UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019March 31, 2020 or |
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER 001-35872
EVERTEC, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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| | | |
Puerto Rico | | 66-0783622 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification number) |
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Cupey Center Building, | Road 176, Kilometer 1.3, | | |
San Juan, | Puerto Rico | | 00926 |
(Address of principal executive offices) | | (Zip Code) |
(787) 759-9999
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | EVTC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | | Accelerated filer | | ☐ |
Non-accelerated filer | ☐ | | | Smaller reporting company | | ☐ |
Emerging growth company | ☐ | | | | | |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
At October 25, 2019,May 7, 2020, there were 71,925,84371,865,305 outstanding shares of common stock of EVERTEC, Inc.
TABLE OF CONTENTS
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Part I. FINANCIAL INFORMATION | |
Item 1. | Financial Statements | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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All reports we file with the Securities and Exchange Commission ("SEC") are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC’s website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.evertecinc.com as soon as reasonably practicable after filing such material with the SEC.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of, and subject to the protection of, the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. Among the factors that significantly impact our business and could impact our business in the future are:
our reliance on our relationship with Popular, Inc. (“Popular”) for a significant portion of our revenues pursuant to our master services agreement with them, and to grow our merchant acquiring business;
as a regulated institution, the likelihood we will be required to obtain regulatory approval before engaging in certain new activities or businesses, whether organically or by acquisition, and our potential inability to obtain such approval on a timely basis or at all, which may make transactions more expensive or impossible to complete, or make us less attractive to potential sellers;
our ability to renew our client contracts on terms favorable to us, including our contract with Popular, and any significant concessions we may have to grant to Popular with respect to pricing or other key terms in anticipation of the negotiation of the extension of the MSA, both in respect of the current term and any extension of the MSA;
our dependence on our processing systems, technology infrastructure, security systems and fraudulent payment detection systems, as well as on our personnel and certain third parties with whom we do business, and the risks to our business if our systems are hacked or otherwise compromised;
our ability to develop, install and adopt new software, technology and computing systems;
a decreased client base due to consolidations and failures in the financial services industry;
the credit risk of our merchant clients, for which we may also be liable;
the continuing market position of the ATH network;
a reduction in consumer confidence, whether as a result of a global economic downturn or otherwise, which leads to a decrease in consumer spending;
our dependence on credit card associations, including any adverse changes in credit card association or network rules or fees;
changes in the regulatory environment and changes in international, legal, tax, political, administrative or economic conditions;
the geographical concentration of our business in Puerto Rico, including our business with the government of Puerto Rico and its instrumentalities, which are facing severe political and fiscal challenges;
additional adverse changes in the general economic conditions in Puerto Rico, whether as a result of the government’s debt crisis or otherwise, including the continued migration of Puerto Ricans to the U.S. mainland, which could negatively affect our customer base, general consumer spending, our cost of operations and our ability to hire and retain qualified employees;
a protracted federal government shutdown may affect our financial performance;
operating an international business in Latin America and the Caribbean, in jurisdictions with potential political and economic instability;
our ability to execute our geographic expansion and acquisition strategies, including challenges in successfully acquiring new businesses and integrating and growing acquired businesses;
our ability to protect our intellectual property rights against infringement and to defend ourselves against claims of infringement brought by third parties;
our ability to recruit and retain the qualified personnel necessary to operate our business;
our ability to comply with U.S. federal, state, local and foreign regulatory requirements;
evolving industry standards and adverse changes in global economic, political and other conditions;
our high level of indebtedness and restrictions contained in our debt agreements, including the senior secured credit facilities, as well as debt that could be incurred in the future;
our ability to prevent a cybersecurity attack or breach in our information security;
our ability to generate sufficient cash to service our indebtedness and to generate future profits;
our ability to refinance our debt;
the possibility that we could lose our preferential tax rate in Puerto Rico;
the risk that the counterparty to our interest rate swap agreements fail to satisfy its obligations under the agreement;
uncertainty of the pending debt restructuring process under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), as well as actions taken by the government of Puerto Rico government or by the PROMESA Board to address the fiscal crisis in Puerto Rico;
the aftermath of Hurricanes Irma and Maria and their continued impact on the economies of Puerto Rico and the Caribbean;
the possibility of future catastrophic hurricanes affecting Puerto Rico and/or the Caribbean, as well as other potential natural disasters; and
the nature, timing and amount of any restatement.restatement; and
the potential impact of COVID-19 on our revenues, net income and liquidity due to future disruptions in operations as well as the macroeconomic instability caused by the pandemic.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under “Item 1A. Risk Factors,” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report. These forward-looking statements speak only as of the date of this Report, and we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
EVERTEC, Inc. Unaudited Condensed Consolidated Balance Sheets
(Dollar amounts in thousands, except for share information)
| | | | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
Assets |
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Current Assets: |
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|
|
|
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|
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|
Cash and cash equivalents |
| $ | 102,535 |
|
| $ | 69,973 |
|
| $ | 103,521 |
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| $ | 111,030 |
|
Restricted cash |
| 13,399 |
|
| 16,773 |
|
| 21,583 |
|
| 20,091 |
|
Accounts receivable, net |
| 92,195 |
|
| 100,323 |
|
| 95,305 |
|
| 106,812 |
|
Prepaid expenses and other assets |
| 36,405 |
|
| 29,124 |
|
| 39,904 |
|
| 38,085 |
|
Total current assets |
| 244,534 |
|
| 216,193 |
|
| 260,313 |
|
| 276,018 |
|
Investment in equity investee |
| 12,257 |
|
| 12,149 |
|
| 12,568 |
|
| 12,288 |
|
Property and equipment, net |
| 43,179 |
|
| 36,763 |
|
| 41,984 |
|
| 43,791 |
|
Operating lease right-of-use asset | | 30,920 |
| | — |
| | 28,356 |
| | 29,979 |
|
Goodwill |
| 395,848 |
|
| 394,644 |
|
| 394,498 |
|
| 399,487 |
|
Other intangible assets, net |
| 244,672 |
|
| 259,269 |
|
| 229,787 |
|
| 241,937 |
|
Deferred tax asset |
| 2,020 |
|
| 1,917 |
|
| 3,261 |
|
| 2,131 |
|
Net investment in lease | | 780 |
| | 1,060 |
| |
Net investment in leases | | | 554 |
| | 722 |
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Other long-term assets |
| 5,856 |
|
| 5,297 |
|
| 7,897 |
|
| 5,323 |
|
Total assets |
| $ | 980,066 |
|
| $ | 927,292 |
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| $ | 979,218 |
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| $ | 1,011,676 |
|
Liabilities and stockholders’ equity |
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Current Liabilities: |
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Accrued liabilities |
| $ | 64,226 |
|
| $ | 57,006 |
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| $ | 52,652 |
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| $ | 58,160 |
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Accounts payable |
| 24,966 |
|
| 47,272 |
|
| 28,230 |
|
| 39,165 |
|
Unearned income |
| 14,596 |
|
| 11,527 |
|
| 18,138 |
|
| 20,668 |
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Income tax payable |
| 4,595 |
|
| 6,650 |
|
| 9,190 |
|
| 6,298 |
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Current portion of long-term debt |
| 14,250 |
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| 14,250 |
|
| 14,250 |
|
| 14,250 |
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Current portion of operating lease liability | | 5,704 |
| | — |
| | 5,740 |
| | 5,773 |
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Total current liabilities |
| 128,337 |
|
| 136,705 |
|
| 128,200 |
|
| 144,314 |
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Long-term debt |
| 514,217 |
|
| 524,056 |
|
| 490,844 |
|
| 510,947 |
|
Deferred tax liability |
| 4,565 |
|
| 9,950 |
|
| 2,957 |
|
| 4,261 |
|
Unearned income - long term |
| 29,722 |
|
| 26,075 |
|
| 32,037 |
|
| 28,437 |
|
Operating lease liability - long-term | | 25,686 |
| | — |
| | 22,869 |
| | 24,679 |
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Other long-term liabilities |
| 28,283 |
|
| 14,900 |
|
| 39,627 |
|
| 27,415 |
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Total liabilities |
| 730,810 |
|
| 711,686 |
|
| 716,534 |
|
| 740,053 |
|
Commitments and contingencies (Note 12) |
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Commitments and contingencies (Note 13) | |
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Stockholders’ equity |
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Preferred stock, par value $0.01; 2,000,000 shares authorized; none issued |
| — |
|
| — |
|
| — |
|
| — |
|
Common stock, par value $0.01; 206,000,000 shares authorized; 71,947,563 shares issued and outstanding at September 30, 2019 (December 31, 2018 - 72,378,710) |
| 719 |
|
| 723 |
| |
Additional paid-in capital |
| 3,058 |
|
| 5,783 |
| |
Common stock, par value $0.01; 206,000,000 shares authorized; 71,865,305 shares issued and outstanding at March 31, 2020 (December 31, 2019 - 72,000,261) | |
| 719 |
|
| 720 |
|
Accumulated earnings |
| 274,518 |
|
| 228,742 |
|
| 308,491 |
|
| 296,476 |
|
Accumulated other comprehensive loss, net of tax |
| (33,094 | ) |
| (23,789 | ) |
| (50,173 | ) |
| (30,009 | ) |
Total EVERTEC, Inc. stockholders’ equity |
| 245,201 |
|
| 211,459 |
|
| 259,037 |
|
| 267,187 |
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Non-controlling interest |
| 4,055 |
|
| 4,147 |
|
| 3,647 |
|
| 4,436 |
|
Total equity |
| 249,256 |
|
| 215,606 |
|
| 262,684 |
|
| 271,623 |
|
Total liabilities and equity |
| $ | 980,066 |
|
| $ | 927,292 |
|
| $ | 979,218 |
|
| $ | 1,011,676 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Income and Comprehensive Income
(Dollar amounts in thousands, except per share information)
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
| | | | | | | | | | | | |
Revenues (affiliates Note 13) | | $ | 118,804 |
| | $ | 112,017 |
| | $ | 360,188 |
| | $ | 335,638 |
| |
Revenues (affiliates Note 14) | | | $ | 121,942 |
| | $ | 118,836 |
|
| | | | | | | | | | | | |
Operating costs and expenses | | | | | | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization shown below | | 51,878 |
| | 49,464 |
| | 154,498 |
| | 146,015 |
| |
Cost of revenues, exclusive of depreciation and amortization | | | 54,067 |
| | 50,019 |
|
Selling, general and administrative expenses | | 15,152 |
| | 14,404 |
| | 45,355 |
| | 45,684 |
| | 17,317 |
| | 15,139 |
|
Depreciation and amortization | | 16,972 |
| | 15,788 |
| | 50,440 |
| | 47,383 |
| | 17,795 |
| | 16,273 |
|
Total operating costs and expenses | | 84,002 |
| | 79,656 |
| | 250,293 |
| | 239,082 |
| | 89,179 |
| | 81,431 |
|
Income from operations | | 34,802 |
| | 32,361 |
| | 109,895 |
| | 96,556 |
| | 32,763 |
| | 37,405 |
|
Non-operating income (expenses) | | | | | | | | | | | | |
Interest income | | 348 |
| | 205 |
| | 864 |
| | 526 |
| | 363 |
| | 259 |
|
Interest expense | | (7,267 | ) | | (7,557 | ) | | (22,191 | ) | | (22,901 | ) | | (6,779 | ) | | (7,551 | ) |
Earnings of equity method investment | | 371 |
| | 238 |
| | 726 |
| | 612 |
| | 338 |
| | 222 |
|
Other income (expenses) | | 252 |
| | 1,130 |
| | (619 | ) | | 1,878 |
| |
Other income, net | | | 108 |
| | 208 |
|
Total non-operating expenses | | (6,296 | ) | | (5,984 | ) | | (21,220 | ) | | (19,885 | ) | | (5,970 | ) | | (6,862 | ) |
Income before income taxes | | 28,506 |
| | 26,377 |
| | 88,675 |
| | 76,671 |
| | 26,793 |
| | 30,543 |
|
Income tax expense | | 3,720 |
| | 3,302 |
| | 10,018 |
| | 10,349 |
| | 4,518 |
| | 3,809 |
|
Net income | | 24,786 |
| | 23,075 |
| | 78,657 |
| | 66,322 |
| | 22,275 |
| | 26,734 |
|
Less: Net income attributable to non-controlling interest | | 32 |
| | 78 |
| | 201 |
| | 251 |
| | 64 |
| | 90 |
|
Net income attributable to EVERTEC, Inc.’s common stockholders | | 24,754 |
