EVERTEC, Inc.
(Exact name of registrant as specified in its charter)
| Puerto Rico | 66-0783622 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | ||||||||||
Cupey Center Building, | Road 176, Kilometer 1.3, | ||||||||||
| 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:
| 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 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.:
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrants's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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$1,296,403,363 based on the closing price of $17.30$36.88 as of the close of business on June 30, 2017.2022.
As of February 21, 2018,2023, there were 72,429,14164,985,880 outstanding shares of common stock of EVERTEC, Inc.
Documents Incorporated by Reference:
Specifically identified portions of the registrant’s definitive Proxy Statement for the 2018relating to its 2023 Annual Meeting of ShareholdersStockholders are incorporated by reference in Part III of this Annual Report on Form 10-K where indicated. The Registrant's definitive proxy statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2022.
EVERTEC, Inc.
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,(this “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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Report, including, without limitation, statements regarding our future results of operations and financial position; our business strategies; objectives of management for future operations; our expected growth; the sufficiency of our cash and cash equivalents; and our future capital expenditures and debt service obligations, are forward-looking statements.
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.strategy, though not all forward-looking statements use these words or expressions.. Readers are cautioned that any such forward-looking statements are notneither guarantees nor promises of future performance and may involve significant risks and uncertainties, and that actual results may varydiffer 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 agreementsecond amended and restated Master Services Agreement (“MSA”) with them, and as it may impact our reliance on Banco Popular de Puerto Rico (“Banco Popular”), Popular’s principal banking subsidiary,ability to grow our merchant acquiring business;
•our ability to renew our client contracts on terms favorable to us, including our contractbut not limited to the current term and any extension of the MSA with Popular;
•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 andor 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 macroeconomic, market, international, legal, tax, political, or administrative conditions, including inflation or economic conditions;the risk of recession;
•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 protect our intellectual property rights against infringement and to defend ourselves against claims of infringement brought by third parties;
•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 the impact of rising interest rates, 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;
•the possibility that we could lose our preferential tax rate in Puerto Rico;
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•the possibility of future catastrophic hurricanes, affecting Puerto Rico and/or the Caribbean, as well asearthquakes and other potential natural disasters;disasters affecting our main markets in Latin America and the Caribbean;
•the nature, timingelimination of Popular's ownership of our common stock; and amount of any restatement; and
•the other risks and uncertainties detailed in Part I,factors set forth under "Part 1, Item IA “Risk Factors”1A. Risk Factors," in this Report.
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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.
WHERE YOU CAN FIND MORE INFORMATION
All reports we file with the SEC are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC’s website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available for download through our website at www.evertecinc.com as soon as reasonably practicable after filing such material with the SEC.
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INDUSTRY AND MARKET DATA
This Annual Report on Form 10-K includes industry data that we obtained from periodic industry publications, including the August 2017September 2022 Nilson Report and the 20172022 World Payments Report. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable. This Annual Report on 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 Annual Report on Form 10-K.
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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 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”)), BBR, SpA, BBR Perú, S.A.C. 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 2017September 2022 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.Caribbean. We serve 26 countries in the region fromout of 12 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 process over six billion transactions annually and manage a system of electronic payment networks in Puerto Rico and Latin America and offer a comprehensive suite of services for core banking, cash processing, and fulfillment in Puerto Rico. Additionally, we offer technology outsourcing and payment transactions fraud monitoring to 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
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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.
Popular, Inc. (NASDAQ:(Nasdaq: BPOP), whose principal banking subsidiary’s history dates back to 1893, is the No. 1 bank holding company by both assets (“Popular”). The revenue concentration with Popular makes our MSA with them our most significant client contract.
See “Item 7. Management’s Discussion and deposits based in Puerto Rico,Analysis of Financial Condition and asResults 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.Operations—Relationship with Popular.”
Industry Trends
Accelerated Shift to Electronic PaymentsDigital Payment Methods
In recent years, 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 was accelerated by the COVID-19 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
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
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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 toones. As per the August 2017September 2022 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.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 two billion transactions in 2017, which accordingAccording 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 revenue that is mostly recurring revenues that collectivelyin nature and accounted for approximately 94%the majority of our total revenuesthe revenue recognized in 2017.2022. 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 A&R MSA through September 2028 and benefit from the bank’s distribution network and continued support. Through our long-standing and diverse customer relationships, we are able tocan 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$282 million over the last five years on technology investments, including POS terminals, enhancements to continue to build the capacityfunctionality and functionalitycapacity 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.
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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 have been successful exporting our regional products to the markets in which we operate, tailoring to the specific needs and regulatory environments of each. We continue to 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
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 substantialan opportunity to expand our businesses in the Latin American region.America, both organically through new business wins and inorganically through mergers and acquisitions. We believe that we have a competitive advantage relative to U.S. competitorsour peers 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 ofseveral large markets such as Brazil, Colombia, México, and Chile, among others.as well as in smaller markets in Central America where expanding our presence could have a significant impact on our growth. 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, weWe continually evaluate our strategic plans for geographic expansion, which can be achieved through joint ventures, partnerships, or alliances or strategicand the pursuit of business acquisitions. 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 expansion and selective acquisition strategy exposes us to risks, including the risk that we may not be able to successfully integrate acquired businesses.”
Develop New Products and Services
At the core of EVERTEC’s value proposition is innovation.We must 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.
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Merchant Acquiring
Payment Services
We provide financial institutions and fintechs with processing, network and financial technology solutions and we believe we are the largest card processor and card network service provider in the Caribbean. We provide a diversified suite of paymentOur main service offerings include authorization, switching, settlement, issuer credit and debit card 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 the infrastructure technology necessary to facilitate theacquiring processing, and routingmanagement and monitoring of payments across the transaction processing value chain.
ATMs and POS. 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. Additionally, through our payment gateway, we allow merchants to capture and process digital transactions. 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 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.
Our EBT application allows certain agencies to deliver government benefits to participants through a magnetic card system and serves approximately 800,000 active 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.
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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 organizationsPaypal, 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., dLocal, 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 consideredconsider 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.
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Diversity and Inclusion
Our culture is underpinned by our core values, including a commitment to diversity, equity 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 composition is 66% male and 34% female.
The Company has been included in the Bloomberg Gender Equality Index (“GEI”) for five 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 2022, with 90% 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.
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 offers a hybrid (on site/remote) work environment to provide flexibility to our employees.
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. Aligned with our Wellness core value, we also provide health and safety educational sessions in conjunction with on-site clinics and external health professionals as part of our health and wellness education programs.
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.
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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. On August 15, 2022, through a secondary offering, Popular sold its remaining shares of Evertec, common stock and, as of the date of this Annual Report on Form 10-K, Popular no longer holds any shares of our common stock. As long assuch, Evertec is no longer deemed a subsidiary of Popular under the Bank Holding Company. To 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.
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 Federal Deposit Insurance Corporation and the office of the Commissioner of Financial Institutions of Puerto Rico also participatesparticipate 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. We are also subject to examinations from regulatory bodies in all other regions in which we operate.
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.
and to 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.services. CFPB rules, examinations and enforcement actions may require us to adjust our activities and may increase our compliance costs.
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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.
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Federal Trade Commission Act and Other Laws Impacting our Customers'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'smerchant’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'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'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.
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Geographic Concentration
Seasonality
Our payment businesses generally experience increased activity during the traditional holiday shopping periods and around other nationally recognized holidays.holidays, which follow consumer spending patterns.
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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”“Governance Documents” 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
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.
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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. 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; additionalCompany. Additional risks and uncertainties not presently known to us or not believed by us to be material may also negatively impact us. These risk factors also serveaffect our business results, financial condition, results of operations, cash flows, the trading price of our common stock, and our ability to describe factors which may causeaccomplish our results to differ materially from those discussedstrategic objectives. Some statements contained in forward looking statements included herein or in other documents or statements that make reference to this Annual Report on Form 10-K.10-K, including statements in the following risk factors section, constitute forward-looking statements. Please also refer to the section titled “Forward“Forward- Looking Statements” inat the beginning of this Annual Report on Form 10-K.
Risks Related to Our Business
Our services to Banco Popular, our largest customer, 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 for approximately 43%Additionally, the elimination of Popular’s ownership of our total revenues.common stock could result in disruptions to relationships with customers and other business partners and adversely affects us.
For the year ended December 31, 2022, approximately 39% of our revenue was attributable to Banco Popular, a wholly owned subsidiary of Popular. The majority of Popular’s businessAmended and Restated Master Service Agreement (the “A&R MSA”) by and among Popular, Banco Popular de Puerto Rico and EVERTEC Group, is presentedour most significant client contract, and was amended and restated to include terms ending in the Business Solutions segment.2028. If Popular were to terminate or fail to perform under or fail to renew the Master Services Agreement (“MSA”), which currently expires in 2025,A&R 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 would have a material adverse impact on our financial condition and results of operations.
Prior to closing the Popular Transaction on July 1, 2022, Popular owned approximately 17.5% of our common stock and historically had substantial influence over our policies and management. In connection with the closing of the Popular Transaction, Popular delivered 4.6 million shares of Evertec common stock that were owned by Popular in turn,exchange for certain assets of EVERTEC Group, and we also modified and extended certain commercial agreements with Banco Popular. Furthermore, effective as of July 1, 2022, the Stockholder Agreement, dated April 17, 2012, with Popular, which had granted them certain benefits as a shareholder of our Company, was terminated. On August 15, 2022, through a secondary offering, Popular sold its remaining shares of Evertec common stock and, as of the date of this Annual Report on Form 10-K, no longer holds any shares of our common stock. Evertec is no longer deemed a subsidiary of Popular under the Bank Holding Company Act.
There is no assurance that we will be able to realize the intended benefits of the Popular Transaction. Specifically, the Popular Transaction could potentiallycause disruptions in our remaining businesses or otherwise limit ourthe ability to renegotiatecompete for or perform certain contracts or services. The elimination of Popular’s holdings of our debt.common stock and the corresponding termination in Popular’s right to nominate directors to our Board of Directors may negatively impact our business relationship with Popular and increase the likelihood of a change of control of our Company. Similarly, the elimination and the modification to commercial arrangements with Popular could have a material adverse effect on our business, financial condition, results of operations and cash flows, and the trading price of our common stock.
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 substantial portion of our business is generated from our Amended and Restated Independent Sales Organization Sponsorship and Services Agreement (the “ISO“A&R ISO Agreement”) with Banco Popular, which expires in 2025.was amended and restated on July 1, 2022, among other things, to extend its term to 2035.
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
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will continue and the loss or deterioration of these relationships, whether due to the termination of the A&R ISO Agreement or otherwise, could negatively impact our business and result in a material reduction of our revenue and profit.income.
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:
We rely on our information technology (“IT”) systems, employees and certain suppliers and counterparties, and certain failures or disruptions in those systems or chains 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 in the past and expect to continue to experience in the future actual and attempted cyber-attacks of our IT networks, such as through phishing scams and ransomware. Although none of these actual or attempted cyber-attacks has had a material adverse impact on our operations or financial condition, we cannot guarantee that any such incidents will not have such an impact in the future. The technology solutions underlying our
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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 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. Thirderror. 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.
