Note 6 – Debt and Short-Term Borrowings
Total debt at September 30, 2017March 31, 2021 and December 31, 20162020 follows:
| | | | | | | | | | | | | | |
(In thousands) | | March 31, 2021 | | December 31, 2020 |
2023 Term A Loan bearing interest at a variable interest rate (LIBOR plus applicable margin(1)(2)) | | $ | 178,804 | | | $ | 188,788 | |
2024 Term B Loan bearing interest at a variable interest rate (LIBOR plus applicable margin(1)(3)) | | 295,559 | | | 306,503 | |
| | | | |
Note payable due January 1, 2022(1) | | 703 | | | 1,443 | |
Total debt | | $ | 475,066 | | | $ | 496,734 | |
|
| | | | | | | | |
(Dollar amounts in thousands) | | September 30, 2017 | | December 31, 2016 |
Senior Secured Credit Facility (2018 Term A) due on April 17, 2018 paying interest at a variable interest rate (London InterBank Offered Rate (“LIBOR”) plus applicable margin(1)(3)) | | $ | 27,293 |
| | $ | 28,721 |
|
Senior Secured Credit Facility (2020 Term A) due on January 17, 2020 paying interest at a variable interest rate (LIBOR plus applicable margin(3)(4)) | | 203,656 |
| | 212,661 |
|
Senior Secured Credit Facility (Term B) due on April 17, 2020 paying interest at a variable interest rate (LIBOR plus applicable margin(2)(3)) | | 376,804 |
| | 378,074 |
|
Senior Secured Revolving Credit Facility(6) | | 33,000 |
| | 28,000 |
|
Note Payable due on October 1, 2017(3) | | 389 |
| | 1,524 |
|
Note Payable due on July 31, 2017(3) | | — |
| | 357 |
|
Note Payable due on August 31, 2019(5) | | 584 |
| | 890 |
|
Note Payable due on April 30, 2021(3) | | 447 |
| | 532 |
|
Total debt | | $ | 642,173 |
| | $ | 650,759 |
|
| |
(1) | Applicable margin of 2.25% at September 30, 2017 and December 31, 2016. |
| |
(2) | Subject to a minimum rate (“LIBOR floor”) of 0.75% plus applicable margin of 2.50% at September 30, 2017 and December 31, 2016. |
| |
(3) | Net of unaccreted discount and unamortized debt issue costs, as applicable. |
| |
(4) | Applicable margin of 2.50% at September 30, 2017 and December 31, 2016. |
| |
(5) | Fixed interest rate of 7.50%. |
| |
(6) | Applicable margin of 2.50% at September 30, 2017 and December 31, 2016. |
(1)Net of unaccreted discount and unamortized debt issue costs, as applicable.
Senior (2)Applicable margin of 1.75% at March 31, 2021 and December 31, 2020.
(3)Subject to a minimum rate ("LIBOR floor") of 0% plus applicable margin of 3.50% at March 31, 2021 and December 31, 2020.
Secured Credit Facilities
On April 17, 2013,November 27, 2018, EVERTEC and EVERTEC Group, LLC ("EVERTEC Group") (collectively, the “Borrower”) entered into a credit agreement (the “2013 Credit Agreement”) governingproviding for the senior secured credit facilities, consisting of a $300.0$220.0 million term loan A facility that matures on November 27, 2023 (the “Term“2023 Term A Loan”Loan"), a $400.0$325.0 million term loan B facility that matures on November 27, 2024 (the “Term“2024 Term B Loan”), together with the Term A Loan, the “Senior Secured term loans”) and a $100.0$125.0 million revolving credit facility (the "Revolving Facility"“Revolving Facility”) that matures on November 27, 2023, with a syndicate of lenders and Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent, swingline lender and line of credit issuer (collectively the “2018 Credit Agreement”). During 2016,
The 2018 Credit Agreement requires mandatory repayment of outstanding principal balances based on a percentage of excess cash flow, provided that no such payment shall be due if the resulting amount of the excess cash flow multiplied by the applicable percentage is less than $10 million. On March 8, 2021 and March 5, 2020, in connection with this mandatory repayment clause, the Company entered into two separate amendments torepaid $17.8 million and $17.0 million, respectively, as a result of excess cash flow calculation performed for the 2013 Credit Agreement. In the second quarter of 2016, EVERTEC Group, together with certain other directyears ended December 31, 2020 and indirect subsidiaries of the Company, entered into a second amendment and waiver to the outstanding 2013 Credit Agreement (the “Second Amendment”). In the fourth quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiaries of the Company, entered into a third amendment (the “Third Amendment”) to the 2013 Credit Agreement. The Third Amendment extends the maturity of (a) approximately $219 million of EVERTEC Group’s existing approximately $250 million of Term A loan facility to January 17, 2020 (the “2020 Term A Loan”) and (b) $65 million of EVERTEC Group’s existing $100 million of Revolving Facility to January 17, 2020. The remaining approximately $30 million of Term A loan (the “2018 Term A Loan”) and the $35 million of Revolving Facility that were not extended will remain in place and mature as originally scheduled on April 17, 2018. The Term B Loan will remain in place and mature as originally scheduled on April 17, 2020.2019, respectively.
The unpaid principal balance at September 30, 2017March 31, 2021 of the 2018 Term A Loan, the 20202023 Term A Loan and the 2024 Term B Loan was $27.6 million, $206.2$179.9 million and $383.0$298.3 million, respectively. The additional borrowing capacity forunder our Revolving Facility at March 31, 2021 was $117.0 million. The Company issues letters of credit against the Revolving Facility at September 30, 2017 was $67.0 million.which reduce the additional borrowing capacity of the Revolving Facility.
Notes payablePayable
In December 2014, June 2015 and May 2016,2019, EVERTEC Group entered into 2 non-interest bearing financing agreements amounting to $4.6 million, $1.1 million, and $0.7 million, respectively, and in October 2016 entered into an interest bearing agreement of $1.1$2.4 million to purchase software.software and maintenance. As of September 30, 2017March 31, 2021 and December 31, 2016,2020, the outstanding principal balance of the notes payable iswas $0.8 million and $1.5 million, and $3.4 million, respectively. The current portion of theseThese notes is recorded as part ofare included in accounts payable andin the long-term portion is included in other long-term liabilities.Company's unaudited condensed consolidated balance sheets.
Interest Rate SwapSwaps
As of September 30, 2017,March 31, 2021, the Company has the followingan interest rate swap agreement, convertingentered into in December 2018, which converts a portion of the interest rate exposurepayments on the Company's 2024 Term B Loan from variable to fixed:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Swap Agreement | | Effective date | | Maturity Date | | Notional Amount | | Variable Rate | | Fixed Rate |
| | | | | | | | |
Effective date | | Maturity Date | | Notional Amount | | Variable Rate | | Fixed Rate |
January 20172018 Swap | | April 2020 | | $200 millionNovember 2024 | | $250 million | | 1-month LIBOR | | 1.9225%2.89% |
The Company has accounted for this transactionagreement as a cash flow hedge. 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 September 30, 2017March 31, 2021 and December 31, 2016,2020, the carrying amount of the derivative included on the Company’sCompany's unaudited condensed consolidated balance sheets was $21.0 million and $25.6 million, respectively. The fair value of this derivative is as follows:estimated using Level 2 inputs in the fair value hierarchy on a recurring basis. Refer to Note 8 for disclosure of losses recorded on cash flow hedging activities.
|
| | | | | | | | |
(Dollar amounts in thousands) | | September 30, 2017 | | December 31, 2016 |
Other long-term liabilities | | $ | 1,207 |
| | $ | 1,964 |
|
During the three and nine months ended September 30, 2017,March 31, 2021 and 2020, the Company reclassified losses of $0.4$1.7 million and $1.3$0.2 million, respectively, from accumulated other comprehensive loss into income through interest expense. Based on current LIBOR rates, the Company expects to reclassify $1.4losses of $6.9 million from accumulated other comprehensive loss into income through interest expense over the next 12 months. Refer to Note 7 for tabular disclosure of the fair value of derivatives and to Note 8 for tabular disclosure of gains recorded on cash flow hedging activities.
The cash flow hedge is considered highly effective and no impact on earnings is expected due to hedge ineffectiveness.effective.
Note 7 – Financial Instruments and Fair Value Measurements
Recurring Fair Value Measurements
Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These provisions describe three levels of input that may be used to measure fair value:Debt Securities Available for Sale
Level 1: Inputs are unadjusted, quoted prices for identical assets or liabilities in an active market at the measurement date.
Level 2: Inputs, other than quoted prices included in Level 1, which are observable for the asset or liability through corroboration with market data at the measurement date.
Level 3: Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
The Company uses observable inputs when available. Fair value is based upon quoted market prices when available. If market prices are not available, the Company may employ models that mostly use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. The Company limits valuation adjustments to those deemed necessary to ensure that the financial instrument’s fair value adequately represents the price that would be received or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit quality and liquidity as well as other criteria. The estimated fair value amounts are subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair value could affect the results. The fair value measurement levels are not indicative of risk of investment.
The fair value of financial instrumentsdebt securities is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value estimates are made at a specific point in timeestimated based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions. The following table summarizesobservable inputs, therefore classifying as a Level 2 asset within the fair value measurement by levelhierarchy. The fair value of debt securities at September 30, 2017March 31, 2021 was $3.0 million.
Derivatives Instruments
The fair value of the Company's interest rate swap is estimated using Level 2 inputs under the fair value hierarchy. This derivative was in a liability position with a balance of $21.0 million and $25.6 million as of March 31, 2021 and December 31, 2016 for the liability measured at fair value on a recurring basis:2020, respectively.
|
| | | | | | | | | | | | | | | | |
(Dollar amounts in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
September 30, 2017 | | | | | | | | |
Financial liability: | | | | | | | | |
Interest rate swap | | $ | — |
| | $ | 1,207 |
| | $ | — |
| | $ | 1,207 |
|
December 31, 2016 | | | | | | | | |
Financial liability: | | | | | | | | |
Interest rate swap | | $ | — |
| | $ | 1,964 |
| | $ | — |
| | $ | 1,964 |
|
The following table presents the carrying value, as applicable, and estimated fair valuesvalue for financial instruments at September 30, 2017March 31, 2021 and December 31, 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
(In thousands) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial assets: | | | | | | | | |
Costa Rica government obligations | | $ | 2,968 | | | $ | 2,968 | | | $ | 0 | | | $ | 0 | |
Financial liabilities: | | | | | | | | |
Interest rate swap | | 21,012 | | | 21,012 | | | 25,578 | | | 25,578 | |
2023 Term A Loan | | 178,804 | | | 177,840 | | | 188,788 | | | 186,678 | |
2024 Term B Loan | | 295,559 | | | 297,163 | | | 306,503 | | | 308,339 | |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollar amounts in thousands) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial liabilities: | | | | | | | | |
Interest rate swap | | $ | 1,207 |
| | $ | 1,207 |
| | $ | 1,964 |
| | $ | 1,964 |
|
Senior Secured Term B Loan | | 376,804 |
| | 355,233 |
| | 378,074 |
| | 383,491 |
|
2018 Term A Loan | | 27,293 |
| | 27,450 |
| | 28,721 |
| | 29,268 |
|
2020 Term A Loan | | 203,656 |
| | 204,747 |
| | 212,661 |
| | 213,872 |
|
The fair valuevalues of the term loans at September 30, 2017March 31, 2021 and December 31, 20162020 were obtained using the prices provided by third party service providers. Their pricing is based on various inputs such as:as market quotes, recent trading activity in a non-active market or imputed prices. These inputs are considered Level 3 inputs under the fair value hierarchy. Also, the pricing may include the use of an algorithm that could take into account movementmovements in the general high yield market, among other variants. The unpaid principal balance of the 2018 Term A Loan as of September 30, 2017 and December 31, 2016 was $27.6 million and $29.5 million, respectively, and the unpaid principal balance of the 2020 Term A Loan was $206.2 million and $216.0 million for the same periods, respectively. The unpaid principal balance of the Term B Loan was $383.0 million and $386.0 million as of September 30, 2017 and December 31, 2016, respectively.
The Senior Securedsecured term loans which are not measured at fair value in the balance sheets, would be categorized as Level 3 in the fair value hierarchy.sheets.
