EVERTEC, Inc.
(Exact name of registrant as specified in its charter)
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Puerto Rico | | 66-0783622 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification number) |
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Puerto Rico | | 66-0783622 |
(State or other jurisdiction of
incorporation or organization)
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identification number)
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Cupey Center Building, | Road 176, Kilometer 1.3, San Juan, Puerto Rico
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(Zip Code)
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San Juan, | Puerto Rico | | 00926 |
(Address of principal executive offices) | | (Zip Code) |
(787) 759-9999
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | EVTC | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐☒ No ☒☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.:
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Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ (Do not check if a smaller reporting company) | | Smaller reporting company | | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates of EVERTEC, Inc. was approximately $1,042,574,760$2,628,353,889 based on the closing price of $17.30$43.65 as of the close of business on June 30, 2017.2021.
As of February 21, 2018,18, 2022, there were 72,429,14171,969,856 outstanding shares of common stock of EVERTEC, Inc.
Documents Incorporated by Reference:
Part III incorporates certain information by reference to
Specifically identified portions of the registrant's definitive Proxy Statement for the 2018relating to its 2022 Annual Meeting of Shareholders are incorporated by reference in Part III.
EVERTEC, Inc.
20172021 Annual Report on Form 10-K
TABLE OF CONTENTS
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Item 9C— Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | |
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Forward-Looking Statements
This Annual Report on Form 10-K, or Report, contains “forward-looking statements” within the meaning of, and subject to the protection of, the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. Among the factors that significantly impact our business and could impact our business in the future are:
•our reliance on our relationship with Popular, Inc. (“Popular”) for a significant portion of our revenues pursuant to our master services agreementMaster Services Agreement ("MSA") with them, and our reliance on Banco Popular de Puerto Rico (“Banco Popular”), Popular’s principal banking subsidiary, to grow our merchant acquiring business;
•as a regulated institution, the likelihood we most likely will be required to obtain regulatory approval before engaging in certain new activities or businesses, whether organically or by acquisition, and may be unableour potential inability to obtain such approval on a timely basis or at all, which may make transactions more expensive or impossible to complete, or make us less attractive to potential sellers;
•our ability to renew our client contracts on terms favorable to us, including our contract with Popular;Popular, and any significant concessions we may grant to Popular with respect to pricing or other key terms arising out of any disputes or in anticipation of the negotiation of the extension of the MSA, both in respect of the current term and any extension of the MSA;
•our dependence on our processing systems, technology infrastructure, security systems and fraudulent payment detection systems, as well as on our personnel and certain third parties with whom we do business, and the risks to our business if our systems are hacked or otherwise compromised;
•our ability to develop, install and adopt new software, technology and computing systems;
•a decreased client base due to consolidations and failures in the financial services industry;
•the credit risk of our merchant clients, for which we may also be liable;
•the continuing market position of the ATH network;
•a reduction in consumer confidence, whether as a result of a global economic downturn or otherwise, which leads to a decrease in consumer spending;
•our dependence on credit card associations, including any adverse changes in credit card association or network rules or fees;
•changes in the regulatory environment and changes in international, legal, tax, political, administrative or economic conditions;
•the geographical concentration of our business in Puerto Rico, including our business with the government of Puerto Rico and its instrumentalities, which are facing severe political and fiscal challenges;
•additional adverse changes in the general economic conditions in Puerto Rico, whether as a result of the government’s debt crisis or otherwise, including the continued migration of Puerto Ricans to the U.S. mainland, which could negatively affect our customer base, general consumer spending, our cost of operations and our ability to hire and retain qualified employees;
•operating an international business in Latin America and the Caribbean, in jurisdictions with potential political and economic instability;
our ability to execute our geographic expansion and acquisition strategies, including challenges in successfully acquiring new businesses and integrating and growing acquired businesses;
•our ability to protect our intellectual property rights against infringement and to defend ourselves against claims of infringement brought by third parties;
our ability to recruit and retain the qualified personnel necessary to operate our business;
•our ability to comply with U.S. federal, state, local and foreign regulatory requirements;
•evolving industry standards and adverse changes in global economic, political and other conditions;
•our high level of indebtedness and restrictions contained in our debt agreements, including the senior secured credit facilities, as well as debt that could be incurred in the future;
•our ability to prevent a cybersecurity attack or breach into our information security;
our ability to generate sufficient cash to service our indebtedness and to generate future profits;
our ability to refinance our debt;
•the possibility that we could lose our preferential tax rate in Puerto Rico;
the risk that the counterparty to our interest rate swap agreement fails to satisfy its obligations under the agreement
uncertainty of the pending debt restructuring process under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), as well as actions taken by the Puerto Rico government or by the PROMESA Board to address the Puerto Rico fiscal crisis;
uncertainty related to Hurricanes Irma and Maria and their aftermaths’ impact on the economies of Puerto Rico and the Caribbean;
•the possibility of future catastrophic hurricanes, earthquakes and other potential natural disasters affecting Puerto Rico and/orour main markets in Latin America and the Caribbean,Caribbean;
•uncertainty related to the effect of the discontinuation of the London Interbank Offered Rate at the end of 2021;
•the continued impact of the COVID-19 pandemic and measures taken in response to the outbreak, on our resources, net income and liquidity due to current and future disruptions in operations as well as other potential natural disasters;the macroeconomic instability caused by the pandemic; and
the nature, timing and amount of any restatement; and
•other risks and uncertainties detailed in Part I, Item IA “Risk Factors” in this Report.
The forward-looking statements in this Annual Report on Form 10-K are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements involveare subject to a number of risks and uncertaintiesimportant factors that could cause actual results to differ materially from those suggested byin the forward-looking statements. Forward-looking statements, and
should, therefore, be considered in light of various factors, including those set forth under “Item 1A. Risk Factors,” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report. These forward-looking statements speak only as of the date of this Report, and, except as may be required by law, we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.events.
INDUSTRY AND MARKET DATA
This Form 10-K includes industry data that we obtained from periodic industry publications, including the August 2017 Nilson Report and the 20172021 World Payments Report. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable. This Form 10-K also includes market share and industry data that were prepared primarily based on management’s knowledge of the industry and industry data. Unless otherwise noted, statements as to our market share and market position relative to our competitors are approximated and based on management estimates using the above-mentioned latest-available third-party data and our internal analysesanalysis and estimates. While we are not aware of any misstatements regarding any industry data presented herein, our estimates, in particular as they relate to market share and our general expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors,” “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.
Part I
Item 1. Business
Except as otherwise indicated or unless the context otherwise requires, (a) the terms “EVERTEC,” “we,” “us,” “our,” “our Company” and “the Company” refer to EVERTEC, Inc. and its subsidiaries on a consolidated basis, (b) the term “Holdings” refers to EVERTEC Intermediate Holdings, LLC, but not any of its subsidiaries and (c) the term “EVERTEC Group” refers to EVERTEC Group, LLC and its predecessor entities and their subsidiaries on a consolidated basis, including the operations of its predecessor entities prior to the Merger (as defined below).basis. EVERTEC Inc.’s subsidiaries include Holdings, EVERTEC Group, EVERTEC Dominicana, SAS, Evertec Chile Holdings SpA (formerly known as Tecnopago SpA), Evertec Chile SpA (formerly known as EFT Group SpA), Evertec Chile Global SpA (formerly known as EFT Global Services SpA), Evertec Chile Servicios Profesionales SpA (formerly known as EFT Servicios Profesionales SpA), EFT Group S.A., Tecnopago España SL, EFT Servicos Profesionales SpA, Paytrue S.A., Caleidon, S.A., Evertec Brasil Solutions Informática Ltda. (formerly known as Paytrue Solutions InformaticaInformática Ltda.), EVERTEC Panamá, S.A., EVERTEC Costa Rica, S.A. (“EVERTEC CR”), EVERTEC Guatemala, S.A., Evertec Colombia, SAS (formerly known as Processa, SAS ("Processa")SAS), EVERTEC USA, LLC, Evertec Placetopay, SAS (formerly known as EGM Ingeniería sin Fronteras, S.A.S. ("PlacetoPay")) and EVERTEC México Servicios de Procesamiento, S.A. de C.V. Neither EVERTEC nor Holdings conducts any operations other than with respect to its indirect or direct ownership of EVERTEC Group.
Company Overview
EVERTEC is a leading full-service transaction processingtransaction-processing business in Puerto Rico, the Caribbean and Latin America, and the Caribbean, providing a broad range of merchant acquiring, payment services and business process management services. According to the August 2017 Nilson Report,We believe that we are one of the largest merchant acquirers in Latin America based on total number of transactions and we believe we are the largest merchant acquirer in the Caribbean and Central America.Caribbean. We serve 26 countries in the region fromout of 11 offices, including our baseheadquarters in Puerto Rico. We manage a system of electronic payment networks that process more than two billion transactions annually, and offer a comprehensive suite of services for core bank processing, cash processing and technology outsourcing. In addition, we own and operate the ATH network, which we believe is one of the leading personal identification number (“PIN”) debit networks in Latin America. We manage a system of electronic payment networks and offer a comprehensive suite of services for core banking, cash processing, and fulfillment in Puerto Rico, that process over three billion transactions annually. Additionally, we offer technology outsourcing in all the regions we serve. We serve a diversified customer base of leading financial institutions, merchants, corporations, and government agencies with “mission-critical” technology solutions that enable them to issue, process and accept transactions securely. We believe our business is well-positioned to continue to expand across the fast-growing Latin American region.
We are differentiated, in part, by our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe this capability provides several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services, win new customers, develop new sales channels, and enter new markets. We believe these competitive advantages include:
•Our ability to provide best in classcompetitive products;
•Our ability to provide in one package a range of services that traditionally had to be sourced from different vendors;
•Our ability to leverage proprietary IP that enables us to be nimble and flexible when it comes to client requirements;
•Our ability to put forth Spanish speaking developers in front of our Spanish speaking customers making communication much more effective and integrations more efficient;
•Our ability to serve customers with disparate operations inacross several geographies with integrated technology solutions that enable them to manage their business as one enterprise; and
•Our ability to capture and analyze data across the transaction processingtransaction-processing value chain and use that data to provide value-added services that are differentiated from those offered by pure-play vendors that serve only one portion of the transaction processingtransaction-processing value chain (such as only merchant acquiring or payment services).
Our broad suite of services spans the entire transaction processingtransaction-processing value chain and includes a range of front-end customer-facing solutions such as the electronic capture and authorization of transactions at the point-of-sale, as well as back-end support services such as the clearing and settlement of transactions and account reconciliation for card issuers. These include: (i) merchant acquiring services, which enable point of sales (“POS”) and e-commerce merchants to accept and process electronic methods of payment such as debit, credit, prepaid and electronic benefit transfer (“EBT”) cards; (ii) payment processing services, which enable financial institutions and other issuers to manage, support and facilitate the processing for credit, debit, prepaid, automated teller machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide “mission-critical” technology solutions such as core bank processing, as well as IT outsourcing and cash management services to financial institutions, corporations and governments. We provide these services through scalable, end-to-end technology platforms that we manage and operate in-house and that generatesgenerate significant operating efficiencies that enable us to maximize profitability.
We sell and distribute our services primarily through a proprietary direct sales force with established customer relationships. We are also building a variety of indirect sales channels that enable us to leverage the distribution capabilities of partners in adjacent markets, including value-added resellers. We continue to pursue joint ventures and merchant acquiring alliances.
We benefit from an attractive business model, the hallmarks of which are recurring revenue, scalability, significant operating margins, and moderate capital expenditure requirements. Our revenue is predominantly recurring in nature because of the mission-critical and embedded nature of the services we provide. In addition, we generally negotiate multi-year contracts with
our customers. We believe our business model should enable us to continue to grow our business organically in the primary markets we serve without significant incremental capital expenditures.
Financial Information About Operating SegmentsAs of December 31, 2021, Popular, Inc. (Nasdaq: BPOP) ("Popular") owned approximately 16.2% of our common stock and Geographic Areas
Inwas our largest shareholder. For the year ended December 31, 2021, 42% of 2017, as a result of the PayGroup acquisition, the Chief Operating Decision Maker ("CODM") completed an evaluation of the current Company structure and the information regularly reviewed for purposes of allocating resources and assessing performance. As a result of this evaluation, Management concluded that the operating segments are driven by the products and services the Company provides and the geographic regions in which the Company operates, resulting in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America (collectively "Payment Services segments"), Merchant Acquiring, and Business Solutions. We recasted our segment results for all previous periods to conform to the new segment presentation. In addition to these operating segments, Management identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These cost areas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these cost areas are aggregated and presented as “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and Other category consists of corporate overhead expenses, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. For information about our operating segments refer to Note 23 of the Notes to Consolidated Financial Statements.
Corporate Background
EVERTEC, Inc. (formerly known as Carib Latam Holdings, Inc.) is a Puerto Rico corporation organized in April 2012. Our main operating subsidiary, EVERTEC Group, LLC (formerly known as EVERTEC, LLC and EVERTEC, Inc., hereinafter “EVERTEC Group”),revenue was organized in Puerto Rico in 1988. EVERTEC Group was formerly a wholly-owned subsidiary of Popular. On September 30, 2010, pursuant to an Agreement and Plan of Merger (as amended, the “Merger Agreement”), AP Carib Holdings, Ltd. (“Apollo”), an affiliate of Apollo Global Management LLC, acquired a 51% indirect ownership interest in EVERTEC Group as part of a merger (the “Merger”) and EVERTEC Group became a wholly-owned subsidiary of Holdings.
On April 17, 2012, EVERTEC Group was converted from a Puerto Rico corporation to a Puerto Rico limited liability company (the “Conversion”) for the purpose of improving its consolidated tax efficiency by taking advantage of changes to the Puerto Rico Internal Revenue Code, as amended (the “PR Code”), that permit limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Concurrent with the Conversion, Holdings, which is our direct subsidiary, was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company. Prior to these conversions, EVERTEC, Inc. was formed in order to act as the new parent company of Holdings and its subsidiaries, including EVERTEC Group. The transactions described above in this paragraph are collectively referred to as the “Reorganization.”
History
We have over a 25 year operating history in the transaction processing industry. Prior to the Merger, EVERTEC Group was 100% owned by Popular, the largest financial institution in the Caribbean, and operated substantially as an independent entity within Popular. As mentioned above, following the Merger, Apollo owned a 51% interest in us and shortly thereafter, we began the transition to a separate, stand-alone entity. As a stand-alone company, we have made substantial investments in our technology and infrastructure, recruited various senior executives with significant transaction processing experience in Latin America, enhanced our profitability through targeted productivity and cost savings actions and broadened our footprint beyond the markets historically served.
We continue to benefitgenerated from our relationship with Popular. The revenue concentration with Popular makes our MSA with them our most significant client contract. On February 24, 2022, we announced that we entered into an agreement to modify and extend the main commercial agreements with Popular that had an initial term ending in 2025, including the MSA. We also entered into an agreement to sell Popular certain assets in exchange for Popular owned Evertec stock ("Popular Transaction"). As part of this transaction, Popular has agreed to take certain actions after closing to ensure that Evertec is our largest customer, acts as oneno longer deemed a “subsidiary” of our largest merchant referral partners and sponsors us with the card associations (such as Visa or MasterCard), enabling merchants to accept these card associations’ credit card transactions. Popular also provides merchant sponsorship as onefor purposes of the participantsBank Holding Company Act, including reducing their voting interest in Evertec to 4.5% over a period of three months after the close of the ATH network, enabling merchantstransaction through either the sale of shares or conversion to connect to the ATH networknon-voting preferred shares.
See “Item 7. Management’s Discussion and accept ATH debit card transactions. We provide a numberAnalysis of critical productsFinancial Condition and services to Popular, which are governed by a 15-year Amended and Restated Master Services Agreement (the “Master Services Agreement”) that runs through 2025.Results of Operations—Relationship with Popular.”
On April 17, 2013, the Company completed its initial public offering of 28,789,943 shares of common stock at a price to the public of $20.00 per share. On September 18, 2013 and December 13, 2013, the Company completed public offerings of 23,000,000 and 15,233,273 shares, respectively, of the Company’s common stock by Apollo, Popular, and current and former employees. After the completion of these offerings, Popular owned approximately 11.7 million shares of EVERTEC’s common stock, or 16.1% as of December 31, 2017, and Apollo no longer owns any of the Company’s common stock.
Principal Stockholder
Popular, Inc. (NASDAQ: BPOP), whose principal banking subsidiary’s history dates back to 1893, is the No. 1 bank holding company by both assets and deposits based in Puerto Rico, and, as of September 30, 2017, ranks 48 by assets among U.S. bank holding companies. As of December 31, 2017, Popular owned approximately 16.1% of our common stock.
Industry Trends
Accelerated Shift to Electronic PaymentsDigital Payment Methods
As a result of the COVID-19 pandemic, consumer preference has accelerated its shift away from cash and paper payment methods, noting increased demand for omni-channel payment services that facilitate cashless and contactless transactions. The ongoing migration from cash, check and other paperto digital payment methods of payment to electronic payments continues to benefit the transaction processingtransaction-processing industry globally. This migration is driven by factors including customer convenience, marketing efforts by financial institutions, card issuer rewardsTechnologies such as contactless payments, tap-on-phone, mobile commerce, “e-wallets” and advanced and smart POS devices continue to drive the developmentshift away from cash and other traditional payment methods. The Company has benefited from an increase in transaction volumes for these types of new formspayment solutions.As consumers and merchants increase demand for contactless and mobility-based solutions, the Company has continued to innovate and invest, expanding the footprint and functionality of payment.digital solutions such as Placetopay (e-commerce gateway), our wallet ATH Movil and ATH Business, and Paystudio our issuing and acquiring processing platform. We believe that the penetration of electronic payments in the markets where we principally operate is significantly lower relative to more mature U.S. and European markets and that this ongoing shift to digital payments will continue to generate importantsubstantial growth opportunities for our business. In addition,
The digital payments space is experiencing rapid and disruptive technological innovation which has been accelerated by the ongoing pandemic and the resulting shift in an effort to better capture taxes over generated revenue, legislation in Puerto Rico has required most licensed professionals to provide an electronic payment option to their customers,consumer preferences and that all consumer businesses that generate revenues in excess of $50,000 provide an electronic payment option, with the exception of certain businesses, further expanding the need for an electronic payment network in Puerto Rico.merchant demands.
Fast Growing Latin American and Caribbean Financial Services and Payments Markets
Currently, the penetration of banking products, including electronic payments,The markets in which we operate, particularly in the Latin American and Caribbean region is lower relative to the mature U.S. and European markets. As these markets continue to grow and financial inclusion increases, the emergence of a larger and more sophisticated consumer base will influence and drivepreference is driving an increase in card (like debit, credit, prepayment, and EBT) andfor electronic payments usage. According to the 2017 World Payments Report, non-cash paymentNon-cash transaction volumes in Latin America grew by 7.2%have grown from 201540.9 billion in 2016 to 2016,57.2 billion in 2020 according to the 2021 World Payments report, representing a compound annual growth rate of 8.7%. Increase in demand for contactless technology, QR code payments and are projected to grow 7.1% through 2020, mainly driven by high levelsinstant payment-based transfers is one of the main drivers for this growth. Latin America is one of the fastest-growing mobile markets globally, with a growing base of tech-savvy customers that demonstrate a preference for credit cards, digital innovation taking place as banks move away from their traditional retail banking strategieswallets, contactless payments, and investother value-added offerings. Non-cash markets in digital technologies. In NorthLatin America non-cash payments grew by 4.4% and are projected to grow 4.4% through 2020, attributable to a significant growth in proximity mobile payments. While in the past mature markets have dominated non-cash transaction volumes, a shift in balance is occurring as the developing markets’ share of global non-cash transaction volumes have increased from 12% to 27%. If current trends continue, developing markets’ share of global non-cash volumes is expected to increasecontinue their accelerated growth, with non-cash transactions expected to reach over 100 billion in 2025, a growth rate of 14.1% from 27% in 20132020 to 33% by 2020.2025. The region's FinTech sector is driving change via new contactless payment technology that are becoming popular alternatives to cash payments. We continue to believe that the attractive characteristics of our markets and our position across multiple services and sectors will continue to drive growth and profitability in our businesses.
Ongoing Technology Outsourcing Trends
We benefit from the trend of financial institutions and government agencies outsourcing technology systems and processes. Financial institutions globally are facing significant challenges including the entrance of non-traditional competitors, the
compression of margins on traditional products, significant channel proliferation and increasing regulation that could potentially curb profitability. Many of these institutions have traditionally fulfilled their IT needs through legacy computer systems, operated by the institution itself. Legacy systems are generally highly proprietary, inflexible, and costly to operate and maintainmaintain. Many medium and we believe the trend to outsource in-house technology systems and processes by financial institutions will continue. We believe our ability to provide integrated, open, flexible, customer-centric and efficient IT products and services cater to the evolving needs of our customers, particularly for small- and mid-sized financialsmall-size institutions in the Latin American markets in which we operate.operate have outdated computer systems and updating these legacy systems is financially and logistically challenging, which presents a business opportunity for the Company.
Industry Innovation
The electronic payments industry experiences ongoing technology innovation. Emerging payment technologies such as prepaid cards, contactless payments, payroll cards, mobile commerce, mobile “wallets” and innovative POS devices facilitate the continued shift away from cash, check and other paper methods of payment. The increasing demand for new and flexible payment options catering to a wider range of consumer segments is driving growth in the electronic payment processing sector.
Our Competitive Strengths
Market Leadership in Latin America and the Caribbean
We believe we have an inherent competitive advantage relative to U.S. competitors based on our first-hand knowledge of the Latin American and Caribbean markets and technologicaltechnology needs, language, and culture. We have built leadership positions
across the transaction processingtransaction-processing value chain and the financial technology space in the key geographic markets that we serve, which we believe will enable us to continue to penetrate our core markets and provide advantages to enter new markets. According to the August 2017 Nilson Report, weones. We are one of the largest merchant acquirers in Latin America based on total number of transactions and we believe we are the largest merchant acquirer in the Caribbean and Central America.transactions. We own and operate the ATH network, which we believe is one of the leading ATM and PIN debit networks in Latin America. EVERTEC processed approximately twoover three billion transactions in 2017, which according2021. According to managementmanagement's estimates, makes ATH branded products are the most frequently used electronic method of payment in Puerto Rico. We offer compelling value to our merchants, as noted in the most recent report published by the Federal Reserve Board regarding debit network fees, the ATH network ranked as one of the most economical networks for merchants. Given ourOur scale and customer base of top tier financial institutions and government entities we believeensures we are the leading card issuer and core bank processorprocessors in the Caribbean and the only non-bank provider of cash processing services to the U.S. Federal Reserve in the Caribbean. We believe our competitive position and brand recognition increases card acceptance, driving usage of our proprietary network, and presents opportunities for future strategic relationships.
Broad and Deep Customer Relationships and Recurring Revenue Business Model
We have built a strong and long-standing portfolio of financial institution, merchant, fintech, corporate and government customers across Latin America and the Caribbean, which provides us with a reliable, recurring revenue base and powerful references that have helped us expand into new channels and geographic markets. Our Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America and Merchant Acquiring segments, as well as certain business lines representing the majority of our business solutions segment, generate recurring revenues that collectively accounted for approximately 94%95% of our total revenues in 2017.2021. We receive recurring revenues from services based on our customers’ on-going daily commercial activity such as processing loans, hosting accounts and information on our servers, and processing everyday payments at grocery stores, gas stations and similar establishments. We generally provide these services under one to five yearfive-year contracts, often with automatic renewals. We also provide a few project-based services that generate non-recurring revenues in our business solutions segment and our Payment Services - Latin America segment, such as IT consulting for a specific project or integration.integration or one-time license sales. Additionally, we entered into a 15-year Master Services Agreement with Popular on September 30, 2010. We provide a number of critical payment services, core baking services and business solutions products and services to Popular as part of the 15-year MSA entered into on September 30, 2010 and benefit from the bank’s distribution network and continued support. Through our long-standing and diverse customer relationships, we are able to gain valuable insight into trends in the marketplace that allows us to identify new market opportunities. In addition, we believe the recurring nature of our business model provides us with revenue and earnings stability.
Highly Scalable, End-to-End Technology Platform
Our diversified business model is supported by our scalable, end-to-end technology platforms that allow us to provide a broad range of transaction processingtransaction-processing services and develop and deploy technology solutions to our customers at low incremental costs and increasing operating efficiencies. We have spent over $170$251 million over the last five years on technology investments, including POS terminals, to continue to buildbuilding the capacity and functionality of our platforms and we have been able to achieve attractive economies of scale with flexible product development capabilities. We believe that our platforms will allow us to provide differentiated services to our customers and facilitate further expansion into new sales channels and geographic markets.
Experienced Management Team with a Strong Track Record of Execution
We have grown our revenue organically by introducing new products and services and expanding our geographic footprint throughout Latin America. We have a proven track record of creating value from operational and technology improvements and capitalizing on cross-selling opportunities. We have combined new leadership at EVERTEC, bringingEVERTEC's management team brings many years of industry experience, with long-standing leadership at the operating business level. Collectively, our management teamlevel and collectively benefits from an average of over 20 years of industry experience and weexperience. We believe they areour leadership team is well positioned to continue to drive growth across business lines and regions.
Our Growth Strategy
We intend to grow our business by continuing to execute on the following business strategies:
Continue Cross-Sales to Existing Customers
We seek to grow revenue by continuing to sell additional products and services to our existing merchant, financial institution, corporate and government customers. We intend to broaden and deepen our customer relationships by leveraging our full suite of end-to-end technology solutions. For example, we believe that there is significant opportunity to cross-sell our payment gateway product; card issuing and acquiring platforms and services; network services,services; ATM and point-of-sale processing services, and card issuer processing servicespayment and collection platforms, and our risk management products to our over 180 existing financial institution
customers, particularly in markets outside of Puerto Rico. We will also seek to continue to cross-sell value addedvalue-added services into our existing merchant base.
Leverage Our Franchise to Attract New Customers in the Markets We Currently Serve
We intend to attract new customers by leveraging our comprehensive product and services offering, the strength of our brand and our leading end-to-end technology platform. Furthermore, we believe we are well positioned to develop new products and services and to take advantage of our access to and position in markets we currently serve. For example, in markets we serve outside of Puerto Rico, we believe there is a significantgood opportunity to penetrate small to medium and some larger financial institutions, fintech companies and medium to large retailers with our products and services.
Expand in the Latin AmericanAmerica Region
We believe there is substantial opportunity to expand our businesses in the Latin American region. We believe that we have a competitive advantage relative to U.S. competitors based on our first-hand knowledge of the Latin American and Caribbean markets and their technological needs, our physical presence in the region, language, and culture. We believe significant growth opportunities exist in a number of large markets such as Colombia, México, and Chile, among others. We also believe that there is an opportunity to provide our services to existing fintech and financial institution customers in other regions where they operate. Additionally, we continually evaluate our strategic plans for geographic expansion, which can be achieved through strategic acquisitions, joint ventures, partnerships, alliances or strategic acquisitions.alliances. For a description of risks associated with obtaining regulatory approvals and other risks associated with strategic transactions, see “Item 1A. Risk Factors—Risks Related to Our Business—Our expansionWe are subject to extensive government regulation and selective acquisition strategy exposes usoversight. Failure to risks, includingcomply with existing and future rules and regulations in the risk thatjurisdictions in which we may not be able to successfully integrate acquired businesses.operate could adversely affect the operations of one or more of our businesses in those jurisdictions.”
Develop New Products and Services
At the core of Evertec’s value proposition is innovation.We have to take advantage of the changing consumer and market dynamics and build innovative solutions for our clients. Our experienceclose relationship with customers and deep understanding of the markets where we operate, together with a proprietary intellectual property around our customers provides us with insight into their needsproducts and enables usofferings, allow Evertec to continuously explore and develop new transaction processing services. products and services that tend to our customer’s needs.
We plan to continue investing and growing our merchant, financial institution, fintech, corporate and government customer base by developinginvesting in core products, including (i) processing platforms, such as Paystudio, (ii) data and offering additionalfraud management solutions, such as Risk Center, Scudo and 3DS, (iii) merchant capture channels, such as ATH Movil for person-to-person, and person-to-merchant digital transactions, pvot for Smart POS and Placetopay for card-not-present and omni-channel experiences. We also invest in value-added productsservices such as API enablement, tokenization, loyalty, digital on-boarding, and services to cross-sell along with our core offerings.predictive models. We intend to continue to focus on these and other new product opportunities in order to take advantage of our leadership position in the transaction processingtransaction-processing and financial services industry in the Latin American and Caribbean region.
Our Business
We offer our customers end-to-end products and solutions across the transaction processingtransaction-processing value chain from a single source across numerous channels and geographic markets, as further described below.
Merchant Acquiring
According to the August 2017 Nilson Report, we are one of the largest merchant acquirers in Latin America based on total number of transactions and we believe we are the largest merchant acquirer in the Caribbean and Central America. Our merchant acquiring business provides services to merchants that allow them to accept electronic methods of payment such as debit, credit, prepaid and EBT cards carrying the ATH, Visa, MasterCard, Discover and American Express brands. Our full suite of merchant acquiring services includes, but is not limited to, the underwriting of each merchant’s contract, the deployment and rental of POS devices and other equipment necessary to capture merchant transactions, the processing of transactions at the point-of-sale, processing of transactions digitally through our online payment gateway, the settlement of funds with the participating financial institution, detailed sales reports, and customer support. In 2017,2021, our merchant acquiring business processed over 358474 million transactions.
Payment Services
We believe we are the largest card processor and card network service provider in the Caribbean. We provide a diversified suite of payment processing products and services to blue chip regional and global corporate customers, government agencies, and financial institutions across Latin America and the Caribbean. These services provide our clients with the infrastructure technology necessary to facilitate the processing and routing of payments across the transaction processingtransaction-processing value chain.
At the point-of-sale, we sell transaction processingtransaction-processing technology solutions, similar to the services in our merchant acquiring business, to other merchant acquirers to enableenabling them to service their own merchant customers. We also offer terminal driving solutions to merchants, merchant acquirers (including our merchant acquiring business) and financial institutions, which provide the technology to securely operate, manage and monitor POS terminals and ATMs. We also rent POS devices to financial institution customers who seek to deploy them across their own businesses.
To connect the POS terminalsmerchants to card issuers, we own and operate the ATH network, which we believe is one of the leading ATM and PIN debit networks in Latin America. The ATH network connects the merchant or merchant acquirer to the card issuer and enables transactions to be routed or “switched” across the transaction processingtransaction-processing value chain. The ATH network offers the technology, communications standards, rules and procedures, security and encryption, funds settlement and common branding that allow consumers, merchants, merchant acquirers, ATMs, card issuer processors and card issuers to conduct commerce seamlessly, across a variety of channels, similar to the services provided by Visa and MasterCard. We also own and operate ATH Movil and ATH Business which is an ATH network application that allows individuals to (i) transfer money instantly to individuals and merchants using only their phone number, and (ii) transfer money between an individual's registered cards. ATH Business enables businesses through the download of the application to accept payments instantly for their services or products from individuals with ATH Movil in real time and to donate to non-profit organizations. The ATH network and payment processing businesses processed approximately two billion transactions in 2017.2021.
To enable financial institutions, governments and other businesses to issue and operate a range of payment products and services, we offer an array of card processing and other payment technology services, such as internet and mobile banking software services, bill payment systems and EBT solutions. Financial institutions and certain retailers outsource to us certain card processing services such as card issuance, processing card applications, cardholder account maintenance, transaction authorization and posting, high volume payment processing fraud and risk management services, and settlement. Our payment products include electronic check processing, automated clearing house (“ACH”), lockbox, online, interactive voice response and web-based payments through personalized websites, among others.
We have been the main provider of EBT services to the Puerto Rican government since 1998. Our EBT application allows certain agencies to deliver government benefits to participants through a magnetic card system and serves approximately 800,000over 850,000 active participants.participants in Puerto Rico.
Business Solutions
We provide our financial institutions, corporate and government customers with a wide suite of business process management solutions including specifically core bank processing, network hosting and management, IT consulting, services, business process outsourcing, item and cash processing, and fulfillment. In addition, we believe we are the only non-bank provider of cash processing services to the U.S. Federal Reserve in the Caribbean.
Competition
Competitive factors impacting the success of our services include the quality of the technology-based application or service, application features and functions, ease of delivery and integration, ability of the provider to maintain, enhance and support the applications or services, and price. We believe that we compete well in each of these categories. In addition, we believe that our relationship with Popular, scale and expertise, and financial institution industry expertise, combined with our ability to offer multiple applications, services and integrated solutions to individual customers, enhances our competitiveness against companies with more limited offerings and helps us compete with large global competitors with similar assets to ours.
In merchant acquiring, we compete with several other service providers and financial institutions that are either in our markets or represented through Independent Sales Organizations (“ISO”), including Worldpay,Fidelity National Information Services, Inc., First Data Corporation,Fiserv, Inc., Global Payments, Inc., Elavon, Inc., Sage Payment Solutions, independent sales organizationsEVO Payments, Inc., Paypal, Square, Zelle and some local banks. Also, the card associations and payment networks are increasingly offering products and services that compete with ours. The main competitive factors are price, reliability of service, brand awareness, strength of the relationship with financial institutions, system functionality, integration service capabilities and innovation. Our business is also impacted by the expansion of new payments methods and devices, card association business model expansion, and bank consolidation.
In payment services, we compete with several other third partythird-party card processors, and debit networks, and financial technology providers, including First Data Corporation, Tecnocom Telecomunicaciones y Energía, S.A., Galileo Financial Technologies, LLC, Marqeta, Inc., Fidelity National Information Services, Inc., Fiserv, Inc., Total System Services, Inc., Vantiv, Inc., MasterCard, Visa, American Express, Discover, and Global Payments, Inc. Rappi, PayU and Paypal. Also, card associations and payment networks are increasingly offering products and services that compete with our products and services. The main competitive factors are price, system performance and reliability, system functionality, security, service capabilities and disaster recovery and business continuity capabilities.
In business solutions, our main competition includes internal technology departments within financial institutions, retailers, data processing or software development departments of large companies, and/or large technology and consulting companies. Maincompanies, and/or financial technology providers, such as Fidelity National Information Services, Inc., Jack Henry & Associates, Inc., CGI Inc. and Fiserv, Inc. The main competitive factors are price, system performance and reliability, system functionality, security, service capabilities, and disaster recovery and business continuity capabilities.
Intellectual Property
We own numerous registrations for several trademarks in different jurisdictions and own or have licenses to use certain software and technology, which are critical to our business and future success. For example, we own the ATH and EVERTEC trademarks in several jurisdictions, which are associated by the public, financial institutions and merchants with high quality and reliable electronic commerce, payments, and debit network solutions and services. Such goodwill allows us to be competitive, retain our customers and expand our business. Further, we also use a combination of (i) proprietary software, and (ii) duly licensed third partythird-party software to operate our business and deliver secure and reliable products and services to our customers. The licensed software is subject to terms and conditions that we considered within the industry standards. Most are perpetual licenses and the rest are term licenses with renewable terms. In addition, we monitor these license agreements and maintain close contact with our suppliers to ensure their continuity of service.
We seek to protect our intellectual property rights by securing appropriate statutory intellectual property protection in the relevant jurisdictions. We also protect proprietary know-how and trade secrets through company confidentiality policies, licenses, programs, and contractual agreements.
