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 existing commercial 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 expireswas amended and restated on July 1, 2022, among other things, to extend its term to end in 2025.2035.
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. Although Banco Popular is not our sole distribution channel, it is the most significant. We rely on the continuing growth of our merchant relationships, which in turn is dependent upon our alliance with Banco Popular and other distribution channels. There can be no guarantee that this growth will continue and the loss or deterioration of these relationships, whether due to the termination of the A&R ISO Agreement or otherwise, could negatively impact our business and result in a material reduction of our revenue and profit.income.
If our amortizable intangible assets or goodwill become impaired, it may adversely affect our financial condition and operating results.
If our amortizable intangible assets or goodwill were to become impaired, we may be required to record a significant charge to earnings. Under the generally accepted accounting principles in the United States of America (“GAAP”), definitive useful life intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested for impairment at least annually.
The goodwill impairment evaluation process requires us to make estimates and assumptions with regards to the fair value of our reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact our results of operations and the reporting unit where the goodwill is recorded.
Our risk management procedures may not be fully effective in identifying or helping us mitigate our risk exposure against all types of risks.
We operate in a rapidly changing industry, and we have experienced significant change in the past five years, including our separation from Popular following the Merger, our initial public offering in April 2013 and our listing on the New York Stock Exchange (“NYSE”). Accordingly, we may not be fully effective in identifying, monitoring and managing our risks. In some cases, the information we use to perform our risk assessments may not be accurate, complete or up-to-date. In other cases, our risk assessments may depend upon information that we may not have or cannot obtain. If we are not fully effective or we are not always successful in identifying all risks to which we are or may be exposed, we could be subject to losses, penalties, litigation or regulatory actions that could harm our reputation or have a material adverse effect on our business, financial conditions and results of operations.
Security breaches or our own failure to comply with privacy regulations and industry security requirements imposed on providers of services to financial institutions and card processing services could harm our business by disrupting our delivery of services and damaging our reputation.
As part of our business, we electronically receive, process, store and transmit a wide range of confidential information, including sensitive businesscustomer information of our customers. In addition, we collectand personal consumer data, such as names and addresses, social security numbers, driver’s license numbers, cardholder data and payment history records. The uninterrupted operation of ourrecords, as well as proprietary information systems 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 accessbelonging to our computer systemsbusiness 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 systembusiness partners (collectively, "Confidential Information"). We also operate payment, cash access and loss of confidential information such as creditelectronic card numbers and related information could have a longer and more significant impact on the business operations than a hardware failure and could result in claims against us for misuse of personal information, such as identity theft.
Additionally, as a provider of services to financial institutions, such as card processing services, we are subject directly (or indirectly through our clients) to the same laws, regulations, industry standards and limitations on disclosure of the information we receive from our customers that apply to the customers themselves. If we fail to comply with these regulations, standards and limitations, we could be exposed to claims for breach of contract, fines, governmental proceedings, or prohibitions on card processing services. In addition, as more restrictive privacy laws, rules or industry security requirements are adopted in the
future on the federal or local level or by a specific industry body, the change could have an adverse impact on us through increased costs or restrictions on business processes. We may be required to expend significant capital and other resources to comply with mandatory privacy and security standards required by law, industry standards or contracts.
Any inability to prevent security or privacy breaches or failure to comply with privacy regulations and industry security requirements could cause our existing customers to lose confidence in our systems and terminate their agreements with us, and could inhibit our ability to attract new customers, damage our reputation and/or adversely impact our relationship with administrative agencies.
We may experience breakdowns in our processing systems that could damage customer relations and expose us to liability.
We depend heavily on the reliability of our processing systems in our core businesses. A system outage or data loss, regardless of reason, could have a material adverse effect on our business, financial condition and results of operations. Not only would we suffer damage to our reputation in the event of a system outage or data loss, but we may also be liable to third parties. Some of our contractual agreements with financial institutions require the crediting of certain fees if our systems do not meet certain specified service levels. To successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Events that could cause system interruptions include, but are not limited to, fire, natural disasters, telecommunications failure, computer viruses, terrorist acts and war. Although we have taken steps to protect against data loss and system failures, there is still risk that we may lose critical data or experience system failures. We perform the vast majority of disaster recovery operations ourselves, though we utilize select third parties for some aspects of recovery. To the extent we outsource our disaster recovery, we are at risk of the vendor’s unresponsiveness in the event of breakdowns in our systems. Furthermore, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.
Lack of system integrity, fraudulent payments or credit quality related to funds settlement could result in a financial loss.
We settle funds on behalf of financial institutions, other businesses and consumers and process funds transactions from clients, card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by us include debit card, credit card, electronic bill payment transactions, ACH payments, electronic benefits transfer transactions and check clearing that supports consumers, financial institutions and other businesses. These payment activities rely upon the technology infrastructure that facilitates the verification of activity with counterparties, the facilitation of the payment and, in some cases, the detection or prevention of fraudulent payments. If the continuity of operations, integrity of processing, or ability to detect or prevent fraudulent payments were compromised this could result in a financial loss to us.
We may experience defects, development delays, installation difficulties, system failure, or other service disruptions with respect to our technology solutions, which would harm our business and reputation and expose us to potential liability.
Many of our services are based on sophisticated software, technology and computing systems, and we may encounter delays when developing new technology solutions and services. Further, the technology solutions underlying our services have occasionally contained, and may in the future contain, undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technologies on platforms used by our customers. Finally, our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry and computer viruses or other cyber-attacks. Attacks on information technology systemsIT Systems continue to grow in frequency, complexity and sophistication, a trend we expect will continue. Such attacks have become a point of focus for individuals, businesses and governmental entities. The objectives of these attacks include, among other things, gaining unauthorized access to systems to facilitate financial fraud, disrupt operations, cause denial of service events, corrupt data, and steal non-public information. Such attacks have become a point of focus for individuals, businesses, and governmental entities.
As partUnauthorized access to our or third-party IT Systems could result in the theft or publication, the deletion or modification or other compromise to the confidentiality, integrity or availability of Confidential Information and could disrupt successful operations of our business,businesses. These risks increase when we electronically receive, process, store and transmit a wide range of confidential information including sensitive customer 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 Confidential 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 publicity and loss of reputation;credit card numbers or (7) exposure to liability claims.
Any one or more of the foregoingother Confidential Information, could have a material adverse effect on our reputation, expose us to significant liability and result in a loss of customers. Some of our IT Systems have experienced in the past and may experience in the future security breaches and, although they did not have a material adverse effect on our results of operations or reputation, there can be no assurance of a similar result in the future. We cannot assure you that our security measures will prevent security breaches or that failure to prevent them will not have a material adverse effect on our business, results of operations, financial condition, and reputation. Any breaches of network or data security at our customers, partners or vendors could have similar negative effects.
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, and may not have the desired effect. 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.
Failure to comply with federal, state and foreign 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 personal data of our employees and business partners, which is governed by a variety of U.S. federal and state and foreign 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.
Certain states in the United States and most countries have adopted privacy and security laws that may apply to our business. These laws generally require companies to implement specific privacy and information security controls and legal protections to protect certain types of personal information and to collect or use it subject to disclosures. Additional compliance investment and potential business process changes may continue to be required as these laws and others go into effect. Further, in order to comply with the varying state laws around data breaches, we must maintain adequate security measures, which require significant investments in resources and ongoing attention. Additionally, our customers and business partners are imposing more stringent obligations on us in the form of contracts regarding privacy and information security. Even though we believe we and our vendors are generally in compliance with applicable laws, rules and regulations relating to privacy and data security, these laws are in some cases relatively new and the interpretation and application of these laws are uncertain.
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 and security-related 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, and may 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.
TheUnder certain circumstances, we may be liable for certain fraudulent transactions and/or credits initiated by merchants or others. For instance, if we were to process payments for a merchant that engaged in unfair or deceptive trade practices, we may be subject to certain fines or penalties. Examples of merchant fraud include merchants or other parties knowingly using a stolen or counterfeit credit, debit or prepaid card, card number, or other credentials to record a false sales or credit transaction, processing an invalid card or intentionally failing to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using increasingly sophisticated methods to engage in illegal activities such as counterfeiting and fraud. A single significant incident of fraud, or increases in the overall level of fraud, involving our services, could result in reputational damage to us, which could reduce the use and acceptance of our solutions and services or lead to greater regulation that would increase our compliance costs. Failure to effectively manage risk and prevent fraud could increase our chargeback liability or cause us to incur other liabilities, and our insurance coverage may be insufficient or inadequate to compensate us. It is possible that incidents of fraud could increase in the future. Increases in chargebacks or other liabilities could adversely affect our business, financial condition or results of operations.
We are subject to the credit risk that our merchants will be unable to satisfy obligations for which we may also be liable.
We are subject to the credit risk of our merchants being unable to satisfy obligations for which we 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 abilityinability to adopt technological advancements surrounding POS technology available to merchants could have ana material and adverse impact on our merchant acquiring business.
Our use of artificial intelligence and machine learning tools may subject us to additional risks and may adversely impact our reputation and the performance of our products, service offerings and business.
We use machine learning, artificial intelligence, and automated decision making technologies, including proprietary artificial intelligence and machine learning algorithms throughout our business, and are making significant investments to continuously improve our use of such technologies.
There are significant risks involved in developing, maintaining and deploying these technologies and there can be no assurance that the usage of such technologies will always enhance our products or services or be beneficial to our business, including our efficiency or profitability. Furthermore, our use of artificial intelligence and machine learning technologies may result in legal and regulatory risks and any resulting investigations or litigation could have an adverse impact on our business, financial condition, and results of our operations.
A number of aspects of intellectual property protection in the field of artificial intelligence and machine learning are currently under development, and there is uncertainty and ongoing litigation in different jurisdictions as to the degree and extent of protection warranted for artificial intelligence and machine learning systems and relevant system input and outputs. If we fail to obtain protection for the intellectual property rights concerning our artificial intelligence and machine learning technologies, or later have our intellectual property rights invalidated or otherwise diminished, our competitors may be able to take advantage of our research and development efforts to develop competing products.
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, thereThere 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.
We are subjectThere may be a decline in the use of cards as a payment mechanism for consumers or adverse developments with respect to the card industry in general.
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.
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 disputeddriven by the cardholdercost, ease-to-use, and charged backquality of products and services offered to customers and businesses. In order to consistently increase and maintain our profitability, businesses and consumers must continue to use electronic and digital payment methods that we process, including credit and debit cards. If consumers and businesses discontinue the merchants. For certain merchants,use of credit, debit or prepaid cards as a payment mechanism for their transactions or if we are unable to collect this amount fromthere is a change in the merchant, due to the merchant’s insolvency or other reasons, we will bear the loss for the amountmix of the refund or chargeback paid to the cardholder. Notwithstanding our adherence to industry standards with regards to the acceptance of new merchantspayments between cash, alternative currencies and certain steps to screen for credit risk,technologies, it is possible that a default on such obligations by one or more of our merchants could have a material adverse effect on our business.business, results of operations and financial condition.
Increased competition or changes in consumer spending or payment preferences could adversely affect our business.
A decline in the market for our services, either as a result of increased competition, continued migration of Puerto Ricans to the U.S. mainland, a further deterioration in the Puerto Rico economy, a decrease in consumer spending or a shift in consumer payment preferences, could have a material adverse effect on our business. We may face increased competition in the future as new companies enter the market and existing competitors expand their services. Some of these competitors could have greater overall financial, technical and marketing resources than us, which could enhance their ability to finance acquisitions, fund internal growth and respond more quickly to professional and technological changes. Some competitors could have or may develop a lower cost structure. New competitors or alliances among competitors could emerge, resulting in a loss of business for us and a corresponding decline in revenues and profit margin. Further, if consumer confidence decreases in a way that adversely affects consumer spending, whether in conjunction with a global economic downturn or otherwise, we could experience a reduction in the volume of transactions we process. In addition, if we fail to respond to changes in technology or consumer payment preferences, we could lose business to competitors.
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.
Additionally, we are subject to the PCI DSS, issued by the Payment Card Industry Security Standards Council. The PCI DSS contains compliance requirements regarding our security surrounding the physical and electronic storage, processing and
transmission of cardholder data. If we or our service providers are unable to comply with the security standards required by PCI DSS, we may be subject to fines, restrictions, and expulsion from card acceptance programs, which would materially and adversely affect our business. Additionally, costs and potential problems and interruptions associated with the implementation of new or upgraded IT Systems such as those necessary to maintain compliance with the PCI DSS or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. Any material interruptions or failures in our payment related systems could have a material adverse effect on our business, financial condition and results of operations.
Changes in interchange fees or other fees charged by credit card associations and debit networks could increase our costs or otherwise materially adversely affect our business.
From time to time, card associations and debit networks change interchange, processing, and other fees, which could impact our merchant acquiring and payment services businesses. It is possible that competitiveCompetitive pressures willcould result in our merchant acquiring and payment services businesses absorbing a portion of such increases in the future, which would increase our operating costs, reduce our profit margin, and adversely affect our business, operating results of operations and financial condition.
Our revenues from the sale of services to merchants that accept Visa, Discover and MasterCard cards are dependent upon our continued Visa, Discover and MasterCard registration and financial institution sponsorship.
In order to provide our Visa, Discover and MasterCard transaction processing services, we must be registered as a merchant processor of Visa, Discover and MasterCard. These designations are dependent upon our being sponsored by member banks of those organizations. If our sponsor banks should stop providing sponsorship for us, we would need to find another financial institution to serve as a sponsor, which could prove to be difficult and/or more expensive. If we are unable to find a replacement financial institution to provide sponsorship we may no longer be able to provide processing services to the affected customers which would negatively impact our revenues and earnings.
For purposes of the Bank Holding Company Act of 1956 (the “BHC Act”), for so long as we are deemed to be controlled by Popular, we will be subject to supervision and examination by U.S. federal banking regulators, and our activities will be limited to those permissible for Popular. Furthermore, as a technology service provider to regulated financial institutions, weWe are subject to additionalextensive government regulation and oversight. Failure to comply with existing and future rules and regulations in the jurisdictions in which we operate could materially adversely affect the operations of one or more of our businesses in those jurisdictions.
Our business is subject to the laws, rules, regulations, and policies in the countries in which we operate, as well as the legal interpretation of such regulations by administrative bodies and the judiciary of those countries. The expansion of our business may also result in increased regulatory oversight and examination. As a regulated institution,enforcement, as well as any claims by regulatory agencies and courts that we may beare required to obtain regulatory approval before engaginglicenses to engage in certain new activitiesbusiness activity.
Enforcement of, failure, or businesses, whether organically or by acquisition.
For so long as we are deemed to be a “subsidiary” of Popular for purposes of the BHC Act, in other words deemed to be controlled by Popular, we will be subject to regulation and supervision by the Federal Reserve Board. The BHC Act defines “control” differently than GAAP. As a deemed “subsidiary”, we may conduct only those activities that are authorized for our deemed parent, which depend on whether it is treated as a bank holding company or a financial holding company. The activities that are permissible for subsidiaries of bank holding companies are those that are treated as closely related to banking; those that are permissible for subsidiaries of financial holding companies generally include activities that are financial in nature or complementary to financial activities. In addition, we are subject to regulatory oversight and examination by the Federal Financial Institution Examination Council because we are a technology service provider to regulated financial institutions, including Banco Popular.
New lines of business, other new activities, acquisitions that we may wish to commence or undertake in the future and the manner in which we conduct our business may not be permissible for us under the BHC Act, Regulation K or other relevant U.S. federal banking laws or may require the approval of the Federal Reserve Board or any other applicable U.S. federal banking regulator. In addition, potential acquisitions or deals may take longer, be more costly, or make us less attractive as a buyer. Additional regulatory requirements may be imposed if Popular is subject to any enforcement action. More generally, the Federal Reserve Board has broad powers to approve, deny or refuse to act upon applications or notices submitted by Popular on our behalf with respect to new activities, the acquisition of businesses or assets, or the reconfiguration of existing operations. Any such action by the Federal Reserve Board may also depend on our abilityperceived failure to comply with laws, rules, regulations, policies, or licensing requirements could result in criminal or civil lawsuits, penalties, fines, regulatory investigations, forfeiture of significant assets, an outright or partial restriction on our operations, enforcement in one or more jurisdictions, additional compliance and licensure requirements, reputational damage and force us to change the standards imposed by our regulators. There can be no assurance that any required regulatory approvals will be obtained. In addition, further restrictions placed on Popular as a result of supervisory or enforcement actions may restrict usway we or our activitiesusers do business. Any changes in certain circumstances, even if these actions are unrelated to conduct our business.or our users’ business methods could increase cost or reduce revenue.
Changes inThe laws, rules, regulations, and enforcement activities may adversely affectpolicies in the products and services we provide and markets in which we operate.operate include, but are not limited to, privacy and user data protection, banking, money transmission, antitrust, anti-money laundering and the export, re-export, and re-transfer abroad of covered items. In addition, our operations in most of the countries where we operate are subject to risks related to compliance with the U.S. Foreign Corrupt Practices Act and other applicable U.S. and other local laws prohibiting corrupt payments to government officials and other third parties.
Privacy and 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.
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
July 21, 2010, the Dodd-Frank Act was signed into law in the United States. The Durbin Amendment contains requirements relating to payment card networks. To implement this provision, the Federal Reserve adopted rules which took effect on October 1, 2011 and April 1, 2012. These rules, among other things, place certain restrictions on the interchange transaction fees that a card issuer can receive for an electronic debit transaction originated at a merchant and also places various exclusivity prohibitions and routing requirements on such transactions. To date, the Durbin Amendment has had mixed implications for our business, but the overall net impact has been positive due to lower interchange costs improving the overall margins of the business. However, we cannot assure you that this trend will continue, and we believe that any future impact (positive or negative) resulting from the Durbin Amendment and subsequent developments is uncertain due to the competitive landscape in which we operate. Further, bankingfees. Banking regulators have been strengthening their examination guidelines with respect to relationships between banks and their third-party service providers, such as EVERTEC.us. Any such heightened supervision of our relationship with our banking and financial services customers, including Popular, could have an effect on our contractual relationship with Popularour customers as well as on the standards applied in the evaluation of our services. See “Item“Part I, Item 1. Business-GovernmentBusiness- Government Regulation and Payment Network Rules-RegulatoryRules- Regulatory Reform and Other Legislative Initiatives.”
Further changes to laws, rules and regulations, or interpretation or enforcement thereof, could have a negative financial effect on us. We have structured our business in accordance with existing tax laws and interpretations of such laws. Changes in tax laws or their interpretations could decrease the value of revenues we receive and the amount of our cash flow and have a material adverse impact on our business.Export
Our business concentration in Puerto Rico and our business with the government of Puerto Rico expose us to significant risks.
For the fiscal years ended December 31, 2017 and 2016, approximately 81% and 84%, respectively, of our total revenues were generated from our operations in Puerto Rico. In addition, some revenues that are generated from our operations outside Puerto Rico are dependent upon our operations in Puerto Rico. As a result, our financial condition and results of operations are highly dependent on the economic and political conditions in Puerto Rico, and could be significantly adversely impacted by adverse economic or political developments in Puerto Rico.
In 2017, the government of Puerto Rico was our second largest customer representing approximately 7% of our total revenues. Revenues from the government of Puerto Rico come from numerous agencies and public corporations. We believe the significant majority of the services we provide to the government of Puerto Rico are mission-critical or essential. Some of the government-sponsored initiatives we provide are indirectly funded in part by U.S. federal government programs. The government of Puerto Rico is currently experiencing a fiscal crisis (as described further in the following risk factor). A federal law adopted in June 2016 created an Oversight Board with broad budgetary and financial powers over Puerto Rico’s budget, laws, financial plans and regulation, and imposes an automatic temporary stay on all litigation against Puerto Rico and its instrumentalities to enforce or collect claims against the Puerto Rico government. If the Puerto Rico government defaults in payment, delays or withholds payment to us, we may have limited options for recourse and may not be able to recover the full amount on the receivables due to us. In addition, the Puerto Rico government may elect not to renew contracts for our services, or the Oversight Board may decide not to approve the budget for them. While we believe that the government of Puerto Rico will continue to engage our services despite the challenging financial situation it is currently facing, a failure of the government to do so or the Oversight Board to approve the required budget could have a material adverse impact on our financial condition and results of operations.
In addition, Puerto Rico’s location in the Caribbean exposes the island to increased risk of hurricanes and other severe tropical weather conditions and natural disasters. In 2017, Puerto Rico was hit by two powerful hurricanes, Irma and Maria, causing catastrophic damage across the island and affecting our business. We cannot predict if similarly powerful hurricanes will become more commonplace. Similarly, we cannot be certain of the effect that potential future hurricanes may have on Puerto Rico or our business. Such hurricanes, tropical storms and other natural disasters could negatively affect, among other things, our ability to provide services, as well as our physical locations, property and equipment, and could have a material adverse effect on our financial condition and results of operations
The Government of Puerto Rico’s fiscal crisis continues. The expiration of the automatic stay on litigation to collect claims against the Government on May 1, 2017, the initiation of creditor litigation promptly thereafter and the Government’s filing for bankruptcy protection on May 3, 2017, are all expected to further slow the Puerto Rico economy, increase emigration from Puerto Rico, increase the risk of non-payment of Government obligations and negatively affect the economy and consumer spending, which could have a material adverse effect on our business and the trading price of our common stock.
The Commonwealth of Puerto Rico (the "Commonwealth") has been in economic recession since 2006. In August 2015, the Commonwealth defaulted for the first time on the Public Finance Corporation bonds. In April 2016, the Puerto Rico governor
signed a debt moratorium law that gave the governor emergency powers to deal with the fiscal crisis, including the ability to declare a moratorium on any debt payment. On June 30, 2016, the U.S. President signed into law the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). PROMESA establishes a fiscal oversight and management board (the “Oversight Board”) comprised of seven voting members appointed by the President. PROMESA also imposed an automatic stay on all litigation against Puerto Rico and its instrumentalities, as well as any other judicial or administrative actions or proceedings to enforce or collect claims against the Puerto Rico government.
