Evertec(EVTC) - 2023 Q2 - Quarterly Report

Part I. Financial Information Condensed Consolidated Balance Sheet Highlights (As of June 30, 2023) | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $393,888 | $389,129 | | Total Assets | $1,171,633 | $1,131,743 | | Total Current Liabilities | $198,930 | $208,410 | | Total Liabilities | $633,491 | $656,995 | | Total Equity | $538,142 | $474,748 | Condensed Consolidated Statements of Income Highlights (in thousands) | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $167,076 | $160,571 | $326,890 | $310,819 | | Income from Operations | $34,773 | $46,647 | $74,863 | $92,692 | | Net Income | $28,050 | $33,556 | $58,113 | $72,422 | | Diluted EPS | $0.43 | $0.47 | $0.89 | $1.00 | Condensed Consolidated Statements of Cash Flows Highlights (Six months ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $126,238 | $129,902 | | Net cash used in investing activities | $(58,371) | $(46,192) | | Net cash used in financing activities | $(58,623) | $(58,796) | Item 1. Financial Statements This section presents EVERTEC, Inc.'s unaudited condensed consolidated financial statements and notes for Q2 and H1 2023 Note 2 – Business Acquisition The company acquired paySmart in Brazil for approximately $25 million, expanding its footprint and product offerings - The company acquired 100% of paySmart in Brazil for approximately $25 million on February 16, 2023[33] Preliminary Fair Value of Assets Acquired and Liabilities Assumed (in thousands) | Category | Amount | | :--- | :--- | | Total assets acquired | $79,655 | | Total liabilities assumed | $55,382 | | Preliminary goodwill | $8,292 | Note 6 – Debt and Short-Term Borrowings The company's debt includes a $404.6 million Term Loan Facility and $194.0 million available Revolving Facility, with interest rate swaps mitigating risk - The Term Loan Facility's unpaid principal balance was $404.6 million at June 30, 2023, with $194.0 million available under the Revolving Facility[48] Interest Rate Swap Agreements (as of June 30, 2023) | Swap Agreement | Notional Amount | Maturity Date | Fixed Rate | | :--- | :--- | :--- | :--- | | 2018 Swap | $250 million | November 2024 | 2.929% | | 2023 Swap | $250 million | December 2027 | 3.375% | Note 10 – Revenues Revenue disaggregation shows significant concentration with Popular, Inc. (37% in H1 2023) and $944.5 million in remaining performance obligations - Revenue concentration with Popular, Inc. was 37% of total revenues for the first six months of 2023, down from 42% in 2022[64] - The estimated transaction price for remaining performance obligations as of June 30, 2023, is $944.5 million, expected over 1 to 6 years[68] Note 16 – Segment Information The company reports four segments, with Payment Services showing revenue growth in Q2 2023, while Business Solutions declined Segment Revenues (Three Months Ended June 30) | Segment | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Payment Services - Puerto Rico & Caribbean | $50,795 | $46,078 | | Payment Services - Latin America | $39,076 | $30,784 | | Merchant Acquiring, net | $41,248 | $38,539 | | Business Solutions | $56,971 | $64,690 | Segment Adjusted EBITDA (Three Months Ended June 30) | Segment | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Payment Services - Puerto Rico & Caribbean | $29,183 | $23,875 | | Payment Services - Latin America | $14,060 | $10,234 | | Merchant Acquiring, net | $15,643 | $17,534 | | Business Solutions | $23,374 | $29,835 | Note 17 – Subsequent Events Post-quarter, the company declared a $0.05 per share dividend and agreed to acquire Sinqia S.A. in Brazil for $600 million financing - On July 20, 2023, the company entered a Merger Agreement to acquire Sinqia S.A. in Brazil, expected to close in Q4 2023[107] - The company declared a quarterly cash dividend of $0.05 per share, payable on September 1, 2023[106] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 and H1 2023 financial results, noting 4% revenue growth, a 25% decline in operating income due to higher SG&A, and the pending Sinqia acquisition Q2 2023 vs Q2 2022 Performance Summary | Metric | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $167,076 | $160,571 | 4% | | Cost of Revenues | $80,452 | $74,313 | 8% | | SG&A Expenses | $29,522 | $20,051 | 47% | | Income from Operations | $34,773 | $46,647 | (25)% | - The increase in Q2 2023 SG&A expenses was primarily driven by higher professional fees related to corporate transactions and increased personnel costs[129] - The company's relationship with Popular, Inc. accounted for approximately 37% of revenues for the six months ended June 30, 2023[116] - On July 20, 2023, the company agreed to acquire Sinqia S.A. in Brazil, expected to close in Q4 2023, financed by cash and $600 million in committed debt[117][119] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations (e.g., 100 bps increase raises annual interest by $2.6 million) and foreign exchange volatility, mitigated by interest rate swaps - A hypothetical 100 basis point increase in interest rates on variable-rate debt would increase annual interest expense by approximately $2.6 million[184] - The company recognized a non-cash unrealized foreign currency remeasurement loss of $4.5 million for H1 2023, compared to a $0.9 million gain in the prior-year period[188] - The company utilizes an interest rate swap agreement to convert a portion of its variable-rate debt to a fixed rate, hedging against interest rate risk[185] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of the end of the report period[190] - No material changes occurred during the fiscal quarter affecting the company's internal control over financial reporting[191] Part II. Other Information Item 1. Legal Proceedings The company is involved in various legal proceedings, but management expects no material adverse effect on financial condition or operations - Management does not expect liabilities from ongoing legal proceedings to have a material adverse effect on the company's financial condition or results of operations[194] Item 1A. Risk Factors Updated risk factors highlight challenges and uncertainties related to acquisitions, especially the pending Sinqia merger, including integration difficulties and potential non-completion - The company faces acquisition risks, including integration challenges, management distraction, and business disruption, particularly with the pending Sinqia transaction[197] - There is no assurance that the Sinqia transaction will be completed or that expected benefits like earnings accretion and revenue synergies will be realized[200][202] - Failure to complete the Sinqia transaction could adversely affect the company's business and stock price due to unrecoverable costs and negative market perception[201] Item 2. Issuer Purchases of Equity Securities The company repurchased 268,398 shares in Q2 2023 and increased its stock repurchase program authorization to $150 million, extending it to December 31, 2024 Share Repurchases (Q2 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | June 2023 | 268,398 | $35.64 | - The Board increased the stock repurchase program authorization to $150 million and extended it to December 31, 2024[203] Other Disclosures (Items 3, 4, 5 & 6) This section confirms standard corporate disclosures, including no defaults on senior securities, non-applicability of mine safety, no other material information, and a list of filed exhibits - Item 3: No defaults upon senior securities were reported[204] - Item 4: Mine safety disclosures are not applicable to the company[205] - Item 6: A list of exhibits filed with the Form 10-Q is included, such as the Merger Agreement for Sinqia and CEO/CFO certifications[209]