribbean, and natural disasters.
- Hurricane Fiona adversely affected Q3 results, with an estimated approximately $1.0 million impact on Merchant Acquiring revenue. The company also recorded a $4.1 million software impairment charge during the first nine months.
- The BBR acquisition in Chile and Peru closed July 1, 2022 for cash consideration of approximately $53.2 million, including certificates of deposit; its revenue and earnings contribution was not material during the reporting period.
- Legal proceedings are described as ordinary-course matters, and management believes any aggregate loss will not materially affect the company.
Investor Verification Items
- Verify the recurring revenue and margin impact of the amended Popular agreements, including revenue sharing, the CPI cap reduction, asset-sale effects and contractual minimums.
- Assess whether the $135.6 million Popular Transaction gain, preferential tax effects and other adjustments obscure underlying operating performance; compare GAAP results with adjusted EBITDA and adjusted EPS.
- Monitor Banco Popular concentration: it represented approximately 35% of Q3 revenue and 40% of nine-month revenue, and accounts receivable from Popular were $36.4 million at September 30.
- Evaluate refinancing and interest-rate exposure as the Term A and Term B loans approach their 2023 and 2024 maturities, respectively.
- Track integration and contribution from BBR and other acquisitions, including goodwill of $417.8 million and intangible assets of $196.3 million at September 30.
- Confirm the sustainability of cash generation after capital expenditures, acquisitions, dividends and the $72.5 million of year-to-date share repurchases.
- Review the effects of inflation, foreign exchange, Hurricane Fiona, cybersecurity threats and Puerto Rico and Latin American economic conditions on future results.