Note 8 – Equity
Accumulated Other Comprehensive Loss
The following table provides a summary of the changes in the balances of accumulated other comprehensive loss for the ninethree months period ended September 30, 2017:March 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Total |
Balance - December 31, 2020, net of tax | | $ | (24,842) | | | $ | (23,412) | | | $ | (48,254) | |
Other comprehensive (loss) income before reclassifications | | (2,613) | | | 2,463 | | | (150) | |
Effective portion reclassified to net income | | 0 | | | 1,726 | | | 1,726 | |
Balance - March 31, 2021, net of tax | | $ | (27,455) | | | $ | (19,223) | | | $ | (46,678) | |
|
| | | | | | | | | | | | |
(Dollar amounts in thousands) | | Foreign Currency Translation Adjustments | | Cash Flow Hedge | | Total |
Balance - December 31, 2016 | | $ | (10,427 | ) | | $ | (1,964 | ) | | $ | (12,391 | ) |
Other comprehensive loss before reclassifications | | (518 | ) | | (514 | ) | | (1,032 | ) |
Effective portion reclassified to Net Income | | — |
| | 1,271 |
| | 1,271 |
|
Balance - September 30, 2017, net of tax | | $ | (10,945 | ) | | $ | (1,207 | ) | | $ | (12,152 | ) |
Note 9 – Share-based Compensation
Long-term Incentive Plan ("LTIP")
InDuring the first quarter of 2015, 2016three months ended March 31, 2019, 2020 and 2017,2021, the Compensation Committee of the Company's Board of Directors ("Board") approved grants of restricted stock units (“RSUs”) to executives and certain employees pursuant to the 20152019 LTIP, 20162020 LTIP and 20172021 LTIP, respectively, all under the terms of ourthe Company's 2013 Equity Incentive Plan. Under the LTIPs, the Company granted restricted stock unitsRSUs to eligible participants as time-based awards and/or performance-based awards.
The vesting of the RSUs is dependent upon service market, and/or performance conditions as defined in the grants. Employees that received time-based awards with service conditions are entitled to receive a specific number of shares of the Company’s common stock on the vesting date if the employee is providingprovides services to the Company onthrough the vesting date. Time-based awards vest over a period of three years in substantially equal installments commencing on the start of the fiscal year during which the RSUs were granted or on the grant date and ending on January 1February 22 of each year for the 20152019 LTIP, on February 1927 of each year for the 20162020 LTIP, and on February 24March 2 of each year for the 20172021 LTIP.
Employees that received awards with market conditions under the 2015 and 2016 LTIPs are entitled to receive a specific number of shares of the Company’s common stock on the vesting date if the Company’s total shareholder return (“TSR”) target relative to a specified group of industry peer companies is achieved. Employees that received awards with performance conditions are entitled to receive a specific number of shares of the Company’s common stock on the vesting date if the Cumulative Annual Growth Rate (“CAGR”) of Diluted EPS target over three years is achieved for the 2015 LTIP. For the 2016 LTIP, the CAGR EPS RSUs was based on the Company’s actual one-year diluted EPS measured over the period commencing on January 1, 2016 and ending on December 31, 2016, relative to the goals set by the Compensation Committee. The shares earned according to the plan are further subject to a two-year service vesting period. For the performance-based awards under the 20172019 LTIP, 2020 LTIP, and 2021 LTIP, the Compensation Committee established adjusted earnings before income taxes, depreciation and amortization ("Adjusted EBITDAEBITDA") as the primary performance measure while maintaining focus on total shareholder return through the use of a market-based TSRtotal shareholder return ("TSR") performance modifier. The Adjusted EBITDA measure is based on annual targets and can produce a payout between 0% and 200%. The TSR modifier adjusts the shares earned based on the core Adjusted EBITDA performance upwards or downwards (+/- 25%) based on the Company’s relative TSR at the end of the three-yearthree-year performance period as compared to the companies in the Russell 2000 Index. The Adjusted EBITDA performance measure will be calculated for the one-yearone-year period commencing on January 1 2017of the year of the grant and ending on December 31 2017,of the same year, relative to the goals set by the Compensation Committee for this same period. The shares earned will be subject to a further two-yearan additional two-year service vesting period.
Performanceperiod and market-based awardswill vest at the end of the performance period that commenced on January 1, 2015February 22, 2022 for the 20152019 LTIP, February 19, 201627, 2023 for the 20162020 LTIP, and February 24, 2017March 2, 2024 for the 20172021 LTIP. The periods end respectively on January 1, 2018 forUnless otherwise specified in the 2015 LTIP, February 19, 2019 for the 2016 LTIP and February 24, 2020 for the 2017 LTIP. Awardsaward agreement, or in an employment agreement, awards are forfeited if the employee voluntarily ceases to be employed by the Company prior to vesting.
The following table summarizes the stock options activity for the nine months ended September 30, 2017:
|
| | | | | | | |
| | Shares | | Weighted-Average exercise price |
Outstanding December 31, 2016 | | 20,000 |
| | $ | 6.04 |
|
Outstanding September 30, 2017 | | — |
| | $ | — |
|
Exercisable at September 30, 2017 | | — |
| | $ | — |
|
Management uses the fair value method of recording stock-based compensation as described in the guidance for stock compensation in ASC topic 718.
The following table summarizes nonvested restricted shares and RSUs activity for the ninethree months ended September 30, 2017:March 31, 2021:
| | | | | | | | | | | | | | |
Nonvested restricted shares and RSUs | | Shares | | Weighted-average grant date fair value |
Nonvested at December 31, 2020 | | 1,093,515 | | | $ | 27.88 | |
Granted | | 659,598 | | | 31.10 | |
Vested | | (647,491) | | | 20.49 | |
Forfeited | | (293) | | | 22.90 | |
Nonvested at March 31, 2021 | | 1,105,329 | | | $ | 34.14 | |
|
| | | | | | | |
Nonvested restricted shares and RSUs | | Shares | | Weighted-average grant date fair value |
Nonvested at December 31, 2016 | | 1,212,364 |
| | $ | 14.88 |
|
Forfeited | | 139,017 |
| | 16.05 |
|
Vested | | 310,005 |
| | 15.26 |
|
Granted | | 699,266 |
| | 17.85 |
|
Nonvested at September 30, 2017 | | 1,462,608 |
| | $ | 16.10 |
|
For the three and nine months ended September 30, 2017 and 2016,March 31, 2021, the Company recognized $2.4 million and $6.6 million, and $1.2 million and $3.7$3.4 million of share-based compensation expense, respectively.compared with $3.5 million for the corresponding period in 2020.
As of September 30, 2017,March 31, 2021, the maximum unrecognized cost for restricted stock and RSU’sRSUs was $14.3$29.4 million. The cost is expected to be recognized over a weighted average period of 1.882.3 years.
Note 10 – Revenues
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into primary geographical markets, nature of the products and services, and timing of transfer of goods and services. The Company's operating segments are determined by the nature of the products and services the Company provides and the primary geographical markets in which the Company operates. Revenue disaggregated by segment is discussed in Note 16, Segment Information.
In the following tables, revenue for each segment, excluding intersegment revenues, is disaggregated by timing of revenue recognition for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Three months ended March 31, 2021 |
(In thousands) | Payment Services - Puerto Rico & Caribbean | | Payment Services - Latin America | | Merchant Acquiring, net | | Business Solutions | | Total |
Timing of revenue recognition | | | | | | | | | |
Products and services transferred at a point in time | $ | 78 | | | $ | 676 | | | $ | 0 | | | $ | 2,498 | | | $ | 3,252 | |
Products and services transferred over time | 24,782 | | | 22,621 | | | 30,867 | | | 58,006 | | | 136,276 | |
| $ | 24,860 | | | $ | 23,297 | | | $ | 30,867 | | | $ | 60,504 | | | $ | 139,528 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Three months ended March 31, 2020 |
(In thousands) | Payment Services - Puerto Rico & Caribbean | | Payment Services - Latin America | | Merchant Acquiring, net | | Business Solutions | | Total |
Timing of revenue recognition | | | | | | | | | |
Products and services transferred at a point in time | $ | 5 | | | $ | 431 | | | $ | 0 | | | $ | 297 | | | $ | 733 | |
Products and services transferred over time | 20,633 | | | 19,809 | | | 25,121 | | | 55,646 | | | 121,209 | |
| $ | 20,638 | | | $ | 20,240 | | | $ | 25,121 | | | $ | 55,943 | | | $ | 121,942 | |
Contract Balances
The following table provides information about contract assets from contracts with customers.
| | | | | | | | | | | |
(In thousands) | March 31, 2021 | | December 31, 2020 |
Balance at beginning of period | $ | 2,796 | | | $ | 1,191 | |
Services transferred to customers | 1,140 | | | 3,934 | |
Transfers to accounts receivable | (1,318) | | | (2,329) | |
Balance at end of period | $ | 2,618 | | | $ | 2,796 | |
| | | |
| | | |
The current portion of contract assets is recorded as part of prepaid expenses and other assets, and the long-term portion is included in other long-term assets in the unaudited condensed consolidated balance sheets.
Accounts receivable, net at March 31, 2021 amounted to $99.7 million. Contract liability and contract liability - long term at March 31, 2021 amounted to $25.3 million and $31.8 million, respectively, and may arise when consideration is received or due in advance from customers prior to performance. The contract liability is mainly comprised of upfront fees for implementation or set up activities, including fees charged in pre-production periods in connection with hosting services. Contract liabilities may also arise when consideration is received or due in advance from customers prior to performance. During the three months ended March 31, 2021, the Company recognized revenue of $8.2 million that was included in the contract liability at
December 31, 2020. During the three months ended March 31, 2020, the Company recognized revenue of $5.2 million that was included in the contract liability at December 31, 2019.
Transaction price allocated to the remaining performance obligations
The estimated aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially satisfied at March 31, 2021 is $317.1 million. This amount primarily consists of professional service fees for implementation or set up activities related to managed services and maintenance services, typically recognized over the life of the contract, which varies from 2 to 5 years. It also includes professional service fees for customizations or development of on-premise licensing agreements, which are recognized over time based on inputs relative to the total expected inputs to satisfy a performance obligation.
Note 11 – Current Expected Credit Losses
Allowance for Current Expected Credit Losses
Trade receivables from contracts with customers are financial assets analyzed by the Company under the expected credit loss model. To measure expected credit losses, trade receivables are grouped based on shared risk characteristics (i.e., the relevant industry sector and customer's geographical location) and days past due (i.e., delinquency status), while considering the following:
•Customers in the same geographical location share similar risk characteristics associated with the macroeconomic environment of their country.
•The Company has two main industry sectors: private and governmental. The private pool is comprised mainly of leading financial institutions, merchants and corporations, while the governmental pool is comprised of government agencies. The governmental customers possess different risk characteristics than private customers because although all invoices are due 30 days after issuance, governmental customers usually pay within 60 to 90 days after issuance (i.e., approximately 30 to 60 more days than private customers).
•The expected credit loss rate is likely to increase as receivables move to older aging buckets. The Company used the following aging categories to estimate the risk of delinquency status: (i) 0 days past due; (ii) 1-30 days past due; (iii) 31-60 days past due; (iv) 61-90 days past due; and (v) over 90 days past due.
The credit losses of the Company’s trade receivables have been low historically and most balances are collected within one year. Therefore, the Company determined that the expected loss rates should be calculated using the historical loss rates adjusted by macroeconomic factors. The historical rates are calculated for each of the aging categories used for pooling trade receivables. To determine the collected portion of each bucket, the collection time of each trade receivable is identified, to estimate the proportion of outstanding balances per aging bucket that ultimately will not be collected. This is used to determine the expectation of losses based on the history of uncollected trade receivables once the specific past due period is surpassed. The historical rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of customers to settle the receivables by applying a country risk premium as the forward-looking macroeconomic factor. Specific reserves are established for certain customers for which collection is doubtful.
Rollforward of the Allowance for Expected Current Credit Losses
The following table provides information about the allowance for expected current credit losses on trade receivables.
| | | | | | | | | | | | | | |
| | | | |
(In thousands) | | March 31, 2021 | | December 31, 2020 |
Balance at beginning of period | | $ | 2,401 | | | $ | 3,460 | |
Current period (release) provision for expected credit losses | | (27) | | | 832 | |
Write-offs | | (74) | | | (1,894) | |
Recoveries of amounts previously written-off | | 0 | | | 3 | |
Balance at end of period | | $ | 2,300 | | | $ | 2,401 | |
| | | | |
The Company does not have a delinquency threshold for writing-off trade receivables. The Company has a formal process for the review and approval of write-offs.
