Business Context and Reporting Period
EVERTEC, Inc. filed this unaudited Form 10-Q on November 6, 2014, covering the three and nine months ended September 30, 2014. EVERTEC provides merchant acquiring, payment processing and business solutions across 19 Latin American and Caribbean countries, including operation of the ATH debit network. Popular, Inc. remained a significant customer, generating approximately 46% of third-quarter revenue and 45% of nine-month revenue.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $88.6 million | $87.4 million | $267.0 million | $263.9 million |
| Income from operations | $26.5 million | $21.9 million | $76.8 million | $59.2 million |
| Operating margin | 29.9% | 25.0% | 28.8% | 22.4% |
| Net income (loss) | $19.1 million | $14.8 million | $55.1 million | $(44.7) million |
| Net margin | 21.5% | 16.9% | 20.6% | (16.9)% |
| Diluted EPS | $0.24 | $0.18 | $0.70 | $(0.57) |
| Cash flow from operations | Not separately provided | Not separately provided | $103.8 million | $13.7 million |
Revenue was approximately $88.6 million in the third quarter and $267.0 million for the first nine months. Q3 revenue increased 1%; operating income increased 21%; and net income increased 29%. For nine months, revenue increased 1%, operating income increased 30%, and the company moved from a prior-year loss to net income.
- Q3 segment revenue: Merchant Acquiring $19.2 million, up 6%; Payment Processing $25.6 million, up 4%; Business Solutions $43.8 million, down 2%.
- 9M segment revenue: Merchant Acquiring $58.3 million, up 8%; Payment Processing $77.0 million, up 5%; Business Solutions $131.6 million, down 4%.
- Q3 cost profile: operating costs declined 5% to $62.2 million. SG&A declined 21% to $7.1 million, and depreciation and amortization declined 7% to $16.5 million.
- 9M cost profile: operating costs declined 7% to $190.2 million, including a 5% decline in cost of revenues, a 16% decline in SG&A and a 7% decline in depreciation and amortization.
- Adjusted metrics: Q3 Adjusted EBITDA was $44.5 million; nine-month Adjusted EBITDA was $135.3 million. Nine-month Adjusted net income was $95.6 million, or $1.21 basic and $1.20 diluted per share.
Balance Sheet, Debt and Liquidity
- September 30 cash was $29.2 million, compared with $22.5 million at December 31, 2013. Restricted cash was $6.1 million.
- Total debt was $679.1 million, consisting primarily of $281.0 million under Term A, $390.1 million under Term B and $8.0 million drawn on the revolving facility, compared with $735.9 million at year-end 2013.
- The $100 million revolving facility had $92.0 million available at September 30, 2014. The senior secured leverage ratio was 3.53 to 1.00 versus a permitted maximum of up to 6.60 to 1.00, and the company reported compliance with its covenants.
- Capital expenditures and intangible asset purchases totaled approximately $16.6 million for the first nine months. Cash dividends paid were $23.5 million, reflecting quarterly dividends of $0.10 per share.
- Management stated that operating cash flow and available revolver capacity should meet liquidity needs for the next twelve months, while noting dependence on future operating performance and external economic factors.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially because revenue growth was accompanied by lower operating expenses and lower interest expense following the 2013 refinancing.
- The prior-year nine-month results included a $58.5 million loss on debt extinguishment and a $16.7 million consulting-agreement termination expense. These unusual items were absent in 2014.
- Interest expense declined to $19.8 million for nine months from $31.4 million, while the 2013 period included refinancing-related effects.
- Business Solutions revenue declined primarily because hardware and software sales fell $7.4 million for the nine-month period, partly offset by higher demand for core banking and other services.
- Foreign currency translation produced a $6.6 million loss in accumulated other comprehensive income at September 30, compared with a $0.4 million gain at December 31, 2013.
- On September 24, 2014, the board authorized a stock repurchase program of up to $75 million over 12 months; no shares had been repurchased through September 30.
Outlook, Risks, Contingencies and Unusual Items
Management cited continued migration from cash and paper payments to electronic payments, lower electronic-payment penetration in Latin America, and financial-institution outsourcing as growth opportunities. The company also expects recurring, contract-based revenue and operating scalability to support expansion.
- Key risks include dependence on Popular and Banco Popular, contract renewals, Puerto Rico and Latin American economic conditions, regulatory changes, competition, credit and fraud exposure, cybersecurity and system failures, foreign exchange, acquisitions and high indebtedness.
- All senior secured debt bears variable interest rates. Management estimated that a 100-basis-point increase in rates above applicable floors would increase annual interest expense by approximately $6.8 million, excluding the revolver.
- The company had a $1.1 million letter of credit with a maturity of less than three months and $26.7 million of unused windfall tax benefits available to offset future taxable income.
- Goodwill was $369.3 million and other intangible assets were $338.2 million at September 30. The third-quarter qualitative impairment assessment identified no impairment.
- EVERTEC was involved in ordinary-course legal proceedings; management believed any aggregate loss would not materially affect financial condition, results or cash flows. The filing reports no material changes to previously disclosed risk factors.
- The board declared a further $0.10 per-share dividend on November 5, 2014, payable December 5, 2014, subject to the usual conditions.
Important Facts for Investors to Verify
- Whether revenue growth can continue while Business Solutions hardware and software sales remain lower.
- The sustainability of margin expansion after the reduction in prior-year unusual expenses and amortization.
- Popular-related revenue concentration and the terms and renewal prospects of the 15-year master services agreement.
- Floating-rate debt exposure, required amortization and refinancing needs before the 2018 and 2020 maturities.
- Execution and funding of the $75 million share repurchase authorization alongside dividends and debt repayment.
- Foreign currency impacts, regulatory developments, cybersecurity controls and potential merchant credit or fraud losses.