EmployeesPeople and Culture
As ofAt December 31, 2017,2021, we had approximately 2,1002,500 employees, across 11 countries53% of which are Puerto Rico and US employees, while our remaining workforce is composed of foreign nationals working in the United States,our offices throughout Latin America, which include, Dominican Republic, Mexico, Guatemala, Costa Rica, Panama, Colombia, Chile, Uruguay and the Caribbean.Brazil. In Brazil, we have onetwo unionized employeeemployees covered by the terms of industry-specific collective agreements. None of our other employees are otherwise represented by any labor organization. We consider ourbelieve we have strong and positive relationships with our employees to be good.employees. We have not experienced any work stoppages in connection with employee matters.
Diversity and Inclusion
Our culture is underpinned by our core values, including a commitment to diversity and inclusion, an essential component of our formula for innovation. We value diversity of ideas, thoughts, and opinions, as well as of race, gender, age, cultural backgrounds, and physical abilities, among others. We embrace inclusion by integrating diversity into our human capital management, product development and customer service strategies and decisions. Our workforce is 37% female and 63% male, making us unique among technology companies both in the U.S. and in Latin America. Over 99% of our employees and over 90% of our managers are Hispanic.
In 2021, the Company implemented the Next Generation Talent Program which identifies emerging leaders in the organization and provides them with training and development focused on becoming the successors for senior management. The program has a 50/50 male and female participation.
The Company has been included in the Bloomberg Gender Equality Index ("GEI") for four consecutive years. The GEI distinguishes companies committed to transparency in gender reporting and advancing women’s equality.
Employee Engagement
Evertec considers employee engagement a key component of its high-performance culture. Throughout the year, we engage with our employees in many ways, including through content on Evertec’s intranet, digital signage, virtual quarterly town-hall style (all-staff) meetings, and in many other ways.
An internal engagement survey is conducted at least once every two years. Our last comprehensive engagement survey was performed in 2020, with 85% of employees participating, the highest participation rate in the Company's history. The survey empowers employees to provide feedback on a variety of experiences, the results help Evertec's management and leadership gain insight into the most important drivers related to the work environment of our employees. Areas with highest employee satisfaction were our business and organizational development, collaboration, and work environment. In response to this employee feedback, management collaborates with our employees to create and adopt action plans to address concerns or potential areas of improvement. Completion of these action plans are monitored by the People & Culture division and reported to senior management.
Recruiting and Development Initiatives
Evertec pursues a diverse talent pool and is an Equal Opportunity Employer that aims to hire the best-qualified candidates for available positions. We promote based on merit. Our diversity recruitment initiatives are tracked through the completion of an Annual Affirmative Action Plan. In addition, we periodically conduct gender gap pay analysis for our employee population. The Company currently has a remote recruitment and on-boarding strategy to ensure the safety of our new hires and existing population in connection with the ongoing COVID-19 pandemic.
Evertec is focused on providing our employees the tools needed for their career development. Evertec University, in one platform, features all the learning opportunities available to our workforce, providing a curriculum composed of both online classroom and external trainings. Within Evertec University, we developed a leadership program that includes a 360-degree assessment, feed forward sessions, a leadership on-boarding program and a leadership academy. In 2021, the Company began providing access to the Linkedin learning platform which provides an extensive and diverse training catalog ranging from technical to soft-skill and leadership courses that allow our employees to develop in a self-paced and flexible environment. We also provide health and safety educational sessions in liaison with external health professionals as part of our health and wellness education programs efforts.
Our values for People and Culture are aligned with our commitment to environmental, social and governance (ESG). For further information, refer to the ESG tear sheet available on our website at https://ir.evertecinc.com/ESG.doc as well as Vision, Mission and Values section in our most recent proxystatement.Nothing on our website shall be deemed incorporated by reference into this Annual Report on Form 10-K.
Government Regulation and Payment Network Rules
Federal Reserve Regulations
Popular is a bank holding company that has elected to be treated as a financial holding company under the provisions of the Gramm-Leach-Bliley Act of 1999. As long asTo the extent that we are deemed to be a “subsidiary” of Popular for purposes of the Bank Holding Company (“BHC”) Act, we will be subject to regulation and oversight by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and our activities will be subject to several related significant restrictions, the more significant of which are discussed below.
Transactions with Affiliates
IfTo the extent that we are deemed to be an affiliate of Popular for purpose of the affiliate transaction rules found in Section 23A and 23B of the Federal Reserve Act and Regulation W of the Federal Reserve Board, we will be subject to various restrictions on our ability to borrow from and engage in certain other transactions with Popular’s bank subsidiaries, Banco Popular and Banco Popular North America (“BPNA”). In general, these rules require that any “covered transaction” that we enter into with Banco Popular or BPNA (or any of their respective operating subsidiaries), as the case may be, must be secured by designated amounts of specified collateral and must be limited to 10% of Banco Popular’s or BPNA’s, as the case may be, capital stock and surplus. In addition, all “covered transactions” between Banco Popular or BPNA, on the one hand, and Popular and all of its subsidiaries and affiliates on the other hand, must be limited to 20% of Banco Popular’s or BPNA’s, as the case may be, capital stock and surplus. “Covered transactions” are defined by statute and by regulation to include a loan or extension of credit from a bank to an affiliate, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve Board) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, or the credit risk arising from certain repurchase, securities borrowing/lending and derivative transactions that a bank may engage in with an affiliate. Certain credit transactions by a bank with an affiliate, in addition to being subject to the limitations above, must be secured by specified collateral.
In addition, Section 23B and Regulation W require that ifto the extent that we are deemed an affiliate of Banco Popular or BPNA, all transactions between us and either Banco Popular or BPNA be on terms and conditions, including credit standards, that are substantially the same or at least as favorable to Banco Popular or BPNA, as the case may be, as those prevailing at the time for comparable transactions involving other non-affiliated companies or, in the absence of comparable transactions, on terms and conditions, including credit standards, that in good faith would be offered by Banco Popular or BPNA to, or would apply to, non-affiliated companies.
Permissible Activities
As long asTo the extent that we are deemed to be controlled by Popular for bank regulatory purposes, we may conduct only those activities that are authorized for a bank holding company or a financial holding company under the BHC Act, the Federal Reserve Board’s Regulation K and other relevant U.S. federal banking laws. These activities generally include activities that are related to banking, or that are financial in nature or incidental to financial activities. In addition, restrictions placed on Popular as a result of supervisory or enforcement actions may restrict us or our activities in certain circumstances, even if these actions are unrelated to our conduct or business. As
long asTo the extent that we are deemed to be a foreign subsidiary of a bank holding company under the Federal Reserve Board’s regulations, we will rely on the authority granted under the Federal Reserve Board’s Regulation K to conduct our data processing, management consulting and related activities outside the United States. The Federal Reserve Board’s Regulation K generally limits activities of a bank holding company outside the United States that are not those activities of a banking or financial in nature, that are specifically permitted under Regulation K to foreign subsidiaries or necessary to carry on such activities that are not otherwise permissible for a foreign subsidiary under the banking regulations. We continue to engage in certain activities outside the scope of such permissible activities pursuant to authority under the Federal Reserve Board’s Regulation K, which allows a bank holding company to retain, in the context of an acquisition of a going concern, such otherwise impermissible activities if they account for not more than 5% of either the consolidated assets or consolidated revenues of the acquired organization.
New lines of business, other new activities, divestitures, or acquisitions that we may wish to commence in the future may not be permissible for us under the BHC Act, the Federal Reserve Board’s Regulation K or other relevantapplicable U.S. federal banking laws. Further, as a result of being subject to regulation and supervision by the Federal Reserve Board, we may be required to obtain the approval of the Federal Reserve Board before engaging in certain new activities or businesses, whether organically or by acquisition, unless such activities are considered financial in nature. More generally, the Federal Reserve Board has broad power to approve, deny or refuse to act upon applications or notices for us to conduct new activities, acquire or divest businesses or assets, or reconfigure existing operations. If we are unable to obtain any such approval on a timely basis, are delayed in receiving approval, are approved subject to regulatory conditions or do not receive approval, this may make transactions more expensive or may make us less attractive to potential sellers.
Examinations
As a technology service provider to financial institutions, we are also subject to regulatory oversight and examination by the Federal Financial Institutions Examination Council (the “FFIEC”), an interagency body of federal financial regulators that includes the Federal Reserve Board. The office of the Commissioner of Financial Institutions of Puerto Rico also participates in such examinations by the FFIEC. In addition, independent auditors annually review several of our operations to provide reports on internal controls for our clients’ auditors and regulators.
Regulatory Reform and Other Legislative Initiatives
The payment card industry has come under increased scrutiny from lawmakers and regulators. The Dodd-Frank Wall Street Reform and Protection Act (the “Dodd-Frank Act”) set forth significant structural and other changes to the regulation of the financial services industry, including the establishment of the Consumer Financial Protection Bureau (the “CFPB”). The CFPB has broad supervisory, enforcement and rulemaking authority over consumer financial products and services (including many offered by us and by our clients) and certain bank and non-bank providers of such products and services. In addition, Section 1075 of the Dodd-Frank Act (commonly referred to as the “Durbin Amendment”) imposesimposed new restrictions on card networks and debit card issuers. More specifically, the Durbin Amendment provides that the interchange transaction fees that a card issuer or payment network may receive or charge for an electronic debit transaction must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing, clearing, and settling the transaction. The Board of Governors of the Federal Reserve System (the “Federal Reserve”) adopted final regulations implementing the Durbin Amendment on June 29, 2011 and added a fraud-prevention adjustment on July 27, 2012.
The Federal Reserve’s regulations (a) limit debit transaction interchange fees to $.21 + (5 bps times the value of the transactions) + $.01 (as a fraud adjustment for issuers that have in place policies and measures to address fraud); (b) require that issuers must enable at least two unaffiliated payment card networks on their debit cards without regard to authentication method; and (c) prohibit card issuers and payment card networks from entering into exclusivity arrangements for debit card processing and restrict card issuers and payment networks from inhibiting the ability of merchants to direct the routing of debit card transactions over networks of their choice. The Dodd-Frank Act also allows merchants to set minimum dollar amounts (currently, not to exceed $10) for the acceptance of a credit card and provide discounts or incentives to entice consumers to pay with various payment methods, such as cash, checks, debit cards or credit cards, as the merchant prefers.
The CFPB is responsible for many of the regulatory functions previously performed by the federal banking and other agencies with respect to consumer financial products and services. In addition to rulemaking authority over several enumerated federal consumer financial protection laws, the CFPB is authorized to issue rules prohibiting unfair, deceptive, or abusive acts or practices in connection with the offering of a consumer financial product or service or any transaction with a consumer for such product or service. The CFPB also has authority to examine supervised entities for compliance with, and to enforce violations of, consumer financial protection laws.
AsTo the extent that we are deemed an affiliate of Banco Popular-anPopular, an insured depository institution with greater than $10 billion in total consolidated assets-andassets, and as a service provider to other insured depository institutions with $10 billion or more in total consolidated assets, as well as
larger participants in markets for consumer financial products and services, as determined by the CFPB, we are subject to the supervision, enforcement, and rulemaking authority of the CFPB. CFPB rules, examinations and enforcement actions may require us to adjust our activities and may increase our compliance costs.
In 2017, the former Director of the CFPB resigned and was replaced by an interim Director. This change in leadership, although the subject of ongoing litigation, may result in certain changes to CFPB policies and supervision, enforcement and rulemaking priorities. In addition, various legislative proposals to restructure or limit the authority of the CFPB, or to modify certain consumer financial protection laws or CFPB regulations, have been considered by Congress. It is unclear whether or to what extent any such change would affect the manner in which we engage in consumer product and service activities.
In addition to the Dodd-Frank Act, fromFrom time to time, various legislative initiatives are introduced in Congress and state legislatures, and changes in regulations or agency policies, or in the interpretation of such regulations and policies, are proposed by regulatory agencies. Such initiatives may include proposals to modify the powers of bank holding companies and their affiliates. Such legislation or changes in regulation could affect our operating environment in substantial and unpredictable ways. If adopted, such legislation or changes in regulation could increase the cost of doing business or limit permissible activities. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations or related policies and guidance, would have on our financial condition or results of operations.
Other Government Regulations
Our services are also subject to a broad range of complex federal, state, Puerto Rico, and foreign regulation, including privacy laws, international trade regulations, the Bank Secrecy Act and other anti-money laundering laws, anti-trust and competition laws, the U.S. Internal Revenue Code, the PR Code, the Employee Retirement Income Security Act, the Health Insurance Portability and Accountability Act and other Puerto Rico laws and regulations. Failure of our services to comply with applicable laws and regulations could result in restrictions on our ability to provide such services, as well as the imposition of civil fines and/or criminal penalties. The principal areas of regulation (in addition to oversight by the Federal Reserve Board) that impact our business are described below.
Privacy and Information Security Regulations
We and our financial institution clients are required to comply with various U.S. state, federal and foreign privacy laws and regulations, including those imposed under the Gramm-Leach-Bliley Act of 1999 which applies directly to a broad range of financial institutions and to companies that provide services to financial institutions. These laws and regulations place restrictions on the collection, processing, storage, use and disclosure of certain personal information, require disclosure to individuals of detailed privacy practices and provide them with certain rights to prevent the use and disclosure of protected information. The regulations, however, permit financial institutions to share information with non-affiliated parties who perform services for the financial institutions. These laws also impose requirements for safeguarding personal information through the issuance of data security standards or guidelines. Certain state laws impose similar privacy obligations, as well as, in certain circumstances, obligations to provide notification to affected individuals, states officers and consumer reporting agencies, as well as businesses and governmental agencies that own data, of security breaches of computer databases that contain personal information. In addition, U.S. state and federal government agencies have been contemplating or developing new initiatives to safeguard privacy and enhance data and information security. Some foreign privacy laws aremay be stricter than those applicable under U.S. federal, state, or Puerto Rican law. As a provider of services to financial institutions, we are required to comply with theapplicable privacy and cybersecurity regulations and are bound by the same limitations on disclosure of the information received from our customers as applyapplied to the financial institutions themselves. See “Item 1A. Risk Factors-Risks Related to Our Business-SecurityBusiness-We are subject to security breaches or other confidential data theft from our own failure to comply with privacy regulationssystems, which can adversely affect our reputation and industry security requirements imposed on providers of services to financial institutions and card processing services could harm our business by disrupting our delivery of services and damaging our reputation.”business."
Anti-Money Laundering and Office of Foreign Assets Control Regulation
Since we provide data processing services to both foreign and domestic financial institutions, we are required to comply with certain anti-money laundering and terrorist financing laws and economic sanctions imposed on designated foreign countries, nationals, and others. Specifically, we must adhere to the requirements of the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001 (collectively, the “BSA”) regarding processing and facilitation of financial transactions, as well as other state, local and foreign laws relating to money laundering. Furthermore, as a data processing company that provides services to foreign parties and facilitates financial transactions between foreign parties, we are obligated to screen transactions for compliance with the sanctions programs administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). These regulations prohibit us from entering into or facilitating a transaction to or from or dealings with specified countries, their
governments and, in certain circumstances, their nationals and others, such as narcotics traffickers and terrorists or terrorist organizations designated by the U.S. Government under one or more sanctions regimes.
A major focus of governmental policy in recent years has been aimed at combating money laundering and terrorist financing. Preventing and detecting money laundering and other related suspicious activities at their earliest stages warrants careful monitoring. The BSA, along with a number of other anti-money laundering laws, imposes various reporting and record-keeping requirements concerning currency and other types of monetary instruments. Similar anti-money laundering, counter-terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified on lists maintained by organizations similar to OFAC in several other countries and which may impose specific data retention obligations or prohibitions on intermediaries in the payment process. These laws and regulations impose obligations to maintain appropriate policies, procedures, and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for us. We may also be subject to enforcement actions and as a result may incur losses and liabilities that may impact our business.
Federal Trade Commission Act and Other Laws Impacting our Customers' Business
All persons engaged in commerce, including, but not limited to, us and our merchant and financial institution customers are subject to Section 5 of the Federal Trade Commission Act prohibiting Unfair or Deceptive Acts or Practices (“UDAP”). In addition, there are other laws, rules and/or regulations, including the Telemarketing Sales Act, that may directly impact the activities of our merchant customers and in some cases may subject us, as the merchant's payment processor, to investigations, fees, fines, and disgorgement of funds in the event we are deemed to have aided and abetted or otherwise provided the means and instrumentalities to facilitate the illegal activities of the merchant through our payment processing services. Federal and state regulatory enforcement agencies including the Federal Trade Commission, or FTC, and the states' attorneys general have authority to take action against nonbanks that engage in UDAP or violate other laws, rules, and regulations. To the extent we process payments for a merchant that may be in violation of these laws, rules, and regulations, we may be subject to enforcement actions and as a result may incur losses and liabilities that may impact our business.
Anti-trust and Competition Laws
We are required to comply with various federal, local, and foreign competition and anti-trust laws, including the Sherman Act, Clayton Act, Hart-Scott-Rodino Antitrust Improvements Act, Robinson-Patman Act, Federal Trade Commission Act and Puerto Rico Anti-Monopoly Act. In general, competition laws are designed to protect businesses and consumers from anti-competitive behavior. Competition and anti-trust law investigations can be lengthy, and violations are subject to civil and/or criminal fines and other sanctions for both corporations and individuals that participate in the prohibited conduct. Class action civil anti-trust lawsuits can result in significant judgments, including in some cases, payment of treble damages and/or attorneys' fees to the successful plaintiff. See “Item 1A. Risk Factors-RisksFactors—Risks Related to Our Business-FailureBusiness—We are subject to extensive government regulation and oversight. Failure to comply with U.S. stateexisting and federal antitrust requirements, orfuture rules and regulations in the Puerto Rico Anti-Monopoly Act, and government investigations into our compliance,jurisdiction in which we operate could adversely affect the operations of one or more of our business.businesses in those jurisdictions.”
Foreign Corrupt Practices Act (“FCPA”), Export Administration and Other
As a data processing company that services both foreign and domestic clients, our business activities in foreign countries, and in particular our transactions with foreign governmental entities, subject us to the anti-bribery provisions of the FCPA, as well as the laws and regulations of the foreign jurisdiction where we operate. Pursuant to applicable anti-bribery laws, our transactions with foreign government officials and political candidates are subject to certain limitations. Finally, in the course of business with foreign clients and subsidiaries, we export certain software and hardware that is regulated by the Export Administration Regulations from the United States to the foreign parties. Together, these regulations place restrictions on who we can transact with, what transactions may be facilitated, how we may operate in foreign jurisdictions and what we may export to foreign countries.
The preceding list of laws and regulations is not exhaustive, and the regulatory framework governing our operations changes continuously. The enactment of new laws and regulations may increasingly affect directly and indirectly the operation of our business, which could result in substantial regulatory compliance costs, litigation expense, loss of revenue, decreased profitability and/or adverse publicity.
Association and Network Rules
Several of our subsidiaries are registered with or certified by card associations and payment networks, including the ATH network, MasterCard, Visa, American Express, Discover and numerous debit and EBT networks as members or as service providers for
member institutions in connection with the services we provide to our customers. As such, we are subject to applicable card association and network rules, which could subject us to a variety of fines or penalties that may be levied by the card associations or networks for certain acts and/or omissions by us, our acquirer customers, processing customers and/or merchants. For example, “EMV” is a credit and debit card authentication methodology that the card associations are mandating to processors, issuers, and acquirers in the payment industry. Compliance deadlines for EMV mandates vary by country and by payment network. We have invested significant resources and man-hours to develop and implement this methodology in all our payment related platforms. However, we are not certain if or when our financial institution customers will use or accept the methodology and the time it will take for this technology to be rolled-out to all customer ATM and POS devices connected to our platforms or adopted by our card issuing clients. Non-compliance with EMV mandates could result in lost business or financial losses from fraud or fines from network operators. We are also subject to network operating rules promulgated by the National Automated Clearing House Association relating to payment transactions processed by us using the Automated Clearing House Network and to various government laws regarding such operations, including laws pertaining to EBT.
Geographic Concentration
Our revenue composition by geographical area is basedFor the year ended December 31, 2021, 80% of revenues were generated from our business in Puerto Rico, while the remaining 20% was generated from Latin America and the Caribbean. Latin America includes, among others, Costa Rica, México, Guatemala, Colombia, Chile, Uruguay, Brazil, and Panamá. The Caribbean primarily represents Puerto Rico, the Dominican Republic and the Virgin Islands. See Note 23 of24 to Audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information related to geographic areas.
Seasonality
Our payment businesses generally experience increased activity during the traditional holiday shopping periods and around other nationally recognized holidays.
Available Information
EVERTEC’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to such reports (if applicable) filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available free of charge, through our website, http://www.evertecinc.com, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. In addition, we make available on our website under the heading of “Corporate Information” our: (i) Code of Ethics; (ii) Code of Ethics for Service Providers; (iii) Corporate Governance Guidelines; (iv) the charters of the Audit, Compensation and Nominating and Corporate Governance committees, and also, we intend to disclose any amendments to the Code of Ethics. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC. The aforementioned reports and materials can also be obtained free of charge upon written request or telephoning to the following address or telephone number:
EVERTEC, Inc.
Cupey Center Building
Road, 176, Kilometer 1.3
San Juan, Puerto Rico 00926
(787) 759-9999
The public may read and copy any materials EVERTEC files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. In addition, the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at http://www.sec.gov.
Our Corporate Information
We were incorporated on April 13, 2012 in Puerto Rico under the name Evertec, Inc. Our principal executive offices are located at Cupey Center Building, Road 176, Kilometer 1.3, San Juan, Puerto Rico 00926, and our telephone number is (787) 759-9999.
Item 1A. Risk Factors
Readers should carefully consider, in connection with other information disclosed in this Annual Report on Form 10-K, the risks and uncertainties described below. The following discussion sets forth somerisks that we believe are material to our stockholders and prospective stockholders. The occurrence of any of the more important risk factors that could affectfollowing risks might cause our business, financial condition, operating resultsstockholders to lose all or cash flow. However, other factors, besides those discussed below or elsewherea part of their investment in this Report or other of our reports filed with or furnished to the Securities and Exchange Commission (“SEC”), also could adversely affect our business, financial condition, operating results or cash flow.Company. We cannot assure you that the risk factors described below or elsewhere in this document are a complete set of all potential risks we may face; additional risks and uncertainties not presently known to us or not believed by us to be material may also negatively impact us. Theseaffect our business results, financial condition, results of operations, cash flows, and the trading price of our common stock. Some statements in this report, including statements in the following risk factors also serve to describe factors which may cause our results to differ materially from those discussed in forward looking statements included herein or in other documents or statements that make reference to this Annual Report on Form 10-K.section, constitute forward-looking statements. Please also refer to the section titled “Forward Looking Statements” inat the beginning of this Annual Report on Form 10-K.
Risks Related to Our Business
We expect to continue to derive a significant portion of our revenue from Popular.
Our services to Popular account for a significant portion of our revenues, and we expect that our services to Popular will continue to represent a significant portion of our revenues for the foreseeable future.
In 2017, products and services billed to Popular accounted for2021, we derived approximately 43%42% of our total revenues.revenue from our relationship with Popular and the MSA is our most significant client contract, which has an initial term ending in 2025. The majority of Popular’s business is presented in the Business Solutions segment. If Popular were to terminate or fail to perform under or fail to renew the Master Services Agreement (“MSA”), which currently expires in 2025,MSA, or our other material agreements with Popular, our revenues could be materially reduced and our profitability and cash flows could also be materially reduced, all of which in turn, could potentially limitwould have a material adverse impact on our abilityfinancial condition and results of operations.
If we are unable to renegotiate our debt.
We depend, in part, onmaintain our merchant relationships and our alliance with Banco Popular, a wholly-owned subsidiary of Popular, to grow our merchant acquiring business. If we are unable to maintain these relationships and this alliance, our business may be materially adversely affected.
Growth in our merchant acquiring business is derived primarily from acquiring new merchant relationships, new and enhanced product and service offerings, cross selling products and services into existing relationships, the shift of consumer spending to increased usage of electronic forms of payment, and the strength of our relationship with Banco Popular, a wholly owned subsidiary of Popular. A substantial portion of our business is generated from our Independent Sales Organization Sponsorship and Services Agreement (the “ISO Agreement”) with Banco Popular, which expireshas an initial term ending in 2025.
Banco Popular acts as a merchant referral source and provides sponsorship into the ATH, Visa, Discover and MasterCard networks for merchants, as well as card association sponsorship, clearing and settlement services. We provide transaction processingtransaction-processing and related functions. Both we and Popular, as alliance partners, may provide management, sales, marketing, and other administrative services.services to merchants. We rely on the continuing growth of our merchant relationships, which in turn is dependent upon our alliance with Banco Popular and other distribution channels. There can be no guarantee that this growth will continue and the loss or deterioration of these relationships, whether due to the termination of the ISO Agreement or otherwise, could negatively impact our business and result in a material reduction of our revenue and profit.income.
OurIf we are unable to renew or negotiate extensions for our MSA with Popular, our ISO Agreement with Banco Popular and our ATH Network Participation Agreement and ATH Support Agreement with Banco Popular (the “BPPR ATH Agreements”Agreements") have initial terms ending in 2025. If Popular or Banco Popular decide not to renew one or more of these agreements,, or if we are unablerequired to negotiate extensions, or if we must provide significant concessions to Popular or Banco Popular to secure extensions or otherwise, our ability to renegotiate our debt, results of operations, financial condition and trading price of our common stock may be materially adversely affected, and it could also potentially limit our ability to renegotiate our debt.affected.
Our MSAWe regularly discuss with Popular has an initial term that ends in 2025. For 2017, we derived approximately 43%the terms of our revenue from such contract, which makes the MSA our most significant client contract. We expect thatand the services we will enter into a negotiation withprovide to Popular prior to the expiration of the initial term of the MSA.thereunder. We cannot be certain that we will be able to negotiate an extension to the MSA. In addition, evenMSA upon its expiration on its terms. Even if we are able to negotiate an extension of the MSA, any new master services agreement may be materially different from the existing MSA andMSA. Further, Popular may result inrequire significant concessions from us with respect to Popular.pricing, services, and other key terms, both in respect of the current term and any future extension of the MSA. Any such events may materially and negatively impact our financial condition, results of operations and trading price of our common stock, as well as potentially limit our ability to renegotiate our debt.
We are also a counterpartyPursuant to our ISO Agreement with Banco Popular, under the ISO Agreement, which has an initial term ending on 2025. Pursuant to the ISO Agreement, Banco Popular sponsors us as an independent sales organization with respect to certain credit card associations and is required to exclusively refer to us any merchant that inquires about, requests or otherwise evidences interest in the merchant services, amongand other things.services. If the ISO Agreement is not renewed, we will have to seek other card association sponsors, we will not benefit from BPPRBanco Popular referral of merchants and we may experience the loss of
some merchants if BPPRBanco Popular itself enters the merchant acquiring business or associates itself withagrees to sponsor another independent sales organization. Any of these events may negatively impact our financial condition and results of operations.
Similarly, theThe BPPR ATH Agreements also have initial terms ending in 2025. Under such agreements, among other things, we provide Banco Popular certain ATM and POS services in connection with our ATH network; we grant a license to use the ATH logo, word mark and associated trademarks; and Banco Popular agrees to support, promote, and market the ATH network and brand and to issue debit cards bearing the symbol of the ATH network. If one or both of the BPPR ATH Agreements are not extended, our ATH brand and network could be negatively impacted, and our financial conditionscondition and results of operations materially adversely affected.
If we are unableThe inability to renew otheror maintain client contracts aton favorable terms we could lose clients andor at all may materially adversely affect our results of operations and financial condition may be adversely affected.condition.
Failure to achieve favorable renewals of client contracts could negatively impact our business. Our contracts with private clients generally run for a period of one to five years, except for the Master Services Agreement with Popular, described above.years. Our government contracts generally run for one year withoutand do not include automatic renewal periods due to requirements of the government procurement rules and related fiscal funding requirements. Our standard merchant contract has an initial term of one orup to three years, with automatic one-year renewal periods. At the end of the relevant contract term, clients have the opportunity tocan renew or renegotiate their contracts with us, and to consider whetherbut may also decide to engage one of our competitors to provide products and services. If we are not successful in achieving high renewal rates andand/or contract terms that are favorable to us, our results of operations and financial condition may be adversely affected.
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our notes and senior secured credit facilities.
We are highly leveraged. As of December 31, 2017, the total principal amount of our indebtedness was approximately $624.8 million. Our high degree of leverage could have important consequences for you, including:
increasing our vulnerability to adverse economic, industry or competitive developments;
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interestalso depend on our indebtedness, therefore reducing our abilitypayment processing clients to use our cash flow for other purposes, including for our operations, capital expenditurescomply with their contractual obligations, applicable laws, regulatory requirements and future business opportunities;
exposing us to the risk of increased interest rates because our borrowings are predominantly at variable rates of interest;
making it more difficult for us to satisfy our obligations with respect to our indebtedness, and anycredit card associations rules or standards. A client's failure to comply with any such laws or requirements could force us to declare a breach of contract and terminate the obligationsclient relationship. The termination of such contracts or relationships, as well as any inability to collect any damages caused, could have a material adverse effect on our business, financial condition, and results of our other debt instruments, including restrictive covenants and borrowing conditions,operations. Additionally, any such failure by clients to comply could also result in an event of default under the agreements governing such other indebtedness;
restricting us from making strategic acquisitionsfines, penalties or causing usobligations imputed to make non-strategic divestitures;
limiting our ability to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions and general corporate or other purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us atEVERTEC, which could also have a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.
For the year ended December 31, 2017, our cash interest expense on the senior secured credit facilities amounted to $25.4 million. Our interest expense could increase if interest rates increase because the entire amount of the indebtedness under the senior secured credit facilities bears interest at a variable rate. At December 31, 2017, we had approximately $611.7 million aggregate principal amount of variable rate indebtedness under the senior secured credit facilities of which $200 million is fixed with an interest rate swap. A 100 basis point increase in interest rates over our floor(s)material adverse effect on our debt balances outstanding as of December 31, 2017 under the senior secured credit facilities would increase our annual interest expense by approximately $4.1 million after taking into consideration the referenced fixed interest rate swap.business.
We rely on our systems, employees and certain suppliers and counterparties, and certain failures could materially adversely affect our operations.
Many of our services are based on sophisticated software, technology, and computing systems, and we may encounter delays when developing new technology solutions and services. We have experienced and expect to continue to experience actual and attempted cyber-attacks of our IT networks, such as through phishing scams and ransomware. The technology solutions underlying our services have occasionally contained, and may in the future contain, undetected errors or defects when first introduced or when new versions are released. We may experience difficulties in installing or integrating our technologies on platforms used by our customers.
Our businesses are dependent on our ability to reliably process, record and monitor a large number of transactions. We settle funds on behalf of financial institutions, other businesses and consumers and process funds transactions from clients, card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by us include debit card, credit card, electronic bill payment transactions, ACH payments, electronic benefits transfer ("EBT") transactions and check clearing that supports consumers, financial institutions, and other businesses. These payment activities rely upon the technology infrastructure that facilitates the verification of activity with counterparties, the facilitation of the payment and, in some cases, the detection or prevention of fraudulent payments. If any of our financial, accounting, or other data processing systems or applications fail or haveexperience other significant shortcomings, or limitations, weour ability to serve our clients and accordingly our results of operations could be materially adversely affected. Such failures or shortcomings could be the result of events that are beyond our control, which may include, for example, computer viruses, fires, electrical or telecommunications outages, natural disasters, disease pandemics, terrorist acts or other unanticipated damage to property or physical assets. Any such shortcoming could also damage our reputation, require us to expend significant resources to correct the defect, and may result in liability to third parties, especially since some of our contractual agreements with financial institutions require the crediting of certain fees if our systems do not meet certain specified service levels.
There is also a risk that we may lose critical data or experience system failures. We perform the vast majority of disaster recovery operations ourselves, though we utilize select third parties for some aspects of recovery. To the extent we outsource our disaster recovery, we are at risk of the vendor’s unresponsiveness in the event of breakdowns in our systems. Our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.
We are similarly dependent on our employees. WeOur operations could be materially adversely affected if one of ouror more employees causescause a significant operational breakdown or failure, either intentionally or as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. Third error. Suppliers and third
parties with which we do business could also be sources of operational risk to us, including relating to breakdowns or failures of such parties’ own systems or employees. Any of these occurrences could diminish our ability to operate one or more of our businesses, or result in potential liability to clients, reputational damage and regulatory intervention or fines, any of which could materially adversely affect us.our financial condition or results of operations.
WeThe ongoing COVID-19 pandemic has had, and may be subjectcontinue to have, a negative impact on the global economy and may have a negative impact on our business, operations, and results.
The COVID-19 pandemic, and measures taken to contain and/or mitigate it, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns, have had dramatic adverse consequences for the global economy. The effects of COVID-19 on our business and our financial condition could include but are not limited to the following: (i) payment processing risks associated with disruptions to merchant activity and business failures including chargeback risk; (ii) adverse effects on revenue streams for certain lines of business in the Business Solutions segment (including core banking, network services, IT consulting, cash and item processing); (iii) reduced transactional revenue in our Payment Services - Latin America segment; (iv) additional regulatory requirements; (v) changes to normal operations; (vi) impairments in our ability to timely deliver key projects; (vii) negative effects of general macroeconomic conditions on consumer confidence; (viii) significant reductions or volatility in demand for one or more of our operating systems arisingproducts and (ix) reduced demand from events that are wholly or partially beyond our control, which may include, for example, computer viruses or electrical or telecommunications outages, natural disasters, disease
pandemics or other unanticipated damage to property or physical assets. Such an incident occurred as a resultconsumers, stemming from the concern of the impact and aftermathrisk of Hurricanes Irma and Mariacontracting COVID-19, resulting in 2017, which affected the ability of the majority of the island's businesses to transact electronically in Puerto Rico and the Caribbean. Such disruptions may give rise to losses in service to customers and loss or liability to us. In addition, there is the risk that our controls and procedures as well as business continuity and data security systems prove to be inadequate. Any such failure could affect our operations, damage our reputation and materially adversely affect our results of operations by requiring us to expend significant resources to correct the defect, by causing a loss of confidence in our services that leads toprofits.
These factors may prevail for a decrease in usesignificant period of our services,time and by exposing us to litigation, regulatory fines, penalties or other sanctions or losses not covered by insurance.
If our amortizable intangible assets or goodwill become impaired, it may adversely affect our financial condition and operating results.
If our amortizable intangible assets or goodwill were to become impaired, we may be required to record a significant charge to earnings. Under the generally accepted accounting principles in the United States of America (“GAAP”), definitive useful life intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested for impairment at least annually.
The goodwill impairment evaluation process requires us to make estimates and assumptions with regards to the fair value of our reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact ourbusiness, results of operations and financial condition even after the COVID-19 outbreak has subsided, including any economic downturn or recession that has occurred or may occur in the future. If these effects are sustained, they could have accounting consequences such as impairments of tangible and intangible long-lived assets and could affect our ability to operate effective internal control over financial reporting unit whereand execute expansion plans or invest in product development. Further, to the goodwill is recorded.extent the COVID-19 pandemic adversely affects our business, results of operations or financial condition, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section.
