EVERTEC, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. EVERTEC is a Puerto Rico-based transaction-processing company serving 26 countries in Latin America and the Caribbean through payment services, merchant acquiring, and business solutions. The filing was signed August 2, 2019.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $122.5 million | $113.3 million | $241.4 million | $223.6 million |
| Income from operations | $37.7 million | $30.6 million | $75.1 million | $64.2 million |
| Net income | $27.1 million | $20.1 million | $53.9 million | $43.2 million |
| Net income attributable to EVERTEC | $27.1 million | $20.1 million | $53.7 million | $43.1 million |
| Diluted EPS | $0.37 | $0.27 | $0.73 | $0.58 |
| Adjusted EBITDA | $57.8 million | $53.8 million | $115.4 million | $107.7 million |
| Cash flow from operations | Not separately provided | Not separately provided | $76.0 million | $76.9 million |
Q2 operating margin was approximately 30.8%, compared with 27.0% in the prior-year quarter. Net margin was approximately 22.1%, compared with 17.8%. Six-month operating margin was approximately 31.1%, compared with 28.7%, and net margin was approximately 22.3%, compared with 19.3%. Adjusted EBITDA margin was approximately 47.2% in Q2 and 47.8% for the first six months.
- Liquidity: Cash and cash equivalents were $64.0 million; restricted cash was $13.5 million. The revolving credit facility provided $116.9 million of additional borrowing capacity.
- Debt: Total debt was $537.0 million, consisting primarily of the 2023 Term A and 2024 Term B facilities. The secured leverage ratio was 2.17 to 1.00, and the company reported no default or event of default.
- Capital spending: Six-month additions to software and property and equipment totaled $35.6 million, compared with $15.9 million in the prior-year period.
- Shareholder returns: The company paid $7.2 million of dividends and repurchased $28.2 million of common stock during the first six months. A further quarterly dividend of $0.05 per share was declared for payment in September 2019.
- Balance sheet: Total assets were $950.5 million and total equity was $228.8 million at June 30, 2019. Operating lease right-of-use assets and liabilities were newly reported under ASC 842.
Material changes versus the prior comparable period
- Q2 revenue increased 8%, driven by higher ATH debit-network volumes, value-added solutions, pricing actions, core banking activity, new managed-services projects, and approximately $2.5 million of special-project and hardware revenue.
- Six-month revenue also increased 8%, including approximately $2.7 million from a one-time electronic-benefits contract and approximately $2.5 million from hardware sales and completed projects.
- Q2 operating income rose 23%, as revenue growth and a 16% reduction in selling, general and administrative expense more than offset higher cost of revenues and depreciation and amortization.
- Q2 net income increased 35%; the effective tax rate declined to 8.4% from 13.4%, partly due to a $1.0 million stock-based compensation tax benefit and a shift in taxable income toward Puerto Rico.
- Six-month operating cash flow was broadly stable, declining slightly from $76.9 million to $76.0 million. Investing cash outflows increased substantially due to higher software and equipment spending.
- Financing cash outflows included $28.2 million of share repurchases and $7.2 million of dividends, while long-term debt repayments declined compared with 2018.
- Segment revenue increased in all four operating segments. Business Solutions contributed the largest dollar increase in Q2, while Payment Services–Puerto Rico & Caribbean delivered the largest increase in segment Adjusted EBITDA.
Guidance, outlook, risks and unusual items
- Management expected 2019 capital expenditures of approximately $50 million to $55 million.
- Management estimated Latin American revenue attrition of approximately $2 million to $3 million in 2019 from previously disclosed client migrations. Timing remained dependent on customer conversion schedules.
- Management stated that operating cash flow and available revolver capacity should be adequate for the next twelve months, but future liquidity depends on operating performance, capital needs, debt service, refinancing capacity, and other factors.
- Popular generated approximately 42% of revenue in both the quarter and first six months. EVERTEC relies on Popular under a long-term master services agreement; anticipated extension negotiations may involve pricing or other concessions.
- Key risks include Puerto Rico’s fiscal crisis and PROMESA restructuring, geographic concentration, government and financial-institution customers, cybersecurity and system failures, payment-network and card-association rules, regulatory approvals, foreign-exchange exposure, interest-rate increases, high indebtedness, and the ability to retain and renew customer contracts.
- A 100-basis-point increase in applicable interest rates was estimated to increase annual interest expense by approximately $3.4 million. Interest-rate swaps hedge portions of the variable-rate debt.
- Foreign-currency translation losses in accumulated other comprehensive loss were $17.3 million at June 30, 2019. Other comprehensive loss also reflected unfavorable cash-flow-hedge movements.
- The filing identifies ordinary-course legal proceedings but states that any aggregate loss is not expected to be material. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether revenue growth remains after removing approximately $5.0 million of disclosed one-time or project-related revenue in the first half.
- The timing and financial terms of anticipated Latin American client migrations and the projected $2 million to $3 million revenue attrition.
- Renewal and extension negotiations with Popular, given its approximately 42% revenue contribution and the potential for pricing concessions.
- Actual 2019 capital expenditures relative to the $50 million to $55 million expectation and the effect on free cash flow.
- Debt repayment, interest-rate exposure, swap valuations, covenant compliance, and the company’s ability to refinance or service approximately $537 million of debt.
- Effects of Puerto Rico’s fiscal restructuring, government receivables, consumer spending, and any future disruption from hurricanes or other natural disasters.
- Whether elevated margins and the lower tax rate are sustainable, particularly given tax benefits, foreign-exchange movements, project revenue, and other unusual items.