EVERTEC, Inc. — Form 10-Q Summary
Business Context and Reporting Period
EVERTEC is a transaction-processing company serving 26 countries in Latin America and the Caribbean. Its businesses include payment processing, merchant acquiring, the ATH debit network, core banking, technology outsourcing, and business-process management. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Revenue is substantially recurring and is generated through four segments: Payment Services—Puerto Rico & Caribbean, Payment Services—Latin America, Merchant Acquiring, and Business Solutions. Popular-related revenue represented 41% of total revenue in both the second quarter and first six months of 2018.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $113.3 million | $103.5 million | $223.6 million | $204.8 million |
| Income from operations | $30.6 million | $30.0 million | $64.2 million | $60.6 million |
| Operating margin | 27.0% | 29.0% | 28.7% | 29.6% |
| Net income | $20.1 million | $20.2 million | $43.2 million | $43.4 million |
| Net margin | 17.8% | 19.5% | 19.3% | 21.2% |
| Diluted EPS | $0.27 | $0.27 | $0.58 | $0.59 |
| Adjusted EBITDA | $53.8 million | $50.1 million | $107.7 million | $99.3 million |
Net cash provided by operating activities was $76.9 million for the first six months, compared with $71.1 million in 2017. Capital expenditures were approximately $15.9 million, consisting primarily of software and property and equipment additions. Net cash used in financing activities was $51.0 million, including repayment of the 2018 Term A Loan and other debt.
Cash and cash equivalents were $59.3 million at June 30, 2018, and cash, cash equivalents, and restricted cash totaled $70.4 million. The company reported $569.7 million of total debt, including $193.8 million under the 2020 Term A Loan and $375.6 million under the Term B Loan. The company had $65.0 million of available revolving-credit capacity. The senior secured leverage ratio was 2.93 to 1.00, versus a maximum applicable covenant of 4.75 to 1.00, and management reported no default.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 10% and first-half revenue increased 9%, primarily from the PayGroup acquisition, post-hurricane recovery activity in Puerto Rico, federal relief and benefit programs, insurance proceeds, and higher transaction volumes.
- Payment Services—Latin America revenue increased 48% for the quarter and 53% for the first half, primarily because of PayGroup. Management stated that the acquired business contributed revenue at a lower margin.
- Merchant Acquiring revenue increased 10% for the quarter and 7% for the first half, supported by higher sales volumes, a higher average ticket, improved net revenue margin, and higher non-transactional fees.
- Operating expenses grew faster than revenue in the second quarter. Cost of revenue increased 14% and selling, general and administrative expense increased 22%, reflecting PayGroup-related personnel costs, higher equipment maintenance, increased share-based compensation, and professional fees related to a potential transaction that was not pursued.
- Net income was essentially flat despite higher revenue. Higher interest expense and lower foreign-exchange gains increased non-operating expenses, while the prior-year period included tax expense associated with a one-time dividend used to fund the PayGroup acquisition.
- Adjusted EBITDA increased 7% in the second quarter and 9% for the first six months. Share-based compensation expense increased to $7.3 million in the first half from $4.2 million in the prior-year period.
- Total debt declined from $616.7 million at December 31, 2017 to $569.7 million at June 30, 2018, principally because the 2018 Term A Loan and revolving borrowings were repaid or matured.
- The company adopted ASC 606. Reported adoption effects were not material to the income statement, cash flows, or earnings per share; the company recorded a cumulative equity adjustment of approximately $0.8 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects 2018 capital expenditures of approximately $35 million to $40 million.
- Management expects elevated Puerto Rico and Virgin Islands sales volumes to continue through the remainder of 2018 as additional insurance and relief funds are received, although the timing and sustainability of this benefit are uncertain.
- Management estimates approximately $2 million to $4 million of Latin American revenue attrition in 2018 from previously disclosed client migrations. Timing depends on customer conversion schedules.
- The company reinstated its quarterly dividend after suspending it in November 2017. A $0.05-per-share dividend was declared on July 26, 2018, payable September 7, 2018. Future dividends remain subject to board approval and business conditions.
- A $200 million interest-rate swap fixes the rate on a portion of the Term B Loan at 4.4225% through April 2020. A 100-basis-point increase in applicable interest rates would increase annual interest expense by approximately $3.8 million after considering the swap.
- Principal risks include dependence on Popular, concentration in Puerto Rico, the Puerto Rico fiscal crisis and PROMESA restructuring, hurricane-related disruption, client contract renewals, cybersecurity and system failures, regulatory requirements, credit and merchant liability, foreign exchange, high indebtedness, refinancing needs, and potential loss of Puerto Rico tax benefits.
- The company is party to ordinary-course legal proceedings. Management believes any resulting losses will not materially affect financial condition, results of operations, or cash flows; some early-stage matters do not have a reasonably estimable loss range.
- No material changes were reported to the risk factors in the 2017 Form 10-K. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether post-hurricane recovery, relief funding, and insurance proceeds continue to support Puerto Rico merchant-acquiring volumes after 2018.
- The timing and financial impact of the expected $2 million to $4 million Latin American revenue attrition and the integration and margin profile of PayGroup.
- Popular’s continuing contribution to revenue and the terms, renewal prospects, and concentration risk of the master services agreement.
- Debt repayment and refinancing requirements as the 2020 Term A and Term B facilities approach maturity, including compliance with leverage covenants.
- Whether operating-cost growth, share-based compensation, and lower foreign-exchange gains continue to pressure operating and net margins.
- The sustainability of the reinstated dividend given debt service, capital expenditure requirements, acquisitions, and Puerto Rico operating conditions.
- Potential effects of PROMESA proceedings, Puerto Rico economic conditions, regulatory developments, cybersecurity events, and future hurricanes.