EVERTEC, Inc. — Form 10-Q Summary
Business context and reporting period
EVERTEC is a Puerto Rico-based transaction-processing company operating across 19 Latin American and Caribbean countries. Its businesses are Merchant Acquiring, Payment Processing and Business Solutions, including operation of the ATH debit network, card and ATM processing, core banking, technology outsourcing and cash-processing services. This unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $91.3 million | $87.4 million | 4% |
| Income from operations | $27.0 million | $24.9 million | 9% |
| Net income | $19.1 million | $18.2 million | 5% |
| Diluted EPS | $0.24 | $0.23 | 4% |
| Cash flow from operations | $29.6 million | $30.0 million | Down $0.4 million |
| Adjusted EBITDA | $45.7 million | $45.2 million | 1% |
Operating margin was approximately 29.6%, compared with 28.5% in the prior-year quarter. Net margin was approximately 20.9%, compared with 20.8%. Adjusted EBITDA margin was approximately 50.0%; the filing does not provide a comparable prior-year adjusted EBITDA margin on the same presentation basis.
- Revenue by segment: Merchant Acquiring increased 4% to $20.1 million; Payment Processing increased 5% to $26.4 million; and Business Solutions increased 5% to $44.9 million.
- Segment operating income: Merchant Acquiring rose 10% to $9.3 million; Payment Processing declined 8% to $13.5 million; and Business Solutions rose 23% to $14.1 million.
- Expenses: Cost of revenues increased 5% to $39.8 million, SG&A declined 4% to $7.7 million, and depreciation and amortization increased 1% to $16.8 million.
- Non-operating items: Interest expense declined 10% to $6.2 million, while other income fell to $0.3 million from $2.0 million, primarily because of lower foreign-exchange gains and lower gains on local-currency purchases.
- Liquidity: Cash was $32.4 million, including $26.4 million held by foreign subsidiaries. The revolving credit facility had $80.0 million available of its $100.0 million capacity.
- Debt: Total debt was $686.0 million, consisting principally of $273.5 million of Term A debt, $388.5 million of Term B debt and $20.0 million drawn under the revolving facility. The company reported a senior secured leverage ratio of 3.57 to 1.00 and compliance with applicable covenants.
- Cash deployment: Financing cash outflows included $7.8 million of debt repayments, $7.8 million of dividends and $10.0 million of share repurchases. Capital expenditures were approximately $2.6 million.
Material changes versus the prior comparable period
- Revenue growth was broad-based, led by higher ATH transactions, increased card accounts, higher core banking revenue, and increased hardware and software sales.
- Payment Processing profitability weakened despite revenue growth because of higher depreciation, professional services and software-license expenses.
- Business Solutions operating income improved materially, reflecting revenue growth and lower depreciation, equipment and software-maintenance costs, partly offset by higher cost of sales.
- Net income benefited from higher operating income and lower interest expense, but the benefit was partly offset by substantially lower other income.
- Foreign-currency translation produced a $0.9 million gain in Q1 2015 versus a $7.7 million loss in Q1 2014.
- The company repurchased 452,175 shares for $10.0 million, reducing shares outstanding to 77.4 million at March 31, 2015.
- Stockholders’ equity increased to $122.4 million from $119.6 million at December 31, 2014, after net income, dividends, repurchases and other comprehensive income.
Guidance, outlook, risks and unusual items
The filing does not provide formal numerical revenue or earnings guidance. Management describes growth opportunities from the continued migration from cash and paper payments to electronic payments, greater outsourcing by financial institutions and government agencies, recurring multi-year contracts and expansion in Latin America. Management believes operating cash flow and available revolver capacity will fund liquidity needs for the next twelve months.
- EVERTEC remains highly dependent on Popular, Inc. and Banco Popular. Popular-related revenue represented 44% of total revenue in Q1 2015, and the company relies on a long-term master services agreement.
- Puerto Rico concentration presents risk because of the Commonwealth’s fiscal challenges. EVERTEC had $22.7 million of accounts receivable from the Puerto Rico government and its agencies at March 31, 2015, although it had no direct exposure to Puerto Rico government debt.
- The company has substantial floating-rate debt. A 100-basis-point increase in applicable interest rates would increase annual interest expense by approximately $6.7 million, excluding the revolving facility.
- Other risks include cybersecurity and processing-system disruption, fraud and merchant credit exposure, regulatory changes, network rules and fees, contract renewals, foreign-exchange and political risk, customer concentration, and the ability to refinance or service debt.
- Legal proceedings are described as arising in the ordinary course; management believes any aggregate liability will not be material. The company had a $0.9 million letter of credit with a maturity of less than three months.
- The company identified and remediated the material weakness reported in 2014 concerning segregation of duties and journal-entry access. Management concluded the controls were effectively designed and operating as of March 31, 2015.
- Goodwill was $369.2 million and other intangible assets were $323.9 million. Management reported no impairment-triggering events after the most recent impairment assessment.
- The board declared a subsequent quarterly dividend of $0.10 per share, payable June 5, 2015, subject to the usual board approval and business conditions.
Important facts for investors to verify
- Confirm the sustainability of revenue and cash-flow growth given the 44% revenue contribution from Popular-related relationships.
- Monitor Puerto Rico government receivables, government spending and the effect of further credit-rating downgrades on customer activity and collections.
- Evaluate refinancing and interest-rate exposure, particularly the Term A maturity in April 2018 and the Term B maturity in April 2020.
- Reconcile Adjusted EBITDA and Adjusted Net Income to GAAP results and assess the recurring nature of the excluded items.
- Track Payment Processing cost increases and whether the segment’s operating-margin decline reverses.
- Assess the effect of share repurchases and dividends on leverage, liquidity and long-term capital allocation.
- Review the effectiveness and continued operation of the remediated internal controls, as well as cybersecurity, fraud and system-continuity disclosures.