| | 22,997 |
| | 78,456 |
| | 66,071 |
| | 22,211 |
| | 26,644 |
|
Other comprehensive income (loss), net of tax of $(278), $180, $(1,279) and $348 | | | | | | | | | |
Other comprehensive income (loss), net of tax of $1,085 and $384 | | | | | |
Foreign currency translation adjustments | | (576 | ) | | (4,325 | ) | | 3,714 |
| | (6,225 | ) | | (8,305 | ) | | 1,965 |
|
(Loss) gain on cash flow hedges | | (2,922 | ) | | 219 |
| | (13,019 | ) | | 2,109 |
| |
Loss on cash flow hedges | | | (11,859 | ) | | (4,055 | ) |
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders | | $ | 21,256 |
| | $ | 18,891 |
| | $ | 69,151 |
| | $ | 61,955 |
| | $ | 2,047 |
| | $ | 24,554 |
|
Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders | | $ | 0.34 |
| | $ | 0.32 |
| | $ | 1.09 |
| | $ | 0.91 |
| | $ | 0.31 |
| | $ | 0.37 |
|
Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders | | $ | 0.34 |
| | $ | 0.31 |
| | $ | 1.07 |
| | $ | 0.89 |
| | $ | 0.30 |
| | $ | 0.36 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollar amounts in thousands, except share information)
| | | | Number of Shares of Common Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Non-Controlling Interest | | Total Stockholders’ Equity | | Number of Shares of Common Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Non-Controlling Interest | | Total Stockholders’ Equity |
Balance at December 31, 2018 | | 72,378,710 |
| | $ | 723 |
| | $ | 5,783 |
| | $ | 228,742 |
| | $ | (23,789 | ) | | $ | 4,147 |
| | $ | 215,606 |
| |
Balance at December 31, 2019 | | | 72,000,261 |
| | $ | 720 |
| | $ | — |
| | $ | 296,476 |
| | $ | (30,009 | ) | | $ | 4,436 |
| | $ | 271,623 |
|
Share-based compensation recognized | | — |
| | — |
| | 3,279 |
| | — |
| | — |
| | — |
| | 3,279 |
| | — |
| | — |
| | 3,483 |
| | — |
| | — |
| | — |
| | 3,483 |
|
Repurchase of common stock | | (618,573 | ) | | (6 | ) | | (3,129 | ) | | (14,351 | ) | | — |
| | — |
| | (17,486 | ) | | (336,022 | ) | | (3 | ) | | (775 | ) | | (6,522 | ) | | — |
| | — |
| | (7,300 | ) |
Restricted stock units delivered, net of cashless | | 507,308 |
| | 5 |
| | (5,933 | ) | | — |
| | — |
| | — |
| | (5,928 | ) | |
Restricted stock units delivered | | | 201,066 |
| | 2 |
| | (2,708 | ) | | — |
| | — |
| | — |
| | (2,706 | ) |
Net income | | — |
| | — |
| | — |
| | 26,644 |
| | — |
| | 90 |
| | 26,734 |
| | — |
| | — |
| | — |
| | 22,211 |
| | — |
| | 64 |
| | 22,275 |
|
Cash dividends declared on common stock, $0.05 per share | | — |
| | — |
| | — |
| | (3,617 | ) | | — |
| | — |
| | (3,617 | ) | | — |
| | — |
| | — |
| | (3,600 | ) | | — |
| | — |
| | (3,600 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (2,090 | ) | | — |
| | (2,090 | ) | | — |
| | — |
| | — |
| | | | (20,164 | ) | | (853 | ) | | (21,017 | ) |
Balance at March 31, 2019 | | 72,267,445 |
| | 722 |
| | — |
| | 237,418 |
| | (25,879 | ) | | 4,237 |
| | 216,498 |
| |
Share-based compensation recognized | | — |
| | — |
| | 3,436 |
| | — |
| | — |
| | — |
| | 3,436 |
| |
Repurchase of common stock | | (368,293 | ) | | (4 | ) | | (3,201 | ) | | (7,505 | ) | | — |
| | — |
| | (10,710 | ) | |
Restricted stock units delivered, net of cashless | | 38,364 |
| | 1 |
| | (235 | ) | | — |
| | — |
| | — |
| | (234 | ) | |
Net income | | — |
| | — |
| | — |
| | 27,058 |
| | — |
| | 79 |
| | 27,137 |
| |
Cash dividends declared on common stock, $0.05 per share | | — |
| | — |
| | — |
| | (3,610 | ) | | — |
| | — |
| | (3,610 | ) | |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (3,717 | ) | | — |
| | (3,717 | ) | |
Balance at June 30, 2019 | | 71,937,516 |
| | 719 |
| | — |
| | 253,361 |
| | (29,596 | ) | | 4,316 |
| | 228,800 |
| |
Share-based compensation recognized | | — |
| | — |
| | 3,453 |
| | — |
| | — |
| | — |
| | 3,453 |
| |
Repurchase of common stock | | (8,120 | ) | | — |
| | (253 | ) | | — |
| | — |
| | — |
| | (253 | ) | |
Restricted stock units delivered, net of cashless | | 18,167 |
| | — |
| | (142 | ) | | — |
| | — |
| | — |
| | (142 | ) | |
Net income | | — |
| | — |
| | — |
| | 24,754 |
| | — |
| | 32 |
| | 24,786 |
| |
Cash dividends declared on common stock, $0.05 per share | | — |
| | — |
| | — |
| | (3,597 | ) | | — |
| | — |
| | (3,597 | ) | |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (3,498 | ) | | (293 | ) | | (3,791 | ) | |
Balance at September 30, 2019 | | 71,947,563 |
| | $ | 719 |
| | $ | 3,058 |
| | $ | 274,518 |
| | $ | (33,094 | ) | | $ | 4,055 |
| | $ | 249,256 |
| |
Cumulative adjustment for the implementation of ASU 2016-13 | | | | | | | | | (74 | ) | | | | | | (74 | ) |
Balance at March 31, 2020 | | | 71,865,305 |
| | $ | 719 |
| | $ | — |
| | $ | 308,491 |
| | $ | (50,173 | ) | | $ | 3,647 |
| | $ | 262,684 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares of Common Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Non-Controlling Interest | | Total Stockholders’ Equity |
Balance at December 31, 2017 | | 72,393,933 |
| | $ | 723 |
| | $ | 5,350 |
| | $ | 148,887 |
| | $ | (10,848 | ) | | $ | 3,864 |
| | $ | 147,976 |
|
Cumulative adjustment from implementation of ASC 606 | | — |
| | — |
| | — |
| | 858 |
| | — |
| | (16 | ) | | 842 |
|
Share-based compensation recognized | | — |
| | — |
| | 3,637 |
| | — |
| | — |
| | — |
| | 3,637 |
|
Restricted stock units delivered, net of cashless | | 35,208 |
| | 1 |
| | (205 | ) | | — |
| | — |
| | — |
| | (204 | ) |
Net income | | — |
| | — |
| | — |
| | 23,022 |
| | — |
| | 92 |
| | 23,114 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 3,910 |
| | — |
| | 3,910 |
|
Balance at March 31, 2018 | | 72,429,141 |
| | 724 |
| | 8,782 |
| | 172,767 |
| | (6,938 | ) | | 3,940 |
| | 179,275 |
|
Share-based compensation recognized | | — |
| | — |
| | 3,685 |
| | — |
| | — |
| | — |
| | 3,685 |
|
Restricted stock units delivered, net of cashless | | 287,997 |
| | 3 |
| | (1,813 | ) | | — |
| | — |
| | — |
| | (1,810 | ) |
Net income | | — |
| | — |
| | — |
| | 20,052 |
| | — |
| | 81 |
| | 20,133 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (3,920 | ) | | — |
| | (3,920 | ) |
Balance at June 30, 2018 | | 72,717,138 |
| | 727 |
| | 10,654 |
| | 192,819 |
| | (10,858 | ) | | 4,021 |
| | 197,363 |
|
Share-based compensation recognized | | — |
| | — |
| | 2,370 |
| | — |
| | — |
| | — |
| | 2,370 |
|
Restricted stock units delivered, net of cashless | | 23,139 |
| | — |
| | (114 | ) | | — |
| | — |
| | — |
| | (114 | ) |
Net income | | — |
| | — |
| | — |
| | 22,997 |
| | — |
| | 78 |
| | 23,075 |
|
Cash dividends declared on common stock | |
|
| |
|
| |
|
| | (3,636 | ) | |
|
| |
|
| | (3,636 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (4,106 | ) | | — |
| | (4,106 | ) |
Balance at September 30, 2018 | | 72,740,277 |
| | $ | 727 |
| | $ | 12,910 |
| | $ | 212,180 |
| | $ | (14,964 | ) | | $ | 4,099 |
| | $ | 214,952 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares of Common Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Non-Controlling Interest | | Total Stockholders’ Equity |
Balance at December 31, 2018 | | 72,378,710 |
| | $ | 723 |
| | $ | 5,783 |
| | $ | 228,742 |
| | $ | (23,789 | ) | | $ | 4,147 |
| | $ | 215,606 |
|
Share-based compensation recognized | | — |
| | — |
| | 3,279 |
| | — |
| | — |
| | — |
| | 3,279 |
|
Repurchase of common stock | | (618,573 | ) | | (6 | ) | | (3,129 | ) | | (14,351 | ) | | — |
| | — |
| | (17,486 | ) |
Restricted stock units delivered | | 507,308 |
| | 5 |
| | (5,933 | ) | | — |
| | — |
| | — |
| | (5,928 | ) |
Net income | | — |
| | — |
| | — |
| | 26,644 |
| | — |
| | 90 |
| | 26,734 |
|
Cash dividends declared on common stock, $0.05 per share | | — |
| | — |
| | — |
| | (3,617 | ) | | — |
| | — |
| | (3,617 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (2,090 | ) | | — |
| | (2,090 | ) |
Balance at March 31, 2019 | | 72,267,445 |
| | $ | 722 |
| | $ | — |
| | $ | 237,418 |
| | $ | (25,879 | ) | | $ | 4,237 |
| | $ | 216,498 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
| | | | Nine months ended September 30, | | Three months ended March 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
Cash flows from operating activities |
|
| |
|
|
| |
|
Net income |
| $ | 78,657 |
| | $ | 66,322 |
|
| $ | 22,275 |
| | $ | 26,734 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
| |
|
|
| |
|
Depreciation and amortization |
| 50,440 |
| | 47,383 |
|
| 17,795 |
| | 16,273 |
|
Amortization of debt issue costs and accretion of discount |
| 1,256 |
| | 3,410 |
|
| 621 |
| | 415 |
|
Operating lease amortization | | 3,966 |
| | — |
| | 1,173 |
| | 1,472 |
|
Provision for doubtful accounts and sundry losses |
| 3,224 |
| | 1,065 |
|
| 104 |
| | 815 |
|
Deferred tax benefit |
| (4,197 | ) | | (2,734 | ) |
| (1,080 | ) | | (882 | ) |
Share-based compensation |
| 10,168 |
| | 9,692 |
|
| 3,483 |
| | 3,279 |
|
Loss on disposition of property and equipment and other intangibles |
| 691 |
| | 12 |
|
| 81 |
| | 22 |
|
Earnings of equity method investment |
| (726 | ) | | (612 | ) |
| (338 | ) | | (222 | ) |
Dividend received from equity method investment |
| 485 |
| | 390 |
| |
(Increase) decrease in assets: |
|
| |
|
|
| |
|
Accounts receivable, net |
| 6,475 |
| | (64 | ) |
| 11,729 |
| | 3,961 |
|
Prepaid expenses and other assets |
| (7,268 | ) | | (4,462 | ) |
| (1,836 | ) | | (5,326 | ) |
Other long-term assets |
| (1,450 | ) | | (280 | ) |
| (2,477 | ) | | (2,558 | ) |
Increase (decrease) in liabilities: |
|
| |
|
|
| |
|
Accounts payable and accrued liabilities |
| (6,834 | ) | | (3,674 | ) | |
Accrued liabilities and accounts payable | |
| (20,662 | ) | | (18,339 | ) |
Income tax payable |
| (2,080 | ) | | 4,278 |
|
| 3,307 |
| | 191 |
|
Unearned income |
| 6,718 |
| | 7,655 |
|
| 1,075 |
| | 4,754 |
|
Operating lease liabilities | | (4,825 | ) | | — |
| | (1,409 | ) | | (1,281 | ) |
Other long-term liabilities |
| 1,467 |
| | 62 |
|
| 84 |
| | 31 |
|
Total adjustments |
| 57,510 |
| | 62,121 |
|
| 11,650 |
| | 2,605 |
|
Net cash provided by operating activities |
| 136,167 |
| | 128,443 |
|
| 33,925 |
| | 29,339 |
|
Cash flows from investing activities |
|
| |
|
|
| |
|
Additions to software |
| (27,969 | ) | | (15,385 | ) |
| (6,055 | ) | | (8,917 | ) |
Property and equipment acquired |
| (21,994 | ) | | (9,620 | ) |
| (3,357 | ) | | (5,071 | ) |
Proceeds from sales of property and equipment |
| 101 |
| | 15 |
|
| — |
| | 32 |
|
Net cash used in investing activities |
| (49,862 | ) | | (24,990 | ) |
| (9,412 | ) | | (13,956 | ) |
Cash flows from financing activities |
|
| |
|
|
| |
|
Statutory withholding taxes paid on share-based compensation |
| (6,304 | ) | | (2,128 | ) |
| (2,706 | ) | | (5,928 | ) |
Net decrease in short-term borrowings |
| — |
| | (12,000 | ) | |
Net proceeds under short-term borrowings | |
| — |
| | 15,000 |
|
Repayment of short-term borrowings for purchase of equipment and software |
| (852 | ) | | (686 | ) |
| (792 | ) | | (34 | ) |
Dividends paid |
| (10,824 | ) | | (3,636 | ) |
| — |
| | (3,617 | ) |
Repurchase of common stock |
| (28,449 | ) | | — |
|
| (7,300 | ) | | (17,486 | ) |
Repayment of long-term debt |
| (10,688 | ) | | (41,374 | ) |
| (20,560 | ) | | (3,563 | ) |
Net cash used in financing activities |
| (57,117 | ) | | (59,824 | ) |
| (31,358 | ) | | (15,628 | ) |
Net increase in cash, cash equivalents and restricted cash |
| 29,188 |
| | 43,629 |
| |
Effect of foreign exchange rate on cash, cash equivalents and restricted cash | | | 828 |
| | — |
|
Net decrease in cash, cash equivalents and restricted cash | |
| (6,017 | ) | | (245 | ) |
Cash, cash equivalents and restricted cash at beginning of the period |
| 86,746 |
| | 60,367 |
|
| 131,121 |
| | 86,746 |
|
Cash, cash equivalents and restricted cash at end of the period |
| $ | 115,934 |
| | $ | 103,996 |
|
| $ | 125,104 |
| | $ | 86,501 |
|
Reconciliation of cash, cash equivalents and restricted cash | | | | | | | | |
Cash and cash equivalents | | $ | 102,535 |
| | $ | 91,310 |
| | $ | 103,521 |
| | $ | 73,183 |
|
Restricted cash | | 13,399 |
| | 12,686 |
| | 21,583 |
| | 13,318 |
|
Cash, cash equivalents and restricted cash | | $ | 115,934 |
| | $ | 103,996 |
| | $ | 125,104 |
| | $ | 86,501 |
|
Supplemental disclosure of cash flow information: | | | | | | | | |
Cash paid for interest | | $ | 21,668 |
| | $ | 19,923 |
| | $ | 6,372 |
| | $ | 7,390 |
|
Cash paid for income taxes | | 12,535 |
| | 7,150 |
| | 2,083 |
| | 3,496 |
|
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
Operating cash flows from operating leases | | 5,266 |
| | — |
| |
Supplemental disclosure of non-cash activities: | | | | | | | | |
Payable due to vendor related to equipment and software acquired | | 2,707 |
| | 330 |
| | 1,482 |
| | 893 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – The Company and Basis of Presentation
The Company
EVERTEC, Inc. (formerly known as Carib Latam Holdings, Inc.) and its subsidiaries (collectively the “Company,” or “EVERTEC”) is a leading full-service transaction processing business in Latin America and the Caribbean. The Company is based in Puerto Rico and provides a broad range of merchant acquiring, payment processing and business process management. The Company provides services across 26 countries in the region. EVERTEC owns and operates the ATH network, one of the leading automated teller machine ("ATM") and personal identification number ("PIN") debit networks in Latin America. In addition, EVERTEC provides a comprehensive suite of services for core bank processing and cash processing in Puerto Rico and technology outsourcing in all the regions the Company serves. EVERTEC serves a broad and diversified customer base of leading financial institutions, merchants, corporations and government agencies with solutions that are essential to their operations, enabling them to issue, process and accept transactions securely. EVERTEC's common stock is listed under the ticker symbol "EVTC" on the New York Stock Exchange.
