EVERTEC, Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
EVERTEC is a Puerto Rico-based transaction-processing company serving 26 countries in Latin America and the Caribbean. Its businesses include merchant acquiring, payment processing, the ATH debit network, core banking, technology outsourcing and business process management. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
The company remains substantially dependent on Popular, Inc., which represented 44% of third-quarter revenue and 43% of year-to-date revenue. EVERTEC is negotiating with Popular regarding certain pricing terms under the Master Services Agreement.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $118.8 million | $112.0 million | $360.2 million | $335.6 million |
| Income from operations | $34.8 million | $32.4 million | $109.9 million | $96.6 million |
| Net income | $24.8 million | $23.1 million | $78.7 million | $66.3 million |
| Net income attributable to EVERTEC | $24.8 million | $23.0 million | $78.5 million | $66.1 million |
| Diluted EPS | $0.34 | $0.31 | $1.07 | $0.89 |
| Adjusted EBITDA | $55.5 million | $52.1 million | $170.9 million | $159.8 million |
| Cash flow from operations | Not separately provided | Not separately provided | $136.2 million | $128.4 million |
Q3 operating margin was approximately 29.3%, versus 28.9% in the prior-year quarter. Q3 net margin was approximately 20.9%, versus 20.6%. For the first nine months, operating margin was approximately 30.5%, versus 28.8%, and net margin was approximately 21.8%, versus 19.8%.
At September 30, 2019, cash and cash equivalents were $102.5 million, and cash, cash equivalents and restricted cash totaled $115.9 million. Total debt was $531.2 million, consisting primarily of $209.9 million under the 2023 Term A facility and $318.6 million under the 2024 Term B facility. Revolver availability was $116.9 million. The secured leverage ratio was 2.12 to 1.00, and management reported no default or event of default.
Material changes versus the prior comparable period
- Q3 revenue increased 6% and nine-month revenue increased 7%, reflecting pricing actions, higher transaction volumes, new managed services, value-added solutions and completed projects.
- Q3 operating income rose 8%; nine-month operating income rose 14%, producing improved operating margins despite higher cost of revenues and depreciation and amortization.
- Q3 net income increased 7%; nine-month net income increased 19%. Diluted EPS increased from $0.31 to $0.34 in Q3 and from $0.89 to $1.07 year to date.
- Q3 Adjusted EBITDA increased 6% to $55.5 million; nine-month Adjusted EBITDA increased 7% to $170.9 million.
- Operating cash flow increased $7.7 million year to date, but investing cash usage increased to $49.9 million from $25.0 million, principally because of higher software and property and equipment spending.
- The company repurchased $28.4 million of common stock year to date and paid $10.8 million of dividends, compared with no repurchases and $3.6 million of dividends in the 2018 period.
- Debt declined from $538.6 million at December 31, 2018 to $531.2 million at September 30, 2019. Interest expense also declined year to date following the 2018 debt refinancing.
- Accumulated other comprehensive loss increased to $33.1 million from $23.8 million, primarily because of losses on cash flow hedges. Interest-rate swap liabilities increased to $16.7 million from $4.1 million.
Segment performance
| Segment | Q3 revenue | Q3 Adjusted EBITDA | 9M revenue | 9M Adjusted EBITDA |
|---|---|---|---|---|
| Payment Services—Puerto Rico & Caribbean | $30.4 million | $18.4 million | $92.9 million | $60.0 million |
| Payment Services—Latin America | $20.6 million | $7.6 million | $62.5 million | $23.6 million |
| Merchant Acquiring | $26.4 million | $11.2 million | $79.2 million | $35.4 million |
| Business Solutions | $52.9 million | $25.1 million | $159.5 million | $72.4 million |
Business Solutions was the largest contributor to growth, supported by new Popular and Puerto Rico government services and completed projects. Latin America revenue and EBITDA benefited from intercompany software and development services but remained affected by client attrition. Puerto Rico and Caribbean EBITDA declined in Q3 despite higher revenue because of increased professional and programming costs.
Guidance, outlook, commentary and risks
- Management expects 2019 capital expenditures of approximately $50 million to $55 million; approximately $50 million had been invested through September 30.
- Management expects Latin American revenue attrition of approximately $2 million to $3 million in 2019 from previously disclosed client migrations, although timing may change.
- Management believes operating cash flow and available revolver capacity will be adequate for liquidity needs over the next twelve months.
- The board declared a regular quarterly dividend of $0.05 per share payable December 6, 2019. Future dividends remain subject to board approval and business, contractual and regulatory considerations.
- Key risks include reliance on Popular and potential pricing concessions in connection with the MSA, the ongoing pricing dispute with Popular, Puerto Rico’s fiscal crisis and government-related exposure, client attrition in Latin America, high indebtedness and refinancing requirements, variable interest rates, cybersecurity and system disruptions, fraud and merchant credit risk, regulatory changes, foreign exchange volatility, and natural disasters.
- Legal proceedings are described as arising in the ordinary course of business; management believes any ultimate losses will not materially affect the company, although certain early-stage claims cannot currently be estimated.
- The company adopted lease accounting under ASC 842 during 2019, recording $30.9 million of operating lease right-of-use assets and $31.4 million of operating lease liabilities at September 30, 2019.
- The company expects to adopt the current expected credit loss standard on January 1, 2020 and does not expect a material effect based on its initial assessment.
Most important facts for investors to verify
- Progress and ultimate terms of the Popular MSA pricing negotiations and any related dispute-resolution proceedings.
- Whether the projected $2 million to $3 million Latin American client attrition occurs as expected and whether additional migrations emerge.
- Execution of the $50 million to $55 million 2019 capital-expenditure plan and its effect on free cash flow.
- Debt reduction, revolver availability, covenant compliance and sensitivity to higher interest rates; management estimates a 100-basis-point rate increase would raise annual interest expense by approximately $3.3 million.
- Exposure to Puerto Rico government customers, receivables and the PROMESA restructuring process.
- Sustainability of revenue growth and margins after excluding approximately $2.7 million of one-time electronic-benefits revenue and approximately $4.5 million of hardware sales and completed-project revenue in the first nine months.
- Effect of currency movements, cybersecurity incidents, system outages and regulatory developments across the company’s 26-country operating footprint.