EVERTEC, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. The unaudited consolidated financial statements are prepared under U.S. GAAP. EVERTEC provides merchant acquiring, payment processing and business solutions across 19 Latin American and Caribbean countries, with substantial operations and customer concentration in Puerto Rico.
Financial performance and key metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $93.2 million | $91.3 million | $184.6 million | $178.8 million |
| Income from operations | $27.6 million | $25.4 million | $54.6 million | $50.3 million |
| Net income | $20.3 million | $17.8 million | $39.3 million | $36.0 million |
| Diluted earnings per share | $0.26 | $0.22 | $0.51 | $0.45 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $76.7 million | $67.5 million |
| Adjusted EBITDA | $47.2 million | $45.5 million | $92.8 million | $90.7 million |
- Revenue growth: Quarterly revenue increased 2%; year-to-date revenue increased 3%. Merchant acquiring grew 7% for the quarter and 5% year to date, payment processing grew 1% and 2%, and business solutions grew 1% and 3%, respectively.
- Profitability: Quarterly operating margin was approximately 29.6%, compared with 27.8% in the prior-year quarter. Year-to-date operating margin was approximately 29.6%, compared with 28.2%. Quarterly net margin was approximately 21.7%, compared with 19.5%; year-to-date net margin was approximately 21.3%, compared with 20.1%.
- Cash generation: Operating cash flow increased $9.2 million year over year, primarily due to higher operating income and a decrease in accounts receivable. Capital expenditures and other investing outlays totaled $15.9 million, including $8.6 million for property and equipment and $6.8 million for intangible assets.
- Balance sheet and liquidity: Cash was $38.8 million at June 30, 2015, including $26.3 million held by foreign subsidiaries. Total debt was $666.2 million, consisting principally of $269.8 million of Term A debt, $387.7 million of Term B debt and $4.0 million drawn on the revolving facility. The $100 million revolving facility had $96.0 million available.
- Leverage: The senior secured leverage ratio was 3.4 to 1.0 versus a maximum covenant level of up to 6.60 to 1.0; the company reported compliance with its covenants.
- Shareholder returns: EVERTEC paid $15.5 million in dividends during the first six months and repurchased 452,175 shares for approximately $10.0 million. The board subsequently declared another $0.10-per-share quarterly dividend.
Material changes versus the prior comparable period
- Operating income increased 9% in both the quarter and first six months, supported by revenue growth, lower selling, general and administrative expenses, and modestly lower depreciation and amortization.
- Business solutions segment operating income increased 11% in the quarter and 16% year to date. Merchant acquiring operating income increased 10% and 11%, respectively.
- Payment processing operating income declined 5% in the quarter and 6% year to date, despite modest revenue growth. The company cited the absence of a Department of Education program revenue recognized in the second quarter of 2014.
- Quarterly selling, general and administrative expense declined 14% and year-to-date expense declined 10%, primarily because the prior-year period included professional fees related to a withdrawn debt offering.
- Interest expense declined to $6.2 million for the quarter and $12.4 million year to date, reflecting lower debt balances. Other income was lower year to date, primarily because of reduced foreign currency translation gains and lower gains on local-currency purchases.
- Accumulated other comprehensive loss improved to $5.7 million at June 30, 2015 from $6.5 million at December 31, 2014, mainly due to favorable foreign currency translation adjustments.
Outlook, commentary, risks and unusual items
- Management expects cash from operations and available revolving capacity to satisfy operating, capital expenditure, dividend and debt-service needs for at least the next twelve months. No formal revenue or earnings guidance is provided in the filing.
- Management highlighted continued migration from cash to electronic payments, lower electronic-payment penetration in Latin America, and outsourcing demand from financial institutions and government agencies as growth opportunities.
- Popular generated approximately 45% to 46% of total revenue in the periods presented. EVERTEC remains dependent on its relationship with Popular and Banco Popular, including a 15-year master services agreement.
- Puerto Rico presents significant concentration risk. The company had $17.4 million of receivables from the Puerto Rico government and its agencies at June 30, 2015, although it reported no direct exposure to Puerto Rico government debt obligations. Subsequent to quarter-end, Puerto Rico defaulted on certain Public Finance Corporation bonds.
- Subsequent to quarter-end, voluntary termination offers were extended to certain employees; accepted offers are expected to produce up to approximately $2.8 million of one-time compensation expense in the third quarter of 2015.
- Other principal risks include high indebtedness and floating interest rates, regulatory oversight, cybersecurity and system availability, merchant credit exposure, client concentration, contract renewals, foreign exchange and political or economic instability in Latin America. A 100-basis-point increase in applicable interest rates would increase annual interest expense by approximately $6.6 million, excluding the revolver.
- The company reported ordinary-course legal proceedings that management does not expect to have a material adverse effect. It also had a $0.9 million letter of credit with a maturity of less than three months.
Facts investors should verify
- Whether revenue growth, particularly in merchant acquiring and business solutions, is sustainable after the Puerto Rico tax amnesty and customer-specific volume increases.
- The deterioration in payment processing segment profitability and the effect of lost or nonrecurring government-program revenue.
- Refinancing plans and repayment capacity for the Term A maturity in April 2018 and Term B maturity in April 2020.
- Compliance with leverage covenants as interest rates, debt balances and adjusted EBITDA change.
- Collections and payment timing for the $17.4 million of Puerto Rico government receivables.
- The actual cost and timing of the employee termination program and any additional restructuring actions.
- The extent of ongoing revenue dependence on Popular and the enforceability and economics of the master services agreement.