Impairment losses on trade receivables are presented as net impairment losses within cost of revenue, exclusive of depreciation and amortization in the unaudited condensed consolidated statements of income and comprehensive income. Subsequent
recoveries of amounts previously written-off, when applicable are credited against the allowance for expected current credit losses within accounts receivable, net on the unaudited condensed consolidated balance sheets.
Note 12 – Income Tax
The components of income tax expense (benefit) for the three and nine months ended September 30, 2017March 31, 2021 and 2016,2020, respectively, consisted of the following:
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
(In thousands) | | 2021 | | 2020 | | | | |
| | | | | | | | |
Current tax provision | | $ | 5,598 | | | $ | 5,598 | | | | | |
Deferred tax benefit | | (890) | | | (1,080) | | | | | |
Income tax expense | | $ | 4,708 | | | $ | 4,518 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollar amounts in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Current tax (benefit) provision | | $ | (301 | ) | | $ | 2,560 |
| | $ | 7,586 |
| | $ | 8,774 |
|
Deferred tax benefit | | (4,539 | ) | | (921 | ) | | (6,338 | ) | | (2,458 | ) |
Income tax (benefit) expense | | $ | (4,840 | ) | | $ | 1,639 |
| | $ | 1,248 |
| | $ | 6,316 |
|
The Company conducts operations in Puerto Rico, the United States, and certain countries in Latin America. As a result, the income tax expense includes the effect of taxes paid to the government of Puerto Rico government as well as foreign jurisdictions. The following table presents the components of income tax expense for the three and nine months ended September 30, 2017March 31, 2021 and 2016, respectively,2020, and its segregation based on location of operations:
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
(In thousands) | | 2021 | | 2020 | | | | |
| | | | | | | | |
Current tax provision | | | | | | | | |
Puerto Rico | | $ | 1,604 | | | $ | 1,679 | | | | | |
United States | | 30 | | | 155 | | | | | |
Foreign countries | | 3,964 | | | 3,764 | | | | | |
Total current tax provision | | $ | 5,598 | | | $ | 5,598 | | | | | |
Deferred tax benefit | | | | | | | | |
Puerto Rico | | $ | (294) | | | $ | (88) | | | | | |
United States | | (429) | | | (25) | | | | | |
Foreign countries | | (167) | | | (967) | | | | | |
Total deferred tax benefit | | $ | (890) | | | $ | (1,080) | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollar amounts in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Current tax (benefit) provision | | | | | | | | |
Puerto Rico | | $ | (1,440 | ) | | $ | 1,150 |
| | $ | 3,420 |
| | $ | 4,711 |
|
United States | | (10 | ) | | 86 |
| | 190 |
| | 322 |
|
Foreign countries | | 1,149 |
| | 1,324 |
| | 3,976 |
| | 3,741 |
|
Total current tax (benefit) provision | | $ | (301 | ) | | $ | 2,560 |
| | $ | 7,586 |
| | $ | 8,774 |
|
Deferred tax benefit | | | | | | | | |
Puerto Rico | | $ | (4,098 | ) | | $ | (558 | ) | | $ | (5,150 | ) | | $ | (1,468 | ) |
United States | | (107 | ) | | (93 | ) | | (190 | ) | | (144 | ) |
Foreign countries | | (334 | ) | | (270 | ) | | (998 | ) | | (846 | ) |
Total deferred tax benefit | | $ | (4,539 | ) | | $ | (921 | ) | | $ | (6,338 | ) | | $ | (2,458 | ) |
Taxes payable to foreign countries by EVERTEC’s subsidiaries will be paid by such subsidiary and the corresponding liability and expense will be presented in EVERTEC’s consolidated financial statements.
As of September 30, 2017,March 31, 2021, the Company has $32.1$84.3 million of unremitted earnings from foreign subsidiaries.subsidiaries, compared to $80.2 million as of December 31, 2020. The Company has not recognized a deferred tax liability on undistributed earnings for the Company’s foreign subsidiaries because these earnings are intended to be indefinitely reinvested.
On June 27, 2017 the Company received a one-time repatriation of cash from a foreign subsidiary of $8.9 million to partially fund the acquisition of PayGroup. This distribution was subject to withholding at source of 15% in the country of origin and accordingly the Company recognized current income tax expense of $1.3 million. No income tax expense was recorded in the country that received the distribution because of the availability to credit foreign taxes paid both at the corporate level and the withholding at source on the distribution. The Company believes that this one time repatriation of existing funds from a foreign subsidiary does not prohibit applying the indefinite reinvestment exception to the remaining undistributed earnings because Management has sufficient evidence of specific plans to continue reinvesting the foreign subsidiary’s undistributed earnings.
As of September 30, 2017,March 31, 2021, the gross deferred tax asset amounted to $7.1$21.8 million and the gross deferred tax liability amounted to $20.1$17.3 million, compared to $5.0$22.0 million and $19.2$19.0 million, respectively, as of December 31, 2016.2020. As of March 31, 2021, there is a valuation allowance against the gross deferred tax asset of approximately $1.0 million.
During the third quarter of 2017, the Company decreased a previously recorded potential liability for uncertain tax positions by $4.5 million, as a result of the expiration of the statute of limitation.
Pursuant to the applicable provision of the PR Code, net operating losses (“NOL”) can be carried forward for a period of seven, ten or twelve taxable years, depending on the taxable year generated. Act 72 enacted on May 29, 2015, limited the amount of a NOL deduction to 80% for regular tax and 70% for alternative minimum tax. At September 30, 2017, the Company has $1.5 million in NOL carryforwards for tax purposes available to offset future taxable income.
Income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate to the income before income taxes as a result of the following:
The reconciliation of the numerator and denominator of the income per common share is as follows:
(1)Potential common shares consist of common stock issuable under RSUs awards using the treasury stock method.
| |
(1) | Potential common shares consist of common stock issuable under the assumed exercise of stock options and restricted stock awards using the treasury stock method. |
On February 17, 2017,18, 2021, the Company's Board declared a quarterly cash dividenddividends of $0.10$0.05 per share of common stock, which was paid on March 20, 201726, 2021, to stockholders of record as of the close of business on March 1, 2017. On April 27, 2017, the Board declared a quarterly cash dividend of $0.10 per share of common stock, which was paid on June 9, 2017 to stockholders of record as of the close of business on May 8, 2017. On July 25, 2017, the Board declared a quarterly cash dividend of $0.10 per share of common stock, which was paid on September 8, 2017 to stockholders of record as of the close of business on August 7, 2017.2021.
Note 1214 – Commitments and Contingencies
Certain lease agreements contain provisions for future rent increases. The total amount of rental payments due over the lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is recorded as a deferred rent obligation.
Rent expense of office facilities and real estate for the three and nine months ended September 30, 2017 and 2016 amounted $2.1 million and $6.1 million, and $2.2 million and $6.2 million, respectively. Rent expense for telecommunications and other equipment for the three and nine months ended September 30, 2017 and 2016 amounted to $1.5 million and $4.5 million, and $1.5 million and $4.6 million, respectively.
EVERTEC is a defendant in a number of legal proceedings arising in the ordinary course of business. Based on the opinion of legal counsel and other factors, Managementmanagement believes that the final disposition of these matters will not have a material adverse effect on the business, results of operations, financial condition, or cash flows of the Company. The Company has identified certain claims as a result of which a loss may be incurred, but in the aggregate the loss would be insignificant. For other claims regarding proceedings that are in an initial phase, the Company is unable to estimate the range of possible loss, if any, but at this time believes that any loss related to such claims will not be material.
Note 1315 – Related Party Transactions
The following table presents the Company’s transactions with related parties for the three and nine months ended September 30, 2017March 31, 2021 and 2016:2020:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollar amounts in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Total revenues (1)(2) | | $ | 44,090 |
| | $ | 43,022 |
| | $ | 134,045 |
| | $ | 129,786 |
|
Cost of revenues | | $ | 1,775 |
| | $ | 381 |
| | $ | 2,610 |
| | $ | 1,179 |
|
Rent and other fees | | $ | 1,962 |
| | $ | 2,088 |
| | $ | 5,810 |
| | $ | 6,051 |
|
Interest earned from affiliate | | | | | | | | |
Interest income | | $ | 41 |
| | $ | 51 |
| | $ | 119 |
| | $ | 165 |
|
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
(In thousands) | | 2021 | | 2020 | | | | |
Total revenues (1)(2) | | $ | 60,369 | | | $ | 54,572 | | | | | |
Cost of revenues | | $ | 1,049 | | | $ | 618 | | | | | |
Operating lease cost and other fees | | $ | 1,915 | | | $ | 1,981 | | | | | |
Interest earned from affiliate | | | | | | | | |
Interest income | | $ | 108 | | | $ | 89 | | | | | |
| |
(1) | Total revenues from Popular as a percentage of revenues were 42%, 45%, 43% and 45% for the periods presented above, respectively. |
| |
(2) | Includes revenues generated from investee accounted for under the equity method of $0.4 million and $1.5 million, and $0.5 million and $1.6 million for the three and nine months ended September 30, 2017, and 2016, respectively. |
At September 30, 2017(1)Popular revenues as a percentage of total revenues were 44% and 45%, respectively, for each of the periods presented above.
(2)Includes revenues generated from investee accounted for under the equity method of $0.1 million and $0.3 million, respectively, for each of the periods presented above.
As of March 31, 2021 and December 31, 2016,2020, EVERTEC had the following balances arising from transactions with related parties:
| | | | | | | | | | | | | | |
(In thousands) | | March 31, 2021 | | December 31, 2020 |
Cash and restricted cash deposits in affiliated bank | | $ | 78,712 | | | $ | 126,189 | |
Other due to/from affiliate | | | | |
Accounts receivable | | $ | 35,324 | | | $ | 28,419 | |
Prepaid expenses and other assets | | $ | 4,125 | | | $ | 4,678 | |
Operating lease right-of-use assets | | $ | 16,196 | | | $ | 17,099 | |
| | | | |
Accounts payable | | $ | 2,427 | | | $ | 4,607 | |
Contract liabilities | | $ | 36,802 | | | $ | 35,807 | |
Operating lease liabilities | | $ | 16,633 | | | $ | 17,781 | |
| | | | |
|
| | | | | | | | |
(Dollar amounts in thousands) | | September 30, 2017 | | December 31, 2016 |
Cash and restricted cash deposits in affiliated bank | | $ | 21,810 |
| | $ | 15,918 |
|
Other due/to from affiliate | | | | |
Accounts receivable | | $ | 18,540 |
| | $ | 21,461 |
|
Prepaid expenses and other assets | | $ | 647 |
| | $ | 699 |
|
Other long-term assets | | $ | 343 |
| | $ | 554 |
|
Accounts payable | | $ | 4,551 |
| | $ | 6,300 |
|
Unearned income | | $ | 17,657 |
| | $ | 14,383 |
|
Note 1416 – Segment Information
During the periods presented, the Company operated its business in the segments described below. As a result of the acquisition of PayGroup discussed in Note 3, the Chief Operating Decision Maker (“CODM”) continues to evaluate the current structure of the Company and the information that he regularly reviews for purposes of allocating resources and assessing performance. The Company’s reportable segments will be re-evaluated for any changes that occur as a result of the CODM's evaluation.
The Company operates in three4 business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America (collectively "Payment Services segments"), Merchant Acquiring, Payment Processing and Business Solutions.
The Company’sPayment 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 point of sale ("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 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 ATH debit network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed and other processing services. For EBT services, revenues are primarily derived from the number of beneficiaries on file.
The Payment Services - Latin America segment revenues consist of revenues related to providing access to the ATH 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 network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed, and other processing services.
The Merchant Acquiring segment consists of revenues from services that allow merchants to accept electronic methods of payment. In the Merchant Acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees 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 segmentsprocess 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 organizedderived in part from a recurrent fixed fee and from fees based on the naturenumber of accounts on file (i.e. savings or checking accounts, loans, etc.) or computer resources utilized. Revenues from other processing services within the Business Solutions segment are generally volume-based and depend on factors such as the number of accounts processed. In addition, EVERTEC is a reseller of hardware and software products and services.these resale transactions are generally non-recurring.
In addition to the 4 operating segments described above, management identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These areas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these areas are aggregated and presented within the “Corporate and Other” category in the financial statements alongside the operating segments. The CODMCorporate and Other category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:
•marketing,
•corporate finance and accounting,
•human resources,
•legal,
•risk management functions,
•internal audit,
•corporate debt related costs,
•non-operating depreciation and amortization expenses generated as a result of 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 level
The Chief Operating Decision Maker ("CODM") reviews their individualthe 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. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with ASC Topic 280, Segment Reporting, given that it is reported to the CODM for purposes of allocating resources. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by revenues and Adjusted EBITDA. As such, segment assets are not disclosed in the notes to the accompanying unaudited condensed consolidated financial statements.