Our ability to recruit, retain and develop qualified personnel is critical to our success and growth.
All our businesses require a wide range of expertise and intellectual capital to adapt to the rapidly changing technological, social, economic and regulatory environments. In order to successfully compete and grow, we must recruit, retain and develop personnel who can provide the necessary expertise across a broad spectrum of intellectual capital needs. In addition, we must develop, maintain and, as necessary, implement appropriate succession plans to assure we have the necessary human resources capable of maintaining continuity in our business. 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. In addition, from time to time, there may be changes in our management team that may be disruptive to our business. If our management team, including new hires that we make, fails to work together effectively and to execute our plans and strategies on a timely basis, our business could be harmed. Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. We cannot assure that key personnel, including our executive officers, will continue to be employed or that we will be able to attract and retain qualified personnel in the future. Failure to recruit, retain or develop qualified personnel could adversely affect our business, financial condition or results of operations.
We may beare subject to disruptions of our operating systems arising 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
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.
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Unauthorized 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 increase 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.
Failure to comply with federal and state laws and regulations relating to data privacy and security, or the expansion of current, or the enactment of new, laws or regulations relating to data privacy and security, could adversely affect our business, financial condition and operating results.
While we are not a direct-to-consumer business, we do collect, process, store, use and share some personal data of our employees and business partners, which is governed by a variety of federal and state laws and regulations. Laws and regulations relating to data privacy and security are complex and rapidly evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As we seek to expand our business, we are, and may increasingly become, subject to various laws, regulations, standards, and contractual obligations relating to data privacy and security in the jurisdictions in which we operate. Despite our efforts, our practices may not comply, now or in the future, with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any current or future federal or state data privacy or security-related laws, regulations, regulatory guidance, orders, or other legal obligations relating to privacy or security could adversely affect our reputation, brand and business, and may result in claims, proceedings, or actions against us by governmental entities or others or other liabilities or require us to change our operations and/or cease using certain data sets. Any such claim, proceeding or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and manufacturers, and may result in the imposition of monetary penalties and otherwise adversely affect our financial condition and operating results. We may also be contractually required to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations, or other legal obligations relating to privacy or security or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.
Fraud by merchants or others could adversely affect our business, financial condition or results of operations.
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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.
Our 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.results of operations.
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. Our business strategy may not effectively respond to these changes, and we may fail to recognize and position ourselves to capitalize upon market opportunities. 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 theour 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.
If the number of electronic and digital payment transactions of the type we process does not continue to grow, if there are other, more attractive emerging means of payments or if businesses or consumers discontinue adopting our services, it could have a material adverse effect on the profitability of our business, financial position, and results of operations. We believe future growth in the use of credit, risk that our merchantsdebit and other electronic and digital payments will be unable to satisfy obligations for which we may also be liable.
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 of operations 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.
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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 of operations and financial condition.
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.
Privacy and 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.
Although we make reasonable efforts to comply with all applicable data protection laws and regulations, our interpretations and efforts may have been or may prove to be insufficient or incorrect. We also make public statements about our use and disclosure of personal information through our privacy policy, information provided on our website and other public statements. Although we endeavor to ensure that our public statements are complete, accurate and fully implemented, we may at times fail to do so or be alleged to have failed to do so. We may be subject to potential regulatory or other legal action if such policies or statements are found to be deceptive, unfair or misrepresentative of our actual practices. In addition, from time to time, concerns may be expressed about whether our products and services compromise the privacy of our customers and others. Any concerns about our data privacy and security practices (even if unfounded), or any failure, real or perceived, by us to comply with our posted privacy policies or with any legal or regulatory requirements, standards, certifications or orders or other privacy or consumer protection-related laws and regulations applicable to us, could cause our customers, riders and users to reduce their use of our products and services.
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.
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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,customers that are subject to banking 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,financial regulation, 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
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 of operations 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
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.
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.
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,
ESG Regulatory Developments
The recent emphasis on environmental, social and other sustainability matters has resulted and may continue to result in the successadoption of any acquisition dependsnew laws and regulations, including new reporting requirements. Compliance with environmental, social and other sustainability laws, regulations, expectations or reporting requirements may result in part onincreased compliance costs, as well as additional scrutiny. It is possible that other types of environmental and social regulations, for example regulations regarding the
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use of energy or water or regulations regarding human capital management matters, may also result in increased costs. Moreover, if we fail to comply with new laws, regulations, expectations or reporting requirements, or if we are perceived as failing, our reputation and business could be adversely impacted. Any reputational damage associated with environmental, social and governance (ESG) factors may also adversely impact our ability to integraterecruit and retain employees and customers.
Puerto Rico’s fiscal crisis could have a material adverse effect on our business 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, 2022 and 2021, approximately 78% and 80%, 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, 2022, we conduct due diligence investigations priorhad net receivables of $9.4 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 deficiencies or material liabilitiesa decrease in electronic benefit card volume. The effect of an acquired business for which wea protracted government shutdown 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 the ongoing financial crisis and the effects of potential natural disasters, including weather events connected to climate change, could have a prolonged negative impact on the countries in which we operate and, as a result, could have 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 more generally. These events have accelerated and could continue to accelerate the ongoing emigration trend of Puerto Rico residents to the United States. Prolonged delays 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 the demand for our services and could have a material adverse effect on our business and results of operations.
There are increasing and rapidly evolving concerns over the risks of climate change and related environmental sustainability matters. The physical risks of climate change include rising average global temperatures, rising sea levels and an increase in the frequency and severity of extreme weather events and natural disasters. Such events and disasters, including any such events or disasters in Puerto Rico, the Caribbean or elsewhere, could disrupt our operations or the operations of customers or third parties on which we rely and could result in market volatility. We could also experience increased expenses resulting from strategic planning, litigation and changes to our technology, operations, products and services, as well as reputational harm as a result of negative public sentiment, regulatory scrutiny and reduced stakeholder confidence, due to our response to climate change or real or perceived vulnerability to climate change-related risks.
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.
Our operations, business, customers and partners could be adversely affected by climate change.
Our operations, business, customers and partners could be adversely affected by climate change. There are increasing and rapidly evolving concerns over the risks of climate change and related environmental sustainability matters. The physical risks of climate change including rising average global temperatures, rising sea levels and an increase in the frequency and severity of extreme weather events and natural disasters. Such events and disasters could disrupt our operations or the operations of
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customers or third parties on which we rely and could result in market volatility. Additionally, we may face risks related to the transition to a low-carbon economy. We could experience increased expenses resulting from strategic planning, litigation and changes to our technology, operations, products and services, access to energy and water, as well as reputational harm as a result of negative public sentiment, regulatory scrutiny and reduced stakeholder confidence, due to our response to climate change or real or perceived vulnerability to climate change-related risks. Changes in consumer preferences, travel patterns and legal requirements could increase expenses or otherwise adversely impact our business, customers and partners.
The ongoing COVID-19 pandemic has had, and may continue to have, a negative impact on the global economy, which in turn could have a material adverse impact on our business, results of operations and financial condition.
The COVID-19 pandemic continues to evolve, with pockets of resurgence and the emergence of variant strains contributing to continued uncertainty about its scope, duration, severity, trajectory and lasting impact. The effects of the COVID-19 pandemic on our business and 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) continuing negative effects of general macroeconomic conditions on consumer confidence; (viii) significant reductions or volatility in demand for one or more of our products; and (ix) reduced demand from consumers, stemming from the concern of the risk of contracting COVID-19, resulting in loss of profits.
These factors may prevail for a significant period of time and may materially and adversely affect our business, results of operations and financial condition. The impact of these disruptions 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 and execute expansion plans or invest in product development. In addition, new pandemics may emerge in the future that could have similar negative effects on macroeconomic conditions generally and our business, results of operations and financial condition.
We are exposed to risks associated with our presence in international markets, including global political, social and 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 political, social and economic crises in the past, including most recently as a result of the COVID-19 pandemic and the related restrictions imposed to mitigate its impact, as well as the resulting macroeconomic slowdown, 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) instability in the banking sector and 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; (ix) high unemployment; and (x) overall political, social, and economic disruptions. Any of these events in the markets in which we operate could result in a material adverse impact on our customers and 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.
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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.
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.
The enactment of legislation implementing changes in tax legislation or policies in different geographic jurisdictions including the United States could materially impact our business, financial condition and results of operations.
We conduct business and file income tax returns in several jurisdictions. Our consolidated effective income tax rate could be materially adversely affected by several factors, including: changing tax laws, regulations and treaties, or the interpretation thereof (such as the recent United States Inflation Reduction Act which, among other changes, introduced a 15% corporate minimum tax on certain United States corporations and a 1% excise tax on certain stock redemptions by United States corporations, which the U.S. Treasury indicated may also apply to certain stock redemptions by a foreign corporation funded by certain United States affiliates); tax policy initiatives and reforms under consideration (such as those related to the Organization for Economic Co-Operation and Development’s (“OECD”) Base Erosion and Profit Shifting, or BEPS, project and other initiatives); the practices of tax authorities in jurisdictions in which we operate; the resolution of issues arising from tax audits or examinations and any related interest or penalties. Such changes may include (but are not limited to) the taxation of operating income, investment income, dividends received or (in the specific context of withholding tax) dividends, royalties and interest paid.
We are unable to predict what tax reforms may be proposed or enacted in the future or what effect such changes would have on our business, but such changes, to the extent they are brought into tax legislation, regulations, policies or practices in jurisdictions in which we operate, could increase the estimated tax liability that we have expensed to date and paid or accrued on our Consolidated Statement of Financial Position, and otherwise affect our future results of operations, cash flows in a particular period and overall or effective tax rates in the future in countries where we have operations, reduce post-tax returns to our stock price.stockholders and increase the complexity, burden and cost of tax compliance.
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We are exposed to inflation, which could negatively affect our business, financial condition and results of operations.
The markets in which we operate have recently experienced historically high levels of inflation. As inflation rates continue to increase or persist for a prolonged period of time, it may continue to affect our expenses, including, but not limited to, employee compensation expenses and benefits as well as increased general administrative costs. In the event inflation continues to increase, we may seek to increase the sales prices of our products and services in order to maintain satisfactory margins. Any attempts to offset cost increases with price increases may result in reduced sales, increase customer dissatisfaction or otherwise harm our reputation. Moreover, to the extent inflation has other adverse effects on the market, it may adversely affect our business, financial condition and results of operations.
Acquisitions, strategic investments, partnerships, or alliances could be difficult to identify, pose integration challenges, divert the attention of management, disrupt our business, dilute shareholder value, and adversely affect our business, financial condition and results of operations.
We may in the future seek to acquire or invest in businesses, joint ventures, products and platform capabilities, or technologies that we believe could complement or expand our products and platform capabilities, enhance our technical capabilities, or otherwise offer growth opportunities. Any such acquisition or investment may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable opportunities, whether or not the transactions are completed, and may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products and platform capabilities, personnel, or operations of the acquired companies, particularly if we are unable to retain the key personnel of the acquired company, their software is not easily adapted to work with our existing platforms, or we have difficulty retaining customer, vendors and other relationships of any acquired business due to changes in ownership, management, or otherwise. These transactions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our existing businesses. Any such transactions that we are able to complete may not result in any synergies or other benefits we had expected to achieve, which could result in substantial impairment charges.