Our risk management procedures may not be fully effective in identifying or helping us mitigate our risk exposure against all types of risks.
We operate in a rapidly changing industry, and we have experienced significant change in the past five years, including our separation from Popular following the Merger, our initial public offering in April 2013 and our listing on the New York Stock Exchange (“NYSE”). Accordingly, we may not be fully effective in identifying, monitoring and managing our risks. In some cases, the information we use to perform our risk assessments may not be accurate, complete or up-to-date. In other cases, our risk assessments may depend upon information that we may not have or cannot obtain. If we are not fully effective or we are not always successful in identifying all risks to which we are or may be exposed, we could be subject to losses, penalties, litigationsecurity breaches or regulatory actions that could harmother confidential data theft from our systems, which can adversely affect our reputation or have a material adverse effect on our business, financial conditions and results of operations.business.
Security breaches or our own failure to comply with privacy regulations and industry security requirements imposed on providers of services to financial institutions and card processing services could harm our business by disrupting our delivery of services and damaging our reputation.
As part of our business, we electronically receive, process, store and transmit a wide range of confidential information, including sensitive businesscustomer information of our customers. In addition, we collectand personal consumer data, such as names and addresses, social security numbers, driver’s license numbers, cardholder data and payment history records. The uninterrupted operation of our information systemsWe also operate payment, cash access and the confidentiality of the customer/consumer information that resides on such systems are critical to the successful operations of our business. Despite the safeguards we have in place, unauthorized access to our computer systems or databases could result in the theft or publication of confidential information, the deletion or modification of records or could otherwise cause interruptions in our operations. These risks are increased when we transmit information over the Internet. Our visibility in the global payments industry may attract hackers to conduct attacks on our systems that could compromise the security of our data or could cause interruptions in the operations of our businesses and subject us to increased costs, litigation and other liabilities. There is also a possibility of mishandling or misuse, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees acting contrary to our policies, or where such information is intercepted or otherwise improperly taken by third parties. An information breach in the system and loss of confidential information such as creditelectronic card numbers and related information could have a longer and more significant impact on the business operations than a hardware failure and could result in claims against us for misuse of personal information, such as identity theft.
Additionally, as a provider of services to financial institutions, such as card processing services, we are subject directly (or indirectly through our clients) to the same laws, regulations, industry standards and limitations on disclosure of the information we receive from our customers that apply to the customers themselves. If we fail to comply with these regulations, standards and limitations, we could be exposed to claims for breach of contract, fines, governmental proceedings, or prohibitions on card processing services. In addition, as more restrictive privacy laws, rules or industry security requirements are adopted in the
future on the federal or local level or by a specific industry body, the change could have an adverse impact on us through increased costs or restrictions on business processes. We may be required to expend significant capital and other resources to comply with mandatory privacy and security standards required by law, industry standards or contracts.
Any inability to prevent security or privacy breaches or failure to comply with privacy regulations and industry security requirements could cause our existing customers to lose confidence in our systems and terminate their agreements with us, and could inhibit our ability to attract new customers, damage our reputation and/or adversely impact our relationship with administrative agencies.
We may experience breakdowns in our processing systems that could damage customer relations and expose us to liability.
We depend heavily on the reliability of our processing systems in our core businesses. A system outage or data loss, regardless of reason, could have a material adverse effect on our business, financial condition and results of operations. Not only would we suffer damage to our reputation in the event of a system outage or data loss, but we may also be liable to third parties. Some of our contractual agreements with financial institutions require the crediting of certain fees if our systems do not meet certain specified service levels. To successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Events that could cause system interruptions include, but are not limited to, fire, natural disasters, telecommunications failure, computer viruses, terrorist acts and war. Although we have taken steps to protect against data loss and system failures, there is still risk that we may lose critical data or experience system failures. We perform the vast majority of disaster recovery operations ourselves, though we utilize select third parties for some aspects of recovery. To the extent we outsource our disaster recovery, we are at risk of the vendor’s unresponsiveness in the event of breakdowns in our systems. Furthermore, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.
Lack of system integrity, fraudulent payments or credit quality related to funds settlement could result in a financial loss.
We settle funds on behalf of financial institutions, other businesses and consumers and process funds transactions from clients, card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by us include debit card, credit card, electronic bill payment transactions, ACH payments, electronic benefits transfer transactions and check clearing that supports consumers, financial institutions and other businesses. These payment activities rely upon the technology infrastructure that facilitates the verification of activity with counterparties, the facilitation of the payment and, in some cases, the detection or prevention of fraudulent payments. If the continuity of operations, integrity of processing, or ability to detect or prevent fraudulent payments were compromised this could result in a financial loss to us.
We may experience defects, development delays, installation difficulties, system failure, or other service disruptions with respect to our technology solutions, which would harm our business and reputation and expose us to potential liability.
Many of our services are based on sophisticated software, technology and computing systems, and we may encounter delays when developing new technology solutions and services. Further, the technology solutions underlying our services have occasionally contained, and may in the future contain, undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technologies on platforms used by our customers. Finally, our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry and computer viruses or other cyber-attacks. Attacks on information technology systems continue to grow in frequency, complexity and sophistication, a trend we expect will continue. Such attacks have become a point of focus for individuals, businesses and governmental entities. The objectives of these attacks include, among other things, gaining unauthorized access to systems to facilitate financial fraud, disrupt operations, cause denial of service events, corrupt data, and steal non-public information. Such attacks have become a point of focus for individuals, businesses, and governmental entities.
As part ofUnauthorized access to our business, we electronically receive, process, store and transmit a wide rangecomputer systems or databases could result in the theft or publication of confidential information, including sensitive customerthe deletion or modification of records or could otherwise cause interruptions in the successful operations of our businesses. These risks are increased when we transmit information and personal consumer data. We also operate payment, cash access and electronic card systems. A successful cyber-attackover the Internet as our visibility in the global payments industry attracts hackers to conduct attacks on our system couldsystems. Our security measures may also be breached due to the mishandling or misuse of information; for example, if such information were erroneously provided to parties who are not permitted to have the information, either by employees acting contrary to our policies or as a result in: (1) interruption of business operations; (2) delaya fault in market acceptance; (3)our systems.
Actual or perceived vulnerabilities or data breaches may lead to claims against us, which may require us to spend significant additional developmentresources to remediate by addressing problems caused by breaches and remediation costs; (4) diversion of technicalfurther protect against security or privacy breaches. Additionally, while we maintain insurance policies specifically for cyber-attacks, our current insurance policies may not be adequate to reimburse us for losses caused by security breaches, and other resources; (5)we may not be able to collect fully, if at all, under these insurance policies. A significant security breach, such as loss of customers; (6) negative publicitycredit card numbers and loss of reputation; or (7) exposure to liability claims.
Any one or more of the foregoingrelated information, could have a material adverse effect on our reputation and could result in a loss of customers throughout the years. Some of our systems have experienced in the past and may experience in the future security breaches and, although they did not have a material adverse effect on our operating results or reputation, there can be no assurance of a similar result in the future. We cannot assure you that our security measures will prevent security breaches or that failure to prevent them will not have a material adverse effect on our business, results of operations, financial condition, and resultsreputation. Any breaches of operations.network or data security at our customers, partners or vendors could have similar negative effects.
Due to the COVID-19 pandemic, we transitioned a significant subset of our employee population to a remote working environment, which may exacerbate various cybersecurity risks to our business, including an increased demand for information
technology resources, an increased risk of phishing and other cybersecurity attacks, and an increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information.
We are subject to the credit risk that our merchants will be unable to satisfy obligations for which we may also be liable.
We are subject to the credit risk of our merchants being unable to satisfy obligations for which we also may be liable. For example, as the merchant acquirer, we are contingently liable for transactions originally acquired by us that are disputed by the cardholder and charged back to the merchants. For certain merchants, if we are unable to collect amounts paid to cardholders in the form of refunds or chargebacks from the merchant, we bear the loss for those amounts. A default on payment obligations by one or more of our merchants could have a material adverse effect on our business.
The ability to adopt technology to changing industry and customer needs or trends may affect our competitiveness or demand for our products, which may adversely affect our operating results.
Changes in technology may limit the competitiveness of and demand for our services. Our businesses operate in industries that are subject to technological advancements, developing industry standards and changing customer needs and preferences. Also, our customers continue to adopt new technology for business and personal uses. We must anticipate and respond to these industry and customer changes in order to remain competitive within our relative markets. Our inability to respond to new competitors and technological advancements could impact all of our businesses. For example, the ability to adopt technological advancements surrounding POS technology available to merchants could have ana material and adverse impact on our merchant acquiring business.
Consolidations in the banking and financial services industry could adversely affect our revenues by eliminating existing or potential clients and making us more dependent on a more limited number of clients.
In recent years, there have been a number of mergers and consolidations in the banking and financial services industry. Mergers and consolidations of financial institutions reduce the number of our clients and potential clients, which could adversely affect our revenues. Further, if our clients fail or merge with or are acquired by other entities that are not our clients, or that use fewer of our services, they may discontinue or reduce their use of our services. It is also possible that the larger banks or financial institutions resulting from mergers or consolidations would have greater leverage in negotiatingto negotiate terms withless favorable to us or could decide to perform in-house some or all of the services which we currently provide or could provide. Any of these developments could have a material adverse effect on our business, financial condition, and results of operations.
We are subject to the credit risk that our merchants will be unable to satisfy obligations for which we may also be liable.
We are subject to the credit risk of our merchants being unable to satisfy obligations for which we alsoThere may be liable. For example,a change in the use of cards as a payment mechanism or adverse developments with respect to card industry in general.
If the merchant acquirer, we are contingently liable fornumber of electronic and digital payment transactions originally acquired by us that are disputed by the cardholder and charged back to the merchants. For certain merchants, if we are unable to collect this amount from the merchant, due to the merchant’s insolvency or other reasons, we will bear the loss for the amount of the refundtype we process does not continue to grow or chargeback paidif businesses or consumers do not continue to the cardholder. Notwithstandingadopt our adherence to industry standards with regards to the acceptance of new merchants and certain steps to screen for credit risk,services, it is possible that a default on such obligations by one or more of our merchants could have a material adverse effect on the profitability of our business.
Increased competition or changes in consumer spending or payment preferences could adversely affect our business.
A declinebusiness, financial position, and results of operations. We believe future growth in the market foruse of credit, debit and other electronic and digital payments will be driven by the cost, ease-to-use, and quality of products and services offered to customers and businesses. In order to consistently increase and maintain our services, either as a result of increased competition, continued migration of Puerto Ricansprofitability, businesses and consumers must continue to the U.S. mainland, a further deterioration in the Puerto Rico economy, a decrease in consumer spending or a shift in consumeruse electronic and digital payment preferences, could have a material adverse effect on our business. We may face increased competition in the future as new companies enter the marketmethods that we process, including credit and existing competitors expand their services. Some of these competitors could have greater overall financial, technical and marketing resources than us, which could enhance their ability to finance acquisitions, fund internal growth and respond more quickly to professional and technological changes. Some competitors could have or may develop a lower cost structure. New competitors or alliances among competitors could emerge, resulting in a loss of business for us and a corresponding decline in revenues and profit margin. Further, if consumer confidence decreases in a way that adversely affects consumer spending, whether in conjunction with a global economic downturn or otherwise, we could experience a reduction in the volume of transactions we process. In addition, if we fail to respond to changes in technology or consumer payment preferences, we could lose business to competitors.debit cards.
Changes in credit card association or other network rules or standards could adversely affect our business.
In order to provide our transaction processingtransaction-processing services, several of our subsidiaries are registered with or certified by Visa, Discover and MasterCard and other networks as members or as service providers for member institutions. As such, we and many of our customers are subject to card association and network rules that could subject us or our customers to a variety of fines or penalties that may be levied by the card associations or networks for certain acts or omissions by us, acquirer customers, processing customers and merchants. Visa, Discover, MasterCard and other networks, some of which are our competitors, set the standards with respect to which we must comply. The termination of Banco Popular’s or our subsidiaries’ member registration or our subsidiaries’ status as a certified service provider, or any changes in card association or other network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit our ability to provide transaction processingtransaction-processing services to or through our customers, could have an adverse effect on our business, operating results and financial condition.
Changes in interchange fees or other fees charged by credit card associations and debit networks could increase our costs or otherwise materially adversely affect our business.
From time to time, card associations and debit networks change interchange, processing, and other fees, which could impact our merchant acquiring and payment services businesses. It is possible that competitiveCompetitive pressures willcould result in our merchant acquiring and payment services businesses absorbing a portion of such increases in the future, which would increase our operating costs, reduce our profit margin, and adversely affect our business, operating results, and financial condition.
Our revenues from the sale of services to merchants that accept Visa, Discover and MasterCard cards are dependent upon our continued Visa, Discover and MasterCard registration and financial institution sponsorship.
In order to provide our Visa, Discover and MasterCard transaction processing services, we must be registered as a merchant processor of Visa, Discover and MasterCard. These designations are dependent upon our being sponsored by member banks of those organizations. If our sponsor banks should stop providing sponsorship for us, we would need to find another financial institution to serve as a sponsor, which could prove to be difficult and/or more expensive. If we are unable to find a replacement financial institution to provide sponsorship we may no longer be able to provide processing services to the affected customers which would negatively impact our revenues and earnings.
For purposes of the Bank Holding Company Act of 1956 (the “BHC Act”), for so long as we are deemed to be controlled by Popular, we will be subject to supervision and examination by U.S. federal banking regulators, and our activities will be limited to those permissible for Popular. Furthermore, as a technology service provider to regulated financial institutions, weWe are subject to additionalextensive government regulation and oversight. Failure to comply with existing and future rules and regulations in the jurisdictions in which we operate could materially adversely affect the operations of one or more of our businesses in those jurisdictions.
Our business is subject to the laws, rules, regulations, and policies in the countries in which we operate, as well as the legal interpretation of such regulations by administrative bodies and the judiciary of those countries. The expansion of our business may also result in increased regulatory oversight and examination. As a regulated institution,enforcement, as well as any claims by regulatory agencies and courts that we may beare required to obtain regulatory approval before engaginglicenses to engage in certain new activitiesbusiness activity.
Enforcement of, failure, or businesses, whether organically or by acquisition.
For so long as we are deemed to be a “subsidiary” of Popular for purposes of the BHC Act, in other words deemed to be controlled by Popular, we will be subject to regulation and supervision by the Federal Reserve Board. The BHC Act defines “control” differently than GAAP. As a deemed “subsidiary”, we may conduct only those activities that are authorized for our deemed parent, which depend on whether it is treated as a bank holding company or a financial holding company. The activities that are permissible for subsidiaries of bank holding companies are those that are treated as closely related to banking; those that are permissible for subsidiaries of financial holding companies generally include activities that are financial in nature or complementary to financial activities. In addition, we are subject to regulatory oversight and examination by the Federal Financial Institution Examination Council because we are a technology service provider to regulated financial institutions, including Banco Popular.
New lines of business, other new activities, acquisitions that we may wish to commence or undertake in the future and the manner in which we conduct our business may not be permissible for us under the BHC Act, Regulation K or other relevant U.S. federal banking laws or may require the approval of the Federal Reserve Board or any other applicable U.S. federal banking regulator. In addition, potential acquisitions or deals may take longer, be more costly, or make us less attractive as a buyer. Additional regulatory requirements may be imposed if Popular is subject to any enforcement action. More generally, the Federal Reserve Board has broad powers to approve, deny or refuse to act upon applications or notices submitted by Popular on our behalf with respect to new activities, the acquisition of businesses or assets, or the reconfiguration of existing operations. Any such action by the Federal Reserve Board may also depend on our abilityperceived failure to comply with laws, rules, regulations, policies, or licensing requirements could result in criminal or civil lawsuits, penalties, fines, forfeiture of significant assets, an outright or partial restriction on our operations, enforcement in one or more jurisdictions, additional compliance and licensure requirements, and force us to change the standards imposed by our regulators. There can be no assurance that any required regulatory approvals will be obtained. In addition, further restrictions placed on Popular as a result of supervisory or enforcement actions may restrict usway we or our activitiesusers do business. Any changes in certain circumstances, even if these actions are unrelated to conduct our business.or our users' business methods could increase cost or reduce revenue.
Changes inThe laws, rules, regulations, and enforcement activities may adversely affectpolicies in the products and services we provide and markets in which we operate.operate include, but are not limited to, privacy and user data protection, banking, money transmission, antitrust, anti-money laundering and the export, re-export, and re-transfer abroad of covered items. In addition, our operations in most of the countries where we operate are subject to risks related to compliance with the U.S. Foreign Corrupt Practices Act and other applicable U.S. and other local laws prohibiting corrupt payments to government officials and other third parties.
Privacy and Use Data Protection
Our business relies on the processing of data in multiple jurisdictions and the movement of data across national borders. Legal requirements relating to the collection, storage, handling, use, disclosure, transfer, and security of personal data continues to evolve, and regulatory scrutiny in this area is increasing around the world. Significant uncertainty exists as privacy and data protection laws may differ from country to country and may create inconsistent or conflicting requirements. Our ongoing efforts to comply with privacy, cybersecurity, and data protection laws may entail expenses, may divert resources from other initiatives and projects, and could limit the service we are able to offer. Enforcement actions and investigations by regulatory authorities related to data security incidents and privacy actions or investigations could damage our reputation and impact us through increased costs or restrictions on our business, and noncompliance could result in regulatory penalties and significant legal liability.
Banking
In general, financial institution regulators require their supervised institutions to cause their service providers to agree to certain terms and to agree to supervision and oversight by applicable financial regulators, primarily to protect the safety and soundness of the financial institution. We have agreed to such terms and provisions in many of our service agreements with financial institutions.
We and our customers are also generally subject to U.S. federal, Puerto Rico and other countries’ laws, rules and regulations that affect the electronic payments industry. Our customers are subjectindustry, including with respect to numerous laws, rules and regulations applicable to banks, financial institutions, processors and card issuers in the United States and abroad. We are subject to regulation because of our activities in the countries where we carry them outoperate and because ofdue to our relationship with Popular, and at times we are also affected by the laws, rules and regulations to which our customers are subject. Failure to comply with any of these laws, rules and regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of service, and/or the imposition of civil and criminal penalties, including fines which could have an adverse effect on our financial condition. In addition, even an inadvertent failure by us to comply with laws, rules and regulations, as well as rapidly evolving social expectations of corporate fairness, could damage our reputation or brands.Popular.
Regulation of the electronic payment card industry including regulations applicable to us and our customers, has increased significantly in recent years. There is also continued scrutiny by the U.S. Congress of the manner in which payment card networks and card issuers set various fees, from which some of our customers derive significant revenue. For example, on
July 21, 2010, the Dodd-Frank Act was signed into law in the United States. The Durbin Amendment contains requirements relating to payment card networks. To implement this provision, the Federal Reserve adopted rules which took effect on October 1, 2011 and April 1, 2012. These rules, among other things, place certain restrictions on the interchange transaction fees that a card issuer can receive for an electronic debit transaction originated at a merchant and also places various exclusivity prohibitions and routing requirements on such transactions. To date, the Durbin Amendment has had mixed implications for our business, but the overall net impact has been positive due to lower interchange costs improving the overall margins of the business. However, we cannot assure you that this trend will continue, and we believe that any future impact (positive or negative) resulting from the Durbin Amendment and subsequent developments is uncertain due to the competitive landscape in which we operate. Further, bankingfees. Banking regulators have been strengthening their examination guidelines with respect to relationships between banks and their third-party service providers, such as EVERTEC.us. Any such heightened supervision of our relationship with Popular could have an effect on our contractual relationship with Popular as well as on the standards applied in the evaluation of our services. See “Item 1. Business-Government Regulation and Payment Network Rules-Regulatory Reform and Other Legislative Initiatives.”
Further changesTo the extent that we are deemed to laws, rulesbe controlled by Popular pursuant to regulation and regulations,guidance under the Bank Holding Company Act of 1956 (the “BHC Act”), we will be subject to regulation, supervision, and examination by the U.S. Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The BHC Act defines “control” differently than GAAP, and “control” can be found based on a variety of facts and circumstances. New lines of business, other new activities
and acquisitions that we may wish to commence or interpretation or enforcement thereof, could have a negative financial effect on us. We have structuredundertake in the future, including the manner in which we conduct our business in accordance with existing tax laws and interpretations ofor may undertake such laws. Changes in tax lawsactivities or their interpretations could decrease the value of revenues we receive and the amount of our cash flow and have a material adverse impact on our business.
Our business concentration in Puerto Rico and our business with the government of Puerto Rico expose us to significant risks.
For the fiscal years ended December 31, 2017 and 2016, approximately 81% and 84%, respectively, of our total revenues were generated from our operations in Puerto Rico. In addition, some revenues that are generated from our operations outside Puerto Rico are dependent upon our operations in Puerto Rico. As a result, our financial condition and results of operations are highly dependent on the economic and political conditions in Puerto Rico, and could be significantly adversely impacted by adverse economic or political developments in Puerto Rico.
In 2017, the government of Puerto Rico was our second largest customer representing approximately 7% of our total revenues. Revenues from the government of Puerto Rico come from numerous agencies and public corporations. We believe the significant majority of the services we provide to the government of Puerto Rico are mission-critical or essential. Some of the government-sponsored initiatives we provide are indirectly funded in part by U.S. federal government programs. The government of Puerto Rico is currently experiencing a fiscal crisis (as described further in the following risk factor). A federal law adopted in June 2016 created an Oversight Board with broad budgetary and financial powers over Puerto Rico’s budget, laws, financial plans and regulation, and imposes an automatic temporary stay on all litigation against Puerto Rico and its instrumentalities to enforce or collect claims against the Puerto Rico government. If the Puerto Rico government defaults in payment, delays or withholds payment to us, we may have limited options for recourse andacquisitions, may not be able to recoverpermissible for us under the full amount onBHC Act, the receivables due to us. In addition,Federal Reserve Board's Regulation K or other applicable U.S. federal banking laws or may require the Puerto Rico government may elect not to renew contracts for our services, or the Oversight Board may decide not to approve the budget for them. While we believe that the government of Puerto Rico will continue to engage our services despite the challenging financial situation it is currently facing, a failureapproval of the government to do soFederal Reserve Board or the Oversight Board to approve the required budget could haveanother applicable U.S. federal banking regulator. Potential acquisitions may take longer, be more costly, or make us less attractive as a material adverse impact on our financial condition and results of operations.
In addition, Puerto Rico’s location in the Caribbean exposes the island to increased risk of hurricanes and other severe tropical weather conditions and natural disasters. In 2017, Puerto Rico was hit by two powerful hurricanes, Irma and Maria, causing catastrophic damage across the island and affecting our business. We cannot predict if similarly powerful hurricanes will become more commonplace. Similarly, we cannot be certain of the effect that potential future hurricanes may have on Puerto Rico or our business. Such hurricanes, tropical storms and other natural disasters could negatively affect, among other things, our ability to provide services, as well as our physical locations, property and equipment, and could have a material adverse effect on our financial condition and results of operations
The Government of Puerto Rico’s fiscal crisis continues. The expiration of the automatic stay on litigation to collect claims against the Government on May 1, 2017, the initiation of creditor litigation promptly thereafter and the Government’s filing for bankruptcy protection on May 3, 2017, are all expected to further slow the Puerto Rico economy, increase emigration from Puerto Rico, increase the risk of non-payment of Government obligations and negatively affect the economy and consumer spending, which could have a material adverse effect on our business and the trading price of our common stock.
The Commonwealth of Puerto Rico (the "Commonwealth") has been in economic recession since 2006. In August 2015, the Commonwealth defaulted for the first time on the Public Finance Corporation bonds. In April 2016, the Puerto Rico governor
signed a debt moratorium law that gave the governor emergency powers to deal with the fiscal crisis, including the ability to declare a moratorium on any debt payment. On June 30, 2016, the U.S. President signed into law the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). PROMESA establishes a fiscal oversight and management board (the “Oversight Board”) comprised of seven voting members appointed by the President. PROMESA also imposed an automatic stay on all litigation against Puerto Rico and its instrumentalities, as well as any other judicial or administrative actions or proceedings to enforce or collect claims against the Puerto Rico government.
On May 1, 2017, the automatic stay expired. Promptly after the expiration of the stay, creditors of the Puerto Rico government filed various lawsuits involving defaults on more than $70 billion of bonds issued by Puerto Rico, having failed to reach a negotiated settlement on such defaults with the Puerto Rico government during the period of the automatic stay. On May 3, 2017, the Oversight Board filed a voluntary petition of relief on behalf of the Commonwealth pursuant to Title III of PROMESA for the restructuring of the Commonwealth’s debt. Subsequently, the Oversight Board filed voluntary petitions of relief pursuant to Title III of PROMESA on behalf of certain public corporations and instrumentalities. Title III is an in-court debt restructuring proceeding similar to protections afforded debtors under Chapter 11 of the United States Code (the “Bankruptcy Code”); the Bankruptcy Code is not available to the Commonwealth or its instrumentalities.
The approximate aggregate amount of unfunded pension obligations of the Puerto Rico government and its instrumentalities plus the bonds in default, far exceed the approximately $20 billion of outstanding obligations involved when Detroit filed for bankruptcy protection in 2013, which was described as the largest municipal bankruptcy at that time. Moreover, there is no precedent for a Title III filing, and there may be uncertainties as to the processes to be followed.
While the Title III processes do not foreclose negotiations between creditors and the Puerto Rico government toward a consensual restructuring agreement, therebuyer. There can be no assurance that meaningful negotiationsany required regulatory approvals will occurbe obtained, or that any consensual agreementthey will be reachedobtained without regulatory conditions. Additional regulatory requirements may be imposed on our activities or by what date. Importantly, there also can be no assurance asacquisitions to the financial outcomeextent we are controlled by Popular and Popular is subject to any supervisory or timingenforcement action, even if the supervisory actions are unrelated to us or to our business. To the extent that we are deemed to be controlled by Popular for purposes of the completion ofBHC Act, we may conduct only activities authorized under the Title III processes. There also can be no assurance as to any favorable intervention by the U.S. Congress or the U.S. President.
In all events, the invocation of Title III is expected to potentially deepen Puerto Rico’s economic recession, and to further curtail the ability of the Commonwealth and its instrumentalities, subject to the oversight of the Oversight Board (collectively, the “Government”), to access capital markets to place new debt or roll future maturities. Additionally, potential Government actions such as further reductions in spending or the imposition of new taxes may further deepen the current economic crisis, lead to an increase in unemployment rates, and result in a continued decline in population and in the economy.
Consequently, such recent events could potentially adversely impact the trading price of our common stock, adversely impact our customer base, depress general consumer spending and delay the Government’s payments thus increasing our Government accounts receivables, and potentially impair the collectability of those accounts receivable, all of which, individually or in the aggregate, could potentially have a material adverse effect on our business, financial condition and results of operations. As of December 31, 2017, we had no direct exposure to the Government’s debt obligations and had net receivables of $11.8 million with the Commonwealth and certain public corporations.
Hurricanes Irma and Maria and their aftermaths could have a prolonged negative impact on the Puerto Rican and Caribbean economies and a material adverse effect on our business and results of operations
Hurricanes Irma and Maria and their aftermaths, including the widespread power outage in Puerto Rico, the damage to infrastructure and communications networks,BHC Act and the temporary cessation and slow pace of reestablishment of regular day-to-day commerce, have severely impacted the economies of Puerto Rico and the Caribbean. It is unknown how long it will take for the business communities, resident populations and the economies to recover. Puerto Rico’s current situation following Hurricane Maria could further accelerate the ongoing emigration trend of Puerto Rico residents to the United States. A prolonged delay in the repairs to the islands’ infrastructures, decline in business volume and any other economic declines due to Hurricanes Irma and Maria and their aftermaths may impact demand for our services and could have a material adverse effect on our business and results of operations.
There are risks associated with our presence in international markets, including political or economic instability.
Our financial performance may be significantly affected by general economic, political and social conditions in the emerging markets where we operate. Many countries in Latin America have suffered significant economic, political and social crises in the past, and these events may occur again in the future. Instability in Latin America has been caused by many different factors, including:
exposure to foreign exchange variation;
significant governmental influence over local economies;
substantial fluctuations in economic growth;
high levels of inflation;
exchange controls or restrictions on expatriation of earnings;
high domestic interest rates;
wage and price controls;
changes in governmental economic or tax policies;
imposition of trade barriers;
unexpected changes in regulation which may restrict the movement of funds or result in the deprivation of contract rights or the taking of property without fair compensation; and
overall political, social and economic instability.
Adverse economic, political and social conditions in the Latin America markets where we operate may create uncertainty regarding our operating environment, which could have a material adverse effect on our company.
Our business in countries outside the United States and transactions with foreign governments increase our compliance risks and exposes us to business risks.
Our operations outside the United States could expose us to trade and economic sanctions or other restrictions imposed by the United States or other local governments or organizations. The U.S. Departments of the Treasury and Justice (the “Agencies”), the SECFederal Reserve Board's Regulation K and other federal agencies and authorities haverelated regulations for a broad range of civil and criminal penalties theybank holding company or a financial holding company. These restrictions may seeklimit our ability to impose against corporations and individuals for violations of economic sanctions laws, the FCPA andacquire other federal statutes. Under economic sanctions laws, the Agencies may seek to impose modifications to business practices, including cessation of business activities involving sanctioned countries, and modifications to compliance programs, which may increase compliance costs. In addition, we are also subject to compliance with local government regulations. If any of the risks described above materialize, it could adversely impact our business, operating results and financial condition.businesses or enter into other strategic transactions.
These regulations also prohibit improper payments or offers of payments to foreign governments and their officials and political parties by the United States and other business entities for the purpose of obtaining or retaining business. We have operations and deal with government entities and financial institutions in countries known to experience corruption, particularly certain emerging countries in Latin America, and further international expansion may involve more of these countries. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees or consultants that could be in violation of various laws including the FCPA, even though these parties are not always subject to our control. Our existing safeguards and any future improvements may prove to be less than effective, and our employees or consultants may engage in conduct for which we may be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.Export
We are also subject to the Export Administration Regulations (“EAR”) administered by the U.S. Department of Commerce’s Bureau of Industry and Security, which regulates the export, re-export and re-transfer abroad of covered items made or originating in the United States as well as the transfer of covered U.S.-origin technology abroad. We have adopted an Export Management Compliance Policy, a comprehensive compliance program under which the goods and technologies that we export are identified and classified under the EAR to make sure they are being exported in compliance with the requirements of the EAR. However, thereThere can be no assurance that we have not violated the EAR in past transactions or that our new policies and procedures will prevent us from violating the EAR in every transaction in which we engage. Any such violations of the EAR could result in fines, penalties or other sanctions being imposed on us, which could negatively affect our business, operating results, and financial condition.
Moreover, someSome financial institutions refuse, even in the absence of a regulatory requirement, to provide services to companies operating in certain countries or engaging in certain practices because of concerns that the compliance efforts perceived to be necessary may outweigh the usefulness of the service relationship. Our operations outside the United States make it more likely that financial institutions may refuse to conduct business with us for this type of reason. Any such refusal could negatively affect our business, operating results, and financial condition.
We and our subsidiaries conduct business with financial institutions and/or card payment networks operating in countries whose nationals, including some of our customers’ customers, engage in transactions in countries that are the targets of U.S. economic sanctions and embargoes. If we are found to have failed to comply with applicable U.S. sanctions laws and
regulations in these instances, we and our subsidiaries could be exposed to fines, sanctions and other penalties or other governmental investigations.
We and our subsidiaries conduct business with financial institutions and/or card payment networks operating in countries whose nationals, including some of our customers’ customers, engage in transactions in countries that are the target of U.S. economic sanctions and embargoes, including Cuba. As a U.S.-based entity, we and our subsidiaries are obligated to comply with the economic sanctions regulations administered by OFAC. These regulations prohibit U.S.-based entities from entering into or facilitating unlicensed transactions with, for the benefit of, or in some cases involving the property and property interests of, persons, governments, or countries designated by the U.S. government under one or more sanctions regimes. Failure to comply with these sanctions and embargoes may result in material fines, sanctions or other penalties being imposed on us or other governmental investigations. In addition, variousVarious state and municipal governments, universities and other investors maintain prohibitions or restrictions on investments in companies that do business involving sanctioned countries or entities.
For these reasons, we have established risk-based policies and procedures designed to assist us and our personnel in complying with applicable U.S. laws and regulations. These policies and procedures include the use of software to screen transactions we process for evidence of sanctioned-country and persons involvement. Consistent with a risk-based approach and the difficulties of identifying all transactions of our customers’ customers that may involve a sanctioned country, there can be no assurance that our policies and procedures will prevent us from violating applicable U.S. laws and regulations in every transaction in which we engage, and such violations could adversely affect our reputation, business, financial condition and results of operations.
Because we process transactions on behalf of the aforementioned financial institutions through the aforementioned payment networks, we have processed a limited number of transactions potentially involving sanctioned countries and there can be no assurances that, in the future, we will not inadvertently process such transactions. Due to a variety of factors, including technical failures and limitations of our transaction screening process, conflicts between U.S. and local laws, political or other concerns in certain countries in which we and our subsidiaries operate, and/or failures in our ability to effectively to control employees operating in certain non-U.S. subsidiaries, we have not rejected every transaction originating from or otherwise involving sanctioned countries, or persons and there can be no assurances that, in the future, we will not inadvertently fail to reject such transactions.
EVERTEC Group voluntarily submitted two disclosuresAntitrust
Due to OFAC in 2010 (the "2010 Disclosures") regarding potential violationsour ownership of the Cuban Assets Control Regulations (“CACR”) by EVERTEC Group, its subsidiaryATH network and our merchant acquiring and payment services business in Costa Rica,Puerto Rico, we are involved in a significant percentage of the debit and a former subsidiary in Venezuela that involved processing Cuba-related credit and debit card transactions conducted in Puerto Rico each day. We have in the past been subject to regulatory investigations and shortcomings in sanctions screening processes. In addition, Popular filed a voluntary disclosure with OFAC in 2013 (the "2013 Disclosure") regarding potential violationsany future regulatory scrutiny of, the CACRor regulatory enforcement action in connection with, certain routed debit card transactions by Tranred that maycompliance with U.S. state and federal antitrust requirements could potentially have been representative of transactions that occurred prior to October 2010, when the entity was under the ownershipa material adverse effect on our reputation and control of EVERTEC.
To date, OFAC has not imposed any fines or penalties nor has the U.S. government taken other enforcement actions in connection with the 2010 Disclosures and 2013 Disclosure. EVERTEC Group and its subsidiaries have implemented a number of corrective actions in order to address the sanctions issues that were the subject of these disclosures and reduce the risk of future violations of the CACR and other U.S. sanctions. Should OFAC determine that certain activities identified in the voluntary self-disclosures described above constituted violations of the CACR, civil or criminal penalties could be assessed against EVERTEC Group and/or its subsidiary.
Popular agreed to specific indemnification obligations with respect to the 2010 Disclosures, the 2013 Disclosure and certain other matters, in each case, subject to the terms and conditions contained in the Merger Agreement and/or contained in the Venezuela Transition Services Agreement, dated September 29, 2010, as amended. However, we cannot assure you that we will be able to fully collect any claims made with respect to such indemnities or that Popular and/or Tranred will satisfy its indemnification obligations to us.