On May 1, 2017, the automatic stay expired. Promptly after the expiration of the stay, creditors of the Puerto Rico government filed various lawsuits involving defaults on more than $70 billion of bonds issued by Puerto Rico, having failed to reach a negotiated settlement on such defaults with the Puerto Rico government during the period of the automatic stay. On May 3, 2017, the Oversight Board filed a voluntary petition of relief on behalf of the Commonwealth pursuant to Title III of PROMESA for the restructuring of the Commonwealth’s debt. Subsequently, the Oversight Board filed voluntary petitions of relief pursuant to Title III of PROMESA on behalf of certain public corporations and instrumentalities. Title III is an in-court debt restructuring proceeding similar to protections afforded debtors under Chapter 11 of the United States Code (the “Bankruptcy Code”); the Bankruptcy Code is not available to the Commonwealth or its instrumentalities.
The approximate aggregate amount of unfunded pension obligations of the Puerto Rico government and its instrumentalities plus the bonds in default, far exceed the approximately $20 billion of outstanding obligations involved when Detroit filed for bankruptcy protection in 2013, which was described as the largest municipal bankruptcy at that time. Moreover, there is no precedent for a Title III filing, and there may be uncertainties as to the processes to be followed.
While the Title III processes do not foreclose negotiations between creditors and the Puerto Rico government toward a consensual restructuring agreement, there can be no assurance that meaningful negotiations will occur or that any consensual agreement will be reached or by what date. Importantly, there also can be no assurance as to the financial outcome or timing of the completion of the Title III processes. There also can be no assurance as to any favorable intervention by the U.S. Congress or the U.S. President.
In all events, the invocation of Title III is expected to potentially deepen Puerto Rico’s economic recession, and to further curtail the ability of the Commonwealth and its instrumentalities, subject to the oversight of the Oversight Board (collectively, the “Government”), to access capital markets to place new debt or roll future maturities. Additionally, potential Government actions such as further reductions in spending or the imposition of new taxes may further deepen the current economic crisis, lead to an increase in unemployment rates, and result in a continued decline in population and in the economy.
Consequently, such recent events could potentially adversely impact the trading price of our common stock, adversely impact our customer base, depress general consumer spending and delay the Government’s payments thus increasing our Government accounts receivables, and potentially impair the collectability of those accounts receivable, all of which, individually or in the aggregate, could potentially have a material adverse effect on our business, financial condition and results of operations. As of December 31, 2017, we had no direct exposure to the Government’s debt obligations and had net receivables of $11.8 million with the Commonwealth and certain public corporations.
Hurricanes Irma and Maria and their aftermaths could have a prolonged negative impact on the Puerto Rican and Caribbean economies and a material adverse effect on our business and results of operations
Hurricanes Irma and Maria and their aftermaths, including the widespread power outage in Puerto Rico, the damage to infrastructure and communications networks, and the temporary cessation and slow pace of reestablishment of regular day-to-day commerce, have severely impacted the economies of Puerto Rico and the Caribbean. It is unknown how long it will take for the business communities, resident populations and the economies to recover. Puerto Rico’s current situation following Hurricane Maria could further accelerate the ongoing emigration trend of Puerto Rico residents to the United States. A prolonged delay in the repairs to the islands’ infrastructures, decline in business volume and any other economic declines due to Hurricanes Irma and Maria and their aftermaths may impact demand for our services and could have a material adverse effect on our business and results of operations.
There are risks associated with our presence in international markets, including political or economic instability.
Our financial performance may be significantly affected by general economic, political and social conditions in the emerging markets where we operate. Many countries in Latin America have suffered significant economic, political and social crises in the past, and these events may occur again in the future. Instability in Latin America has been caused by many different factors, including:
exposure to foreign exchange variation;
significant governmental influence over local economies;
substantial fluctuations in economic growth;
high levels of inflation;
exchange controls or restrictions on expatriation of earnings;
high domestic interest rates;
wage and price controls;
changes in governmental economic or tax policies;
imposition of trade barriers;
unexpected changes in regulation which may restrict the movement of funds or result in the deprivation of contract rights or the taking of property without fair compensation; and
overall political, social and economic instability.
Adverse economic, political and social conditions in the Latin America markets where we operate may create uncertainty regarding our operating environment, which could have a material adverse effect on our company.
Our business in countries outside the United States and transactions with foreign governments increase our compliance risks and exposes us to business risks.
Our operations outside the United States could expose us to trade and economic sanctions or other restrictions imposed by the United States or other local governments or organizations. The U.S. Departments of the Treasury and Justice (the “Agencies”), the SEC and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, the FCPA and other federal statutes. Under economic sanctions laws, the Agencies may seek to impose modifications to business practices, including cessation of business activities involving sanctioned countries, and modifications to compliance programs, which may increase compliance costs. In addition, we are also subject to compliance with local government regulations. If any of the risks described above materialize, it could adversely impact our business, operating results and financial condition.
These regulations also prohibit improper payments or offers of payments to foreign governments and their officials and political parties by the United States and other business entities for the purpose of obtaining or retaining business. We have operations and deal with government entities and financial institutions in countries known to experience corruption, particularly certain emerging countries in Latin America, and further international expansion may involve more of these countries. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees or consultants that could be in violation of various laws including the FCPA, even though these parties are not always subject to our control. Our existing safeguards and any future improvements may prove to be less than effective, and our employees or consultants may engage in conduct for which we may be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.
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.
Moreover, someSome financial institutions refuse, even in the absence of a regulatory requirement, to provide services to companies operating in certain countries or engaging in certain practices because of concerns that the compliance efforts perceived to be necessary may outweigh the usefulness of the service relationship. Our operations outside the United States make it more likely that financial institutions may refuse to conduct business with us for this type of reason. Any such refusal could negatively affect our business, operating results 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
regulations in these instances, we and our subsidiaries could be exposed to fines, sanctions and other penalties or other governmental investigations.
We and our subsidiaries conduct business with financial institutions and/or card payment networks operating in countries whose nationals, including some of our customers’ customers, engage in transactions in countries that are the target of U.S. economic sanctions and embargoes, including Cuba. As a U.S.-based entity, we and our subsidiaries are obligated to comply with the economic sanctions regulations administered by OFAC. These regulations prohibit U.S.-based entities from entering into or facilitating unlicensed transactions with, for the benefit of, or in some cases involving the property and property interests of, persons, governments, or countries designated by the U.S. government under one or more sanctions regimes. Failure to comply with these sanctions and embargoes may result in material fines, sanctions or other penalties being imposed on us or other governmental investigations. In addition, variousVarious state and municipal governments, universities and other investors maintain prohibitions or restrictions on investments in companies that do business involving sanctioned countries or entities.
For these reasons, we have established risk-based policies and procedures designed to assist us and our personnel in complying with applicable U.S. laws and regulations. These policies and procedures include the use of software to screen transactions we process for evidence of sanctioned-country and persons involvement. Consistent with a risk-based approach and the difficulties of identifying all transactions of our customers’ customers that may involve a sanctioned country, there can be no assurance that our policies and procedures will prevent us from violating applicable U.S. laws and regulations in every transaction in which we engage, and such violations could adversely affect our reputation, business, financial condition and results of operations.
Because we process transactions on behalf of the aforementioned financial institutions through the aforementioned payment networks, we have processed a limited number of transactions potentially involving sanctioned countries and there can be no assurances that, in the future, we will not inadvertently process such transactions. Due to a variety of factors, including technical failures and limitations of our transaction screening process, conflicts between U.S. and local laws, political or other concerns in certain countries in which we and our subsidiaries operate, and/or failures in our ability to effectively to control employees operating in certain non-U.S. subsidiaries, we have not rejected every transaction originating from or otherwise involving sanctioned countries, or persons and there can be no assurances that, in the future, we will not inadvertently fail to reject such transactions.
EVERTEC Group voluntarily submitted two disclosuresAntitrust
Due to OFAC in 2010 (the "2010 Disclosures") regarding potential violationsour ownership of the Cuban Assets Control Regulations (“CACR”) by EVERTEC Group, its subsidiaryATH network and our merchant acquiring and payment services business in Costa Rica,Puerto Rico, we are involved in a significant percentage of the debit and a former subsidiary in Venezuela that involved processing Cuba-related credit and debit card transactions conducted in Puerto Rico each day. We have in the past been subject to regulatory investigations and shortcomings in sanctions screening processes. In addition, Popular filed a voluntary disclosure with OFAC in 2013 (the "2013 Disclosure") regarding potential violationsany future regulatory scrutiny of, the CACRor regulatory enforcement action in connection with, compliance with U.S. state and federal antitrust requirements could potentially have a material adverse effect on our reputation and business. In addition, we are subject to applicable antitrust requirements in each of the countries in which we operate. All of these laws and requirements may affect potential acquisitions in the relevant jurisdictions.
ESG Regulatory Developments
The recent emphasis on environmental, social and other sustainability matters has resulted and may continue to result in the adoption of new laws and regulations, including new reporting requirements. For example, various policymakers, including the SEC, have adopted (or are considering adopting) requirements for the disclosure of certain routed debit card transactionsclimate-related information or other environmental, social and governance ("ESG") disclosures. Compliance with environmental, social and other sustainability laws, regulations, expectations or reporting requirements may result in increased compliance costs, as well as additional scrutiny. It is possible that other types of environmental and social regulations, for example regulations regarding the 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 ESG factors may also adversely impact our ability to recruit and retain employees and customers.
We are subject to a series of risks associated with scrutiny of environmental, social, and sustainability matters.
Companies across industries are facing increasing scrutiny from a variety of stakeholders related to their ESG practices. For example, various groups produce ESG scores or ratings based at least in part on a company’s ESG disclosures, and certain market participants, including institutional investors and capital providers, use such ratings to assess companies’ ESG profiles. Unfavorable perceptions of our ESG performance could negatively impact our business, whether from a reputational perspective, through a reduction in interest in purchasing our stock or products, issues in attracting/retaining employees, customers and business partners, or otherwise. Simultaneously, there are efforts by Tranredsome stakeholders to reduce companies’ efforts on certain ESG-related matters. Both advocates and opponents to certain ESG matters are increasingly resorting to a range of activism forms, including media campaigns and litigation, to advance their perspectives. To the extent we are subject to such activism, it may require us to incur costs or otherwise adversely impact our business.
While we have engaged in, and expect to continue to engage in, certain voluntary initiatives (such as voluntary disclosures, certifications, or goals) to improve the ESG profile of our company and/or products or respond to stakeholder concerns, such initiatives may be costly and may not have the desired effect. Expectations around companies’ management of ESG matters continue to evolve rapidly, in many instances due to factors that are out of our control.For example, our actions or statements that we may make based on expectations, assumptions, or third-party information that we currently believe to be reasonable may subsequently be determined to be erroneous or not in keeping with best practice. If we fail to, or are perceived to fail to, comply with or advance certain ESG initiatives (including the manner in which we complete such initiatives), we may be subject to various adverse impacts, including reputational damage and potential stakeholder engagement and/or litigation, even if such initiatives are currently voluntary. There are also increasing regulatory expectations for ESG matters. This and other stakeholder expectations will likely lead to increased costs as well as scrutiny that could heighten all of the risks identified in this risk factor. Additionally, many of our customers, business partners, and suppliers may be subject to similar expectations, which may augment or create additional risks, including risks that may not be known to us.
Puerto Rico’s fiscal crisis could have been representativea material adverse effect on our business and the trading price of transactionsour common stock.
For the years ended December 31, 2023 and 2022, approximately 73% and 78%, respectively, of our total revenues were generated from our operations in Puerto Rico. Some revenues that occurred priorare generated from our operations outside Puerto Rico are dependent upon our operations in Puerto Rico. As a result, our financial condition and results of operations are highly dependent on the economic and political conditions in Puerto Rico, and could be significantly 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, 2023, we had net receivables of $11.1 million from the Government and certain public corporations.
A protracted government shutdown could negatively affect our financial condition.
During any protracted federal government shutdown, the federal government may reduce or cut funding for certain welfare and disaster relief programs. Beneficiaries of certain federal programs, such as the Supplemental Nutrition Assistance Program (SNAP), obtain their benefits through EBT accounts. A temporary or permanent reduction in federal welfare and relief programs could lead to October 2010, whena decrease in electronic benefit card volume. The effect of a protracted government shutdown may materially and adversely affect our revenues, profitability, and cash flows.
Puerto Rico’s economy, including the entity was underongoing financial crisis and the ownershipeffects of potential natural disasters, including weather events connected to climate change, or future disease pandemics or other public health crisis, could have a prolonged negative impact on the countries and controlmarkets in which we operate and, as a result, could have a material adverse effect on our business and results of EVERTEC.operations.
To date, OFAC has not imposedPuerto 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 wildfires, 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 finesother economic declines due to natural disasters and their aftermaths may impact the demand for our services and could have a material adverse effect on our business and results of operations. Additionally, future disease pandemics or penalties nor has the U.S. government takenany other enforcement actionspublic health crisis may materially adversely affect our business, results of operations and financial condition, similar to or beyond those disruptions and operational consequences that we experienced in connection with the 2010 Disclosures and 2013 Disclosure. EVERTEC Group and its subsidiaries have implemented a number of corrective actions in order to address the sanctions issues that were the subject of these disclosures and reduce the risk of future violations of the CACR and other U.S. sanctions. Should OFAC determine that certain activities identified in the voluntary self-disclosures described above constituted violations of the CACR, civil or criminal penalties could be assessed against EVERTEC Group and/or its subsidiary.
Popular agreed to specific indemnification obligations with respectCOVID-19 pandemic. Prolonged economic uncertainties relating to the 2010 Disclosures, the 2013 Disclosure and certain other matters, in each case, subject to the terms and conditions contained in the Merger Agreement and/or contained in the Venezuela Transition Services Agreement, dated September 29, 2010, as amended. However, we cannot assure you that we will be able to fully collect any claims made with respect to such indemnities or that Popular and/or Tranred will satisfy its indemnification obligations to us.
Our expansion and selective acquisition strategy exposes us to risks, including the risk that we may not be able to successfully integrate acquired businesses.
As partresidual impacts of our growth strategy, we evaluate opportunities for acquiring complementary businesses that may supplement our internal growth. However, there can be no assurance that we will be able to identify and purchase suitable operations. Furthermore, for as long as we are deemed a “subsidiary” of a bank holding company for purposes of the BHC Act, we may conduct only activities authorized under the BHC Act and the Federal Reserve Board’s Regulation K and other related regulations for a bank holding company or a financial holding company. These restrictions mayCOVID-19 could limit our ability to acquire other businesses or enter into other strategic transactions. See “-For purposesgrow our business and negatively affect our operating results. Moreover, the global electronic payments industry and the banking and financial services industries depend heavily upon the overall levels of consumer, business and government spending. Adverse economic conditions, such as those caused by the BHC Act,COVID-19 pandemic, could result in a decrease in consumers' use of banking services and financial service providers resulting in significant decreases in the demand for as long as we are deemed to
be controlled by Popular, we will be subject to supervisionour products and examination by U.S. federal banking regulators, and our activities are limited to those permissible for Popular. Furthermore, as a technology service provider to regulated financial institutions, we are subject to additional regulatory oversight and examination. As a regulated institution, we may be required to obtain regulatory approval before engaging in certain new activities or businesses, whether organically or by acquisition.”
In addition, in connection with any acquisitions, we must comply with U.S. federal and other antitrust and/or competition law requirements. Further, the success of any acquisition depends in part on our ability to integrate the acquired company,services which may involve unforeseen difficulties and may require a disproportionate amount of our management’s attention and our financial and other resources. Although we conduct due diligence investigations prior to each acquisition, there can be no assurance that we will discover all operational deficiencies or material liabilities of an acquired business for which we may be responsible as a successor owner or operator. The failure to successfully integrate these acquired businesses or to discover such liabilities could adversely affect our business and operating results.
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.
There are increasing and rapidly evolving concerns over the risks of climate change and related environmental sustainability matters. Our operations, business, customers and partners could be adversely affected by climate change. 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 could disrupt our operations or the operations of 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.
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 international markets in which we operate. Many countries in Latin America have suffered significant political, social and economic crises in the past, including 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, if any of the third party software or technology licenses are terminated or otherwise determined to be unenforceable, then we would have to obtain a comparable license, which may involve increased license fees and other costs.
Despite our efforts to protect our proprietary or confidential business know-how and other intellectual property rights, unauthorizedUnauthorized parties may attempt to copy or misappropriate certain aspects of our services, infringe upon our rights, or to obtain and use information that we regard as proprietary. Policing such unauthorized use of our proprietary rights is often very difficult, and therefore, we are unable to guarantee that the steps we have taken will prevent misappropriation of our proprietary software/technology or that the agreements entered into for that purpose will be effective or enforceable in all instances. Misappropriation of our intellectual property or potential litigation concerning such matters could have a material adverse effect on our results of operations or financial condition. Our registrations and/or applications for trademarks, copyrights, and patents could be challenged, invalidated, or circumvented by others and may not be of sufficient scope or strength to provide us with maximum protection or meaningful advantage. If we are unable to maintain the proprietary nature of our software or technologies, we could lose competitive advantages and our businesses may be materially adversely affected. Furthermore, the laws of certain foreign countries in which we do business or contemplate doing business in the future may not protect intellectual property rights to the same extent as do the laws of the United States or Puerto Rico. Adverse determinations in judicial or administrative proceedings could prevent us from selling our services and products, or prevent us from preventing others from selling competing services, and may result in a material adverse effect on our business, financial condition and results of operations.
If our applications or services or third party applications upon which we rely are found to infringe the proprietary rights of others, we may be required to change our business practices and may also become subject to significant costs and monetary penalties.
As our IT applications and services develop, we are increasingly subject to potential claims for intellectual property infringement, for example, patent or copyright infringement. AnyManaging any such claims,challenges, even if lackingthey lack merit, could: (i) be expensive and time-consuming to defend; (ii) cause us to cease making, licensing, or using software or applications that incorporate the challenged intellectual property; (iii) require us to redesign our software or applications, if feasible; (iv) divert management’s attention and resources; and (v) require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies. Unfavorable resolutionThe laws of these claimscertain foreign countries in which we do business or contemplate doing business in the future may not protect intellectual property rights to the same extent as do the laws of the United States or Puerto Rico. Adverse determinations in judicial or administrative proceedings related to intellectual property or licenses could prevent us from selling our services and products or prevent us from preventing others from selling competing services, impose liability costs on us, or result in a non-favorable settlement, all of which could result in us being restricted from delivering the related service and products, liable for damages, or otherwise result in a settlement that could be material to us.
The ability to recruit, retain and develop qualified personnel is critical to our success and growth.
All of our businesses function at the intersection of rapidly changing technological, social, economic and regulatory developments that requires a wide ranging set of expertise and intellectual capital. For us to successfully compete and grow, we must retain, recruit and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our
intellectual capital needs. In addition, we must develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. Recruiting and retaining qualified personnel in Puerto Rico is particularly challenging, given the poor state of the Puerto Rican economy and the increased emigration of Puerto Ricans following Hurricanes Irma and Maria. Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. We cannot assure you that key personnel, including executive officers, will continue to be employed or that we will be able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on us.
Failure to comply with U.S. state and federal antitrust requirements, or the Puerto Rico Anti-Monopoly Act, and government investigations into our compliance, could adversely affect our business.
Due to our ownership of the ATH network and our merchant acquiring and payment services business in Puerto Rico, we are involved in a significant percentage of the debit and credit card transactions conducted in Puerto Rico each day. Regulatory scrutiny of, or regulatory enforcement action in connection with, compliance with U.S. state and federal antitrust requirements could potentially have a material adverse effect on our reputation and business.
In February 2016, the Department of Justice of the Commonwealth of Puerto Rico announced that it initiated a formal investigation into whether we had engaged in conduct that interferes with free competition with respect to the products and services we provide within the Commonwealth of Puerto Rico and which conduct could constitute a violation of the Puerto Rico Anti-Monopoly Act, Law 77 of June 25, 1964. In August 2016, we received official confirmation that the Puerto Rico Department of Justice had formally closed its investigation and concluded that we had not engaged in such conduct. However, there can be no assurance that another such investigation will not be initiated in the future. If there is another such investigation, an adverse finding could lead to restrictions on our business, or our being required to take action, that has a materially adverse effect on our financial condition and results of operations. Any such effect, or the perception by investors as to the likelihood of such an effect, could have a material adverse effect on our stock price.
The market for our electronic commerce services is evolving and may not continue to develop or grow rapidly enough for us to maintain and increase our profitability.
If the number of electronic commerce transactions does not continue to grow or if consumers or businesses do not continue to adopt our services, it could have a material adverse effect on the profitability of our business, financial condition and results of operations. We believe future growth
Assertions by third parties of infringement or other violations by us of their intellectual property rights, whether or not correct, could result in significant costs and harm our business and operating results.
Third parties may in the electronic commerce market will be driven byfuture assert claims of infringement, misappropriation or other violations of intellectual property rights against us. They may also assert such claims against our customers or reseller partners, whom we typically indemnify against claims that our products and services infringe, misappropriate, or otherwise violate the cost, ease-of-use,intellectual property rights of third parties. If we do infringe a third party’s rights and qualityare unable to provide a sufficient workaround, we may need to negotiate with holders of those rights to obtain a license to those rights or otherwise settle any infringement claim as a party that makes a claim of infringement against us may obtain an injunction preventing us from shipping products containing the allegedly infringing technology. As the number of products and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business.