In addition, we may not be able to find and identify desirable acquisition targets or business opportunities or be successful in entering into agreements with any particular strategic partner. We expect that certain of our competitors, many of which have greater resources than we do, will compete with us in acquiring complementary businesses or products. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are often subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we may not be able to consummate an acquisition that we believe is in our best interests and may incur significant costs. These transactions could also result in transaction fees, dilutive issuances of our equity securities, incurrence of debt or contingent liabilities, and fluctuations in quarterly results and expenses. Further, if the resulting business from such a transaction fails to meet our expectations, our business, financial condition and results of operations may be adversely affected, or we may be exposed to unknown risks or liabilities.
We may acquire businesses located primarily or entirely outside the United States which could increase our current exposure to international operations located in the Caribbean and Latin America including currency exchange fluctuations, regulatory and organizational complexity, and varying economic, climatic and geopolitical circumstances.
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.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 72,394,04364,847,233 are outstanding as of JanuaryDecember 31, 2018.2022. 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 have no direct operations or reports aboutsignificant 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
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we conduct our company, or if they issue unfavorable commentary about us oroperations through our industry or downgradesubsidiaries, 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 our 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 priceability of our common stock could decline.
subsidiaries to pay dividends to us. The trading market forearnings from, or other available assets of, our common stock will depend in partsubsidiaries may not be sufficient to pay dividends or make distributions or loans or enable us to pay any dividends 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.obligations.
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, and 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.Board. These provisions include:
•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.meetings.
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, 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, the existence of the foregoing provisions, as well as the significant 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.
The market price of our common stock may be volatile.
The market price of our common stock may fluctuate significantly in response to a number of factors, some of which may be beyond our control. These factors include the perceived prospects for or actual operating results of our business; changes in estimates of our operating results by analysts, investors or our management; our actual operating results relative to such estimates or expectations; actions or announcements by us, our agents, or our competitors; litigation and judicial decisions; legislative or regulatory actions; and changes in general economic or market conditions. In addition, the stock market in general has from time to time experienced extreme price and volume fluctuations. These market fluctuations could reduce the market price of our common stock for reasons unrelated to our operating performance.
From time to time we are subject to various legal proceedings which could adversely affect our business, financial condition or results of operations.
We are involved in various litigation matters from time to time. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Our insurance or indemnities may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. If we are unsuccessful in our defense in these litigation matters, or any other legal proceeding, we may be forced to pay damages or fines, enter into consent decrees or change our business practices, any of which could adversely affect our business, financial condition or results of operations.
We continue to incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the NYSE and other applicable securities laws and regulations. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. Our management and other personnel devote a
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substantial amount of time to compliance with these requirements. Moreover, these rules and regulations have increased and will continue to increase our legal and financial compliance costs and make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the specific timing of such costs. Furthermore, if we are unable to satisfy our obligations as a public company or the specific timing of such costs, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
Risks Related to Our Indebtedness
We are leveraged. As of December 31, 2022, the risks associatedtotal principal amount of our indebtedness was approximately $435.0 million. Our 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 such 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$174.0 million which was available for borrowing under our revolving credit facility as of December 31, 2017,2022, 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.
Further, borrowings under our secured credit facilities are at variable rates of interest and are exposed to market risk due to the floating interest rates. Our results of operations, cash flows and financial position could be affected adversely by significant fluctuations in interest rates from current levels.
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,contains, 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 or guarantee additional indebtedness or issue certain preferred shares;
indebtedness; (ii) pay dividends or other distributions on, or repurchase or make distributions in respect of (or agree not to pay dividends or other distributions on , or repurchase or make distributions in respect of) our capital stockstock; (iii) make investments; (iv) sell assets; (v) grant (or agree not to grant) liens on our assets; (vi) consummate a consolidation, merger or make other restricted payments;
similar transaction; (vii) enter into certain transactions with our affiliates; and(viii) make payments in respect of certain indebtedness or modify the documents governing such indebtedness; and/or; (ix) modify our organizational documents.
We are also required under the secured credit facilities to maintain compliance with a maximum total net leverage ratio at the end of each fiscal quarter.
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, the covenants in the senior secured credit facilities require us to maintain a maximum senior secured 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.
A breach of any of these covenants could result in a default under one or more of theseour secured credit facilities and other material 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.provisions. Upon the occurrence of an event of default under the senior secured credit facilities, the lenders can cease making revolving loans to us and 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 also cause cross defaults under our other indebtedness.
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If any such debt is accelerated and we wereare unable to repay thosethe amounts outstanding thereunder, the lenders under our seniorany such secured credit facilities could proceed against the collateral granted to them to secure thatsecuring such 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.be negatively impacted.
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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 1213 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.
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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”. 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 17, 2023, there were 483 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
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:
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
The following table summarizes repurchases of shares of the Company's common stock in the three month period ended December 31, 2022:
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 | ||||||||
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of a publicly announced program (1) | Approximate dollar value of shares that may yet be purchased under the program | ||||||||||||||||||||||
| 10/1/2022-10/31/2022 | 412,252 | 32.62 | 412,252 | |||||||||||||||||||||||
| 11/1/2022-11/30/2022 | 156,147 | 34.01 | 156,147 | |||||||||||||||||||||||
| 12/1/2022-12/31/2022 | 172,638 | 30.74 | 172,638 | |||||||||||||||||||||||
| 741,037 | 32.94 | 741,037 | 78,198,083 | |||||||||||||||||||||||
(1) On February 24, 2022, the Company announced that its Board approved an increase to the current stock
repurchase program, authorizing the purchase of up to an aggregate of $150 million shares of the Company’s common stock under the program which expires on December 31, 2023.
Securities Authorized for Issuance under Equity Compensation Plans
On
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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, 2017:2022:
| 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 | 1,363,780 | $0.00 | 4,596,629 | |||||||||||||||||
| 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) | 2,340,892 | $15.08 | 6,372,420 | |||||
| Equity compensation plans not approved by security holders | N/A | N/A | N/A | |||||
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 500Russell 2000 Index and the S&P Composite 1500 / Information Technology Index.Index for the five years ended December 31, 2022. The graph assumes that $100 was invested on April 12, 2013December 31, 2017 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.
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Item 6. Selected Financial Data[Reserved]
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| 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 | ||||||||||
| 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 2022 results as compared to our 2021 results. For discussion of operationsour 2021 results as compared to our 2020 results, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation” within our Annual Report on Form 10-K for the yearsyear ended December 31, 2017, 2016 and 2015; and (ii)2021 filed with the financial condition as of December 31, 2017 and 2016.SEC on February 25, 2022. 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 2017September 2022 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.Caribbean. We serve 26 countries in the region fromout of 12 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 process over six billion transactions annually through a system of electronic payment networks in Puerto Rico and Latin America and a comprehensive suite of services for core banking, cash processing, and fulfillment in Puerto Rico. Additionally, we offer technology outsourcing and payment transactions fraud monitoring to 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 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 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 negotiateenter into multi-year contracts with our customers. OurWe believe our business
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model enablesshould enable us to continue to grow our business organically in the primary markets we serve without significant incremental capital expenditures.
The Company’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.2022. The Board anticipates reviewingdeclaring this dividend in future quarters on a regular basis; however future declarations of dividends are subject to the dividend policyBoard’s approval and may be adjusted as business needs or market conditions stabilize in Puerto Rico.change.
On July 3, 2017, EVERTEC’s main operating subsidiary,1, 2022, EVERTEC completed the Popular Transaction as described above.
Additionally, on July 1, 2022, EVERTEC Group and EVERTEC Panama, S.A. ("EVERTEC Panama") closed oncompleted the direct and indirect acquisitionpurchase of 100% of the share capital of EFT Group S.A.,BBR SpA, a Chilean-basedSantiago, Chile based payment processing and softwaretechnology solutions company known commercially as “PayGroup”, by entering into a sharewith an office in Perú ("BBR"). The aggregate 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 expandsprice for 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.shares is CLP 48,600 million, approximately USD$53 million.
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 thiswhich, together with the ongoing shift from cash and paper methods of payment to electronic payments will continue to generate substantial growth opportunities for our business. For example, currently the adoption of banking products, including electronic payments, in the Latin AmericanAmerica 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 AmericanAmerica 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.
In recent years, 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 markets in which we operate, particularly Latin America and the Caribbean continue to grow and consumer preference is driving an increase for electronic payments usage. 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 wallets, contactless payments, and other value-added offerings. 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.
On July 1, 2022, we closed the previously announced Popular Transaction, which includes extensions and amendments to the main commercial agreements with Banco Popular. The extension of the A&R ISO Agreement includes a revenue sharing provision which will be treated as an expense and has resulted, and we expect will continue to result in a decline to the Merchant Acquiring Segment Adjusted EBITDA and margin. The extension of the MSA includes a reduction in the CPI cap
35
from 5% to 1.5%, as well as a retroactive one-time credit for the 5% CPI price increase applied to certain services since October 1, 2021 through closing, both of which negatively impacted our results of operations, and we expect will continue to negatively impact revenue and consequently, margin of our Business Solutions Segment and, to a lesser extent, the Payment Services – Puerto Rico Segment. Additionally, as part of the amendments to the MSA, there will be contractual revenue minimums through 2028. As part of the Popular Transaction, we also sold certain assets from our Business Solutions Segment to Banco Popular, which has resulted, and we expect will continue to result in a reduction in revenue and margin for this segment.
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.
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 areis the most critical; require the most difficult, subjective, or complex judgments; and thus, resultresults in estimates that are inherently uncertain.
Revenue recognitionRecognition
The Company’s revenue recognition policy follows the guidance from Accounting Standards Codification (“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
The Company recognizes revenue when the following four criteria are met: (i) persuasive evidencevaluation 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, revenuesgoodwill 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 price 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.
quantitative analysis. 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.