Our expansion and selective acquisition strategy exposes us to risks, including the risk that we may not be able to successfully integrate acquired businesses.
As part of our growth strategy, we evaluate opportunities for acquiring complementary businesses that may supplement our internal growth. However, there can be no assurance that we will be able to identify and purchase suitable operations. Furthermore, for as long as we are deemed a “subsidiary” of a bank holding company for purposes of the BHC Act, we may conduct only activities authorized under the BHC Act and the Federal Reserve Board’s Regulation K and other related regulations for a bank holding company or a financial holding company. These restrictions may limit our ability to acquire other businesses or enter into other strategic transactions. See “-For purposes of the BHC Act, for as long as we are deemed to
be controlled by Popular, we will be subject to supervision and examination by U.S. federal banking regulators, and our activities are limited to those permissible for Popular. Furthermore, as a technology service provider to regulated financial institutions, we are subject to additional regulatory oversight and examination. As a regulated institution, we may be required to obtain regulatory approval before engaging in certain new activities or businesses, whether organically or by acquisition.”
business. In addition, in connection with any acquisitions, in addition to other U.S. federal requirements, we must also comply with U.S. federal and other antitrust and/or competition law requirements. Further, the success
Puerto Rico's fiscal crisis could have a material adverse effect on our ability to integratebusiness and the acquired company, which may involve unforeseen difficulties and may require a disproportionate amounttrading price of our management’s attentioncommon stock.
For the years ended December 31, 2021 and 2020, approximately 80% and 82%, respectively, of our total revenues were generated from our operations in Puerto Rico. Some revenues that are generated from our operations outside Puerto Rico are dependent upon our operations in Puerto Rico. As a result, our financial condition and other resources. Althoughresults of operations are highly dependent on the economic and political conditions in Puerto Rico, and could be significantly impacted by adverse economic or political developments in Puerto Rico, including adverse effects on the trading price of our common stock, our customer base, general consumer spending and the timeliness of the Government's payments, thus increasing our Government accounts receivable, and potentially impairing the collectability of those accounts receivable. As of December 31, 2021, we conduct due diligence investigations priorhad net receivables of $14.1 million from the Government and certain public corporations.
A protracted government shutdown could negatively affect our financial condition
During any protracted federal government shutdown, the federal government may reduce or cut funding for certain welfare and disaster relief programs. Beneficiaries of certain federal programs, such as the Supplemental Nutrition Assistance Program (SNAP), obtain their benefits through electronic benefits transfer (EBT) accounts. A temporary or permanent reduction in federal welfare and relief programs could lead to each acquisition, there can be no assurance that we will discover all operational deficienciesa decrease in electronic benefit card volume. The effect of a protracted government shutdown now or material liabilities of an acquired business for which wein the future may be responsible as a successor owner or operator. The failure to successfully integrate these acquired businesses or to discover such liabilities couldmaterially and adversely affect our operating results.revenues, profitability, and cash flows.
Puerto Rico's economy, including its financial crisis and the effects of potential natural disasters, could have a prolonged negative impact on the countries in which we operate and a material adverse effect on our business and results of operations.
Puerto Rico's location in the Caribbean exposes the island to increased risk of hurricanes and other severe tropical weather conditions and natural disasters. Hurricanes and other natural disasters including earthquakes, and their potential aftermaths, such as widespread power outages in Puerto Rico, damage to infrastructure and communications networks, and the temporary cessation and slow pace of reestablishment of regular day-to-day commerce, may severely impact the economies of Puerto Rico and the Caribbean. Any such events could further accelerate the ongoing emigration trend of Puerto Rico residents to the United States. Any prolonged delay in the repairs to the island's infrastructures, decline in business volumes, insufficient federal recovery and rebuilding assistance and any other economic declines due to hurricanes and their aftermaths may impact demand for our services and could have a material adverse effect on our business and results of operations.
As a result of Puerto Rico's high cost of electricity and governmental financial crisis, businesses may be reluctant to establish or expand their operations in Puerto Rico and the Caribbean, or might consider closing operations currently in such locations. If companies in the financial services and related industries decide not to commence new operations or not to expand their existing operations in Puerto Rico, or consider closing operations in Puerto Rico, the demand for our services could be negatively affected.
We are exposed to risks associated with our presence in international markets, including political or economic instability.
Our financial performance and results of operations may be adversely affected by general economic, political, and social conditions and uncertainty in the emerging markets in which we operate. Many countries in Latin America have suffered significant economic, political, and social crises in the past, including most recently as a result of the ongoing COVID-19 pandemic and the related restrictions imposed to mitigate its impact, and these events may occur again in the future. Instability in Latin America has been caused by many different factors, including (i) exposure to foreign exchange variation, (ii) significant governmental influence over local economies; (iii) substantial fluctuations in economic growth; (iv) high inflation levels or domestic interest rates; (v) wage, price or exchange controls, or restrictions on expatriation of earnings; (vi) changes in governmental economic or tax policies or unexpected changes in regulation which may restrict the movement of funds or results in the deprivation of contract or property rights; (vii) imposition of trade barriers; (viii) terrorist attacks and other acts of violence or war; and (ix) overall political, social, and economic instability. Any of these events in the markets in which we operate could result in a material adverse impact on our business.
Failure to protect our intellectual property rights and defend ourselves from potential intellectual property infringement claims may diminish our competitive advantages or restrict us from delivering our services.services, which could result in a material and adverse impact on our business operations.
Our trademarks, proprietary software, and other intellectual property, including technology/software licenses, are important to our future success. For example, the ATH trademark and trade name is recognized in Latin America and the Caribbean. Therefore, such marks represent substantial intangible assets and are important to our business. Limitations or restrictions on our ability to use such marks or a diminution in the perceived quality associated therewith could have an adverse impact on the growth of our businesses. We also rely on proprietary software and
technology, including third party software that is used under licenses. It is possible that others will independently develop the same or similar software or technology, which would permit them to compete with us more efficiently. Furthermore, ifIf any of the third partythird-party software or technology licenses are terminated or otherwise determined to be unenforceable, then we would have to obtain a comparable license, which may involve increased license fees and other costs.
Despite our efforts to protect our proprietary or confidential business know-how and other intellectual property rights, unauthorizedUnauthorized parties may attempt to copy or misappropriate certain aspects of our services, infringe upon our rights, or to obtain and use information that we regard as proprietary. Policing such unauthorized use of our proprietary rights is often very difficult, and therefore, we are unable to guarantee that the steps we have taken will prevent misappropriation of our proprietary software/technology or that the agreements entered into for that purpose will be effective or enforceable in all instances. Misappropriation of our intellectual property or potential litigation concerning such matters could have a material adverse effect on our results of operations or financial condition. Our registrations and/or applications for trademarks, copyrights, and patents could be challenged, invalidated, or circumvented by others and may not be of sufficient scope or strength to provide us with maximum protection or meaningful advantage. If we are unable to maintain the proprietary nature of our software or technologies, we could lose competitive advantages and our businesses may be materially adversely affected. Furthermore, the laws of certain foreign countries in which we do business or contemplate doing business in the future may not protect intellectual property rights to the same extent as do the laws of the United States or Puerto Rico. Adverse determinations in judicial or administrative proceedings could prevent us from selling our services and products, or prevent us from preventing others from selling competing services, and may result in a material adverse effect on our business, financial condition and results of operations.
If our applications or services or third party applications upon which we rely are found to infringe the proprietary rights of others, we may be required to change our business practices and may also become subject to significant costs and monetary penalties.
As our IT applications and services develop, we are increasingly subject to potential claims for intellectual property infringement, for example, patent or copyright infringement. AnyManaging any such claims,challenges, even if lackingthey lack merit, could: (i) be expensive and time-consuming to defend; (ii) cause us to cease making, licensing, or using software or applications that incorporate the challenged intellectual property; (iii) require us to redesign our software or applications, if feasible; (iv) divert management’s attention and resources; and (v) require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies. Unfavorable resolutionThe laws of these claimscertain foreign countries in which we do business or contemplate doing business in the future may not protect intellectual property rights to the same extent as do the laws of the United States or Puerto Rico. Adverse determinations in judicial or administrative proceedings related to intellectual property or licenses could prevent us from selling our services and products or prevent us from preventing others from selling competing services, impose liability costs on us, or result in a non-favorable settlement, all of which could result in us being restricted from delivering the related service and products, liable for damages, or otherwise result in a settlement that could be material to us.
The ability to recruit, retain and develop qualified personnel is critical to our success and growth.
All of our businesses function at the intersection of rapidly changing technological, social, economic and regulatory developments that requires a wide ranging set of expertise and intellectual capital. For us to successfully compete and grow, we must retain, recruit and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our
intellectual capital needs. In addition, we must develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. Recruiting and retaining qualified personnel in Puerto Rico is particularly challenging, given the poor state of the Puerto Rican economy and the increased emigration of Puerto Ricans following Hurricanes Irma and Maria. Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. We cannot assure you that key personnel, including executive officers, will continue to be employed or that we will be able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on us.
Failure to comply with U.S. state and federal antitrust requirements, or the Puerto Rico Anti-Monopoly Act, and government investigations into our compliance, could adversely affect our business.
Due to our ownership of the ATH network and our merchant acquiring and payment services business in Puerto Rico, we are involved in a significant percentage of the debit and credit card transactions conducted in Puerto Rico each day. Regulatory scrutiny of, or regulatory enforcement action in connection with, compliance with U.S. state and federal antitrust requirements could potentially have a material adverse effect on our reputation and business.
In February 2016, the Department of Justice of the Commonwealth of Puerto Rico announced that it initiated a formal investigation into whether we had engaged in conduct that interferes with free competition with respect to the products and services we provide within the Commonwealth of Puerto Rico and which conduct could constitute a violation of the Puerto Rico Anti-Monopoly Act, Law 77 of June 25, 1964. In August 2016, we received official confirmation that the Puerto Rico Department of Justice had formally closed its investigation and concluded that we had not engaged in such conduct. However, there can be no assurance that another such investigation will not be initiated in the future. If there is another such investigation, an adverse finding could lead to restrictions on our business, or our being required to take action, that has a materially adverse effect on our financial condition and results of operations. Any such effect, or the perception by investors as to the likelihood of such an effect, could have a material adverse effect on our stock price.
The market for our electronic commerce services is evolving and may not continue to develop or grow rapidly enough for us to maintain and increase our profitability.
If the number of electronic commerce transactions does not continue to grow or if consumers or businesses do not continue to adopt our services, it could have a material adverse effect on the profitability of our business, financial condition and results of operations. We believe future growth in the electronic commerce market will be driven by the cost, ease-of-use, and quality of products and services offered to consumers and businesses. In order to consistently increase and maintain our profitability, consumers and businesses must continue to adopt our services.
Our subsidiary, EVERTEC Group, benefits from a preferential tax exemption grant from the Puerto Rico Government under the Tax Incentive Act No. 73 of 2008 that imposes certain commitments, conditions and representations on EVERTEC Group. If EVERTEC Group does not comply with the terms of theits preferential tax exemption grant, EVERTEC Groupit may be subject to reduction of the benefits of the grant, tax penalties, other payment obligations or full revocation of the grant, which could have a material adverse effect on our financial condition, results of operations and our stock price.
EVERTEC Group has a tax exemption grant under the Tax Incentive Act No. 73 of 2008 from the Government of Puerto Rico. Under this grant, EVERTEC Group will benefit from a preferential income tax rate of 4% on industrial development income, as well as from tax exemptions with respect to its municipal and property tax obligations for certain activities derived from its data processing operations in Puerto Rico. The grant has a term of 15 years effective as of January 1, 2012 with respect to income tax obligations and July 1, 2013 and January 1, 2013 with respect to municipal and property tax obligations, respectively.
The grant contains customary commitments, conditions, and representations that EVERTEC Group will beis required to comply with in order to maintain the grant. The more significant commitments include: (i) maintaining at least 750 employees in EVERTEC Group’s Puerto Rico data processing operations during 2012 and at least 700 employees for the remaining years of the grant, (ii) investing at least $200.0 million in building, machinery, equipment or computer programs to be used in Puerto Rico during the effective term of the grant (to be made over four year capital investment cycles in $50.0 million increments), (iii) an additional best efforts capital investments requirement of $75.0 million by December 31, 2026 (to be made over four year capital investment cycles in $20.0 million the first three increments and $15.0 million the last increment); and (iv) 80% of EVERTEC Group employees must be residents of Puerto Rico. Failure to meet the requirements could result, among other
things, in reductions in the benefits of the grant, tax penalties, other payment obligations or revocation of the grant in its entirety, which could have a material adverse effect on our financial condition and results of operations and our stock price.operations.
Risks Related to Our Securities, Corporate Structure Governance and Stock Exchange ListingGovernance
Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock
We may sell additional shares of common stock in subsequent public offerings or otherwise, including financing acquisitions. Our amended and restated certificate of incorporation authorizes us to issue 206,000,000 shares of common stock, of which 71,969,856 are outstanding as of December 31, 2021. All of these shares, other than the 11,654,803 shares held by Popular and the shares held by our officers and directors, are freely transferable without restriction or further registration under the Securities Act. We cannot predict the size of future issuances of our common stock or the effect, if any that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including any shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
We are a holding company and rely on dividends and other payments, advances, and transfers of funds from our subsidiaries to meet our obligations and pay any dividends.
We have no direct operations or significant assets other than the ownership of 100% of the membership interest of Holdings, which in turn has no significant assets other than ownership of 100% of the membership interest of EVERTEC Group. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments to generate the funds necessary to meet our financial obligations, and to pay any dividends with respect to our common stock. Legal and contractual restrictions in the seniorour existing secured credit facilities and other agreements which may govern future indebtedness of our subsidiaries, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. We are prohibited from paying any cash dividend on our common stock unless we satisfy certain conditions. The secured credit facilities also include limitations on the ability of our subsidiaries to pay dividends to us. The earnings from, or other available assets of, our subsidiaries may not be sufficient to pay dividends or make distributions or loans or enable us to pay any dividends on our common stock or other obligations.
Any declaration and payment of future dividends to holders of our common stock may be limited by restrictive covenants of our debt agreements, and will be at the sole discretion of our Board and will also depend on many factors.
Any declaration and payment of future dividends to holders of our common stock may be limited by restrictive covenants of our debt agreements, and will be at the sole discretion of our Board and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our Board deems relevant. The terms of our senior secured credit facilities may restrict our ability to pay cash dividends on our common stock. We are prohibited from paying any cash dividend on our common stock unless we satisfy certain conditions. The senior secured credit facilities also include limitations on the ability of our subsidiaries to pay dividends to us. Furthermore, we will be permitted under the terms of our debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. The agreements governing our current and future indebtedness may not permit us to pay dividends on our common stock.
The requirements of having a class of publicly traded equity securities may strain our resources and distract management.
Upon completion of our initial public offering in April 2013, we became subject to additional reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002, (the “Sarbanes-Oxley Act”), and the Dodd-Frank Act. The Dodd-Frank Act effects comprehensive changes to public company governance and disclosures in the United States and subjects us to additional federal regulation. Some of the regulation mandated under the Dodd-Frank Act has yet to be adopted or implemented. We cannot predict with any certainty the requirements of the regulations ultimately adopted or how such regulations will impact the cost of compliance for a company with publicly traded common stock. We are currently evaluating and monitoring developments with respect to the Dodd-Frank Act and other new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. These new rules and regulations may make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board, particularly to serve on our audit committee, and qualified executive officers.
We are required to maintain effective internal controls over financial reporting, which could place a strain on our resources, and our failure to do so could require a restatement of our financials and lead to a potential default under our credit facility or a delisting from NYSE.
The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. These requirements may place a strain on our systems and resources. Under Section 404 of the Sarbanes-Oxley Act, we are required to include a report of management on our internal control over financial reporting in this Annual
Report on Form 10-K for the year ended December 31, 2017. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight is required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. If we are unable to conclude that our disclosure controls and procedures and internal control over financial reporting are effective, or if our independent public accounting firm is unable to provide us with an unqualified report on our internal control over financial reporting in future years, investors may lose confidence in our financial reports and our stock price may decline. In addition, a material weakness in our internal controls over financial reporting could lead to the occurrence of material misstatements in our financial statements and we could be required to restate our financial results. Our failure to file timely and file materially complete and accurate financial information in our reports with the SEC could lead to a number of adverse consequences, including a loss of confidence by our investors, a default under our credit facility, or a violation of NYSE’s listing rules that could lead to our delisting. Any of these results could have a material adverse effect on our business and results of operations and on the trading price of our common stock.
The price of our common stock may fluctuate significantly and you could lose all or part of your investment.
Volatility in the market price of our common stock may prevent you from being able to sell your common stock at or above the price you paid for your common stock. The market price for our common stock could fluctuate significantly for various reasons, including:
our operating and financial performance and prospects;
changes in earnings estimates or recommendations by securities analysts who track our common stock or industry;
market perception of our success, or lack thereof, in pursuing our growth strategy;
market perception of the challenges of operating a company in Puerto Rico; and
sales of common stock by us, our stockholders, Popular or members of our management team.
In addition, the stock market has experienced significant price and volume fluctuations historically. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price.
Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.
We may sell additional shares of common stock in subsequent public offerings or otherwise, including financing acquisitions. Our amended and restated certificate of incorporation authorizes us to issue 206,000,000 shares of common stock, of which 72,394,043 are outstanding as of January 31, 2018. All of these shares, other than the 11,654,803 shares held by Popular and the shares held by our officers and directors, are freely transferable without restriction or further registration under the Securities Act.
In addition, we have filed a Form S-8 under the Securities Act covering 12,089,382 shares of our common stock reserved for issuance under our Carib Holdings, Inc. 2010 Equity Incentive Plan (or the 2010 Plan), and our EVERTEC, Inc. 2013 Equity Incentive plan (or the 2013 Plan) and certain options and restricted stock granted outside of these plans (which we refer to as the Equity Plans), but subject to the terms and conditions of the 2010 Plan. Accordingly, shares of our common stock registered under such registration statement may become available for sale in the open market upon grants under the Equity Incentive Plans, subject to vesting restrictions and Rule 144 limitations applicable to our affiliates.
We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including any shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
If securities analysts stop publishing research or reports about our company, or if they issue unfavorable commentary about us or our industry or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock will depend in part on the research and reports that third party securities analysts publish about our company and our industry. One or more analysts could downgrade our common stock or issue other negative commentary about our company or our industry. In addition, we may be unable or slow to attract research coverage.
Alternatively, if one or more of these analysts cease coverage of our company, we could lose visibility in the market. As a result of one or more of these factors, the trading price of our common stock could decline.
The interests of Popular may conflict with or differ from your interests as a stockholder.
Popular has the right to nominate two members of our Board and, therefore, may be able to influence our decisions. The interests of Popular could conflict with your interests as a holder of shares of our common stock. For example, the concentration of ownership held by Popular, the terms of the Stockholder Agreement and our organizational documents (including Popular’s quorum rights and consent rights over amendments to our bylaws) and Popular’s right to terminate certain of its agreements with us in certain situations upon a change of control of EVERTEC Group, could delay, defer or prevent certain significant corporate actions that you as a stockholder may otherwise view favorably, including a change of control of us (whether by merger, takeover or other business combination). See “Certain Relationships and Related Party Transactions” in EVERTEC'sour proxy statement for a description of the circumstances under which Popular may terminate certain of its agreements with us. A sale of a substantial number of shares of stock in the future by Popular could cause our stock price to decline.
Our organizational documents and Stockholder Agreement may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.
Provisions of our amended and restated certificate of incorporation, amended and restated bylaws and the Stockholder Agreement may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our Board and/or Popular. These provisions include:
•a voting agreement pursuant to which Popular agreed to vote its shares in favor of the Popular director nominees (which, constitute the right to appoint two of our nine directors), directors nominated by a committee of our Board in accordance with the Stockholder Agreement and the management director and to remove and replace any such directors in accordance with the terms of the Stockholder Agreement and applicable law and an agreement by us to take all actions within our control necessary and desirable to cause the election, removal and replacement of such directors in accordance with the Stockholder Agreement and applicable law;
•requiring that a quorum for the transaction of business at any meeting of the Board (other than a reconvened meeting with the same agenda as the originally adjourned meeting) consist of (1) a majority of the total number of directors then serving on the Board and (2) at least one director nominated by Popular, for so long as it owns, together with its affiliates, 5% or more of our outstanding common stock;
•prohibiting cumulative voting in the election of directors;
•authorizing the issuance of “blank check” preferred stock without any need for action by stockholders other than Popular (as further described below);
•prohibiting stockholders from acting by written consent unless the action is taken by unanimous written consent; and
•establishing advance notice requirements for nominations for election to our Board or for proposing matters that can be acted on by stockholders at stockholder meetings, which advance notice requirements are not applicable to any directors nominated in accordance with the terms of the Stockholder Agreement.
Our issuance of shares of preferred stock could delay or prevent a change in control of us. Our Board has authority to issue shares of preferred stock, subject to the approval of at least one director nominated by Popular for so long as it,Popular, together with its respective affiliates, owns at least 10% of our outstanding common stock. Our Board may issue preferred stock in one or more series, designate the number of shares constituting any series, and fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. The issuance of shares of our preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders, even where stockholders are offered a premium for their shares. In addition, Popular, under and subject to the Stockholder Agreement and our organizational documents, will retain significant influence over matters requiring board or stockholder approval, including the election of directors. See “Certain Relationships and Related Party Transactions-Related Party Transactions”. Together, our amended and restated certificate of incorporation, bylaws and Stockholder Agreement could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, theThe existence of the foregoing provisions, as well as the significant percentage of shares of our outstanding common stock owned by Popular and its individual right to nominate a specified number of directors in certain circumstances, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of us, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
Risks Related to Our Indebtedness
DespiteOur substantial leverage could adversely affect our highability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations with respect to our substantial indebtedness, level,and we and our subsidiaries still may be able to incur significant additional amounts of debt,indebtedness, which could further exacerbateincrease such risks.
We are highly leveraged. As of December 31, 2021, the risks associatedtotal principal amount of our indebtedness was approximately $467.5 million. Our high degree of leverage could have a significant impact on us, including (i) increasing our vulnerability to adverse economic, industry or competitive developments; (ii) requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, reducing our ability to use our cash flow for other purposes, including for our operations, capital expenditures and future business opportunities; (iii) exposing us to the risk of increased interest rates because our borrowings are predominantly at variable rates of interest; (iv) making it difficult for us to satisfy our indebtedness obligations generally, including complying with restrictive covenants and borrowing conditions, our substantial indebtedness.noncompliance with which could result in an event of default under the agreements setting forth the terms of other indebtedness; (v) restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; (vi) limiting our ability to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions and general corporate or other purposes; and (vii) limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage to competitors who may be less highly leveraged.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future, some of which may be secured. Although the agreement governing our senior secured credit facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial.
In addition to the $88.0$119.1 million which was available for borrowing under our revolving credit facility as of December 31, 2017,2021, the terms of the senior secured credit facilities enable us to increase the amount available under the term loan and/or revolving credit facilities if we are able to obtain loan commitments from banks and satisfy certain other conditions. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we face would increase.
If we are unable to comply with covenants in our debt instruments that limit our flexibility in operating our business or obligate us to take action such as deliver financial reports, we may default under our debt instruments and our indebtedness may become due.
The agreement governingsetting forth the seniorterms of the secured credit facilities contain, and any future indebtedness we incur may contain, various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability and our restricted subsidiaries’ ability to among other things:
(i) incur additional indebtedness or issue certain preferred shares;
(ii) pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
(iii) make certain investments;
(iv) sell certain assets;
create (v) grant liens;
(vi) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
(vii) enter into certain transactions with our affiliates; and
(viii) designate our subsidiaries as unrestricted subsidiaries.
As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, theThe covenants in the senior secured credit facilities require us to maintain a maximum seniortotal secured net leverage ratio and also limit our capital expenditures. In addition, we are required to comply with certain non-monetary covenants, including the timely delivery of financial statements that fairly present, in all material respects in accordance with GAAP, our financial condition and results of operations.
ratio. A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions and, in the case of our revolving credit facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under the senior secured credit facilities, the lenders could elect to declare all amounts outstanding under the senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as
collateral under the senior secured credit facilities. If the lenders under the senior secured credit facilities accelerate the repayment of borrowings, the proceeds from the sale or foreclosure upon such assets will first be used to repay debt under our senior secured credit facilities and we may not have sufficient assets to repay our unsecured indebtedness thereafter. As a result, our common stock could become worthless.
Discontinuation, reform or replacement of LIBOR and other benchmark rates, or uncertainty related to the potential for any of the foregoing, may adversely affect our business.
At December 31, 2021, we had $467.5 million of borrowings under our secured credit facilities bearing interest at Interbank Offered Rate (“LIBOR”) plus an applicable margin. In July 2017, the U.K. Financial Conduct Authority announced its intention to phase out LIBOR by the end of 2021. However, for U.S. dollar-denominated (“USD”) LIBOR, only one-week and two-month USD LIBOR have ceased to be published after 2021, and all remaining USD LIBOR tenors will continue being published until June 2023. It is not possible to predict the effect of any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR's phaseout. Any of these developments could cause LIBOR to perform differently than in the past or cease to exist. If a published U.S. dollar LIBOR rate is unavailable, the interest rates on our debt indexed to LIBOR will be determined using various alternative methods set forth in our existing secured credit facilities, any of which could result in interest obligations that are more than or that do not otherwise correlate over time with the payments that would have been made on this debt if U.S. dollar LIBOR were available in its current form. Any of these proposals or consequences could have a material adverse effect on our financing costs. We may choose in the future to pursue amendments to our secured credit facilities to provide for a comparable or successor rate, but we can give no assurance that we will be able to reach agreement with our lenders on any such amendments.
At December 31, 2021, we also had an interest rate swap agreement which is designed to protect us from changes in interest rates. If LIBOR becomes unavailable and market quotations for specified inter-bank lending are not available, it is unclear how payments under such agreement would be calculated, which could cause these agreements to no longer offer us the protection we expect.
Risks Related to the Popular Transaction
The Popular Transaction is contingent upon the satisfaction of a number of conditions, and the transaction may not be ableconsummated on the terms or timeline currently contemplated, or at all.
On February 24, 2022, we entered into an Asset Purchase Agreement with Popular, Inc. and Banco Popular, pursuant to generate sufficient cashwhich we will sell certain assets that are currently used to service allprovide services to Banco Popular under the MSA, and, in connection with the closing of our indebtednesswhich, we and may be forcedBanco Popular agreed to takeenter into certain other actionsagreements and to satisfy our obligations under our indebtedness, which may not be successful.amend and extend the duration of certain existing commercial agreements (collectively, the “Popular Transaction”).
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, whichThe consummation of the Popular Transaction is subject to prevailing economiccertain conditions, including (i) satisfaction of certain regulatory requirements, including under the Hart-Scott Rodino Antitrust Improvements Act and competitive conditionsthe Bank Holding Company Act, (ii) completion of certain actions required in order to operate the acquired assets under Banco Popular ownership (iii) the absence of any injunction or other order from a governmental authority that prevents the closing of the Popular Transaction, and (iv) subject to certain financial, businessexceptions, the accuracy of the representations and warranties of, and compliance with covenants by, the other party. There can be no assurances that such conditions will be satisfied.
The proposed transaction may result in disruptions to relationships with customers and other factors beyond our control. Webusiness partners or may not achieve the intended results and may increase the risk of a change of control of the Company.
If we complete the Popular Transaction, there can be no assurance that we will be able to maintain a levelrealize the intended benefits of cash flows from operating activitiesthe transaction. Specifically, the Popular Transaction could cause disruptions in our remaining businesses or otherwise limiting the ability to compete for or perform certain contracts or services. Any of the foregoing could adversely affect our remaining businesses, financial condition, results of operations and prospects.
Banco Popular has agreed that, following the closing of the Popular Transaction, it will seek to sell common stock in an amount sufficient to permit usreduce its shareholding below 5% and if it has not done so within 90 days, subject to pay the principal, premium, ifsatisfaction of certain requirements by the Company, then it will exchange any and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the conditionshares it holds above 4.5% for newly issued non-voting convertible preferred stock of the capital marketsCompany that will convert automatically into common stock upon a qualified transfer by Banco Popular to an unaffiliated third party.
The limited voting stake to be held by Banco Popular, as well as the corresponding reduction in Banco Popular’s right to nominate directors to the Company’s board of directors, may increase the likelihood of a change of control of the Company.
The actions required to implement the Popular Transaction will take significant management time and our financial condition at such time. Any refinancingattention
The Popular Transaction will require significant amounts of management’s time and resources, which will be in addition to and may divert management’s time and attention from the operation of our debt couldremaining businesses and the execution of our other strategic initiatives. Additionally, we will incur costs in connection with the Popular Transaction. These costs must be paid regardless of whether the Popular Transaction is consummated.
The Popular Transaction will result in an immediate reduction to our revenues and income and will not provide any cash at higher interest ratesclosing.
While the term of certain commercial agreements between the Company and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us
from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likelyPopular will be extended at closing, the Popular Transaction will result in a reduction of revenues to the Company from Banco Popular under the MSA (and related costs) that will primarily impact our Business Services segment. Because the consideration for the asset sale will be shares of common stock that are currently owned by Banco Popular, we will not receive a cash payment at closing.A reduction in the revenues and profitability of our Business Services segment may increase leverage ratios under our existing credit rating, whichagreement that could harmimpact our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.indebtedness levels in the future.
.
The risks referenced above are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal operations are conducted in Puerto Rico. Our principal executive offices are leased and located at Cupey Center Building, Road 176, Kilometer 1.3, San Juan, Puerto Rico 00926.
We own one property in Costa Rica, in the province of San Jose, which is used by our Costa Rican subsidiary for its payment services business. We also lease space in 1214 other locations across Latin America and the Caribbean, including our headquarters in San Juan, Puerto Rico and various data centers and office facilities to meet our sales and operating needs. We believe that our properties are in good operating condition and adequately serve our current business operations. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion.
Item 3. Legal Proceedings
We are defendants in various lawsuits or arbitration proceedings arising in the ordinary course of business. Management believes, based on the opinion of legal counsel and other factors, that the aggregated liabilities, if any, arising from such actions will not have a material adverse effect on the financial condition, results of operations and the cash flows of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock trades on the NYSE under the symbol “EVTC”"EVTC". The following table sets forth the high and low sales prices
Holders of our common stock as reported by the NYSE, for each full quarterly period within the two most recent fiscal years. Record
As of January 31, 2018, the approximate number of recordFebruary 18, 2022, there were 405 registered holders of our common stock was 247. The closing price as reported on the NYSEstock. Given that many of our shares of common stock are held in “street name” by brokers and other institutions on such date was $15.65 per share.behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
|
| | | | | | | | |
| | Price Range |
| | High | | Low |
2017 | | | | |
First Quarter | | $ | 18.15 |
| | $ | 15.55 |
|
Second Quarter | | 17.30 |
| | 14.85 |
|
Third Quarter | | 19.10 |
| | 14.95 |
|
Fourth Quarter | | 16.20 |
| | 13.00 |
|
2016 | | | | |
First Quarter | | 16.63 |
| | 11.27 |
|
Second Quarter | | 16.32 |
| | 12.98 |
|
Third Quarter | | 17.62 |
| | 15.13 |
|
Fourth Quarter | | 18.60 |
| | 14.15 |
|
Dividends
Historically, we have paid
The Company has a regular quarterly dividend on our common stock, subject to the declaration thereof by our Board each quarter. The following table provides a detailhistory of dividend information for 2017 and 2016:
|
| | | | | | |
Declaration Date | | Record Date | | Payment Date | | Dividend per share |
February 17, 2016 | | February 29, 2016 | | March 17, 2016 | | 0.10 |
May 11, 2016 | | May 23, 2016 | | June 10, 2016 | | 0.10 |
July 28, 2016 | | August 9, 2016 | | September 2, 2016 | | 0.10 |
October 27, 2016 | | November 14, 2016 | | December 2, 2016 | | 0.10 |
February 17, 2017 | | March 1, 2017 | | March 20, 2017 | | 0.10 |
April 27, 2017 | | May 8, 2017 | | June 9, 2017 | | 0.10 |
July 25, 2017 | | August 7, 2017 | | September 8, 2017 | | 0.10 |
On November 2, 2017, the Board voted to temporarily suspend the quarterly dividend on the Company's common stock due to the difficult operating environment in Puerto Rico in the aftermath of Hurricane Maria. The Board anticipates reviewing the dividend policy as conditions stabilize in Puerto Rico.paying cash dividends. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board and will depend on many factors, including our financial condition, earnings, available cash, business opportunities, legal requirements, restrictions in our debt agreements and other contracts, capital requirements, level of indebtedness and other factors that our Board deems relevant. The covenants of our senior secured credit facilities may limit our ability to pay dividends on our common stock and limit the ability of our subsidiaries to pay dividends to us if we do not meet required performance metrics contained in our debt agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Obligations.”
We are a holding company and have no direct operations. We will only be able to pay dividends from our available cash on hand and funds received from our subsidiaries, Holdings and EVERTEC Group, whose ability to make any payments to us will depend upon many factors, including their operating results and cash flows. In addition, the senior secured credit facilities limit EVERTEC Group’sInc.’s ability to pay distributions on its equity interests. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Obligations.”
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | | |
| | Total number of shares | | Average price paid | | Total number of shares purchased as part of a publicly | | Approximate dollar value of shares that may yet be purchased |
Period | | purchased | | per share | | announced program (1) | | under the program |
3/1/2017-3/31/2017 | | 228,289 |
| | $ | 16.480 |
| | 228,289 |
| | |
5/1/2017-5/31/2017 | | 77,257 |
| | 16.592 |
| | 77,257 |
| | |
6/1/2017-6/30/2017 | | 159,694 |
| | 16.423 |
| | 159,694 |
| | |
Total | | 465,240 |
| | $ | 16.479 |
| | 465,240 |
| | $ | 72,345,478 |
|
| |
(1) | On February 17, 2016, the Company announced that its Board of Directors approved an increase and extension to the current stock repurchase program, authorizing the purchase of up to $120 million of the Company’s common stock and extended the expiration to December 31, 2017. On November 2, 2017 the Company's Board of Directors approved an extension to the expiration date of the current stock repurchase program to December 31, 2020. |
Securities Authorized for Issuance under Equity Compensation Plans
On September 30, 2010, the board of directors of Holdings adopted the 2010 Plan. Holdings reserved 5,843,208 shares of its Class B Non-Voting Common Stock for issuance upon exercise and grants of stock options, restricted stock and other equity awards under the Plan. On April 17, 2012, in connection with the Reorganization, the Company assumed the 2010 Plan and all of the outstanding equity awards issued thereunder or subject thereto. As a result, each of the then outstanding stock options to purchase shares of Holdings’ Class B Non-Voting Common Stock became a stock option to purchase the same number and class of shares of the Company’s Class B Non-Voting Common Stock, in each case on the same terms (including exercise price) as the original stock option. In connection with our initial public offering in April 2013, all of the outstanding shares of the Company’s Class B Non-Voting Common Stock and stock options to purchase shares of the Company’s Class B Non-Voting Common Stock were converted into and deemed exercisable for, respectively, shares of our common stock on a one-to-one basis. Similarly, each of the then outstanding shares of restricted stock of Holdings was converted into the same number of shares of restricted stock of the Company.