Future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our own patents may therefore provide little or no deterrence or protection. There can be no assurance that we will not be found to infringe or otherwise violate any third-party intellectual property rights or to have done so in the past.
Any events of such nature could seriously harm our business, financial condition, and results of operations. Moreover, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our ordinary shares. We expect that the occurrence of infringement claims is likely to grow as the market for our products and
solutions grows. Accordingly, our exposure to damages resulting from infringement claims could increase and this could further exhaust our financial and management resources.
We incorporate technology and components from third parties into our products, and our inability to obtain or maintain rights to the technology could harm our business.
We incorporate technology and software from third parties into our products. We cannot be certain that our vendors and licensors are not infringing the intellectual property rights of third parties or that the vendors and licensors have sufficient rights to the software and technology in all jurisdictions in which it may sell our products. If we are unable to obtain or maintain rights to any of this software or technology because of intellectual property infringement claims brought by third parties against our vendors and licensors or against us, or if we are unable to continue to obtain such software and technology or enter into new agreements on commercially reasonable terms, our ability to develop and sell products, subscriptions and services offeredcontaining such software and technology could be severely limited, and our business could be harmed. Further, disputes with vendors and licensors over uses or terms could result in the payment of additional royalties or penalties by us, cancellation or non-renewal of the underlying license or litigation. Any such event could have a material and adverse impact on our business, financial condition, and results of operation. Additionally, if we are unable to consumersobtain necessary software or technology from third parties, we may be forced to acquire or develop alternative software and businesses.technology, which may require significant time, cost and effort and may be of lower quality or performance standards. This would limit or delay our ability to offer new or competitive products and increase our costs. If alternative software or technology cannot be obtained or developed, we may not be able to offer certain functionality as part of our products, subscriptions and services. As a result, our margins, market share and results of operations could be significantly harmed.
Our use of "open source" software could subject our proprietary software to general release, negatively affect our ability to offer our products and subject us to possible litigation.
We have used “open source” software in connection with the development and deployment of some of our software products, and we expect to continue to use open source software in the future.
Companies that incorporate open-source software into their products have, from time to time, faced claims challenging the use of open source software and compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open-source software or claiming noncompliance with open source licensing terms. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, we cannot guarantee that we will be successful, that all open source software is reviewed prior to use in our products, that our developers have not incorporated open source software into our products that we are unaware of or that they will not do so in the future.
In addition to risks related to license requirements, use of certain open-source software carries greater technical and legal risks than does the use of third-party commercial software. To the extent that our products depend upon the successful operation of open-source software, any undetected errors or defects in open source software that we use could prevent the deployment or impair the functionality of our systems and injure our reputation. In addition, the public availability of such software may make it easier for others to compromise our products. Any of the foregoing risks could materially and adversely affect our business, financial condition, and results of operations.
Confidentiality arrangements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
We have devoted substantial resources to the development of our technology, business operations and business plans. In order to consistently increaseprotect our trade secrets and maintainproprietary information, we rely in significant part on confidentiality arrangements with our profitability, consumersemployees, licensees, independent contractors, advisors, suppliers, reseller partners, and businesses must continuecustomers. Further, despite these efforts, these arrangements may not be effective to adoptprevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our services.technologies that we consider proprietary. In addition, if others independently develop equivalent knowledge, methods, and know-how, we would not be able to assert trade secret rights against such parties. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary information will be effective.
Our subsidiary, EVERTEC Group, benefits from a preferential tax exemption grant from the Puerto Rico Government under the Tax Incentive Act No. 73
If EVERTEC Group does not comply with the terms of theits preferential tax exemption grant, EVERTEC Groupit may be subject to reduction of the benefits of the grant, tax penalties, other payment obligations or full revocation of the grant, which could have a material adverse effect on our financial condition, results of operations and our stock price.
EVERTEC Group has a tax exemption grant under the Tax Incentive Act No. 73 of 2008 from the Government of Puerto Rico. Under this grant, EVERTEC Group will benefit from a preferential income tax rate of 4% on industrial development income, as well as from tax exemptions with respect to its municipal and property tax obligations for certain activities derived from its data processing operations in Puerto Rico. The grant has a term of 15 years effective as of January 1, 2012 with respect to income tax obligations and July 1, 2013 and January 1, 2013 with respect to municipal and property tax obligations, respectively.
The grant contains customary commitments, conditions, and representations that EVERTEC Group will beis required to comply with in order to maintain the grant. The more significant commitments include: (i) maintaining at least 750 employees in EVERTEC Group’s Puerto Rico data processing operations during 2012 and at least 700 employees for the remaining years of the grant, (ii) investing at least $200.0 million in building, machinery, equipment or computer programs to be used in Puerto Rico during the effective term of the grant (to be made over four year capital investment cycles in $50.0 million increments), (iii) an additional best efforts capital investments requirement of $75.0 million by December 31, 2026 (to be made over four year capital investment cycles in $20.0 million the first three increments and $15.0 million the last increment); and (iv) 80% of EVERTEC Group employees must be residents of Puerto Rico. Failure to meet the requirements could result, among other
things, in reductions in the benefits of the grant, tax penalties, other payment obligations or revocation of the grant in its entirety, which could have a material adverse effect on our financial condition and results of operations.
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 (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.
Risks Related to Our Structure, Governance and Stock Exchange Listing
We are exposed to fluctuations in inflation, which could negatively affect our business, financial condition and results of operations.
The markets in which we operate have experienced historically high levels of inflation.As inflation rates continue to increase or if they persist for a holdingprolonged period of time, they may continue to affect our expenses, including, but not limited to, increased employee compensation expenses and benefits as well as increased general administrative costs. 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.
In the event inflation remains elevated or 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. For example, in November 2023, we completed a the Sinqia Transaction, pursuant to which, among other things, Sinqia became a wholly-owned subsidiary of Evertec BR. 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, and rely on dividendstheir software is not easily adapted to work with our existing platforms, or we have difficulty retaining customer, vendors and other payments, advancesrelationships of any acquired business due to changes in ownership, management, or otherwise. These transactions may also disrupt our business, divert our resources, and transfersrequire significant management attention that would otherwise be available for development of fundsour 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 our subsidiariessuch a transaction fails to meet our obligationsexpectations, our business, financial condition and pay any dividends.results of operations may be adversely affected, or we may be exposed to unknown risks or liabilities.
We have no directmay acquire businesses located primarily or entirely outside the United States which could increase our current exposure to international operations or significant assets other than the ownership of 100% of the membership interest of Holdings, which in turn has no significant assets other than ownership of 100% of the membership interest of EVERTEC Group. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments to generate the funds necessary to meet our financial obligations, and to pay any dividends with respect to our common stock. Legal and contractual restrictionslocated in the senior secured credit facilitiesCaribbean and other agreementsLatin America including currency exchange fluctuations, regulatory and organizational complexity, and varying economic, climatic and geopolitical circumstances.
We may not realize the anticipated benefits of our merger with Sinqia, which may govern future indebtedness ofadversely affect our subsidiaries, as well as the financial condition and, operating requirements ofresults.
In November 2023, we completed a business combination with Sinqia. We believe this complementary acquisition will enhance our subsidiaries, may limitgrowth strategy, diversify our business, expand our addressable markets, increase our product offerings and drive synergies over time. Achieving these benefits will depend, in part, on our ability to obtain cashintegrate Sinqia's business successfully and efficiently. Moreover, the successful integration of the Sinqia business will require significant management attention, and may divert the attention of management from our subsidiaries. The earnings from, or other available assetsbusiness and operational issues.
If we are not able to successfully complete these integrations in an efficient and cost-effective manner, the anticipated benefits of our subsidiariesthis merger may not be sufficientrealized fully, or at all, or may take longer to pay dividends or make distributions or loans or enable us to pay any dividends on our common stock or other obligations.
Any declarationrealize than expected, and payment of future dividends to holdersthe value of our common stock may be limited by restrictive covenants of our debt agreements, and will be ataffected adversely. In addition, the sole discretion of our Board and will also depend on many factors.
Any declaration and payment of future dividends to holders of our common stock may be limited by restrictive covenants of our debt agreements, and will be at the sole discretion of our Board and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our Board deems relevant. The terms of our senior secured credit facilities may restrict our ability to pay cash dividends on our common stock. We are prohibited from paying any cash dividend on our common stock unless we satisfy certain conditions. The senior secured credit facilities also include limitations on the ability of our subsidiaries to pay dividends to us. Furthermore, we will be permitted under the terms of our debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. The agreements governing our current and future indebtedness may not permit us to pay dividends on our common stock.
The requirements of having a class of publicly traded equity securities may strain our resources and distract management.
Upon completion of our initial public offering in April 2013, we became subject to additional reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002, (the “Sarbanes-Oxley Act”), and the Dodd-Frank Act. The Dodd-Frank Act effects comprehensive changes to public company governance and disclosures in the United States and subjects us to additional federal regulation. Some of the regulation mandated under the Dodd-Frank Act has yet to be adopted or implemented. We cannot predict with any certainty the requirements of the regulations ultimately adopted or how such regulations will impact the cost of compliance for a company with publicly traded common stock. We are currently evaluating and monitoring developments with respect to the Dodd-Frank Act and other new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investmentactual integrations may result in additional and unforeseen expenses, including increased generallegal, accounting and administrative expensescompliance costs. If we do not successfully manage these issues and a diversionthe other challenges inherent in integrating an acquired business, then we may not achieve the anticipated benefits, of management’s time and attention from revenue-generating activities to compliance activities. Ifthe merger within our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatoryanticipated timeframe or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against usat all and our business may be harmed. These new rules and regulations may make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board, particularly to serve on our audit committee, and qualified executive officers.
We are required to maintain effective internal controls over financial reporting, which could place a strain on our resources, and our failure to do so could require a restatement of our financials and lead to a potential default under our credit facility or a delisting from NYSE.
The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. These requirements may place a strain on our systems and resources. Under Section 404 of the Sarbanes-Oxley Act, we are required to include a report of management on our internal control over financial reporting in this Annual
Report on Form 10-K for the year ended December 31, 2017. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight is required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business,revenue, expenses, operating results, financial condition results of operations and cash flows. If we are unable to conclude that our disclosure controls and procedures and internal control over financial reporting are effective, or if our independent public accounting firm is unable to provide us with an unqualified report on our internal control over financial reporting in future years, investors may lose confidence in our financial reports and our stock price may decline. In addition, a material weakness in our internal controls over financial reporting could lead to the occurrence of material misstatements in our financial statements and we could be requiredmaterially adversely affected.
Risks Related to restate our financial results. Our failure to file timelySecurities, Corporate Structure and file materially complete and accurate financial information in our reports with the SEC could lead to a number of adverse consequences, including a loss of confidence by our investors, a default under our credit facility, or a violation of NYSE’s listing rules that could lead to our delisting. Any of these results could have a material adverse effect on our business and results of operations and on the trading price of our common stock.Governance
The price of our common stock may fluctuate significantly and you could lose all or part of your investment.
Volatility in the market price of our common stock may prevent you from being able to sell your common stock at or above the price you paid for your common stock. The market price for our common stock could fluctuate significantly for various reasons, including:
our operating and financial performance and prospects;
changes in earnings estimates or recommendations by securities analysts who track our common stock or industry;
market perception of our success, or lack thereof, in pursuing our growth strategy;
market perception of the challenges of operating a company in Puerto Rico; and
sales of common stock by us, our stockholders, Popular or members of our management team.
In addition, the stock market has experienced significant price and volume fluctuations historically. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price.
Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.
We may sell additional shares of common stock in subsequent public offerings or otherwise, including financing acquisitions. Our amended and restated certificate of incorporation authorizes us to issue 206,000,000 shares of common stock, of which 72,394,04365,450,799 are outstanding as of JanuaryDecember 31, 2018.2023. All of these shares, other than the 11,654,803 shares held by Popular and the866,616 shares held by our officers and directors as of December 31, 2023 are freely transferable without restriction or further registration under the Securities Act.
In addition, we have filed a Form S-8 under the Securities Act covering 12,089,382 shares of our common stock reserved for issuance under our Carib Holdings, Inc. 2010 Equity Incentive Plan (or the 2010 Plan), and our EVERTEC, Inc. 2013 Equity Incentive plan (or the 2013 Plan) and certain options and restricted stock granted outside of these plans (which we refer to as the Equity Plans), but subject to the terms and conditions of the 2010 Plan. Accordingly, shares of our common stock registered under such registration statement may become available for sale in the open market upon grants under the Equity Incentive Plans, subject to vesting restrictions and Rule 144 limitations applicable to our affiliates.
We cannot predict the size of future issuances of our common stock or the effect, if any that future issuances and sales of our
common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including any shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
If securities analysts stop publishing researchWe are a holding company and rely on dividends and other payments, advances, and transfers of funds from our subsidiaries to meet our obligations and pay any dividends.
We have no direct operations or 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. Given that 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.
Alternatively, if one or more of these analysts cease coverage of our company, we could lose visibility in the market. As a result of one or more of these factors, the trading price of our common stock could decline.
The interests of Popular may conflict with or differ from your interests as a stockholder.
Popular has the right to nominate two members of our Board and, therefore, may be able to influence our decisions. The interests of Popular could conflict with your interests as a holder of our common stock. For example, the concentration of ownership held by Popular, the terms of the Stockholder Agreement and our organizational documents (including Popular’s quorum rights and consent rights over amendments to our bylaws) and Popular’s right to terminate certain of its agreements with us in certain situations upon a change of control of EVERTEC Group, could delay, defer or prevent certain significant corporate actions that you as a stockholder may otherwise view favorably, including a change of control of us (whether by merger, takeover or other business combination). See “Certain Relationships and Related Party Transactions” in EVERTEC's proxy statement for a description of the circumstances under which Popular may terminate certain of its agreements with us. A sale of a substantial number of shares of stock in the future by Popular could cause our stock price to decline.
Our organizational documents and Stockholder Agreement may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.
Provisions of our amended and restated certificate of incorporation, 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:
a voting agreement pursuant to which Popular agreed to vote its shares in favor of the Popular director nominees (which, constitute the right to appoint two of our nine directors), directors nominated by a committee of our Board in accordance with the Stockholder Agreement and the management director and to remove and replace any such directors in accordance with the terms of the Stockholder Agreement and applicable law and an agreement by us to take all actions within our control necessary and desirable to cause the election, removal and replacement of such directors in accordance with the Stockholder Agreement and applicable law;
requiring that a quorum for the transaction of business at any meeting of the Board (other than a reconvened meeting with the same agenda as the originally adjourned meeting) consist of (1) a majority of the total number of directors then serving on the Board and (2) at least one director nominated by Popular, for so long as it owns, together with its affiliates, 5% or more of our outstanding common stock;
•prohibiting cumulative voting in the election of directors;
•authorizing the issuance of “blank check” preferred stock without any need for action by stockholders other than Popular (as further described below);
•prohibiting stockholders from acting by written consent unless the action is taken by unanimous written consent; and
•establishing advance notice requirements for nominations for election to our Board or for proposing matters that can be acted on by stockholders at stockholder meetings, which advance notice requirements are not applicable to any directors nominated in accordance with the terms of the Stockholder Agreement.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 New York Stock Exchange (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 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.
Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own, but rather has borrowed or intends to borrow from a third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. It is therefore in the short seller’s interest for the price of the stock to decline, and some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, often involving misrepresentations of the issuer’s business prospects and similar matters calculated to create negative market momentum, which may permit them to obtain profits for themselves as a result of selling the stock short.
As a public entity, we may be the subject of concerted efforts by short sellers to spread negative information in order to gain a market advantage. In addition, the publication of misinformation may also result in lawsuits, the uncertainty and expense of which could adversely impact our business, financial condition, and reputation. There are no assurances that we will not face short sellers’ efforts or similar tactics in the future, and the market price of our stock may decline as a result of their actions.
Risks Related to Our Indebtedness
DespiteOur leverage could adversely affect our highability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations with respect to our substantial indebtedness, level,and we and our subsidiaries still may be able to incur significant additional amounts of debt,indebtedness, which could further exacerbateincrease such risks.
As of December 31, 2023, the risks associatedtotal principal amount of our indebtedness was approximately $993.5 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$194.0 million which was available for borrowing under our revolving credit facility as of December 31, 2017,
2023, 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;
make certain investments;
sell certain assets;
create liens;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
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.
designate our subsidiaries as unrestricted subsidiaries.
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.
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.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us
from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
The risks referenced above are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Cybersecurity Risk Management and Strategy
We have developed and implemented a cybersecurity risk management program intended to protect the confidentiality, integrity, and availability of our critical systems and information. Our cybersecurity risk management program includes a cybersecurity incident response plan.
We design and assess our program based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF). This does not imply that we meet any particular technical standards, specifications, or requirements, only that we use the NIST CSF as a guide to help us identify, assess, and manage cybersecurity risks relevant to our business.
Our cybersecurity risk management program is integrated into our overall enterprise risk management program, and shares common methodologies, reporting channels and governance processes that apply across the enterprise risk management program to other legal, compliance, strategic, operational, and financial risk areas.
Key elements of our cybersecurity risk management program include but are not limited to:
•risk assessments designed to help identify material cybersecurity risks to our critical systems, information, and digital assets;
•a security team principally responsible for managing (1) our cybersecurity risk assessment processes, (2) our security controls, and (3) our response to cybersecurity incidents;
•the use of external service providers, where appropriate, to assess, test or otherwise assist with aspects of our security processes;
•cybersecurity awareness training of our employees, incident response personnel, senior management and our Board of Directors;
•a cybersecurity incident response plan that includes procedures for responding to cybersecurity incidents; and
•a third-party risk management process for service providers, suppliers, and vendors, based on their critically and risk profile.
We have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected us, including our operations, business strategy, results of operations, or financial condition. We face certain ongoing risks from cybersecurity threats that, if realized, are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition. See "Risk factors - We rely on our information technology systems, employees and certain suppliers and counterparties, and certain failures or disruptions in those systems or chains could materially adversely affect our operations."
Cybersecurity Governance
Our Board considers cybersecurity risk as part of its risk oversight function and has delegated to the Information Technology Committee (the "IT Committee") oversight of cybersecurity and other information technology risks, which includes, among others things:
•oversight of IT and cybersecurity related risks with regard to the Company’s IT platforms and investments;
•advising and making recommendations to the Board regarding the state of the Company’s cybersecurity preparedness, including review of the threat landscape facing the Company; and
•monitoring and evaluating the effectiveness of IT security and cybersecurity protocols within the Company, including disaster recover capabilities.
The IT Committee receives periodic reports from management on our cybersecurity risks. In addition, management updates the IT Committee, as necessary, regarding any significant cybersecurity incidents.
Board members receive presentations on cybersecurity topics. For example, February 2024, the full Board held a cybersecurity tabletop exercise to help prepare to respond to a cyberattack or other security incident.
Our management team, including our Chief Information Security Officer, is responsible for assessing and managing our material risks from cybersecurity threats. The team has primary responsibility for our overall cybersecurity risk management program and supervises both our internal cybersecurity personnel and our retained external cybersecurity consultants. Our Chief Information Security Officer experience includes approximately 17 years in different information security roles, including recent roles as Chief Information Security Officer of Unum and Deputy Chief Information Security Officer of MasterCard.
Our management team supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents through various means, which may include briefings from internal security personnel; threat intelligence and other information obtained from governmental, public or private sources, including external consultants engaged by us; and alerts and reports produced by security tools deployed in the IT environment.
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 two properties, one property in Costa Rica, in the province of San Jose, which is used by our Costa Rican subsidiary for its payment services business, and one in Tupã, Brazil, which is used by Sinqia for their commercial business. We also lease space
in 1220 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. See Note 25 to the Audited Consolidated Financial Statements appearing elsewhere in this Report for additional information.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock trades on the NYSE under the symbol “EVTC”. 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 22, 2024, there were 328 registered holders of our common stock was 247. The closing price as reported on the NYSEstock. Given that many of our shares of common stock are held in “street name” by brokers and other institutions on such date was $15.65 per share.behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
|
| | | | | | | | |
| | Price Range |
| | High | | Low |
2017 | | | | |
First Quarter | | $ | 18.15 |
| | $ | 15.55 |
|
Second Quarter | | 17.30 |
| | 14.85 |
|
Third Quarter | | 19.10 |
| | 14.95 |
|
Fourth Quarter | | 16.20 |
| | 13.00 |
|
2016 | | | | |
First Quarter | | 16.63 |
| | 11.27 |
|
Second Quarter | | 16.32 |
| | 12.98 |
|
Third Quarter | | 17.62 |
| | 15.13 |
|
Fourth Quarter | | 18.60 |
| | 14.15 |
|
Dividends
Historically, we have paid
The Company has a regular quarterly dividend on our common stock, subject to the declaration thereof by our Board each quarter. The following table provides a detailhistory of dividend information for 2017 and 2016:
|
| | | | | | |
Declaration Date | | Record Date | | Payment Date | | Dividend per share |
February 17, 2016 | | February 29, 2016 | | March 17, 2016 | | 0.10 |
May 11, 2016 | | May 23, 2016 | | June 10, 2016 | | 0.10 |
July 28, 2016 | | August 9, 2016 | | September 2, 2016 | | 0.10 |
October 27, 2016 | | November 14, 2016 | | December 2, 2016 | | 0.10 |
February 17, 2017 | | March 1, 2017 | | March 20, 2017 | | 0.10 |
April 27, 2017 | | May 8, 2017 | | June 9, 2017 | | 0.10 |
July 25, 2017 | | August 7, 2017 | | September 8, 2017 | | 0.10 |
On November 2, 2017, the Board voted to temporarily suspend the quarterly dividend on the Company's common stock due to the difficult operating environment in Puerto Rico in the aftermath of Hurricane Maria.paying cash dividends. The Board anticipates reviewing the dividend policy as conditions stabilizedeclaring similar dividends in Puerto Rico. Anyfuture quarters on a regular basis, however, any ultimate declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board and will depend on many factors, including our financial condition, earnings, available cash, business opportunities, legal requirements, restrictions in our debt agreements and other contracts, capital requirements, level of indebtedness and other factors that our Board deems relevant. The covenants of our senior secured credit facilities may limit our ability to pay dividends on our common stock and limit the ability of our subsidiaries to pay dividends to us if we do not meet required performance metrics contained in our debt agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Obligations.”