The following tables set forth information about the Company’s operations by its three4 business segments for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | |
(Dollar amounts in thousands) | | Merchant Acquiring, net | | Payment Processing | | Business Solutions | | Other | | Total |
Three months ended September 30, 2017 | | | | | | | | | | |
Revenues | | $ | 21,555 |
| | $ | 41,980 |
| | $ | 46,952 |
| | $ | (7,762 | ) | (1) | $ | 102,725 |
|
(Loss) income from operations | | (656 | ) | | 8,094 |
| | 8,506 |
| | (7,136 | ) | (2) | 8,808 |
|
Three months ended September 30, 2016 | | | | | | | | | | |
Revenues | | $ | 21,970 |
| | $ | 35,969 |
| | $ | 44,913 |
| | $ | (8,385 | ) | (1) | $ | 94,467 |
|
Income from operations | | 6,728 |
| | 12,803 |
| | 14,930 |
| | (7,454 | ) | (2) | 27,007 |
|
|
| | | | | | | | | | | | | | | | | | | | |
(Dollar amounts in thousands) | | Merchant Acquiring, net | | Payment Processing | | Business Solutions | | Other | | Total |
Nine months ended September 30, 2017 | | | | | | | | | | |
Revenues | | $ | 67,546 |
| | $ | 120,189 |
| | $ | 144,943 |
| | $ | (25,162 | ) | (1) | $ | 307,516 |
|
Income from operations | | 13,444 |
| | 41,893 |
| | 35,678 |
| | (21,621 | ) | (2) | 69,394 |
|
Nine months ended September 30, 2016 | | | | | | | | | | |
Revenues | | $ | 68,137 |
| | $ | 106,797 |
| | $ | 136,765 |
| | $ | (24,081 | ) | (1) | $ | 287,618 |
|
Income from operations | | 23,940 |
| | 39,493 |
| | 43,299 |
| | (24,967 | ) | (2) | 81,765 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2021 |
(In thousands) | Payment Services - Puerto Rico & Caribbean | | Payment Services - Latin America | | Merchant Acquiring, net | | Business Solutions | | Corporate and Other (1) | | Total |
| | | | | | | | | | | |
Revenues | $ | 36,264 | | | $ | 25,014 | | | $ | 30,867 | | | $ | 60,611 | | | $ | (13,228) | | | $ | 139,528 | |
Operating costs and expenses | 20,489 | | | 19,846 | | | 16,466 | | | 36,689 | | | 1,039 | | | 94,529 | |
Depreciation and amortization | 3,942 | | | 2,934 | | | 654 | | | 4,794 | | | 6,299 | | | 18,623 | |
Non-operating income (expenses) | 185 | | | 1,108 | | | 231 | | | 553 | | | (1,247) | | | 830 | |
EBITDA | 19,902 | | | 9,210 | | | 15,286 | | | 29,269 | | | (9,215) | | | 64,452 | |
Compensation and benefits (2) | 241 | | | 809 | | | 231 | | | 363 | | | 1,860 | | | 3,504 | |
Transaction, refinancing and other fees (3) | 660 | | | 0 | | | 0 | | | 0 | | | 273 | | | 933 | |
Adjusted EBITDA | $ | 20,803 | | | $ | 10,019 | | | $ | 15,517 | | | $ | 29,632 | | | $ | (7,082) | | | $ | 68,889 | |
(1)Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $9.7 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring, intercompany software developments and transaction processing of $2.3 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean, and transaction processing and monitoring fees of $1.2 million from Payment Services - Puerto Rico & Caribbean to Payment Services - Latin America. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $3.5 million.
(2)Primarily represents share-based compensation.
(3)Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A and a software impairment charge.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 |
(In thousands) | Payment Services - Puerto Rico & Caribbean | | Payment Services - Latin America | | Merchant Acquiring, net | | Business Solutions | | Corporate and Other (1) | | Total |
| | | | | | | | | | | |
Revenues | $ | 29,887 | | | $ | 21,640 | | | $ | 25,121 | | | $ | 55,943 | | | $ | (10,649) | | | $ | 121,942 | |
Operating costs and expenses | 17,406 | | | 17,651 | | | 14,706 | | | 33,617 | | | 5,799 | | | 89,179 | |
Depreciation and amortization | 3,249 | | | 2,757 | | | 499 | | | 4,296 | | | 6,994 | | | 17,795 | |
Non-operating income (expenses) | 113 | | | 754 | | | 154 | | | 387 | | | (962) | | | 446 | |
EBITDA | 15,843 | | | 7,500 | | | 11,068 | | | 27,009 | | | (10,416) | | | 51,004 | |
Compensation and benefits (2) | 231 | | | 742 | | | 216 | | | 436 | | | 1,875 | | | 3,500 | |
Transaction, refinancing and other fees (3) | 0 | | | 0 | | | 0 | | | 0 | | | 1,786 | | | 1,786 | |
Adjusted EBITDA | $ | 16,074 | | | $ | 8,242 | | | $ | 11,284 | | | $ | 27,445 | | | $ | (6,755) | | | $ | 56,290 | |
| |
(1) | Represents the elimination of intersegment revenues for services provided by the Payment Processing segment to the Merchant Acquiring segment for the cost of transaction processing on merchant acquiring transactions, and other miscellaneous intersegment revenues. |
| |
(2) | Primarily represents non-operating depreciation and amortization expenses generated as a result of the Merger and certain non-recurring fees and expenses. |
(1)Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $9.0 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $1.6 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $5.1 million.
(2)Primarily represents share-based compensation.
(3)Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A.
The reconciliation of income from operationsEBITDA to consolidated net income for the three and nine months ended September 30, 2017 and 2016 is as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
(In thousands) | 2021 | | 2020 | | | | |
Total EBITDA | $ | 64,452 | | | $ | 51,004 | | | | | |
Less: | | | | | | | |
Income tax expense | 4,708 | | | 4,518 | | | | | |
Interest expense, net | 5,517 | | | 6,416 | | | | | |
Depreciation and amortization | 18,623 | | | 17,795 | | | | | |
Net income | $ | 35,604 | | | $ | 22,275 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollar amounts in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Segment income from operations | | | | | | | | |
Merchant Acquiring | | $ | (656 | ) | | $ | 6,728 |
| | $ | 13,444 |
| | $ | 23,940 |
|
Payment Processing | | 8,094 |
| | 12,803 |
| | 41,893 |
| | 39,493 |
|
Business Solutions | | 8,506 |
| | 14,930 |
| | 35,678 |
| | 43,299 |
|
Total segment income from operations | | 15,944 |
| | 34,461 |
| | 91,015 |
| | 106,732 |
|
Merger related depreciation and amortization and other unallocated expenses (1) | | (7,136 | ) | | (7,454 | ) | | (21,621 | ) | | (24,967 | ) |
Income from operations | | 8,808 |
| | 27,007 |
| | 69,394 |
| | 81,765 |
|
Interest expense, net | | (7,853 | ) | | (6,189 | ) | | (21,894 | ) | | (18,026 | ) |
Earnings (losses) of equity method investment | | 155 |
| | 43 |
| | 413 |
| | (58 | ) |
Other income | | 192 |
| | 489 |
| | 2,829 |
| | 1,747 |
|
Income tax expense | | 4,840 |
| | (1,639 | ) | | (1,248 | ) | | (6,316 | ) |
Net income | | $ | 6,142 |
| | $ | 19,711 |
| | $ | 49,494 |
| | $ | 59,112 |
|
| |
(1) | Primarily represents non-operating depreciation and amortization expenses generated as a result of the Merger and certain non-recurring fees and expenses. |
Note 1517 – Subsequent Events
On November 2, 2017,April 22, 2021, the Board declared a regular quarterly cash dividend of $0.05 per share on the Company’s outstanding shares of common stock. The dividend will be paid on June 4, 2021 to stockholders of record as of the close of business on May 3, 2021. The Board anticipates declaring this dividend in future quarters on a regular basis; however future declarations of Directors agreeddividends are subject to extend the Company's current stock repurchase program to December 31, 2020.Board’s approval and may be adjusted as business needs or market conditions change.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (“MD&A”) covers: (i) the results of operations for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 and (ii) the financial condition as of September 30, 2017.March 31, 2021. You should read the following discussion and analysis in conjunction with the audited consolidated financial statements (the “Audited Consolidated Financial Statements”) and related notes for the fiscal year ended December 31, 2016,2020, included in the Company’s Annual Report on Form 10-K and with the unaudited condensed consolidated condensed financial statements (the “Unaudited Condensed Consolidated 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.
Except as otherwise indicated or unless the context otherwise requires, (a) the terms “EVERTEC,” “we,” “us,” “our,” “our Company” and “the Company” refer to EVERTEC, Inc. and its subsidiaries on a consolidated basis, (b) the term “Holdings” refers to EVERTEC Intermediate Holdings, LLC, but not any of its subsidiaries and (c) the term “EVERTEC Group” refers to EVERTEC Group, LLC and its predecessor entities and their subsidiaries on a consolidated basis, including the operations of its predecessor entities prior to the Merger (as defined below). EVERTEC Inc.’s subsidiaries include Holdings, EVERTEC Group, EVERTEC Dominicana, SAS, Evertec Chile Holdings SpA (formerly known as Tecnopago SpA), Evertec Chile SpA (formerly known as EFT Group SpA), Evertec Chile Global SpA (formerly known as EFT Global Services SpA), Evertec Chile Servicios Profesionales SpA (formerly known as EFT Servicios Profesionales SpA), EFT Group Panama S.A., Tecnopago España Ltd., EFT Servicos Profesionales SpA,SL, Paytrue S.A., Caleidon, S.A., Evertec Brasil Solutions Informática Ltda. (formerly known as Paytrue Solutions InformaticaInformática Ltda.), EVERTEC Panamá, S.A., EVERTEC Costa Rica, S.A. (“EVERTEC CR”), EVERTEC Guatemala, S.A., Evertec Colombia, SAS (formerly known as Processa, SAS ("Processa")SAS), EVERTEC USA, LLC, EGM Ingeniería sin Fronteras, S.A.S. ("Place to Pay") and EVERTEC México Servicios de Procesamiento, S.A. de C.V. Neither EVERTEC nor Holdings conducts any operations other than with respect to its indirect or direct ownership of EVERTEC Group.
Executive Summary
EVERTEC is a leading full-service transaction processingtransaction-processing business in Latin America (which includes Central America andPuerto Rico, the Caribbean unless otherwise specified),and Latin America, providing a broad range of merchant acquiring, payment processingservices and business process management services. According to the September 2016August 2020 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. As of September 30, 2017, with the completion of the acquisition of PayGroup on July 3, 2017, the Company provides services acrossWe serve 26 countries out of 11 offices, including our headquarters in the region.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, wePuerto Rico. We own and operate the ATH network, one of the leading personal identification number (“PIN”("PIN") debit networks in Latin America. We manage a system of electronic payment networks and offer a comprehensive suite of services for core banking, cash processing, and fulfillment in Puerto Rico, that process approximately three billion transactions annually. Additionally we offer technology outsourcing in all the regions we serve. We serve a diversified customer base of leading financial institutions, merchants, corporations and government agencies with “mission-critical” technology solutions that enable them to issue, process and accept transactions securely. We believe our business is well-positioned to continue to expand across the fast-growing Latin American region.
We are differentiated, in part, by our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe this single-source capability provides several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services, win new customers, develop new sales channels and enter new markets. We believe these competitive advantages include:
•Our ability to provide best in classcompetitive products;
•Our ability to provide in one package a range of services that traditionally had to be sourced from different vendors;
•Our ability to serve customers with disparate operations inacross several geographies with a single integrated technology solutionsolutions that enablesenable 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 processing)services).
Our broad suite of services spans the transaction processingentire 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, as well as back-end support services such as the clearing and settlement of transactions and account reconciliation for card issuers. These include: (i) merchant acquiring services, which enable point of sales (“POS”) and e-commerce merchants to accept and process electronic methods of payment such as debit, credit, prepaid and electronic benefit transfer (“EBT”) cards; (ii) payment processing
services, which enable financial institutions and other issuers to manage, support and facilitate the processing forof credit, debit, prepaid, automated teller machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide “mission-critical” technology solutions such as core bank processing, as well as IT outsourcing and
cash management services to financial institutions, corporations and governments. We provide these services through scalable, end-to-end technology platforms that we manage and operate in-house which generatesand that generate significant operating efficiencies that enable us to maximize profitability.