In connection with our initial public offering, we adopted the 2013 Equity Incentive Plan (the “2013 Plan”) and reserved 5,956,882 shares of our Common Stock for issuance upon exercise and grants of stock options, restricted stock and other equity awards. We have filed a Form S-8 under the Securities Act covering 12,089,382such shares of our common stock reserved for issuance under the Equity Plans and certain options and restricted stock granted outside of the Equity Plans but subject to the terms and conditions of the 20102013 Plan.
The following table summarizes equity compensation plans approved by security holders and equity compensation plans that were not approved by security holders as of December 31, 2017:2021:
|
| | | | | | | | |
Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (A) | | Weighted-average exercise price of outstanding options, warrants and rights (B) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A)) (C) |
Equity compensation plans approved by security holders (1) | | 2,340,892 |
| | $15.08 | | 6,372,420 |
|
Equity compensation plans not approved by security holders | | N/A |
| | N/A | | N/A |
|
| | | | | | | | | | | | | | | | | | | | |
Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (A) | | Weighted average exercise price of outstanding options, warrants and rights (B) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A)) (C) |
Equity compensation plans approved by security holders (1) | | 1,086,329 | | | $0.00 | | 1,414,664 | |
Equity compensation plans not approved by security holders | | N/A | | N/A | | N/A |
| |
(1) | The Company's equity plans were approved by the two sole stockholder's prior to the Company's initial public offering, Apollo and Popular. |
(1)The Company's 2013 Plan was approved by the two sole stockholders prior to the Company's initial public offering, Popular and a fund managed by Apollo Global Management, LLC.
Stock Performance Graph
The following Performance Graph shall not be deemed incorporated by reference and shall not constitute soliciting material or otherwise considered filed under the Securities Act of 1933 or the Exchange Act.
The following graph shows a comparison from April 12, 2013 (the date our common stock commenced trading on the NYSE) through December 31, 2017 of the cumulative total return for our common stock, the S&P 500 Index and the S&P Technology Index.Index for the five years ended December 31, 2021. The graph assumes that $100 was invested on April 12, 2013December 31, 2016 in our common stock and each index and that all dividends were reinvested.
Note that historical stock price performance is not necessarily indicative of future stock price performance.
Comparison of fifty seven months
Five-year cumulative total return of EVERTEC Inc.
Item 6. Selected Financial DataReserved
The following table sets forth our selected historical consolidated financial data as of the dates and for the periods indicated. The selected consolidated financial data as of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 have been derived from the audited consolidated financial statements of EVERTEC, included in our Annual Reports on Form 10-K.
The results of operations for any period are not necessarily indicative of the results to be expected for any future period. The selected historical consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto appearing elsewhere in this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
(Dollar amounts in thousands, except per share data) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Statements of Income Data: | | | | | | | | | | |
Revenues | | $ | 407,144 |
| | $ | 389,507 |
| | $ | 373,528 |
| | $ | 361,788 |
| | $ | 358,402 |
|
Operating costs and expenses | | | | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization shown below | | 200,650 |
| | 175,809 |
| | 167,916 |
| | 157,537 |
| | 162,980 |
|
Selling, general and administrative expenses | | 56,161 |
| | 46,986 |
| | 37,278 |
| | 41,276 |
| | 38,810 |
|
Depreciation and amortization | | 64,250 |
| | 59,567 |
| | 64,974 |
| | 65,988 |
| | 70,366 |
|
Total operating costs and expenses | | 321,061 |
| | 282,362 |
| | 270,168 |
| | 264,801 |
| | 272,156 |
|
Income from operations | | 86,083 |
| | 107,145 |
| | 103,360 |
| | 96,987 |
| | 86,246 |
|
Interest income | | 716 |
| | 377 |
| | 495 |
| | 328 |
| | 236 |
|
Interest expense | | (29,861 | ) | | (24,617 | ) | | (24,266 | ) | | (25,772 | ) | | (37,417 | ) |
Earnings (losses) of equity method investment | | 604 |
| | (52 | ) | | 147 |
| | 1,140 |
| | 935 |
|
Other income (expenses), net | | 2,657 |
| | 544 |
| | 2,306 |
| | 2,375 |
| | (75,682 | ) |
Income (loss) before income taxes | | 60,199 |
| | 83,397 |
| | 82,042 |
| | 75,058 |
| | (25,682 | ) |
Income tax expense (benefit) | | 4,780 |
| | 8,271 |
| | (3,335 | ) | | 8,901 |
| | 1,435 |
|
Net income (loss) | | 55,419 |
| | 75,126 |
| | 85,377 |
| | 66,157 |
| | (27,117 | ) |
Less: Net income attributable to non-controlling interest | | 365 |
| | 90 |
| | — |
| | — |
| | — |
|
Net income (loss) attributable to EVERTEC, Inc.’s common stockholders | | $ | 55,054 |
| | $ | 75,036 |
| | $ | 85,377 |
| | $ | 66,157 |
| | $ | (27,117 | ) |
Net income (loss) per common share—basic | | $ | 0.76 |
| | $ | 1.01 |
| | $ | 1.11 |
| | $ | 0.84 |
| | $ | (0.34 | ) |
Net income (loss) per common share—diluted | | $ | 0.76 |
| | $ | 1.01 |
| | $ | 1.11 |
| | $ | 0.84 |
| | $ | (0.34 | ) |
Cash dividends declared per common share (1) | | $ | 0.30 |
| | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.20 |
|
| |
(1) | Adjusted to reflect the two for one stock split effective April 1, 2013. |
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Balance Sheet Data: | | | | | | | | | | |
Cash and cash equivalents | | $50,423 | | $51,920 | | $28,747 | | $32,114 | | $22,275 |
Total assets | | 902,788 |
| | 885,662 |
| | 863,654 |
| | 885,321 |
| | 918,863 |
|
Total long-term liabilities | | 607,596 |
| | 648,324 |
| | 662,939 |
| | 691,085 |
| | 705,872 |
|
Total debt | | 616,740 |
| | 650,759 |
| | 662,699 |
| | 681,240 |
| | 725,648 |
|
Total equity | | 147,976 |
| | 108,175 |
| | 98,214 |
| | 94,840 |
| | 87,972 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) covers: (i) thefocuses on discussion of our 2021 results as compared to our 2020 results. For discussion of operationsour 2020 results as compared to our 2019 results, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" within our Annual Report on Form 10-K for the yearsyear ended December 31, 2017, 2016 and 2015; and (ii)2020 filed with the financial condition as of December 31, 2017 and 2016.SEC on March 1, 2021. See Note 1 of the Notes to Audited Consolidated Financial Statements for additional information about the Company and the basis of presentation of our financial statements. You should read the following discussion and analysis in conjunction with the financial statements and related notes appearing elsewhere herein. This MD&A contains forward-looking statements that involve risks and uncertainties. Our actual results may differ from those indicated in the forward-looking statements. See “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with these statements.
Overview
EVERTEC is a leading full-service transaction processingtransaction-processing business in Puerto Rico, the Caribbean and Latin America, providing a broad range of merchant acquiring, payment services and business process management services. According to the August 2017 Nilson Report,We believe that we are one of the largest merchant acquirers in Latin America based on total number of transactions and we believe we are the largest merchant acquirer in the Caribbean and Central America.Caribbean. We serve 26 countries in the region fromout of 11 offices, including our baseheadquarters in Puerto Rico. We manage a system of electronic payment networks that process more than two billion transactions annually, and offer a comprehensive suite of services for core bank processing, cash processing and technology outsourcing. In addition, we own and operate the ATH network, which we believe is one of the leading personal identification number (“PIN”) debit networks in Latin America. We manage a system of electronic payment networks and offer a comprehensive suite of services for core banking, cash processing, and fulfillment in Puerto Rico, that process approximately three billion transactions annually. Additionally, we offer technology outsourcing in all the regions we serve. We serve a diversified customer base of leading financial institutions, merchants, corporations, and government agencies with “mission-critical” technology solutions that enable them to issue, process and accept transactions securely. We believe our business is well-positioned to continue to expand across the fast-growing Latin American region.
We are differentiated, in part, by our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe this single-source capability provides several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services, win new customers, develop new sales channels, and enter new markets. We believe these competitive advantages include:
•Our ability to provide competitive products;
•Our ability to provide in one package a range of services that traditionally had to be sourced from different vendors;
•Our ability to serve customers with disparate operations in several geographies with integrated technology solutions that enable them to manage their business as one enterprise; and
•Our ability to capture and analyze data across the transaction processingtransaction-processing value chain and use that data to provide value-added services that are differentiated from those offered by pure-play vendors that serve only one portion of the transaction processingtransaction-processing value chain (such as only merchant acquiring or payment services).
Our broad suite of services spans the entire transaction processing value chain and includes a range of front-end customer-facing solutions such as the electronic capture and authorization of transactions at the point-of-sale for both card present transactions and card not present transactions, as well as back-end support services such as the clearing and settlement of transactions and account reconciliation for card issuers. These include: (i) merchant acquiring services, which enable point of sales (“POS”) and e-commerce merchants to accept and process electronic methods of payment such as debit, credit, prepaid and electronic benefit transfer (“EBT”) cards; (ii) payment processing services, which enable financial institutions and other issuers to manage, support and facilitate the processing for credit, debit, prepaid, automated teller machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide “mission-critical” technology solutions such as core bank processing, as well as IT outsourcing and cash management services to financial institutions, corporations and governments. We provide these services through a highly scalable, end-to-end technology platformplatforms that we manage and operate in-house and that generates significant operating efficiencies that enable us to maximize profitability.
We sell and distribute our services primarily through a proprietary direct sales force with established customer relationships. We are also building a variety of indirect sales channels that enable us to leverage the distribution capabilities of partners in adjacent markets, including value-added resellers. We continue to pursue joint ventures and merchant acquiring alliances.
We benefit from an attractive business model, the hallmarks of which are recurring revenue, scalability, significant operating margins and lowmoderate capital expenditure requirements. Our revenue is predominantly recurring in nature because of the mission-critical and embedded nature of the services we provide. In addition, we generally negotiate multi-year contracts with our customers. OurWe believe our business model enablesshould enable us to continue to grow our business organically in the primary markets we serve without significant incremental capital expenditures.
Separation from and Key Relationship with Popular
Prior to the Merger onOn September 30, 2010, EVERTEC Group was 100% owned by Popular, the largest financial institution in the Caribbean, and operated substantially as an independent entity within Popular. After the consummation of the Merger, Popular retained an approximately 49% indirect ownership interest in EVERTEC Group and is our largest customer. In connection with, and upon consummation of, the Merger, EVERTEC Group entered into a 15-year Master Services Agreement,MSA, and several related agreements with Popular. Under the terms of the Master Services Agreement,MSA, Popular agreed to continue to use EVERTEC services on an ongoing exclusive basis for the duration of the agreement, on commercial terms consistent with those of our historical relationship.agreement. Additionally, Popular granted us a right of first refusal on the development of certain new financial technology products and services for the duration of the Master Services Agreement.MSA. As of December 31, 2017,2021, Popular retained a 16.1%16.2% interest in EVERTEC.EVERTEC and was our largest shareholder.
On February 24, 2022, we entered into an agreement with Popular to modify and extend the main commercial agreements which had an initial term ending in 2025.These include a 10-year extension of the Merchant Acquiring Independent Sales Organization Agreement (the “ISO Agreement”), a 5-year extension of the ATH Network Participation Agreement, and a 3-year extension of the Master Services Agreement (the “MSA”).The ISO Agreement will now include revenue sharing provisions with BPPR. The MSA modifications include the elimination of the exclusivity requirement, the inclusion of annual MSA minimums through 2028, and adjustments to the existing CPI pricing escalator clause.
2017
Additionally, the Company signed a definitive agreement to sell BPPR certain assets at a price of approximately $197 million (the “APA”). BPPR will pay the purchase price in Evertec stock. The management of infrastructure, information security and communications will continue to be supported by Evertec through its Managed Service Provider (MSP) business offering pursuant to the MSA.
Popular has agreed to take certain actions after closing to ensure that Evertec is no longer deemed a “subsidiary” of Popular for purposes of the Bank Holding Company Act, including selling shares over the subsequent three months in the open market or converting the shares into non-voting stock to reduce their voting interest to under 4.5%.
The transaction is expected to close during the second quarter of 2022 and is subject to customary closing conditions.
For 2021, we derived approximately 42% of our revenue from our relationship with Popular, which makes the MSA our most significant client contract. “Item 1A. Risk Factors—Risks Related to Our Business—Our services to Popular account for a significant portion of our revenues, and we expect that our services to Popular will continue to represent a significant portion of our revenues for the foreseeable future.”
2021 Developments
The Company’sCompany's Board of Directors approved regular quarterly dividends of $0.10$0.05 per common share in February, April, July and JulyOctober of 2017. On November 2, 2017, the Board voted to temporarily suspend the quarterly dividend on the Company's common stock due to the difficult operating environment in Puerto Rico.2021. The Board anticipates reviewing thedeclaring this dividend policy as conditions stabilize in Puerto Rico.
On July 3, 2017, EVERTEC’s main operating subsidiary, EVERTEC Group, and EVERTEC Panama, S.A. ("EVERTEC Panama") closedfuture quarters on the direct and indirect acquisitiona regular basis; however future declarations of 100% of the share capital of EFT Group S.A., a Chilean-based payment processing and software solutions company known commercially as “PayGroup”, by entering into a share purchase agreement (Contrato de Compraventa de Acciones), by and among EVERTEC Group, EVERTEC Panama, Fondo de Inversión Privado Mater, Inversiones San Bernardo SpA, Asesorías e Inversiones Supernova SpA, Inversiones y Asesorías Bayona Limitada, Inversiones Hagerdorn y Morales Limitada, Christian Hagedorn Hitschfeld and Inversiones Vaimaca Limitada. The PayGroup acquisition expands the Company's presence in Latin America to eight new countries and increases the Company's payment solutions offerings. During the third quarter of 2017 Evertec Panama ceased being a shareholder in PayGroup and Evertec Group became the 100% owner of PayGroup.
In September 2017, Puerto Rico and the Caribbean, two of our principal markets, were severely impacted by Hurricane Irma and Hurricane Maria.
On November 2, 2017 the Company's Board of Directors approved an extensiondividends are subject to the expiration date of the current stock repurchase program to December 31, 2020. In addition, on this same date the Board voted to temporarily suspend the quarterly dividend on the Company's common stock due to the difficult operating environment in Puerto Rico in the aftermath of Hurricane Maria. The Board anticipates reviewing the dividend policyBoard’s approval and may be adjusted as business needs or market conditions stabilize in Puerto Rico.change.
Factors and Trends Affecting the Results of Our Operations
The ongoing migration from cash and paper methods of payment to electronic payments continues to benefit the transaction- processing industry globally. We believe that the penetration of electronic payments in the markets in which we operate is significantly lower relative to the U.S. market, and that this ongoing shift will continue to generate substantial growth opportunities for our business. For example, currently the adoption of banking products, including electronic payments, in the Latin American and Caribbean region is lower relative to the mature U.S. and European markets. We believe that the unbanked and underbanked population in our markets will continue to shrink, and therefore drive incremental penetration and growth of electronic payments in Puerto Rico and other Latin American regions. We also benefit from the outsourcing of technology systems and processes trend for financial institutions and government agencies to outsource technology systems and processes.government. Many medium- and small-size institutions in the Latin American markets in which we operate have outdated computer systems and updating these IT legacy systems is financially and logistically challenging, which presents a business opportunity for us.
Finally, our financial condition and results of operations are, in part, dependent on the economic and general conditions of the geographies in which we operate.
On June 30, 2016, the U.S. President signed into law PROMESA. PROMESA establishes a fiscal oversight and the Oversight Board comprisedThe government of seven voting members appointed by the President. The Oversight Board has broad budgetary and financial powers over Puerto Rico’s budget, laws, financial plans and regulations, including the power to approve restructuring agreements with creditors, file petitions for restructuring and reform the electronic system for the tax collection. The Oversight Board will have ultimate authority in preparing the Puerto Rico government’s budget and any issuance of future debt by the government and its instrumentalities. In addition, PROMESA imposes an automatic stay on all litigation against Puerto Rico
and its instrumentalities, as well as any other judicial or administrative actions or proceedings to enforce or collect claims against the Puerto Rico government. On May 1, 2017, the automatic stay expired. Promptly after the expiration of the stay, creditors of the Puerto Rico government filed various lawsuits involving defaults on more than $70 billion of bonds issued by Puerto Rico, having failed to reachhas experienced a negotiated settlement on such defaults with the Puerto Rico government during the period of the automatic stay. On May 3, 2017, the Oversight Board filed a voluntary petition of relief on behalf of the Commonwealth pursuant to Title III of PROMESA for the restructuring of the Commonwealth’s debt. Subsequently, the Oversight Board filed voluntary petitions of relief pursuant to Title III of PROMESA on behalf certain public corporations and instrumentalities. Title III is an in-court debt restructuring proceeding similar to protections afforded debtors under Chapter 11 of the United States Code (the “Bankruptcy Code”); the Bankruptcy Code is not available to the Commonwealth or its instrumentalities.
As the solution to the Puerto Rican government’sprolonged debt crisis, remains unclear, we continuethe resolution of which has progressed but has yet to be fully resolved. Given this situation, the Company carefully monitormonitors our receivables with the government as well as monitor general economic trends to understand the impact the crisis has on the economy of Puerto Rico and our card payment volumes. To date
our receivables with the government of Puerto Rican governmentRico and overall payment transaction volumes have not been significantly affected by the debt crisis,crisis; however, we remain cautious.
In September 2017, Puerto RicoConsumer preference for digital payment solutions accelerated in connection with the COVID-19 pandemic and the Caribbean, two of our principal markets, were severely impacted by Hurricane Irma and Hurricane Maria. As a result of these hurricanes, the islands' economies have been adversely affected. The destruction brought on by these hurricanes affected infrastructure and telecommunication services, necessary elements for electronic transacting. Electronic transacting primarily affects our Merchant Acquiring segment and Payments Services segments, including our ATH network in Puerto Rico. While our ATH network remained operational continuously, the lack of power, water and telecommunications limited merchants' ability to either open for business or transact electronically and, as a result, our revenueCompany has decreased. Since the hurricanes, merchants have gradually reopened their businesses as power distribution has been restored, however it is unclear how many merchants will fail to repoen. Currently, our merchant mix reflects a greater percent of large merchants as compared to prior to the hurricanes. Consumer spending patterns have been erratic in the aftermath of the hurricanes. We earn less revenue per transactionbenefited from these merchants and this mix of merchants has negatively impacted our net revenue yield and margins. Businesses have gradually reopened and accepted payments and we have experienced an increase in transaction volumes from these types of payment solutions as a result. The acceleration of contactless and sales volume, approaching prior yearcard-not-present transactions has driven innovation and focus towards our digital channels such as, ATH Movil and ATH Business, where we have introduced new technologies for contactless payment such as QR codes. In Latin America we have expanded the reach of our payment gateway product by localizing into our other geographies to further capitalize on the acceleration of e-commerce and digital payments. In addition, during 2021, the Company benefited from the inflow of Federal Stimulus funds granted as a result of the pandemic, most of which represented direct payments to individuals, increasing disposable income and positively impacting transactional volumes but there is uncertainty as to when or whether or not volumes will sustain pre-hurricane levels of growth. Cash use has also risen significantly due to the lack of ability to accept electronic payments and merchant steering. Additionally, it has been reported that a large number of residents have left Puerto Rico for the United States and that more residents may leave in the continuing aftermath of the hurricanes.Company.
In addition to the macroeconomic trends described above, Management currently estimates that we will continue to experience a revenue attrition in Latin America of approximately $5 million to $8 million for previously disclosed migrations anticipated in 2018. The clients decisions, which were made prior to 2015, for these anticipated migrations were driven by a variety of historical factors, most importantly customer service experience. Management believes that these customer decisions are unlikely to change, however timing is subject to change based on customer's conversion schedules.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of certain assets and liabilities, and in some instances, the reported amounts of revenues and expenses during the period.
We base our assumptions, estimates, and judgments on historical experience, current events, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. However, because future events are inherently uncertain and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. A summary of significant accounting policies is included in Note 1 of the Notes to Audited Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. We believe that the following accounting estimates are the most critical; require the most difficult, subjective, or complex judgments; and thus, result in estimates that are inherently uncertain.
Revenue recognitionRecognition
The Company’s revenue recognition policy follows the guidance from Accounting Standards Codification (“ASC”("ASC') 605 606, Revenue Recognition; ASC 605-25, Revenue Recognition—Multiple Element Arrangements; and; ASC 985, Software,from Contracts with Customers, which provide guidance on the recognition, presentation, and disclosure of revenue in consolidated financial statements. Application of this policy requires us to make certain judgements and estimates.
Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, when another party is involved in providing goods or services to a customer, the Company evaluates, for each performance obligation, whether it is providing the goods or services itself (i.e., as principal), or if it is only arranging on behalf of the other party. Changes in judgement with respect to assumptions and estimates in revenue recognition could impact the amount of revenue recognized.
Valuation of Goodwill and Other Intangible Assets
The valuation of goodwill and intangible assets for impairment require the use of significant estimates and assumptions.
The Company recognizes revenue when the following four criteria are met: (i) persuasive evidence of an agreement exists, (ii) delivery and acceptance has occurred or services have been rendered, (iii) the selling price is fixed or determinable, and (iv) collection is reasonably assured. For multiple deliverable arrangements, EVERTEC evaluates each arrangement to determine if the elements or deliverables within the arrangement represent separate units of accounting pursuant to ASC 605-25. If the deliverables are determined to be separate units of accounting, revenues are recognized as units of accounting are delivered and the revenue recognition criteria are met. If the deliverables are not determined to be separate units of accounting, revenuesmay test for the delivered services are combined into one unit of accounting and recognized (i) over the life of the arrangement if all services are consistently delivered over such term, or if otherwise, (ii) at the time that all services and deliverables have been delivered. The selling price for each deliverable is based on vendor specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or management best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. EVERTEC establishes VSOE of selling pricegoodwill impairment using the price charged when the same element is sold separately. EVERTEC bifurcates or allocates the arrangement consideration to each of the deliverables based on the relative selling price of each unit of accounting.
The Company has two main categories of revenues according to the type of transactions EVERTEC enters into with the Company’s customers: (a) transaction-based fees and (b) fixed fees and time and material.
Transaction-based fees
The Company provides services that generate transaction-based fees. Typically transaction-based fees depend on factors such as number of accounts or transactions processed. These factors typically consist of a fee per transaction or item processed, a percentage of dollar volume processedqualitative or a fee per account on file, or some combination thereof. Revenue derived from the transaction-based fee contracts are recognized when the underlying transaction is processed, which constitutes delivery of service.
Revenues from business contracts in the Company’s Merchant Acquiring segment are primarily comprised of discount fees charged to the merchants based on the sales amount of transactions processed. Revenues includequantitative analysis. In a discount fee and membership fees charged to merchants and debit network fees as well as point-of-sale (“POS”) rental fees. Pursuant to the guidance from ASC 605-45-45, Revenue Recognition—Principal Agent Considerations, EVERTEC records Merchant Acquiring revenues net of interchange and assessments charged by the credit and debit card network associations and recognizes such revenues at the time of the sale (when a transaction is processed).
Payment services revenues are comprised of revenues related to providing access to the ATH network and other card networks to financial institutions, and related services. Payment services revenues also include revenues from card issuer processing services (such as credit and debit card processing, authorization and settlement, and fraud monitoring and control to debit or credit card issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions) and electronic benefit transfer (“EBT”) (which principally consists of services to the Puerto Rico government for the delivery of government benefits to participants). Revenues in EVERTEC’s Payment Services segments are primarily comprised of fees per transaction processed or per account on file, or a combination of both, and are recognized at the time transactions are processed or on a monthly basis for accounts on file.
Transaction-based fees within EVERTEC’s Business Solutions segment consist of revenues from business process management solutions including core bank processing, business process outsourcing, item and cash processing, and fulfillment. Transaction-based fee revenues generated by the Company’s core bank processing services are derived from fees based on various factors such as the number of accounts on file (e.g. savings or checking accounts, loans, etc.), and the number of transactions processed or registered users (e.g. for online banking services). For services dependent on the number of transactions processed, revenues are recognized as the underlying transactions are processed. For services dependent on the number of users or accounts on file, revenues are recognized on a monthly basis based on the number of accounts on file each month. Item and cash processing revenues are based upon the number of items (e.g. checks) processed and revenues are recognized when the underlying item is processed. Fulfillment services include technical and operational resources for producing and distributing variable print documents such as statements, bills, checks and benefits summaries. Fulfillment revenues are based upon the number pages for printing services and the number of envelopes processed for mailing services. Revenues are recognized as services are delivered based on a fee per page printed or envelope mailed, as applicable.
Fixed fees and time and material
The Company also provides services that generate a fixed fee per month or fees based on time and expenses incurred. These services are mostly provided in EVERTEC’s Business Solutions segment. Revenues are generated from EVERTEC’s core bank solutions, network hosting and management and IT consulting services.
In core bank solutions,qualitative analysis, the Company mostly provides access to applications and services such as back-up or recovery, hosting and maintenance that enable a bank to operate the related hosted services accessing the Company’s IT infrastructure. These contracts generally contain multiple elements or deliverables which are evaluated by EVERTEC and revenues are recognized according to the applicable guidance. Revenue is derived from fixed fees charged for the use of hosted services and are recognized on a monthly basis as delivered. Set-up fees are billed to the customer when the service is rendered; however, they are deferred and recognized as revenues over the term of the arrangement or the expected period of the customer relationship,whichever is longer, as set-up services rarely provide value to the customer on a stand-alone basis and are interrelated with the service to be provided under the contract.
In network hosting and management, EVERTEC provides hosting services for network infrastructure at EVERTEC’s facilities; automated monitoring services; maintenance of call centers; interactive voice response solutions, among other related services. Revenues are primarily derived from monthly fees as services are delivered. Set-up fees are billed up-front to the customer when the set-up service is rendered; however, they are deferred and recognized as revenues over the term of the arrangement or the expected period of the customer relationship, whichever is longer, as set-up services rarely provide value to the customer on a stand-alone basis and are interrelated with the service under the contract. There are some arrangements under this line of service category that may contain undelivered elements. In such cases, the undelivered elements are evaluated and recognized when the services are delivered or at the time that all deliverables under the contract have been delivered.
IT consulting services revenue primarily consists of time billings based upon the number of hours dedicated to each client. Revenue from time billings are recognized as services are delivered.
EVERTEC also charges members of the ATH network an annual membership fee; however, these fees are deferred and recognized as revenues on a straight-line basis over the year and recorded in the Company’s Payment Services segments. In addition, occasionally EVERTEC is a reseller of hardware and software products and revenues from these resale transactions are recognized when such product is delivered and accepted by the client.
Service level arrangements
The Company’s service contracts may include service level arrangements (“SLA”) generally allowing the customer to receive a credit for part of the service fee when the Company has not provided the agreed level of services. The SLA performance obligation is committed on a monthly basis, thus SLA performance is monitored and assessed for compliance with arrangements on a monthly basis, including determination and accounting for its economic impact, if any.
Goodwill and other intangible assets
Goodwill represents the excess of the purchase price and related costs over the value assigned to net assets acquired. Goodwill is not amortized, but is tested for impairment at least annually, or more often if events or circumstances indicate there may be impairment.
The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). The Company may assess qualitative factors to determine whether it is more"more likely than not, that is, a likelihood of more than 50 percentnot" that the fair value of thea reporting unit is less than its carrying amount,amount. In the quantitative analysis, the Company compares the estimated fair value of the reporting units to their carrying values, including goodwill. The Company hasestimated fair value of the reporting units is computed using a combination of an unconditional option to bypassincome approach and a market approach. The income approach involves projecting the qualitative assessment for anycash flows that the reporting unit is expected to generate and converting these cash flows into a present value equivalent through discounting. Significant estimates and assumptions used in any periodthe cash flow projection include, among others, earnings before interest, taxes, depreciation and proceed directly to performing the quantitative goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. With the early adoption in December 2017 of the accounting standards update that simplifies the goodwill impairment test, the quantitative goodwill impairment test, used to identify both the existence of impairmentamortization ("EBITDA") margins, and the amountselection of impairment loss, comparesdiscount rates. Internal projections are based on the fairCompany’s historical experience and estimated future business performance. The discount rate used is based on the weighted-average cost of capital, which reflects the rate of return expected to be earned by market participants and the estimated cost to obtain long-term debt financing. The market approach estimates the value of a reporting unit with its carrying amount, including goodwill. Ifby using multiples of revenue and EBITDA based on the Company determinesguidelines of publicly traded companies. Valuation using the market approach requires management to perform a quantitative impairment test, a third-party valuator may be engagedmake assumptions related to prepare an independent valuation of each reporting unit. IfEBITDA multiples. Comparable businesses are selected based on the fair value of a reporting unit exceeds its carrying amount, goodwill ofmarket in which the reporting unit is considered not impaired. If the carrying amountunits operate, considering size, profitability and growth.
Other identifiable intangible assets with a definitive useful lives are amortized using the straight-line method or accelerated methods. These intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable.
Other identifiable intangible assets with a definitive useful lives include customer relationships, trademarks, software packages In this assessment, we consider relevant events and a non-compete agreement. Customer relationships were valued using the excess earnings method under the income approach. Trademark assets were valued using the relief-from-royalty method under the income approach. Internally developed software packages, which include capitalized software development costs, are recorded at cost, while software packages acquired as part of a business combination were valued using the relief-from-royalty method under the income approach. The non-compete agreement was valued based on the estimated impact that theoretical competition would have on revenues and expenses.
Share-based compensation
The Company estimates the fair value of stock-based awards, on a contemporaneous basis, at the date they are granted using the Black-Scholes-Merton option pricing model for Tranche A options and the Monte Carlo simulation analysis for Tranche B and Tranche C optionsconditions, including, but not limited to macroeconomic trends, industry and market based restricted stock units (“RSUs”) using the following assumptions: (1) stock price; (2) risk-free rate; (3) expected volatility; (4) expected annual dividend yieldconditions, overall financial performance, regulatory and (5) expected term. The risk-free rate is based on the U.S. Constant Maturities Treasury Interest Rate as of the grant date or the yield of a 2-year or 3-year Treasury bond, as applicable. The expected volatility is based on a combination of historical volatilitylegal factors, and implied volatility from publicly traded companies in the Company’s industry. The expected annual dividend yield is based on management’s expectations of future dividends as of the grant date and, in certain cases, assumes that those dividends will be reinvested over the performance period. The expected term for stock options granted under the 2010 Plan was based on the vesting time of the options. For the stock options granted under the 2013 Plan, the simplified method was used to estimate the expected term, given that the Company did not have appropriate exercise data on which to base the estimate nor is exercise data relating to employees of comparable companies easily obtainable. Performance and time based RSUs and restricted stock are valued based on the market price of the Company’s stock at the grant date.company-specific events.
Upon option exercise or restricted stock or RSUs release, participants may elect to “net share settle”. Rather than requiring the participant to deliver cash to satisfy the exercise price, for options exercise, and tax withholdings, the Company withholds a sufficient number of shares to cover these amounts and delivers the net shares to the participant.
Income Tax
Income taxes are accounted for under the asset and liability method. A temporary difference refers to a difference between the tax basis of an asset or liability, determined based on recognition and measurement requirements for tax positions, and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Deferred tax assets and liabilities represent the future effects on income taxes that result from temporary differences and carryforwards that exist at the end of a period. Deferred tax assets and liabilities are measured using enacted tax rates and provisions of the enacted tax law and are not discounted to reflect the time-value of money. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income and comprehensive income in the period that includes the enactment date. A deferred tax valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax asset will not be realized.
The Company recognizes the benefit of uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement or disposition of the underlying issue with the taxing authority. Accordingly, the amount of benefit recognized in the consolidated financial statements may differ from the amount taken or expected to be taken in the tax return resulting in unrecognized tax benefits (“UTBs”). The Company recognizes the interest and penalties associated with UTBs as part of the provision for income taxes on its consolidated statements of income and comprehensive income. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheets.
All companies within EVERTEC are legal entities which file separate income tax returns.
Recent Accounting Pronouncements
For a description of recent accounting standards, see Note 2 of the Notes to Audited Consolidated Financial Statements included in this Annual Report on Form 10-K.
Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, as presented in this Annual Report on Form 10-K, are supplemental measures of our performance that are not required by or presented in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to total revenues, net income or any other performance measures derived in accordance with GAAP or as alternatives to cash flows from operating activities as measures of our liquidity. Adjusted EBITDA at the segment level is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in conformity with Accounting Standards CodificationASC 280, Segment Reporting, and is excluded from the definition of non-GAAP financial measures under the Securities and Exchange Commission's Regulation G and Item 10(e) of Regulation S-K.
For more information regarding EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, including a quantitative reconciliation of EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share to the most directly comparable GAAP financial performance measure, which is net income, see “—Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share” and “—Covenant Compliance” below.
Results of Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, | | | | | | | | |
(In thousands) | 2021 | | 2020 | | | | Variance | | |
| | | | | | | | | | | | | |
Revenues | $ | 589,796 | | | $ | 510,588 | | | | | $ | 79,208 | | | 16 | % | | | | |
Operating costs and expenses | | | | | | | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization shown below | 250,164 | | | 226,870 | | | | | 23,294 | | | 10 | % | | | | |
Selling, general and administrative expenses | 68,048 | | | 70,808 | | | | | (2,760) | | | (4) | % | | | | |
Depreciation and amortization | 75,070 | | | 71,518 | | | | | 3,552 | | | 5 | % | | | | |
Total operating costs and expenses | 393,282 | | | 369,196 | | | | | 24,086 | | | 7 | % | | | | |
Income from operations | $ | 196,514 | | | $ | 141,392 | | | | | $ | 55,122 | | | 39 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | | | | | |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 | | Variance 2017 vs. 2016 | | Variance 2016 vs. 2015 |
| | | | | | | | | | | | | |
Revenues | $ | 407,144 |
| | $ | 389,507 |
| | $ | 373,528 |
| | $ | 17,637 |
| | 5 | % | | $ | 15,979 |
| | 4 | % |
Operating costs and expenses | | | | | | | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization shown below | 200,650 |
| | 175,809 |
| | 167,916 |
| | 24,841 |
| | 14 | % | | 7,893 |
| | 5 | % |
Selling, general and administrative expenses | 56,161 |
| | 46,986 |
| | 37,278 |
| | 9,175 |
| | 20 | % | | 9,708 |
| | 26 | % |
Depreciation and amortization | 64,250 |
| | 59,567 |
| | 64,974 |
| | 4,683 |
| | 8 | % | | (5,407 | ) | | (8 | )% |
Total operating costs and expenses | 321,061 |
| | 282,362 |
| | 270,168 |
| | 38,699 |
| | 14 | % | | 12,194 |
| | 5 | % |
Income from operations | $ | 86,083 |
| | $ | 107,145 |
| | $ | 103,360 |
| | $ | (21,062 | ) | | (20 | )% | | $ | 3,785 |
| | 4 | % |
Revenues
Total revenues in 20172021 increased by $17.6$79.2 million or 5%16% to $589.8 million when compared withto the prior year. Revenue increased across all of the Company's segments. The increase in revenuesPuerto Rico was primarily driven by increases in ATH debit network transaction volumes and card processing volumes,transactional revenue generated from the PayGroup acquisition, increased revenue from our Accuprint acquisition in the fourth quarter of 2016 and an increase in core banking revenue. Revenues in 2017 were negativelygrowth which was positively impacted by the two hurricanes that made landfall in Puerto Ricoinflow of federal funds and the Caribbean in Septembercontinuous adoption of 2017. We estimate the hurricanes reduced revenues by approximately $13 to $14 million.