Recent Accounting Pronouncements
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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) | 2022 | 2021 | Variance | ||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 618,409 | $ | 589,796 | $ | 28,613 | 5 | % | |||||||||||||||||||||||||||||||||
| Operating costs and expenses | |||||||||||||||||||||||||||||||||||||||||
| Cost of revenues, exclusive of depreciation and amortization shown below | 292,621 | 250,164 | 42,457 | 17 | % | ||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 89,770 | 68,048 | 21,722 | 32 | % | ||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 78,618 | 75,070 | 3,548 | 5 | % | ||||||||||||||||||||||||||||||||||||
| Total operating costs and expenses | 461,009 | 393,282 | 67,727 | 17 | % | ||||||||||||||||||||||||||||||||||||
| Income from operations | $ | 157,400 | $ | 196,514 | $ | (39,114) | (20) | % | |||||||||||||||||||||||||||||||||
| 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 2017 increased by $17.6for the year ended December 31, 2022 were $618.4 million, or 5% whenan increase of $28.6 million compared withto $589.8 million in the prior year. The increaseRevenue in revenues was driven by increasesPuerto Rico increased in ATH debit networkboth the Merchant Acquiring and Payment Services segments, benefiting from increased transaction volumes as well as pricing initiatives implemented during the year. Merchant Acquiring revenue also benefited from two additional months in 2022 from the expanded FirstBank relationship. Payment Services in Puerto Rico continues to benefit from growth from ATH Movil Business as well as revenue generated from an acquisition completed in the second quarter. Business Solutions revenue decreased primarily due to the impact from assets sold as part of the Popular Transaction and card processing volumes,the one-time credit granted upon closing, partially offset by revenue generated from projects completed in connection with closing, one-time hardware and software sales and revenue generated from the PayGroupprinting contract entered into in June 2021. Latin America revenue benefited from strong organic growth from existing customers and the revenue contribution from the BBR acquisition increased revenue from our Accuprint acquisitioncompleted in the fourth quarter of 2016 and an increase in core banking revenue. Revenues in 2017 were negatively impacted by the two hurricanes that made landfall in Puerto Rico and the Caribbean in September of 2017. We estimate the hurricanes reduced revenues by approximately $13 to $14 million.third quarter.
Cost of revenues
Cost of revenues in 2017 increased $24.8for the year ended December 31, 2022 amounted to $292.6 million, an increase of $42.5 million or 14%17% when compared withto the same period in the prior year. The increase in cost of revenues was primarily driven by an increase in personnel costs, in part due to the impact of increased headcount in Latin America and the added headcount from the BBR acquisition. The year over year variance also reflected higher equipment expenses for cloud services as utilization continues to grow, an increase in printing supply expense, an increase in provisions for operational losses and an increase in cost of sales mainly due to the new revenue is primarily related to $12.8 million in charges taken in connectionsharing agreement with an exit activity forPopular resulting from the Popular Transaction. Cost of revenues also includes a third party software solution that is
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Selling, general and administrative
Selling, general and administrative expenses in 2017 increased $9.2for the year ended December 31, 2022 amounted to $89.8 million, an increase of $21.7 million or 32% when compared with 2016. The increase is primarily related to the same period in the prior year driven by an increase in share based compensation, expenses related to the PayGroup acquisition andpersonnel costs as well as an increase in payroll and other taxes in our Latin America operations.professional fees.
Depreciation and amortization
Depreciation and amortization expense increased by $4.7for the year ended December 31, 2022 amounted to $78.6 million, in 2017an increase of $3.5 million or 5% when compared to 2016 mainly related to an increase in amortization expense related to intangible assets acquired as part of business combinations completedthe same period in the prior and current year.
| 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 | % | ||||||||
Non-operating income (expenses)
| Years ended December 31, | |||||||||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | Variance | ||||||||||||||||||||||||||||||||||||||
| Interest income | 3,121 | 1,889 | $ | 1,232 | 65 | % | |||||||||||||||||||||||||||||||||||
| Interest expense | (24,772) | (22,810) | (1,962) | 9 | % | ||||||||||||||||||||||||||||||||||||
| Gain on sale of a business | 135,642 | — | 135,642 | 100 | % | ||||||||||||||||||||||||||||||||||||
| (Loss) gain on foreign currency remeasurement | (7,645) | 1,897 | (9,542) | (503) | % | ||||||||||||||||||||||||||||||||||||
| Earnings of equity method investment | 2,968 | 1,713 | 1,255 | 73 | % | ||||||||||||||||||||||||||||||||||||
| Other income | 1,138 | 2,502 | (1,364) | (55) | % | ||||||||||||||||||||||||||||||||||||
| Total non-operating income (expenses) | $ | 110,452 | $ | (14,809) | $ | 125,261 | (846) | % | |||||||||||||||||||||||||||||||||
Non-operating income for the year ended December 31, 2022 increased by $125.3 million to $110.5 million when compared to the same period in the prior year, as it includes the gain from the Popular Transaction of $135.6 million, an increase of $1.3 million in earnings from the Company’s equity method investment and an increase of $1.2 million in interest income. Partially offsetting these increases was a loss on extinguishment recorded as partforeign currency remeasurement of $7.6 million for the debt refinancing transaction completed in the fourth quarter of 2016, which is included in Other income, net, coupledyear ended December 31, 2022 compared with a $0.4gain of $1.9 million in prior year, a $2.0 million increase in interest expense due to an increase in interest rates and a $0.2 million decreasethe benefit of the gain on sale of assets included in earnings from our equity method investmentother income in the Dominican Republic, Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”).prior year, while none in 2022.
Income tax expense (benefit)
| Years ended December 31, | |||||||||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | Variance | ||||||||||||||||||||||||||||||||||||||
| Income tax expense | $ | 28,983 | $ | 20,562 | $ | 8,421 | 41 | % | |||||||||||||||||||||||||||||||||
| 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 for the year ended December 31, 20162022 amounted to approximately $8.3$29.0 million, an increase of $8.4 million when compared with an income tax benefit of $3.3 millionto the same period in 2015.the prior year. The effective tax rate for the period was 10.8%, compared with 11.3% in 2016the 2021 period. The decrease in the effective tax rate was approximately 10%. The prior yearprimarily driven by the impact of the Popular Transaction which was taxed at a preferential tax benefit reflectsrate and the impact from the reversal of taxa potential liability related to anfor uncertain tax position for whichpositions because of the expiration of the statute of limitations expired duringlimitation, partially offset by the third quarterimpact of 2015.higher revenues in higher taxed jurisdictions, a shift in the mix of business in Puerto Rico and higher withholding taxes.
Segment Results of Operations
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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,
•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.
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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 25 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) | 2022 | 2021 | ||||||||||||
| Revenues | $178,481 | $155,392 | ||||||||||||
| Adjusted EBITDA | 100,780 | 89,939 | ||||||||||||
| Adjusted EBITDA margin | 56.5 | % | 57.9 | % | ||||||||||
| 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 2017for the year ended December 31, 2022 increased $2.0by $23.1 million to $178.5 million when compared with 2016. Revenue growth reflected increasesto the same period in ATH debit networkthe prior year. The increase in revenues was primarily driven by an increase in transaction volumes, mainly POS processing, the continued strong digital payments growth from ATH Movil Business, higher issuing services and cardthe revenue contribution from the acquisition completed in the second quarter. Segment revenue also benefited from 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 $10.8 million mainly a resultto $100.8 million driven by the increase in revenues partially offset by higher operating expenses, including the $4.1 million impairment charge discussed in Cost of Revenues above, higher personnel costs, cloud services, and the impact from the one-time credit granted upon closing of the impairment charge taken relatedPopular Transaction.
Payment Services - Latin America
| Years ended December 31, | |||||||||||||||||
| (In thousands) | 2022 | 2021 | |||||||||||||||
| Revenues | $128,221 | $105,963 | |||||||||||||||
| Adjusted EBITDA | 36,074 | 42,502 | |||||||||||||||
| Adjusted EBITDA margin | 28.1 | % | 40.1 | % | |||||||||||||
Payment Services - Latin America segment revenues for the year ended December 31, 2022 increased by $22.3 million to a$128.2 million driven mainly by organic growth in all regions as well as revenue generated from the BBR acquisition completed in the third quarter. Additionally, revenues benefited from an increase in intercompany software asset under developmentdevelopments and reduced revenues relatedtransaction processing revenue recognized for services provided to the hurricanes.
Payment Services - Puerto Rico & Caribbean revenues remained relatively flatsegment. Adjusted EBITDA decreased by $6.4 million primarily due to a $6.6 million loss from foreign currency remeasurement of assets and liabilities denominated in 2016 whenUS dollars compared towith a $1.9 million gain in the prior year. Revenues in 2016 were impacted byyear, an increase in operating expenses driven by higher personnel costs, mainly due to an increase in headcount including employees from the BBR acquisition, and increases in fees for transaction processing and monitoring services from the Payment Services - Puerto Rico & Caribbean segment as more transactions are processed overin the ATH debit network,Company's centralized platforms, partially offset by the shiftincrease in revenuerevenues.
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Merchant Acquiring
| Years ended December 31, | |||||||||||||||||
| (In thousands) | 2022 | 2021 | |||||||||||||||
| Revenues | $151,085 | $143,965 | |||||||||||||||
| Adjusted EBITDA | 63,607 | 73,872 | |||||||||||||||
| Adjusted EBITDA margin | 42.1 | % | 51.3 | % | |||||||||||||
Merchant Acquiring segment revenues for a customer contract change from payment services to merchant acquiring 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.
| 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 | ||
| 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 | ||
| 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 Solution applications, primarily for Banco Popular coupled with higher expenses related to infrastructure supporting the Solutions
| Years ended December 31, | |||||||||||||||||
| (In thousands) | 2022 | 2021 | |||||||||||||||
| Revenues | $235,299 | $243,807 | |||||||||||||||
| Adjusted EBITDA | 100,568 | 116,488 | |||||||||||||||
| Adjusted EBITDA margin | 42.7 | % | 47.8 | % | |||||||||||||
Business Solutions segment as we replaced obsolete assets.
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$200.0 million revolving credit facility,Revolving Facility, of which $88.0$174.0 million was available for borrowing as of December 31, 2017.2022. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.
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 at least for the next twelve months.months from the date of this Annual Report on Form 10-K. However, our ability to fund future operating expenses, dividend payments, capital expenditures, mergers and
42
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.
Comparison of the years ended December 31, 20172022 and 20162021
The following table presents our cash flows from operations for the years ended December 31, 20172022 and 2016:
| 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 | |||
| Years ended December 31, | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Cash provided by operating activities | $ | 223,361 | $ | 228,420 | ||||||||||
| Cash used in investing activities | (133,324) | (83,820) | ||||||||||||
| Cash used in financing activities | (156,768) | (81,285) | ||||||||||||
| Effect of foreign exchange rate on cash, cash equivalents and restricted cash | (3,529) | 1,497 | ||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (70,260) | $ | 64,812 | ||||||||||
Net cash provided by operating activities for the year ended December 31, 20172022 was $145.8$223.4 million, a decrease of $22.3$5.1 million compared with 2016.to 2021. The decrease in cash provided by operating activities was primarily driven by the effects from the sale of a decrease in net income.business to Popular and the one-time credit granted to them upon closing, partially offset by less cash used to pay down accounts payable and accrued liabilities as the Company continues to effectively manage working capital.
Net cash used in investing activities increased by $24.0$49.5 million to $78.1$133.3 million. The increase was mainlyis primarily attributable to the completionBBR acquisition closed on July 1, 2022 for $44.4 million and a $7.3 million purchase of certificates of deposit, which were transferred upon closing of the purchaseBBR acquisition, and an increase in capital expenditures for additions to software and purchases of PayGroup duringproperty, plant and equipment of $5.0 million, partially offset by proceeds from the third quartermaturity of 2017.available-for-sale debt securities of $1.0 million, as well as a decrease in acquisitions of customer relationships of $4.1 million given that the prior year acquisition amounted to $14.8 million while the acquisition in the current year amounted to $10.6 million.
