EVERTEC, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 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. The financial statements are unaudited and prepared under U.S. GAAP.
Popular remained a critical customer and related party. Revenue from Popular represented approximately 45% of consolidated revenue in both the quarter and first six months of 2014.
Key financial metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $91.1 million | $89.2 million | $178.3 million | $176.5 million |
| Income from operations | $25.4 million | $16.9 million | $50.3 million | $37.3 million |
| Operating margin | 27.9% | 19.0% | 28.2% | 21.1% |
| Net income (loss) | $17.8 million | $(64.9) million | $36.0 million | $(59.5) million |
| Net margin | 19.5% | (72.8)% | 20.2% | (33.7)% |
| Diluted earnings per share | $0.22 | $(0.82) | $0.45 | $(0.78) |
| Cash flow from operations | Not separately provided | Not separately provided | $67.5 million | $(13.9) million |
Segment revenue for the quarter was $19.8 million from Merchant Acquiring, $26.4 million from Payment Processing and $44.9 million from Business Solutions. Six-month segment revenue was $39.1 million, $51.4 million and $87.8 million, respectively.
Six-month adjusted EBITDA was $90.7 million, compared with reported EBITDA of $86.4 million. Twelve-month adjusted EBITDA was $183.3 million. Adjusted net income was $64.2 million for the six months and $32.2 million for the quarter; these are non-GAAP measures and exclude or adjust for specified items.
At June 30, 2014, cash was $27.8 million and restricted cash was $5.2 million. Total debt was $698.6 million, consisting primarily of Term A debt of $284.7 million, Term B debt of $390.9 million and $23.0 million drawn on the revolving facility. The revolving facility had $77.0 million available. The senior secured leverage ratio was 3.69 to 1.00, versus a maximum covenant level of up to 6.60 to 1.00, and the company reported compliance with its covenants.
Material changes versus the prior comparable period
- Quarterly revenue increased 2%; six-month revenue increased 1%.
- Merchant Acquiring revenue increased 9% for the quarter and 10% for the six months, primarily from higher transaction volumes.
- Payment Processing revenue increased 9% for the quarter and 6% for the six months, reflecting higher ATH and POS processing activity, new customer additions and growth in card accounts.
- Business Solutions revenue decreased 4% for the quarter and 5% for the six months, principally because hardware and software sales declined by $2.9 million and $6.4 million, respectively.
- Operating income increased 50% for the quarter and 35% for the six months. Cost of revenues, selling, general and administrative expense, and depreciation and amortization all declined.
- Interest expense declined by $3.2 million for the quarter and $11.6 million for the six months following the 2013 debt refinancing.
- Prior-year results included unusual expenses of $58.5 million from debt extinguishment and $16.7 million from termination of consulting agreements. Their absence drove the significant year-over-year improvement in net income.
- Foreign currency translation produced a $7.0 million loss in accumulated other comprehensive income during the first six months, resulting in accumulated other comprehensive loss of $6.5 million at June 30, 2014.
Cash flow, capital allocation and outlook
- Operating cash flow was $67.5 million for the first six months, compared with cash used of $13.9 million in the prior-year period. The improvement reflected stronger operating results and the absence of prior-year debt-refinancing and consulting-termination payments.
- Investing cash outflow was $9.5 million, including $5.8 million for intangible assets and $3.9 million for property and equipment. Management reported capital expenditures of approximately $9.7 million.
- Financing cash outflow was $52.7 million, including $37.7 million of debt repayment and $15.7 million of dividends.
- The board declared a regular quarterly dividend of $0.10 per share for payment on September 5, 2014. Future dividends remain subject to board approval and business conditions.
- Management stated that operating cash flow and available revolver capacity should be adequate for liquidity needs over the next twelve months, while noting dependence on future operating performance and broader economic and financial conditions.
- The company withdrew a senior secured notes offering during the second quarter and incurred approximately $1.1 million of related professional expenses; transaction and refinancing fees included in adjusted EBITDA totaled $2.5 million for the first six months.
Risks, contingencies and unusual items
- Material concentration exists with Popular, which accounted for approximately 45% of revenue and remains subject to a long-term master services agreement.
- The company has substantial floating-rate debt. A 100-basis-point increase in rates above applicable floors would increase annual interest expense by approximately $6.8 million, excluding the revolver.
- Key risks include dependence on processing systems and security controls, fraud and merchant credit exposure, network and card-association rules, regulatory changes, Puerto Rico concentration, Latin American political and economic conditions, foreign exchange movements, contract renewals and acquisition or expansion execution.
- As of June 30, 2014, the company had a $1.1 million letter of credit with a maturity of less than three months and $36.6 million of unused tax windfall benefits available to offset future taxable income.
- EVERTEC was party to ordinary-course legal proceedings. Management believed any resulting losses would not materially affect the company, although some early-stage claims did not have an estimable loss range.
- The company adopted no disclosed material accounting change during the period. It was evaluating the impact of the new FASB revenue-recognition standard, effective for annual periods beginning after December 15, 2016.
Investor verification checklist
- Verify the sustainability of revenue growth and margin expansion after normalizing for the prior-year debt-extinguishment and consulting-termination charges.
- Assess Popular concentration, related-party transactions and the durability of the master services agreement.
- Review debt maturities, floating-rate exposure, covenant calculations and the ability to refinance or repay the Term A balance due in 2018.
- Reconcile reported net income, adjusted net income, EBITDA and adjusted EBITDA, including all non-GAAP adjustments.
- Monitor Business Solutions revenue, particularly hardware and software sales, and determine whether recurring service growth offsets that decline.
- Evaluate foreign currency exposure, technology and cybersecurity risks, regulatory developments and legal contingencies.