We are a holding company and have no direct operations. We will only be able to pay dividends from our available cash on hand and funds received from our subsidiaries, Holdings and EVERTEC Group, whose ability to make any payments to us will depend upon many factors, including their operating results and cash flows. In addition, the senior secured credit facilities limit EVERTEC Group’sInc.’s ability to pay distributions on its equity interests. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Obligations.”
Issuer Purchases of Equity Securities
The following table summarizes repurchases of shares of the Company's common stock in the three-month period ended December 31, 2023: |
| | | | | | | | | | | | | | |
| | Total number of shares | | Average price paid | | Total number of shares purchased as part of a publicly | | Approximate dollar value of shares that may yet be purchased |
Period | | purchased | | per share | | announced program (1) | | under the program |
3/1/2017-3/31/2017 | | 228,289 |
| | $ | 16.480 |
| | 228,289 |
| | |
5/1/2017-5/31/2017 | | 77,257 |
| | 16.592 |
| | 77,257 |
| | |
6/1/2017-6/30/2017 | | 159,694 |
| | 16.423 |
| | 159,694 |
| | |
Total | | 465,240 |
| | $ | 16.479 |
| | 465,240 |
| | $ | 72,345,478 |
|
| |
(1) | On February 17, 2016, the Company announced that its Board of Directors approved an increase and extension to the current stock repurchase program, authorizing the purchase of up to $120 million of the Company’s common stock and extended the expiration to December 31, 2017. On November 2, 2017 the Company's Board of Directors approved an extension to the expiration date of the current stock repurchase program to December 31, 2020. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
| | | | | | | | |
| | | | | | | | |
11/1/2023-11/30/2023 | | 209,560 | | | 35.26 | | 209,560 | | | |
12/1/2023-12/31/2023 | | 135,155 | | | 37.79 | | 135,155 | | | |
| | 344,715 | | | 36.82 | | 344,715 | | | 137,493,259 | |
(1) On July 20, 2023, 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, 2024. Under the repurchase program, the Company may repurchase shares in the open market, through accelerated share repurchase programs, Rule 10b5-1 plans, or in privately negotiated transactions, subject to business opportunities and other factors.
Securities Authorized for Issuance under Equity Compensation Plans
On September 30, 2010,May 20, 2022 (the “Effective Date”), the board of directors of Holdings adoptedCompany’s stockholders approved the 2010Company’s 2022 Equity Incentive Plan (the “2022 Plan”) which replaced the Company’s 2013 Equity Incentive Plan. Holdings reserved 5,843,208The 2022 Plan allows the Company to grant 5,250,000 shares of its Class B Non-Voting Common Stockcommon stock. In addition, 757,357 shares remaining available for issuance upon exercisegrant under the 2013 Plan as of the Effective Date were rolled over to the 2022 Plan and grantsare available to be granted as of the Effective Date. Under the terms of the 2022 Plan, any shares of common stock options, restricted stock and other equityof the Company covered by outstanding awards under the Plan. On April 17, 2012, in connection with the Reorganization, the Company assumed the 20102013 Plan and allas of the outstanding equityEffective
Date will again become available for grant, to the extent the shares underlying such awards are not issued thereunderbecause they are forfeited or subject thereto. As a result, each of the then outstanding stock options to purchase shares of Holdings’ Class B Non-Voting Common Stock became a stock option to purchase the same number and classsettled or terminated without distribution of shares of the Company’s Class B Non-Voting Common Stock, in each case on the same terms (including exercise price) as the original stock option. In connection with our initial public offering in April 2013, all of the outstanding shares of the Company’s Class B Non-Voting Common Stock and stock options to purchase shares of the Company’s Class B Non-Voting Common Stock were converted into and deemed exercisable for, respectively, shares of our common stock on a one-to-one basis. Similarly, each of the then outstanding shares of restricted stock of Holdings was converted into the same number of shares of restricted stock of the Company.
In connection with our initial public offering, we adopted the 2013 Plan and reserved 5,956,882 shares of our Common Stock for issuance upon exercise and grants of stock options, restricted stock and other equity awards. We have filed a Form S-8 under the Securities Act covering 12,089,382 shares of our common stock reserved for issuance under the Equity Plans and certain options and restricted stock granted outside of the Equity Plans but subject to the terms and conditions of the 2010 Plan.
The following table summarizes equity compensation plans approved by security holders and equity compensation plans that were not approved by security holders as of December 31, 2017:2023:
| | | | | | | | | | | | | | | | | | | | |
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 | | 1,799,012 | | | $0.00 | | 3,117,365 | |
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 |
|
| |
(1) | The Company's equity plans were approved by the two sole stockholder's prior to the Company's initial public offering, Apollo and Popular. |
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, 2023. 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.
Comparison of fifty seven months cumulative total return of EVERTEC Inc.
Item 6. Selected Financial Data[Reserved]
The following table sets forth our selected historical consolidated financial data as of the dates and for the periods indicated. The selected consolidated financial data as of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 have been derived from the audited consolidated financial statements of EVERTEC, included in our Annual Reports on Form 10-K.
The results of operations for any period are not necessarily indicative of the results to be expected for any future period. The selected historical consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto appearing elsewhere in this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
(Dollar amounts in thousands, except per share data) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Statements of Income Data: | | | | | | | | | | |
Revenues | | $ | 407,144 |
| | $ | 389,507 |
| | $ | 373,528 |
| | $ | 361,788 |
| | $ | 358,402 |
|
Operating costs and expenses | | | | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization shown below | | 200,650 |
| | 175,809 |
| | 167,916 |
| | 157,537 |
| | 162,980 |
|
Selling, general and administrative expenses | | 56,161 |
| | 46,986 |
| | 37,278 |
| | 41,276 |
| | 38,810 |
|
Depreciation and amortization | | 64,250 |
| | 59,567 |
| | 64,974 |
| | 65,988 |
| | 70,366 |
|
Total operating costs and expenses | | 321,061 |
| | 282,362 |
| | 270,168 |
| | 264,801 |
| | 272,156 |
|
Income from operations | | 86,083 |
| | 107,145 |
| | 103,360 |
| | 96,987 |
| | 86,246 |
|
Interest income | | 716 |
| | 377 |
| | 495 |
| | 328 |
| | 236 |
|
Interest expense | | (29,861 | ) | | (24,617 | ) | | (24,266 | ) | | (25,772 | ) | | (37,417 | ) |
Earnings (losses) of equity method investment | | 604 |
| | (52 | ) | | 147 |
| | 1,140 |
| | 935 |
|
Other income (expenses), net | | 2,657 |
| | 544 |
| | 2,306 |
| | 2,375 |
| | (75,682 | ) |
Income (loss) before income taxes | | 60,199 |
| | 83,397 |
| | 82,042 |
| | 75,058 |
| | (25,682 | ) |
Income tax expense (benefit) | | 4,780 |
| | 8,271 |
| | (3,335 | ) | | 8,901 |
| | 1,435 |
|
Net income (loss) | | 55,419 |
| | 75,126 |
| | 85,377 |
| | 66,157 |
| | (27,117 | ) |
Less: Net income attributable to non-controlling interest | | 365 |
| | 90 |
| | — |
| | — |
| | — |
|
Net income (loss) attributable to EVERTEC, Inc.’s common stockholders | | $ | 55,054 |
| | $ | 75,036 |
| | $ | 85,377 |
| | $ | 66,157 |
| | $ | (27,117 | ) |
Net income (loss) per common share—basic | | $ | 0.76 |
| | $ | 1.01 |
| | $ | 1.11 |
| | $ | 0.84 |
| | $ | (0.34 | ) |
Net income (loss) per common share—diluted | | $ | 0.76 |
| | $ | 1.01 |
| | $ | 1.11 |
| | $ | 0.84 |
| | $ | (0.34 | ) |
Cash dividends declared per common share (1) | | $ | 0.30 |
| | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.20 |
|
| |
(1) | Adjusted to reflect the two for one stock split effective April 1, 2013. |
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Balance Sheet Data: | | | | | | | | | | |
Cash and cash equivalents | | $50,423 | | $51,920 | | $28,747 | | $32,114 | | $22,275 |
Total assets | | 902,788 |
| | 885,662 |
| | 863,654 |
| | 885,321 |
| | 918,863 |
|
Total long-term liabilities | | 607,596 |
| | 648,324 |
| | 662,939 |
| | 691,085 |
| | 705,872 |
|
Total debt | | 616,740 |
| | 650,759 |
| | 662,699 |
| | 681,240 |
| | 725,648 |
|
Total equity | | 147,976 |
| | 108,175 |
| | 98,214 |
| | 94,840 |
| | 87,972 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) covers: (i) thefocuses on discussion of our 2023 results as compared to our 2022 results. For discussion of operationsour 2022 results as compared to our 2021 results, see “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” within our Annual Report on Form 10-K for the yearsyear ended December 31, 2017, 2016 and 2015; and (ii)2022 filed with the financial condition as of December 31, 2017 and 2016.SEC on February 24, 2023. See Note 1 ofto 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 Latin America, Puerto Rico and the Caribbean, providing a broad range of merchant acquiring, payment services and business process management services.solutions. 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 20 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”)POS and e-commerce merchants to accept and process electronic methods of payment such as debit, credit, prepaid and electronic benefit transfer (“EBT”)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 model enablesshould enable us to continue to grow our business organically in the primary markets we serve without significant incremental capital expenditures.
Separation from and Key Relationship with Popular
Prior to the Merger onOn September 30, 2010, EVERTEC Group was 100% owned by Popular, the largest financial institution in the Caribbean, and operated substantially as an independent entity within Popular. After the consummation of the Merger, Popular retained an approximately 49% indirect ownership interest in EVERTEC Group and is our largest customer. In connection with, and upon consummation of, the Merger, EVERTEC Group entered into a 15-year Master Services Agreement,MSA, and several related agreements with Popular. UnderOn July 1, 2022, we modified and extended the termsmain commercial agreements with Popular, including a 10-year extension of the Master ServicesMerchant Acquiring Independent Sales Organization Agreement Popular agreed to continue to use EVERTEC services on an ongoing exclusive basis, for(as amended, the duration"A&R ISO Agreement"), a 5-year extension of the agreement,ATH Network Participation Agreement and a 3-year extension of the MSA (the "A&R ISO Agreement"). The A&R ISO Agreement, which defines our merchant acquiring relationship with Popular, now includes revenue sharing provisions with Popular. The MSA modifications also include the elimination of the exclusivity requirement, the inclusion of annual MSA minimums through September 30, 2028, a 10% discount on commercial terms consistentcertain MSA services beginning in October of 2025 and adjustments to the CPI pricing escalator clause. On the same date, we also sold to Popular certain assets in exchange for 4.6 million shares of EVERTEC common stock owned by Popular (collectively with thosethe contract amendments, the "Popular Transaction"). On August 15, 2022, through a secondary offering, Popular sold its remaining shares of EVERTEC common stock. EVERTEC is no longer deemed a subsidiary of Popular under the Bank Holding Company Act. Popular continues to be the Company’s largest customer and during the year ended December 31, 2023 approximately 35% of our historicalrevenues were generated from this relationship. Additionally, Popular granted us a right of first refusal on the development of certain new financial technology products and services for the duration of the Master Services Agreement. As of December 31, 2017, Popular retained a 16.1% interest in EVERTEC.
20172023 Developments
The Company’s Board of Directors approved regular quarterly dividends of $0.10 per common share inOn February April, and July of 2017. On November 2, 2017,16, 2023, the Board voted to temporarily suspend the quarterly dividend on the Company's common stock due to the difficult operating environment in Puerto Rico. The Board anticipates reviewing the dividend policy as conditions stabilize in Puerto Rico.
On July 3, 2017, EVERTEC’s main operating subsidiary, EVERTEC Group, and EVERTEC Panama, S.A. ("EVERTEC Panama")Company closed on the directacquisition of 100% of paySmart. Headquartered in Porto Alegre, Brazil, paySmart provides issuer processing services and indirectBIN Sponsorship services for prepaid programs under domestic and international schemes in Brazil. The acquisition expands the Company's footprint in Brazil and compliments the current product offering in the country.
On November 1, 2023, the Company completed the acquisition of 100% of the share capitaloutstanding shares of EFT Group S.A.,Sinqia, a Chilean-based payment processingpublicly held company incorporated and existing in accordance with the laws of the Federative Republic of Brazil. As a result, Sinqia became an indirect, wholly-owned subsidiary of Evertec. Sinqia is a company that provides financial software solutions company known commercially as “PayGroup”, by entering into a share purchase agreement (Contrato de Compraventa de Acciones), byto financial institutions in Brazil across four key verticals of banks, funds, pensions 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 expandsconsortiums.
Thesestrategic acquisitions are expected to enhance the Company's presence in Latin America to eight new countries and increasesgrowth strategy, diversify the Company's payment solutions offerings. During the third quarter of 2017 Evertec Panama ceased being a shareholder in PayGroup and Evertec Group became the 100% owner of PayGroup.
In September 2017, Puerto Rico and the Caribbean, two of our principal markets, were severely impacted by Hurricane Irma and Hurricane Maria.
On November 2, 2017business, expand the Company's Board of Directors approved an extension to the expiration date of the current stock repurchase program to December 31, 2020. In addition, on this same date the Board voted to temporarily suspend the quarterly dividend onaddressable markets, increase the Company's common stock due to the difficult operating environment in Puerto Rico in the aftermath of Hurricane Maria. The Board anticipates reviewing the dividend policy as conditions stabilize in Puerto Rico.product offerings and drive synergies over time.
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, which is becoming a popular alternative 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.
Our payment businesses also generally experience moderate increased activity during the traditional holiday shopping periods and around other nationally recognized holidays, which follow consumer spending patterns.
Finally, our financial condition and results of operations are, in part, dependent on the economic and general conditions of the geographies in which we operate.
On June 30, 2016, the U.S. President signed into law PROMESA. PROMESA establishes a fiscal oversight Rising interest rates, inflationary pressures, foreign currency fluctuations and the Oversight Board comprised of seven voting members appointed by the President. The Oversight Board has broad budgetary and financial powers over Puerto Rico’s budget, laws, financial plans and regulations, including the power to approve restructuring agreements with creditors, file petitions for restructuring and reform the electronic system for the tax collection. The Oversight Board will have ultimate authority in preparing the Puerto Rico government’s budget and any issuance of future debt by the government and its instrumentalities. In addition, PROMESA imposes an automatic stay on all litigation against Puerto Rico
and its instrumentalities, as well as any other judicial or administrative actions or proceedings to enforce or collect claims against the Puerto Rico government. On May 1, 2017, the automatic stay expired. Promptly after the expiration of the stay, creditors of the Puerto Rico government filed various lawsuits involving defaults on more than $70 billion of bonds issued by Puerto Rico, having failed to reach a negotiated settlement on such defaults with the Puerto Rico government during the period of the automatic stay. On May 3, 2017, the Oversight Board filed a voluntary petition of relief on behalf of the Commonwealth pursuant to Title III of PROMESA for the restructuring of the Commonwealth’s debt. Subsequently, the Oversight Board filed voluntary petitions of relief pursuant to Title III of PROMESA on behalf certain public corporations and instrumentalities. Title III is an in-court debt restructuring proceeding similar to protections afforded debtors under Chapter 11 of the United States Code (the “Bankruptcy Code”); the Bankruptcy Code is not available to the Commonwealth or its instrumentalities.
As the solution to the Puerto Rican government’s debt crisis remains unclear, we continue to carefully monitor our receivables with the government as well as monitor general economic trends to understand the impact the crisis has on the economy of Puerto Rico and our card payment volumes. To date our receivables with the Puerto Rican government and overall payment transaction volumes have not been significantly affected by the debt crisis, however we remain cautious.
In September 2017, Puerto Rico and the Caribbean, two of our principal markets, were severely impacted by Hurricane Irma and Hurricane Maria. As a result of these hurricanes, the islands' economies have been adversely affected. The destruction brought on by these hurricanes affected infrastructure and telecommunication services, necessary elements for electronic transacting. Electronic transacting primarily affects our Merchant Acquiring segment and Payments Services segments, including our ATH network in Puerto Rico. While our ATH network remained operational continuously, the lack of power, water and telecommunications limited merchants' ability to either open for business or transact electronically and, as a result, our revenue has decreased. Since the hurricanes, merchants have gradually reopened their businesses as power distribution has been restored, however it is unclear how many merchants will fail to repoen. Currently, our merchant mix reflects a greater percent of large merchants as compared to prior to the hurricanes. Consumer spending patterns have been erraticuncertainty in the aftermathmarkets in which we operate may affect consumer confidence, which could result in a decrease in consumer spending and an impact to our financial results.
In addition to the macroeconomic trends described above, Management currently estimates that we will continue to experience a revenue attrition in Latin America of approximately $5 million to $8 million for previously disclosed migrations anticipated in 2018. The clients decisions, which were made prior to 2015, for these anticipated migrations were driven by a variety of historical factors, most importantly customer service experience. Management believes that these customer decisions are unlikely to change, however timing is subject to change based on customer's conversion schedules.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our consolidated 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 ofto the Notes to Audited Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K.Report. We believe that the following accounting estimates are 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 the 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.
The Company has two main categories of revenues according to the type of transactions EVERTEC enters into with the Company’s customers: (a) transaction-based fees and (b) fixed fees and time and material.
Transaction-based fees
The Company provides services that generate transaction-based fees. Typically transaction-based fees depend on factors such as number of accounts or transactions processed. These factors typically consist of a fee per transaction or item processed, a percentage of dollar volume processed or a fee per account on file, or some combination thereof. Revenue derived from the transaction-based fee contracts are recognized when the underlying transaction is processed, which constitutes delivery of service.
Revenues from business contracts in the Company’s Merchant Acquiring segment are primarily comprised of discount fees charged to the merchants based on the sales amount of transactions processed. Revenues include a discount fee and membership fees charged to merchants and debit network fees as well as point-of-sale (“POS”) rental fees. Pursuant to the guidance from ASC 605-45-45, Revenue Recognition—Principal Agent Considerations, EVERTEC records Merchant Acquiring revenues net of interchange and assessments charged by the credit and debit card network associations and recognizes such revenues at the time of the sale (when a transaction is processed).
Payment services revenues are comprised of revenues related to providing access to the ATH network and other card networks to financial institutions, and related services. Payment services revenues also include revenues from card issuer processing services (such as credit and debit card processing, authorization and settlement, and fraud monitoring and control to debit or credit card issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions) and electronic benefit transfer (“EBT”) (which principally consists of services to the Puerto Rico government for the delivery of government benefits to participants). Revenues in EVERTEC’s Payment Services segments are primarily comprised of fees per transaction processed or per account on file, or a combination of both, and are recognized at the time transactions are processed or on a monthly basis for accounts on file.
Transaction-based fees within EVERTEC’s Business Solutions segment consist of revenues from business process management solutions including core bank processing, business process outsourcing, item and cash processing, and fulfillment. Transaction-based fee revenues generated by the Company’s core bank processing services are derived from fees based on various factors such as the number of accounts on file (e.g. savings or checking accounts, loans, etc.), and the number of transactions processed or registered users (e.g. for online banking services). For services dependent on the number of transactions processed, revenues are recognized as the underlying transactions are processed. For services dependent on the number of users or accounts on file, revenues are recognized on a monthly basis based on the number of accounts on file each month. Item and cash processing revenues are based upon the number of items (e.g. checks) processed and revenues are recognized when the underlying item is processed. Fulfillment services include technical and operational resources for producing and distributing variable print documents such as statements, bills, checks and benefits summaries. Fulfillment revenues are based upon the number pages for printing services and the number of envelopes processed for mailing services. Revenues are recognized as services are delivered based on a fee per page printed or envelope mailed, as applicable.
Fixed fees and time and material
The Company also provides services that generate a fixed fee per month or fees based on time and expenses incurred. These services are mostly provided in EVERTEC’s Business Solutions segment. Revenues are generated from EVERTEC’s core bank solutions, network hosting and management and IT consulting services.
In core bank solutions, the Company mostly provides access to applications and services such as back-up or recovery, hosting and maintenance that enable a bank to operate the related hosted services accessing the Company’s IT infrastructure. These contracts generally contain multiple elements or deliverables which are evaluated by EVERTEC and revenues are recognized according to the applicable guidance. Revenue is derived from fixed fees charged forimpairment requires the use of hosted servicessignificant estimates and are recognized onassumptions. The Company may test for goodwill impairment using a monthly basis as delivered. Set-up fees are billed to the customer when the service is rendered; however, they are deferred and recognized as revenues over the term of the arrangementqualitative or the expected period of the customer relationship,whichever is longer, as set-up services rarely provide value to the customer on a stand-alone basis and are interrelated with the service to be provided under the contract.
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.
IT consulting services revenue primarily consists of time billings based upon the number of hours dedicated to each client. Revenue from time billings are recognized as services are delivered.