Net cash used in financing activities for the year ended December 31, 2017 amounted2022 was $156.8 million, compared to $69.2$81.3 million a decrease of $21.6 million when compared with thein prior year. The decrease is driven by less cash used for stock repurchases and dividend payments.
| 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 | ) | |||
Capital Resources
Our principal capital expenditures are for hardware and computer software (purchased and internally developed), and additions to property and equipment and acquisitions. We invested approximately $33.5 million, $42.3 million, and $47.0 million on capital expenditures for hardware and computer software and property and equipment forequipment. During the years ended December 31, 2017, 20162022 and 2015, respectively. In terms of acquisitions, in 2017, we completed2021, the purchase of PayGroup for $42.8 million, while in the 2016, we completed the purchase of Processa for $5.9Company invested approximately $71.9 million and Accuprint$66.9 million, respectively. Additionally, the Company acquired a business for $9.7 million. Capital$44.4 million, net of cash acquired, as well as $7.3 million in certificates of deposit in connection with this business acquisition in 2022. The Company acquired customer relationships amounting to $10.6 million and $14.8 million during the year ended December 31, 2022 and 2021, respectively and acquired $0.3 million in available-for-sale debt securities, compared with $3.0 million in 2021. Generally, we fund capital expenditures are expected to be funded bywith cash flow generated from operations and, if necessary, borrowings under our Revolving Facility.
Dividend Payments
Board deems relevant. Refer to the table below for details regarding our dividends in 20172022 and 2016:
2021:
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| Declaration Date | Record Date | Payment Date | Dividend per share | ||||||||||||||||||||
| February | March | $0.05 | |||||||||||||||||||||
| April 22, 2021 | May | 0.05 | |||||||||||||||||||||
| July 22, 2021 | August 2, 2021 | September 3, 2021 | 0.05 | ||||||||||||||||||||
| October 21, 2021 | November 1, 2021 | December 3, 2021 | 0.05 | ||||||||||||||||||||
| February 15, 2022 | February 25, 2022 | March 25, 2022 | 0.05 | ||||||||||||||||||||
| April 21, 2022 | May 2, 2022 | June 3, 2022 | 0.05 | ||||||||||||||||||||
| July 28, | August | September 2, | 0.05 | ||||||||||||||||||||
| October | November | December 2, | |||||||||||||||||||||
0.05 | |||||||||||||||||||||||
Stock Repurchase
During 2017,2022, the Company repurchased 465,2402,810,182 shares of the Company’s common stock at a cost of $7.7$96.6 million. The Company funded such repurchase with cash on handhand. At December 31, 2022, the Company's share repurchase program has approximately $78 million remaining and borrowings under the existing revolving credit facility.
Financial Obligations
The Company has operating leases for certain office facilities, buildings, telecommunications and other equipment; and finance leases for certain equipment. The Company’s lease contracts have remaining terms ranging from 1 year to 6 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) | 2022 | 2021 | |||||||||
| Operating lease liability - current | 5,936 | 5,580 | |||||||||
| Operating lease liability - long-term | 10,788 | 16,456 | |||||||||
| Total operating lease liabilities | $ | 16,724 | $ | 22,036 | |||||||
See Note 24 of the Notes to Audited Consolidated Financial Statements for additional information regarding operating lease obligations.
2022 Secured Credit Facilities
On April 17, 2013,December 1, 2022 (the “Closing Date”), EVERTEC and EVERTEC Group, entered into a credit agreement (the “2013 Credit“Credit Agreement”) governing the senior secured credit facilities, consistingwith a syndicate of lenders and Truist Bank (“Truist”), as administrative agent and collateral agent, providing for (i) a $300.0$415.0 million term loan A facility (the “Term A Loan”), a $400.0 million term loan B facility (the “Term B Loan”, together with the Term A Loan the “Senior Secured term loans”Facility”) and (ii) a $100.0$200.0 million revolving credit facility (the "Revolving Facility"“Revolving Facility”, and together with the Term Loan Facility, the “2022 Credit Facilities”).
Scheduled Amortization Payments
The Term Loan Facility amortizes in equal quarterly installments at a rate per annum equal to, the 2013 Credit Agreement. In the second quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiariesinitially, 5% of the Company, entered into a second amendmentprincipal amount and, waiverfor any installment payments to be made in the outstanding Credit Agreement (the “Second Amendment”). The Company paid each lender that consented to the amendment a fee equal to 0.50%calendar year ending 2027, 7.5% 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.
Voluntary Prepayments and Reduction and Termination of Commitments
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EVERTEC Group may prepay loans under the Term A Loan amortizes onFacility and permanently reduce the loan commitments under the Revolving Facility at any time without premium or penalty, subject to compensation for any break funding costs incurred by a basislender and timely submission of 1.50%a notice of prepayment or commitment reduction, as applicable. EVERTEC Group is required to make certain mandatory prepayments of the original principal amount beginning2022 Credit Facilities 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, with the balance payable on the final maturity date. Principal payments for the Term B Loan were not changed by the Third Amendment 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.certain circumstances.
Interest
The applicable margininterest rates under the 20132022 Credit Agreement isFacilities denominated in US Dollars, are based on, at EVERTEC Group’s option (i) with respect to any 2018(a) the Adjusted Term A Loan, 2.50% per annumSOFR for the Interest Period in the caseeffect for such borrowing plus an applicable margin of any LIBOR Loan and 1.50% per annum, which applicable margin is subject to four 25 bps step-ups (i.e. 1.75%, 2.00%, 2.25% or 2.50% per annum) based upon the Company’s total net leverage ratio or (b) the ABR plus an applicable margin of 0.50% per annum, which applicable margin is subject to four 25 bps step-ups (i.e. 0.75%, 1.00%, 1.25% or 1.50% per annum) based upon the Company’s total net leverage ratio. Borrowings under the Revolving Credit Facility that are denominated in a currency other than Dollars will bear interest at the Alternative Currency Rate for the Interest Period in effect for such borrowing plus an applicable margin of 1.50% per annum, which applicable margin is subject to four 25 bps step-ups (i.e. 1.75%, 2.00%, 2.25% or 2.50% per annum) based upon the Company’s total net leverage ratio.
Guarantees and Collateral
The 2022 Credit Facilities are secured by substantially all assets of EVERTEC and its existing and future material subsidiaries (including EVERTEC Group), subject to customary exceptions, and guarantee repayment of the 2022 Credit Facilities.
In connection with the Credit Agreement, on December 1, 2022, EVERTEC, EVERTEC Group and the subsidiary guarantors party thereto, entered into a Guarantee Agreement (the “Guarantee Agreement”), pursuant to which EVERTEC Group’s obligations under the 2022 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.
In addition, on December 1, 2022, EVERTEC, EVERTEC Group and the subsidiaries party thereto, entered into a Collateral Agreement (the “Collateral Agreement”), pursuant to which, subject to certain exceptions, the 2022 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 2022 Credit Facilities are subject to customary affirmative and negative covenants. The negative covenants in the case2022 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 or investments (including acquisitions);
•merge or enter into acquisitions
•sell assets;
•enter into any Alternate Base Rate (“ABR”), assale 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 2022 Credit Facilities require EVERTEC Group to maintain a maximum total net leverage ratio of 4.50 to 1.00 (i) from March 31, 2023 to September 30, 2024, and 4.00 to 1.00 (ii) thereafter.
Events of Default
45
The events of default under the 2022 Credit Facilities include, without limitation, nonpayment, material misrepresentation, breach of covenants, insolvency, bankruptcy, certain judgments, change of control (as defined in the 2013 Credit Agreement, subject to reduction basedAgreement) and cross-events of default 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.material indebtedness.
The unpaid principal balance at December 31, 20172022 of the 2018 Term A Loan the 2020 Term A Loan and the Term B LoanFacility was $26.9 million, $202.9 million and $382.0 million, respectively.$415.0 million. The additional borrowing capacity for the Revolving Facility loan at December 31, 20172022 was $88.0$174.0 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
2018 Secured Credit Facilities
On November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement providing for the secured credit facilities, consisting of a $220.0 million term loan A facility (“2023 Term A Loan”), a $325.0 million term loan B facility (“2024 Term B Loan”) and a $125.0 million revolving credit facility (the “Revolving Facility”), 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 “2018 Credit Agreement”). The 2018 Credit Agreement was terminated on December 1, 2022.
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, which were fully repaid in January 2022. As of December 31, 2017 and December 31, 2016,2021, the outstanding principal balance of the notes payable is $1.0 million and $3.4 million, respectively. The current portion of thesewas $0.8 million. These 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 sheet as of December 31, 2021.
Interest Rate SwapSwaps
As of December 31, 2017,2022, the Company has the followingan interest rate swap agreement, convertingentered in December 2018, which converts a portion of the interest rate exposurepayments on the Company'sCompany’s 2024 Term B Loan from variable to fixed:
| Swap Agreement | Effective date | Maturity Date | Notional Amount | Variable Rate | Fixed Rate | |||||||||||||||||||||||||||
| April 2020 | $250 million | 1-month | ||||||||||||||||||||||||||||||
In connection with the Credit Agreement, the Company amended the 2018 Swap variable rate from 1-month LIBOR to 1-month SOFR as allowed by the expedients included in ASC Topic 848 Reference Rate Reform. The Company has accountedcontinues to account for this transactionagreement as a cash flow hedge. The fair value of the Company’s derivative instrument is determined using a standard valuation model. The significant inputs used in this model are readily available in public markets, or can be derived 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.
As of December 31, 20172022, and December 31, 2016,2021, the carrying amount of the derivativederivatives included on the Company’s consolidated balance sheets was an asset of $7.4 million and a liability of $13.4 million, respectively. The fair value of this derivative 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 yearyears ended December 31, 2017,2022, 2021 and 2020, the Company reclassified losses of $1.6$3.0 million, $7.1 million and $5.1 million, respectively, from accumulated other comprehensive loss into interest expense. Based on current SOFR rates, the Company expects to reclassify gains of $3.7 million from accumulated other comprehensive loss into income through interest expense. Based on current LIBOR rates, the Company expects to reclassify $0.9 million from accumulated other comprehensive loss into income through interest expense over the next 12 months. Refer to Note 15 of the Notes to Audited Consolidated Financial Statements for tabular disclosure of the fair value of derivatives and to Note 17 of the Notes to Audited Consolidated Financial Statements for tabular disclosure of gains (losses) recorded on cash flow hedging activities.
Covenant Compliance
In this Annual Report on Form 10-K, we refer to the term “Adjusted EBITDA” to mean EBITDA as so defined and calculated in a substantially consistent manner 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.
46
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 makerCODM 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.