We sell and distribute our services primarily through a proprietary direct sales force with established customer relationships. We are also building a variety of indirect sales channels that enable us to leverage the distribution capabilities of partners in adjacent markets, including value-added resellers. We continue to pursue joint ventures and merchant acquiring alliances.
We benefit from an attractive business model, the hallmarks of which are recurring revenue, scalability, significant operating margins and moderate capital expenditure requirements. Our revenue is predominantly recurring in nature because of the mission-critical and embedded nature of the services we provide. In addition, we generally negotiate multi-year contracts with our customers. 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.
Corporate BackgroundRelationship with Popular
EVERTEC, Inc. (formerly known as Carib Latam Holdings, Inc.) is a Puerto Rico corporation organized in April 2012. Our main operating subsidiary, EVERTEC Group, LLC (formerly known as EVERTEC, LLC and EVERTEC, Inc., hereinafter “EVERTEC Group”), was organized in Puerto Rico in 1988. EVERTEC Group was formerly a wholly-owned subsidiary of Popular. On September 30, 2010, pursuant to an Agreement and Plan of Merger (as amended, the “Merger Agreement”), AP Carib Holdings, Ltd. (“Apollo”) acquired a 51% indirect ownership interest in EVERTEC Group as part of a merger (the “Merger”) and EVERTEC Group became a wholly-owned subsidiary of Holdings.
On April 17, 2012, EVERTEC Group was converted from a Puerto Rico corporation to a Puerto Rico limited liability company (the “Conversion”) for the purpose of improving its consolidated tax efficiency by taking advantage of changes to the Puerto Rico Internal Revenue Code, as amended (the “PR Code”), that permit limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Concurrent with the Conversion, Holdings, which is our direct subsidiary, was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company. Prior to these conversions, EVERTEC, Inc. was formed in order to act as the new parent company of Holdings and its subsidiaries, including EVERTEC Group. The transactions described above in this paragraph are collectively referred to as the “Reorganization.”
Separation from and Key Relationship with Popular
Prior to the Merger on 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 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 (the “MSA”),MSA, and several related agreements with Popular. Under the terms of the MSA, Popular agreed to continue to use EVERTEC services on an ongoing and exclusive basis for the duration of the agreement, on commercial terms consistent with those of our historical relationship.agreement. Additionally, Popular granted us a right of first refusal on the development of certain new financial technology products and services for the duration of the MSA.Master Services Agreement.
Factors and Trends Affecting the Results of Our Operations
The ongoing migration from cash check and other paper methods of payment to electronic payments continues to benefit the transaction processingtransaction-processing industry globally. This migration is driven by factors including customer convenience, marketing efforts by financial institutions, card issuer rewards and the development of new forms of payment. We believe that the penetration of electronic payments in the markets in which we operate is significantly lower relative to the U.S. market, and that this ongoing shift will continue to generate substantial growth opportunities for our business. For example, currently the adoption of banking products, including electronic payments, in the Latin American regionand Caribbean regions is lower relative to the more mature U.S. and European markets. We believe that the unbanked and underbanked population in our markets will continue to shrink, and therefore drivingdrive incremental penetration and growth of electronic payments in Puerto Rico and other Latin American regions. We also benefit from the trend forof financial institutions and government agencies to outsourceoutsourcing technology systems and processes. 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. We believe that our technology andchallenging, which presents a business outsourcing solutions cater to the evolving needs of the financial institution customer base we target, providing integrated, open, flexible, customer-centric and efficient IT products and services.opportunity for us.
Our results of operations may be affected by regulatory changes that will occur as the payments industry has come under increased scrutiny from lawmakers and regulators.
As described in the risk factors in our 2016 Form 10-K,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. The
Results of Operations
Comparison of the three months ended March 31, 2021 and 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | |
In thousands | 2021 | | 2020 | | | | Variance | | |
| | | | | | | | | | | | | |
Revenues | $ | 139,528 | | | $ | 121,942 | | | | | $ | 17,586 | | | 14 | % | | | | |
Operating costs and expenses | | | | | | | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization | 59,804 | | | 54,067 | | | | | 5,737 | | | 11 | % | | | | |
Selling, general and administrative expenses | 16,102 | | | 17,317 | | | | | (1,215) | | | (7) | % | | | | |
Depreciation and amortization | 18,623 | | | 17,795 | | | | | 828 | | | 5 | % | | | | |
Total operating costs and expenses | 94,529 | | | 89,179 | | | | | 5,350 | | | 6 | % | | | | |
Income from operations | $ | 44,999 | | | $ | 32,763 | | | | | $ | 12,236 | | | 37 | % | | | | |
Revenues
Total revenues for the three months ended March 31, 2021 increased by $17.6 million or 14% to $139.5 million when compared to the same period in the prior year, as revenue in the prior year period was impacted by the beginning of the pandemic. Revenue increased across all of the Company's segments, reflecting sales volume growth with a high average ticket, as well as continued growth in the Company's digital solutions, such as ATH Movil, in Puerto Rico, fiscal crisis continuescoupled with the impact of revenues generated from new client contracts in Latin America, as well as, hardware and software sales in the quarter amounting to negatively impact$1 million.
Cost of Revenues
Cost of revenues for the economy, while austerity measures pursuantthree months ended March 31, 2021 amounted to $59.8 million, an increase of $5.7 million or 11% when compared to the fiscal plan aresame period in the early stagesprior year. The increase during the three months is primarily driven by an increase in salaries and benefits, mainly due to increased headcount, coupled with an increase in cloud services. Additionally, cost of implementation. However,sales increased primarily due to date, our operationshardware and oursoftware sales completed in the quarter.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended March 31, 2021 decreased by $1.2 million or 7% when compared to the same period in the prior year. The decrease is almost entirely related to a decrease in professional services, as prior year includes expenses incurred for corporate transactions.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31, 2021 amounted to $18.6 million, an increase of $0.8 million or 5% when compared to the same period in the prior year. Increased expense during the three months is driven by an increase in software amortization driven by key projects that went into production in the prior year as well as increased capital expenditures.
Non-Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | |
In thousands | 2021 | | 2020 | | | | Variance | | |
| | | | | | | | | | | | | |
Interest income | $ | 389 | | | $ | 363 | | | | | $ | 26 | | | 7 | % | | | | |
Interest expense | (5,906) | | | (6,779) | | | | | 873 | | | 13 | % | | | | |
Earnings of equity method investment | 502 | | | 338 | | | | | 164 | | | 49 | % | | | | |
Other income | 328 | | | 108 | | | | | 220 | | | 204 | % | | | | |
Total non-operating expenses | $ | (4,687) | | | $ | (5,970) | | | | | $ | 1,283 | | | 21 | % | | | | |
Non-operating expenses for the three months ended March 31, 2021 decreased by $1.3 million to $4.7 million when compared to the same period in the prior year. The decrease is mainly related to a $0.9 million decrease in interest expense, resulting from a reduction in interest rates and a lower outstanding balance in connection with debt repayments made during the prior year, coupled with a $0.2 million increase in other income driven by the favorable impact of foreign currency exchange.
Income Tax Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | |
In thousands | 2021 | | 2020 | | | | Variance | | |
Income tax expense | $ | 4,708 | | | $ | 4,518 | | | | | $ | 190 | | | 4 | % | | | | |
Income tax expense for the three months ended March 31, 2021 amounted to $4.7 million, an increase of $0.2 million when compared to the same period in the prior year. The effective tax rate for the period was 11.7%, compared with 16.9% in the 2020 period. The decrease in the effective tax rate primarily reflects the impact of COVID-19 on the mix of business within the prior year and the impact of additional net discrete tax items recorded in the current year quarter.
Segment Results of Operations
The Company operates in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America (collectively "Payment Services segments"), Merchant Acquiring, and Business Solutions.
The Payment Services - Puerto Rico & Caribbean segment revenues are comprised of revenues related to providing access to the ATH debit network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and point of sale ("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 person-to-merchant digital transactions) and EBT (which principally consist of services to the government of Puerto Rico have not been significantly impacted. We continuefor the delivery of benefits to closely monitorparticipants). For ATH debit network and processing services, revenues are primarily driven by the Puerto Rico fiscal situationnumber of transactions processed. Revenues are derived primarily from network fees, transaction switching and its impactprocessing 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 economynumber of cards embossed and our business.other processing services. For EBT services, revenues are primarily derived from the number of beneficiaries on file.
In additionThe Payment Services - Latin America segment revenues consist of revenues related to providing access to the macroeconomic trends described above, Management currently estimates that we will experience a revenue attrition in Latin AmericaATH network of approximately $1 millionATMs and other card networks to $3 million in 2017financial 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 client migrations anticipated to occur throughout 2017debit or credit issuers), payment processing services (such as payment and approximately $5 million to $7 millionbilling products for migrations anticipated in 2018. The client decisionsmerchants, businesses and financial institutions), as well as licensed software solutions for these anticipated migrations wererisk and fraud management and card payment processing. For network and processing services, revenues are primarily driven by a varietythe number of historical factors, most importantly customer service experience. Management believes that these customer decisionstransactions processed. Revenues are unlikely to change, however timing is subject to change based on customer's conversion schedules.
In September 2017, Puerto Ricoderived primarily from network fees, transaction switching and processing fees, and the Caribbean, twoleasing of our principal markets, were severely impacted by Hurricane IrmaPOS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and Hurricane Maria. As a resultauthorizations processed, the number of these hurricanes the islands' economies have been affected. The destruction brought on by these hurricanes affected infrastructurecards embossed, and telecommunication services, necessary elements for electronic transacting. Electronic transacting primarily affects ourother processing services.
The Merchant Acquiring segment and Payments Processing Segment, 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, the merchants that have opened for business are generally large merchants, supermarkets and gas stations and consumer spending patterns have been erratic. We earn less revenue per transaction from these merchants and this mix of merchants has negatively impacted our net revenue yield and margins. Businesses have gradually reopened and accepted payments and we have experienced a gradual increase in transaction and sales volume, but there is uncertainty as to the timing and rate at which such volumes will return to pre-hurricanes levels. Cash use has also risen significantly due to the lack of ability to accept electronic payments and merchant steering. Additionally, it has been reported that a large number of residents have left Puerto Rico for the US and that more residents may leave in the continuing aftermath of the hurricanes. Considering all these factors, we currently estimate that our transactions will continue to modestly and gradually recover from our October average during the remainder of fourth quarter of 2017. Our total decrease in revenue for 2017 related to the huricane’s impact is estimated between $20 million and $30 million. The pace and success of Puerto Rico’s recovery of power, water, and telecommunication services could affect our estimate 2017 range of impact from the hurricanes.
Overview of Results of Operations
The following briefly describes the components of revenues and expenses as presented in the unaudited consolidated condensed statements of income and comprehensive income. Descriptions of the revenue recognition policies are detailed in Note 1 of the Notes to Audited Consolidated Financial Statements included in our 2016 Form 10-K.
Merchant Acquiring, net. Merchant Acquiring revenue consists of revenues from services that allow merchants to accept electronic methods of payment. Our standard merchant contract has an initial term of one or three years, with automatic one-year renewal periods. In the Merchant Acquiring segment, sources of revenues include a discount fee (generally a percentage of the sales amount of a credit or debit card transaction value) and membership fees charged to merchants, debit network fees and rental incomefees 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.
Merchant Acquiring accounted The discount fee is generally a percentage of the transaction value. EVERTEC also charges merchants for $21.6 million, or 21% of total revenues, and $(0.7) million or (4)% of total segment income from operations for the three months ended September 30, 2017, compared with $22.0 million, or 23%, of total revenues and $6.7 million, or 20% of total segment income from operations for the comparable period in 2016. For the nine months ended September 30, 2017, our Merchant Acquiring business accounted for $67.5 million, or 22% of total revenues and $13.4 million or 15% of total segment income from operations compared with $68.1 million, or 24%, of total revenues and $23.9 million, or 22%, of total segment income from operations for the nine months ended September 30, 2016.
Payment Processing. Payment Processing revenue primarily reflects ATH network and payment transaction processing, including relatedother services such as authorization, management and recording of ATM and POS transactions, and ATM management and monitoring. Payment Processing revenue also includes income from card processing servicesthat are unrelated to debit or credit card issuers, such as credit and debit card processing, authorization and settlement and fraud monitoring and control services; payment processing services such as payment and billing products for merchants, businesses and financial institutions; and EBT, which principally consist of services to the Puerto Rico government for the delivery of government benefits to
participants. Payment products include electronic check processing, automated clearing house (“ACH”), lockbox, interactive voice response and web-based payments through personalized websites, among others.