EVERTEC also charges members of the ATH network an annual membership fee; however, these fees are deferred and recognized as revenues on a straight-line basis over the year and recorded in the Company’s Payment Services segments. In addition, occasionally EVERTEC is a reseller of hardware and software products and revenues from these resale transactions are recognized when such product is delivered and accepted by the client.
Service level arrangements
The Company’s service contracts may include service level arrangements (“SLA”) generally allowing the customer to receive a credit for part of the service fee whenqualitative analysis, the Company has not provided the agreed level of services. The SLA performance obligation is committed on a monthly basis, thus SLA performance is monitored and assessed for compliance with arrangements on a monthly basis, including determination and accounting for its economic impact, if any.
Goodwill and other intangible assets
Goodwill represents the excess of the purchase price and related costs over the value assigned to net assets acquired. Goodwill is not amortized, but is tested for impairment at least annually, or more often if events or circumstances indicate there may be impairment.
The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). The Company may assess qualitative factors to determine whether it is more"more likely than not, that is, a likelihood of more than 50 percentnot" that the fair value of thea reporting unit is less than its carrying amount,amount. In the quantitative analysis, the Company compares the estimated fair value of the reporting units to their carrying values, including goodwill. The Company hasestimated fair value of the reporting units is computed using a combination of an unconditional option to bypassincome approach and a market approach. The income approach involves projecting the qualitative assessment for anycash flows that the reporting unit is expected to generate and converting these cash flows into a present value equivalent through discounting. Significant estimates and assumptions used in any periodthe cash flow projection include, among others, earnings before interest, taxes, depreciation and proceed directly to performing the quantitative goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. With the early adoption in December 2017 of the accounting standards update that simplifies the goodwill impairment test, the quantitative goodwill impairment test, used to identify both the existence of impairmentamortization ("EBITDA") margins, and the amountselection of impairment loss, comparesdiscount rates. Internal projections are based on the fairCompany’s historical experience and estimated future business performance. The discount rate used is based on the weighted-average cost of capital, which reflects the rate of return expected to be earned by market participants and the estimated cost to obtain long-term debt financing. The market approach estimates the value of a reporting unit with its carrying amount, including goodwill. If the Company determines to perform a quantitative impairment test, a third-party valuator may be engaged to prepare an independent valuationby using multiples of each reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Additionally, the Company shall consider the income tax effect from any tax-deductible goodwill on the carrying amount of the reporting unit, if applicable, when measuring the goodwill impairment loss. For the years ended December 31, 2017, 2016revenue and 2015, no impairment losses associated with goodwill were recognized.
Other identifiable intangible assets with a definitive useful lives are amortized using the straight-line method or accelerated methods. These intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable.
Other identifiable intangible assets with a definitive useful lives include customer relationships, trademarks, software packages and a non-compete agreement. Customer relationships were valued using the excess earnings method under the income approach. Trademark assets were valued using the relief-from-royalty method under the income approach. Internally developed software packages, which include capitalized software development costs, are recorded at cost, while software packages acquired as part of a business combination were valued using the relief-from-royalty method under the income approach. The non-compete agreement was valuedEBITDA based on the estimated impact that theoretical competition would have on revenues and expenses.
Share-based compensation
The Company estimates the fair valueguidelines of stock-based awards, on a contemporaneous basis, at the date they are grantedpublicly traded companies. Valuation using the Black-Scholes-Merton option pricing model for Tranche A options and the Monte Carlo simulation analysis for Tranche B and Tranche C options and market based restricted stock units (“RSUs”) using the following assumptions: (1) stock price; (2) risk-free rate; (3) expected volatility; (4) expected annual dividend yield and (5) expected term. The risk-free rate is based on the U.S. Constant Maturities Treasury Interest Rate as of the grant date or the yield of a 2-year or 3-year Treasury bond, as applicable. The expected volatility is based on a combination of historical volatility and implied volatility from publicly traded companies in the Company’s industry. The expected annual dividend yield is based on management’s expectations of future dividends as of the grant date and, in certain cases, assumes that those dividends will be reinvested over the performance period. The expected term for stock options granted under the 2010 Plan was based on the vesting time of the options. For the stock options granted under the 2013 Plan, the simplified method was usedapproach requires management to estimate the expected term, given that the Company did not have appropriate exercise data on whichmake assumptions related to base the estimate nor is exercise data relating to employees of comparable companies easily obtainable. Performance and time based RSUs and restricted stockEBITDA multiples. Comparable businesses are valuedselected based on the market pricein which the reporting units operate, considering size, profitability and growth.
Redeemable Non-controlling Interests
The Company records redeemable non-controlling interests ("RNCI") in consolidated subsidiaries that result from business acquisition transactions where the Company is granted the right to purchase ("Call Option") and the sellers are granted the right to sell to the Company ("Put Option") the remaining interest at the calculated redemption value and classifies them as mezzanine equity in the consolidated balance sheets as potential redemption is not solely within the Company's control. The acquired RNCI were initially measured at fair value at the acquisition date. The non-controlling interest is adjusted each reporting period for income (loss) attributable to the non-controlling interest and for any dividends declared. Each reporting period, a measurement period adjustment, if any, is then recorded to adjust the non-controlling interest to the higher of either the redemption value, assuming it was redeemable at the reporting date, or its carrying value, but not if such adjustment would result in a redemption value less than the initial fair value of the Company’s stock atredeemable non-controlling interest. If and when applicable, these adjustments are recorded in equity and are not reflected in the grant date.accompanying consolidated statements of income and comprehensive income.
Upon option exercise or restricted stock or RSUs release, participants may elect to “net share settle”. Rather than requiring the participant to deliver cash to satisfy the exercise price, for options exercise, and tax withholdings, the Company withholds a sufficient number
Income Tax
Income taxes are accounted for under the asset and liability method. A temporary difference refers to a difference between the tax basis of an asset or liability, determined based on recognition and measurement requirements for tax positions, and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Deferred tax assets and liabilities represent the future effects on income taxes that result from temporary differences and carryforwards that exist at the end of a period. Deferred tax assets and liabilities are measured using enacted tax rates and provisions of the enacted tax law and are not discounted to reflect the time-value of money. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income and comprehensive income in the period that includes the enactment date. A deferred tax valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax asset will not be realized.
The Company recognizes the benefit of uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement or disposition of the underlying issue with the taxing authority. Accordingly, the amount of benefit recognized in the consolidated financial statements may differ from the amount taken or expected to be taken in the tax return resulting in unrecognized tax benefits (“UTBs”). The Company recognizes the interest and penalties associated with UTBs as part of the provision for income taxes on its consolidated statements of income and comprehensive income. Accrued interest and penalties are included onwithin the related tax liability line in the consolidated balance sheets. Judgment is required to determine whether or not some portion or all deferred tax assets will not be realized. To the extent that the Company will not realize the benefit of some or all of our deferred tax assets, these deferred tax assets are adjusted via a valuation allowance through our provision for income taxes in the period in which this determination is made.
All companies within EVERTEC are legal entities whichthat file separate income tax returns.
Recent Accounting Pronouncements
For a description of recent accounting standards, see Note 2 ofto the Notes to Audited Consolidated Financial Statements included in this Annual Report on Form 10-K.Report.
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) | 2023 | | 2022 | | | | Variance | | |
| | | | | | | | | | | | | |
Revenues | $ | 694,709 | | | $ | 618,409 | | | | | $ | 76,300 | | | 12 | % | | | | |
Operating costs and expenses | | | | | | | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization shown below | 336,756 | | | 292,621 | | | | | 44,135 | | | 15 | % | | | | |
Selling, general and administrative expenses | 128,172 | | | 89,770 | | | | | 38,402 | | | 43 | % | | | | |
Depreciation and amortization | 93,621 | | | 78,618 | | | | | 15,003 | | | 19 | % | | | | |
Total operating costs and expenses | 558,549 | | | 461,009 | | | | | 97,540 | | | 21 | % | | | | |
Income from operations | $ | 136,160 | | | $ | 157,400 | | | | | $ | (21,240) | | | (13) | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2023 were $694.7 million, or 5% whenan increase of $76.3 million compared withto $618.4 million in the prior year. The revenue increase in revenues was primarily driven by increasesgrowth in ATH debit network transaction volumesthe LATAM Payments and cardSolutions, Payment Services - Puerto Rico & Caribbean and the Merchant Acquiring segments. LATAM Payments and Solutions revenue benefited from strong organic growth throughout the year including the $6.3 million impact related to the Company's processing volumes, revenue generatedcontract with Getnet Chile in the third quarter and the contribution from the PayGroup acquisition, increased revenue from our Accuprint acquisitionacquisitions completed over the past year. Payment processing revenues in the fourth quarter of 2016 andPuerto Rico continue to reflect an increase in core banking revenue. RevenuesPOS transaction volume as well as the continued growth in 2017 were negatively impacted by the two hurricanes that made landfall in Puerto RicoATH Movil revenues, primarily ATH Business. Merchant acquiring revenue reflected higher sales volumes and the Caribbean in September of 2017. We estimate the hurricanes reduced revenues by approximately $13 to $14 million.
Revenues in 2016 increased by $16.0 million or 4% when compared with 2015. The increase in revenue in 2016 was driven by the addition of the FirstBank of Puerto Rico (“FirstBank”) merchant portfolio in the fourth quarter of 2015, an increase in transactions processed over the ATH debit network and revenuespread which is mainly related to the Processa acquisitionbenefit of pricing initiatives and an increasea shift in revenue from core banking activities related to an increase in volume and new services provided.the card mix. These increases were partially offset by a decrease in revenues duethe impact to a delayed project amounting to approximately $4.5 million and lower revenuesBusiness Solutions segment from the Puerto Rico government lottery tax contract terminatedassets sold as part of the Popular Transaction in the fourththird quarter of 2015.2022.
Cost of revenues
Cost of revenues in 2017 increased $24.8for the year ended December 31, 2023 amounted to $336.8 million, an increase of $44.1 million or 14%15% when compared withto the same period in the prior year. The increase in cost of revenue is primarily related to $12.8 million in charges taken in connection with an exit activity for a third party software solution that is
no longer commercially viable and a $5.0 million impairment loss related to a software asset under development. The remaining increase was primarily attributable to the PayGroup acquisition.
Cost of revenues in 2016 increased 5% to $175.8 million when compared with 2015 and was primarily driven by a $4.9 millionan increase in expenses for revenue sharing referral agreements with certain bankspersonnel costs, mainly due to the impact of increased headcount in Puerto Rico and increasesLatin America including the added headcount from the acquisitions, an increase in equipment expenses, professional fees and other operating taxes. These increases were partially offset by a $4.5 million decrease in compensation expense ascloud services, and the prior year period included severance payments as partimpact of voluntary termination offers extended to certain employees which included special termination benefits.the revenue sharing agreement with Banco Popular.
Selling, general and administrative
Selling, general and administrative expenses in 2017 increased $9.2for the year ended December 31, 2023 amounted to $128.2 million, an increase of $38.4 million or 43% when compared with 2016. Theto the same period in the prior year driven by an increase isin expenses incurred as part of the closing and integration of Sinqia, as well as an increase in personnel costs and professional fees primarily related to an increase in share based compensation, expenses related to the PayGroup acquisition and an increase in payroll and other taxes in our Latin America operations.corporate development initiatives.
Selling, general and administrative expenses increased by $9.7 million in 2016 compared with 2015 primarily driven by a $4.5 million increase in salaries and benefits including higher share based compensation, coupled with a $3.0 million increase in professional fees mostly due to costs incurred in connection with the restatement of our 2015 financial results during 2016.
Depreciation and amortization
Depreciation and amortization expense increased by $4.7for the year ended December 31, 2023 amounted to $93.6 million, in 2017an increase of $15.0 million or 19% when compared to 2016 mainly related tothe same period in the prior year. This increase was primarily driven by an increase in amortization expense related toof intangible assets acquiredcreated in connection with the Sinqia, paySmart and BBR acquisitions, as part of business combinations completedwell as an increase in software amortization for internally developed software.
Non-operating income (expenses) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, | | | | | | | | |
(In thousands) | 2023 | | 2022 | | | | Variance | | |
| | | | | | | | | | | | | |
Interest income | $ | 8,512 | | | $ | 3,121 | | | | | $ | 5,391 | | | 173 | % | | | | |
Interest expense | (32,321) | | | (24,772) | | | | | (7,549) | | | 30 | % | | | | |
Gain on sale of a business | — | | | 135,642 | | | | | (135,642) | | | 100 | % | | | | |
(Loss) gain on foreign currency remeasurement | (8,276) | | | (7,645) | | | | | (631) | | | 8 | % | | | | |
Loss on foreign currency swap | (24,065) | | | — | | | | | (24,065) | | | — | % | | | | |
Earnings of equity method investment | 4,976 | | | 2,968 | | | | | 2,008 | | | 68 | % | | | | |
Other income | 367 | | | 1,138 | | | | | (771) | | | (68) | % | | | | |
Total non-operating income (expenses) | $ | (50,807) | | | $ | 110,452 | | | | | $ | (161,259) | | | (146) | % | | | | |
Non-operating income (expenses) for the year ended December 31, 2023 decreased by $161.3 million when compared to the same period in the prior and current year.
Depreciation and amortization expense decreased by $5.4 million or 8% in 2016 compared with 2015. The decrease resulted primarily from lower amortization of software packagesnegative variance was mainly related to software acquired as partthe gain on sale of a business of $135.6 million recorded in the prior year period upon closing of the Merger that became fully amortized duringPopular Transaction as well as the third quarterimpact in 2023 from the loss on foreign currency swap of 2015.
Non-operating income (expenses)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | | | | | |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 | | Variance 2017 vs. 2016 | | Variance 2016 vs. 2015 |
| | | | | | | | | | | | | |
Interest income | $ | 716 |
| | $ | 377 |
| | $ | 495 |
| | $ | 339 |
| | 90 | % | | $ | (118 | ) | | (24 | )% |
Interest expense | (29,861 | ) | | (24,617 | ) | | (24,266 | ) | | (5,244 | ) | | 21 | % | | (351 | ) | | 1 | % |
Earnings (losses) of equity method investment | 604 |
| | (52 | ) | | 147 |
| | 656 |
| | (1,262 | )% | | (199 | ) | | (135 | )% |
Other income, net | 2,657 |
| | 544 |
| | 2,306 |
| | 2,113 |
| | 388 | % | | (1,762 | ) | | (76 | )% |
Total non-operating expenses | $ | (25,884 | ) | | $ | (23,748 | ) | | $ | (21,318 | ) | | (2,136 | ) | | 9 | % | | (2,430 | ) | | 11 | % |
Total non-operating expenses$24.1 million and an increase in 2017 increased $2.1 million or 9% when compared to 2016 . Interest expense increased by $5.2 million primarily as a result of the Third Amendment (defined below) completed in the fourth quarter of 2016 coupled with an increased LIBOR and increased interest expense of $7.5 million resulting from the commencement ofincreased debt raised to finance the fixed interest rate swap.Sinqia acquisition. This increase waswere partially offset by an increase of $5.4 million in foreign exchange gainsinterest income and ana $2.0 million increase in earnings from ourthe Company’s equity method investment.
Total non-operating expenses in 2016 increased $2.4 million when compared with the prior year. The increase is driven by the $1.5 million loss on extinguishment recorded as part of the debt refinancing transaction completed in the fourth quarter of 2016, which is included in Other income, net, coupled with a $0.4 million increase in interest expense and a $0.2 million decrease in earnings from our equity method investment in the Dominican Republic, Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”).
Income tax expense (benefit) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, | | | | | | | | |
(In thousands) | 2023 | | 2022 | | | | Variance | | |
Income tax expense | $ | 5,477 | | | $ | 28,983 | | | | | $ | (23,506) | | | (81) | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | | | | | |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 | | Variance 2017 vs. 2016 | | Variance 2016 vs. 2015 |
Income tax expense (benefit) | $ | 4,780 |
| | $ | 8,271 |
| | $ | (3,335 | ) | | (3,491 | ) | | (42 | )% | | 11,606 |
| | (348 | )% |
Income tax expense in 2017 decreased by $3.5 million to $4.8 million. The effective tax rate in 2017 was approximately 8%. The decrease in income tax expense was mainly due to the reversal of a tax liability related to an uncertain tax position for which the statute of limitations expired during the third quarter of 2017.
Income tax expense for the year ended December 31, 20162023 amounted to approximately $8.3$5.5 million, a decrease of $23.5 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 6.4%, compared with 10.8% in 2016the 2022 period. The decrease in the effective tax rate was approximately 10%. Theprimarily driven by the loss on foreign currency swap, as well as the higher interest expense resulting from the incremental debt raised as part of the Sinqia acquisition, partially offset by the impact of higher revenues in higher taxed jurisdictions, a shift in the mix of business in Puerto Rico and higher withholding taxes. Effective tax rate in the prior year was impacted by the gain recognized from closing the Popular Transaction, which was taxed at a preferential tax benefit reflectsrate and the reversal of taxa potential liability related to anfor uncertain tax position for whichpositions as a result of the expiration of the statute of limitations expired during the third quarter of 2015.limitation.
Segment Results of Operations
In December of 2017, as a result of the PayGroup acquisition, the Chief Operating Decision Maker ("CODM") completed an evaluation of the current Company structure and the information regularly reviewed for purposes of allocating resources and assessing performance. As a result of this evaluation, Management concluded that the operating segments are determined by the products and services the Company provides and the geographic regions in which theThe Company operates resulting in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America (collectively "Payment Services segments"),Payments and Solutions, Merchant Acquiring, and Business Solutions.
The Payment Services - Puerto Rico & Caribbean segment revenues are comprised of revenues related to providing access to the ATH debit network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and 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), ATH Movil (person-to-person) and electronic benefit transfer (“EBT”)ATH Business (person-to-merchant) digital transactions and 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 Payments and Solutions segment payment 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. Solution revenues consist of (a) licensing, support and maintenance (“subscription”), implementation and customization of software used to provide financial products in areas such as core banking, credit, investments, payments, foreign exchange, mutual funds, pension funds and consortium, in addition to software used to execute processes such as digital onboarding, digital signature and digital collection; and (b) outsourcing of mission critical IT services. Revenues are based on monthly fixed fees and, in several cases, variable fees based on usage.
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 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.), server capacity usage 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 aswithin the “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and otherOther category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:
marketing,
•marketing,
•corporate finance and accounting,
•human resources,
•legal,
•risk management functions,
•internal audit,
•corporate debt related costs,
•non-operating depreciation and amortization expenses generated as a result of the Merger,merger and acquisition activity,
•intersegment revenues and expenses, and
•other non-recurring fees and expenses that are not considered when management evaluates financial performance at a segment levellevel.
The CODMChief Operating Decision Maker (“CODM”) reviews the operating segments separate financial information to assess performance and to allocate resources. Management evaluates the operating results of each of its operating segments based upon revenues and Adjusted EBITDA. Effective as of the quarter ended March 31, 2023, the Company modified the manner in which it calculates and reports Adjusted EBITDA presented to the CODM for assessing segment performance to exclude the impact of non-cash unrealized gains and losses from foreign currency remeasurement. Adjusted EBITDA is defined as EBITDA further adjusted to exclude certain non-cash unrealized items and unusual expenses such as: share-based compensation, restructuring related expenses, fees and expenses from corporate transactions such as M&A activity and financing, equity investment income net of dividends received, and the impact from non-cash unrealized gains and losses on foreign currency remeasurement for assets and liabilities in non-functional currency. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with Accounting Standards CodificationASC Topic 280, "Segment Reporting"Segment Reporting, given that it is reported to the CODM for purposes of allocating resources. The Company has recast prior periods to conform with the modified definition of Adjusted EBITDA. 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.Adjusted EBITDA. As such, segment assets are not disclosed in the notes to the accompanying consolidated financial statements.
See Note 26 to the Audited Consolidated Financial Statements appearing elsewhere in this Report 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) | 2023 | | 2022 | |
Revenues | $203,232 | | $178,481 | |
Adjusted EBITDA | 118,266 | | 100,860 | |
Adjusted EBITDA margin | 58.2 | % | | 56.5 | % | |
|
| | | | | |
| 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, 2023 increased $2.0by $24.8 million when compared with 2016. Revenue growth reflected increases in ATH debit network transaction volumes and card processing volumes. Adjusted EBITDA decreased $4.6to $203.2 million mainly a result of the impairment charge taken related to a software asset under development and reduced revenues related to the hurricanes.
Payment Services - Puerto Rico & Caribbean revenues remained relatively flat in 2016 when compared to the same period in the prior year. RevenuesThe increase in 2016 were impactedrevenues was primarily driven by an increase in transactions processed overPOS transaction volumes, continued strong digital payments growth from ATH Movil, primarily ATH Business, increases in transaction processing and monitoring services provided to the ATH debit network,Latin America Payments and Solutions segment, as well as revenue contribution from issuing services provided to health care companies and revenue from the small acquisition completed in the second quarter of 2022. Adjusted EBITDA increased by $17.4 million to $118.3 million driven by the increase in revenues and the positive net effect of previously recorded operational losses, partially offset by higher operating expenses, including higher professional fees.
Latin America Payments and Solutions | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2023 | | 2022 | | |
Revenues | $186,503 | | $128,221 | | |
Adjusted EBITDA | 60,158 | | 42,607 | | |
Adjusted EBITDA margin | 32.3 | % | | 33.2 | % | | |
Latin America Payments and Solutions segment revenues for the shiftyear ended December 31, 2023 increased by $58.3 million to $186.5 million when compared to the same period in the prior year. The increase was driven by strong organic growth as well as revenue for a customer contract changegenerated from payment services to merchant acquiringthe Sinqia, paySmart and BBR acquisitions completed in the fourth quarter of 2015, a decrease in revenues due to a delayed project amounting to approximately $4.5 million2023, first quarter of 2023 and lower revenuesthird quarter of 2022, respectively. Revenues benefited from the government lottery tax$6.3 million impact related to the Company’s processing contract terminatedwith Getnet Chile in the fourth quarter of 2015. Adjusted EBITDA was impacted by the same factors described for revenues.