47
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, 2022 | ||||||||
| (Dollar amounts in thousands) | ||||||||
| Net income | $ | 238,869 | ||||||
| Income tax expense | 28,983 | |||||||
| Interest expense, net | 21,651 | |||||||
| Depreciation and amortization | 78,618 | |||||||
| EBITDA | 368,121 | |||||||
Equity income (1) | (1,121) | |||||||
Compensation and benefits (2) | 20,335 | |||||||
Transaction, refinancing and other fees (3) | (117,828) | |||||||
| Adjusted EBITDA | 269,507 | |||||||
Operating depreciation and amortization (4) | (44,418) | |||||||
Cash interest expense, net (5) | (21,008) | |||||||
Income tax expense (6) | (36,509) | |||||||
Non-controlling interest (7) | 34 | |||||||
| Adjusted net income | $ | 167,606 | ||||||
| Net income per common share (GAAP): | ||||||||
| Diluted | $ | 3.45 | ||||||
| Adjusted Earnings per common share (Non-GAAP): | ||||||||
| Diluted | $ | 2.42 | ||||||
| Shares used in computing adjusted earnings per common share: | ||||||||
| Diluted | 69,312,717 | |||||||
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. 2)Primarily represents share-based compensation and severance payments. 3)Represents fees and expenses associated with corporate transactions as defined in the 2022 Credit Agreement and the gain from the Popular transaction. 4)Represents operating depreciation and amortization expense, which excludes amounts generated as a result of merger and acquisition activity. 5)Represents interest expense, less interest income, as they appear |
| 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 | $ | — | $ | — | ||||||||||
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 impact on our operating results duringof amortization for intangibles created as part of 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.purchase.
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, foreign exchange risk that may result in unfavorable foreign currency translation adjustments and inflation.. Market risk is the potential loss arising from adverse changes in market rates and prices. The following analysis provides quantitative information regarding these risks.
Interest rate risks
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Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control.
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 isare subject to floors or minimum rates. A 100 basis point increase in interest rates over our floor(s)floor on our debt balances outstanding as of December 31, 2017,2022, under the senior secured credit facilities would increase our annual interest expense by approximately $4.1$1.9 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.
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 purposespurposes.
See Note 1214 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 operationsAmerica for which we have determined that the functional currency is other than the US dollar. Given this, our operating results are exposed to volatility due to fluctuations in exchange rates for the countries' functional currencies. Non-functional currency transactions are remeasured into the functional currency which results in a foreign exchange gain or loss recorded through Other income (expenses). For the years ended December 31, 2022, 2021 and 2020, we recognized foreign currency remeasurement losses of $7.6 million, gains of $1.9 million and gains of $2.9 million, respectively. For subsidiaries whose local currency is their functional currency, their assets and liabilities are translated into U.S. dollar,dollars at exchange rates at the balance sheet date, and revenues and expenses are translated using average exchange rates in effect during the period. The resulting foreign currency translation adjustments are reported in accumulated other comprehensive loss in the audited consolidated balance sheet, except for highly inflationary environments in which the effects would be included in other operating income in the consolidated statementssheets. As of income and comprehensive income. At December 31, 2017,2022, the Company had $11.1$23.5 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss compared towith an unfavorable foreign currency translation adjustment of $10.4$36.0 million atas of December 31, 2016.2021.
Inflation Risk
While it is difficult to accurately measure the impact of inflation on our results of operations and financial condition, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. General inflation in the geographies in which we operate has risen to levels that have not been experienced in recent years, however, inflation has historically had a minimal net effect on our operating results given that overall inflation has been offset by sales and cost reduction actions. Rising prices for input costs, including wages and benefits, occupancy and general administrative costs, could potentially have a negative impact on our results of operations and financial condition which may not be readily recoverable from our customers. In addition, inflation has driven a rising interest rate environment, which has had an adverse effect on our cost of funding, as well as led to enhanced volatility on foreign currency exchange rates. While we proactively try to mitigate these rising costs, we may not be able to fully offset these impacts and these could result in negative effect on our results of operation. Thus, we cannot assure you that our results of operations and financial condition will not be materially impacted by inflation in the future.
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Item 8. Financial Statements and Supplementary Data
The Audited Consolidated Financial Statements, together with EVERTEC’s independent registered public accounting firmsfirm's reports, are included herein beginning on page F-1 of this Annual Report on Form 10-K.
| 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
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 20172022 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.
Based on this assessment,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, 20172022 was effective.
Attestation Report of 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.Registered Public Accounting Firm
Deloitte & Touche LLP, an independent registered public accounting firm, has audited the consolidated financial statements as of and for the year ended December 31, 2017,2022, included in this Annual Report on Form 10-K and, as part of the audit, has issued a report, included as part of Item 8 of this Annual Report on Form 10-K, on the effectiveness of our internal control over financial reporting as of December 31, 2017.2022.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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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 and controller, and 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 the information on our website to be part of this Annual Report on Form 10-K.
BIOGRAPHICAL INFORMATION OF OUR DIRECTORS
Frank G. D’Angelo
Mr. D’Angelo has been Chairman of the Board since February 2014 and a director since September 2013. He currently serves as Operating Partner in Hill Path, a private equity partnership and as a partner in Bridgeport Partners, a private investment firm. Until 2020, he served as Executive Vice President and President of NCR Banking. Mr. D’Angelo has over 40 years of experience in the financial services, digital banking and payments industries. He is a former chairman of the Electronic Funds Transfer Association, served on the Payments Advisory Council of the Federal Reserve Bank of Philadelphia, and served as a director for Walsh University (Ohio). Mr. D’Angelo’s experience in the financial services industry, as well as in operations and management, provides great value to our Board.
Morgan M. Schuessler, Jr.
Mr. Schuessler has been a director and the Company’s President and CEO since April 2015. Previously, he served as President of International for Global Payments, Inc., overseeing the company’s business outside of the Americas, spanning 23 countries throughout Europe and Asia. Mr. Schuessler currently serves on the Board of Directors of Endeavor Puerto Rico, on the Wharton Executive Education Board, and the Smithsonian Institution National Board. Mr. Schuessler has over 20 years of experience in the payments industry; accordingly, he is well-versed in the intricacies of the Company’s core business and has developed management and oversight skills required to make significant contributions to the Board.
Kelly Barrett
From 2016 until her retirement in 2020, Ms. Barrett was the Senior Vice President of Home Services at The Home Depot. Ms. Barrett joined The Home Depot in 2003, where she held various senior management positions, including as Vice President of Internal Audit and Corporate Compliance, and Controller. Ms. Barrett currently serves as board member of the National Association of Corporate Directors (“NACD”)-Atlanta Chapter, Piedmont Office Realty Trust, The Aaron’s Company, Inc., and Americold Realty Trust. Her leadership roles in the community include currently serving as Chair of the Board of the Metro Atlanta YMCA, the Georgia Tech Foundation Board of Trustees and a member of the Advisory Board of Scheller College of Business at Georgia Tech. She is also a Certified Public Accountant in the state of Georgia. Ms. Barrett’s substantial experience in leadership roles, strategy and enterprise risk management, coupled with service on several boards, will be of great service to the Company.
Olga Botero
Ms. Botero has been a director since September 2014. She is the founder and Managing Director of C&S Customer and Strategy, a consulting firm focused on supporting IT and digital and cybersecurity management for leading companies in Latin America, co-founder and Chair of Seccuri, Inc., and has been a Senior Advisor to the Boston Consulting Group since 2011. She is the Co-Chair of the Women Corporate Directors Foundation Colombia Chapter and a fellow at the NACD Board Leadership Fellow program. She serves as an independent director and member of the Audit and Risk Committees of each of ESVAL S.A. and ESSBIO S.A., which are both publicly traded water utilities companies in Chile; and as an independent member of the Altipal S.A.S. Board of Directors since April 2022, serving as chair of their Audit Committee and member of their Innovation Committee. She also serves as independent director, chair of the Audit Committee and member of the Transactions Committee of Farmalatam Holding Inc. (Farmalisto), a health tech and e-pharmacy company in Latin America; as an independent member of the Audit Committee of Grupo Coppel in Mexico; and as an advisor to the Information Technology Committee of Grupo Pichincha and Banco Pichincha in Ecuador. Ms. Botero has over 25 years of experience in leadership roles in financial services,
51
telecommunications and technology. Her experience, expertise in cybersecurity and technology, and knowledge of Latin American markets are an asset to the Company.
Jorge A. Junquera
Mr. Junquera has been a director since April 2012. He currently serves as Managing Partner at Kohly Capital, LLC, a private investment company. He has over 40 years of experience in the banking and financial services industries. Until his retirement in 2015, Mr. Junquera was Vice Chairman of the Board of Directors of Popular. Prior to becoming Vice Chairman, he was the Chief Financial Officer of Popular and Supervisor of Popular’s Financial Management Group. He currently serves as a director for Sacred Heart University (PR) and Bluestone Community Development Fund. Mr. Junquera’s substantial experience managing financial institutions and serving on various boards of directors provides him with unique expertise and valuable perspective to assist the Board.
Iván Pagán
Mr. Pagán has been a director since May 2019. For twenty-two years until his retirement in February 2019, Mr. Pagán was the Head of Corporate Development at Popular, where he managed mergers and acquisitions, divestitures, corporate reorganization and strategic alliances for Popular, completing significant transactions in the United States, Latin American, Puerto Rico and the Caribbean. Mr. Pagán currently serves as a member of the Board of Directors of Centro Financiero BHD in the Dominican Republic. Mr. Pagán’s substantial expertise in financial and M&A matters, experience in the Caribbean and Latin American markets, and knowledge of the Company’s operations are an asset to the Company.
Aldo J. Polak
Mr. Polak has been a director since May 2019. He has been a Managing Director of Mizuho since November 2021. From April 2021 until October 2021, he was the Managing Member of Ionos Capital Partners LLC. From April 2019 until April 2021, Mr. Polak served as Chief Investment & Development Officer at Cisneros Group of Companies, a privately held company. Prior to Cisneros, he spent over 15 years as an investment banker in Wall Street, most recently heading the Latin America efforts at LionTree, a global investment and merchant banking firm, from 2013 until March 2019. He currently serves on the boards of two charitable organizations, LatinoU and Reaching U, and is chairman of the latter. He is also involved with Endeavor as a panelist and mentor to entrepreneurs. Mr. Polak’s significant experience in M&A, strategy and corporate development, and his knowledge and network of contacts in Latin America and in the payments sector provide great value to the Board.
Alan H. Schumacher
Mr. Schumacher has been a director since April 2013. For 23 years he worked at American National Can Corporation as well as at American National Can Group, where he served as Vice President, Controller and Chief Accounting Officer until 1997 and as Executive Vice President and Chief Financial Officer from 1997 until his retirement in 2000. He is a former member of the Federal Accounting Standards Advisory Board, and currently serves as a director of Blue Bird Corporation, Warrior Met Coal, Albertsons Companies, Inc., and Pendrick Capital Partners LLC. Mr. Schumacher has substantial expertise in accounting, reporting, audit and financial matters and, as such, is able to provide valuable contributions to our Board in its oversight functions.
Brian J. Smith
Mr. Smith has been a director since February 2016. Mr. Smith served as President and Chief Operating Officer of The Coca-Cola Company from January 2019 until September 2022. From 2016 until December 2018, he served as President of its Europe, Middle East and Africa (EMEA) Group and, prior to that, he also held other strategic and management roles since joining The Coca-Cola Company in 1997. Mr. Smith serves as a director for the Coca-Cola Europacific Partners Board and is a member of its Corporate Social Responsibility Committee. Like other members of the Board, Mr. Smith has substantial managerial experience in Latin America. His extensive expertise in management and corporate strategy makes him a valuable asset to the Company.