We generally enter into one to five year contracts with our private payment processing clients and one year contracts with our government payment processing clients. For ATH network and processing services, revenue is driven mainly by the number of transactions processed. Revenue is derived mainly from network fees,or the transaction switching and processing fees, and leasing of POS devices. For card issuer processing, revenue is dependent mostly upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed and other processing services. For EBT services, revenue is derived mainly from the number of beneficiaries on file.value.
Payment Processing accounted for $34.2 million, or 33%, of total revenues and $8.1 million, or 51%, of total segment income from operations for the three months ended September 30, 2017, compared with $27.6 million, or 29%, of total revenues and $12.8 million, or 37%, of total segment income from operations for the three months ended September 30, 2016. For the nine months ended September 30, 2017, our Payment Processing business accounted for $95.0 million, or 31%, of total revenues and $41.9 million, or 46% of total segment income from operations compared with $82.7 million, or 29%, of total revenues and $39.5 million, or 37%, of total segment income from operations for the nine months ended September 30, 2016.
Business Solutions.The Business Solutions revenuesegment consists of revenues from a full suite of business process management solutions includingin various product areas such as core bank processing, network hosting and management, IT consultingprofessional services, business process outsourcing, item andprocessing, cash processing, and fulfillment. We generally enter into one to five year contracts with our privateCore bank processing and network services revenues are derived in part from a recurrent fixed fee and from fees based on the number of accounts on file (i.e. savings or checking accounts, loans, etc.) or computer resources utilized. Revenues from other processing services within the Business Solutions clientssegment are generally volume-based and one year or multi-year contracts, with annual fiscal funding clauses, for our government Business Solutions clients.
depend on factors such as the number of accounts processed. In addition, we areEVERTEC is a reseller of hardware and software products;products and these resale transactions are generally one-time transactions. Revenue from salesnon-recurring.
In addition to the four operating segments described above, management identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These areas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these areas are aggregated and presented within the “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and Other category consists of hardware or software products is recognized once the following four criteria are met: (i) evidence of an agreement exists, (ii) delivery and acceptance has occurred or services have been rendered, (iii) the selling price is fixed or determinable, and (iv) collection of the selling price is reasonably assured or probable, as applicable.
Business Solutions accounted for $47.0 million, or 46%, of total revenues and $8.5 million, or 53%, of total segment income from operations for the three months ended September 30, 2017, compared with $44.9 million, or 48%, of total revenues and $14.9 million, or 43%, of total segment income from operations for the three months ended September 30, 2016. For the nine months ended September 30, 2017, Business Solutions accounted for $144.9 million, or 47%, of total revenues and $35.7 million, or 39%, of total segment income from operations compared with $136.8 million, or 48%, of total revenues and $43.3 million, or 41%, of total segment income from operations for the nine months ended September 30, 2016.
Cost of revenues. This caption includes the costs directly associated with providing services to customers, as well as product and software sales, including software licensing and maintenance costs; telecommunications costs; personnel and infrastructure costs to develop and maintain applications, operate computer networks and provide associated customer support,corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating expenses.segments. The overhead and leveraged costs relate to activities such as:
Selling, general•marketing,
•corporate finance and administrative. This caption consists mainlyaccounting,
•human resources,
•legal,
•risk management functions,
•internal audit,
•corporate debt related expenses paid to sales personnel, administrative employees and management, advertising and promotional costs, audit and legal fees, and other selling expenses.
Depreciation and amortization. This caption consists of our•non-operating depreciation and amortization expense. Following the completion of the Merger, our depreciation and amortization expense increasedexpenses generated as a result of 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 level
The Chief Operating Decision Maker ("CODM") reviews the purchase price allocation adjustmentsoperating segments separate financial information to reflectassess performance and to allocate resources. Management evaluates the fair market valueoperating results of each of its operating segments based upon revenues and revised useful life assignedAdjusted EBITDA. Adjusted EBITDA is defined as EBITDA further adjusted to propertyexclude unusual items and equipmentother adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with ASC Topic 280, Segment Reporting, given that it is reported to the CODM for purposes of allocating resources. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by revenues and intangibleadjusted EBITDA. As such, segment assets are not disclosed in connection with the Merger.notes to the accompanying unaudited condensed consolidated financial statements.
Results of Operations
The following tables set forth certain consolidated financial information about the Company’s operations by its four business segments for the three and nine months ended September 30, 2017 and 2016. The following tables and discussion should be read in conjunction with the information contained in our Unaudited Consolidated Condensed Financial Statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.periods indicated below.
Comparison of the three months ended September 30, 2017March 31, 2021 and 20162020
Payment Services - Puerto Rico & Caribbean
The following tables present the components of our unaudited consolidated condensed statements of income and comprehensive income by business | | | | | | | | | | | | | |
| Three months ended March 31, |
In thousands | 2021 | | 2020 | | |
Revenues | $36,264 | | $29,887 | | |
Adjusted EBITDA | 20,803 | | 16,074 | | |
Adjusted EBITDA Margin | 57.4 | % | | 53.8 | % | | |
Payment Services - Puerto Rico & Caribbean segment and the change in those amounts for the three months ended September 30, 2017 and 2016.
Revenues
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | |
(Dollar amounts in thousands) | | 2017 | | 2016 | | Variance |
| | | | | | | | |
Merchant Acquiring, net | | $ | 21,555 |
| | $ | 21,970 |
| | $ | (415 | ) | | (2 | )% |
Payment Processing | | 34,218 |
| | 27,584 |
| | 6,634 |
| | 24 | % |
Business Solutions | | 46,952 |
| | 44,913 |
| | 2,039 |
| | 5 | % |
Total revenues | | $ | 102,725 |
| | $ | 94,467 |
| | $ | 8,258 |
| | 9 | % |
Total revenues for the three months ended September 30, 2017March 31, 2021 increased by $8.3$6.4 million or 9% asto $36.3 million when compared to the corresponding 2016 period.
Merchant Acquiring, net revenue decreased 2% to $21.6 million. Merchant sales volume and revenue were negatively impacted by Hurricanes Irma and Maria in the last month of the quarter, while EVERTEC continued to be available to process ATM and POS transactions, transacting depends on power and telecommunications, which were affected by these events. This decline was partially offset by volume increases in the first two months of the quarter.
Payment Processing revenue in the quarter amounted to $34.2 million, an increase of $6.6 million or 24%. Revenue growth in the quarter reflected the acquisition of PayGroup and increases in ATH® debit network transaction volumes and card processing volumes in the first two months of the quarter, partially offset by the impact of the hurricanes as described above.
Business Solutions revenue amounted to $47.0 million, compared with $44.9 millionsame period in the prior year, quarter, an increase of 5%. Business Solutions revenue growthwhich was impacted by a decline in the quarter primarily reflects increased revenue form our printing business and increased core banking revenue, partially offset by decreases in network services relatedtransaction volumes due to the impact of COVID-19. The increase in revenues was primarily driven by an incremental $2.5 million in revenue recognized from ATH Movil and ATH Movil Business as consumer preference continues to shift to digital payment products, as well as an increase in transaction processing and monitoring revenue recognized for services provided from the hurricanes.Payment Services - Puerto Rico & Caribbean segment to the Payment Services - Latin America Segment. Adjusted EBITDA increased by $4.7 million to $20.8 million driven by the increase in revenues, as well as a decrease in cost of sales, partially offset by higher operating expenses driven by higher equipment expenses.
Operating costs and expenses
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | |
(Dollar amounts in thousands) | | 2017 | | 2016 | | Variance |
| | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization shown below | | $ | 62,699 |
| | $ | 41,753 |
| | $ | 20,946 |
| | 50 | % |
Selling, general and administrative expenses | | 14,612 |
| | 10,818 |
| | 3,794 |
| | 35 | % |
Depreciation and amortization | | 16,606 |
| | 14,889 |
| | 1,717 |
| | 12 | % |
Total operating costs and expenses | | $ | 93,917 |
| | $ | 67,460 |
| | $ | 26,457 |
| | 39 | % |
Payment Services - Latin America | | | | | | | | | | | | | |
| Three months ended March 31, |
In thousands | 2021 | | 2020 | | |
Revenues | $25,014 | | $21,640 | | |
Adjusted EBITDA | 10,019 | | 8,242 | | |
Adjusted EBITDA Margin | 40.1 | % | | 38.1 | % | | |
Total operating costs and expenses
Payment Services - Latin America segment revenues for the three months ended September 30, 2017March 31, 2021 increased $26.5by $3.4 million or 39% asto $25.0 million driven mainly by revenues generated by new client contracts, increased revenue for services related to card products and increased volume from PlacetoPay, partially offset by a decrease in ATM volumes coupled with client attrition. Adjusted EBITDA increased by $1.8 million when compared to the corresponding 2016 period.
Cost of revenues increased by $20.9 million or 50% when compared withsame period in the 2016 quarterly period. The increase isprior year primarily related to charges taken in connection with an exit activity for a third party software solution that is no longer commercially viable. The remaining increase was primarily attributabledue to the PayGroup acquisition.
Selling, general and administrative expenses increased $3.8 million or 35% to $14.6 million when compared with the corresponding 2016 period. The increase is primarily related toin revenues, partially offset by an increase in salariesfees for transaction processing and other benefitsmonitoring services from the Payment Services - Puerto Rico & Caribbean segment to the Payment Services - Latin America Segment.
Merchant Acquiring
| | | | | | | | | | | | | |
| Three months ended March 31, |
In thousands | 2021 | | 2020 | | |
Revenues | $30,867 | | $25,121 | | |
Adjusted EBITDA | 15,517 | | 11,284 | | |
Adjusted EBITDA Margin | 50.3 | % | | 44.9 | % | | |
Merchant Acquiring segment revenues for the three months ended March 31, 2021 increased by $5.7 million to $30.9 million as the prior year quarter was impacted by lower sales volume and a decline in spread as a result of the beginning of the COVID-19 pandemic. The current year quarter reflected an increase in sales volume and an increase in professional fees associatedspread partially due to the higher average ticket which continues to benefit from federal stimulus packages. Additionally, the current year quarter benefited slightly from the expanded relationship with FirstBank of Puerto Rico in connection with the PayGroup acquisition.
Depreciation and amortization expenseacquisition of the customer relationship in the current year quarter. Adjusted EBITDA increased by $1.7$4.2 million or 12%,driven by the increase in revenues, partially offset by an increase in operating expenses driven by the increased transaction volume.
Business Solutions | | | | | | | | | | | | | |
| Three months ended March 31, |
In thousands | 2021 | | 2020 | | |
Revenues | $60,611 | | $55,943 | | |
Adjusted EBITDA | 29,632 | | 27,445 | | |
Adjusted EBITDA Margin | 48.9 | % | | 49.1 | % | | |
Business Solutions segment revenues for the three months ended March 31, 2021 increased by $4.7 million to $60.6 million as a result of an increase in IT consulting services revenue coupled with revenue recognized in the quarter for hardware and software and other intangibles amortization driven by software and intangiblessales. In addition, the current year quarter benefited from the PayGroup acquisition.
Income from operations
The following table presents income from operations by reportable segments.
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | |
(Dollar amounts in thousands) | | 2017 | | 2016 | | Variance |
| | | | | | | | |
Segment income from operations | | | | | | | | |
Merchant Acquiring, net | | $ | (656 | ) | | $ | 6,728 |
| | $ | (7,384 | ) | | (110 | )% |
Payment Processing | | 8,094 |
| | 12,803 |
| | (4,709 | ) | | (37 | )% |
Business Solutions | | 8,506 |
| | 14,930 |
| | (6,424 | ) | | (43 | )% |
Total segment income from operations | | 15,944 |
| | 34,461 |
| | (18,517 | ) | | (54 | )% |
| | | | | | | | |
Merger related depreciation and amortization and other unallocated expenses (1) | | (7,136 | ) | | (7,454 | ) | | 318 |
| | (4 | )% |
Income from operations | | $ | 8,808 |
| | $ | 27,007 |
| | $ | (18,199 | ) | | (67 | )% |
| |
(1) | Primarily represents non-operating depreciation and amortization expenses generated as a result of the Merger and certain non-recurring fees and expenses. |
Income from operations for the three months ended September 30, 2017 decreased $18.2 million or 67% compared with the corresponding 2016 period. The decreaseshift to digital as mobile banking usage increases, resulting in income from operations primarily reflects charges taken in connection with the previously mentioned exit activity and a disadvantageous revenue mix compared to the one in the prior year.
