EVERTEC, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017; filed November 9, 2017. EVERTEC provides merchant acquiring, payment processing, business solutions and ATH network services across 26 countries in Latin America and the Caribbean.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $102.7 million | $94.5 million | $307.5 million | $287.6 million |
| Income from operations | $8.8 million | $27.0 million | $69.4 million | $81.8 million |
| Operating margin | 8.6% | 28.6% | 22.6% | 28.4% |
| Net income | $6.1 million | $19.7 million | $49.5 million | $59.1 million |
| Net margin | 6.0% | 20.9% | 16.1% | 20.5% |
| Diluted EPS | $0.08 | $0.26 | $0.67 | $0.79 |
| Operating cash flow | Not separately provided | Not separately provided | $108.4 million | $124.6 million |
- Q3 revenue increased 9%, led by Payment Processing revenue growth of 24% and Business Solutions growth of 5%; Merchant Acquiring revenue declined 2%.
- For the first nine months, Payment Processing revenue increased 15%, Business Solutions increased 6%, and Merchant Acquiring declined 1%.
- Q3 operating costs increased 39% to $93.9 million, including a $6.5 million software impairment, $5.3 million accrual for ongoing contractual fees and $1.0 million of related maintenance expense. These exit-activity charges totaled $12.8 million in the Adjusted EBITDA reconciliation.
- Q3 income tax benefit was $4.8 million, including a $4.5 million reversal of a previously recorded uncertain-tax-position liability following expiration of the statute of limitations.
- Adjusted EBITDA was $41.7 million in Q3 and $141.0 million for the first nine months, versus $45.1 million and $140.0 million, respectively, in the comparable periods. Adjusted diluted EPS was $0.33 in Q3 and $1.22 for the first nine months.
- September 30 cash and cash equivalents were $48.4 million, plus $10.4 million of restricted cash. Total debt was $642.2 million, consisting primarily of senior secured term loans and $33.0 million of revolver borrowings. Revolver availability was $67.0 million.
- The senior secured leverage ratio was 3.30 to 1.00 versus a maximum quarterly covenant of up to 4.75 to 1.00 through September 30, 2018. Management reported no default or event of default.
- The company paid $21.8 million of dividends and repurchased $7.7 million of common stock during the first nine months. Shares outstanding declined to 72.4 million from 72.6 million at December 31, 2016.
Material changes versus the prior comparable period
- Revenue growth did not translate into earnings growth: Q3 operating income fell 67% and net income fell 69%, primarily because of the software exit activity, hurricane-related transaction disruption and unfavorable revenue mix.
- First-nine-month operating income declined 15% and net income declined 16%, despite 7% revenue growth. Merchant Acquiring and Business Solutions operating income declined 44% and 18%, respectively; Payment Processing operating income increased 6%.
- Operating cash flow declined $16.2 million, while investing cash use increased $35.4 million, primarily because of the PayGroup acquisition.
- Interest expense increased 23% for the first nine months, reflecting higher LIBOR, debt terms under the 2016 amendment and the interest-rate swap that commenced in January 2017.
- On July 3, 2017, EVERTEC acquired PayGroup, a Chilean payment-processing and software company, for approximately $42.8 million net of cash acquired. The preliminary purchase accounting included $29.5 million of goodwill and $18.3 million of intangible assets. Reported PayGroup revenue and earnings were immaterial for the period.
Outlook, commentary, risks and unusual items
- Hurricanes Irma and Maria severely damaged Puerto Rico and Caribbean infrastructure, power and telecommunications. Although the ATH network remained operational, merchants’ ability to open and transact electronically was impaired, reducing transaction volumes, revenue yield and margins.
- Management estimated a $20 million to $30 million reduction in 2017 revenue attributable to the hurricanes and expected only modest, gradual recovery during the remainder of the fourth quarter. The timing and extent of recovery remained uncertain.
- Management estimated Latin American revenue attrition of approximately $1 million to $3 million in 2017 and $5 million to $7 million in 2018 from anticipated client migrations.
- Management expected 2017 capital expenditures of $30 million to $35 million; approximately $24.2 million had been invested during the first nine months.
- Management stated that operating cash flow and revolver availability should meet liquidity needs for the next twelve months, but debt service, refinancing, acquisitions, dividends and future performance remain dependent on operating results and external conditions.
- On November 2, 2017, after the reporting date, the board temporarily suspended the quarterly common-stock dividend because of the difficult Puerto Rico operating environment. The board also extended the stock-repurchase program through December 31, 2020.
- Key continuing risks include dependence on Popular, which generated 42% of Q3 revenue and 43% of nine-month revenue; Puerto Rico’s fiscal crisis and PROMESA restructuring; hurricanes and potential population migration; cybersecurity and processing-system disruptions; regulatory changes; customer concentration; high indebtedness; variable interest rates; and the ability to refinance debt.
- The company adopted ASU 2016-09 during 2017, recording a $4.2 million cumulative increase to accumulated earnings. Revenue-recognition and lease accounting standards were not yet adopted; the quantitative impact of revenue recognition remained under evaluation.
Facts investors should verify
- Whether Puerto Rico’s power, telecommunications and business activity recovered sufficiently to support the company’s $20 million to $30 million hurricane-impact estimate.
- The sustainability of operating margins after the $12.8 million software exit activity and the effect of related contractual obligations.
- PayGroup’s contribution to revenue, earnings, cash flow and integration costs after the first full reporting periods.
- Compliance with leverage covenants and the company’s ability to refinance or repay the approximately $27.6 million 2018 Term A balance maturing in April 2018.
- The basis and duration of the dividend suspension and any effect on capital allocation and debt reduction.
- Revenue concentration with Popular, customer migrations and the company’s ability to retain and renew major contracts.
- The eventual impact of the new revenue-recognition, lease and credit-loss accounting standards.