EVERTEC, Inc. 2020 Q2 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 services, merchant acquiring, the ATH debit network, core banking and business-process solutions. The filing covers the quarter and six months ended June 30, 2020, with results significantly affected by the COVID-19 pandemic.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $117.9 million | $239.9 million |
| Income from operations | $25.6 million | $58.4 million |
| Net income | $15.6 million | $37.9 million |
| Net income attributable to EVERTEC | $15.5 million | $37.7 million |
| Diluted EPS | $0.21 | $0.52 |
| EBITDA | $43.8 million | $94.8 million |
| Adjusted EBITDA | $50.2 million | $106.5 million |
| Cash flow from operations | Not separately provided | $87.3 million |
Approximate consolidated margins were 21.7% operating and 13.2% net for the second quarter, compared with 30.8% and 22.1%, respectively, in the prior-year quarter. For the six-month period, operating and net margins were approximately 24.3% and 15.8%, compared with 31.1% and 22.3% in 2019.
- Cash, cash equivalents and restricted cash totaled $169.1 million at June 30, 2020, including $146.9 million of cash and cash equivalents.
- Total debt was $518.3 million, consisting primarily of the 2023 Term A Loan, 2024 Term B Loan and $15.0 million outstanding under the revolving facility. Additional revolving borrowing capacity was $86.7 million.
- The company’s secured leverage ratio was 2.12 to 1.00, and management reported no credit-agreement default or event of default.
- Net cash increased $38.0 million during the first six months, compared with a $9.2 million decrease in the 2019 period.
- Investing cash use was $18.4 million, primarily for software and property and equipment. Financing cash use was $27.9 million, including debt repayments, dividends and share repurchases.
- The company paid quarterly dividends of $0.05 per share and declared another $0.05 per-share dividend payable in September 2020.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 4% to $117.9 million; six-month revenue declined 1% to $239.9 million.
- Second-quarter operating income fell 32% and six-month operating income fell 22%, as operating costs increased faster than revenue.
- Second-quarter net income declined 42% and six-month net income declined 30%. Adjusted EBITDA declined 13% in the quarter and 8% year to date.
- Cost of revenues increased 8% in both the quarter and six-month period, driven by higher salaries, COVID-19-related incentives, professional services and cloud costs.
- Second-quarter selling, general and administrative expense increased 16%; six-month expense increased 15%, primarily due to higher professional services.
- Interest expense declined because of scheduled debt amortization and lower interest rates, partially offsetting the operating deterioration.
- The effective tax rate increased to 22.4% from 8.4% in the second quarter and to 19.3% from 10.5% for the six-month period, reflecting COVID-19-related changes in income mix, discrete tax items and foreign-jurisdiction taxes.
- Business Solutions was the strongest segment, with six-month revenue up 5% and Adjusted EBITDA up 9%. Payment Services–Puerto Rico & Caribbean revenue and Adjusted EBITDA declined 8% and 29%, respectively, for the six-month period.
- Merchant Acquiring revenue declined 5% for the six-month period, but Adjusted EBITDA increased 2% because of lower operating expenses and a higher average ticket.
- Payment Services–Latin America revenue declined 1% and Adjusted EBITDA declined 11% for the six-month period, reflecting COVID-19, foreign exchange effects, client attrition and lower-margin activity from the PlacetoPay acquisition.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management did not provide formal full-year revenue or earnings guidance in the filing.
- Management expects approximately $3 million to $4 million of 2020 revenue attrition in Latin America from previously disclosed client migrations, although timing may vary based on customer conversion schedules.
- Management stated that transaction volumes declined during the pandemic but began recovering as businesses reopened in Puerto Rico. Digital-payment adoption, contactless payments and the Latin American gateway product were identified as opportunities.
- The company drew $30 million on its revolving facility in April as a precaution, but fully repaid that draw by the filing period. It also deferred approximately $0.8 million of payroll taxes through June 30 under the CARES Act and expects total permitted deferrals of approximately $2.7 million.
- COVID-19 risks include lower merchant and ATM/POS volumes, weaker consumer spending, merchant failures and chargebacks, customer disruption, project delays, credit losses, cybersecurity threats and potential asset impairments. The duration and ultimate financial impact remain uncertain.
- Goodwill impairment assessments were performed in response to market deterioration, and no impairment was recognized as of June 30, 2020.
- Interest-rate exposure remains material: a 100-basis-point increase in applicable rates would increase annual interest expense by approximately $3.1 million. A $250 million interest-rate swap fixed a portion of Term B Loan interest at 2.89%; approximately $6.8 million of hedge losses were expected to be reclassified into interest expense over the following 12 months.
- Key structural risks include dependence on Popular, which represented approximately 45% of revenue, the anticipated negotiation of the Popular master services agreement extension, Puerto Rico’s fiscal and political conditions, foreign exchange volatility, cybersecurity, regulatory requirements, LIBOR transition and refinancing needs.
- Legal proceedings are described as ordinary-course matters, with management stating that any aggregate losses are not expected to be material.
Most Important Facts for Investors to Verify
- Whether transaction volumes and merchant activity continued to recover after June 30, 2020, and whether recovery was sustained.
- The effect of COVID-19 on merchant acquiring, Puerto Rico payment services, chargebacks, receivables and expected credit-loss reserves.
- Progress and economics of the anticipated Popular master services agreement extension, given Popular’s approximately 45% revenue contribution.
- Compliance with debt covenants, scheduled principal repayments, revolving-facility availability and the company’s ability to refinance debt.
- Future effective tax rates and the continued availability of Puerto Rico tax benefits.
- Potential goodwill, intangible-asset or other long-lived-asset impairments if market conditions deteriorate.
- Foreign exchange exposure, LIBOR replacement effects and changes in the fair value of interest-rate swaps.
- Whether the company maintains its quarterly dividend while funding capital expenditures, debt service and potential acquisitions.