See Note 14 of the Notes to Unaudited Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for additional information on the Company’s reportable segments and for a reconciliation of income from operations to net income.
Non-operating income (expenses)
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | |
(Dollar amounts in thousands) | | 2017 | | 2016 | | Variance |
| | | | | | | | |
Non-operating income (expenses) | | | | | | | | |
Interest income | | $ | 159 |
| | $ | 87 |
| | $ | 72 |
| | 83 | % |
Interest expense | | (8,012 | ) | | (6,276 | ) | | (1,736 | ) | | 28 | % |
Earnings of equity method investment | | 155 |
| | 43 |
| | 112 |
| | 260 | % |
Other income | | 192 |
| | 489 |
| | (297 | ) | | (61 | )% |
Total non-operating expenses | | $ | (7,506 | ) | | $ | (5,657 | ) | | $ | (1,849 | ) | | 33 | % |
Total non-operating expenses for the three months ended September 30, 2017 increased by $1.8 million when compared with the third quarter of 2016. The increase is driven by an increase in interest expense of $1.7core banking revenue. Adjusted EBITDA increased by $2.2 million primarily as a result of an increased LIBOR and increased interest expense from the commencement of the fixed interest rate swap in January 2017.
Income tax (benefit) expense
Income tax benefit for the three months ended September 30, 2017 amounted to $4.8$29.6 million compared with an income tax expense of $1.6 million in the prior year period. The income tax benefit in the third quarter of 2017 is driven by the reversal of a previously recorded potential liability for uncertain tax positions of $4.5 million, related to the net operating loss created by previously deducted transaction costs, as a result of the expiration of the statute of limitation.
See Note 10 of the Notes to Unaudited Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding income taxes.
Comparison of the nine months ended September 30, 2017 and 2016
The following tables present the components of our unaudited consolidated condensed statements of income and comprehensive income by business segment and the change in those amounts for the nine months ended September 30, 2017 and 2016.
Revenues
|
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | |
(Dollar amounts in thousands) | | 2017 | | 2016 | | Variance |
| | | | | | | | |
Merchant Acquiring, net | | $ | 67,546 |
| | $ | 68,137 |
| | $ | (591 | ) | | (1 | )% |
Payment Processing | | 95,027 |
| | 82,716 |
| | 12,311 |
| | 15 | % |
Business Solutions | | 144,943 |
| | 136,765 |
| | 8,178 |
| | 6 | % |
Total revenues | | $ | 307,516 |
| | $ | 287,618 |
| | $ | 19,898 |
| | 7 | % |
Total revenues for the nine months ended September 30, 2017 increased by $19.9 million or 7% as compared to the corresponding 2016 period.
Merchant Acquiring, net revenue decreased by $0.6 million to $67.5 million. The decrease was primarily driven by the shift of revenue from the Merchant Acquiring segment to the Payment Processing segment, related to a client contract change in the second quarter of 2016.
Payment Processing revenue for the nine months ended September 30, 2017 amounted to $95.0 million, an increase of $12.3 million or 15%. Revenue results in the period were affected by the same factors as those above explained for the quarter.
Business Solutions revenue amounted to $144.9 million, compared with $136.8 million in the prior year period, an increase of 6%. Business Solutions revenue growth in the nine month period primarily reflects increased revenue from our printing business and an increase in core banking revenue.
Operating costs and expenses
|
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | |
(Dollar amounts in thousands) | | 2017 | | 2016 | | Variance |
| | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization shown below | | $ | 149,902 |
| | $ | 127,127 |
| | $ | 22,775 |
| | 18 | % |
Selling, general and administrative expenses | | 40,031 |
| | 34,226 |
| | 5,805 |
| | 17 | % |
Depreciation and amortization | | 48,189 |
| | 44,500 |
| | 3,689 |
| | 8 | % |
Total operating costs and expenses | | $ | 238,122 |
| | $ | 205,853 |
| | $ | 32,269 |
| | 16 | % |
Total operating costs and expenses for the nine months ended September 30, 2017 increased $32.3 million or 16% as compared to the corresponding 2016 period.
Cost of revenues increased by $22.8 million or 18% when compared with the 2016 period. The increase was driven by the above discussed exit activity, coupled with an increase in expenses related to the PayGroup acquisition.
Selling, general and administrative expenses for the nine months ended September 30, 2017 amounted to $40.0 million, an increase of $5.8 million or 17%. The increase is primarily related to an increase in share based compensation, expenses related to the PayGroup acquisition and an increase in withholding taxes in our Latin America operations.
Depreciation and amortization expense increased by $3.7 million or 8% mainly related to an increase in amortization expense related to intangible assets acquired as part of business combinations completed in the prior and current year.
Income from operations
The following table presents income from operations by reportable segments.
|
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | |
(Dollar amounts in thousands) | | 2017 | | 2016 | | Variance |
| | | | | | | | |
Segment income from operations | | | | | | | | |
Merchant Acquiring, net | | $ | 13,444 |
| | $ | 23,940 |
| | $ | (10,496 | ) | | (44 | )% |
Payment Processing | | 41,893 |
| | 39,493 |
| | 2,400 |
| | 6 | % |
Business Solutions | | 35,678 |
| | 43,299 |
| | (7,621 | ) | | (18 | )% |
Total segment income from operations | | 91,015 |
| | 106,732 |
| | (15,717 | ) | | (15 | )% |
| | | | | | | | |
Merger related depreciation and amortization and other unallocated expenses (1) | | (21,621 | ) | | (24,967 | ) | | 3,346 |
| | (13 | )% |
Income from operations | | $ | 69,394 |
| | $ | 81,765 |
| | $ | (12,371 | ) | | (15 | )% |
| |
(1) | Primarily represents non-operating depreciation and amortization expenses generated as a result of the Merger and certain non-recurring fees and expenses. |
Income from operations for the nine months ended September 30, 2017 decreased $12.4 million or 15% compared with the corresponding 2016 period. The decrease in income from operations was the result of a decrease in income from our Merchant Acquiring segment and our Business Solutions segment,revenue, partially offset by an increase in income from our Payment Processing segment. The decrease was primarilycosts of sales directly related to the factors above discussed for the quarter partially offset by an increase in income from our Payment Processing segment driven by an increase in income from operations from our Latin American operations, PayGrouphardware and Processa, partially offset by a decrease an income from operations in Puerto Rico.software sales.
See Note 14 of the Notes to Unaudited Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for additional information on the Company’s reportable segments and for a reconciliation of income from operations to net income.
Non-operating income (expenses)
|
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | |
(Dollar amounts in thousands) | | 2017 | | 2016 | | Variance |
| | | | | | | | |
Non-operating income (expenses) | | | | | | | | |
Interest income | | $ | 560 |
| | $ | 266 |
| | $ | 294 |
| | 111 | % |
Interest expense | | (22,454 | ) | | (18,292 | ) | | (4,162 | ) | | 23 | % |
Earnings (losses) of equity method investment | | 413 |
| | (58 | ) | | 471 |
| | (812 | )% |
Other income | | 2,829 |
| | 1,747 |
| | 1,082 |
| | 62 | % |
Total non-operating expenses | | $ | (18,652 | ) | | $ | (16,337 | ) | | $ | (2,315 | ) | | 14 | % |
Total non-operating expenses for the nine months ended September 30, 2017 increased $2.3 million or 14% when compared with the corresponding 2016 period. Interest expense increased by $4.2 million primarily as a result of the Third Amendment completed in the fourth quarter of 2016 coupled with an increased LIBOR and increased interest expense from the commencement of the fixed interest rate swap. This increase was partially offset by an increase in foreign exchange gains and an increase in earnings from our equity method investment.
Income tax expense
Income tax expense for the nine months ended September 30, 2017 amounted to $1.2 million compared with an income tax expense of $6.3 million in the prior year period. The decrease is due to the same reasons explained above for the quarter.
See Note 10 of the Notes to Unaudited Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding income taxes.
Liquidity and Capital Resources
Our principal source of liquidity is cash generated from operations, and our primary liquidity requirements are the funding of capital expenditures, working capital needs, capital expenditures, and acquisitions. We also have a $100.0$125.0 million Revolving Facility, of which $67.0$117.0 million was available for borrowing as of September 30, 2017.March 31, 2021. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.
As of March 31, 2021, we had cash and cash equivalents of $48.4$156.4 million, of which $25.8$80.0 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 previously announced 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, dividend payments, share repurchases, debt service, acquisitions and other transactions as opportunities present themselves.
Based on our current level of operations, we believe our cash flows from operations and the available senior secured Revolving Facility will be adequate to meet our liquidity needs for the next twelve months. However, our ability to fund future operating expenses, dividend payments, capital expenditures, mergers and acquisitions, and our ability to make scheduled payments of interest, to pay principal on or refinance our indebtedness and to satisfy any other of our present or future debt obligations will depend on our future operating performance, which willmay be affected by general economic, financial and other factors beyond our control.
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
(In thousands) | | 2021 | | 2020 |
| | | | |
Cash provided by operating activities | | $ | 34,746 | | | $ | 33,925 | |
Cash used in investing activities | | (34,413) | | | (9,412) | |
Cash used in financing activities | | (48,716) | | | (31,358) | |
Effect of foreign exchange rate on cash, cash equivalents and restricted cash | | 2,700 | | | 828 | |
Increase in cash, cash equivalents and restricted cash | | $ | (45,683) | | | $ | (6,017) | |
|
| | | | | | | | |
| | Nine months ended September 30, |
(Dollar amounts in thousands) | | 2017 | | 2016 |
| | | | |
Cash provided by operating activities | | $ | 108,435 |
| | $ | 124,601 |
|
Cash used in investing activities | | (69,286 | ) | | (33,852 | ) |
Cash used in financing activities | | (42,629 | ) | | (74,511 | ) |
(Decrease) increase in cash | | $ | (3,480 | ) | | $ | 16,238 |
|
Net cash provided by operating activities for the ninethree months ended September 30, 2017March 31, 2021 was $108.4$34.7 million compared with cash provided by operating activities of $124.6to $33.9 million for the corresponding 2016 period.same period in the prior year. The $16.2$0.8 million decreaseincrease in cash provided by operating activities is primarily driven by the increase in net income, partially offset by a decrease in net income coupled with more cash used to pay downcollections for accounts payable and accrued liabilities.receivable.
Net cash used in investing activities for the ninethree months ended September 30, 2017March 31, 2021 was $69.3$34.4 million compared with $33.9to $9.4 million for the correspondingsame period in 2016.the prior year. The $35.4$25.0 million increase was mainlyis primarily attributable to the completionacquisition of a $14.8 million customer relationship, an increase in additions to software of $5.9 million and the purchase of PayGroup$3.0 million in available-for-sale debt securities during the third quarter of 2017.quarter.
Net cash used in financing activities for the ninethree months ended September 30, 2017March 31, 2021 was $42.6$48.7 million as compared with $74.5to $31.4 million for the corresponding 2016 period. Cash usedsame period in financing activitiesthe prior year. The $17.4 million increase was primarily relatedmainly attributed to stock repurchases, cash dividends on common stock and cash used for principal repayments on long-term debt. The decreasean increase in cash used to repurchase common stock of $7.0 million, $6.0 million increase in financing activities is due to a decrease in stock repurchases coupled with an increase short-term borrowingswithholding taxes paid on share-based compensation and cash used individends paid during the prior yearquarter amounting to pay for the credit amendment fees.$3.6 million.
Capital Resources
Our principal capital expenditures are for hardware and computer software (purchased and internally developed) and additions to property and equipment. We invested approximately $24.2$16.7 million and $31.5$9.4 million, forrespectively, during the ninethree months ended September 30, 2017March 31, 2021 and 2016, respectively. During2020. In addition, during the third quarter of 2017,three month period ended March 31, 2021, the Company acquired a $14.8 million customer relationship as well as $3.0 million in available-for-sale debt securities. Generally, we completed the purchase of PayGroup for $42.8 million, while in the 2016 period, we completed the purchase of Processa for $5.9 million. Capitalfund capital expenditures are expected to be funded bywith cash flow generated from operations and, if necessary, borrowings under our Revolving Facility. We expect capital expenditures to be in a range of $30 million to $35 million in 2017.