BIOGRAPHICAL INFORMATION OF OUR EXECUTIVE OFFICERS
Morgan M. Schuessler, Jr. – Please refer to the Biographical Information of our Directors for Mr. Schuessler’s biographical information.
52
Joaquín A. Castrillo
Mr. Castrillo has served as our Executive Vice President, CFO and Treasurer since October 2018. From August 2018 until such appointment, he served as Interim CFO and Treasurer. He has worked at the Company since 2012 serving in roles of increasing responsibility, including as Vice President and Finance Manager from 2015 to 2018, and as Vice President and Finance Director in 2018 until his appointment as Executive Vice President, CFO and Treasurer. Prior to joining the Company, Mr. Castrillo was an Audit Manager in the Banking and Capital Markets group of PwC. Mr. Castrillo holds a B.B.A. with a double concentration in Finance and Accounting from Villanova University. He is also a Certified Public Accountant and a member of the Villanova University Finance Department Advisory Committee.
Paola Pérez
Ms. Pérez has served as our Executive Vice President since February 2018 and Group Head of Puerto Rico since August 2022. Prior to that she was our Chief Administrative Officer from March 2020 until August 2022, and Senior Vice President of People and Culture from August 2017 until her appointment as Executive Vice President. She joined the Company in 2011 as Director of Internal Audit. Before joining Evertec, Ms. Pérez worked at Chartis as an External Reporting Manager for the Latin America Region, and PwC where she worked as a senior auditor. She obtained her Bachelor of Science in Accounting from Fairfield University, is a Certified Public Accountant and a board member of Lectores para el Futuro, a non-profit organization.
Luis A. Rodríguez
Mr. Rodríguez has served as our Executive Vice President since February 2017 and as Chief Legal and Administrative Officer since February 2021. He joined the Company in 2015 as Senior Vice President for Corporate Development, and was appointed General Counsel and Secretary of the Board in September 2016. Prior to joining the Company, Mr. Rodríguez served as Executive Director at J.P. Morgan in New York. Mr. Rodríguez possesses a bachelor’s degree from the Woodrow Wilson School of Public and International Affairs at Princeton University and holds a Juris Doctor from Stanford Law School.
Guillermo Rospigliosi
Mr. Rospigliosi has served as our Executive Vice President since 2016 and as Group Head of Latin America since August 2022. Prior to that he was our Chief Product and Innovation Officer from February 2020 until August 2022. Before joining the Company in 2016, he served as Chief Risk Officer for Visa in Latin America and before that he was the Managing Director for Latin America at CyberSource, a Visa subsidiary. He graduated from the Universidad de Lima with a Bachelor of Science in Business Administration and holds an MBA from the University of Texas in Austin.
Diego Viglianco
Mr. Viglianco has served as our Executive Vice President and COO since June 2021, and was a consultant to the Company from March 2021 until his appointment as COO. Before joining the Company, Mr. Viglianco served as the CEO of Interbanking, S.A., a digital financial ACH/real time payments company headquarters in Argentina, from July 2019 to February 2021. Prior to that, he was the CEO of the Processing Division of Prisma Medios de Pago S.A. in Argentina from March 2017 to June 2019. Previously, he held senior management positions with MasterCard in Argentina and Miami, USA, and Promoción y Operación S.A. de C.V. (PROSA) in Mexico. Mr. Viglianco holds an MBA in Economy and Business Administration from ESEADE University, Argentina, and a Bachelor of Science in Engineering from the University of Salvador, Argentina.
Miguel Vizcarrondo
Mr. Vizcarrondo has served as our Executive Vice President since 2012, and as Chief Product and Innovation Officer since August 2022. Prior to that he was our Chief Commercial Officer for Puerto Rico and the Caribbean from 2021 until August 2022. Prior to joining the Company in 2010, Mr. Vizcarrondo worked in Banco Popular de Puerto Rico for 14 years in a variety of roles, lastly as Senior Vice President of the Merchant Acquiring Solutions group from 2006 until he joined the Company in 2010. Mr. Vizcarrondo serves as a member of the Banco Popular Foundation, and as director for the Puerto Rico American Football Alliance, a youth sports league. Mr. Vizcarrondo holds a Bachelor of Science in Management, with a concentration in Finance, from Tulane University.
Alexandra López-Soler
Ms. López-Soler was named Executive Vice President in February 2022 and Chief Marketing Officer in August 2022. She joined the Company in 2018 as our Senior Vice President of Marketing and Communications. Before joining Evertec in 2018, she served as Chief Marketing and Audience Officer at GFR Media. She also held various executive level positions at GFR Media, Oriental Bank and Doral Bank. Ms. López-Soler has over twenty years of experience in the marketing industry, with
53
emphasis on digital media, financial technology, and banking. Ms. López-Soler earned a Bachelor of Arts in political science and Italian from Tufts University, and a master’s degree (MBA) from the University of Michigan Ross School of Business.
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 20172022 fiscal year and is incorporated herein by reference.
54
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 20172022 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 20172022 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 20172022 fiscal year and is incorporated herein by reference.
Item 14. Principal AccountingAccountant 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 20172022 fiscal year and is incorporated herein by reference.
55
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, 20172022 and 2016
2021•Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2017, 20162022, 2021 and 2015
2020•Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 20162022, 2021 and 2015
2020•Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162022, 2021 and 2015
2020•Notes to Audited Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule I—Parent Company Only Financial Statements
(3) Exhibits
56
| Exhibit No. | Description | ||||||||||
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 4.1 | |||||||||||
| 4.2* | ||||||||
| 10.1 | |||||||||||
| 10.6# | |||||||||||
| 10.7 | |||||||||||
| 10.8# | |||||||||||
| 10.9# | |||||||||||
| 10.10 | |||||||||||
| 10.11# | |||||||||||
| 10.12 | |||||||||||
57
| 10.13 | |||||||||||
| 10.14+ | |||||||||||
| 10.16+ | |||||||||||
| 10.17*+ | |||||||||||
| 10.18+ | |||||||||||
| 10.19+ | |||||||||||
| 10.20+ | |||||||||||
| 10.22+ | |||||||||||
| 10.23+ | |||||||||||
| 21.1* | |||||||||||
| 23.1* | |||||||||||
| 31.1* | |||||||||||
| 31.2* | |||||||||||
58
| 32.1** | |||||||||||
| 32.2** | |||||||||||
| 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.
# Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted
schedule or exhibit will be furnished to the Securities and Exchange Commission upon request.
Item 16. Form 10-K Summary
None.
59
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 | 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 | ||||||||||||
| Morgan M. Schuessler, Jr. | Officer) | |||||||||||||
| /s/ | Chief Financial Officer (Principal Financial and | February | ||||||||||||
| Accounting Officer) | ||||||||||||||
| /s/ Frank G. D’Angelo | Chairman of the Board | February | ||||||||||||
| Frank G. D’Angelo | ||||||||||||||
| /s/ | Director | February | ||||||||||||
| /s/ Alan H. Schumacher | Director | February | ||||||||||||
| Alan H. Schumacher | ||||||||||||||
| /s/ | Director | February | ||||||||||||
| /s/ Jorge A. Junquera | Director | February | ||||||||||||
| Jorge A. Junquera | ||||||||||||||
| /s/ | Director | February | ||||||||||||
| /s/ Olga M. Botero | Director | February | ||||||||||||
| Olga M. Botero | ||||||||||||||
| /s/ Brian J. Smith | Director | February | ||||||||||||
| Brian J. Smith | ||||||||||||||
60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
F - 1
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, 20172022 and 2016,2021, 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, 2017,2022, 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, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2022, 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, 2017,2022, 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, 2018,24, 2023 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 Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenues – Payment services and merchant acquiring- Refer to Notes 1 and 4 to the financial statements
Critical Audit Matter Description
The Company's revenues from payment services and merchant acquiring includes activity-based fees made up of a significant volume of low-dollar transactions, sourced from multiple systems, platforms, and applications. The processing of transactions and recording of payments services and merchant acquiring revenue is highly automated and is based on contractual terms with financial institutions, government entities, merchants, and other issuers.
We identified these revenues as a critical audit matter because the Company relies on multiple systems to process and record revenue which are highly automated with multiple platforms and applications. This required an increased extent of effort, including the need for us to involve professionals with expertise in information technology (IT), to identify, test, and evaluate the Company’s systems, applications, and automated controls.
How the Critical Audit Matter Was Addressed in the Audit
F - 2
Our audit procedures related to the Company's systems to process payment services and merchant acquiring revenues included the following, among others:
•With the assistance of our IT specialists, we:
◦Identified the significant systems used to process revenue transactions and tested the general IT controls over each of these systems, including testing of user access controls, change management controls, and IT operations controls.
◦Tested system interface controls and automated controls within the relevant revenue streams, as well as the controls designed to ensure the accuracy and completeness of revenue.
•We tested internal controls within the relevant revenue business processes, including those in place to reconcile the various reports extracted from the IT systems to the Company’s general ledger.
•For a sample of revenue transactions, we tested selected transactions by agreeing the amounts of revenue recognized to source documents and testing the mathematical accuracy of the recorded revenue.
Sale of business and modification and extension of commercial agreements with Banco Popular de Puerto Rico and its parent, Popular (collectively, “Popular”) — Refer to Notes 3 and 4 to the financial statements
Critical Audit Matter Description
During the year ended December 31, 2022, the Company sold certain technology service assets which represented a business to Popular, and concurrently, modified and extended its main commercial agreements with Popular, which required that the sale of the business and modification and extension of the commercial agreements be accounted for on a combined basis as a multi-element transaction. Accordingly, the total consideration of the combined arrangement was allocated to the sale of the business and the modified and extended commercial agreements’ performance obligations based on the relative stand-alone selling prices of each component of the combined transaction.
We identified the determination of relative stand-alone selling prices used to allocate the total consideration to the components of the combined arrangement as a critical audit matter, given the judgment required to determine the relative stand-alone selling prices.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the determination of relative stand-alone selling prices included the following, among others:
•We evaluated the effectiveness of internal controls over the combined transaction, including controls over the determination of the relative stand-alone selling prices used to allocate the total consideration of the combined arrangement to the sale of the business and the modified and extended commercial agreements.
•We evaluated, with the assistance of subject matter experts in our firm, the appropriateness of the Company's methodology used to allocate the total consideration of the combined arrangement on a relative stand-alone selling price basis.
•We tested the assumptions and underlying data used by the Company to determine stand-alone selling prices for a sample of agreements by comparing such stand-alone selling prices to observable, historical cost-plus margin arrangements.
/s/ Deloitte & Touche LLP
San Juan, Puerto Rico
February 28, 201824, 2023
Stamp No. E308482E478957
affixed to originaloriginal.
We have served as the Company’s auditor since 2015.
F - 3
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, 2017,2022, 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, 2017,2022, 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, 2017,2022, of the Company and our report dated February 28, 2018,24, 2023, expressed an unqualified opinion on those financial statements.