Revenues in 2016 increased by $16.0 million or 4% when compared with 2015. The increase in revenue in 2016 was driven byCompany's digital solutions, mainly ATH Movil and ATH Business and the additionexpansion of the relationship with FirstBank of Puerto Rico (“FirstBank”("FirstBank") merchant portfolio. Latin America revenue growth was mainly driven by new business and projects that went into production during 2021, such as Santander in Chile and Mercado Libre in Mexico, as well as organic growth from existing clients and the fourth quarterexpansion of 2015, an increasethe payment gateway Place to Pay. Prior year results were also negatively impacted by COVID-19 stay-at-home orders in transactions processed overall of the ATH debit network and revenue related toregions in which the Processa acquisition and an increase in revenue from core banking activities related to an increase in volume and new services provided. These increases were partially offset by a decrease in revenues due to a delayed project amounting to approximately $4.5 million and lower revenues from the Puerto Rico government lottery tax contract terminated in the fourth quarter of 2015.Company operates
Cost of revenues
Cost of revenues in 20172021 increased $24.8by $23.3 million or 14%10% when compared with theto prior year. The increase in cost of revenue is primarily related to $12.8 million in charges taken in connection with an exit activity for a third party software solution that is
no longer commercially viable and a $5.0 million impairment loss related to a software asset under development. The remaining increase was primarily attributable to the PayGroup acquisition.
Cost of revenues in 2016 increased 5% to $175.8 million when compared with 2015 and was primarily driven by a $4.9 millionan increase in expenses for revenue sharing referral agreements with certain banks in Puerto Rico andpersonnel costs, increases in equipment expenses,technology services, higher professional feesservices, and other operating taxes. These increases were partially offset by a $4.5 million decreasean increase in compensation expense as the prior year period included severance payments as partcosts of voluntary termination offers extended to certain employees which included special termination benefits.sales.
Selling, general and administrative
Selling, general and administrative expenses in 2017 increased $9.22021 decreased by $2.8 million or 4% when compared with 2016.to prior year. The increasedecrease is primarilyalmost entirely related to a decrease in professional services as prior year includes higher expenses related to corporate initiatives, partially offset by an increase in share based compensation, expenses related to the PayGroup acquisition and an increase in payroll and other taxes in our Latin America operations.personnel costs.
Selling, general and administrative expenses increased by $9.7 million in 2016 compared with 2015 primarily driven by a $4.5 million increase in salaries and benefits including higher share based compensation, coupled with a $3.0 million increase in professional fees mostly due to costs incurred in connection with the restatement of our 2015 financial results during 2016.
Depreciation and amortization
Depreciation and amortization expense increased by $4.7$3.6 million in 20172021 compared to 2016prior year. Increased expense during the year is driven by software amortization due to key projects that have gone into production, as well as increased capital expenditures.
Non-operating income (expenses) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, | | | | | | | | |
(In thousands) | 2021 | | 2020 | | | | Variance | | |
| | | | | | | | | | | | | |
Interest income | $ | 1,889 | | | 1,502 | | | | | $ | 387 | | | 26 | % | | | | |
Interest expense | (22,810) | | | (25,074) | | | | | 2,264 | | | (9) | % | | | | |
Earnings of equity method investment | 1,713 | | | 1,136 | | | | | 577 | | | 51 | % | | | | |
Other income (expenses) | 4,399 | | | 4,897 | | | | | (498) | | | (10) | % | | | | |
Total non-operating expenses | $ | (14,809) | | | $ | (17,539) | | | | | $ | 2,730 | | | (16) | % | | | | |
Non-operating expenses in 2021 decreased by $2.7 million or 16% to $14.8 million when compared to prior year. The decrease is mainly related to a $2.3 million decrease in interest expense, resulting from the scheduled amortization of debt and a reduction in interest rates.
Income tax expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, | | | | | | | | |
(In thousands) | 2021 | | 2020 | | | | Variance | | |
Income tax expense | $ | 20,562 | | | $ | 19,002 | | | | | $ | 1,560 | | | 8 | % | | | | |
Income tax expense in 2021 amounted to $20.6 million, an increase in amortization expense relatedof $1.6 million when compared to intangible assets acquired as part of business combinations completedprior year. The effective tax rate for the period was 11.3%, compared with 15.3% in the prior and current year.
Depreciation and amortization expense decreased by $5.4 million or 8% in 2016 compared with 2015. The decrease resultedin the effective tax rate primarily reflects the impact from lower amortizationthe reversal of software packages related to software acquired as part of the Merger that became fully amortized during the third quarter of 2015.
Non-operating income (expenses)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | | | | | |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 | | Variance 2017 vs. 2016 | | Variance 2016 vs. 2015 |
| | | | | | | | | | | | | |
Interest income | $ | 716 |
| | $ | 377 |
| | $ | 495 |
| | $ | 339 |
| | 90 | % | | $ | (118 | ) | | (24 | )% |
Interest expense | (29,861 | ) | | (24,617 | ) | | (24,266 | ) | | (5,244 | ) | | 21 | % | | (351 | ) | | 1 | % |
Earnings (losses) of equity method investment | 604 |
| | (52 | ) | | 147 |
| | 656 |
| | (1,262 | )% | | (199 | ) | | (135 | )% |
Other income, net | 2,657 |
| | 544 |
| | 2,306 |
| | 2,113 |
| | 388 | % | | (1,762 | ) | | (76 | )% |
Total non-operating expenses | $ | (25,884 | ) | | $ | (23,748 | ) | | $ | (21,318 | ) | | (2,136 | ) | | 9 | % | | (2,430 | ) | | 11 | % |
Total non-operating expenses in 2017 increased $2.1 million or 9% when compared to 2016 . Interest expense increased by $5.2 million primarilya liability for uncertain tax positions as a result of the Third Amendment (defined below) completed in the fourth quarterexpiration of 2016 coupled with an increased LIBOR and increased interest expense from the commencement of the fixed interest rate swap. This increase was partially offset by an increase in foreign exchange gains and an increase in earnings from our equity method investment.
Total non-operating expenses in 2016 increased $2.4 million when compared with the prior year. The increase is driven by the $1.5 million loss on extinguishment recorded as part of the debt refinancing transaction completed in the fourth quarter of 2016, which is included in Other income, net, coupled with a $0.4 million increase in interest expense and a $0.2 million decrease in earnings from our equity method investment in the Dominican Republic, Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”).
Income tax expense (benefit)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | | | | | |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 | | Variance 2017 vs. 2016 | | Variance 2016 vs. 2015 |
Income tax expense (benefit) | $ | 4,780 |
| | $ | 8,271 |
| | $ | (3,335 | ) | | (3,491 | ) | | (42 | )% | | 11,606 |
| | (348 | )% |
Income tax expense in 2017 decreased by $3.5 million to $4.8 million. The effective tax rate in 2017 was approximately 8%. The decrease in income tax expense was mainly due to the reversal of a tax liability related to an uncertain tax position for which the statute of limitations expired duringlimitation in 2021, while the third quarter of 2017.
Income tax expense for the year ended December 31, 2016 amounted to approximately $8.3 million compared with an income tax benefit of $3.3 million in 2015. The effective tax rate in 2016 was approximately 10%. The prior year tax benefit reflectswas impacted by the reversal of tax liability related to an uncertain tax position for which the statute of limitations expired during the third quarter of 2015.revenue mix towards higher taxed businesses.
Segment Results of Operations
In December of 2017, as a result of the PayGroup acquisition, the Chief Operating Decision Maker ("CODM") completed an evaluation of the current Company structure and the information regularly reviewed for purposes of allocating resources and assessing performance. As a result of this evaluation, Management concluded that the operating segments are determined by the products and services the Company provides and the geographic regions in which theThe Company operates resulting in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America (collectively "Payment Services segments"), Merchant Acquiring, and Business Solutions.
The Payment Services - Puerto Rico & Caribbean segment revenues are comprised of revenues related to providing access to the ATH debit network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POSpoint of sale ("POS") transactions, and ATM management and monitoring.monitoring, ATH Movil and ATH Business. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses, and financial institutions) and electronic benefit transfer (“EBT”)EBT (which principally consist of services to the government of Puerto Rico for the delivery of benefits to participants).For. For ATH debit network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed and other processing services. For EBT services, revenues are primarily derived from the number of beneficiaries on file.
The Payment Services - Latin America segment revenues consist of revenues related to providing access to the ATH debit network of ATMs and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POS transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses, and financial institutions), as well as licensed software solutions for risk and fraud management and card payment processing. For ATH debit network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed, and other processing services.
The Merchant Acquiring segment consists of revenues from services that allow merchants to accept electronic methods of payment. In the Merchant Acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees, fees from payment and collection platforms, and rental fees from POS devices and other equipment, net of credit card interchange and assessment fees charged by credit cards associations (such as VISA or MasterCard) or payment networks. The discount fee is generally a percentage of the transaction value. EVERTEC also charges merchants for other services that are unrelated to the number of transactions or the transaction value.
The Business Solutions segment consists of revenues from a full suite of business process management solutions in various product areas such as core bank processing, network hosting and management, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived
in part from a recurrent fixed fee, and from fees based on the number of accounts on file (i.e., savings or checking accounts, loans, etc.), or computer resources utilized. Revenues from other processing services within the Business Solutions segment are generally volume-based and depend on factors such as the number of accounts processed. In addition, EVERTEC is a reseller of hardware and software products and these resale transactions are generally one-time transactions.non-recurring.
In addition to the four operating segments described above, Managementmanagement identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These unitsareas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these unitsareas are aggregated and presented as “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and otherOther category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:
marketing,
•marketing,
•corporate finance and accounting,
•human resources,
•legal,
•risk management functions,
•internal audit,
•corporate debt related costs,
•non-operating depreciation and amortization expenses generated as a result of the Merger,merger and acquisition activity,
•intersegment revenues and expenses, and
•other non-recurring fees and expenses that are not considered when management evaluates financial performance at a segment levellevel.
The CODMChief Operating Decision Maker ("CODM") reviews the operating segments separate financial information to assess performance and to allocate resources. Management evaluates the operating results of each of its operating segments based upon revenues and Adjusted EBITDA.Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"). Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with Accounting Standards Codification TopicASC 280, "Segment Reporting"Segment Reporting, given that it is reported to the CODM for purposes of allocating resources. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by revenues and adjusted EBITDA performance.EBITDA. As such, segment assets are not disclosed in the notes to the accompanying consolidated financial statements.
See Note 24 of the Audited Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K for the reconciliation of EBITDA to consolidated net income.
The following tables set forth information about the Company’s operations by its four business segments for the periods indicated below.
Payment Services - Puerto Rico & Caribbean | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | |
Revenues | $155,392 | | $124,771 | | |
Adjusted EBITDA | 89,939 | | 66,947 | | |
Adjusted EBITDA margin | 57.9 | % | | 53.7 | % | | |
|
| | | | | |
| Year ended December 31, |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 |
Revenues | $101,687 | | $99,680 | | $99,311 |
Adjusted EBITDA | 58,534 | | 63,086 | | 62,297 |
Payment Services - Puerto Rico & Caribbean segment revenues in 2017 increased $2.02021 grew by $30.6 million to $155.4 million when compared with 2016. Revenue growth reflected increasesto prior year. The increase was driven by higher transactional revenue when compared to the prior year which was impacted by a decline in ATH debit network transaction volumes due to the impact of COVID-19, while the current year is benefiting from incremental federal stimulus and cardincreased consumer demand. Revenue during the year has also benefited from an incremental $6.3 million recognized from ATH Movil and ATH Business, as well as an increase in transaction processing volumes.and monitoring revenue recognized for services provided to the Payment Services - Latin America Segment. Adjusted EBITDA decreased $4.6increased by $23.0 million mainly a result of the impairment charge taken related to a software asset under development and reduced revenues related$89.9 million primarily due to the hurricanes.increase in revenue, partially offset by higher operating expenses driven by higher equipment expenses.
Payment Services - Latin America | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | |
Revenues | $105,963 | | $84,641 | | |
Adjusted EBITDA | 42,502 | | 32,778 | | |
Adjusted EBITDA margin | 40.1 | % | | 38.7 | % | | |
Payment Services - Latin America segment revenues increased by $21.3 million when compared to prior year mainly due to revenues generated from new client implementations that went into production in early 2021, organic growth from existing clients, cross selling with existing clients and the continued expansion of Place to Pay our e-commerce gateway into new geographies. Adjusted EBITDA increased $9.7 million when compared to prior year primarily due to the increase in revenues, partially offset by an increase in expenses coming from the Payment Services - Puerto Rico & Caribbean revenues remained relatively flat in 2016 when comparedsegment to support the prior year. Revenues in 2016 were impacted by an increase in transactions processed over the ATH debit network, partially offset by the shift in revenue for a customer contract change from payment services to merchant acquiringnew client implementations in the fourth quarter of 2015, a decrease in revenues due to a delayed project amounting to approximately $4.5 million and lower revenues from the government lottery tax contract terminated in the fourth quarter of 2015. Adjusted EBITDA was impacted by the same factors described for revenues.region.
Payment Services - Latin America
|
| | | | | |
| Year ended December 31, |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 |
Revenues | $62,702 | | $47,162 | | $37,523 |
Adjusted EBITDA | 17,558 | | 15,354 | | 11,800 |
Payment Services - Latin America 2017 revenues increased $15.5 million driven mainly by added revenues from the PayGroup acquisition. Adjusted EBITDA increased $2.2 million mainly driven by increased transaction growth as well as contribution from our PayGroup acquisition at a lower margin, both of which were partially offset by customer attrition.
Payment Services - Latin America revenues in 2016 increased by $9.6 million driven primarily by revenue from the Processa acquisition, and transaction and terminal rental growth while Adjusted EBITDA increased approximately $3.5 million reflecting operating leverage on incremental revenues and the Processa contribution.
Merchant Acquiring | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | |
Revenues | $143,965 | | $109,788 | | |
Adjusted EBITDA | 73,872 | | 55,106 | | |
Adjusted EBITDA margin | 51.3 | % | | 50.2 | % | | |
|
| | | | | |
| Year ended December 31, |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 |
Revenues | $85,778 | | $91,248 | | $85,411 |
Adjusted EBITDA | 37,497 | | 41,629 | | 45,447 |
Merchant acquiring segment revenue increased $34.2 million to $144.0 million in 2017 decreased $5.5 million. Merchant2021 primarily driven by an increase in transactional revenue due to higher sales volume, as the Company continues to benefit from the impact of COVID-19 related federal stimulus, and revenue were negatively impacted by Hurricanes Irma and Maria in September 2017. The decrease was also impactedgenerated from the expanded relationship with FirstBank. Adjusted EBITDA increased $18.8 million driven by the shiftincrease in revenues, partially offset by an increase in operating expenses driven by the increased transaction volume.
Business Solutions | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | |
Revenues | $243,807 | | $234,965 | | |
Adjusted EBITDA | 116,488 | | 114,802 | | |
Adjusted EBITDA margin | 47.8 | % | | 48.9 | % | | |
Business Solutions segment revenues increased $8.8 million to a client contract change in the second quarter of 2016. Adjusted EBITDA decreased by $4.1$243.8 million mainly due to the factors above described for revenues coupled with a less favorable merchant mix and a lower average ticket, both of which reduced margins.
Merchant acquiring segment revenue in 2016 amounted to $91.2 million, an increase when compared to the prior year, driven by the addition of the FirstBank merchant portfolioyear. Revenue growth in the fourth quartersegment was a result of 2015. Merchant acquiring segment Adjusted EBITDA decreased from $45.4 million to $41.6 million in 2016 primarily due to revenues at a lower margin from our FirstBank merchant portfolio, reduced margin contribution due to increased transactions at a lower ticket price and merchant mix shifts that reduced net revenue.
Business Solutions
|
| | | | | |
| Year ended December 31, |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 |
Revenues | $189,077 | | $184,276 | | $179,532 |
Adjusted EBITDA | 86,790 | | 89,239 | | 83,192 |
Business solutions revenue in 2017 increased to $189.1 million primarily reflecting increased revenue from our Accuprint printing business acquisition and an increase in core banking revenue.revenues and an increase in IT consulting services revenue, as we continue to benefit from the shift towards digital services and several one-time hardware and software sales amounting to $3.0 million, partially offset by revenue recognized in the prior year for a one-time contract with the Puerto Rico Department of Education that amounted to $4.4 million. Adjusted EBITDA decreasedincreased $1.7 million to $86.8$116.5 million mainlycompared to prior year as a result of higher internal charges related to higher support and maintenance hours for Business Solution applications, primarily for Banco Popular coupled with higher expenses related to infrastructure supporting the Business Solutions segment as we replaced obsolete assets.
Business solutions revenue in 2016 increased to $184.3 million. The increase is primarily drivenrevenues, partially offset by revenues from core banking activities related to an increase in volume and new services provided. In addition, revenues grew modestly in network services, business process outsourcing and IT Consulting. This growth was partially offset by a decrease in revenue from cash and item processing services. Adjusted EBITDA increased primarily driven by the same factors explained for the increase in revenues.costs of sales.
Liquidity and Capital Resources
Liquidity
Our principal source of liquidity is cash generated from operations, and our primary liquidity requirements are the funding of working capital needs, capital expenditures, and working capital needs.acquisitions. We also have a $100.0$125.0 million revolving credit facility,Revolving Facility, of which $88.0$119.1 million was available for borrowing as of December 31, 2017.2021. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.
AtAs of December 31, 2017,2021, we had cash and cash equivalents of $50.4$266.4 million, of which $30.0$96.3 million resides in our subsidiaries located outside of Puerto Rico for purposes of (i) funding the respective subsidiary’s current business operations and (ii) funding potential future investment outside of Puerto Rico. During the second quarterWe intend to indefinitely reinvest these funds outside of 2017, the Company repatriated capital and earnings from foreign subsidiaries in order to partially fund the acquisition of PayGroup. This acquisition expands our Latin American operations and increases the Company's foreign operations. This transaction resulted in a one-time tax on dividends from foreign operations of approximately $1.3 million. This repatriation of earnings and capital is considered a one-time transaction specifically for the acquisition,Puerto Rico, and based on our liquidity forecast, we dowill not believe we will need to repatriate this cash to fund the Puerto Rico operations or to meet debt-service obligations. However, if in the future we determine that we no longer need to maintain cash balances within our foreign subsidiaries, we may elect to distribute such cash to the Company in Puerto Rico. Distributions from the foreign subsidiaries to Puerto Rico may be subject to tax withholding and other tax consequences. Additionally, our credit agreement imposes certain restrictions on the distribution of dividends from subsidiaries.
Our primary use of cash is for operating expenses, working capital requirements, capital expenditures, acquisitions, dividend payments, share repurchases, debt service, acquisitions and other transactions as opportunities present themselves.
Based on our current level of operations, we believe our cash flows from operations and the available senior secured Revolving Credit Facility will be adequate to meet our liquidity needs for the next twelve months. However, our ability to fund future operating expenses, dividend payments, capital expenditures, mergers and acquisitions, and our ability to make scheduled payments of interest, to pay principal on or refinance our indebtedness and to satisfy any other of our present or future debt obligations will depend on our future operating performance, which willmay be affected by general economic, financial, and other factors beyond our control.control, including the impact of the ongoing COVID-19 pandemic.
Comparison of the years ended December 31, 20172021 and 20162020
The following table presents our cash flows from operations for the years ended December 31, 20172021 and 2016: 2020: | | | | | | | | | | | | | | |
| | Years ended December 31, |
(In thousands) | | 2021 | | 2020 |
Cash provided by operating activities | | $ | 228,420 | | | $ | 199,089 | |
Cash used in investing activities | | (83,820) | | | (48,634) | |
Cash used in financing activities | | (81,285) | | | (62,617) | |
Effect of foreign exchange rate on cash, cash equivalents and restricted cash | | 1,497 | | | 2,146 | |
Increase in cash, cash equivalents and restricted cash | | $ | 64,812 | | | $ | 89,984 | |
|
| | | | | | | | |
| | Years ended December 31, |
(Dollar amounts in thousands) | | 2017 | | 2016 |
Cash provided by operating activities | | $ | 145,786 |
| | $ | 168,054 |
|
Cash used in investing activities | | (78,100 | ) | | (54,083 | ) |
Cash used in financing activities | | (69,183 | ) | | (90,798 | ) |
(Decrease) increase in cash | | $ | (1,497 | ) | | $ | 23,173 |
|
Net cash provided by operating activities for the year ended December 31, 20172021 was $145.8$228.4 million, a decreasean increase of $22.3$29.3 million compared with 2016.to 2020. The increase was primarily driven by the increase in net income and a decrease in cash provided by operating activities was primarily driven by a decrease in net income.used for prepaid software maintenance contracts.
Net cash used in investing activities increased by $24.0$35.2 million to $78.1$83.8 million. The increase was mainlyis primarily attributable to the completionacquisition of a $14.8 million customer relationship, an increase in additions to software of $10.2 million, an increase in additions to property, plant, and equipment of $8.0 million and the purchase of PayGroup$3.0 million in available-for-sale debt securities during the third quarter of 2017.period.
Net cash used in financing activities for the year ended December 31, 2017 amounted2021 was $81.3 million, compared to $69.2$62.6 million a decrease of $21.6 million when compared with thein prior year. The decrease$18.7 million increase is driven by less cash used for stock repurchases and dividend payments.
Comparison of the years ended December 31, 2016 and 2015
The following table presents our cash flows from operations for the years ended December 31, 2016 and 2015:
|
| | | | | | | | |
| | Years ended December 31, |
(Dollar amounts in thousands) | | 2016 | | 2015 |
Cash provided by operating activities | | $ | 168,054 |
| | $ | 162,419 |
|
Cash used in investing activities | | (54,083 | ) | | (53,068 | ) |
Cash used in financing activities | | (90,798 | ) | | (112,718 | ) |
Increase (decrease) in cash | | $ | 23,173 |
| | $ | (3,367 | ) |
Net cash provided by operating activities for the year ended December 31, 2016 was $168.1mainly attributable to a $17.1 million an increase of $5.6 million compared with 2015. The increase was driven by lessin cash used to pay accounts payable and accrued liabilities and an increase in unearned income.repurchase common stock.
Net cash used in investing activities amounted to $54.1 million, primarily driven by additions to software amounting to $23.8 million, acquisitions of property and equipment of $18.5 million and the completion of the Processa and the Accuprint purchase transactions for $15.6 million in cash.
Net cash used in financing activities for the year ended December 31, 2016 amounted to $90.8 million, a decrease of $21.9 million when compared with the prior year. The decrease is driven by less cash used in the repurchase of common stock, coupled with an increase in cash provided by short-term borrowings partially offset by cash paid during the year for amendments made to the Company’s debt agreement, credit amendment fees of $3.6 million and debt issue costs of $4.8 million.
Capital Resources
Our principal capital expenditures are for hardware and computer software (purchased and internally developed), additions to property and equipment in the form of hardware and technology infrastructure, and acquisitions. We invested approximately $33.5$66.9 million, $42.3$48.6 million, and $47.0$59.9 million, on capital expenditures for hardware and computer software and property and equipment for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively. In terms of acquisitions, in 2017,Generally, we completed the purchase of PayGroup for $42.8 million, while in the 2016, we completed the purchase of Processa for $5.9 million and Accuprint for $9.7 million. Capitalfund capital expenditures are expected to be funded bywith cash flow generated from operations and, if necessary, borrowings under our Revolving Facility.
Dividend Payments
Historically, we have paidThe Company pays a regular quarterly dividend on our common stock, subject to the declaration thereof by our Board each quarter. On November 2, 2017, the Board voted to temporarily suspend the quarterly dividend on the Company's common stock due to the difficult operating environment in Puerto Rico in the aftermath of Hurricane Maria. The Board anticipates reviewing the dividend policy as conditions stabilize in Puerto Rico. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board and will depend on many factors, including our financial condition, earnings, available cash, business opportunities, legal requirements, restrictions in our debt agreements and other contracts, capital requirements, level of indebtedness and other factors that our
Board deems relevant. Refer to the table below for details regarding our dividends in 20172021 and 2016:
2020: |
| | | | | | | | | | | | | | | | | | | |
Declaration Date | | Record Date | | Payment Date | | Dividend per share |
February 17, 201620, 2020 | | February 29, 2016March 4, 2020 | | March 17, 2016April 3, 2020 | | 0.10 | $0.05 |
April 21, 2020 | | May 11, 20164, 2020 | | May 23, 2016June 5, 2020 | | June 10, 2016 | | 0.10 | 0.05 |
July 28, 201624, 2020 | | August 9, 20163, 2020 | | September 2, 20164, 2020 | | 0.10 | 0.05 |
October 27, 201620, 2020 | | November 14, 20162, 2020 | | December 2, 20164, 2020 | | 0.10 | 0.05 |
February 17, 201718, 2021 | | March 1, 20172021 | | March 20, 201726, 2021 | | 0.10 | 0.05 |
April 27, 201722, 2021 | | May 8, 20173, 2021 | | June 9, 20174, 2021 | | 0.10 | 0.05 |
July 25, 201722, 2021 | | August 7, 20172, 2021 | | September 8, 20173, 2021 | | 0.100.05 |
October 21, 2021 |
| November 1, 2021 | | December 3, 2021 | | 0.05 |
Stock Repurchase
During 2017,2021, the Company repurchased 465,240614,288 shares of the Company’s common stock at a cost of $7.7$24.4 million. The Company funded such repurchase with cash on hand and borrowings under the existing revolving credit facility.
During 2016,hand. On February 24, 2022, the Company repurchased 2,504,427 shares ofannounced an increase to the Company’s common stock at a cost of $39.9 million. The Company funded suchshare repurchase with cashauthorization to an aggregate $150 million expiring on hand and borrowings underDecember 31, 2023. Prior to this increase, the existing revolving credit facility.share repurchase program had approximately $76 million remaining.
During 2015, the Company repurchased 3,012,826 shares of the Company’s common stock at a cost of $54.9 million. The Company funded such repurchase with cash on hand and borrowings under the existing revolving credit facility.
Repurchases may be accomplished through open market transactions, privately negotiated transactions, accelerated share repurchase programs and other means.
Financial Obligations
Senior Secured Credit Facilities
On April 17, 2013,November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement (the “2013 Credit Agreement”) governingproviding for the senior secured credit facilities, consisting of a $300.0$220.0 million term loan A facility (the “Termthat matures on November 27, 2023 ("2023 Term A Loan”Loan"), a $400.0$325.0 million term loan B facility (the “Termthat matures on November 27, 2024 ("2024 Term B Loan”, together with the Term A Loan, the “Senior Secured term loans”Loan") and a $100.0$125.0 million
revolving credit facility (the "Revolving Facility").
During 2016, that matures on November 27, 2023, with a syndicate of lenders and Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent, swingline lender and line of credit issuer (collectively the Company entered into two separate amendments to the 2013“2018 Credit Agreement. In the second quarter of 2016, EVERTEC Group, together with certain other directAgreement”). The material terms and indirect subsidiariesconditions of the Company, entered into a second amendment and waiver to the outstanding Credit Agreement (the “Second Amendment”). secured credit facilities are summarized below.
Scheduled Amortization Payments
The Company paid each lender that consented to the amendment a fee equal to 0.50% of the aggregate principal amount of outstanding term loans and revolving commitments held by such lender. The credit amendment fees paid during the second quarter of 2016 amounted to $3.6 million. In the fourth quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiaries of the Company, entered into a third amendment (the “Third Amendment”) to the 2013 Credit Agreement. The Third Amendment extends the maturity of (a) approximately $219 million of EVERTEC Group’s existing approximately $250 million of Term A loan facility to January 17, 2020 (the “2020 Term A loan”) and (b) $65 million of EVERTEC Group’s existing $100 million of revolving credit facility to January 17, 2020. The remaining approximately $30 million of Term A loan (the “2018 Term A loan”) and the $35 million of revolving credit facility that were not extended will remain in place and mature as originally scheduled on April 17, 2018. The Term B loan facility will remain in place and mature as originally scheduled on April 17, 2020.
Under the terms of the Third Amendment, the 20182023 Term A Loan amortizes on a basisprovides for amortization in the amount of 1.875%1.25% of the original principal amount beginning inof the third quarter of 2016 and2023 Term A Loan during each of the next threefirst twelve quarters starting from the quarter ending March 31, 2019, 1.875% during each of the four subsequent quarters and 2.50% of the original principal amount during each of the final three quarters, with the balance payable on the final maturity date.
The 20202024 Term AB Loan amortizes on a basis of 1.50%provides for quarterly amortization payments totaling 1.00% per annum of the original principal amount beginning in the fourth quarter of 2016 and during each of the next five quarters, 1.875% of the original principal amount during each of the four subsequent quarters, and 2.50% of the original principal amount during each of the final three quarters,2024 Term B Loan, with the balance payable on the final maturity date. Principal payments
Voluntary Prepayments and Reduction and Termination of Commitments
The 2018 Credit Agreement allows EVERTEC Group to prepay loans and permanently reduce the loan commitments under the secured credit facilities at any time, subject to the payment of customary LIBOR breakage costs, if any, provided that, in connection with certain refinancing or repricing of the 2024 Term B on or prior to the date which is six months after the closing date of the 2018 Credit Agreement, a prepayment premium of 1.00% will be required.
Additionally, the 2018 Credit Agreement requires mandatory repayment of outstanding principal balances based on a percentage of excess cash flow provided that no such prepayment shall be due if the resulting amount of the excess cash flows multiplied by the applicable percentage is less than $10 million. On March 8, 2021 and March 5, 2020, in connection with this mandatory repayment clause, the Company repaid $17.8 million and $17.0 million, respectively, as a result of the excess cash flow calculation performed for the Term B Loan were not changed by the Third Amendmentyears ended December 31, 2020 and continues to require payments on the last business day of each quarter equal to 0.250% of the original principal amount and the remaining outstanding principal amount on the maturity of the Term B Loan.2019, respectively.
Interest
The applicable margininterest rates under the 2013 Credit Agreement is2023 Term A Loan and revolving credit facility are based on, at EVERTEC Group’s option, (a) adjusted LIBOR plus an interest margin of 2.25% or (b) the greater of (i) with respect to any 2018Bank of America’s “prime rate,” (ii) the Federal Funds Effective Rate plus 0.5% and (iii) adjusted LIBOR plus 1.0% (“ABR”) plus an interest margin of 1.25%. The interest rates under the 2024 Term B Loan are based on, at EVERTEC Group’s option, (a) adjusted LIBOR plus an interest margin of 3.50% or (b) ABR plus an interest margin of 2.50%. The interest margins under the 2023 Term A Loan 2.50% per annum in the case of any LIBOR Loan and 1.50% per annum in the case of any Alternate Base Rate (“ABR”), as defined in the 2013 Credit Agreement,Revolving Facility are subject to reduction based on achievement of specific first lien secured leverage ratios, (ii) with respect to any 2020 Term A Loan, 2.50% per annum in the case of any LIBOR Loan and 1.50% per annum in the case of any ABR Loan, (iii) with respect to any Term B Loan, 2.75% per annum in the case of any LIBOR Loan and 1.75% per annum in the case of any ABR Loan subject to reduction based on achievement of specific first lien secured leverage ratios, and (iv) with respect to any revolving credit facility, (A) 2.50% per annum in the case of any LIBOR Loan and (B) 1.50% per annum in the case of any ABR Loan.
The revolving credit facility interest rate is calculated the same as the 2020 Term A Loan rate and has a “commitment fee” payable one business day after the last business day of each quarter calculated based on the daily unused commitment during the preceding quarter. The commitment fee for the unused portion of this facility ranges from 0.125% to 0.375% and is based on EVERTEC Group’s first lienspecified total secured net leverage ratio.
AllGuarantees and Collateral
EVERTEC Group’s obligations under the secured credit facilities and under any cash management, interest rate protection or other hedging arrangements entered into with a lender, or any affiliate thereof are guaranteed by EVERTEC and each of EVERTEC’s existing wholly owned subsidiaries (other than EVERTEC Group) and subsequently acquired or organized subsidiaries, subject to certain exceptions.
Subject to certain exceptions, the secured credit facilities are secured to the extent legally permissible by substantially all of the assets of (1) EVERTEC, including a perfected pledge of all of the limited liability company interests of EVERTEC Intermediate Holdings, LLC (“Holdings”), (2) Holdings, including a perfected pledge of all of the limited liability company interests of EVERTEC Group and (3) EVERTEC Group and the subsidiary guarantors, including but not limited to: (a) a pledge of substantially all capital stock held by EVERTEC Group or any guarantor and (b) a perfected security interest in substantially all tangible and intangible assets of EVERTEC Group and each guarantor.
Covenants
The secured credit facilities contain affirmative and negative covenants that the Company believes are usual and customary for a secured credit agreement. The negative covenants in the secured credit facilities include, among other things, limitations (subject to exceptions) on the ability of EVERTEC and its restricted subsidiaries to:
•declare dividends and make other distributions;
•redeem or repurchase capital stock;
•grant liens;
•make loans may be prepaid without premium or penalty.investments (including acquisitions);
•merge or enter into acquisitions;
•sell assets;
•enter into any sale or lease-back transactions;
•incur additional indebtedness;
•prepay, redeem or repurchase certain indebtedness;
•modify the terms of certain debt;
•restrict dividends from subsidiaries;
•change the business of EVERTEC or its subsidiaries; and
•enter into transactions with their affiliates.
In addition, the 2023 Term A Loan and the Revolving Facility require EVERTEC to maintain a maximum total secured net leverage ratio of 4.25 to 1.00 for any quarter that ended on or prior to September 30, 2020. Beginning with the quarter ended December 31, 2020 and for fiscal quarters ending thereafter, 4.00 to 1.00.
The unpaid principal balance at December 31, 20172021 of the 2018 Term A Loan, the 20202023 Term A Loan and the 2024 Term B Loan was $26.9 million, $202.9$171.6 million, and $382.0$295.8 million, respectively. The additional borrowing capacity for the Revolving Facility loan at December 31, 20172021 was $88.0$119.1 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
Events of Default
The events of default under the secured credit facilities include, without limitation, nonpayment, material misrepresentation, breach of covenants, insolvency, bankruptcy, certain judgments, change of control (as defined in the 2018 Credit Agreement) and cross-events of default on material indebtedness.
Notes payable
In December 2014, June 2015 and May 2016,2019, EVERTEC Group entered into non-interest bearingtwo non interest-bearing financing agreements amounting to $4.6 million, $1.1 million, and $0.7 million, respectively, and in October 2016 entered into an interest bearing agreement of $1.1$2.4 million to purchase software.software and maintenance. As of December 31, 20172021, and December 31, 2016,2020, the outstanding principal balance of the notes payable is $1.0was $0.8 million and $3.4$1.5 million, respectively. The current portion of theseThese notes is recorded as part ofare included in accounts payable andin the long-term portion is included in other long-term liabilities.Company's consolidated balance sheets.