Dividend Payments
Historically, we have paid a regular quarterly dividend on our common stock, subject to the declaration thereof by our Board each quarter. On February 17, 2017, our18, 2021, the Board declared a quarterly cash dividenddividends of $0.10$0.05 per share of common stock, which waswere paid on March 20, 2017 to stockholders of record as of March 1, 2017. On April 27, 2017, the Board declared a quarterly cash dividend of $0.10 per share of common stock, which was paid on June 9, 201726, 2021, to stockholders of record as of the close of business on May 8, 2017. March 1, 2021.
On July 25, 2017, theApril 22, 2021, our Board declared a regular quarterly cash dividend of $0.10$0.05 per share on the Company’s outstanding shares of common stock, which wasstock. The dividend will be paid on September 8, 2017June 4, 2021 to stockholders of record as of the close of business on August 7, 2017. On November 2, 2017, the Board voted to temporarily suspend the quarterly dividend on the Company's common stock due to the difficult operating environment in Puerto Rico.
May 3, 2021. The Board anticipates reviewing thedeclaring this dividend policy as conditions stabilize in Puerto Rico. Future dividendfuture quarters on a regular basis; however future declarations of dividends are subject to Board of Directors'the Board’s approval and may be adjusted based onas business needs or as market conditions change.
Financial Obligations
Senior Secured Credit Facilities
On April 17, 2013,November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement (the “2013 Credit Agreement”) governingproviding for the senior secured credit facilities, consisting of a $300.0$220.0 million term loan A facility that matures on November 27, 2023 (the “Term“2023 Term A Loan”), a $400.0$325.0 million term loan B facility that matures on November 27, 2024 (the “Term“2024 Term B Loan”), and a $100.0$125.0 million revolving credit facility (the "Revolving Facility"“Revolving Facility”).
During 2016, the Company entered into two separate amendments to the 2013 Credit Agreement. In the second quarter that matures on November 27, 2023, with a syndicate of 2016, EVERTEC Group, together with certain other directlenders and indirect subsidiariesBank of the Company, entered into a second amendment and waiver to the outstanding 2013 Credit Agreement (the “Second Amendment”). The Company paid each lender that consented to the amendment a fee equal to 0.50%America, N.A. (“Bank of the aggregate principal amount of outstanding term loans and revolving commitments held by such lender. The credit amendment fees paid during the second quarter of 2016 amounted to $3.6 million. In the fourth quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiaries of the Company, entered into a third amendment (the “Third Amendment”) to the 2013 Credit Agreement. The Third Amendment extends the maturity of (a) approximately $219 million of EVERTEC Group’s existing approximately $250 million of Term A loan facility to January 17, 2020 (the “2020 Term A loan”) and (b) $65 million of EVERTEC Group’s existing $100 million of Revolving Facility to January 17, 2020. The remaining approximately $30 million of Term A loan (the “2018 Term A loan”) and the $35 million of Revolving Facility that were not extended will remain in place and mature as originally scheduled on April 17, 2018. The Term B Loan will remain in place and mature as originally scheduled on April 17, 2020 (collectively, the “Senior Secured term loans”).
Under the terms of the Third Amendment, the 2018 Term A Loan amortizes on a basis of 1.875% of the original principal amount beginning in the third 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. The 2020 Term A Loan amortizes on 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, with the balance payable on the final maturity date. Principal payments for the Term B Loan were not changed by the Third Amendment and continues to require payments on the last business day of each quarter equal to 0.250% of the original principal amount and the remaining outstanding principal amount on the maturity of the Term B Loan.
The applicable margin under the 2013 Credit Agreement is based on, at EVERTEC Group’s option, (i) with respect to any 2018 Term A Loan, 2.50% per annum in the case of any LIBOR Loan and 1.50% per annum in the case of any Alternate Base Rate (“ABR”America”), as defined inadministrative agent, collateral agent, swingline lender and line of credit issuer (collectively the 2013“2018 Credit Agreement”).
The 2018 Credit Agreement subject to reductionrequire mandatory repayment of outstanding principal balances based on achievementa percentage of specific first lien secured leverage ratios, (ii)excess cash flows provided that no such payment shall be due if the resulting amount of the excess cash flows multiplied by the applicable percentage is less than $10 million. On March 8, 2021 and March 5, 2020, in connection with respect to any 2020 Term A Loan, 2.50% per annum inthis mandatory repayment clause, the caseCompany repaid $17.8 million and $17.0 million, respectively, as a result 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 Facility, (A) 2.50% per annum in the case of any LIBOR Loan and (B) 1.50% per annum in the case of any ABR Loan.
The Revolving 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 feeexcess cash flows for the unused portion of this facility ranges from 0.125% to 0.375%years ended December 31, 2020 and is based on EVERTEC Group’s first lien secured net leverage ratio.2019.
All loans may be prepaid without premium or penalty.
The unpaid principal balance at September 30, 2017March 31, 2021 of the 2018 Term A Loan, the 20202023 Term A Loan and the 2024 Term B Loan was $27.6 million, $206.2$179.9 million and $383.0$298.3 million, respectively. The additional borrowing capacity forunder our Revolving Facility at March 31, 2021 was $117.0 million. The Company issues letters of credit against the Revolving Facility at September 30, 2017 was $67.0 million.which reduce the additional borrowing capacity of the Revolving Facility.
Notes payablePayable
In December 2014, June 2015 and May 2016,2019, EVERTEC Group entered into two non-interest bearing financing agreements amounting to $4.6 million, $1.1 million, and $0.7 million, respectively, and in October 2016 entered into an interest bearing agreement of $1.1$2.4 million to purchase software.software and maintenance. As of September 30, 2017March 31, 2021 and December 31, 2016,2020, the outstanding principal balance of the notes payable iswas $0.8 million and $1.5 million, and $3.4 million, respectively. The current portion of theseThese notes is recorded as part ofare included in accounts payable andin the long-term portion is included in other long-term liabilities.Company's unaudited condensed consolidated balance sheets.
Interest Rate SwapSwaps
As of September 30, 2017,March 31, 2021, the Company has the followingan interest rate swap agreement, convertingentered into in December 2018, which converts a portion of the interest rate exposurepayments on the Company's 2024 Term B Loan from variable to fixed:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Swap Agreement | | Effective date | | Maturity Date | | Notional Amount | | Variable Rate | | Fixed Rate |
| | | | | | | | |
Effective date | | Maturity Date | | Notional Amount | | Variable Rate | | Fixed Rate |
January 20172018 Swap | | April 2020 | | $200 millionNovember 2024 | | $250 million | | 1-month LIBOR | | 1.9225%2.89% |
The Company has accounted for this transactionagreement as a cash flow hedge. 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 in 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 September 30, 2017March 31, 2021 and December 31, 2016,2020, the carrying amount of the derivative included on the Company’sCompany's unaudited condensed consolidated balance sheets was $21.0 million and $25.6 million, respectively. The fair value of this derivative is as follows:estimated using Level 2 inputs in the fair value hierarchy on a recurring basis. Refer to Note 7 for disclosure of losses recorded on cash flow hedging activities.
|
| | | | | | | | |
(Dollar amounts in thousands) | | September 30, 2017 | | December 31, 2016 |
Other long-term liabilities | | $ | 1,207 |
| | $ | 1,964 |
|
During the three and nine months ended September 30, 2017,March 31, 2021 and 2020, the Company reclassified losses of $0.4$1.7 million and $1.3gains of $0.2 million, respectively, from accumulated other comprehensive loss into income through interest expense. Based on current LIBOR rates, the Company expects to reclassify $1.4losses of $6.9 million from accumulated other comprehensive loss into income through interest expense over the next 12 months.
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
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 September 30, 2017, the seniorMarch 31, 2021, our secured leverage ratio was 3.301.68 to 1.00.1.00, as determined in accordance with the 2018 Credit Agreement. As of the date of filing of this Form 10-Q, no event has occurred that constitutes an Event of Default or Default.Default under our 2018 Credit Agreement.
Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share (Non-GAAP Measures)
We define “EBITDA” as earnings before interest, taxes, depreciation and amortization. We define “Adjusted EBITDA” as EBITDA further adjusted to exclude unusual items and other adjustments described below. Adjusted EBITDA by segment is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in conformity with ASC Topic 280, Segment Reporting, and is excluded from the definition of non-GAAP financial measures under the Securities and Exchange Commission's Regulation G and Item 10(e) of Regulation S-K. We define “Adjusted Net Income” as net income adjusted to exclude unusual items and other adjustments described below. We define “Adjusted Earnings per common share” as Adjusted Net Income divided by diluted shares outstanding.
We present EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of ourselves and other companies in our industry. In addition, our presentation of Adjusted EBITDA is substantially consistent with the equivalent measurements that are contained in the senior secured credit facilities in testing EVERTEC Group’s compliance with covenants therein such as the senior secured leverage ratio. We use Adjusted Net Income to measure our overall profitability because we believe better reflects our comparable operating performance by excluding the impact of the non-cash amortization and depreciation that was created as a result of the Merger. In addition, in evaluating EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, you should be aware that in the future we may incur expenses such as those excluded in calculating them. Further, our presentation of these measures should not be construed as an inference that our future operating results will not be affected by unusual or nonrecurring items.
Some of the limitations of EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted earnings per common share are as follows:
•they do not reflect cash outlays for capital expenditures or future contractual commitments;
•they do not reflect changes in, or cash requirements for, working capital;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements;
•in the case of EBITDA and Adjusted EBITDA, they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness;
•in the case of EBITDA and Adjusted EBITDA, they do not reflect income tax expense or the cash necessary to pay income taxes; and
•other companies, including other companies in our industry, may not use EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per common share or may calculate EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share differently than as presented in this Report, limiting their usefulness as a comparative measure.
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share are not measurements of liquidity or financial performance under GAAP. You should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share as alternatives to cash flows from operating activities or any other performance measures determined in accordance with GAAP, as an indicator of cash flows, as a measure of liquidity or as an alternative to operating or net income determined in accordance with GAAP.
A reconciliation of net income to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share is provided below:
In the ordinary course of business, the Company may enter into commercial commitments. AsWith the exception of September 30, 2017the letters of credit issued against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility, as of March 31, 2021, the Company did not have any off balanceoff-balance sheet items.
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.
While inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have an impact on our operating results, inflation has had minimal net effect on our operating results during the last three years as overall inflation has been offset by increased selling process and cost reduction actions. We cannot assure you, however, that we will not be affected by general inflation in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.Risk
We are exposed to market risks arising from our normal business activities. These market risks principally involve the possibility of changes in interest rates that will adversely affect the value of our financial assets and liabilities or future cash flows and earnings. Market risk is the potential loss arising from adverse changes in market rates and prices.
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 2024 Term B Loan is subject to floorsa floor or a minimum rates.rate. A 100 basis point increase in interest rates over our floor(s) on our debt balances outstanding as of September 30, 2017, after considering our interest rate swap,March 31, 2021, under the senior secured credit facilities, would increase our annual interest expense by approximately $4.2$2.8 million. The impact on future interest expense as a result of future changes in interest rates will depend largely on the gross amount of our borrowings at that time.
The interest rate swap exposes us to credit risk in the event that the counterparty to the swap agreement does not or cannot meet its obligations. The notional amount is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The loss would be limited to the amount that would have been received, if any, over the remaining life of the swap. The counterparty to the swap is a major United StatesUS based financial institution and we expect the counterparty to be able to perform its obligations under the swap. We use derivative financial instruments for hedging purposes only and not for trading or speculative purposes
We conduct business in certain countries in Latin America. Some of this business is conducted in the countries’ local currencies. The resulting foreign currency translation adjustments, from operations for which the functional currency is other than the U.S. dollar, are reported in accumulated other comprehensive loss in the unaudited condensed consolidated condensed balance sheets, except for highly inflationary environments in which the effects would be included in other operating income in the consolidated condensed statementssheets. As of income and comprehensive income. At September 30, 2017,March 31, 2021, the Company had $10.9$27.5 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss compared with an unfavorable foreign currency translation adjustment of $10.4$24.8 million at December 31, 2016.2020.
Item 4. Controls and Procedures
The Company, under the direction of the Chief Executive Officer and the Chief Financial Officer, has established disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a -15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2017March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are defendants in various lawsuits or arbitration proceedings arising in the ordinary course of business. Management believes, based on the opinion of legal counsel and other factors, that the aggregated liabilities, if any, arising from such actions will not have a material adverse effect on the financial condition, results of operations and the cash flows of the Company.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
* Filed herewith.
** Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.