Basis of Presentation
The unaudited condensed consolidated financial statements of EVERTEC have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the accompanying unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited condensed consolidated financial statements. Actual results could differ from these estimates.
Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted from these statements pursuant to the rules and regulations of the SECSecurities and Exchange Commission and, accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Company for the year ended December 31, 2018,2019, included in the Company’s 2019 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated financial statements, prepared in accordance with GAAP, contain all adjustments necessary for a fair presentation. Intercompany accounts and transactions are eliminated in consolidation.
Risks and Uncertainties due to COVID-19 Pandemic
In December 2019, the outbreak of a novel strain of coronavirus ("COVID-19") was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over 100 countries, including every state and territory of the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and shortly thereafter, governmental authorities in Puerto Rico and the other countries in which EVERTEC operates declared states of emergency and implemented numerous public health measures to try to contain the virus, including lockdowns and curfews, school and business closures and restrictions on travel. COVID-19 presents material uncertainty and risk with respect to EVERTEC’s business, results of operations and cash flows, as well as with respect to changes in laws and regulations and government and regulatory policy. As the spread of the pandemic persists, entities are experiencing conditions often associated with a general economic downturn. The outbreak has disrupted global financial markets and negatively affected supply and demand across a broad range of industries. COVID-19’s impact on global economies could have a material adverse effect on (among other things) the profitability, capital and liquidity of the Company, particularly if consumer spending levels are depressed for a prolonged period of time. While the rapid development and fluidity of the situation prevents management from having clear visibility into the medium and long-term impacts, management believes possible effects may include, but are not limited to, disruption to the Company’s customers and revenue, absenteeism in the Company’s workforce, unavailability of products and supplies used in operations, and a decline in the value of assets held by the Company, including, among other things, tangible and intangible long-lived assets, and increased levels in the Company's current expected credit loss reserve.
Given the uncertain and rapidly evolving situation, management has taken certain precautionary measures intended to help minimize the risk of COVID-19 to the Company, its employees, and customers, including the following:
The Company deployed its business continuity plan for the entire organization a few days before the government of Puerto Rico enacted a shelter in place directive on March 16, 2020. Since then, every country in which the Company operates has implemented some type of social distancing measures. Management expects that the offices will remain closed for an undetermined period, until it is deemed safe by management to return and as permitted or advised by local authorities in each country where the Company operates;
In connection with the Company's business continuity plan, we transitioned most of the Company’s employees to a work from home environment. For certain critical employees who are required to remain working on-site in order to, among other things, maintain network operations oversight functions, cash handling and other critical operations for our customers, we have implemented safety measures including administering daily temperature checks upon entry into the work site, providing protective gear, developing safe social distancing workspaces and increasing overall sanitation at our offices;
As a precautionary measure, to increase the Company's cash position and preserve its financial flexibility in light of the current uncertainty resulting from the COVID-19 outbreak, the Company drew down $30 million on its Senior Secured Revolving Facility on April 8, 2020;
On May 1, 2020, the Company commenced deferral of payroll taxes as permitted under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act"); management anticipates a $2.7 million deferral of payroll taxes during the allowed time;
Management identified additional expense reductions that are intended to be implemented as necessary; and
Management has suspended all non-essential travel for employees.
While the Company anticipates that the foregoing measures are temporary, management cannot predict their duration, and management may elect or need to take additional precautions as more information related to COVID-19 becomes available, including with respect to employees, customers, and relationships with the Company's business partners. The extent to which the COVID-19 pandemic and EVERTEC’s precautionary measures in response to it, may impact the Company’s business, financial condition or results of operations will depend on the ongoing developments related to the pandemic and its direct and indirect consequences, all of which are highly uncertain and cannot be predicted at this time.
Note 2 – Recent Accounting Pronouncements
Recently Adopted Accounting pronouncements issued prior to 2019 and not yet adoptedPronouncements
In June 2016, November 2018, April 2019 and May 2019, the Financial Accounting Standards Board ("FASB") issued updated guidance for the measurement of credit losses on financial instruments, which replaces the incurred loss impairment methodologymodel with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The main objective of these updatesthis update and subsequent clarifications and corrections, including ASU 2018-19, ASU 2019-04, ASU 2019-05, and ASU 2020-03, is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The updatesamendments affect the Company's trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash.receivables. Additional disclosures about significant estimates and credit quality are also required. In addition, the updatedThe Company adopted this new guidance also clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. The updates provide an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. The standards will be effective for the Company beginning January 1, 2020. The Company will adopt the updated guidance2020, using a modified retrospective approach through a cumulative-effect adjustment to retained earnings, as of the effective dateconsidered immaterial to align the credit loss methodology with the new standard. The Company is in the process of implementing its new credit loss model and updating its processes and controls in preparation for the adoption of the updated guidance. Based on the initial assessment, the updates are expected to have an impact on trade receivables, and other assets that represent rights to receive cash. However, the Company does not expect this standard to have a material effect on the consolidated financial statements. Results for reporting periods beginning after January 1, 2020 are presented under the new guidance provided by Accounting Standards Codification ("ASC") Topic 326, while prior period amounts are not adjusted and continue to be reported under legacy GAAP.
In August 2018, the FASB issued an updated disclosure frameworkRefer to Note 3, Current Expected Credit Losses, for fair value measurements. The amendments in the issued update remove, modify and add disclosure requirements on fair value measurements in Topic 820 Fair Value Measurements. The amendments in this update are effective to all entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain amendments in the update should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented. Early adoption is permitted upon issuance of this update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoptiondiscussions of the additional disclosures until their effective date. Mainly given that the Company does not currently have any assets or liabilities classified as level 3 in the fair
value hierarchy, the adoptionimplementation of this update is not expected to have an impact on the disclosures currently included in the notesASC Topic 326 with respect to the condensedCompany’s consolidated financial statements.
In August 2018, the FASB issued updated guidance for customer’s accounting for implementation, set-up and other upfront costs (collectively referred to as implementation costs) incurred in a cloud computing arrangement that isconstituting a service contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.software (and hosting arrangements that include an internal-use software license). The amendments inupdated guidance does not impact the accounting for the service element of a hosting arrangement that is a service contract. The Company adopted this update areguidance prospectively effective for public business entities for fiscal years beginning after December 15, 2019,January 1, 2020 with early adoption permitted, and interim periods within those fiscal years. The amendments in this update should be applied either retrospectively or prospectivelyrespect to all implementation costs incurred after the date of adoption. The Company will adopt the update effective January 1, 2020 and will apply the guidance in this update to all implementation costs prospectively.a cloud computing arrangement constituting a service contract.
In October 2018, the FASB issued updated guidance to improve related party guidance for variable interest entities. The updated guidance requires entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making fee is a variable interest. The amendments in this update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. These amendments should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The Company will adopt this guidance effective January 1, 2020. The Company does not expect the adoption of this guidance to have an impact on the consolidated financial statements.
In November 2018, the FASB issued updated guidance to clarify the interaction between the guidance for collaborative arrangements and the updated revenue recognition guidance. The amendments in this update, among other things, provide guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under ASC Topic 606.606, Revenue from Contracts with Customers. The Company adopted the amendments in this update effective January 1, 2020. All contracts after this date will be evaluated under the updated guidance.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued updated guidance for ASC Topic 848, Reference Rate Reform, to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met for a limited period of time in order to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are elective and apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments to this update are effective for public businessall entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating whether to elect the adoption of this guidance with respect to the consolidated financial statements.
Accounting Pronouncements Issued Prior to 2020 and Not Yet Adopted
In December 2019, the FASB issued updated guidance for ASC Topic 740, Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles set out in ASC Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. The amendments to this update are effective for fiscal years, and interim periods within thosesuch fiscal years, beginning after December 15, 2019, with2020. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption permitted.must adopt all the amendments in the same period. The Company will adoptis currently evaluating the impact, if any, of the adoption of this guidance effectiveon the consolidated financial statements.
Note 3 - Current Expected Credit Losses
Allowance for Current Expected Credit Losses
The Company has only one type of financial asset that is subject to the expected credit loss model, which is trade receivables for contracts with customers. While contract assets and net investments in leases are also subject to the impairment requirements of ASC Topic 326, the impairment loss identified for these financial assets is immaterial to the consolidated financial statements.
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 by government agencies. The governmental customers possess different risk characteristics than private customers because although all invoices are due every 30 days, governmental customers usually pay within 60 to 90 days after issuance (i.e., between 30 to 60 more days than private customers). The Company provides to its customers a broad range of merchant acquiring, payment services and business process management services, which constitute mission-critical technology solutions enabling customers to issue, process and accept transactions securely.
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 historically low 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, as well as, the proportion of outstanding balances per aging bucket that ultimately was never 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 activity in the allowance for expected current credit losses on trade receivables during the period from January 1, 2020 with no impactto March 31, 2020, was as follows:
|
| | | | |
(In thousands) | | March 31, 2020 |
Balance at beginning of period | | $ | 3,460 |
|
Current period provision for expected credit losses | | (19 | ) |
Write-offs | | (1,386 | ) |
Recoveries of amounts previously written-off | | 3 |
|
Balance at end of period | | $ | 2,058 |
|
The Company does not have a delinquency threshold for writing-off trade receivables. Potential write-offs of trade receivables are discussed in the Reserve Committee, which is responsible for the review and approval of write-offs.
Impairment losses on itstrade receivables are presented as net impairment losses within cost of revenue, exclusive of depreciation and amortization in the unaudited condensed consolidated financial statements. Future contracts will be evaluated understatement of income and comprehensive income. Subsequent recoveries of amounts previously written-off are credited against the updated guidance once effective.allowance for expected current credit losses within accounts receivable, net on the unaudited condensed consolidated balance sheet.
Note 34 – Property and Equipment, net
Property and equipment, net consists of the following:
| | (Dollar amounts in thousands) | | Useful life in years | | September 30, 2019 | | December 31, 2018 | | Useful life in years | | March 31, 2020 | | December 31, 2019 |
Buildings | | 30 | | $ | 1,481 |
| | $ | 1,440 |
| | 30 | | $ | 1,497 |
| | $ | 1,542 |
|
Data processing equipment | | 3 - 5 | | 119,386 |
| | 110,673 |
| | 3 - 5 | | 119,428 |
| | 116,950 |
|
Furniture and equipment | | 3 - 20 | | 6,780 |
| | 7,761 |
| | 3 - 20 | | 6,660 |
| | 6,936 |
|
Leasehold improvements | | 5 -10 | | 2,782 |
| | 2,625 |
| | 5 -10 | | 3,007 |
| | 2,814 |
|
| | 130,429 |
| | 122,499 |
| | 130,592 |
| | 128,242 |
|
Less - accumulated depreciation and amortization | | (88,561 | ) | | (86,990 | ) | | (89,916 | ) | | (85,780 | ) |
Depreciable assets, net | | 41,868 |
| | 35,509 |
| | 40,676 |
| | 42,462 |
|
Land | | 1,311 |
| | 1,254 |
| | 1,308 |
| | 1,329 |
|
Property and equipment, net | | $ | 43,179 |
| | $ | 36,763 |
| | $ | 41,984 |
| | $ | 43,791 |
|
Depreciation and amortization expense related to property and equipment for the three and nine months ended September 30, 2019March 31, 2020 amounted to $4.1$4.2 million and $12.4 million, respectively, compared to $3.7 million and $10.9$4.0 million for the same periodscorresponding period in 2018, respectively.2019.