Interest Rate SwapSwaps
As of December 31, 2017,2021, the Company has the followingan interest rate swap agreement, convertingentered into in December 2018, which converts a portion of the interest rate exposurepayments on the Company's 2024 Term B Loan from variable to fixed:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Swap Agreement | | Effective date | | Maturity Date | | Notional Amount | | Variable Rate | | Fixed Rate |
| | | | | | | | |
Effective date | | Maturity Date | | Notional Amount | | Variable Rate | | Fixed Rate |
January 20172018 Swap | | April 2020 | | $200 millionNovember 2024 | | $250 million | | 1-month LIBOR | | 1.9225%2.89% |
The Company has accounted for this transactionagreement as a cash flow hedge.
Additionally, the Company had an interest rate swap agreement that matured in April 2020, with a notional amount of $200 million and a fixed rate of 1.9225%. The fair value of the Company’s derivative instrument is determined usingCompany accounted for this swap as a standard valuation model. The significant inputs used in this model are readily available in public markets, or can be derivedcash flow hedge from observable market transactions, and therefore have been classified as Level 2 within the fair value hierarchy. Inputs used in this standard valuation model for derivative instruments include the applicable forward rates and discount rates. The discount rates are based on the historical LIBOR Swap rates.inception to maturity.
As of December 31, 20172021 and December 31, 2016,2020, the carrying amount of the derivativederivatives included on the Company’s consolidated balance sheetssheet was $13.4 million and $25.6 million, respectively. The fair value of these derivatives is as follows:estimated using Level 2 inputs in the fair value hierarchy on a recurring basis.
|
| | | | | | | | |
(Dollar amounts in thousands) | | December 31, 2017 | | December 31, 2016 |
Other long-term assets | | $ | 214 |
| | $ | — |
|
Other long-term liabilities | | — |
| | 1,964 |
|
During the year endedAs of December 31, 2017,2021, the Company reclassified losses of $1.6$7.1 million from accumulated other comprehensive loss into income through interest expense. Based on current LIBOR rates, the Company expects to reclassify $0.9losses of $7.0 million from accumulated other comprehensive loss into income through interest expense over the next 12 months. Refer to Note 14 for tabular disclosure of the fair value of derivatives and to Note 16 for tabular disclosure of gains (losses) recorded on cash flow hedging activities.
TheAt December 31, 2021, the cash flow hedge is considered highly effectiveeffective.
Leases
The Company has operating leases for certain office facilities, buildings, telecommunications and no impact on earnings is expected dueother equipment; and finance leases for certain equipment. The Company’s lease contracts have remaining terms ranging from 1 year to hedge ineffectiveness.8 years, some of which may include options to extend the leases for up to 5 years, and some which may include the option to terminate the lease within 1 year.
The following table presents the balance of operating lease obligations: | | | | | | | | | | | |
| December 31, |
(In thousands) | 2021 | | 2020 |
Operating lease liability - current | 5,580 | | | 5,830 | |
Operating lease liability - long-term | 16,456 | | | 22,402 | |
Total operating lease liabilities | $ | 22,036 | | | $ | 28,232 | |
See Note 23 of the Notes to Audited Consolidated Financial Statements for additional information regarding operating lease obligations.
Covenant Compliance
The credit facilities contain various restrictive covenants. The Term A Loan and the revolving facility (subject to certain exceptions) require EVERTEC Group to maintain on a quarterly basis a specified maximum senior secured leverage ratio of up to 4.75 to 1.00 as defined in the third amendment to the 2013 Credit Agreement (total first lien senior secured debt to Adjusted EBITDA) until September 30, 2018 and 4.25 to 1.00 for any fiscal quarter ending thereafter. In addition, the 2013 Credit Agreement, among other things: (a) limits EVERTEC Group’s ability and the ability of its subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (b) restricts EVERTEC Group’s ability to enter into agreements that would restrict the ability of its subsidiaries to pay dividends or make certain payments to its parent company; and (c) places restrictions on EVERTEC Group’s ability and the ability of its subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of their assets. However, all of the covenants in these agreements are subject to significant exceptions. As of December 31, 2017,2021, the seniortotal secured net leverage ratio was 3.341.4 to 1.00. As of the date of filing of this Form 10-K, no event has occurred that constitutes an Event of Default or Default.
In this Annual Report on Form 10-K, we refer to the term “Adjusted EBITDA” to mean EBITDA as so defined and calculated for purposes of determining compliance with the seniortotal secured net leverage ratio based on the financial information for the last twelve months at the end of each quarter.
Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share (Non-GAAP Measures)
We define “EBITDA” as earnings before interest, taxes, depreciation and amortization. We define “Adjusted EBITDA” as EBITDA further adjusted to exclude unusual items and other adjustments described below. Adjusted EBITDA by segment is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in conformity with Accounting Standards Codification 280, Segment Reporting, and is excluded from the definition of non-GAAP financial measures under the Securities and Exchange Commission's Regulation G and Item 10(e) of Regulation S-K. We define “Adjusted Net Income” as net income adjusted to exclude unusual items and other adjustments described below. We define “Adjusted Earnings per common share” as Adjusted Net Income divided by diluted shares outstanding.
We present EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of ourselves and other companies in our industry. In addition, our presentation of Adjusted EBITDA is substantially consistent with the equivalent measurements that are contained in the senior secured credit facilities in testing EVERTEC Group’s compliance with covenants therein such as the seniortotal secured net leverage ratio. We use Adjusted Net Income to measure our overall profitability because we believe it better reflects our comparable operating performance by excluding the impact of the non-cash amortization and depreciation that was created as a result of the Merger.merger and acquisition activity. In addition, in evaluating EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, you should be aware that in the future we may incur expenses such as those excluded in calculating them. Further, our presentation of these measures should not be construed as an inference that our future operating results will not be affected by unusual or nonrecurring items.
Some of the limitations of EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted earnings per common share are as follows:
•they do not reflect cash outlays for capital expenditures or future contractual commitments;
•they do not reflect changes in, or cash requirements for, working capital;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements;
•in the case of EBITDA and Adjusted EBITDA, they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness;
•in the case of EBITDA and Adjusted EBITDA, they do not reflect income tax expense or the cash necessary to pay income taxes; and
•other companies, including other companies in our industry, may not use EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per common share or may calculate EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share differently than as presented in this Report, limiting their usefulness as a comparative measure.
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share are not measurements of liquidity or financial performance under GAAP. You should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share as alternatives to cash flows from operating activities or any other performance measures determined in accordance with GAAP, as an indicator of cash flows, as a measure of liquidity or as an alternative to operating or net income determined in accordance with GAAP.
A reconciliation of net income to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share is provided below:
|
| | | | |
| | Year Ended December 31, 2017 |
(Dollar amounts in thousands) | | |
Net income | | $ | 55,419 |
|
Income tax expense | | 4,780 |
|
Interest expense, net | | 29,145 |
|
Depreciation and amortization | | 64,250 |
|
EBITDA | | 153,594 |
|
Equity income (1) | | (604 | ) |
Compensation and benefits (2) | | 9,755 |
|
Transaction, refinancing and other fees (3) | | 2,500 |
|
Exit activity (4) | | 12,783 |
|
Adjusted EBITDA | | 178,028 |
|
Operating depreciation and amortization (5) | | (30,585 | ) |
Cash interest expense, net (6) | | (24,660 | ) |
Income tax expense (7) | | (15,100 | ) |
Non-controlling interest (8) | | (581 | ) |
Adjusted net income | | $ | 107,102 |
|
Net income per common share (GAAP): | | |
Diluted | | $ | 0.76 |
|
Adjusted Earnings per common share (Non-GAAP): | | |
Diluted | | $ | 1.47 |
|
Shares used in computing adjusted earnings per common share: | | |
Diluted | | 72,872,188 |
|
| | | | | | | | |
| | Year Ended December 31, 2021 |
(Dollar amounts in thousands) | | |
Net income | | $ | 161,143 | |
Income tax expense | | 20,562 | |
Interest expense, net | | 20,921 | |
Depreciation and amortization | | 75,070 | |
EBITDA | | 277,696 | |
| | |
Equity income (1) | | (395) | |
Compensation and benefits (2) | | 15,144 | |
Transaction, refinancing and other fees (3) | | 2,373 | |
| | |
| | |
Adjusted EBITDA | | 294,818 | |
Operating depreciation and amortization (4) | | (43,438) | |
Cash interest expense, net (5) | | (19,804) | |
Income tax expense (6) | | (31,684) | |
Non-controlling interest (7) | | (161) | |
Adjusted net income | | $ | 199,731 | |
Net income per common share (GAAP): | | |
Diluted | | $ | 2.21 | |
Adjusted Earnings per common share (Non-GAAP): | | |
Diluted | | $ | 2.74 | |
Shares used in computing adjusted earnings per common share: | | |
Diluted | | 72,870,585 | |
| |
1) | Represents the elimination of non-cash equity earnings from our 19.99% equity investment in Dominican Republic, Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”). |
| |
2) | Primarily represents share-based compensation and other compensation expense. |
| |
3) | Represents fees and expenses associated with corporate transactions as defined in the Credit Agreement, recorded as part of selling, general and administrative expense and cost of revenues, as well as relief contributions related to the Hurricanes. |
| |
4) | Impairment charge and contractual fee accrual for a third party software solution that was determined to be commercially unviable. |
| |
5) | Represents operating depreciation and amortization expense, which excludes amounts generated as a result of the Merger and other from purchase accounting intangibles generated from acquisitions. |
| |
6) | Represents interest expense, less interest income, as they appear on our consolidated statements of income and comprehensive income, adjusted to exclude non-cash amortization of the debt issue costs, premium and accretion of discount. |
| |
7) | Represents income tax expense calculated on adjusted pre-tax income using the applicable GAAP tax rate. |
| |
8) | Represents the 35% non-controlling equity interest in Processa, net of amortization for intangibles created as part of the purchase. |
1)Represents the elimination of non-cash equity earnings from our 19.99% equity investment in Dominican Republic, Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”), net of cash dividends received.
Contractual Obligations2)Primarily represents share-based compensation and severance payments.
3)Represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, recorded as part of selling, general and administrative expenses, a software impairment charge, and a gain from sale of assets.
The Company’s contractual obligations4)Represents operating depreciation and amortization expense, which excludes amounts generated as a result of December 31, 2017 arethe merger and acquisition activity.
5)Represents interest expense, less interest income, as follows:
they appear on our consolidated statements of income and comprehensive income, adjusted to exclude non-cash amortization of the debt issue costs, premium and accretion of discount.
|
| | | | | | | | | | | | | | | | | | | | |
| | Payment due by periods |
(Dollar amounts in thousands) | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years |
Long-term debt (1) | | $ | 662,480 |
| | $ | 70,039 |
| | $ | 592,441 |
| | $ | — |
| | $ | — |
|
Operating leases (2) | | 17,872 |
| | 7,482 |
| | 10,390 |
| | — |
| | — |
|
Short-term borrowings (3) | | 12,180 |
| | 12,180 |
| | — |
| | — |
| | — |
|
Other long-term liabilities | | 1,374 |
| | 631 |
| | 743 |
| | — |
| | — |
|
Total | | $ | 693,906 |
| | $ | 90,332 |
| | $ | 603,574 |
| | $ | — |
| | $ | — |
|
44
| |
(1) | Long-term debt includes principal balance of $624.8 million and the payments of cash interest (based on interest rates as of December 31, 2017 for variable rate debt) and aggregate principal amount of the senior secured term loan facilities, as well as commitments fees related to the unused portion of our senior secured revolving credit facility, as required under the terms of the long-term debt agreements. |
| |
(2) | Includes certain facilities and equipment under operating leases. See Note 22 of the Notes to Audited Consolidated Financial Statements for additional information regarding operating lease obligations. |
| |
(3) | Excludes the payments of cash interest related to the outstanding portion of the senior secured revolving credit facility as of December 31, 2017. |
6)Represents income tax expense calculated on adjusted pre-tax income using the applicable GAAP tax rate, adjusted for certain discrete items.
7)Represents the 35% non-controlling equity interest in Evertec Colombia, net of amortization for intangibles created as part of the purchase.
Off Balance Sheet Arrangements
In the ordinary course of business the Company may enter into commercial commitments. As of December 31, 2017, the Company did not have any off balance sheet items.
Seasonality
Our payment businesses generally experience moderate increased activity during the traditional holiday shopping periods and around other nationally recognized holidays, which follow consumer spending patterns.
Effect of Inflation
While inflationary increases in certain inputsinput costs, such as occupancy, labor and benefits, and general administrative costs, have an impact on our operating results, inflation has had minimal net impact on our operating results during the last three years as overall inflation has been partially offset by increased margins on incremental revenue and cost reduction actions. We cannot assure you, however, that we will not be affected by general inflation in the future.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks arising from our normal business activities. These market risks principally involve the possibility of change in interest rates that will adversely affect the value of our financial assets and liabilities or future cash flows and earnings.earnings, and foreign exchange risk that may result in unfavorable foreign currency translation adjustments. Market risk is the potential loss arising from adverse changes in market rates and prices.
Interest rate risks
We issued floating-rate debt which is subject to fluctuations in interest rates. Our senior secured credit facilities accrue interest at variable rates and only the Term B Loan is subject to floors or minimum rates. A 100 basis point increase in interest rates over our floor(s) on our debt balances outstanding as of December 31, 2017,2021, under the senior secured credit facilities would increase our annual interest expense by approximately $4.1$4.7 million. The impact on future interest expense as a result of future changes in interest rates will depend largely on the gross amount of our borrowings at that time.
InAs of December 2015, we entered into31, 2021, the Company has an interest rate swap agreement, withentered into in December 2018, which converts a notional amount of $200 million, which represents approximately 32%portion of our outstanding debt. Under this agreement, that began on January 1, 2017, we will receive avariable rate equaldebt to fixed.
to the LIBOR rate applicable to our Term B loan, and pay a fixed rate equal to 1.9225%. The net effect of the swap agreement is to fix the interest rate on $200 million of our Term B loan at approximately 4.5%, which began on January 1, 2017 and will end when the Term B loan matures, in April 2020.
The interest rate swap exposes us to credit risk in the event that the counterparty to the swap agreement does not or cannot meet its obligations. The notional amount is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The loss would be limited to the amount that would have been received, if any, over the remaining life of the swap. The counterparty to the swap is a major US based financial institution and we expect the counterparty to be able to perform its obligations under the swap. We use derivative financial instruments for hedging purposes only and not for trading or speculative purposes
See Note 1213 of the Notes to Audited Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K for additional information related to the senior secured credit facilities.
Foreign currency exchange risk
We conduct business in certain countries in Latin America. Some of this business is conducted in the countries’ local currencies. The resulting foreign currency translation adjustments, from operations for which the functional currency is other than the U.S. dollar, are reported in accumulated other comprehensive loss in the audited consolidated balance sheet,sheets, except for highly inflationary environments in which the effects would be included in other operating income in the consolidated statements of income and comprehensive income. At December 31, 2017,2021, the Company had $11.1$36.0 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss compared to an unfavorable foreign currency translation adjustment of $10.4$24.8 million at December 31, 2016.2020.
Item 8. Financial Statements and Supplementary Data
The Audited Consolidated Financial Statements, together with EVERTEC’s independent registered public accounting firms reports, are included herein beginning on page F-1 of this Annual Report on Form 10-K.
Selected Quarterly Financial Data
|
| | | | | | | | | | | | | | | |
| Quarters ended, |
(Dollar amounts in thousands, except per share data) | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 |
Revenues | $ | 101,280 |
| | $ | 103,511 |
| | $ | 102,725 |
| | $ | 99,628 |
|
Operating costs and expenses | 70,688 |
| | 73,517 |
| | 93,917 |
| | 82,939 |
|
Income from operations | 30,592 |
| | 29,994 |
| | 8,808 |
| | 16,689 |
|
Non-operating expenses | (5,434 | ) | | (5,712 | ) | | (7,506 | ) | | (7,232 | ) |
Income before income taxes | 25,158 |
| | 24,282 |
| | 1,302 |
| | 9,457 |
|
Income tax expense (benefit) | 2,020 |
| | 4,068 |
| | (4,840 | ) | | 3,532 |
|
Net income | $ | 23,138 |
| | $ | 20,214 |
| | $ | 6,142 |
| | $ | 5,925 |
|
Net income attributable to EVERTEC, Inc.’s common stockholders | $ | 23,029 |
| | $ | 20,089 |
| | $ | 6,102 |
| | $ | 5,834 |
|
Net income per common share - basic | $ | 0.32 |
| | $ | 0.28 |
| | $ | 0.08 |
| | $ | 0.08 |
|
Net income per common share - diluted | $ | 0.31 |
| | $ | 0.27 |
| | $ | 0.08 |
| | $ | 0.08 |
|
| | | | | | | |
| Quarters ended, |
(Dollar amounts in thousands, except per share data) | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 |
Revenues | $ | 95,479 |
| | $ | 97,672 |
| | $ | 94,467 |
| | $ | 101,889 |
|
Operating costs and expenses | 68,913 |
| | 69,480 |
| | 67,460 |
| | 76,509 |
|
Income from operations | 26,566 |
| | 28,192 |
| | 27,007 |
| | 25,380 |
|
Non-operating expenses | (5,523 | ) | | (5,157 | ) | | (5,657 | ) | | (7,411 | ) |
Income before income taxes | 21,043 |
| | 23,035 |
| | 21,350 |
| | 17,969 |
|
Income tax expense | 1,876 |
| | 2,801 |
| | 1,639 |
| | 1,955 |
|
Net income | $ | 19,167 |
| | $ | 20,234 |
| | $ | 19,711 |
| | $ | 16,014 |
|
Net income attributable to EVERTEC, Inc.’s common stockholders | $ | 19,148 |
| | $ | 20,235 |
| | $ | 19,680 |
| | $ | 15,972 |
|
Net income per common share - basic | $ | 0.26 |
| | $ | 0.27 |
| | $ | 0.27 |
| | $ | 0.22 |
|
Net income per common share - diluted | $ | 0.26 |
| | $ | 0.27 |
| | $ | 0.26 |
| | $ | 0.22 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company, underOur management, with the directionparticipation of the Chief Executive Officer and the Chief Financial Officer, has establishedevaluated the effectiveness of our disclosure controls and procedures as(as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). ) as of the end of the period covered by this Annual Report on Form 10-K.Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2017,2021, the Company’s disclosure controls and procedures arewere effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 20172021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as(as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or underAct).
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, and effected by the Company’s boardwe conducted an evaluation of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the firm; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the firm’s assets that could have a material effect on our financial statements.
The Company’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management usedbased on the criteria establishedframework set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).
Based on this assessment,our evaluation under the framework set forth in Internal Control – Integrated Framework (2013), our management has determinedconcluded that the Company’s internal control over financial reporting as of December 31, 20172021 was effective.
As permitted by the SEC staff’s Frequently Asked Question 3 on Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports (revised September 24, 2007), our management excluded PayGroup, which was acquired on July 3, 2017, from our assessment of internal control over financial reporting effectiveness as of December 31, 2017. PayGroup represented approximately 6% of consolidated total assets and approximately 3% of consolidated total revenues, included in our Consolidated Financial Statements as of and for the year ended December 31, 2017.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited the consolidated financial statements as of and for the year ended December 31, 2017,2021, included in this Form 10-K and, as part of the audit, has issued a report, included as part of Item 8 of this Form 10-K, on the effectiveness of our internal control over financial reporting as of December 31, 2017.2021.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Code of Ethics
Our Board of Directors has adopted a Code of Ethics applicable to all officers, directors, and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of our Code of Ethics is available at the Investor Relations section of our website, located at ir.evertecinc.com under “Governance Documents.” We intend to make all disclosures required by law or the NYSE regarding any amendments to, or waivers from, any provisions of the code at the same location of our website.Our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider information on our website to be part of this Annual Report on Form 10-K.
Other Information
The remaining information required by Item 10 will be included in EVERTEC's proxy statement, to be filed pursuant to Regulation 14 A within 120 days after the end of the 20172021 fiscal year and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 will be included in EVERTEC's proxy statement, to be filed pursuant to Regulation 14 A within 120 days after the end of the 20172021 fiscal year and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 will be included in EVERTEC's proxy statement, to be filed pursuant to Regulation 14 A within 120 days after the end of the 20172021 fiscal year and is incorporated herein by reference.
Item 13. Certain Relationships and Related Party Transactions and Director Independence
The information required by Item 13 will be included in EVERTEC's proxy statement, to be filed pursuant to Regulation 14 A within 120 days after the end of the 20172021 fiscal year and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 will be included in EVERTEC's proxy statement, to be filed pursuant to Regulation 14 A within 120 days after the end of the 20172021 fiscal year and is incorporated herein by reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
The following consolidated financial statements of EVERTEC, Inc. together with the Report of Independent Registered Public Accounting Firm, are included in Part II, Item 8, Financial Statements and Supplementary Data:
•Reports of Independent Registered Public Accounting FirmsFirm
•Consolidated Balance Sheets as of December 31, 20172021 and 2016
2020•Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2017, 20162021, 2020 and 2015
2019•Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 20162021, 2020 and 2015
2019•Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162021, 2020 and 2015
2019•Notes to Audited Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule I—Parent Company Only Financial Statements
(3) Exhibits
| | | | | | | | |
Exhibit No. | | Description |
| | |
Exhibit
No. 3.1 | | Description |
| | |
2.1 | | Agreement and Plan of Merger, dated June 30, 2010, by and among Popular, Inc., AP Carib Holdings, Ltd., Carib Acquisitions, Inc. and EVERTEC Group, LLC (incorporated by reference to Exhibit 2.1 of Popular, Inc.’s Current Report on Form 8-K filed on July 8, 2010, File No. 001-34084) |
| | |
2.2 | | Amendment to the Agreement and Plan of Merger, dated August 5, 2010, by and among Popular, Inc., AP Carib Holdings, Ltd., Carib Acquisition, Inc. and EVERTEC Group, LLC (incorporated by reference to Exhibit 2.2 of Registration Statement on Form S-4 of EVERTEC Group, LLC, filed on April 14, 2011, File No. 333-173504) |
| | |
2.3 | | Second Amendment to the Agreement and Plan of Merger, dated August 8, 2010, by and among Popular, Inc., AP Carib Holdings, Ltd., Carib Acquisition, Inc. and EVERTEC Group, LLC (incorporated by reference to Exhibit 2.1 of Popular, Inc.’s Current Report on Form 8-K filed on August 12, 2010, File No. 001-34084) |
| | |
2.4 | | Third Amendment to the Agreement and Plan of Merger, dated September 15, 2010, by and among Popular, Inc., AP Carib Holdings, Ltd., Carib Acquisition, Inc. and EVERTEC Group, LLC (incorporated by reference to Exhibit 2.1 of Popular, Inc.’s Current Report on Form 8-K filed on September 21, 2010, File No. 001-34084) |
| | |
2.5 | | Fourth Amendment to the Agreement and Plan of Merger, dated September 30, 2010, by and among Popular, Inc., AP Carib Holdings, Ltd., Carib Acquisition, Inc. and EVERTEC Group, LLC (incorporated by reference to Exhibit 2.1 of Popular, Inc.’s Current Report on Form 8-K filed on October 6, 2010, File No. 001-34084) |
| | |
2.6 | | Letter Agreement re: amendment to Merger Agreement, dated as of July 31, 2013, by and among Popular, Inc., EVERTEC Group, LLC (on behalf of itself and as successor in interest to Carib Acquisition, Inc.) and AP Carib Holdings, Ltd. (incorporated by reference to Exhibit 10.2 of EVERTEC, Inc.’s Current Report on Form 8-K filed on August 6, 2013, File No. 001-35872) |
| | |
3.1 | | |
| | |
3.2 | | |
|
| | |
4.14.1* | | |
| | |
4.2 | | Stockholder Agreement, dated April 17, 2012, by and among EVERTEC, Inc. and the holders party thereto (incorporated by reference to Exhibit 99.14.2 of Popular,EVERTEC, Inc.’s CurrentAnnual Report on Form 8-K10-K filed on April 23, 2012,February 27, 2020, File No. 001-34084)001-35872) |
| | |
4.3 | | |
| | |
4.4 | | |
| | |
4.5 | | |
| | |
10.1 | | Credit Agreement, dated April 17, 2013, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, LLC, the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent swingline lender and L/C issuer, J.P. Morgan Securities LLC and Goldman Sachs Bank USA, as joint lead arrangers, J.P. Morgan Securities LLC, Goldman Sachs Bank USA, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc. and Morgan Stanley Senior Funding, Inc., as joint bookrunners, Goldman Sachs Bank USA, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc. and Morgan Stanley Senior Funding, Inc., as co-syndication agents, and Credit Suisse Securities (USA) LLC and UBS Securities LLC, as co-documentation agents (incorporated by reference to Exhibit 10.1 of EVERTEC, Inc.’s Current Report on Form 8-K filed on April 23, 2013, File No. 001-35872) |
| | |
|
| | |
Exhibit
No. 4.6 | | Description |
| | |
10.2 | | Amendment No. 1, dated asDescription of May 14, 2013, to the Credit Agreement, dated as of April 17, 2013, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, LLC, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party theretoRegistrant’s Securities (incorporated by reference to Exhibit 10.14.6 of EVERTEC, Inc.’s QuarterlyAnnual Report on Form 10-Q10-K filed on May 15, 2013,February 27, 2020, File No. 001-35872) |
| | |
10.3
| | Amendment No. 2, dated as of April 14, 2016, to the Credit Agreement, dated as of April 17, 2013, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, LLC, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K of EVERTEC, Inc., filed on April 15, 2016, File No. 001-35872) |
| | |
10.4
| | Amendment No. 3, dated as of November 4, 2016, to the Credit Agreement, dated as of April 17, 2013, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, LLC, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K of EVERTEC, Inc., filed on November 8, 2016, File No. 001-35872) |
| | |
10.5 | | Guarantee Agreement, dated as of April 17, 2013, by and among EVERTEC Group, LLC, the loan parties identified on the signature pages thereof and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 of EVERTEC, Inc.’s Current Report on Form 8-K filed on April 23, 2013, File No. 001-35872) |
| | |
10.6 | | Collateral Agreement, dated as of April 17, 2013, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, LLC and each subsidiary of EVERTEC Group, LLC identified therein and JPMorgan Chase Bank, N.A., as collateral agent (incorporated by reference to Exhibit 10.3 of EVERTEC, Inc.’s Current Report on Form 8-K filed on April 23, 2013, File No. 001-35872) |
| | |
10.7++ | | |
| | |
10.8 | | |
| | |
10.9 | | |
| | |
10.10 | | |
|
| | |
10.11 | | Tax Payment Agreement, dated as of April 17, 2012, by and among EVERTEC, Inc., EVERTEC Intermediate Holdings, LLC and EVERTEC Group, LLC (incorporated by reference to Exhibit 10.2 of Current Report on Form 8-K of EVERTEC Group, LLC, filed on April 18, 2012, File No. 333-173504) |
| | |
10.12 | | Stock Contribution and Exchange Agreement, dated as of April 17, 2012, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC, Inc., and the holders shares of common stock of EVERTEC Intermediate Holdings, LLC (incorporated by reference to Exhibit 10.41 of EVERTEC, Inc.’s Amendment No. 1 to the Registration Statement on Form S-1 filed on March 14, 2013, File No. 333-186487) |
| | |
10.13++ | |
|
| | |
10.14++ | | |
| | |
10.15 | | |
| | |
|
10.1 | | |
Exhibit
No.
| | Description |
| | |
10.16 | | |
| | |
10.1710.2 | | |
| | |
10.1810.3 | | |
| | |
10.1910.4 | | |
| | |
10.20+10.5 | | |
| | |
10.6 | | |
| | |
10.7 | | |
| | |
10.8 | | |
| | |
10.9 | | |
| | |
| | | | | | | | |
10.10+ | | |
| | |
10.2110.11* | | Credit Agreement, dated November 27, 2018, among EVERTEC, Inc., EVERTEC Group, LLC, the lenders party thereto from time to time, Bank of America, N.A., as administrative agent, collateral agent, swingline lender and L/C issuer, Bank of America, N.A. (solely with respect to the Term B Facility), Merrill Lynch Pierce, Fenner & Smith Incorporated (or any other registered broker-dealer wholly-owned by Bank of America Corporation to which all or substantially all of Bank of America Corporation’s or any of its subsidiaries’ investment banking, commercial lending services or related businesses may be transferred following the date of this Credit Agreement) (solely with respect to the Term A Facility and the Revolving Credit Facility), SunTrust Robinson Humphrey, Inc., Citigroup Global Markets Inc., Goldman Sachs Bank USA and JPMorgan Chase Bank, N.A., as joint lead arrangers, Bank of America, N.A. (solely with respect to the Term B Facility), Merrill Lynch Pierce, Fenner & Smith Incorporated (or any other registered broker-dealer wholly-owned by Bank of America Corporation to which all or substantially all of Bank of America Corporation’s or any of its subsidiaries’ investment banking, commercial lending services or related businesses may be transferred following the date of this Credit Agreement) (solely with respect to the Term A Facility and the Revolving Credit Facility), SunTrust Robinson Humphrey, Inc., Citigroup Global Markets Inc., Goldman Sachs Bank USA, JPMorgan Chase Bank, N.A. and Deutsche Bank Securities Inc., as joint bookrunners, Goldman Sachs Bank USA, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc. and FirstBank Puerto Rico and Scotiabank de Puerto Rico as co-syndication agents |
| | |
10.12 | | Collateral Agreement, dated as of November 27, 2018, among EVERTEC, Inc., EVERTEC Group, LLC, each subsidiary loan party identified therein and Bank of America, N.A., as collateral agent (incorporated by reference to Exhibit 10.14 of EVERTEC, Inc.’s Annual Report on Form 10-K filed on February 27, 2020, File No. 001-35872) |
| | |
10.13 | | Guarantee Agreement, dated as of Indemnification AgreementNovember 27, 2018, by and among EVERTEC, Inc., EVERTEC Group, LLC, the loan parties identified on the signature pages thereof and its directorsBank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.6210.15 of EVERTEC, Inc.’s Amendment No. 1 to the Registration StatementAnnual Report on Form S-110-K filed on March 14, 2013,February 27, 2020, File No. 333-186487)001-35872) |
| | |
10.22+10.14+ | | Amended and Restated Employment Agreement, dated as of December 17, 2014,November 8, 2018, by and between EVERTEC Group, LLC and Morgan M. Schuessler, Jr. (incorporated by reference to Exhibit 10.37 of10.33 to EVERTEC, Inc.’s Annual Report on Form 10-K filed on March 2, 2015,February 26, 2019, File No. 001-35872) |
| | |
10.23+10.15+ | | |
| | |
10.24+ | | Restricted Stock Unit Award Agreement for grant of restricted stock units to executive officers under the EVERTEC, Inc. 2013 Equity Incentive Plan, dated as of April 1, 2015,February 22, 2019, by and between EVERTEC, Inc. and the executive (applicable to Morgan M. Schuessler, Jr., Joaquín A. Castrillo, Guillermo Rospigliosi, Luis A. Rodríguez, Miguel Vizcarrondo and Paola Pérez) (incorporated by reference to Exhibit 10.50 of EVERTEC, Inc.’s Quarterly Report on Form 10-Q filed on August 7, 2015, File No. 001-35872) |
| | |
10.25+ | | |
|
| | |
10.26+ | | |
| | |
10.27*+ | | |
| | |
10.28*+ | | |
| | |
10.29+ | |
|
| | |
10.30+10.16+ | | Employment Agreement, dated asForm of April 4, 2016, by and between EVERTEC Group, LLC andExecutive Severance Policy (applicable to Joaquín A. Castrillo, Diego Viglianco, Guillermo Rospigliosi, Luis A. Rodríguez, Miguel Vizcarrondo, Paola Pérez, and Rodrigo Del Castillo) (incorporated by reference to Exhibit 10.48 of10.34 to EVERTEC, Inc.’s QuarterlyAnnual Report on Form 10-Q10-K filed on MayFebruary 26, 2016,2019, File No. 001-35872) |
| | |
10.31*+10.17+ | | Form of Restricted Stock Unit Award Agreement for grant of restricted stock to directorsunits under the EVERTEC, Inc. 2013 Equity Incentive Plan, dated as of July 29, 2016,August 7, 2019, by and between EVERTEC, Inc. and the director (applicableRodrigo Del Castillo (incorporated by reference to Frank G. D’Angelo, Thomas W. Swidarski, Jorge Junquera, Alan H. Schumacher, Olga Botero, Brian J. Smith, and Teresita Loubriel)Exhibit 10.19 to EVERTEC, Inc.'s Annual Report on Form 10-K filed on March 1, 2021, File No. 001-35872) |
| | |
|
| | |
Exhibit
No. 10.18*+ | | Description |
| | |
10.32*+ | | |
| | |
10.19+ | | |
| | |
10.20+ | | Restricted Stock Unit Award Agreement for grant of restricted stock units to executive officers with Employment Agreements under the EVERTEC, Inc. 2013 Equity Incentive Plan, dated February 19, 2016,27, 2020, by and between EVERTEC, Inc. and the executive (applicable to Morgan M. Schuessler, Jr., Peter J. S. Smith, Mariana Lischner Goldvarg, Philip E. Steurer,Joaquín A. Castrillo, Guillermo Rospigliosi, Luis. A. Rodríguez, Miguel Vizcarrondo, Paola Pérez, and Luis A. Rodríguez)Rodrigo Del Castillo) (incorporated by reference to Exhibit 10.22 to EVERTEC, Inc.'s Annual Report on Form 10-K filed on March 1, 2021, File No. 001-35872) |
| | |
| | | | | | | | |
10.33*+10.21+ | | Form of Restricted Stock Unit Award Agreement for grant of restricted stock units to executive officers without Employment Agreements under the EVERTEC, Inc. 2013 Equity Incentive Plan dated February 19, 2016, by and between EVERTEC, Inc. and the executive, dated March 2, 2021 (applicable to Morgan M. Schuessler, Jr., Joaquín A. Castrillo, Guillermo Rospigliosi, Luis A. Rodríguez, Miguel Vizcarrondo, Paola Pérez, and Carlos Ramírez) |
| | |
10.34+ | | |
| | |
10.3510.22+ | | Share Purchase Promise Agreement (Contrato de Promesa de Compraventa de Acciones), dated as of February 17, 2017, by and among EVERTEC Group, LLC, Fondo de Inversión Privado Mater, Inversiones San Bernardo, SpA, Inversiones Supernova SpA, Inversiones y Asesonás Bayona Limitada, Inversiones Hagerdorn y Morales Limitada, Christian Hagedorn Hitschfeld and Inversiones Viaimaca Limitada [English Translation] (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K of EVERTEC, Inc., filed on February 22, 2017, File No. 001-35872) |
| | |
10.36+ | | |
| | |
10.37 | | Share Purchase Agreement (Contrato de Compraventa de Acciones), dated as of July 3, 2017, by and among EVERTEC Group, LLC, EVERTEC Panamá, S.A., Fondo de Inversión Privado Mater, Inversiones San Bernardo SpA, Asesorías e Inversiones Supernova SpA, Inversiones y Asesorías Bayona Limitada, Inversiones Hagerdorn y Morales Limitada, Christian Hagedown Hitschfeld and Inversiones Vaimaca Limitada [English Translation] (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K on July 3, 2017, File No. 001-35872) |
| | |
10.38*+ | | Form of Restricted Stock Unit Award Agreement for grant of restricted stock units to directors under the EVERTEC, Inc. 2013 Equity Incentive Plan, dated as of June 1, 2017,2021 by and between EVERTEC, Inc. and the director (applicable to Frank G. D’Angelo, Thomas W. Swidarski, Jorge Junquera, AlanD'Angelo, Alan. H. Schumacher, Olga Botero,Aldo J. Polak, Brian J. Smith, Iván Pagán, Jorge A. Junquera, Kelly Barrett, and Teresita Loubriel)Olga Botero (incorporated by reference to Exhibit 10.1 to EVERTEC, Inc.'s Quarterly Report on Form 10-Q filed on August 4, 2021, File No. 001-35872) |
| | |
10.39*+10.23+ | | Form of Restricted Stock Unit Award Agreement for grant of restricted stock units to executive officers with employment agreements under the EVERTEC, Inc. 2013 Equity Incentive Plan, dated February 24, 2017,June 7, 2021, by and between EVERTEC, Inc. and the executive (applicableDiego Viglianco (incorporated by reference to Morgan M. Schuessler, Jr., Peter J. S. Smith, Luis A. Rodríguez, Guillermo Rospigliosi, and Philip E. Steurer)Exhibit 10.2 to EVERTEC, Inc.'s Quarterly Report on Form 10-Q filed on August 4, 2021, File No. 001-35872) |
| | |
10.40*+10.24+ | | |
| | |
10.41*+ | | Form of Restricted Stock Unit Award Agreement for special retention grant of restricted stock unit for executive officers under theExhibit 10.3 to EVERTEC, Inc. 2013 Equity Incentive Plan, dated November 20, 2017, by and between EVERTEC, Inc. and the executive (applicable to Morgan M. Schuessler, Jr., Peter J. S. Smith, Miguel Vizcarrondo, Philip E. Steurer, Carlos Ramírez, Guillermo Rospigliosi, and Luis A. Rodríguez)'s Quarterly Report on Form 10-Q filed on August 4, 2021, File No. 001-35872) |
|
| | |
21.1* | | |
| | |
23.1* | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
32.1** | | |
| | |
32.2** | | |
|
| | |
101.INS XBRL** | | Inline XBRL Instance document– the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
Exhibit
No.
