EVERTEC, Inc. — Q2 2013 Form 10-Q Summary
Business context and reporting period
EVERTEC is a transaction-processing and business-solutions provider operating across 19 countries in Latin America and the Caribbean. Its businesses are merchant acquiring, payment processing, and business solutions. The filing covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. The financial statements are unaudited.
EVERTEC completed its initial public offering on April 17, 2013, issuing 6.25 million company shares at $20.00 per share and raising approximately $117.4 million net. Selling stockholders sold an additional 22.54 million shares.
Financial performance and key metrics
| Metric | Q2 2013 | Q2 2012 | Change |
|---|---|---|---|
| Revenue | $89.2 million | $84.4 million | Up 6% |
| Income from operations | $16.9 million | $18.2 million | Down 7% |
| Operating margin | 19.0% | 21.6% | Down approximately 260 bps |
| Net income (loss) | $(64.9) million | $(2.0) million | Lower by $62.9 million |
| Basic and diluted EPS | $(0.82) | $(0.03) | Lower |
| Adjusted EBITDA | $43.4 million | Not provided in the filing excerpt | Not clearly comparable |
| Adjusted net income | $28.9 million | Not provided in the filing excerpt | Not clearly comparable |
| Six-month metric | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|
| Revenue | $176.5 million | $166.9 million |
| Income from operations | $37.3 million | $36.1 million |
| Operating margin | 21.1% | 21.6% |
| Net income (loss) | $(59.5) million | $1.5 million |
| Cash provided by (used in) operating activities | $(13.9) million | $42.0 million |
| Capital expenditures and software acquisitions | $12.3 million | $8.9 million |
Q2 revenue by segment was $18.2 million for merchant acquiring, $24.3 million for payment processing, and $46.7 million for business solutions. Six-month revenue growth was 3% in merchant acquiring, 4% in payment processing, and 8% in business solutions.
At June 30, 2013, cash was $19.6 million, restricted cash was $5.0 million, and total debt was $702.4 million, including $693.7 million of new senior secured term loans and $8.7 million of other short-term borrowing. The $100 million revolving credit facility was undrawn. Total liabilities were $780.6 million and stockholders' equity was $166.7 million.
Material changes versus the prior comparable period
- Revenue increased 6% in both the quarter and first six months, primarily from higher transaction volumes and increased sales and demand for business-solutions services.
- Q2 operating income declined despite revenue growth, primarily because of a $4.9 million non-cash compensation charge when Tranche B and C stock options vested following the IPO. Excluding that charge, management stated that Q2 operating income would have increased approximately 20%.
- Net loss was driven principally by a $58.5 million loss on extinguishment of debt and a $16.7 million charge for terminating consulting agreements with Apollo and Popular.
- The company refinanced its prior debt in April 2013 with $300 million Term A and $400 million Term B senior secured facilities, and redeemed its 11% senior notes. Debt declined from $763.8 million at December 31, 2012 to $702.4 million at June 30, 2013.
- Operating cash flow deteriorated to a $13.9 million use, largely because of $41.9 million of redemption-related payments and $16.7 million of consulting-agreement termination payments.
- Puerto Rico's maximum corporate income tax rate increased from 30% to 39% under Act 40, resulting in a $1.4 million non-cash deferred-tax expense for the six months.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing excerpt. Management stated that cash flows from operations and the available revolving facility were expected to meet liquidity needs for the next twelve months, while noting that future debt service, dividends, capital expenditures, and operating needs depend on future performance and external economic factors.
Management reported a senior secured leverage ratio of 3.94 to 1.00 at June 30, 2013, compared with a maximum permitted ratio of up to 6.60 to 1.00, and stated that the company was in compliance with its debt covenants. A 100-basis-point increase in interest rates would increase annual interest expense by approximately $7.0 million.
- Material dependence on Popular: Popular accounted for approximately 47% of revenue in Q2 and the first six months of 2013. Popular is also a major customer, referral partner, and card-network sponsor.
- Debt and refinancing risk, including variable-rate debt, mandatory amortization, restrictive covenants, and substantial future principal payments.
- Geographic concentration in Puerto Rico and exposure to political, economic, regulatory, currency, and operating conditions in Latin America and the Caribbean.
- Operational dependence on processing systems, technology infrastructure, cybersecurity, fraud detection, employees, third parties, and card associations.
- Potential OFAC and Cuban Assets Control Regulations exposure. EVERTEC and related entities made voluntary self-disclosures regarding potentially prohibited Cuba-related transactions; the ultimate outcome and potential penalties were not determinable.
- Legal proceedings arising in the ordinary course of business were not expected by management to have a material adverse effect, although loss estimates for certain early-stage matters were unavailable.
- The board approved a quarterly dividend of $0.10 per share on August 7, 2013, payable September 6, 2013, subject to debt-agreement restrictions and board discretion.
Most important facts for investors to verify
- Whether recurring operating performance supports the reported $43.4 million quarterly Adjusted EBITDA after excluding substantial unusual and non-cash items.
- The sustainability of revenue concentration involving Popular and the terms and renewal prospects of the 15-year master services agreement extending through 2025.
- Debt covenant headroom, mandatory amortization requirements, variable-rate exposure, and the ability to refinance or repay debt from operating cash flow.
- The causes of negative operating cash flow and whether the unusual refinancing and termination payments are fully non-recurring.
- The status and potential financial consequences of the OFAC reviews and voluntary self-disclosures, including the enforceability and collectability of Popular indemnification obligations.
- The effect of Puerto Rico tax-law changes, tax grants, deferred-tax assets, and the $59.0 million of unused windfall-related tax-loss carryforwards.