Note 45 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill, allocated by operating segments, were as follows (See(see Note 14)15):
| | (In thousands) | | Payment Services - Puerto Rico & Caribbean | | Payment Services - Latin America | | Merchant Acquiring, net | | Business Solutions | | Total | | Payment Services - Puerto Rico & Caribbean | | Payment Services - Latin America | | Merchant Acquiring, net | | Business Solutions | | Total |
Balance at December 31, 2018 | | $ | 160,972 |
| | $ | 49,728 |
| | $ | 138,121 |
| | $ | 45,823 |
| | $ | 394,644 |
| |
Balance at December 31, 2019 | | | $ | 160,972 |
| | $ | 54,571 |
| | $ | 138,121 |
| | $ | 45,823 |
| | $ | 399,487 |
|
Foreign currency translation adjustments | | — |
| | 1,204 |
| | — |
| | — |
| | 1,204 |
| | — |
| | (4,989 | ) | | — |
| | — |
| | (4,989 | ) |
Balance at September 30, 2019 | | $ | 160,972 |
| | $ | 50,932 |
| | $ | 138,121 |
| | $ | 45,823 |
| | $ | 395,848 |
| |
Balance at March 31, 2020 | | | $ | 160,972 |
| | $ | 49,582 |
| | $ | 138,121 |
| | $ | 45,823 |
| | $ | 394,498 |
|
Goodwill is tested for impairment on an annual basis as of August 31, or more often if events or changes in circumstances indicate there may be impairment. The Company may test for goodwill impairment using a qualitative or a quantitative
analysis. In the quantitative analysis, the Company compares the estimated fair value of the reporting units to their carrying values, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the fair value does not exceed the carrying value, an impairment loss equalingis recorded for the excess amount is recorded,of the carrying value over the fair value, limited to the recorded balance of goodwill. In the first quarter of 2020, global equity markets conditions deteriorated in reaction to the COVID-19 pandemic resulting in a corresponding decrease in the Company's stock price and market capitalization. As a result, management performed assessments as to whether the fair value of reporting units was less than carrying value as of March 31, 2020 and concluded that it was more likely than not that the fair value continued to be in excess of the carrying value for all reporting units. NaN impairment losses were recognized as of September 30, 2019.March 31, 2020.
The carrying amount of other intangible assets at September 30, 2019March 31, 2020 and December 31, 20182019 was as follows:
| | | | | | September 30, 2019 | | | | March 31, 2020 |
(Dollar amounts in thousands) | | Useful life in years | | Gross amount | | Accumulated amortization | | Net carrying amount | | Useful life in years | | Gross amount | | Accumulated amortization | | Net carrying amount |
Customer relationships | | 8 - 14 | | $ | 343,174 |
| | $ | (213,989 | ) | | $ | 129,185 |
| | 8 - 14 | | $ | 343,557 |
| | $ | (226,905 | ) | | $ | 116,652 |
|
Trademark | | 2 - 15 | | 41,596 |
| | (31,565 | ) | | 10,031 |
| |
Trademarks | | | 10 - 15 | | 41,874 |
| | (33,360 | ) | | 8,514 |
|
Software packages | | 3 - 10 | | 247,650 |
| | (164,810 | ) | | 82,840 |
| | 3 - 10 | | 259,121 |
| | (175,230 | ) | | 83,891 |
|
Non-compete agreement | | 15 | | 56,539 |
| | (33,923 | ) | | 22,616 |
| | 15 | | 56,539 |
| | (35,809 | ) | | 20,730 |
|
Other intangible assets, net | | $ | 688,959 |
| | $ | (444,287 | ) | | $ | 244,672 |
| | $ | 701,091 |
| | $ | (471,304 | ) | | $ | 229,787 |
|
| | | | | | December 31, 2018 | | | | December 31, 2019 |
(Dollar amounts in thousands) | | Useful life in years | | Gross amount | | Accumulated amortization | | Net carrying amount | | Useful life in years | | Gross amount | | Accumulated amortization | | Net carrying amount |
Customer relationships | | 8 - 14 | | $ | 342,738 |
| | $ | (194,570 | ) | | $ | 148,168 |
| | 8 - 14 | | $ | 344,883 |
| | $ | (220,434 | ) | | $ | 124,449 |
|
Trademark | | 2 - 15 | | 41,357 |
| | (28,888 | ) | | 12,469 |
| |
Trademarks | | | 2 - 15 | | 42,025 |
| | (32,456 | ) | | 9,569 |
|
Software packages | | 3 - 10 | | 224,855 |
| | (151,666 | ) | | 73,189 |
| | 3 - 10 | | 256,220 |
| | (169,974 | ) | | 86,246 |
|
Non-compete agreement | | 15 | | 56,539 |
| | (31,096 | ) | | 25,443 |
| | 15 | | 56,539 |
| | (34,866 | ) | | 21,673 |
|
Other intangible assets, net | | $ | 665,489 |
| | $ | (406,220 | ) | | $ | 259,269 |
| | $ | 699,667 |
| | $ | (457,730 | ) | | $ | 241,937 |
|
For the three and nine months ended September 30, 2019, the Company recorded amortizationAmortization expense related to other intangibles of $12.9for the three months ended March 31, 2020 amounted to $13.6 million and $38.0 million, respectively, compared to $11.9 million and $36.4$12.2 million for the corresponding 2018 periods.period in 2019.
The estimated amortization expense of the balances outstanding at September 30, 2019March 31, 2020 for the next five years is as follows:
| | (Dollar amounts in thousands) | Remaining 2019 | | $ | 12,688 |
| |
2020 | | 45,952 |
| |
Remaining 2020 | | | $ | 37,989 |
|
2021 | | 40,965 |
| | 46,130 |
|
2022 | | 36,224 |
| | 40,887 |
|
2023 | | 33,950 |
| | 36,191 |
|
2024 | | | 28,071 |
|
Note 56 – Debt and Short-Term Borrowings
Total debt at September 30, 2019March 31, 2020 and December 31, 20182019 follows:
|
| | | | | | | | |
(In thousands) | | September 30, 2019 | | December 31, 2018 |
Secured Credit Facility (2023 Term A) due on November 27, 2023 paying interest at a variable interest rate (LIBOR plus applicable margin(1)(2)) | | $ | 209,892 |
| | $ | 217,791 |
|
Senior Secured Credit Facility (2024 Term B) due on November 27, 2024 paying interest at a variable interest rate (LIBOR plus applicable margin(2)(3)) | | 318,575 |
| | 320,515 |
|
Senior Secured Revolving Credit Facility(1) | | — |
| | — |
|
Note Payable due on April 30, 2021(2) | | 207 |
| | 300 |
|
Note Payable due on December 28, 2019 | | 2,500 |
| | — |
|
Total debt | | $ | 531,174 |
| | $ | 538,606 |
|
|
| | | | | | | | |
(In thousands) | | March 31, 2020 | | December 31, 2019 |
2023 Term A Loan paying interest at a variable interest rate (LIBOR plus applicable margin(1)(2)) | | $ | 196,693 |
| | $ | 207,261 |
|
2024 Term B Loan paying interest at a variable interest rate (LIBOR plus applicable margin(1)(3)) | | 308,401 |
| | 317,936 |
|
Note payable due April 30, 2021(1) | | 143 |
| | 175 |
|
Note payable due January 1, 2022(1) | | 1,339 |
| | 2,231 |
|
Total debt | | $ | 506,576 |
| | $ | 527,603 |
|
| |
(1) | Applicable margin of 2.00% at September 30, 2019 and 2.25% at December 31, 2018. |
| |
(2) | Net of unaccreted discount and unamortized debt issue costs, as applicable. |
| |
(2) | Applicable margin of 2.00% at March 31, 2020 and December 31, 2019. |
| |
(3) | Subject to a minimum rate ("LIBOR floor") of 0% plus applicable margin of 3.50% at September 30, 2019March 31, 2020 and December 31, 2018.2019. |
2018 Secured Credit Facilities
On November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement governingproviding for the secured credit facilities, consisting of a $220.0 million term loan A facility that matures on November 27, 2023 (“2023(the “2023 Term A”A Loan"), a $325.0 million term loan B facility that matures on November 27, 2024 (“2024(the “2024 Term B”B Loan”), and a $125.0 million revolving credit facility (the “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”).
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 5, 2020, the Company repaid $17.0 million as a result of excess cash flows for the year ended December 31, 2019.
The unpaid principal balance at September 30, 2019March 31, 2020 of the 2023 Term A Loan and the 2024 Term B Loan was $211.8$198.3 million and $322.6$311.9 million, respectively. The additional borrowing capacity for theunder our Revolving Facility at September 30, 2019March 31, 2020 was $116.9 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
Notes payablePayable
In May 2016,December 2019, EVERTEC Group entered into a2 non-interest bearing financing agreementagreements amounting to $0.7$2.4 million to purchase software.software and maintenance. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the outstanding principal balance of the notenotes payable was $0.2$1.5 million and $0.3$2.4 million, respectively. The current portion of this notethese notes, which totaled $0.8 million at March 31, 2020, is recorded as part ofincluded in accounts payable and the long-term portion is included in other long-term liabilities.
In January 2019, EVERTEC Group entered into a non-interest bearing financing agreement amounting to $10.0 million to purchase data processing equipment and maintenance. As of September 30, 2019,liabilities in the outstanding principalCompany's unaudited condensed consolidated balance of the note payable was $2.5 million, recorded as part of accounts payable.sheet.
Interest Rate Swaps
At September 30, 2019,As of March 31, 2020, the Company has 2 interest rate swap agreements, entered into in December 2015 and December 2018, which convert a portion of the interest rate payments on the Company's 2024 Term B Loan from variable to fixed:
|
| | | | | | | | | | |
Swap Agreement | | Effective date | | Maturity Date | | Notional Amount | | Variable Rate | | Fixed Rate |
2015 Swap | | January 2017 | | April 2020 | | $200 million | | 1-month LIBOR | | 1.9225% |
2018 Swap | | April 2020 | | November 2024 | | $250 million | | 1-month LIBOR | | 2.89% |
The Company has accounted for these transactionsagreements as cash flow hedges.
At September 30, 2019As of March 31, 2020 and December 31, 2018,2019, the carrying amount of the derivatives included in other long-term liabilities on the Company’sCompany's unaudited condensed consolidated balance sheets was $27.4 million and $14.5 million, respectively. The fair value of these derivatives is as follows:estimated using Level 2 inputs in the fair value hierarchy on a recurring basis. Refer to Note 8 for disclosure of losses recorded on cash flow hedging activities.
|
| | | | | | | | |
(In thousands) | | September 30, 2019 | | December 31, 2018 |
Other long-term assets | | $ | — |
| | $ | 1,683 |
|
Other long-term liabilities | | $ | 16,687 |
| | $ | 4,059 |
|
During the three and nine months ended September 30, 2019,March 31, 2020, the Company reclassified gains of $0.2 million and $0.7 million, respectively, from accumulated other comprehensive loss into income through interest expense. Based on current LIBOR rates, the Company expects to reclassify losses of $1.1$4.7 million from accumulated other comprehensive loss into income through interest expense over the next 12 months. Refer to Note 6 for tabular disclosure of the fair value of derivatives and to Note 7 for tabular disclosure of losses recorded on cash flow hedging activities.
The cash flow hedges are considered highly effective.
Note 67 – Financial Instruments and Fair Value Measurements
Recurring Fair Value Measurements
Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximizeThe Company's interest rate swaps are 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:
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 theonly financial instrument’s fair value adequately represents the price that would be received or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit quality and liquidity as well as other criteria. The estimated fair value amounts are subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair value could affect the results. The fair value measurement levels are not indicative of risk of investment.
The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions. The following table summarizes the fair value measurement by level at September 30, 2019 and December 31, 2018 for assets and liabilities measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
September 30, 2019 | | | | | | | | |
Financial liability: | | | | | | | | |
Interest rate swap | | $ | — |
| | $ | 16,687 |
| | $ | — |
| | $ | 16,687 |
|
December 31, 2018 | | | | | | | | |
Financial asset: | | | | | | | | |
Interest rate swap | | $ | — |
| | $ | 1,683 |
| | $ | — |
| | $ | 1,683 |
|
Financial liability: | | | | | | | | |
Interest rate swap | | — |
| | 4,059 |
| | — |
| | 4,059 |
|
basis. The fair value is estimated using Level 2 inputs under the fair value hierarchy. These derivatives were on a liability position with balances of $27.4 million and $14.5 million as of March 31, 2020 and December 31, 2019, respectively.