Payment Services - Latin America
|
| | | | | |
| Year ended December 31, |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 |
Revenues | $62,702 | | $47,162 | | $37,523 |
Adjusted EBITDA | 17,558 | | 15,354 | | 11,800 |
Payment Services - Latin America 2017 revenues increased $15.5 million driven mainly by added revenues from the PayGroup acquisition.third quarter. Adjusted EBITDA increased $2.2by $17.6 million mainly driven by increased transaction growth as well as contribution from our PayGroup acquisition at a lower margin, both of which werewhen compared to the same period in the prior year, primarily related to the increase in revenues partially offset by customer attrition.higher personnel costs driven by
Payment Services - Latin Americahigher headcount from acquisitions, an increase in professional services fees and an increase in transaction processing and monitoring expenses charged from Payments Puerto Rico segment.
Merchant Acquiring | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2023 | | 2022 | | |
Revenues | $162,366 | | $151,085 | | |
Adjusted EBITDA | 60,992 | | 63,607 | | |
Adjusted EBITDA margin | 37.6 | % | | 42.1 | % | | |
Merchant Acquiring segment revenues in 2016for the year ended December 31, 2023 increased by $9.6$11.3 million to $162.4 million when compared to the same period in the prior year. The revenue increase was primarily driven primarily by revenuean increase in sales volume mainly due to new higher volume merchants and incremental sales volume in existing merchants, higher spread from the Processa acquisition, and transaction and terminal rental growth while Adjusted EBITDA increased approximately $3.5 million reflecting operating leverage on incremental revenues and the Processa contribution.
Merchant Acquiring
|
| | | | | |
| Year ended December 31, |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 |
Revenues | $85,778 | | $91,248 | | $85,411 |
Adjusted EBITDA | 37,497 | | 41,629 | | 45,447 |
Merchant acquiring segment revenue in 2017 decreased $5.5 million. Merchant sales volume and revenue were negatively impacted by Hurricanes Irma and Maria in September 2017. The decrease was also impacted by the shift of revenue from Merchant Acquiring related to a client contract change in the second quartermix of 2016.credit cards spend towards premium cards, and pricing initiatives. Adjusted EBITDA decreased by $4.1$2.6 million mainly duewhen compared to the factors above describedsame period in the prior year, primarily driven by higher operating expenses, including the revenue sharing agreement with Popular which began during the third quarter of 2022, and higher processing costs driven by the effect of a declining average ticket.
Business Solutions | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2023 | | 2022 | | |
Revenues | $226,960 | | $235,299 | | |
Adjusted EBITDA | 86,880 | | 100,568 | | |
Adjusted EBITDA margin | 38.3 | % | | 42.7 | % | | |
Business Solutions segment revenues for revenues coupled with a less favorable merchant mix and a lower average ticket, boththe year ended December 31, 2023 decreased by $8.3 million to $227.0 million when compared to the same period in the prior year, primarily driven by the impact from the assets sold as part of the Popular Transaction completed in the third quarter of 2022, which reduced margins.
Merchant acquiring segment revenue in 2016 amountedwere of higher margins, partially offset by the one-time credit granted to $91.2Popular upon closing of the Popular Transaction. Adjusted EBITDA decreased by $13.7 million an increase whento $86.9 million as compared to the prior year period. This decrease was driven by the additionimpact of the FirstBank merchant portfolio inassets sold to Popular as part of the fourth quarter of 2015. Merchant acquiring segment Adjusted EBITDA decreased from $45.4 million to $41.6 million in 2016 primarily due to revenues at a lower margin from our FirstBank merchant portfolio, reduced margin contribution due to increased transactions at a lower ticket price and merchant mix shifts that reduced net revenue.Popular transaction.
Business Solutions
|
| | | | | |
| Year ended December 31, |
Dollar amounts in thousands | 2017 | | 2016 | | 2015 |
Revenues | $189,077 | | $184,276 | | $179,532 |
Adjusted EBITDA | 86,790 | | 89,239 | | 83,192 |
Business solutions revenue in 2017 increased to $189.1 million primarily reflecting increased revenue from our Accuprint printing business acquisition and an increase in core banking revenue. Adjusted EBITDA decreased to $86.8 million mainly as a result of higher internal charges related to higher support and maintenance hours for Business Solution applications, primarily for Banco Popular coupled with higher expenses related to infrastructure supporting the Business Solutions segment as we replaced obsolete assets.
Business solutions revenue in 2016 increased to $184.3 million. The increase is primarily driven by revenues from core banking activities related to an increase in volume and new services provided. In addition, revenues grew modestly in network services, business process outsourcing and IT Consulting. This growth was partially offset by a decrease in revenue from cash and item processing services. Adjusted EBITDA increased primarily driven by the same factors explained for the increase in revenues.
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, acquisitions, dividend payments, share repurchases and working capital needs.debt service. We also have a $100.0$200.0 million revolving credit facility,Revolving Facility, of which $88.0$194.0 million was available for borrowing as of December 31, 2017.2023. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn. The Company also obtained additional financing commitments in the aggregate amount of $660 million, for the purpose of financing the Sinqia acquisition, repaying certain existing indebtedness in connection with the Sinqia Transaction, as well as paying related debt financing fees and expenses. The obligations of the lenders to provide debt financing under the related debt commitment letter are subject to customary terms and conditions.
AtAs of December 31, 2017,2023, we had cash and cash equivalents of $50.4$295.6 million, of which $30.0$206.5 million resides in our subsidiaries located outside of Puerto Rico for purposes of (i) funding the respective subsidiary’s current business operations and (ii) funding potential future investment outside of Puerto Rico. During the second quarterWe intend to indefinitely reinvest these funds outside of 2017, the Company repatriated capital and earnings from foreign subsidiaries in order to partially fund the acquisition of PayGroup. This acquisition expands our Latin American operations and increases the Company's foreign operations. This transaction resulted in a one-time tax on dividends from foreign operations of approximately $1.3 million. This repatriation of earnings and capital is considered a one-time transaction specifically for the acquisition,Puerto Rico, and based on our liquidity forecast, we dowill not believe we will need to repatriate this cash to fund the Puerto Rico operations or to meet debt-service obligations. However, if in the future we determine that we no longer need to maintain cash balances within our foreign subsidiaries, we may elect to distribute such cash to the Company in Puerto Rico. Distributions from the foreign subsidiaries to Puerto Rico may be subject to tax withholding and other tax consequences. Additionally, our credit agreement imposes certain restrictions on the distribution of dividends from subsidiaries.
Our primary use of cash is for operating expenses, working capital requirements, capital expenditures, acquisitions, dividend payments, share repurchases, debt service, acquisitions and other transactions as opportunities present themselves.
Based on our current level of operations, we believe our existing 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 Report. However, our ability to fund future operating expenses, dividend payments, capital expenditures, mergers and acquisitions, and our ability to make scheduled payments of interest, to pay principal on or refinance our indebtedness and to satisfy any other of our present or future debt obligations will depend on our future operating performance, which willmay be affected by general economic, financial, and other factors beyond our control.
Comparison of the years ended December 31, 20172023 and 20162022
The following table presents our cash flows from operations for the years ended December 31, 20172023 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 |
|
2022: | | | | | | | | | | | | | | |
| | Years ended December 31, |
(In thousands) | | 2023 | | 2022 |
Cash provided by operating activities | | $ | 224,290 | | | $ | 223,361 | |
Cash used in investing activities | | (507,932) | | | (133,324) | |
Cash provided by (used in) financing activities | | 403,270 | | | (156,768) | |
Effect of foreign exchange rate on cash, cash equivalents and restricted cash | | 8,439 | | | (3,529) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | 128,067 | | | $ | (70,260) | |
Net cash provided by operating activities for the year ended December 31, 20172023 was $145.8$224.3 million, a decreasean increase of $22.3$0.9 million compared with 2016.to 2022. The decrease in cash provided by operating activitiesincrease was primarily driven by a decrease in net income.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 $24.0was $507.9 million compared to $78.1$133.3 million. The increase was mainlyis primarily attributable to the completion of the purchase of PayGroupacquisitions completed during the third quartercurrent year for $417.6 million compared to an acquisition of 2017.$44.4 million in the prior year, an increase in software additions of $18.7 million and capital contributions for investments in equity investee of $5.5 million.
Net cash used inprovided by financing activities for the year ended December 31, 2017 amounted to $69.22023 was $403.3 million, a decrease of $21.6 million when compared with thecash used of $156.8 million in prior year. The decrease is driven by less cash used for stock repurchases and dividend payments.
Comparison of the years ended December 31, 2016 and 2015
The following table presents our cash flows from operations for the years ended December 31, 2016 and 2015:
|
| | | | | | | | |
| | Years ended December 31, |
(Dollar amounts in thousands) | | 2016 | | 2015 |
Cash provided by operating activities | | $ | 168,054 |
| | $ | 162,419 |
|
Cash used in investing activities | | (54,083 | ) | | (53,068 | ) |
Cash used in financing activities | | (90,798 | ) | | (112,718 | ) |
Increase (decrease) in cash | | $ | 23,173 |
| | $ | (3,367 | ) |
Netnet cash provided by operatingfinancing activities forreflected the year ended December 31, 2016 was $168.1impact of the issuance of new debt in connection with the Sinqia transaction, partially offset by $36.1 million an increase of $5.6used to repurchase stock and $7.2 million compared with 2015. The increase was driven by lessrelated to cash used to pay accounts payablefor purchase of equipment and accrued liabilities and an increase in unearned income.software.
Net cash used in investing activities amounted to $54.1 million, primarily driven by additions to software amounting to $23.8 million, acquisitions of property and equipment of $18.5 million and the completion of the Processa and the Accuprint purchase transactions for $15.6 million in cash.
Net cash used in financing activities for the year ended December 31, 2016 amounted to $90.8 million, a decrease of $21.9 million when compared with the prior year. The decrease is driven by less cash used in the repurchase of common stock, coupled with an increase in cash provided by short-term borrowings partially offset by cash paid during the year for amendments made to the Company’s debt agreement, credit amendment fees of $3.6 million and debt issue costs of $4.8 million.
Capital Resources
Our principal capital expenditures are for hardware and computer software (purchased and internally developed), 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, 20162023 and 2015, respectively.2022, the Company invested approximately $85.0 million and $71.9 million, respectively in our capital resources. In termsaddition, the Company acquired two businesses for an aggregated amount of acquisitions,$417.6 million, net of cash acquired, and an investment in 2017, we completedequity investee of $5.5 million. During the purchaseprior year, the Company acquired a business for $44.4 million, net of PayGroup for $42.8cash, as well as $7.3 million whilein certificates of deposit in connection with this business acquisition in 2022. The Company also acquired customer relationships amounting to $10.6 million in the 2016,prior year. Generally, we completed the purchase of Processa for $5.9 million and Accuprint for $9.7 million. Capitalfund capital expenditures are expected to be funded bywith cash flow generated from operations and, if necessary, borrowings under our Revolving Facility.Facility and, as described above in connection with the Sinqia Transaction, using additional committed financing.
Dividend Payments
Historically, we have paidThe Company pays a regular quarterly dividend on our common stock, subject to the declaration thereof by our Board each quarter. On November 2, 2017, the Board voted to temporarily suspend the quarterly dividend on the Company's common stock due to the difficult operating environment in Puerto Rico in the aftermath of Hurricane Maria. The Board anticipates reviewing the dividend policy as conditions stabilize in Puerto Rico. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board and will depend on many factors, including our financial condition, earnings, available cash, business opportunities, legal requirements, restrictions in our debt agreements and other contracts, capital requirements, level of indebtedness and other factors that our Board deems relevant. Refer to the table below for details regarding our dividends in 20172023 and 2016:
2022:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Declaration Date | | Record Date | | Payment Date | | Dividend per share |
February 17, 201615, 2022 | | February 25, 2022 | | March 25, 2022 | | $0.05 |
April 21, 2022 | | May 2, 2022 | | June 3, 2022 | | 0.05 |
July 28, 2022 | | August 8, 2022 | | September 2, 2022 | | 0.05 |
October 21, 2022 | | November 1, 2022 | | December 2, 2022 | | 0.05 |
February 29, 201616, 2023 | | February 28, 2023 | | March 17, 20162023 | | 0.10 | 0.05 |
April 20, 2023 | | May 11, 20161, 2023 | | June 2, 2023 | | May 23, 2016 | June 10, 2016 | | 0.10 | 0.05 |
July 28, 201620, 2023 | | July 31, 2023 | | August 9, 2016September 1, 2023 | | September 2, 2016 | | 0.10 | 0.05 |
October 27, 201619, 2023 | | October 30, 2023 | | November 14, 2016December 1, 2023 | | December 2, 2016 | | 0.10 |
|
February 17, 2017 | | March 1, 2017 | | March 20, 2017 | | 0.10 |
|
April 27, 2017 | | May 8, 2017 | | June 9, 2017 | | 0.10 |
|
July 25, 2017 | | August 7, 2017 | | September 8, 2017 | | 0.10 | 0.05 |
Stock Repurchase
During 2017,2023, the Company repurchased 465,2401,009,653 shares of the Company’s common stock at a cost of $7.7$36.1 million. The Company funded such repurchaserepurchases with cash on handhand. At December 31, 2023, the Company's share repurchase program has approximately $137.5 million remaining and borrowings under the existing revolving credit facility.
During 2016, the Company repurchased 2,504,427 shares of the Company’s common stock at a cost of $39.9 million.approved for future use. The Company funded suchmay repurchase with cash on hand and borrowings undershares in the existing revolving credit facility.
During 2015, the Company repurchased 3,012,826 shares of the Company’s common stock at a cost of $54.9 million. The Company funded such repurchase with cash on hand and borrowings under the existing revolving credit facility.
Repurchases may be accomplished through open market, transactions, privately negotiated transactions,through accelerated share repurchase programs, 10b5-1 plans, or in privately negotiated transactions, subject to business opportunities and other means.factors.
Financial Obligations
SeniorLeases
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) | 2023 | | 2022 |
Operating lease liability - current | 6,693 | | | 5,936 | |
Operating lease liability - long-term | 9,033 | | | 10,788 | |
Total operating lease liabilities | $ | 15,726 | | | $ | 16,724 | |
See Note 25 to the Audited Consolidated Financial Statements for additional information regarding operating lease obligations.
2023 Secured Credit Facilities
On April 17, 2013,December 1, 2022, EVERTEC and EVERTEC Group, entered into a credit agreement (the “2013 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”),that matures on December 1, 2027, and a $400.0$200.0 million term loan Brevolving credit facility (the “Term B Loan”“Revolving Facility”, and together with the Term A Loan Facility, the “Senior Secured term loans”“2022 Credit Facilities”) and a $100.0 million revolving credit facilitythat matures on December 1, 2027 (the "Revolving Facility"“2022 Credit Facilities Maturity Date”).
During 2016, the Company entered into two separate amendments to the 2013 Credit Agreement. In the second quarter of 2016, On October 30, 2023, Evertec, EVERTEC Group together with certainand other direct and indirect subsidiaries ofLoan Parties (as defined in the Company,Existing Credit Agreement) party thereto, entered into a secondfirst amendment and waiver(the “Amendment”) to the outstandingcredit agreement, dated as of December 1, 2022 (the “Existing Credit Agreement,” and as amended by the Amendment, the “Amended Credit Agreement”), with a syndicate of lenders and Truist, as administrative agent and collateral agent. Under the Amended Credit Agreement, a syndicate of financial institutions and other lenders provided (i) additional term loan A commitments in the amount of $60.0 million (the “Second Amendment”“Incremental TLA Facility”) and (ii) a new tranche of term loan B commitments in the amount of $600.0 million (the “New TLB Facility,” and together with the Incremental TLA Facility, the “Facilities”). The Company paid each lender that consented$600.0 million term loan B facility matures on October 30, 2030 (the “Term Loan B Maturity Date”). Unless otherwise indicated, the terms and conditions detailed below apply to the amendment a fee equal to 0.50% of the aggregate principal amount of outstandingboth term loansloan A facility and revolving commitments held by such lender. The credit amendment fees paid during the second quarter of 2016 amounted to $3.6 million.term loan B (together “Term Loan Facilities”). In the fourth quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiaries2023, the Company prepaid $60 million of the Company, entered into a third amendment (the “Third Amendment”)outstanding balance on Term Loan B.
Scheduled Amortization Payments
The Term Loan A Facility and Incremental TLA Facility amortizes in equal quarterly installments at an amount equal to the 2013 Credit Agreement. The Third Amendment extends the maturity(a)
initially, $5,966,720.78 per quarter and (b) $65 million of EVERTEC Group’s existing $100 million of revolving credit facilityfor any installment payments to January 17, 2020. The remaining approximately $30 million of Term A loan (the “2018 Term A loan”) and the $35 million of revolving credit facility that were not extended will remain in place and mature as originally scheduled on April 17, 2018. The Term B loan facility will remain in place and mature as originally scheduled on April 17, 2020.
Under the terms of the Third Amendment, the 2018 Term A Loan amortizes on a basis of 1.875% of the original principal amount beginningbe made in the thirdcalendar year ending 2027, $8,950,081.17 per quarter, of 2016 and during each of the next three 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.2022 Credit Facilities Maturity Date. The 2020 Term A LoanNew TLB Facility amortizes onin equal quarterly at a basis of 1.50% of the original principal amount beginning in the fourth quarter of 2016 and during each of the next five quarters, 1.875% of the original principal amount during each of the four subsequent quarters, and 2.50% of the original principal amount during each of the final three quarters,rate equal to 1% per calendar year, with the balance payable on the final maturity date. Principal payments forTerm Loan B Maturity Date. The Revolving Credit Facility terminates on the 2022 Credit Facilities Maturity Date, and loans thereunder may be borrowed, repaid and reborrowed prior thereto.
Voluntary Prepayments and Reduction and Termination of Commitments
Other than as set forth below with respect to the New TLB Facility, EVERTEC Group may prepay loans under the Term B Loan were not changedFacilities 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 the Third Amendmenta lender and continuestimely submission of a notice of prepayment or commitment reduction, as applicable. EVERTEC Group is required to require payments on the last business day of each quarter equal to 0.250%make certain mandatory prepayments of the original principal amount2022 Credit Facilities in certain circumstances.
Interest
With respect to the 2022 Facilities and the remaining outstanding principal amount onIncremental TLA Facility, the maturity of the Term B Loan.
The applicable margininterest rates under the 2013 Credit Agreement isFacilities denominated in U.S. Dollars, are based on, at EVERTEC Group’s option (i)(a) the Adjusted Term SOFR, which means SOFR plus 10 basis points, 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 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 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.
With respect to the New TLB Facility, the interest rates are based on, at EVERTEC Group’s option (a) the Adjusted Term SOFR, which means SOFR plus 10 basis points, for the Interest Period in effect for such borrowing plus an applicable margin of 3.50% per annum or (b) the ABR plus an applicable margin of 2.50% per annum.
Guarantees and Collateral
The Credit Facilities are secured by substantially all assets of EVERTEC and its existing and future material subsidiaries (including EVERTEC Group), subject to customary exceptions. EVERTEC and each of EVERTEC’s existing and future material wholly-owned subsidiaries (including EVERTEC Group with respect to the obligations of EVERTEC and its existing and future material wholly-owned subsidiaries (other than EVERTEC Group)), subject to certain customary exceptions, guarantee repayment of the 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 Credit Facilities and under any 2018 Term A Loan, 2.50% per annumcash 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 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 Credit Facilities are subject to customary affirmative and negative covenants. The negative covenants in the caseCredit 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 LIBOR Loansale 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 1.50% per annum in
•enter into transactions with their affiliates.
In addition, the case2022 Credit Facilities require EVERTEC Group to maintain a maximum total net leverage ratio of any Alternate Base Rate (“ABR”), as4.50 to 1.00 (i) from March 31, 2023 to September 30, 2024, and 4.00 to 1.00 (ii) thereafter.
Events of Default
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 revolving credit facility interest rate is calculated the same as the 2020 Term A Loan rate and has a “commitment fee” payable one business day after the last business day of each quarter calculated based on the daily unused commitment during the preceding quarter. The commitment fee for the unused portion of this facility ranges from 0.125% to 0.375% and is based on EVERTEC Group’s first lien secured net leverage ratio.
All loans may be prepaid without premium or penalty.
The unpaid principal balance at December 31, 20172023 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.$993.5 million. The additional borrowing capacity for the Revolving Facility loan at December 31, 20172023 was $88.0$194.0 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
Notes payable
In December 2014, June 2015 and May 2016,September 2023, EVERTEC Group entered into a non-interest bearing financing agreementsagreement 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$10.1 million to purchase software.software and maintenance which the Company recorded on a discounted basis using an implied interest of 6.9%. As of December 31, 2017 and December 31, 2016,2023, the outstanding principal balance of the notesnote payable is $1.0 million and $3.4 million, respectively.on a discounted basis was $7.4 million. The current portion of these notesthe note is recorded as part ofincluded in accounts payable and the long-term portion is included in other long-term liabilities.liabilities on the Company's consolidated balance sheet.