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, 201824, 2023
Stamp No. E308483E478958
affixed to originaloriginal.
F - 4
EVERTEC, Inc. Consolidated Balance Sheets
(Dollar amounts in thousands, except share data)
F - 5
| December 31, 2017 | December 31, 2016 | December 31, 2022 | December 31, 2021 | |||||||||||||||||||
| Assets | Assets | |||||||||||||||||||||
| Current Assets: | Current Assets: | |||||||||||||||||||||
| Cash and cash equivalents | $ | 50,423 | $ | 51,920 | Cash and cash equivalents | 197,229 | 266,351 | |||||||||||||||
| Restricted cash | 9,944 | 8,112 | Restricted cash | 18,428 | 19,566 | |||||||||||||||||
| Accounts receivable, net | 83,328 | 77,803 | Accounts receivable, net | 131,080 | 113,285 | |||||||||||||||||
| Prepaid expenses and other assets | 25,011 | 20,430 | Prepaid expenses and other assets | 42,392 | 37,148 | |||||||||||||||||
| Total current assets | 168,706 | 158,265 | Total current assets | 389,129 | 436,350 | |||||||||||||||||
| Debt securities available-for-sale, at fair value | Debt securities available-for-sale, at fair value | 2,203 | 3,041 | |||||||||||||||||||
| Investment in equity investee | 13,073 | 12,252 | Investment in equity investee | 14,661 | 12,054 | |||||||||||||||||
| Property and equipment, net | 37,924 | 38,930 | Property and equipment, net | 56,387 | 48,533 | |||||||||||||||||
| Operating lease right-of-use asset | Operating lease right-of-use asset | 15,918 | 21,229 | |||||||||||||||||||
| Goodwill | 398,575 | 370,986 | Goodwill | 423,392 | 393,318 | |||||||||||||||||
| Other intangible assets, net | 279,961 | 299,119 | Other intangible assets, net | 200,320 | 213,288 | |||||||||||||||||
| Deferred tax asset | Deferred tax asset | 5,701 | 6,910 | |||||||||||||||||||
| Derivative asset | Derivative asset | 7,440 | — | |||||||||||||||||||
| Net investment in lease | Net investment in lease | 14 | 107 | |||||||||||||||||||
| Other long-term assets | 4,549 | 6,110 | Other long-term assets | 16,578 | 9,926 | |||||||||||||||||
| Total assets | $ | 902,788 | $ | 885,662 | Total assets | $ | 1,131,743 | $ | 1,144,756 | |||||||||||||
| Liabilities and stockholders’ equity | Liabilities and stockholders’ equity | |||||||||||||||||||||
| Current Liabilities: | Current Liabilities: | |||||||||||||||||||||
| Accrued liabilities | $ | 38,451 | $ | 34,243 | Accrued liabilities | $ | 90,341 | $ | 74,540 | |||||||||||||
| Accounts payable | 41,135 | 40,845 | Accounts payable | 46,751 | 28,484 | |||||||||||||||||
| Unearned income | 7,737 | 4,531 | ||||||||||||||||||||
| Contract liability | Contract liability | 15,226 | 17,398 | |||||||||||||||||||
| Income tax payable | 1,406 | 1,755 | Income tax payable | 9,406 | 7,132 | |||||||||||||||||
| Current portion of long-term debt | 46,487 | 19,789 | Current portion of long-term debt | 20,750 | 19,750 | |||||||||||||||||
| Short-term borrowings | 12,000 | 28,000 | Short-term borrowings | 20,000 | — | |||||||||||||||||
| Current portion of operating lease liability | Current portion of operating lease liability | 5,936 | 5,580 | |||||||||||||||||||
| Total current liabilities | 147,216 | 129,163 | Total current liabilities | 208,410 | 152,884 | |||||||||||||||||
| Long-term debt | 557,251 | 599,667 | Long-term debt | 389,498 | 444,785 | |||||||||||||||||
| Deferred tax liability | 13,820 | 14,978 | Deferred tax liability | 10,111 | 2,369 | |||||||||||||||||
| Unearned income—long-term | 23,486 | 17,303 | ||||||||||||||||||||
| Contract liability - long term | Contract liability - long term | 34,068 | 36,258 | |||||||||||||||||||
| Operating lease liability - long-term | Operating lease liability - long-term | 10,788 | 16,456 | |||||||||||||||||||
| Derivative liability | Derivative liability | — | 13,392 | |||||||||||||||||||
| Other long-term liabilities | 13,039 | 16,376 | Other long-term liabilities | 4,120 | 8,344 | |||||||||||||||||
| Total liabilities | 754,812 | 777,487 | Total liabilities | 656,995 | 674,488 | |||||||||||||||||
| Commitments and contingencies (Note 22) | ||||||||||||||||||||||
| Commitments and contingencies (Note 24) | Commitments and contingencies (Note 24) | |||||||||||||||||||||
| 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; 64,847,233 shares issued and outstanding at December 31, 2022 (December 31, 2021 - 71,969,856) | Common stock, par value $0.01; 206,000,000 shares authorized; 64,847,233 shares issued and outstanding at December 31, 2022 (December 31, 2021 - 71,969,856) | 648 | 719 | |||||||||||||||||||
| Additional paid-in capital | 5,350 | — | Additional paid-in capital | — | 7,565 | |||||||||||||||||
| Accumulated earnings | 148,887 | 116,341 | Accumulated earnings | 487,349 | 506,051 | |||||||||||||||||
| Accumulated other comprehensive loss, net of tax | (10,848 | ) | (12,391 | ) | Accumulated other comprehensive loss, net of tax | (16,486) | (48,123) | |||||||||||||||
| Total EVERTEC, Inc. stockholders’ equity | 144,112 | 104,676 | Total EVERTEC, Inc. stockholders’ equity | 471,511 | 466,212 | |||||||||||||||||
| Non-controlling interest | 3,864 | 3,499 | Non-controlling interest | 3,237 | 4,056 | |||||||||||||||||
| Total equity | 147,976 | 108,175 | Total equity | 474,748 | 470,268 | |||||||||||||||||
| Total liabilities and equity | $ | 902,788 | $ | 885,662 | Total liabilities and equity | $ | 1,131,743 | $ | 1,144,756 | |||||||||||||
F - 6
The accompanying notes are an integral part of these audited consolidated financial statements.
F - 7
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, | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||
| Revenues (affiliates Note 21) | $ | 407,144 | $ | 389,507 | $ | 373,528 | ||||||||||||||||||||||||||
| Revenues (affiliates Note 23) | Revenues (affiliates Note 23) | $ | 618,409 | $ | 589,796 | $ | 510,588 | |||||||||||||||||||||||||
| 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 | 292,621 | 250,164 | 226,870 | |||||||||||||||||||||||||
| Selling, general and administrative expenses | 56,161 | 46,986 | 37,278 | Selling, general and administrative expenses | 89,770 | 68,048 | 70,808 | |||||||||||||||||||||||||
| Depreciation and amortization | 64,250 | 59,567 | 64,974 | Depreciation and amortization | 78,618 | 75,070 | 71,518 | |||||||||||||||||||||||||
| Total operating costs and expenses | 321,061 | 282,362 | 270,168 | Total operating costs and expenses | 461,009 | 393,282 | 369,196 | |||||||||||||||||||||||||
| Income from operations | 86,083 | 107,145 | 103,360 | Income from operations | 157,400 | 196,514 | 141,392 | |||||||||||||||||||||||||
| Non-operating income (expenses) | Non-operating income (expenses) | |||||||||||||||||||||||||||||||
| Interest income | 716 | 377 | 495 | Interest income | 3,121 | 1,889 | 1,502 | |||||||||||||||||||||||||
| Interest expense | (29,861 | ) | (24,617 | ) | (24,266 | ) | Interest expense | (24,772) | (22,810) | (25,074) | ||||||||||||||||||||||
| Earnings (losses) of equity method investment | 604 | (52 | ) | 147 | ||||||||||||||||||||||||||||
| Other income, net | 2,657 | 544 | 2,306 | |||||||||||||||||||||||||||||
| Total non-operating expenses | (25,884 | ) | (23,748 | ) | (21,318 | ) | ||||||||||||||||||||||||||
| Gain on sale of a business | Gain on sale of a business | 135,642 | — | — | ||||||||||||||||||||||||||||
| (Loss) gain on foreign currency remeasurement | (Loss) gain on foreign currency remeasurement | (7,645) | 1,897 | 2,891 | ||||||||||||||||||||||||||||
| Earnings of equity method investment | Earnings of equity method investment | 2,968 | 1,713 | 1,136 | ||||||||||||||||||||||||||||
| Other income | Other income | 1,138 | 2,502 | 2,006 | ||||||||||||||||||||||||||||
| Total non-operating income (expenses) | Total non-operating income (expenses) | 110,452 | (14,809) | (17,539) | ||||||||||||||||||||||||||||
| Income before income taxes | 60,199 | 83,397 | 82,042 | Income before income taxes | 267,852 | 181,705 | 123,853 | |||||||||||||||||||||||||
| Income tax expense (benefit) | 4,780 | 8,271 | (3,335 | ) | ||||||||||||||||||||||||||||
| Income tax expense | Income tax expense | 28,983 | 20,562 | 19,002 | ||||||||||||||||||||||||||||
| Net income | 55,419 | 75,126 | 85,377 | Net income | 238,869 | 161,143 | 104,851 | |||||||||||||||||||||||||
| Less: Net income attributable to non-controlling interest | 365 | 90 | — | |||||||||||||||||||||||||||||
| Less: Net (loss) income attributable to non-controlling interest | Less: Net (loss) income attributable to non-controlling interest | (140) | 13 | 415 | ||||||||||||||||||||||||||||
| Net income attributable to EVERTEC, Inc.’s common stockholders | 55,054 | 75,036 | 85,377 | Net income attributable to EVERTEC, Inc.’s common stockholders | 239,009 | 161,130 | 104,436 | |||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax of $122, $176 and $8 | ||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax of $1,447, $1,153 and $792 | Other comprehensive income, net of tax of $1,447, $1,153 and $792 | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (635 | ) | (3,360 | ) | (545 | ) | Foreign currency translation adjustments | 12,490 | (11,129) | (7,970) | ||||||||||||||||||||||
| Gain (loss) on cash flow hedge | 2,178 | (1,449 | ) | (515 | ) | |||||||||||||||||||||||||||
| Gain (loss) on cash flow hedges | Gain (loss) on cash flow hedges | 19,215 | 11,151 | (10,275) | ||||||||||||||||||||||||||||
| Unrealized (loss) gain on change in fair value of debt securities available-for-sale | Unrealized (loss) gain on change in fair value of debt securities available-for-sale | (68) | 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 | $ | 270,646 | $ | 161,261 | $ | 86,191 | |||||||||||||||||||
| 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 | $ | 3.48 | $ | 2.24 | $ | 1.45 | |||||||||||||||||||
| 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 | $ | 3.45 | $ | 2.21 | $ | 1.43 | |||||||||||||||||||
| Cash dividends declared per share | $ | 0.30 | $ | 0.40 | $ | 0.40 | ||||||||||||||||||||||||||