The following table presents the carrying value, as applicable, and estimated fair values for financial instruments at September 30, 2019March 31, 2020 and December 31, 2018:
2019:
| | | | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
(In thousands) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial assets: | | | | | | | | | |
Interest rate swap | | $ | — |
| | $ | — |
| | $ | 1,683 |
| | $ | 1,683 |
| |
Financial liabilities: | | | | | | | | | | | | | | | | |
Interest rate swap | | 16,687 |
| | 16,687 |
| | 4,059 |
| | 4,059 |
| | $ | 27,401 |
| | $ | 27,401 |
| | $ | 14,452 |
| | $ | 14,452 |
|
2023 Term A | | 209,892 |
| | 209,103 |
| | 217,791 |
| | 218,625 |
| |
2024 Term B | | 318,575 |
| | 324,579 |
| | 320,515 |
| | 319,517 |
| |
2023 Term A Loan | | | 196,693 |
| | 185,366 |
| | 207,261 |
| | 206,388 |
|
2024 Term B Loan | | | 308,401 |
| | 264,108 |
| | 317,936 |
| | 324,163 |
|
The fair values of the term loans at September 30, 2019March 31, 2020 and December 31, 20182019 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. Future estimates of fair value may be negatively impacted by market reactions to COVID-19. 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 secured term loans, which are not measured at fair value in the balance sheets, would be categorized as Level 3 in the fair value hierarchy.
Note 78 – 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, 2019:March 31, 2020:
|
| | | | | | | | | | | | |
(In thousands) | | Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Total |
Balance - December 31, 2018, net of tax | | $ | (21,626 | ) | | $ | (2,163 | ) | | $ | (23,789 | ) |
Other comprehensive income (loss) before reclassifications | | 3,714 |
| | (12,305 | ) | | (8,591 | ) |
Effective portion reclassified to Net Income | | — |
| | (714 | ) | | (714 | ) |
Balance - September 30, 2019, net of tax | | $ | (17,912 | ) | | $ | (15,182 | ) | | $ | (33,094 | ) |
|
| | | | | | | | | | | | |
(In thousands) | | Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Total |
Balance - December 31, 2019, net of tax | | $ | (16,872 | ) | | $ | (13,137 | ) | | $ | (30,009 | ) |
Other comprehensive loss before reclassifications | | (8,305 | ) | | (12,050 | ) | | (20,355 | ) |
Effective portion reclassified to net income | | — |
| | 191 |
| | 191 |
|
Balance - March 31, 2020, net of tax | | $ | (25,177 | ) | | $ | (24,996 | ) | | $ | (50,173 | ) |
Note 89 – Share-based Compensation
Long-term Incentive Plan ("LTIP")
In the first quarter of 2017, 2018, 2019 and 2019,2020, 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 2017 LTIP, 2018 LTIP, 2019 LTIP
and 20192020 LTIP, respectively, all under the terms of ourthe Company's 2013 Equity Incentive Plan. Under the LTIPs, the Company granted restricted stock units 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 providing services to the Company on the vesting date. Time-based awards vest over a period of three years in substantially equal installments commencing on the grant date and ending on February 24 of each year for the 2017 LTIP, February 28 of each year for the 2018 LTIP, and February 22 of each year for the 2019 LTIP, and February 27 of each year for the 2020 LTIP.
For the performance-based awards under the 2017 LTIP, 2018 LTIP, 2019 LTIP, and 20192020 LTIP, the Compensation Committee established adjusted earnings before income taxes, depreciation and amortization ("Adjusted EBITDA") as the primary performance measure while maintaining focus on total shareholder return through the use of a market-based total shareholder return ("TSR") performance modifier. 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-year performance period as compared to the companies in the Russell 2000 Index. The Adjusted EBITDA performance measure will be calculated for the one-year period commencing on January 1 of the year of the grant and ending on December 31 of the same year, relative to the goals set by the Compensation Committee for this same period. The shares earned will be subject to an additional two-year service vesting period.
Performance and market-based awards vest at the end of the performance period that commenced on February 24, 2017 for the 2017 LTIP, February 28, 2018 for the 2018 LTIP, and February 22, 2019 for the 2019 LTIP, and February 27, 2020 for the 2020 LTIP. The periods end on February 24, 2020 for the 2017 LTIP, February 28, 2021 for the 2018 LTIP, and February 22, 2022 for the 2019 LTIP and February 27, 2023 for the 2020 LTIP. Unless otherwise specified in the award 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 nonvested restricted shares and RSUs activity for the ninethree months ended September 30, 2019:
March 31, 2020:
| | Nonvested restricted shares and RSUs | | Shares | | Weighted-average grant date fair value | | Shares | | Weighted-average grant date fair value |
Nonvested at December 31, 2018 | | 2,036,163 |
| | $ | 15.09 |
| |
Nonvested at December 31, 2019 | | | 1,592,755 |
| | $ | 20.71 |
|
Forfeited | | (18,775 | ) | | 17.14 |
| | (139,854 | ) | | 19.26 |
|
Vested | | (687,198 | ) | | 28.68 |
| | (305,531 | ) | | 19.84 |
|
Granted | | 373,286 |
| | 29.46 |
| | 378,135 |
| | 31.84 |
|
Nonvested at September 30, 2019 | | 1,703,476 |
| | $ | 18.47 |
| |
Nonvested at March 31, 2020 | | | 1,525,505 |
| | $ | 23.77 |
|
For the three and nine months ended September 30, 2019,March 31, 2020, the Company recognized $3.5 million and $10.2 million of share basedshare-based compensation expense, respectively, compared with $2.4$3.3 million and $9.7 million, respectively for the samecorresponding period in 2018.2019.
As of September 30, 2019,March 31, 2020, the maximum unrecognized cost for restricted stock and RSUs was $16.7$26.3 million. The cost is expected to be recognized over a weighted average period of 1.72.3 years.
Note 910 - Revenues
SummaryDisaggregation of Revenue Recognition Accounting Policy
The Company's revenue recognition policy follows the guidance from Accounting Standards Codification ("ASC") 606 Revenue from Contracts with Customers, which provides guidance on the recognition, presentation and disclosure of revenue in consolidated financial statements.
Revenue is measured on the consideration specified in a contract with a customer. Once the Company determines a contract's performance obligations and the transaction price, including an estimate of any variable consideration, the Company allocates the transaction price to each performance obligation in the contract using a stand-alone selling price. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product or service to a customer. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
At contract inception, the Company assesses the goods and service promised in the contract with a customer and identifies a performance obligation for each promise to transfer to the customer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, the Company considers all the goods or services promised in the contract regardless of whether they are explicitly stated or implied. Payment for the Company's contracts with customers are typically due in full within 30 days of invoice date.
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 14,15, Segment Information.
In the following tables, revenue for each segment is disaggregated by timing of revenue recognition for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2019 |
(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 | $ | 43 |
| | $ | 228 |
| | $ | — |
| | $ | 2,939 |
| | $ | 3,210 |
|
Products and services transferred over time | 20,299 |
| | 18,853 |
| | 26,436 |
| | 50,006 |
| | 115,594 |
|
| $ | 20,342 |
| | $ | 19,081 |
| | $ | 26,436 |
| | $ | 52,945 |
| | $ | 118,804 |
|
|
| | | | | | | | | | | | | | | | | | | |
| 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 |
| | $ | — |
| | $ | 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 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2018 |
(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 | $ | 114 |
| | $ | 15 |
| | $ | — |
| | $ | 1,652 |
| | $ | 1,781 |
|
Products and services transferred over time | 19,679 |
| | 18,892 |
| | 24,486 |
| | 47,179 |
| | 110,236 |
|
| $ | 19,793 |
| | $ | 18,907 |
| | $ | 24,486 |
| | $ | 48,831 |
| | $ | 112,017 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2019 |
(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 | $ | 2,835 |
| | $ | 419 |
| | $ | — |
| | $ | 6,590 |
| | $ | 9,844 |
|
Products and services transferred over time | 60,957 |
| | 57,282 |
| | 79,203 |
| | 152,902 |
| | 350,344 |
|
| $ | 63,792 |
| | $ | 57,701 |
| | $ | 79,203 |
| | $ | 159,492 |
| | $ | 360,188 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2018 |
(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 | $ | 307 |
| | $ | 444 |
| | $ | — |
| | $ | 3,861 |
| | $ | 4,612 |
|
Products and services transferred over time | 56,983 |
| | 58,090 |
| | 73,829 |
| | 142,124 |
| | 331,026 |
|
| $ | 57,290 |
| | $ | 58,534 |
| | $ | 73,829 |
| | $ | 145,985 |
| | $ | 335,638 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 |
(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 | $ | 2,677 |
|
| $ | 70 |
|
| $ | — |
|
| $ | 877 |
|
| $ | 3,624 |
|
Products and services transferred over time | 20,073 |
|
| 18,678 |
|
| 25,974 |
|
| 50,487 |
|
| 115,212 |
|
| $ | 22,750 |
|
| $ | 18,748 |
|
| $ | 25,974 |
|
| $ | 51,364 |
|
| $ | 118,836 |
|
Contract balancesBalances
The following table provides information about contract assets from contracts with customers.
| | (In thousands) | September 30, 2019 | March 31, 2020 |
December 31, 2018 | $ | 996 |
| |
December 31, 2019 | | $ | 1,191 |
|
Services transferred to customers | 544 |
| 922 |
|
Transfers to accounts receivable | (416 | ) | (546 | ) |
September 30, 2019 | $ | 1,124 |
| |
March 31, 2020 | | $ | 1,567 |
|
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.assets in the unaudited condensed consolidated balance sheets.
Accounts receivable, net at September 30, 2019March 31, 2020 amounted to $92.2$95.3 million. Unearned income and Unearnedunearned income - Longlong term, which refer to contract liabilities, at September 30, 2019March 31, 2020 amounted to $14.6$18.1 million and $29.7$32.0 million, respectively, and generally arise when consideration is received or due in advance from customers prior to performance. Unearned income is mainly related to upfront fees for implementation or set up activities, including fees charged in pre-production periods in connection with managed services. During the three and nine months ended September 30, 2019,March 31, 2020, the Company recognized revenue of $1.8$5.2 million and $13.1 million, respectively, that werewas included in unearned income at December 31, 2018.2019. During the three and nine months ended September 30, 2018,March 31, 2019, the Company recognized revenue of $1.2$6.1 million and $6.9 million, respectively, that werewas included in unearned income at December 31, 2017.2018.
The estimated aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially satisfied at September 30, 2019March 31, 2020 is $261.7$288.7 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 varyvaries 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 1011 – Income Tax
The components of income tax expense for the three and nine months ended September 30,March 31, 2020 and 2019, and 2018, respectively, consisted of the following:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
Current tax provision | | $ | 6,096 |
| | $ | 4,923 |
| | $ | 14,215 |
| | $ | 13,083 |
| | $ | 5,598 |
| | $ | 4,691 |
|
Deferred tax benefit | | (2,376 | ) | | (1,621 | ) | | (4,197 | ) | | (2,734 | ) | | (1,080 | ) | | (882 | ) |
Income tax expense | | $ | 3,720 |
| | $ | 3,302 |
| | $ | 10,018 |
| | $ | 10,349 |
| | $ | 4,518 |
| | $ | 3,809 |
|
The Company conducts operations in Puerto Rico 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,March 31, 2020 and 2019, and 2018, and its segregation based on location of operations:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
Current tax provision (benefit) | | | | | | | | | |
Current tax provision | | | | | |
Puerto Rico | | $ | 2,117 |
| | $ | 2,208 |
| | $ | 5,433 |
| | $ | 6,063 |
| | $ | 1,679 |
| | $ | 1,813 |
|
United States | | 187 |
| | (31 | ) | | 202 |
| | 142 |
| | 155 |
| | 112 |
|
Foreign countries | | 3,792 |
| | 2,746 |
| | 8,580 |
| | 6,878 |
| | 3,764 |
| | 2,766 |
|
Total current tax provision | | $ | 6,096 |
| | $ | 4,923 |
| | $ | 14,215 |
| | $ | 13,083 |
| | $ | 5,598 |
| | $ | 4,691 |
|
Deferred tax benefit | | | | | | | | | | | | |
Puerto Rico | | $ | (1,583 | ) | | $ | (1,026 | ) | | $ | (3,178 | ) | | $ | (2,059 | ) | | $ | (88 | ) | | $ | (476 | ) |
United States | | (169 | ) | | (11 | ) | | (168 | ) | | (109 | ) | | (25 | ) | | (372 | ) |
Foreign countries | | (624 | ) | | (584 | ) | | (851 | ) | | (566 | ) | | (967 | ) | | (34 | ) |
Total deferred tax benefit | | $ | (2,376 | ) | | $ | (1,621 | ) | | $ | (4,197 | ) | | $ | (2,734 | ) | | $ | (1,080 | ) | | $ | (882 | ) |
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, 2019,March 31, 2020, the Company has $58.5$67.4 million of unremitted earnings from foreign subsidiaries. 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.
As of September 30, 2019,March 31, 2020, the gross deferred tax asset amounted to $14.1$19.8 million and the gross deferred tax liability amounted to $16.7$19.5 million, compared to $10.8$12.8 million and $18.8$15.0 million, respectively, as of December 31, 2018.2019.