| | Description |
| | |
101.INS XBRL** | | Instance document |
| | |
101.SCH XBRL** | | Inline XBRL Taxonomy Extension Schema |
| | |
101.CAL XBRL** | | Inline XBRL Taxonomy Extension Calculation Linkbase |
| | |
101.DEF XBRL** | | Inline XBRL Taxonomy Extension Definition Linkbase |
| | |
101.LAB XBRL** | | Inline XBRL Taxonomy Extension Label Linkbase |
| | |
101.PRE XBRL** | | Inline XBRL Taxonomy Extension Presentation Linkbase |
| | |
104** | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
** Furnished herewith.
+ This exhibit is a management contract or a compensatory plan or arrangement.
| |
++ | Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC. |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized,
|
| | | | | | | | | | |
| | EVERTEC, Inc. |
| | |
Date: February 28, 201825, 2022 | | By: | /s/ Morgan M. Schuessler, Jr. |
| | | Morgan M. Schuessler, Jr. |
| | | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | | | | | | | | | |
Signature | | Title | | Date |
| | |
/s/ Morgan M. Schuessler, Jr. | | Chief Executive Officer (Principal Executive | | February 28, 201825, 2022 |
Morgan M. Schuessler, Jr. | | Officer) | | |
| | |
/s/ Peter J.S. SmithJoaquin A. Castrillo-Salgado | | Chief Financial Officer (Principal Financial and | | February 28, 201825, 2022 |
Peter J.S. SmithJoaquin A. Castrillo-Salgado | | Accounting Officer) | | |
| | |
/s/ Frank G. D’Angelo | | Chairman of the Board | | February 28, 201825, 2022 |
Frank G. D’Angelo | | | | |
| | |
/s/ Teresita LoubrielIván Pagán | | Director | | February 28, 201825, 2022 |
Teresita LoubrielIván Pagán | | | | |
| | |
/s/ Alan H. Schumacher | | Director | | February 28, 201825, 2022 |
Alan H. Schumacher | | | | |
| | |
/s/ Thomas W. SwidarskiKelly Barrett | | Director | | February 28, 201825, 2022 |
Thomas W. SwidarskiKelly Barrett | | | | |
| | |
/s/ Jorge A. Junquera | | Director | | February 28, 201825, 2022 |
Jorge A. Junquera | | | | |
| | |
/s/ Nestor O. RiveraAldo Polak | | Director | | February 28, 201825, 2022 |
Nestor O. RiveraAldo Polak | | | | |
| | |
/s/ Olga M. Botero | | Director | | February 28, 201825, 2022 |
Olga M. Botero | | | | |
| | |
/s/ Brian J. Smith | | Director | | February 28, 201825, 2022 |
Brian J. Smith | | | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholdersstockholders and the Board of Directors of EVERTEC, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of EVERTEC, Inc. and subsidiaries (the “Company”"Company") as of December 31, 20172021 and 2016,2020, the related consolidated statements of income and comprehensive income, shareholders’changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017,2021, and the related notes and the schedulesschedule listed in the Index at Item 15 (collectively referred to as the “financial statements”"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control-IntegratedControl — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2018,25, 2022, expressed an unqualified opinion on the Company’sCompany's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill - Refer to Notes 1 and 10 to the financial statements
Critical Audit Matter Description
The Company tests goodwill for impairment on an annual basis as of August 31, or more often if events or changes in circumstances indicate there may be impairment. The Company's annual impairment review for goodwill as of August 31, 2021, consisted of performing a qualitative assessment to determine whether it was more likely than not that a reporting unit’s fair value was less than its carrying amount. The Company determines the fair value of its reporting units using the discounted cash flow model and the market approach. The determination of the fair value requires management to make significant estimates and assumptions related to profitability projections, including earnings before interest, taxes, depreciation, and amortization (“EBITDA”) margins and selection of the discount rate. The Company’s goodwill balance was $393.3 million as of December 31, 2021, of which $48.4 million was allocated to the Payment Services – Latin America reporting unit.
We identified goodwill for the Payment Services - Latin America reporting unit as a critical audit matter because of the significant estimates and assumptions management makes to estimate its fair value, and the difference between its fair value and its carrying amount. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of EBITDA margins as well as discount rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to forecasts of EBITDA margin as well as the discount rate for the Payment Services - Latin America reporting unit included the following, among others:
· We tested the design and operating effectiveness of controls over management’s goodwill impairment evaluation, including those over the evaluation of events and circumstances that affect the EBITDA margin and discount rate.
· We evaluated management’s ability to accurately forecast EBITDA margin by comparing actual results to management’s historical forecasts.
· We evaluated the reasonableness of management’s EBITDA margin forecasts to the historical and projected average EBITDA margins of companies in its peer group.
· With the assistance of our fair value specialists, we developed a range of independent estimates of discount rate and compared it to management’s selected discount rate.
/s/ Deloitte & Touche LLP
San Juan, Puerto Rico
February 28, 201825, 2022
Stamp No. E308482E478957
affixed to originaloriginal.
We have served as the Company’s auditor since 2015.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors and Stockholders of EVERTEC, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of EVERTEC, Inc. and subsidiaries (the “Company”) as of December 31, 2017,2021, based on criteria established in Internal Control-IntegratedControl — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control-IntegratedControl — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017,2021, of the Company and our report dated February 28, 2018,25, 2022, expressed an unqualified opinion on those financial statements.
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at PayGroup, which was acquired on July 3, 2017, and whose financial statements constitute 6% of consolidated total assets and 3% of consolidated total revenues as of and for the year ended December 31, 2017. Accordingly, our audit did not include the internal control over financial reporting at PayGroup.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Report on Internal Control Over Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
San Juan, Puerto Rico
February 28, 201825, 2022
Stamp No. E308483E478958
affixed to originaloriginal.
EVERTEC, Inc. Consolidated Balance Sheets
(Dollar amounts in thousands, except share data)
| | | | December 31, 2017 | | December 31, 2016 | | December 31, 2021 | | December 31, 2020 |
Assets | | | | | Assets | |
Current Assets: | | | | | Current Assets: | |
Cash and cash equivalents | | $ | 50,423 |
| | $ | 51,920 |
| Cash and cash equivalents | | 266,351 | | | 202,649 | |
Restricted cash | | 9,944 |
| | 8,112 |
| Restricted cash | | 19,566 | | | 18,456 | |
Accounts receivable, net | | 83,328 |
| | 77,803 |
| Accounts receivable, net | | 113,285 | | | 95,727 | |
Prepaid expenses and other assets | | 25,011 |
| | 20,430 |
| Prepaid expenses and other assets | | 37,148 | | | 42,214 | |
Total current assets | | 168,706 |
| | 158,265 |
| Total current assets | | 436,350 | | | 359,046 | |
Debt securities available-for-sale, at fair value | | Debt securities available-for-sale, at fair value | | 3,041 | | | — | |
Investment in equity investee | | 13,073 |
| | 12,252 |
| Investment in equity investee | | 12,054 | | | 12,835 | |
Property and equipment, net | | 37,924 |
| | 38,930 |
| Property and equipment, net | | 48,533 | | | 43,538 | |
| Operating lease right-of-use asset | | Operating lease right-of-use asset | | 21,229 | | | 27,538 | |
Goodwill | | 398,575 |
| | 370,986 |
| Goodwill | | 393,318 | | | 397,670 | |
Other intangible assets, net | | 279,961 |
| | 299,119 |
| Other intangible assets, net | | 213,288 | | | 219,909 | |
Deferred tax asset | | Deferred tax asset | | 6,910 | | | 5,730 | |
Net investment in lease | | Net investment in lease | | 107 | | | 301 | |
Other long-term assets | | 4,549 |
| | 6,110 |
| Other long-term assets | | 9,926 | | | 6,012 | |
Total assets | | $ | 902,788 |
| | $ | 885,662 |
| Total assets | | $ | 1,144,756 | | | $ | 1,072,579 | |
Liabilities and stockholders’ equity | | | | | Liabilities and stockholders’ equity | | | | |
Current Liabilities: | | | | | Current Liabilities: | |
Accrued liabilities | | $ | 38,451 |
| | $ | 34,243 |
| Accrued liabilities | | $ | 74,540 | | | $ | 58,033 | |
Accounts payable | | 41,135 |
| | 40,845 |
| Accounts payable | | 28,484 | | | 43,348 | |
Unearned income | | 7,737 |
| | 4,531 |
| |
Contract liability | | Contract liability | | 17,398 | | | 24,958 | |
Income tax payable | | 1,406 |
| | 1,755 |
| Income tax payable | | 7,132 | | | 6,573 | |
Current portion of long-term debt | | 46,487 |
| | 19,789 |
| Current portion of long-term debt | | 19,750 | | | 14,250 | |
Short-term borrowings | | 12,000 |
| | 28,000 |
| |
| Current portion of operating lease liability | | Current portion of operating lease liability | | 5,580 | | | 5,830 | |
Total current liabilities | | 147,216 |
| | 129,163 |
| Total current liabilities | | 152,884 | | | 152,992 | |
Long-term debt | | 557,251 |
| | 599,667 |
| Long-term debt | | 444,785 | | | 481,041 | |
Deferred tax liability | | 13,820 |
| | 14,978 |
| Deferred tax liability | | 2,369 | | | 2,748 | |
Unearned income—long-term | | 23,486 |
| | 17,303 |
| |
Contract liability - long term | | Contract liability - long term | | 36,258 | | | 31,336 | |
Operating lease liability - long-term | | Operating lease liability - long-term | | 16,456 | | | 22,402 | |
Derivative liability | | Derivative liability | | 13,392 | | | 25,578 | |
Other long-term liabilities | | 13,039 |
| | 16,376 |
| Other long-term liabilities | | 8,344 | | | 14,053 | |
Total liabilities | | 754,812 |
| | 777,487 |
| Total liabilities | | 674,488 | | | 730,150 | |
Commitments and contingencies (Note 22) | |
| |
| |
Commitments and contingencies (Note 23) | | Commitments and contingencies (Note 23) | | 0 | | 0 |
Stockholders’ equity | | | | | Stockholders’ equity | |
Preferred stock, par value $0.01; 2,000,000 shares authorized; none issued | | — |
| | — |
| Preferred stock, par value $0.01; 2,000,000 shares authorized; none issued | | — | | | — | |
Common stock, par value $0.01; 206,000,000 shares authorized; 72,393,933 shares issued and outstanding at December 31, 2017 (December 31, 2016 - 72,635,032) | | 723 |
| | 726 |
| |
Common stock, par value $0.01; 206,000,000 shares authorized; 71,969,856 shares issued and outstanding at December 31, 2021 (December 31, 2020 - 72,137,678) | | Common stock, par value $0.01; 206,000,000 shares authorized; 71,969,856 shares issued and outstanding at December 31, 2021 (December 31, 2020 - 72,137,678) | | 719 | | | 721 | |
Additional paid-in capital | | 5,350 |
| | — |
| Additional paid-in capital | | 7,565 | | | 5,340 | |
Accumulated earnings | | 148,887 |
| | 116,341 |
| Accumulated earnings | | 506,051 | | | 379,934 | |
Accumulated other comprehensive loss, net of tax | | (10,848 | ) | | (12,391 | ) | Accumulated other comprehensive loss, net of tax | | (48,123) | | | (48,254) | |
Total EVERTEC, Inc. stockholders’ equity | | 144,112 |
| | 104,676 |
| Total EVERTEC, Inc. stockholders’ equity | | 466,212 | | | 337,741 | |
Non-controlling interest | | 3,864 |
| | 3,499 |
| Non-controlling interest | | 4,056 | | | 4,688 | |
Total equity | | 147,976 |
| | 108,175 |
| Total equity | | 470,268 | | | 342,429 | |
Total liabilities and equity | | $ | 902,788 |
| | $ | 885,662 |
| Total liabilities and equity | | $ | 1,144,756 | | | $ | 1,072,579 | |
The accompanying notes are an integral part of these audited consolidated financial statements.
EVERTEC, Inc. Consolidated Statements of Income and Comprehensive Income
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | Years ended December 31, |
| | Years ended December 31, | | | 2021 | | 2020 | | 2019 |
| | 2017 | | 2016 | | 2015 | | | | | | | |
| | | | | | | |
Revenues (affiliates Note 21) | | $ | 407,144 |
| | $ | 389,507 |
| | $ | 373,528 |
| |
Revenues (affiliates Note 22) | | Revenues (affiliates Note 22) | | $ | 589,796 | | | $ | 510,588 | | | $ | 487,374 | |
| | | | | | | | | | | | |
Operating costs and expenses | | | | | | | Operating costs and expenses | |
Cost of revenues, exclusive of depreciation and amortization shown below | | 200,650 |
| | 175,809 |
| | 167,916 |
| Cost of revenues, exclusive of depreciation and amortization shown below | | 250,164 | | | 226,870 | | | 213,379 | |
Selling, general and administrative expenses | | 56,161 |
| | 46,986 |
| | 37,278 |
| Selling, general and administrative expenses | | 68,048 | | | 70,808 | | | 61,411 | |
Depreciation and amortization | | 64,250 |
| | 59,567 |
| | 64,974 |
| Depreciation and amortization | | 75,070 | | | 71,518 | | | 68,082 | |
Total operating costs and expenses | | 321,061 |
| | 282,362 |
| | 270,168 |
| Total operating costs and expenses | | 393,282 | | | 369,196 | | | 342,872 | |
Income from operations | | 86,083 |
| | 107,145 |
| | 103,360 |
| Income from operations | | 196,514 | | | 141,392 | | | 144,502 | |
Non-operating income (expenses) | | | | | | | Non-operating income (expenses) | | | | | | |
Interest income | | 716 |
| | 377 |
| | 495 |
| Interest income | | 1,889 | | | 1,502 | | | 1,217 | |
Interest expense | | (29,861 | ) | | (24,617 | ) | | (24,266 | ) | Interest expense | | (22,810) | | | (25,074) | | | (28,811) | |
Earnings (losses) of equity method investment | | 604 |
| | (52 | ) | | 147 |
| |
Other income, net | | 2,657 |
| | 544 |
| | 2,306 |
| |
Earnings of equity method investment | | Earnings of equity method investment | | 1,713 | | | 1,136 | | | 936 | |
Other income (expenses) | | Other income (expenses) | | 4,399 | | | 4,897 | | | (1,169) | |
Total non-operating expenses | | (25,884 | ) | | (23,748 | ) | | (21,318 | ) | Total non-operating expenses | | (14,809) | | | (17,539) | | | (27,827) | |
Income before income taxes | | 60,199 |
| | 83,397 |
| | 82,042 |
| Income before income taxes | | 181,705 | | | 123,853 | | | 116,675 | |
Income tax expense (benefit) | | 4,780 |
| | 8,271 |
| | (3,335 | ) | |
Income tax expense | | Income tax expense | | 20,562 | | | 19,002 | | | 12,975 | |
Net income | | 55,419 |
| | 75,126 |
| | 85,377 |
| Net income | | 161,143 | | | 104,851 | | | 103,700 | |
Less: Net income attributable to non-controlling interest | | 365 |
| | 90 |
| | — |
| Less: Net income attributable to non-controlling interest | | 13 | | | 415 | | | 231 | |
Net income attributable to EVERTEC, Inc.’s common stockholders | | 55,054 |
| | 75,036 |
| | 85,377 |
| Net income attributable to EVERTEC, Inc.’s common stockholders | | 161,130 | | | 104,436 | | | 103,469 | |
Other comprehensive income (loss), net of tax of $122, $176 and $8 | | | | | | | |
Other comprehensive (loss) income, net of tax of $1,153, $792 and $1,070 | | Other comprehensive (loss) income, net of tax of $1,153, $792 and $1,070 | |
Foreign currency translation adjustments | | (635 | ) | | (3,360 | ) | | (545 | ) | Foreign currency translation adjustments | | (11,129) | | | (7,970) | | | 4,754 | |
Gain (loss) on cash flow hedge | | 2,178 |
| | (1,449 | ) | | (515 | ) | |
Gain (loss) on cash flow hedges | | Gain (loss) on cash flow hedges | | 11,151 | | | (10,275) | | | (10,974) | |
Unrealized gain on change in fair value of debt securities available-for-sale | | Unrealized gain on change in fair value of debt securities available-for-sale | | 109 | | | — | | | — | |
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders | | $ | 56,597 |
| | $ | 70,227 |
| | $ | 84,317 |
| Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders | | $ | 161,261 | | | $ | 86,191 | | | $ | 97,249 | |
Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders | | $ | 0.76 |
| | $ | 1.01 |
| | $ | 1.11 |
| Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders | | $ | 2.24 | | | $ | 1.45 | | | $ | 1.44 | |
Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders | | $ | 0.76 |
| | $ | 1.01 |
| | $ | 1.11 |
| Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders | | $ | 2.21 | | | $ | 1.43 | | | $ | 1.41 | |
Cash dividends declared per share | | $ | 0.30 |
| | $ | 0.40 |
| | $ | 0.40 |
| |
|
The accompanying notes are an integral part of these audited consolidated financial statements.
EVERTEC, Inc. Consolidated Statements of Changes in Stockholders’ Equity
The accompanying notes are an integral part of these audited consolidated financial statements.
The accompanying notes are an integral part of these audited consolidated financial statements.
EVERTEC, Inc. (formerly known as Carib Latam Holdings, Inc.) and its subsidiaries (collectively the “Company,”“Company” or “EVERTEC”) is a leading full-service transaction processing business in Latin America and the Caribbean. The Company is based in Puerto Rico and provides a broad range of merchant acquiring, payment servicesprocessing and business process management services. The Company provides services across 26 countries in the region. EVERTEC owns and operates the ATH network, one of the leading automated teller machine (“ATM”) and personal identification number (“PIN”) debit networks in the Caribbean and Latin America. In addition, EVERTEC provides a comprehensive suite of services for core bank processing and cash processing in Puerto Rico and technology outsourcing in the regions the Company serves. EVERTEC serves a broad and diversified customer base of leading financial institutions, merchants, corporations, and government agencies with solutions that are essential to their operations, enabling them to issue, process and accept transactions securely.
The consolidated financial statements of EVERTEC have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the accompanying consolidated financial statements, prepared in accordance with GAAP, contain all adjustments, all of which are normal and recurring in nature, necessary for a fair presentation.
A summary of the most significant accounting policies used in preparing the accompanying consolidated financial statements is as follows:
The accompanying consolidated financial statements include the accounts and operations of the Company, which are presented in accordance with GAAP. The Company consolidates all entitieswholly owned subsidiaries and subsidiaries that are controlled by ownership of a majority voting interest.owned. Intercompany accounts and transactions are eliminated in the consolidated financial statements.
The preparation of the accompanying consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
The Company accounts for investments using the equity method of accounting if the investment provides the Company the ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of an investor of between 20 percent and 50 percent, although other factors are considered in determining whether the equity method of accounting is appropriate. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of net income or losses as they occur. The Company’s share of investee earnings or losses is recorded, net of taxes, within earnings (losses) of equity method investment caption in the consolidated statements of income and comprehensive income. The Company’s consolidated revenues include fees for services provided to an investee accounted for under the equity method. Additionally, the Company’s interest in the net assets of its equity method investee is reflected in the consolidated balance sheets. On the acquisition of the investment, any difference between the cost of the investment and the amount of the underlying equity in net assets of an investee is required to be accounted as if the investee were a consolidated subsidiary. If the difference is assigned to depreciable or amortizable assets or liabilities, then the difference should be amortized or accreted in connection with the equity earnings based on the Company’s proportionate share of the investee’s net income or loss. If the investor is unable to relate the difference to specific accounts of the investee, the difference should be considered to be goodwill.
The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considered any such decline to be other than temporary (based on various factors, including historical financial results, product development activities and the overall health of the investee’s industry), then the Company would record a write-down to estimated fair value.
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method and expensed over their estimated useful lives. Amortization of leasehold improvements is computed over the terms of the respective leases, including renewal options considered by management to be
reasonably assured of being exercised, or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs which do not improve or extend the life of the respective assets are expensed as incurred.
Long-lived assets to be held and used, and long-lived assets to be disposed of, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company capitalizes interest costs incurred in the development of software. The amount of interest capitalized is an allocation of the interest cost incurred during the period required to substantially complete the asset. The interest rate for capitalization purposes is based on a weighted average rate on the Company’s outstanding borrowing. For the years ended December 31, 2017, 20162021, 2020 and 2015,2019, interest cost capitalized amounted to approximately $0.8 million, $0.4$0.7 million, and $0.3$1.1 million, respectively.
Goodwill represents the excess of the purchase price and related costs over the value assigned to net assets acquired. Goodwill is not amortized, but is tested for impairment at least annually, or more often if events or circumstances indicate there may be impairment.
The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). The Company may assess qualitative factors to determine whether it is more likely than not, that is, a likelihood of more than 50 percent that the fair value of the reporting unit is less than its carrying amount, including goodwill. The Company has an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. With the early adoption in December 2017 of the accounting standards update that simplifies the goodwill impairment test, theThe quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the Company determines to perform a quantitative impairment test, a third-party valuator may be engaged to prepare an independent valuation of each reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Additionally, the Company shall consider the income tax effect from any tax-tax-deductible
The Company uses derivative financial instruments to enhance its ability to manage its exposure to certain financial and market risks. On the date the derivative instrument contract is entered into, the Company may designate the derivative as (1) a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value” hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge), or (3) as a “standalone” derivative instrument, including economic hedges that the Company has not formally documented as a fair value or cash flow hedge. Changes in the fair value of a derivative that qualifies for cash flow hedge accounting are recognized in Other Comprehensive Income.Income (Loss). Amounts accumulated in other comprehensive income (loss) are reclassified to earnings when the related cash outflow affects earnings. Changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that isare attributable to the hedged risk (including gains or losses on firm commitments), are recorded in current-period earnings. Similarly, the changes in the fair value of stand-alone derivative instruments or derivatives not qualifying or designated for hedge accounting are reported in current-period earnings. The Company recognizes all derivative financial instruments in the Consolidated Balance Sheetsconsolidated balance sheets as assets or liabilities at fair value. The Company presents derivative assets and derivative liabilities separately in the consolidated balance sheets. The Company does not enter into derivative financial instruments for speculative purposes.
Income taxes are accounted for under the asset and liability method. A temporary difference refers to a difference between the tax basis of an asset or liability, determined based on recognition and measurement requirements for tax positions, and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Deferred tax assets and liabilities represent the future effects on income taxes that result from temporary differences and carryforwards that exist at the end of a period. Deferred tax assets and liabilities are measured using enacted tax rates and provisions of the enacted tax law and are not discounted to reflect the time-value of money. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income and comprehensive income in the period that includes the enactment date. A deferred tax valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax asset will not be realized.
The Company recognizes the benefit of uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement or disposition of the underlying issue with the taxing authority. Accordingly, the amount of benefit recognized in the consolidated financial statements may differ from the amount taken or expected to be taken in the tax return resulting in unrecognized tax benefits (“UTBs”). The Company recognizes the interest and penalties associated with UTBs as part of the provision for income taxes on its consolidated statements of income and comprehensive income. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheets.
Restricted cash represents cash received on deposits from participating institutions of the ATH network that has been segregated for the development of the ATH brand and cash maintained as collateral for a credit facility with Popular. Also, restricted cash includes certain cash collected from the Ticketpop business and a reserve account for payment and transaction processing services to merchants. Prior to the sale in 2021 of assets related to the Ticketpop business and subsequent exit from this business, restricted cash also included cash collected from the Ticketpop business. The restrictions of these accounts are based on contractual provisions entered into with third parties. This cash is maintained in separate accounts at a financial institution in Puerto Rico.
Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange at the end of the period. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The resulting foreign currency translation adjustment from operations for which the functional currency is other than the U.S. dollar is reported in accumulated other comprehensive loss. Gains and losses on transactions denominated in currencies other than the functional currencies are included in determining net income for the period in which exchange rates change.
The Company estimates the fair value of stock-based awards, on a contemporaneous basis, at the date they are granted using the Black-Scholes-Merton option pricing model for Tranche A options and the Monte Carlo simulation analysis for Tranche B and Tranche C options and market based restricted stock units (“RSUs”) using the following assumptions: (1) stock price; (2) risk-free rate; (3) expected volatility; (4) expected annual dividend yield and (5) expected term. The risk-free rate is based on the U.S. Constant Maturities Treasury Interest Rate as of the grant date or the yield of a 2-year or 3-year Treasury bond, as applicable. The expected volatility is based on a combination of historical volatility and implied volatility from publicly traded companies in the Company’s industry. The expected annual dividend yield is based on management’s expectations of future dividends as of the grant date and, in certain cases, assumes that those dividends will be reinvested over the performance period. The expected term for stock options granted under the 2010 Plan was based on the vesting time of the options. For the stock options granted under the 2013 Plan, the simplified method was used to estimate the expected term, given that the Company did not have appropriate exercise data on which to base the estimate nor is exercise data relating to employees of comparable companies easily obtainable. Performance and time based RSUs and restricted stock are valued based on the market price of the Company’s stock at the grant date.
Basic net income per common share is determined by dividing net income by the weighted-average number of common shares outstanding during the period.
Diluted net income per common share assumes the issuance of all potentially dilutive share equivalents using the treasury stock method. For restricted stock options and RSUs it is assumed that the proceeds will be used to buy back shares. For stock options, such proceeds equal the average unrecognized compensation plus exercise price. For unvested restricted share units, the proceeds equal the average unrecognized compensation.
CONTADO fiscal year ends December 31 and is reported in the consolidated statements of income and comprehensive income for the period subsequent to the acquisition date on a one monthone-month lag. No significant events occurred in CONTADO’s operations subsequent to November 30, 20172021 that would have materially affected the Company’s reported results.
Fair value measurement provisions establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These provisions describe three levels of input that may be used to measure fair value:
The Company uses observable inputs when available. Fair value is based upon quoted market prices when available. If market prices are not available, the Company may employ models that mostly use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. The Company limits valuation adjustments to those deemed necessary to
ensure that the financial instrument’s fair value adequately represents the price that would be received or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit quality and liquidity as well as other criteria. The estimated fair value amounts are subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair value could affect the results. The fair value measurement levels are not indicative of risk of investment.
The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value estimates are made at a specific point in
time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.
The following table presents the carrying value, as applicable, and estimated fair values for financial instruments at December 31, 20172021 and 2016:2020:
There were no transfers in or out of Level 3 during the years ended December 31, 2017, 20162021, 2020 and 2015.2019.
The Company is authorized to issue up to 206,000,000 shares of common stock of $0.01 par value. At December 31, 20172021 and 2016,2020, the Company had 72,393,93371,969,856 and 72,635,03272,137,678 shares outstanding, respectively. The Company is also authorized to issue 2,000,000 shares of $0.01 par value preferred stock. As of December 31, 2017,2021 and 2020, no shares of preferred stock have been issued.
EVERTEC, Inc. Puerto Rico Savings and Investment plan (“the EVERTEC Savings Plan”) was established in 2010, as a defined contribution savings plan qualified under section 1165(e) of the Puerto Rico Internal Revenue Code. Investments in the plan are participant directed, and employer matching contributions are determined based on specific provisions of the EVERTEC Savings Plan. Employees are fully vested in the employer’s contributions after five years of service. For the years ended December 31, 2017, 20162021, 2020 and 2015,2019, the costs incurred under the plan amounted to approximately $0.7$1.0 million, $0.7$0.9 million and $0.8 million, respectively.
EVERTEC Group, Holdings and EVERTEC, Inc. entered into a Tax Payment Agreement pursuant to which EVERTEC Group is obligatedrequired to make certain payments to Holdings or EVERTEC, Inc. for taxable periods or portions thereof occurring on or after April 17, 2012 (the “Effective Date”). Under the Tax Payment Agreement, EVERTEC Group will make payments with respect to any and all taxes (including estimated taxes) imposed under the laws of Puerto Rico, the United States of America and any other jurisdiction or any political (including municipal) subdivision or authority or agency in Puerto Rico, the United States of America or such other jurisdiction, that would have been imposed on EVERTEC Group if EVERTEC Group had been a corporation for tax purposes of that jurisdiction, together with all interest and penalties with respect thereto (“Taxes”), reduced by taking into account any applicable net operating losses or other tax attributes of Holdings or EVERTEC, Inc. that reduce Holdings’ or EVERTEC, Inc.’s taxes in such period. The Tax Payment Agreement provides that the payments thereunder shall not exceed the net amount of Taxes that Holdings and EVERTEC, Inc. actually owe to the appropriate taxing authority for a taxable period. Further, the Tax Payment Agreement provides that if Holdings or EVERTEC, Inc. receives a tax refund attributable to any taxable period or portion thereof occurring on or after the Effective Date, EVERTEC, Inc. shall be required to recalculate the payment for such period required to be made by EVERTEC Group to Holdings or EVERTEC, Inc. If the payment, as recalculated, is less than the amount of the payment EVERTEC Group already made to Holdings or EVERTEC, Inc. in respect of such period, Holdings or EVERTEC, Inc. shall promptly make a payment to EVERTEC Group in the amount of such difference.
Taxes payable to foreign countries by EVERTEC’s subsidiaries will be paid by such subsidiary and the corresponding liability and expense will be presented in EVERTEC’s consolidated financial statements.
amount of unrecognized deferred tax liability related to the Company’s undistributed earnings. If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted, and income taxes have not been recognized by the parent entity, the parent entity shall accrue as an expense of the current period income taxes attributable to that remittance.
The grant contains customary commitments, conditions, and representations that EVERTEC Group will be required to comply with in order to maintain the grant. The more significant commitments include: (i) maintaining at least 750700 employees in EVERTEC Group’sGroup's Puerto Rico data processing operations, during 2012 and at least 700 employees for the remaining years of the grant, (ii) investing at least $200.0 million in building, machinery, equipment or computer programs to be used in Puerto Rico during the effective term of the grant (to be made over four yearfour-year capital investment cycles in $50.0 million increments); and (iii) 80% of EVERTEC Group employees must be residents of Puerto Rico. Failure to meet the requirements could result, among other things, in reductions inof the benefits of the grant or revocation of the grant in its entirety, which could result in EVERTEC, Inc. paying additional taxes or other payments relative to what such parties would be required to pay to other municipal agencies if the full benefits of the grant are not available.
Pursuant to the provision of the PR Code, net operating losses (“NOL”) can be carried forward for a period of seven, ten or twelve taxable years, depending on the taxable year generated. Act 72 of May 29, 2015, limited the amount of NOLs deduction to 80% for regular tax and 70% for AMTalternative minimum tax (“AMT”) for the taxable year endedyears commencing after December 31, 2017.2014. However, Act 257 of 2018 limits the deduction of NOLs to 90% for regular tax for tax years commencing after December 31, 2018. At December 31, 2017,2021, the Company no longer has $6.8 million, $0.6 million and $4.0 million in NOL carryforwards for tax purposes.related to Puerto Rico industrial development income, United States and foreign countries, respectively, available to offset future eligible income. The NOL balance as of December 31, 2021 expires as follows:
The Company recognizes the benefit of uncertain tax positions ("UTPs") only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement. During the third quarter
The Company recognizes interest and penalties related to UTB as part of income tax expense. During the years ended December 31, 2017, 20162021, 2020 and 2015,2019, the Company recognized an income tax benefit of $0.8 million, an income tax expense of $0.7$0.4 million, $0.3 million and an income tax benefit of $2.0$0.4 million, respectively, related to interest and penalties. The amount accrued for interest and penalties at December 31, 20172021 and 20162020 was $1.2$1.6 million and $2.0$2.6 million, respectively. The Company anticipates changesestimates that it is reasonably possible that the Puerto Rico liability for uncertain tax position relating to the UTBs withinnet operating loss created by transaction cost will decrease by approximately $3.6 million in the next 12 months to be primarily related to interest.as a result of the statute of limitations. The Company believes it has sufficient accruals for contingent tax liabilities.
In connection with tax return examinations, contingencies can arise that generally result from different interpretations of tax laws and regulations as they pertain to the amount, timing or inclusion of revenues and expenses in taxable income, or the ability to utilize tax credits to reduce income taxes payable. While it is probable, based on the potential outcome of the Company’s Puerto Rico and foreign tax examinations or the expiration of the statute of limitations for specific jurisdictions, that the liability for UTBs may increase or decrease within the next twelve months, the Company does not expect any such change would have a material effect on our financial condition, results of operations or cash flow.
The Company and its subsidiaries are subject to Puerto Rico income tax as well as income tax of multiple foreign jurisdictions. A significant majority of the income tax is from Puerto Rico with a statute of limitations of four years after filing the income tax returns; therefore, theand Costa Rica. The income tax returns for 2013, 2014, 2015,2017, 2018, 2019, and 20162020 are currently open for examination.examination for both jurisdictions, while 2014 and 2015 are also open for examination for Costa Rica.