Interest Rate SwapSwaps
As of December 31, 2017,2023, the Company has the followingtwo interest rate swap agreement convertingagreements, entered into in December 2018 and May 2023, which convert 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 |
| | | | | | | | | | |
2018 Swap | | April 2020 | | November 2024 | | $250 million | | 1-month SOFR | | 2.929% |
Effective date2023 Swap | | November 2024 | | Maturity DateDecember 2027 | | $250 million | | Notional Amount1-month SOFR | | Variable Rate | | Fixed Rate |
January 2017 | | April 2020 | | $200 million | | 1-month LIBOR | | 1.9225%3.375% |
The Company has accounted for this transaction 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, 20172023, the carrying amount of the derivatives included on the Company’s consolidated balance sheets was an asset of $4.4 million and a liability of $0.9 million. As of December 31, 2016,2022, the carrying amount of the derivative asset included on the Company’sCompany's consolidated balance sheets was $7.4 million. 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, 2017,2023, 2022 and 2021, the Company reclassified gains of $5.6 million, losses of $1.6$3.0 million and losses of $7.1 million, respectively, from accumulated other comprehensive lossincome (loss) into income through interest expense. Based on current LIBORSOFR rates, the Company expects to reclassify $0.9gains of $6.3 million from accumulated other comprehensive lossincome (loss) into income through interest expense over the next 12 months. Refer to Note 16 to the Consolidated Financial Statements in this Report for tabular disclosure of the fair value of derivatives and to Note 19 to the Consolidated Financial Statements in this Report for tabular disclosure of gains (losses) recorded on cash flow hedging activities.
TheAt December 31, 2023, the cash flow hedge is considered highly effective and no impact on earnings is expected due to hedge ineffectiveness.effective.
Covenant Compliance
The credit facilities contain various restrictive covenants. The Term A Loan and the revolving facility (subject to certain exceptions) require EVERTEC Group to maintain on a quarterly basis a specified maximum senior secured leverage ratio of up to 4.75 to 1.00 as defined in the third amendment to the 2013 Credit Agreement (total first lien senior secured debt to Adjusted EBITDA) until September 30, 2018 and 4.25 to 1.00 for any fiscal quarter ending thereafter. In addition, the 2013 Credit Agreement, among other things: (a) limits EVERTEC Group’s ability and the ability of its subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (b) restricts EVERTEC Group’s ability to enter into agreements that would restrict the ability of its subsidiaries to pay dividends or make certain payments to its parent company; and (c) places restrictions on EVERTEC Group’s ability and the ability of its subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of their assets. However, all of the covenants in these agreements are subject to significant exceptions. As of December 31, 2017,2023, the seniortotal secured net leverage ratio was 3.342.24 to 1.00. As of the date of filing of this Form 10-KReport, no event has occurred that constitutes an Event of Default or Default.
In this Annual Report, on Form 10-K, we refer to the term “Adjusted EBITDA” to mean EBITDA as so defined and calculated 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.
Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share (Non-GAAP Measures)
We define “EBITDA”The non-GAAP measures referenced in this Report are supplemental measures of the Company’s performance and are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). They are not measurements of the Company’s financial performance under GAAP and should not be considered as alternatives to total revenue, net income or any other performance measures derived in accordance with GAAP or as alternatives to cash flows from operating activities, as indicators of operating performance or as measures of the Company’s liquidity. In addition to GAAP measures, management uses these non-GAAP measures to focus on the factors the Company believes are pertinent to the daily management of the Company’s operations and believes that they are also frequently used by analysts, investors and other stakeholders to evaluate companies in our industry. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our condensed consolidated statements of operations that are necessary to run our business. Other companies, including other companies in our industry, may not use these measures or may calculate these measures differently than as presented herein, limiting their usefulness as comparative measures.
Reconciliations of the non-GAAP measures to the most directly comparable GAAP measure are included at the end of this earnings release. These non-GAAP measures include EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, each as defined below. Effective for the quarter ended March 31, 2023, the Company modified the manner in which it calculates Adjusted EBITDA, Adjusted Net Income and Adjusted earnings per common share to exclude the impact of unrealized gains and losses from foreign currency remeasurement for assets and liabilities denominated in non-functional currencies. These non-cash unrealized gains and losses are non-operational in nature and we believe that excluding these better presents the overall financial performance of our core business, and helps facilitate comparison with industry peers. The Company has recast prior periods to conform with the modified definition of Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share.
EBITDA is defined as earnings before interest, taxes, depreciation and amortization. We define “Adjusted EBITDA”
Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusualcertain non-cash items and other adjustments described below. Adjusted EBITDA by segmentunusual expenses such as: share-based compensation, restructuring related expenses, fees and expenses from corporate transactions such as M&A activity and financing, equity investment income net of dividends received, and the impact from unrealized gains and losses on foreign currency remeasurement for assets and liabilities in non-functional currency. This measure 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 ourthe Company's 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, ourThe Company’s 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 senior secured leverage ratio. We use
Adjusted Net Income is defined as Adjusted EBITDA less: operating depreciation and amortization expense, defined as GAAP Depreciation and amortization less amortization of intangibles related to acquisitions such as customer relationships, trademarks; cash interest expense defined as GAAP interest expense, less GAAP interest income adjusted to exclude non-cash amortization of debt issue costs, premium and accretion of discount; income tax expense which is calculated on adjusted pre-tax income using the applicable GAAP tax rate, adjusted for uncertain tax position releases, tax true-ups, windfall from share-based compensation, unrealized gains and losses from foreign currency remeasurement, among others; and non-controlling interests, net of amortization for intangibles created as part of the purchase.
Adjusted Earnings per common share is defined as Adjusted Net Income divided by diluted shares outstanding.
The Company uses Adjusted Net Income to measure ourthe Company’s overall profitability because we believethe Company believes it better reflects ourthe 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 wethe Company may incur expenses such as those excluded in calculating them. Further, our presentation
Some of the limitations of EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted earnings per common share are as follows:
they do not reflect cash outlays for capital expenditures or future contractual commitments;
they do not reflect changes in, or cash requirements for, working capital;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements;
in the case of EBITDA and Adjusted EBITDA, they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness;
in the case of EBITDA and Adjusted EBITDA, they do not reflect income tax expense or the cash necessary to pay income taxes; and
other companies, including other companies in our industry, may not use EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per common share or may calculate EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share differently than as presented in this Report, limiting their usefulness as a comparative measure.
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share are not measurements of liquidity or financial performance under GAAP. You should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share as alternatives to cash flows from operating activities or any other performance measures determined in accordance with GAAP, as an indicator of cash flows, as a measure of liquidity or as an alternative to operating or net income determined in accordance with GAAP.
A reconciliation of net income to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share is provided below:
|
| | | | |
| | Year Ended December 31, 2017 |
(Dollar amounts in thousands) | | |
Net income | | $ | 55,419 |
|
Income tax expense | | 4,780 |
|
Interest expense, net | | 29,145 |
|
Depreciation and amortization | | 64,250 |
|
EBITDA | | 153,594 |
|
Equity income (1) | | (604 | ) |
Compensation and benefits (2) | | 9,755 |
|
Transaction, refinancing and other fees (3) | | 2,500 |
|
Exit activity (4) | | 12,783 |
|
Adjusted EBITDA | | 178,028 |
|
Operating depreciation and amortization (5) | | (30,585 | ) |
Cash interest expense, net (6) | | (24,660 | ) |
Income tax expense (7) | | (15,100 | ) |
Non-controlling interest (8) | | (581 | ) |
Adjusted net income | | $ | 107,102 |
|
Net income per common share (GAAP): | | |
Diluted | | $ | 0.76 |
|
Adjusted Earnings per common share (Non-GAAP): | | |
Diluted | | $ | 1.47 |
|
Shares used in computing adjusted earnings per common share: | | |
Diluted | | 72,872,188 |
|
| | | | | | | | |
| | Year Ended December 31, 2023 |
(Dollar amounts in thousands) | | |
Net income | | $ | 79,876 | |
Income tax expense | | 5,477 | |
Interest expense, net | | 23,809 | |
Depreciation and amortization | | 93,621 | |
EBITDA | | 202,783 | |
| | |
Equity income (1) | | (1,945) | |
Compensation and benefits (2) | | 29,312 | |
Transaction, refinancing and other fees (3) | | 53,545 | |
Loss on foreign currency remeasurement (4) | | 8,276 | |
Adjusted EBITDA | | 291,971 | |
Operating depreciation and amortization (5) | | (52,913) | |
Cash interest expense, net (6) | | (24,286) | |
Income tax expense (7) | | (29,038) | |
Non-controlling interest (8) | | (257) | |
Adjusted net income | | $ | 185,477 | |
Net income per common share (GAAP): | | |
Diluted | | $ | 1.21 | |
Adjusted Earnings per common share (Non-GAAP): | | |
Diluted | | $ | 2.82 | |
Shares used in computing adjusted earnings per common share: | | |
Diluted | | 65,814,317 | |
| |
1) | Represents the elimination of non-cash equity earnings from our 19.99% equity investment in Dominican Republic, Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”). |
| |
2) | Primarily represents share-based compensation and other compensation expense. |
| |
3) | Represents fees and expenses associated with corporate transactions as defined in the Credit Agreement, recorded as part of selling, general and administrative expense and cost of revenues, as well as relief contributions related to the Hurricanes. |
| |
4) | Impairment charge and contractual fee accrual for a third party software solution that was determined to be commercially unviable. |
| |
5) | Represents operating depreciation and amortization expense, which excludes amounts generated as a result of the Merger and other from purchase accounting intangibles generated from acquisitions. |
| |
6) | 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 Credit Agreement and the foreign currency swap loss. 4)Represents non-cash unrealized gains (losses) on foreign currency remeasurement for assets and liabilities denominated in non-functional currencies. 5)Represents operating depreciation and amortization expense, which excludes amounts generated as a result of merger and acquisition activity. 6)Represents interest expense, less interest income, as they appear on our consolidated statements of income and comprehensive income, adjusted to exclude non-cash amortization of the debt issue costs, premium and accretion of discount. |
| |
7) | Represents income tax expense calculated on adjusted pre-tax income using the applicable GAAP tax rate. |
| |
8) | Represents the 35% non-controlling equity interest in Processa, net of amortization for intangibles created as part of the purchase. |
Contractual Obligations
The Company’s contractual obligations as of December 31, 2017 are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | 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 |
| | $ | — |
| | $ | — |
|
| |
(1) | Long-term debt includes principal balance of $624.8 million and the payments of cash interest (based on interest rates as of December 31, 2017 for variable rate debt) and aggregate principal amount of the senior secured term loan facilities, as well as commitments fees related to the unused portion of our senior secured revolving credit facility, as required under the terms of the long-term debt agreements. |
| |
(2) | Includes certain facilities and equipment under operating leases. See Note 22 of the Notes to Audited Consolidated Financial Statements for additional information regarding operating lease obligations. |
| |
(3) | Excludes the payments of cash interest related to the outstanding portion of the senior secured revolving credit facility as of December 31, 2017. |
Off Balance Sheet Arrangements
In the ordinary course of business the Company may enter into commercial commitments. As of December 31, 2017, the Company did not have any off balance sheet items.
Seasonality
Our payment businesses generally experience moderate increased activity during the traditional holiday shopping periods and around other nationally recognized holidays, which follow consumer spending patterns.
Effect of Inflation
While inflationary increases in certain inputs costs, such as occupancy, labor and benefits, and general administrative costs, have an impact on our operating results, inflation has had minimalconsolidated statements of income and comprehensive income, adjusted to exclude non-cash amortization of the debt issue costs, premium and accretion of discount.
7)Represents income tax expense calculated on adjusted pre-tax income using the applicable GAAP tax rate, adjusted for certain discrete items.
8)Represents the non-controlling equity interests, 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 aboutAbout 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 currency 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 and qualitative information regarding these risks.
Interest rate risks
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. ABased upon a sensitivity analysis of our outstanding debt on December 31, 2023, a hypothetical 100 basis point increase in interest rates over our floor(s)floor on our debt balances outstanding as of December 31, 2017,2023, under the senior secured credit facilities would increase our annual interest expense by approximately $4.1$7.4 million. The impact on future interest expense as a result of future changes in interest rates will depend largely on the gross amount of our borrowings at that time.
InAs of December 2015, we entered into an31, 2023, the Company has two interest rate swap agreement withagreements, entered into in December 2018 and May 2023, which convert a notional amountportion of $200 million, which represents approximately 32% of our outstanding debt. Under this agreement, that began on January 1, 2017, we will receive a rate equal
to the LIBOR rate applicable to our Term B loan, and pay a fixed rate equal to 1.9225%. The net effect of the swap agreement is to fix the interest rate payments on $200 million of ourthe Company's Term B loan at approximately 4.5%, which began on January 1, 2017 and will end when the Term B loan matures, in April 2020.Loan Facility from variable rate debt to fixed.
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 counterpartycounterparties to the swap is aswaps are major USU.S. based financial institution and we expect the counterpartyboth counterparties to be able to perform its obligations under the swap.swaps. We use derivative financial instruments for hedging purposes only and not for trading or speculative purposespurposes.
See Note 12 of15 to 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 inAmerica and the countries’ local currencies. The resulting foreign currency translation adjustments, from operationsCaribbean for which we have determined that the functional currency is other than the U.S. dollar,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, 2023, 2022 and 2021, we recognized foreign currency remeasurement losses of $8.3 million, losses of $7.6 million and gains of $1.9 million, respectively. For subsidiaries whose local currency is their functional currency, their assets and liabilities are translated into U.S. 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 lossincome (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, 2017,2023, the Company had $11.1$14.8 million in an unfavorablea favorable foreign currency translation adjustment as part of accumulated other comprehensive lossincome compared towith an unfavorable foreign currency translation adjustment of $10.4$23.5 million atas of December 31, 2016.2022.
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, which 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.
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.Report.
Selected Quarterly Financial Data
|
| | | | | | | | | | | | | | | |
| Quarters ended, |
(Dollar amounts in thousands, except per share data) | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 |
Revenues | $ | 101,280 |
| | $ | 103,511 |
| | $ | 102,725 |
| | $ | 99,628 |
|
Operating costs and expenses | 70,688 |
| | 73,517 |
| | 93,917 |
| | 82,939 |
|
Income from operations | 30,592 |
| | 29,994 |
| | 8,808 |
| | 16,689 |
|
Non-operating expenses | (5,434 | ) | | (5,712 | ) | | (7,506 | ) | | (7,232 | ) |
Income before income taxes | 25,158 |
| | 24,282 |
| | 1,302 |
| | 9,457 |
|
Income tax expense (benefit) | 2,020 |
| | 4,068 |
| | (4,840 | ) | | 3,532 |
|
Net income | $ | 23,138 |
| | $ | 20,214 |
| | $ | 6,142 |
| | $ | 5,925 |
|
Net income attributable to EVERTEC, Inc.’s common stockholders | $ | 23,029 |
| | $ | 20,089 |
| | $ | 6,102 |
| | $ | 5,834 |
|
Net income per common share - basic | $ | 0.32 |
| | $ | 0.28 |
| | $ | 0.08 |
| | $ | 0.08 |
|
Net income per common share - diluted | $ | 0.31 |
| | $ | 0.27 |
| | $ | 0.08 |
| | $ | 0.08 |
|
| | | | | | | |
| Quarters ended, |
(Dollar amounts in thousands, except per share data) | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 |
Revenues | $ | 95,479 |
| | $ | 97,672 |
| | $ | 94,467 |
| | $ | 101,889 |
|
Operating costs and expenses | 68,913 |
| | 69,480 |
| | 67,460 |
| | 76,509 |
|
Income from operations | 26,566 |
| | 28,192 |
| | 27,007 |
| | 25,380 |
|
Non-operating expenses | (5,523 | ) | | (5,157 | ) | | (5,657 | ) | | (7,411 | ) |
Income before income taxes | 21,043 |
| | 23,035 |
| | 21,350 |
| | 17,969 |
|
Income tax expense | 1,876 |
| | 2,801 |
| | 1,639 |
| | 1,955 |
|
Net income | $ | 19,167 |
| | $ | 20,234 |
| | $ | 19,711 |
| | $ | 16,014 |
|
Net income attributable to EVERTEC, Inc.’s common stockholders | $ | 19,148 |
| | $ | 20,235 |
| | $ | 19,680 |
| | $ | 15,972 |
|
Net income per common share - basic | $ | 0.26 |
| | $ | 0.27 |
| | $ | 0.27 |
| | $ | 0.22 |
|
Net income per common share - diluted | $ | 0.26 |
| | $ | 0.27 |
| | $ | 0.26 |
| | $ | 0.22 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company, underOur management, with the directionparticipation of the Chief Executive Officer and the Chief Financial Officer, has establishedevaluated the effectiveness of our disclosure controls and procedures as(as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). ) as of the end of the period covered by this Report.Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2017,2023, the Company’s disclosure controls and procedures arewere effective.
Changes in Internal Control Over Financial Reporting
There wereWe completed the Sinqia acquisition on November 1, 2023 (see Note 3 of the Notes to Consolidated Financial Statements). The scope of management’s assessment of the effectiveness of the Company’s disclosure controls and procedures did not include the internal controls over financial reporting of Sinqia. This exclusion is in accordance with the SEC Staff’s general guidance that an assessment of a recently acquired business may be omitted from the scope of management’s assessment for one year following the acquisition. Sinqia represented approximately 3% of our revenues for the year ended December 31, 2023. Total assets of the acquired business as of December 31, 2023, represented approximately 35% of total consolidated assets, consisting principally of goodwill and other intangible assets resulting from the business combination. We are in and will continue with the process of integrating Sinqia into our overall internal control environment. We believe that we have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during this ongoing integration. Except as described above, there have been no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as(as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or underAct).
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, and effected by the Company’s boardwe conducted an evaluation of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the firm; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the firm’s assets that could have a material effect on our financial statements.
The Company’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used thebased on criteria established in the Internal Control-IntegratedControl - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Commission.
Based on this assessment,evaluation under the framework set forth in Internal Control – Integrated Framework (2013), our management has determinedconcluded that the Company’sCompany��s internal control over financial reporting as of December 31, 20172023 was effective.
As permitted by
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, 2017,2023, included in this Form 10-KReport and, as part of the audit, has issued a report, included as part ofin Part II, Item 8 of8. Financial statements and Supplementary Data in this Form 10-K,Report, on the effectiveness of our internal control over financial reporting as of December 31, 2017.2023.
Item 9B. Other Information
None.During the three months ended December 31,2023 no director or “officer” (as defined in Rule 16a-1(f) of the Exchange Act) of the Company adopted, terminated or modified a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Code of Ethics
Our Board of Directors has adopted a Code of Ethics applicable to all officers, directors, and employees, including our principal executive officer, principal financial officer, principal accounting officer 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 Report, and you should not consider the information on our website to be part of this Report.
BIOGRAPHICAL INFORMATION OF OUR DIRECTORS
Certain information concerning our current Board of Directors as of February 22, 2024 follows.
Frank G. D’Angelo
Mr. D’Angelo has been Chairman of the Board since February 2014 and a director since September 2013. Since June 2015 he has served as Operating Partner in Hill Path, a private equity partnership, and as a partner in Bridgeport Partners, a private investment firm since June 2019. From May 2019 until October 2021, 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, 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
Ms. Barrett has been a director since May 2021. 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 Piedmont Office Realty Trust, Inc. (NYSE: PDM), The Aaron’s Company, Inc. (NYSE: AAN), and Americold Realty Trust (NYSE: COLD). Her leadership roles in the community currently include serving on the board of the Metro Atlanta YMCA (where she formerly served as chair); the National Association of Corporate Directors, Atlanta Chapter board; the Georgia Tech Foundation Board of Trustees; and as a member of the Advisory Board of Scheller College of Business at Georgia Tech (where she also formerly served as chair). She has previously served on the board of the Girl Scouts of Greater Atlanta and on the non-profit organization Partnership Against Domestic Violence and the Atlanta Rotary Club. She is also a Certified Public Accountant in the state of Georgia and NACD Directorship Certified. Ms. Barrett’s substantial experience in leadership roles, strategy and enterprise risk management, coupled with service on several boards, is of great service to the Company.
Olga Botero
Ms. Botero has been a director since September 2014. She is the founder and CEO of C&S Customer and Strategy, a boutique consulting firm focused on technology, 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 from 2011 until 2024. She is the Co-Chair of the Women Corporate Directors Foundation Colombia Chapter and a fellow at the National Association of Corporate Directors (NACD) Board Leadership Fellow program. She serves as an independent director 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 an independent member of the Audit Committee of Group Coppel in Mexico, a family owned group with businesses in retail, financial services and real state; and as an independent advisor of Grupo Montoya, a family owned group
with businesses in music, automobile and real estate in Colombia and Panama. Ms. Botero has over 25 years of experience in leadership roles in financial services, telecommunications and technology. She also has Climate Leadership and ESG certificates issued by the Diligent Institute. Her experience, expertise in cybersecurity and technology, and knowledge of Latin American markets are an asset to the Company.
Virginia Gambale
Ms. Gambale has been a director since May 2023. Ms. Gambale founded and has served since 2003 as Managing Partner of Azimuth Partners, Inc., a strategic advisory firm that develops growths, innovation and transformation strategies and planning for technology companies. Prior to founding Azimuth in 2003, she worked at Deutsche Bank, where she was a General Partner and Managing Director of ABS Ventures, responsible for the management of the Tech Venture group and Head of Deutsche Bank Strategic Ventures. Before Deutsche Bank, Ms. Gambale was the Chief Information Officer for Global Investment Banking at Merrill Lynch. Ms. Gambale currently serves as a director for JAMF Software, Nutanix, Virtu Financial, and First Derivatives. She’s also an Adjunct Faculty Member for Colombia University. Her substantial experience in leadership roles, information technology and fintech are of great value to the Company.