Note 1112 – Net Income Per Common Share
The reconciliation of the numerator and denominator of the income per common share is as follows:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, | |
(Dollar amounts in thousands, except per share information) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | |
Net income attributable to EVERTEC, Inc.’s common stockholders | | $ | 24,754 |
| | $ | 22,997 |
| | $ | 78,456 |
| | $ | 66,071 |
| | $ | 22,211 |
| | $ | 26,644 |
| |
Less: non-forfeitable dividends on restricted stock | | 2 |
| | 2 |
| | 2 |
| | 2 |
| | 6 |
| | 6 |
| |
Net income available to EVERTEC, Inc.’s common shareholders | | $ | 24,752 |
| | $ | 22,995 |
| | $ | 78,454 |
| | $ | 66,069 |
| | $ | 22,205 |
| | $ | 26,638 |
| |
Weighted average common shares outstanding | | 71,942,403 |
| | 72,721,414 |
| | 72,148,312 |
| | 72,590,679 |
| | 72,012,648 |
| | 72,378,532 |
| |
Weighted average potential dilutive common shares (1) | | 1,372,301 |
| | 1,935,686 |
| | 1,382,553 |
| | 1,532,752 |
| | 1,280,357 |
| | 1,391,534 |
| |
Weighted average common shares outstanding - assuming dilution | | 73,314,704 |
| | 74,657,100 |
| | 73,530,865 |
| | 74,123,431 |
| | 73,293,005 |
| | 73,770,066 |
| |
Net income per common share - basic | | $ | 0.34 |
| | $ | 0.32 |
| | $ | 1.09 |
| | $ | 0.91 |
| | $ | 0.31 |
| | $ | 0.37 |
| |
Net income per common share - diluted | | $ | 0.34 |
| | $ | 0.31 |
| | $ | 1.07 |
| | $ | 0.89 |
| | $ | 0.30 |
| | $ | 0.36 |
| |
| |
(1) | Potential common shares consist of common stock issuable under the assumed release of restricted stock awards using the treasury stock method. |
On February 15, 2019, April 25, 2019 and July 25, 2019,20, 2020, the Company's Board declared a quarterly cash dividendsdividend of $0.05 per share of common stock, which werewas paid on March 22, 2019, June 7, 2019 and September 6, 2019, respectively,April 3, 2020, to stockholders of record as of the close of business on February 26, 2019, May 6, 2019 and August 5, 2019, respectively.March 4, 2020.
Note 1213 – Commitments and Contingencies
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.
Leases
The Company’s leases accounting policy follows the guidance from Accounting Standards Codification (“ASC”) 842, Leases, which provides guidance on the recognition, presentation and disclosure of leases in condensed consolidated financial statements.
The Company determines if an arrangement is or contains a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease payable, and operating lease liabilities in the condensed consolidated balance sheet. Finance leases are included in property and equipment, accrued liabilities, and other long-term liabilities in the condensed consolidated balance sheet.
ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, Management used the Company’s collateralized incremental borrowing rate (“IBR”) based on the information available at commencement date in determining the present value of future payments. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. We monitor events or changes in circumstances that change the timing or amount of future lease payments which results in the remeasurement of a lease liability, with a corresponding adjustment to the ROU asset. The lease payment terms may include fixed payment terms and variable payments. Fixed payment terms and variable payments that depend on an index (i.e., Consumer Price Index or “CPI”) or rate are considered in the determination of the operating lease liabilities. While lease liabilities are not remeasured because of changes to the CPI, changes are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. Variable payments that do not depend on an index or rate are not included in the lease liabilities determination. Rather, these payments are recognized as variable lease expense when incurred. Variable lease payments are included within operating costs and
expenses in the condensed consolidated statement of income and comprehensive income. For operating leases, lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For finance leases, lease expense is composed of interest expense and amortization expense. The lease liability of these leases is measured using the interest rate method. The ROU asset from financing leases are amortized on a straight-line basis, as part of Property and Equipment, net.
The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. The Company elected the practical expedient of not separating lease and related non-lease components for all classes of underlying assets (i.e., building and equipment). The Company also elected as an accounting policy to not recognize lease liabilities and ROU assets for any future short-term leases (i.e., leases with a lease term of 12 months or less).
The Company has operating leases for certain office facilities, buildings, telecommunications and other equipment; and finance leases for certain equipment. The Company’s lease contracts have remaining terms ranging from 1 year to 10 years, some of which may include options to extend the leases for up to 5 years, and some which may include the option to terminate the lease within 1 year.
At September 30, 2019, equipment leases classified as finance leases, which are included within Property and Equipment, net, were $0.7 million, net of accumulated depreciation.
Total lease cost for the three and nine months ended September 30, 2019, was as follows: |
| | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2019 | | September 30, 2019 |
(in thousands) | | | | |
Operating lease cost | | $ | 1,907 |
| | $ | 5,833 |
|
Finance lease cost | | — |
| | — |
|
Amortization of right-of-use assets | | 63 |
| | 196 |
|
Interest on lease liabilities | | 5 |
| | 20 |
|
Variable lease cost | | 700 |
| | 2,117 |
|
| | $ | 2,675 |
| | $ | 8,166 |
|
Other information related to leases, at September 30, 2019, was as follows: |
| | | | |
(In thousands) | | |
Right-of-use assets obtained in exchange for operating lease obligations: | | $ | 273 |
|
Weighted average remaining lease term, in years | | |
Operating leases | | 6.0 |
|
Finance leases | | 1.0 |
|
Weighted Average Discount Rate | | |
Operating leases | | 4.5 | % |
Finance leases | | 4.2 | % |
Future minimum lease payments under leases at September 30, 2019 were as follows: |
| | | | | | | | |
(In thousands) | | Operating Leases | | Finance Leases |
Remaining 2019 | | $ | 1,698 |
| | $ | 99 |
|
2020 | | 6,492 |
| | 311 |
|
2021 | | 5,680 |
| | 32 |
|
2022 | | 5,419 |
| | — |
|
2023 | | 5,385 |
| | — |
|
Thereafter | | 11,184 |
| | — |
|
Total future minimum lease payments | | 35,858 |
| | 442 |
|
Less: imputed interest | | (4,468 | ) | | (25 | ) |
| | $ | 31,390 |
| | $ | 417 |
|
Reported as of September 30, 2019 | | | | |
Accrued liabilities | | $ | — |
| | $ | 349 |
|
Operating lease payable | | 5,704 |
| | — |
|
Operating lease liabilities - long term | | 25,686 |
| | — |
|
Other long-term liabilities | | — |
| | 68 |
|
| | $ | 31,390 |
| | $ | 417 |
|
Note 1314 – Related Party Transactions
The following table presents the Company’s transactions with related parties for the three and nine months ended September 30, 2019March 31, 2020 and 2018:2019:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollar amounts in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
Total revenues (1)(2) | | $ | 52,702 |
| | $ | 47,216 |
| | $ | 154,022 |
| | $ | 139,954 |
| | $ | 54,572 |
| | $ | 49,030 |
|
Cost of revenues | | $ | 1,719 |
| | $ | 840 |
| | $ | 3,580 |
| | $ | 2,192 |
| | $ | 618 |
| | $ | 523 |
|
Operating lease cost and other fees | | $ | 1,959 |
| | $ | 2,016 |
| | $ | 6,177 |
| | $ | 5,984 |
| | $ | 1,981 |
| | $ | 2,128 |
|
Interest earned from affiliate | | | | | | | | | | | | |
Interest income | | $ | 43 |
| | $ | 37 |
| | $ | 98 |
| | $ | 101 |
| | $ | 89 |
| | $ | 28 |
|
| |
(1) | Popular revenues as a percentage of total revenues were 44%, 42%, 43%,45% and 41%, respectively, for each of the periods presented above, respectively.above. |
| |
(2) | Includes revenues generated from investee accounted for under the equity method of $0.3 million $0.3 million, $0.8 million and $1.0 million for each of the periods presented above, respectively.above. |
At September 30, 2019March 31, 2020 and December 31, 2018,2019, EVERTEC had the following balances arising from transactions with related parties:
| | (Dollar amounts in thousands) | | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
Cash and restricted cash deposits in affiliated bank | | $ | 47,442 |
| | $ | 29,136 |
| | $ | 58,445 |
| | $ | 64,724 |
|
Other due/to from affiliate | | | | | |
Other due to/from affiliate | | | | | |
Accounts receivable | | $ | 35,054 |
| | $ | 25,714 |
| | $ | 41,493 |
| | $ | 39,095 |
|
Prepaid expenses and other assets | | $ | 2,504 |
| | $ | 2,796 |
| | $ | 5,341 |
| | $ | 4,211 |
|
Operating lease right-of use assets | | $ | 21,474 |
| | $ | — |
| | $ | 19,751 |
| | $ | 20,617 |
|
Other long-term assets | | $ | 76 |
| | $ | 166 |
| | $ | 43 |
| | $ | 57 |
|
Accounts payable | | $ | 2,006 |
| | $ | 6,344 |
| | $ | 2,007 |
| | $ | 7,250 |
|
Unearned income | | $ | 32,177 |
| | $ | 25,401 |
| | $ | 36,056 |
| | $ | 35,489 |
|
Operating lease liabilities | | $ | 21,688 |
| | $ | — |
| | $ | 20,054 |
| | $ | 20,905 |
|
Note 1415 – Segment Information
The Company operates in 4 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) 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 ATH debit network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed, and other processing services.
The Merchant Acquiring segment consists of revenues from services that allow merchants to accept electronic methods of payment. In the Merchant Acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees and rental fees from POS devices and other equipment, net of credit card interchange and assessment fees charged by credit cards associations (such as VISA or MasterCard) or payment networks. The discount fee is generally a percentage of the transaction value. EVERTEC also charges merchants for other services that are unrelated to the number of transactions or the transaction value.
The Business Solutions segment consists of revenues from a full suite of business process management solutions in various product areas such as core bank processing, network managed services,hosting and management, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived in part from a recurrent fixed fee and from fees based on the number of accounts on file (i.e. savings or checking accounts, loans, etc.) or computer resources utilized. Revenues from other processing services within the Business Solutions segment are generally volume-based and depend on factors such as the number of accounts processed. In addition, EVERTEC is a reseller of hardware and software products and these resale transactions are generally non-recurring.
In addition to the 4 operating segments described above, Managementmanagement 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 aswithin the “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and otherOther category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:
marketing,
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 the operating segments separate financial information to assess performance and to allocate resources. Management evaluates the operating results of each of its operating segments based upon revenues and Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA").EBITDA. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with Accounting Standards CodificationASC Topic 280, "Segment Reporting"Segment Reporting, given that it is reported to the CODM for purposes of allocating resources. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by revenues and adjusted EBITDA performance.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 4 business segments for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2019 |
(In thousands) | Payment Services - Puerto Rico & Caribbean | | Payment Services - Latin America | | Merchant Acquiring, net | | Business Solutions | | Corporate and Other (1) | | Total |
| | | | | | | | | | | |
Revenues | $ | 30,411 |
| | $ | 20,596 |
| | $ | 26,436 |
| | $ | 52,945 |
| | $ | (11,584 | ) | | $ | 118,804 |
|
Operating costs and expenses | 15,821 |
| | 11,943 |
| | 15,978 |
| | 32,259 |
| | 8,001 |
| | 84,002 |
|
Depreciation and amortization | 3,093 |
| | 2,650 |
| | 457 |
| | 3,780 |
| | 6,992 |
| | 16,972 |
|
Non-operating income (expenses) | 410 |
| | (3,824 | ) | | 8 |
| | 67 |
| | 3,962 |
| | 623 |
|
EBITDA | 18,093 |
| | 7,479 |
| | 10,923 |
| | 24,533 |
| | (8,631 | ) | | 52,397 |
|
Compensation and benefits (2) | 284 |
| | 109 |
| | 285 |
| | 549 |
| | 2,228 |
| | 3,455 |
|
Transaction, refinancing and other fees (3) | — |
| | — |
| | — |
| | — |
| | (372 | ) | | (372 | ) |
Adjusted EBITDA | $ | 18,377 |
| | $ | 7,588 |
| | $ | 11,208 |
| | $ | 25,082 |
| | $ | (6,775 | ) | | $ | 55,480 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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) | — |
|
| — |
|
| — |
|
| — |
|
| 1,786 |
|
| 1,786 |
|
Adjusted EBITDA | $ | 16,074 |
|
| $ | 8,242 |
|
| $ | 11,284 |
|
| $ | 27,445 |
|
| $ | (6,755 | ) |
| $ | 56,290 |
|
| |
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $10.0$9.0 million processing fee from the Payments Services - Puerto Rico & Caribbean segment to the Merchant Acquiring segment and intercompany software sale and developments of $1.6 million from the Payment Services - Latin America segment charged to the Payment Services - Puerto Rico & Caribbean segment.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 $5.2$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., net of cash dividends received. |
| | | Three months ended September 30, 2018 | Three months ended March 31, 2019 |
(In thousands) | Payment Services - Puerto Rico & Caribbean | | Payment Services - Latin America | | Merchant Acquiring, net | | Business Solutions | | Corporate and Other (1) | | Total | Payment Services - Puerto Rico & Caribbean |
| Payment Services - Latin America |
| Merchant Acquiring, net |
| Business Solutions |
| Corporate and Other (1) |
| Total |
| | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
Revenues | $ | 28,951 |
| | $ | 18,907 |
| | $ | 24,486 |
| | $ | 48,831 |
| | $ | (9,158 | ) | | $ | 112,017 |
| $ | 32,017 |
|
| $ | 20,831 |
|
| $ | 25,974 |
|
| $ | 51,364 |
|
| $ | (11,350 | ) |
| $ | 118,836 |
|
Operating costs and expenses | 13,021 |
| | 18,890 |
| | 14,160 |
| | 30,983 |
| | 2,602 |
| | 79,656 |
| 14,215 |
|
| 17,573 |
|
| 14,718 |
|
| 32,910 |
|
| 2,015 |
|
| 81,431 |
|
Depreciation and amortization | 2,505 |
| | 2,337 |
| | 427 |
| | 3,398 |
| | 7,121 |
| | 15,788 |
| 2,643 |
|
| 2,196 |
|
| 468 |
|
| 3,854 |
|
| 7,112 |
|
| 16,273 |
|
Non-operating income (expenses) | 602 |
| | 3,834 |
| | — |
| | 12 |
| | (3,080 | ) | | 1,368 |
| 581 |
|
| 2,634 |
|
| 21 |
|
| 186 |
|
| (2,992 | ) |
| 430 |
|
EBITDA | 19,037 |
| | 6,188 |
| | 10,753 |
| | 21,258 |
| | (7,719 | ) | | 49,517 |
| 21,026 |
|
| 8,088 |
|
| 11,745 |
|
| 22,494 |
|
| (9,245 | ) |
| 54,108 |
|
Compensation and benefits (2) | 207 |
| | 363 |
| | 196 |
| | 485 |
| | 1,117 |
| | 2,368 |
| 237 |
|
| 166 |
|
| 220 |
|
| 554 |
|
| 2,262 |
|
| 3,439 |
|
Transaction, refinancing and other fees (3) | — |
| | — |
| | (1 | ) | | 1 |
| | 215 |
| | 215 |
| — |
|
| 2 |
|
| — |
|
| — |
|
| 47 |
|
| 49 |
|
Adjusted EBITDA | $ | 19,244 |
| | $ | 6,551 |
| | $ | 10,948 |
| | $ | 21,744 |
| | $ | (6,387 | ) | | $ | 52,100 |
| $ | 21,263 |
|
| $ | 8,256 |
|
| $ | 11,965 |
|
| $ | 23,048 |
|
| $ | (6,936 | ) |
| $ | 57,596 |
|
| |
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $9.2 million processing fee from the Payments Services - Puerto Rico & Caribbean segment to the Merchant Acquiring segment. |
| |
(2) | Primarily represents share-based compensation. |
| |
(3) | Primarily the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received and fees and expenses associated with corporate transactions as defined in the Credit Agreement. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2019 |
(In thousands) | Payment Services - Puerto Rico & Caribbean |
| Payment Services - Latin America |
| Merchant Acquiring, net |
| Business Solutions |
| Corporate and Other (1) |
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues | $ | 92,910 |
|
| $ | 62,533 |
|
| $ | 79,203 |
|
| $ | 159,492 |
|
| $ | (33,950 | ) |
| $ | 360,188 |
|
Operating costs and expenses | 43,666 |
|
| 47,170 |
|
| 45,926 |
|
| 101,128 |
|
| 12,403 |
|
| 250,293 |
|
Depreciation and amortization | 8,476 |
|
| 7,393 |
|
| 1,348 |
|
| 12,113 |
|
| 21,110 |
|
| 50,440 |
|
Non-operating income (expenses) | 1,461 |
|
| 411 |
|
| 39 |
|
| 287 |
|
| (2,091 | ) |
| 107 |
|
EBITDA | 59,181 |
|
| 23,167 |
|
| 34,664 |
|
| 70,764 |
|
| (27,334 | ) |
| 160,442 |
|
Compensation and benefits (2) | 778 |
|
| 448 |
|
| 760 |
|
| 1,632 |
|
| 6,774 |
|
| 10,392 |
|
Transaction, refinancing and other fees (3) | — |
|
| 2 |
|
| — |
|
| — |
|
| 37 |
|
| 39 |
|
Adjusted EBITDA | $ | 59,959 |
|
| $ | 23,617 |
|
| $ | 35,424 |
|
| $ | 72,396 |
|
| $ | (20,523 | ) |
| $ | 170,873 |
|
| |
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $29.0 million processing fee from the Payments Services - Puerto Rico & Caribbean segment to the Merchant Acquiring segment, intercompany software sale and developments of $4.9$2.1 million from the Payment Services - Latin America segment charged to the Payment Services - Puerto Rico & Caribbean segment.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 $15.6$4.8 million. |
| |
(2) | Primarily represents share-based compensation, other compensation expense and severance payments. |
| |
(3) | Primarily represents the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received and fees and expenses associated with corporate transactions as defined in the Credit Agreement. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2018 |
(In thousands) | Payment Services - Puerto Rico & Caribbean |
| Payment Services - Latin America |
| Merchant Acquiring, net |
| Business Solutions |
| Corporate and Other (1) |
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues | $ | 84,162 |
|
| $ | 58,534 |
|
| $ | 73,829 |
|
| $ | 145,985 |
|
| $ | (26,872 | ) |
| $ | 335,638 |
|
Operating costs and expenses | 39,084 |
|
| 55,357 |
|
| 41,413 |
|
| 90,349 |
|
| 12,879 |
|
| 239,082 |
|
Depreciation and amortization | 7,230 |
|
| 7,035 |
|
| 1,268 |
|
| 10,437 |
|
| 21,413 |
|
| 47,383 |
|
Non-operating income (expenses) | 1,969 |
|
| 7,048 |
|
| 8 |
|
| 378 |
|
| (6,913 | ) |
| 2,490 |
|
EBITDA | 54,277 |
|
| 17,260 |
|
| 33,692 |
|
| 66,451 |
|
| (25,251 | ) |
| 146,429 |
|
Compensation and benefits (2) | 885 |
|
| 1,080 |
|
| 746 |
|
| 1,609 |
|
| 6,350 |
|
| 10,670 |
|
Transaction, refinancing and other fees (3) | (250 | ) |
| — |
|
| — |
|
| 1 |
|
| 2,986 |
|
| 2,737 |
|
Adjusted EBITDA | $ | 54,912 |
|
| $ | 18,340 |
|
| $ | 34,438 |
|
| $ | 68,061 |
|
| $ | (15,915 | ) |
| $ | 159,836 |
|
| |
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $26.9 million processing fee from the Payments Services - Puerto Rico & Caribbean segment to the Merchant Acquiring segment. |
| |
(2) | Primarily represents share-based compensation, other compensation expense and severance payments. |
| |
(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., net of cash dividends received. |
The reconciliation of EBITDA to consolidated net income is as follows:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Total EBITDA | $ | 52,397 |
| | $ | 49,517 |
| | $ | 160,442 |
| | $ | 146,429 |
| $ | 51,004 |
| | $ | 54,108 |
|
Less: | | | | | | | | | | |
Income tax expense | 3,720 |
| | 3,302 |
| | 10,018 |
| | 10,349 |
| 4,518 |
| | 3,809 |
|
Interest expense, net | 6,919 |
| | 7,352 |
| | 21,327 |
| | 22,375 |
| 6,416 |
| | 7,292 |
|
Depreciation and amortization | 16,972 |
| | 15,788 |
| | 50,440 |
| | 47,383 |
| 17,795 |
| | 16,273 |
|
Net Income | $ | 24,786 |
| | $ | 23,075 |
| | $ | 78,657 |
| | $ | 66,322 |
| |
Net income | | $ | 22,275 |
| | $ | 26,734 |
|
Note 1516 – Subsequent Events
On October 23, 2019,April 21, 2020, 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 December 6, 2019June 5, 2020 to stockholders of record as of the close of business on NovemberMay 4, 2019.2020. The Board anticipates declaring this dividend in future quarters on a regular basis; however future declarations of dividends are subject to the 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,March 31, 2020 and 2019 and 2018 and (ii) the financial condition as of September 30, 2019.March 31, 2020. 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, 2018,2019, included in the Company’s Annual Report on Form 10-K and with the unaudited condensed consolidated 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 S.A., Tecnopago España SL, Paytrue S.A., Caleidon, S.A., Evertec Brasil Solutions Informática Ltda. (formerly known as Paytrue Solutions Informática Ltda.), EVERTEC Panamá, S.A., EVERTEC Costa Rica, S.A. (“EVERTEC CR”), EVERTEC Guatemala, S.A., Evertec Colombia, SAS (formerly known as 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 processing business in Puerto Rico, the Caribbean and Latin America, and the Caribbean, providing a broad range of merchant acquiring, payment services and business process management services. According to the August 2018September 2019 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. We serve 26 countries in the region fromout of 11 offices, including our baseheadquarters in Puerto Rico. We manage a system of electronic payment networks that process more than two billion transactions annually, and offer a comprehensive suite of services for core bank processing and cash processing in Puerto Rico and technology outsourcing in all the regions we serve. In addition, we own and operate the ATH network, one of the leading personal identification number ("PIN") debit networks in Latin America. We serve a diversified customer base of leading financial institutions, merchants, corporations and government agencies with “mission-critical” technology solutions that enable them to issue, process and accept transactions securely. We believe our business is well-positioned to continue to expand across the fast-growing Latin American region.
We are differentiated, in part, by our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe this capability provides several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services, win new customers, develop new sales channels and enter new markets. We believe these competitive advantages include:
Our ability to provide competitive products;
Our ability to provide in one package a range of services that traditionally had to be sourced from different vendors;
Our ability to serve customers with disparate operations in several geographies with technology solutions that enable them to manage their business as one enterprise; and
Our ability to capture and analyze data across the transaction 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 processing value chain (such as only merchant acquiring or payment services).
Our broad suite of services spans the entire transaction processing value chain and includes a range of front-end customer-facing solutions such as the electronic capture and authorization of transactions at the point-of-sale, 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 of credit, debit, prepaid, automated teller machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide “mission-critical” technology solutions such as core bank processing, as well as IT outsourcing and cash management services to financial institutions, corporations and governments. We provide these services through scalable, end-to-end technology platforms that we manage and operate in-house and that 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 continue to pursue joint ventures and merchant acquiring alliances. We benefit from an attractive business model, the hallmarks of which are recurring revenue, scalability, significant operating margins and moderate capital expenditure requirements. Our revenue is predominantly recurring in nature because of the mission-critical and embedded nature of the services we provide. In addition, we generally negotiate multi-year contracts with our customers. We believe our business model should enable us to continue to grow our business organically in the primary markets we serve without significant incremental capital expenditures.
Corporate Background
EVERTEC, Inc. ("EVERTEC", 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”), an affiliate of Apollo Global Management LLC, acquired a 51% indirect ownership interest in EVERTEC Group as part of a merger (the “Merger”) and EVERTEC Group became a wholly-owned subsidiary of Holdings.
On April 17, 2012, EVERTEC Group was converted from a Puerto Rico corporation to a Puerto Rico limited liability company (the “Conversion”) for the purpose of improving its consolidated tax efficiency by taking advantage of changes to the Puerto Rico Internal Revenue Code, as amended (the “PR Code”), that permit limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Concurrent with the Conversion, Holdings, which is our direct subsidiary, was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company. Prior to these conversions, EVERTEC, Inc. was formed in order to act as the new parent company of Holdings and its subsidiaries, including EVERTEC Group. The transactions described above in this paragraph are collectively referred to as the “Reorganization.”
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”), 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. The anticipated negotiation of the MSA extension may result in Popular obtaining significant concessions from us with respect to pricing and other key terms, both in respect of the current term and any extension of the MSA, particularly as we approach 2025. 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.
Factors and Trends Affecting the Results of Our Operations
The ongoing migration from cash and paper methods of payment to electronic payments continues to benefit the transaction-processing industry globally. We believe that the penetration of electronic payments in the markets in which we operate is significantly lower relative to the U.S. market, and that this ongoing shift will continue to generate substantial growth opportunities for our business. For example, currently the adoption of banking products, including electronic payments, in the Latin American and Caribbean regions is lower relative to the mature U.S. and European markets. We believe that the unbanked and underbanked population in our markets will continue to shrink, and therefore drive incremental penetration and growth of electronic payments in Puerto Rico and other Latin American regions. We also benefit from the trend of financial institutions and government agencies outsourcing 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, which presents a business opportunity for us.
Finally, our financial condition and results of operations are, in part, dependent on the economic and general conditions of the geographies in which we operate.
On June 30, 2016, the U.S. President signed into law PROMESA. PROMESA establishes a fiscal oversight and the Oversight Board comprised of seven voting members appointed by the President. The Oversight Board has broad budgetary and financial powers over Puerto Rico’s budget, laws, financial plans and regulations, including the power to approve restructuring agreements with creditors, file petitions for restructuring and reform the electronic system for the tax collection. The Oversight Board will have ultimate authority in preparing the government of Puerto Rico government’sRico’s budget and any issuance of future debt by the government and its instrumentalities. In addition, PROMESA imposes an automatic stay on all litigation against Puerto Rico and its instrumentalities, as well as any other judicial or administrative actions or proceedings to enforce or collect claims against the government of Puerto Rico government.Rico. On May 1, 2017, the automatic stay expired. Promptly after the expiration of the stay, creditors of the government of Puerto Rico government filed various lawsuits involving defaults on more than $70 billion of bonds issued by Puerto Rico, having failed to reach a negotiated settlement on such defaults with the government of Puerto Rico government during the period of the automatic stay. On May 3, 2017, the Oversight Board filed a voluntary petition of relief on behalf of the Commonwealth pursuant to Title III of PROMESA for the restructuring of the Commonwealth’s debt. Subsequently, the Oversight Board filed voluntary petitions of relief pursuant to Title III of PROMESA on behalf certain public corporations and instrumentalities. Title III is an in-court debt restructuring proceeding similar to protections afforded debtors under Chapter 11 of the United States Code (the “Bankruptcy Code”); the Bankruptcy Code is not available to the Commonwealth or its instrumentalities.