Jorge A. Junquera
Mr. Junquera has been a director since April 2012. Since July 2015, he has served 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 Equalize Community Development Fund (NYSE: EQCDX). 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. From November 2021 until January 2024, he was Managing Director at Mizuho. From April 2021 until October 2021, he was the Managing Member of Ionos Capital Partners LLC, an investment vehicle company. From April 2019 to April 2021, Mr. Polak served as Chief Investment & Development Officer at Cisneros Group of Companies, a private conglomerate focused on digital advertising, media and entertainment, real estate and new technologies. 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 to 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 network of corporate relationships 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, a manufacturing company, as well as at American National Can Group Inc, a manufacturer of metal cans, 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 Warrior Met Coal, Inc. (NYSE: HCC), Albertsons Companies, Inc. (NYSE: ACI), 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 in various executive level positions in The Coca-Cola Company, including as President and Chief Operating Officer from January 2019 until September 2022, and as a senior executive from October 2022 until his retirement in February 2023. 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 PLB board (LSE: CCEP) 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
Certain information concerning our current executive officers as of February 22, 2024 follows. There are no family relationships between any of our executive officers.
Morgan M. Schuessler, Jr. – Please refer to the Biographical Information of our Directors for Mr. Schuessler’s biographical information.
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.
Daniel Brignardello
Mr. Brignardello has served as our Executive Vice President and Group Head of Latam since February 2024. Prior to that he was our Senior Vice President and Chief Delivery Officer from July 2021 to February 2024. Mr. Brignardello joined the Company in July 2017 as Vice President of Processing and Fraud Prevention Services. Prior to joining the Company, Mr. Brignardello served as Chief Operating Officer of PayTrue, a Uruguayan based payments solutions company, from 2003 through June 2017; and as a Senior Software Engineer for Trintech from 2000 through 2003. Mr. Brignardello has over 25 years of senior management experience in the payments sector. He has served as a teacher (Grade 1) in the cryptography university chair in the School of Engineering of the Universidad de la República in Uruguay from 2000 through 2003. Mr. Brignardello holds a Computer Analyst degree from the School of Engineering of the Universidad de la República in Uruguay (2000), and a Program for Management Development (PMD) degree from the ESADE Business School in Barcelona, Spain (2009). Mr. Brignardello has been a Board member of ICT4V, a technology and innovation organization in Montevideo, Uruguay, since 2015.
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 to 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 August 2022. 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 holds 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.
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 & Innovation Officer since August 2022. Prior to that he was our Chief Commercial Officer for Puerto Rico and the Caribbean from 2021 to August 2022, and Head of Merchant Acquiring and Payment Processing from February 2012 until 2021. 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 president 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.
Other Information
The remaining information required by Part III, Item 10 will be included under the headings “Corporate Governance” and “Delinquent Section 16(a) Reports” (if applicable) in EVERTEC'sEVERTEC’s proxy statement, to be filed pursuant to RegulationSchedule 14 A within 120 days after the end of the 20172023 fiscal year and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Part III, Item 11 will be included under the headings “Compensation Discussion and Analysis” and “CEO Pay Ratio” in EVERTEC'sEVERTEC’s proxy statement, to be filed pursuant to RegulationSchedule 14 A within 120 days after the end of the 20172023 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 Part III, Item 12 will be included under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Director Compensation” in EVERTEC'sEVERTEC’s proxy statement, to be filed pursuant to RegulationSchedule 14 A within 120 days after the end of the 20172023 fiscal year and is incorporated herein by reference.
Item 13. Certain Relationships and Related Party Transactions and Director Independence
The information required by Part III, Item 13 will be included under the headings “Certain Relationships and Related Person Transactions” and “Corporate Governance” in EVERTEC'sEVERTEC’s proxy statement, to be filed pursuant to RegulationSchedule 14 A within 120 days after the end of the 20172023 fiscal year and is incorporated herein by reference.
Item 14. Principal AccountingAccountant Fees and Services
The information required by Part III, Item 14 will be included under the heading “Principal Accounting Fees and Services” in EVERTEC'sEVERTEC’s proxy statement, to be filed pursuant to RegulationSchedule 14 A within 120 days after the end of the 20172023 fiscal year and is incorporated herein by reference.reference
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
The following consolidated financial statements of EVERTEC, Inc. together with the Report of Independent Registered Public Accounting Firm, are included in Part II, Item 8, Financial Statements and Supplementary Data:
•Reports of Independent Registered Public Accounting FirmsFirm
•Consolidated Balance Sheets as of December 31, 20172023 and 2016
2022•Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2017, 20162023, 2022 and 2015
2021•Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 20162023, 2022 and 2015
2021•Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162023, 2022 and 2015
2021•Notes to Audited Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule I—Parent Company Only Financial Statements
(3) Exhibits
| | | | | | | | | | | |
Exhibit No. | | Description | |
| Exhibit
No.
| | Description |
3.1 | | |
2.1 | | Agreement and Plan of Merger, dated June 30, 2010, by and among Popular, Inc., AP Carib Holdings, Ltd., Carib Acquisitions, Inc. and EVERTEC Group, LLC (incorporated by reference to Exhibit 2.1 of Popular, Inc.’s Current Report on Form 8-K filed on July 8, 2010, File No. 001-34084) |
| | |
2.2 | | Amendment to the Agreement and Plan of Merger, dated August 5, 2010, by and among Popular, Inc., AP Carib Holdings, Ltd., Carib Acquisition, Inc. and EVERTEC Group, LLC (incorporated by reference to Exhibit 2.2 of Registration Statement on Form S-4 of EVERTEC Group, LLC, filed on April 14, 2011, File No. 333-173504) |
| | |
2.3 | | Second Amendment to the Agreement and Plan of Merger, dated August 8, 2010, by and among Popular, Inc., AP Carib Holdings, Ltd., Carib Acquisition, Inc. and EVERTEC Group, LLC (incorporated by reference to Exhibit 2.1 of Popular, Inc.’s Current Report on Form 8-K filed on August 12, 2010, File No. 001-34084) |
| | |
2.4 | | Third Amendment to the Agreement and Plan of Merger, dated September 15, 2010, by and among Popular, Inc., AP Carib Holdings, Ltd., Carib Acquisition, Inc. and EVERTEC Group, LLC (incorporated by reference to Exhibit 2.1 of Popular, Inc.’s Current Report on Form 8-K filed on September 21, 2010, File No. 001-34084) |
| | |
2.5 | | Fourth Amendment to the Agreement and Plan of Merger, dated September 30, 2010, by and among Popular, Inc., AP Carib Holdings, Ltd., Carib Acquisition, Inc. and EVERTEC Group, LLC (incorporated by reference to Exhibit 2.1 of Popular, Inc.’s Current Report on Form 8-K filed on October 6, 2010, File No. 001-34084) |
| | |
2.6 | | Letter Agreement re: amendment to Merger Agreement, dated as of July 31, 2013, by and among Popular, Inc., EVERTEC Group, LLC (on behalf of itself and as successor in interest to Carib Acquisition, Inc.) and AP Carib Holdings, Ltd. (incorporated by reference to Exhibit 10.2 of EVERTEC, Inc.’s Current Report on Form 8-K filed on August 6, 2013, File No. 001-35872) |
| | |
3.1 | | | |
| | | |
3.2 | | |
|
| | | |
4.1 | | |
| | |
4.2 | | |
| | |
4.3 | | |
| | |
4.4 | | |
| | |
4.5 | | | |
| | | |
10.14.2* | | | | Credit Agreement, dated April 17, 2013, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, LLC, the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent swingline lender and L/C issuer, J.P. Morgan Securities LLC and Goldman Sachs Bank USA, as joint lead arrangers, J.P. Morgan Securities LLC, Goldman Sachs Bank USA, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc. and Morgan Stanley Senior Funding, Inc., as joint bookrunners, Goldman Sachs Bank USA, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc. and Morgan Stanley Senior Funding, Inc., as co-syndication agents, and Credit Suisse Securities (USA) LLC and UBS Securities LLC, as co-documentation agents (incorporated by reference to Exhibit 10.1 of EVERTEC, Inc.’s Current Report on Form 8-K filed on April 23, 2013, File No. 001-35872)
| | |
|
10.1 | | |
Exhibit
No.
| | Description |
| | |
10.2 | | Amendment No. 1, dated as of May 14, 2013, to the Credit Agreement, dated as of April 17, 2013, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, LLC, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 of EVERTEC, Inc.’s Quarterly Report on Form 10-Q filed on May 15, 2013, File No. 001-35872) |
| | |
10.3
| | Amendment No. 2, dated as of April 14, 2016, to the Credit Agreement, dated as of April 17, 2013, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, LLC, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K of EVERTEC, Inc., filed on April 15, 2016, File No. 001-35872) |
| | |
10.4
| | Amendment No. 3, dated as of November 4, 2016, to the Credit Agreement, dated as of April 17, 2013, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, LLC, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K of EVERTEC, Inc., filed on November 8, 2016, File No. 001-35872) |
| | |
10.5 | | Guarantee Agreement, dated as of April 17, 2013, by and among EVERTEC Group, LLC, the loan parties identified on the signature pages thereof and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 of EVERTEC, Inc.’s Current Report on Form 8-K filed on April 23, 2013, File No. 001-35872) |
| | |
10.6 | | Collateral Agreement, dated as of April 17, 2013, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, LLC and each subsidiary of EVERTEC Group, LLC identified therein and JPMorgan Chase Bank, N.A., as collateral agent (incorporated by reference to Exhibit 10.3 of EVERTEC, Inc.’s Current Report on Form 8-K filed on April 23, 2013, File No. 001-35872) |
| | |
10.7++ | | |
| | |
10.8 | | |
| | |
10.9 | | |
| | |
10.10 | | |
|
| | |
10.11 | | Tax Payment Agreement, dated as of April 17, 2012, by and among EVERTEC, Inc., EVERTEC Intermediate Holdings, LLC and EVERTEC Group, LLC (incorporated by reference to Exhibit 10.2 of Current Report on Form 8-K of EVERTEC Group, LLC, filed on April 18, 2012, File No. 333-173504) |
| | |
10.12 | | Stock Contribution and Exchange Agreement, dated as of April 17, 2012, by and among EVERTEC Intermediate Holdings, LLC, EVERTEC, Inc., and the holders shares of common stock of EVERTEC Intermediate Holdings, LLC (incorporated by reference to Exhibit 10.41 of EVERTEC, Inc.’s Amendment No. 1 to the Registration Statement on Form S-1 filed on March 14, 2013, File No. 333-186487) |
| | |
10.13++ | |
|
| | |
10.14++ | | |
| | |
10.15 | | |
| | |
|
| | |
Exhibit
No.
| | Description |
| | |
10.16 | | | |
| | | |
10.1710.2 | | | |
| | | |
10.1810.3 | | | |
| | | |
10.1910.4 | | | |
| | | |
10.20+10.5# | | Second Amended and Restated Master Service Agreement, dated as of July 1, 2022, among Popular, Inc., Banco Popular de Puerto Rico and EVERTEC Group, LLC and its subsidiaries (incorporated by reference to Exhibit 10.1 to EVERTEC, Inc.’s Current Report on Form 8-K, filed on July 1, 2022, File No. 001-35872) | |
| | | |
10.6# | | | |
| | | |
10.7# | | Credit Agreement, dated as of December 1, 2022, among EVERTEC, Inc., EVERTEC Group, LLC, the lenders and L/C issuers party thereto from time to time, and Truist Bank, as administrative agent, collateral agent, swingline lender and an L/C issuer (incorporated by reference to Exhibit 10.1 to EVERTEC, Inc.’s Current Report on Form 8-K filed on December 5, 2022, File No. 001-35872) | |
| | | |
10.8# | | First Amendment to Credit Agreement, dated as of October 30, 2023 among EVERTEC, Inc., EVERTEC Group, LLC, the lenders thereto from time to time, and Truist Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 of EVERTEC, Inc.’s Current Report on Form 8-K filed on November 2, 2023) | |
| | | |
10.9 | | Collateral Agreement, dated as of December 1, 2022, among EVERTEC, Inc., EVERTEC Group, LLC, each subsidiary loan party identified therein and Truist Bank, as collateral agent (incorporated by reference to Exhibit 10.2 to EVERTEC, Inc.’s Current Report on Form 8-K filed on December 5, 2022, File No. 001-35872) | |
| | | |
10.1 | | Guarantee Agreement, dated as of December 1, 2022, by and among EVERTEC, Inc., EVERTEC Group, LLC, the loan parties identified on the signature pages thereof and Truist Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.3 to EVERTEC, Inc.’s Current Report on Form 8-K filed on December 5, 2022, File No. 001-35872) | |
| | | |
10.11+ | | | |
| | | |
10.2110.12+ | | | |
| | | |
10.13*+ | | | |
| | | |
| | | | | | | | | | | |
10.14+ | | | |
| | | |
10.15+ | | Restricted Stock Unit Award Agreement for grant of restricted stock units to executive officers under the EVERTEC, Inc. 2013 Equity Incentive Plan, dated March 2, 2021, by and between EVERTEC, Inc. and the executive (applicable to Morgan M. Schuessler, Jr., Joaquín A. Castrillo, Paola Pérez,Luis A. Rodríguez, and Miguel Vizcarrondo)(incorporated by reference to Exhibit 10.1 to EVERTEC, Inc.’s Quarterly Report on Form 10-Q filed on April 30, 2021, File No. 001-35872) | |
| | | |
10.16*+ | | | |
| | | |
10.17+ | | | |
| | | |
10.18+ | | | |
| | | |
10.19 | | Stock Purchase Agreement (Contrato de Compraventa de Acciones), dated as of February 24, 2022, by and between EVERTEC Group, LLC and Fondo de Inversiones Privado IG Capital, Inversiones Cuatro R Limitada, Inversiones Rivers Limitada and Inversiones Brela Limitada [English Translation] (incorporated by reference to Exhibit 10.1 of EVERTEC, Inc.’s Amendment No. 1 to the Registration StatementCurrent Report on Form S-18-K filed on March 14, 2013,February 24, 2022, File No. 333-186487)001-35872 | |
| | | |
10.22+10.20+ | | Amended and Restated Employment Agreement, dated as of December 17, 2014,February 24, 2022, by and between EVERTEC Group, LLC and Morgan M. Schuessler, Jr. (incorporated by reference to Exhibit 10.3710.2 to EVERTEC, Inc.’s Current Report on Form 8-K filed on February 24, 2022, File No. 001-35872) | |
| | | |
10.21+ | | Restricted Stock Unit Award Agreement for grant of restricted stock units to executive officers under the EVERTEC, Inc. 2013 Equity Incentive Plan, dated February 25, 2022, by and between EVERTEC, Inc. and the executive (applicable to Morgan M. Schuessler, Jr., Joaquín A. Castrillo, Luis A. Rodríguez, Miguel Vizcarrondo, and Paola Pérez)(incorporated by reference to Exhibit 10.1 to EVERTEC, Inc.’s Quarterly Report on Form 10-Q filed on April 29, 2022, File No. 001-35872) | |
| | | |
10.22*+ | | | |
| | | |
10.23*+ | | | |
| | | |
10.24+ | | Restricted Stock Unit Award Agreement for grant of restricted stock units under the EVERTEC, Inc. 2022 Incentive Award Plan, dated August 5, 2022, by and between EVERTEC, Inc. and the executive (applicable to Luis A. Rodríguez and Paola Pérez)(incorporated by reference to Exhibit 10.25 of EVERTEC, Inc.’s Annual Report on Form 10-K filed on March 2, 2015,February 24, 2023, File No. 001-35872) | |
| | | |
10.23+10.25+ | | |
| | |
10.24+ | | |
| | |
10.25+ | | |
|
| | |
10.26+ | | |
| | |
10.27*+ | | |
| | |
10.28*+ | | |
| | |
10.29+ | |
|
| | |
10.30+ | | |
| | |
10.31*+ | | Form of Restricted Stock Award Agreement for grant of restricted stock to directors under the EVERTEC, Inc. 2013 Equity Incentive Plan, dated as of July 29, 2016, by and between EVERTEC, Inc. and the director (applicable to Frank G. D’Angelo, Thomas W. Swidarski, Jorge Junquera, Alan H. Schumacher, Olga Botero, Brian J. Smith, and Teresita Loubriel) |
| | |
|
| | |
Exhibit
No.
| | Description |
| | |
10.32*+ | | Form of Restricted Stock Unit Award Agreement for grant of restricted stock units to executive officers with Employment Agreements under the EVERTEC, Inc. 2013 Equity2022 Incentive Award Plan, dated February 19, 2016,24, 2023, by and between EVERTEC, Inc. and the executive officer (applicable to Morgan M. Schuessler, Jr., Peter J. S. Smith, Mariana Lischner Goldvarg, Philip E. Steurer, andJoaquín A. Castrillo, Paola Pérez, Luis A. Rodríguez)guez, Diego G. Viglianco, and Miguel Vizcarrondo)(incorporated by reference to Exhibit 10.1 of EVERTEC, Inc.’s Quarterly Report on Form 10-Q filed on April 28, 2023, File No. 001-35872) | |
| | | |
10.33*10.26*+ | | | |
| | | |
10.27*+ | | | |
| | | |
| | | | | | | | | | | |
10.28+ | | |
| | |
10.34+ | | |
| | |
10.35 | | Share Purchase Promise Agreement (Contrato de Promesa de Compraventa de Acciones), dated as of February 17, 2017, by and among EVERTEC Group, LLC, Fondo de Inversión Privado Mater, Inversiones San Bernardo, SpA, Inversiones Supernova SpA, Inversiones y Asesonás Bayona Limitada, Inversiones Hagerdorn y Morales Limitada, Christian Hagedorn Hitschfeld and Inversiones Viaimaca Limitada [English Translation] (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K of EVERTEC, Inc., filed on February 22, 2017, File No. 001-35872) |
| | |
10.36+ | | |
| | |
10.37 | | Share Purchase Agreement (Contrato de Compraventa de Acciones), dated as of July 3, 2017, by and among EVERTEC Group, LLC, EVERTEC Panamá, S.A., Fondo de Inversión Privado Mater, Inversiones San Bernardo SpA, Asesorías e Inversiones Supernova SpA, Inversiones y Asesorías Bayona Limitada, Inversiones Hagerdorn y Morales Limitada, Christian Hagedown Hitschfeld and Inversiones Vaimaca Limitada [English Translation] (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K on July 3, 2017, File No. 001-35872) |
| | |
10.38*+ | | Form of Restricted Stock Award Agreement for grant of restricted stock to directors under the EVERTEC, Inc. 2013 Equity2022 Incentive Award Plan, dated as of June 1, 2017,2023, by and between EVERTEC, Inc. and the director (applicable to Frank G. D’Angelo, Thomas W. Swidarski,Kelly Barrett, Olga Botero, Virginia Gambale, Jorge A. Junquera, Iván Pagán, Aldo J. Polak, Alan H. Schumacher, Olga Botero,and Brian J. Smith,Smith)(incorporated by reference to Exhibit 10.1 to EVERTEC, Inc.’s Quarterly Report on Form 10-Q filed on August 1, 2023, File No. 001-35872) | |
| | | |
10.29# | | | |
| | | |
10.39*10.30*+ | | Form of Restricted Stock Unit Award Agreement for grant of restricted stock units to executive officers with employment agreements under the EVERTEC, Inc. 2013 Equity2022 Incentive Award Plan, dated February 24, 2017,November 1, 2023, by and between EVERTEC, Inc. and the executive (applicable to Morgan M. Schuessler, Jr., Peter J. S. Smith, Luis A. Rodríguez, Guillermo Rospigliosi, and Philip E. Steurer)Daniel Brignardello | |
| | | |
10.40*10.31*+ | | |
| | |
10.41*+ | | Form of Restricted Stock Unit Award Agreement for special retention grant of restricted stock unit for executive officers under the EVERTEC, Inc. 2013 Equity Incentive Plan, dated November 20, 2017, by and between EVERTEC, Inc. and the executive (applicable to Morgan M. Schuessler, Jr., Peter J. S. Smith, Miguel Vizcarrondo, Philip E. Steurer, Carlos Ramírez, Guillermo Rospigliosi, and Luis A. Rodríguez) |
|
| | | |
21.1* | | | |
| | | |
23.1* | | | |
| | | |
31.1* | | | |
| | | |
31.2* | | | |
| | | |
32.1** | | | |
| | | |
32.2** | | |
|
| | | |
97.1* | | | |
| Exhibit
No.
| | Description |
101.INS XBRL* | | Inline XBRL Instance document– the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.INS XBRL** | | Instance document |
| | |
101.SCH XBRL** | | Inline XBRL Taxonomy Extension Schema | |
| | | |
101.CAL XBRL** | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| | | |
101.DEF XBRL** | | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| | | |
101.LAB XBRL** | | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| | | |
101.PRE XBRL** | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| | | |
104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
* Filed herewith.
** Furnished herewith.
+ This exhibit is a management contract or a compensatory plan or arrangement.
| |
++ | Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC. |
# 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.
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. |
| | | |
| | EVERTEC, Inc. |
| | |
Date: February 28, 201829, 2024 | | By: | /s/ Morgan M. Schuessler, Jr. |
| | | | Morgan M. Schuessler, Jr. |
| | | | Chief Executive Officer |
| | | (Principal 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.
We have audited the accompanying consolidated balance sheets of EVERTEC, Inc. and subsidiaries (the “Company”) as of December 31, 20172023, and 2016,2022, 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, 2017,2023, and the related notes and the schedulesschedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172023, and 2016,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2023, in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’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.
Stamp No. E308482E559558
We have served as the Company’s auditor since 2015.
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, 2017,2023, of the Company and our report dated February 28, 2018,29, 2024, expressed an unqualified opinion on those financial statements.
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.
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.
Stamp No. E308483E559557
EVERTEC, Inc. Consolidated Balance Sheets
The accompanying notes are an integral part of these audited consolidated financial statements.
EVERTEC, Inc. Consolidated Statements of Income and Comprehensive Income