As the solution to the government of Puerto Rican government’sRico’s debt crisis remains unclear, we continue to carefully monitor our receivables with the government as well as monitor general economic trends to understand the impact the crisis has on the economy of Puerto Rico and our card payment volumes. To date our receivables with the government of Puerto Rican governmentRico and overall payment transaction volumes have not been significantly affected by the debt crisis, however we remain cautious.
Furthermore, asWith respect to the macroeconomic trends described above, Managementmanagement currently estimates that we will continue to experience a revenue attrition in Latin America of approximately $2 $3million to $3$4 million for previously disclosed migrations anticipated in 2019.2020. The clients' decisions, which were made prior to 2015, for these anticipated migrations were driven by a variety of historical factors, the most importantlyimportant of which was customer service experience. Management believes that these customer decisions are unlikely to change,change; however, timing is subject to change based on customer'scustomers’ conversion schedules.
Impact of COVID-19 Pandemic
In addition, we are currently negotiating with PopularDecember 2019, the outbreak of a novel strain of coronavirus ("COVID-19") was reported to have surfaced in connection withWuhan, China. COVID-19 has since spread to over 100 countries, including every state and territory of the United States. On March 11, 2020, the World Health Organization declared COVID-19 a disagreementpandemic, and shortly thereafter, governmental authorities in Puerto Rico and the other countries in which EVERTEC operates declared states of emergency and implemented numerous public health measures to try to contain the virus, including lockdowns and curfews, school and business closures and restrictions on travel. COVID-19 presents material uncertainty and risk with respect to EVERTEC’s business, results of operations and cash flows, as well as with respect to changes in laws and regulations and government and regulatory policy. As the spread of the pandemic persists, entities are experiencing conditions often associated with a general economic downturn. The outbreak has disrupted global financial markets and negatively affected supply and demand across a broad range of industries. COVID-19’s impact on global economies could have a material adverse effect on (among other things) the profitability, capital and liquidity of the Company, particularly if consumer spending levels are depressed for a prolonged period of time. While the rapid development and fluidity of the situation prevents management from having clear visibility into the medium and long-term impact, management believes possible effects may include, but are not limited to, disruption to the Company’s customers and revenue, absenteeism in the Company’s workforce, unavailability of products and supplies used in operations, a decline in the value of assets held by the Company, including, among other things, tangible and intangible long-lived assets, and increased levels in the Company's current expected credit loss reserve.
Given the uncertain and rapidly evolving situation, management has taken certain pricing termsprecautionary measures intended to help minimize the risk of COVID-19 to the Company, its employees, and customers, including the following:
The Company deployed its business continuity plan for the entire organization a few days before the government of Puerto Rico enacted a shelter in place directive on March 16, 2020. Since then, every country in which the Company operates has implemented some type of social distancing measures. Management expects that the Company's offices will remain closed for an undetermined period, until it is deemed safe by management to return and as permitted or advised by local authorities in each country where the Company operates;
In connection with the Company’s business continuity plan, we transitioned most of the Company’s employees to a work from home environment. For certain critical employees who are required to remain working on-site in order to, among other things, maintain network operations oversight functions, cash handling and other critical operations for our customers, we have implemented safety measures including administering daily temperature checks upon entering into the work site, providing protective gear, developing safe distancing spaces and increasing overall sanitation at our offices;
As a precautionary measure, to increase the Company's cash position and preserve its financial flexibility in light of the current uncertainty resulting from the COVID-19 outbreak, the Company drew down $30 million on its Senior Secured Revolving Facility on April 8, 2020;
On May 1, 2020, the Company commenced deferral of payroll taxes as permitted under the MSA. Both partiesCoronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act"); management anticipates a $2.7 million deferral of payroll taxes during the allowed time;
Management identified additional expense reductions that are negotiatingintended to find a mutually agreeable resolution. If webe implemented as necessary; and
Management has suspended all non-essential travel for employees.
While the Company anticipates that the foregoing measures are unabletemporary, management cannot predict their duration, and management may elect or need to reach an agreement,take additional precautions as more information related to COVID-19 becomes available, including with respect to employees, customers, and relationships with the partiesCompany's business partners. The extent to which the COVID-19 pandemic and EVERTEC’s precautionary measures in response to, may pursueimpact the dispute resolution mechanism underCompany’s business, financial condition or results of operations will depend on the MSA.ongoing developments to the COVID-19 pandemic and its direct and indirect consequences, all of which are highly uncertain and cannot be predicted at this time.
Results of Operations
Comparison of the three months ended September 30, 2019March 31, 2020 and 20182019
| | | Three months ended September 30, | | | | | Three months ended March 31, | | | | |
In thousands | 2019 | | 2018 | | Variance 2019 vs. 2018 | 2020 | | 2019 | | Variance 2020 vs. 2019 |
| | | | | | | | | | | | | | |
Revenues | $ | 118,804 |
| | $ | 112,017 |
| | $ | 6,787 |
| | 6 | % | $ | 121,942 |
| | $ | 118,836 |
| | $ | 3,106 |
| | 3 | % |
Operating costs and expenses | | | | | | | | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization shown below | 51,878 |
| | 49,464 |
| | 2,414 |
| | 5 | % | |
Cost of revenues, exclusive of depreciation and amortization | | 54,067 |
| | 50,019 |
| | 4,048 |
| | 8 | % |
Selling, general and administrative expenses | 15,152 |
| | 14,404 |
| | 748 |
| | 5 | % | 17,317 |
| | 15,139 |
| | 2,178 |
| | 14 | % |
Depreciation and amortization | 16,972 |
| | 15,788 |
| | 1,184 |
| | 7 | % | 17,795 |
| | 16,273 |
| | 1,522 |
| | 9 | % |
Total operating costs and expenses | 84,002 |
| | 79,656 |
| | 4,346 |
| | 5 | % | 89,179 |
| | 81,431 |
| | 7,748 |
| | 10 | % |
Income from operations | $ | 34,802 |
| | $ | 32,361 |
| | $ | 2,441 |
| | 8 | % | $ | 32,763 |
| | $ | 37,405 |
| | $ | (4,642 | ) | | (12 | )% |
Revenues
Total revenues infor the third quarter of 2019three months ended March 31, 2020 increased by $6.8$3.1 million or 6%3% to $118.8$121.9 million when compared withto the prior year period. RevenueThe increase inis the result of overall growth during the first two months of the quarter, reflected growth across all segments and included benefitspartially offset by the prior year recognition of a $2.7 million one-time benefit from value added solutions, new managed services and other pricing actions. Additionally, increased revenue was driven by the completion of projectsa project, as well as the slowdown in transactional revenue in the last weeks of March as a consequence of COVID-19. We currently expect that the COVID-19 pandemic will impact our revenues for approximately $2.0 million.the three months ending June 30, 2020 more significantly than the three months ended March 31, 2020.
Cost of revenuesRevenues
Cost of revenues for the three months ended March 31, 2020 amounted to $51.9$54.1 million, an increase of $2.4$4.0 million or 5%8% when compared withto the prior year period. The increase is primarily related to an increase in professional fees driven by programming fees coupled with a slight increase in equipment expenses. These increases were partially offset by a decrease in salaries and compensation mainlycosts, driven by deferred salariesincreased headcount, coupled with increases in connection with internal software developments, decreased communications expenseprofessional services related to programming fees and lower bad debt expense.increases in cloud services.
Selling, generalGeneral and administrativeAdministrative
Selling, general and administrative expenses for the three months ended March 31, 2020 increased by $2.2 million or 14% when compared to the same period in the third quarter of 2019 increased by $0.7 million or 5% when compared with the same quarter in 2018.prior year. The increase is primarily related to an increase in salaries and compensation as the prior year includes a significant reversal in share-based compensation expense in connection with a former executive's forfeiture for unvested RSUs, partially offset by lowerhigher professional fees and other operating expenses.services.
Depreciation and amortizationAmortization
Depreciation and amortization expense for the three months ended March 31, 2020 amounted to $17.0$17.8 million, an increase of $1.2$1.5 million or 7%9% when compared withto the prior year period. The increase is related to bothhigher capital expenditures in the prior year and higher depreciation and amortization and includes impact from development projects goingof software assets put into production and purchases of data processing equipment.in the prior year.
Non-operating income (expenses)Non-Operating Income (Expenses)
| | | Three months ended September 30, | | | | Three months ended March 31, | | | |
In thousands | 2019 | | 2018 | | Variance 2019 vs. 2018 | 2020 | | 2019 | | Variance 2020 vs. 2019 |
| | | | | | | | | | | | | | |
Interest income | $ | 348 |
| | $ | 205 |
| | $ | 143 |
| | 70 | % | $ | 363 |
| | $ | 259 |
| | $ | 104 |
| | 40 | % |
Interest expense | (7,267 | ) | | (7,557 | ) | | 290 |
| | (4 | )% | (6,779 | ) | | (7,551 | ) | | 772 |
| | (10 | )% |
Earnings of equity method investment | 371 |
| | 238 |
| | 133 |
| | 56 | % | 338 |
| | 222 |
| | 116 |
| | 52 | % |
Other income (expenses) | 252 |
| | 1,130 |
| | (878 | ) | | (78 | )% | 108 |
| | 208 |
| | (100 | ) | | (48 | )% |
Total non-operating expenses | $ | (6,296 | ) | | $ | (5,984 | ) | | $ | (312 | ) | | 5 | % | $ | (5,970 | ) | | $ | (6,862 | ) | | $ | 892 |
| | (13 | )% |
Non-operating expenses increasedfor the three months ended March 31, 2020 decreased by $0.3$0.9 million to $6.3$6.0 million when compared withto the prior year period. The increasedecrease is mainly related to a $0.9$0.8 million decrease in Other income (expenses) due to higher foreign exchange losses relative tointerest expense, resulting from the same quarterscheduled amortization of debt and a reduction in 2018.interest rates.
Income tax expenseTax Expense
| | | Three months ended September 30, | | | | | Three months ended March 31, | | | | |
In thousands | 2019 | | 2018 | | Variance 2019 vs. 2018 | 2020 | | 2019 | | Variance 2020 vs. 2019 |
Income tax expense | $ | 3,720 |
| | $ | 3,302 |
| | $ | 418 |
| | 13 | % | $ | 4,518 |
| | $ | 3,809 |
| | $ | 709 |
| | 19 | % |
Income tax expense for the three months ended March 31, 2020 amounted to $3.7$4.5 million, an increase of $0.4$0.7 million when compared with the prior year quarterly period. The effective tax rate for the quarter was 13.0%, compared with 12.5% in the 2018 period. The increase in effective tax rate is primarily driven by an increase in foreign taxes in connection with the increased intercompany transactions. This increase was partially offset by a decrease in Puerto Rico taxes due to a shift in fully taxable operations to partially taxable operations and a tax benefit recorded during the period related to a decrease in effective tax rate for certain activities.
Comparison of the nine months ended September 30, 2019 and 2018
|
| | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | |
In thousands | 2019 | | 2018 | | Variance 2019 vs. 2018 |
| | | | | | | |
Revenues | $ | 360,188 |
| | $ | 335,638 |
| | $ | 24,550 |
| | 7 | % |
Operating costs and expenses | | | | |
|
| |
|
Cost of revenues, exclusive of depreciation and amortization shown below | 154,498 |
| | 146,015 |
| | 8,483 |
| | 6 | % |
Selling, general and administrative expenses | 45,355 |
| | 45,684 |
| | (329 | ) | | (1 | )% |
Depreciation and amortization | 50,440 |
| | 47,383 |
| | 3,057 |
| | 6 | % |
Total operating costs and expenses | 250,293 |
| | 239,082 |
| | 11,211 |
| | 5 | % |
Income from operations | $ | 109,895 |
| | $ | 96,556 |
| | $ | 13,339 |
| | 14 | % |
Revenues
Total revenues for the nine months ended September 30, 2019 amounted to $360.2 million, an increase of $24.6 million or 7%. Revenue benefited from the impact of a higher net spread driven by pricing actions, elevated sales volumes in Puerto Rico, higher core banking transactions and an increase in fees generated by network services related to new managed services projects. Additionally, revenue growth was impacted by one-time revenue related to an electronic benefits contract of approximately $2.7 million and revenue from hardware sales and the completion of several projects of approximately $4.5 million.
Cost of revenues
Cost of revenues amounted to $154.5 million, an increase of $8.5 million or 6% when compared with the prior year period. The increase is primarily related to an increase in cost of sales associated with the increased hardware sales coupled with higher professional fees and equipment expenses, partially offset by a decrease in salaries and compensation for the same reason explained above for the quarter.
Selling, general and administrative
Selling, general and administrative expenses in the nine months ended September 30, 2019 decreased by $0.3 million or 1% to $45.4 million when compared with the same period in 2018. The decrease is mainly driven by lower professional services as the prior year included fees in connection with due diligence for a potential transaction that the Company decided not to pursue, almost entirely offset by an increase in salaries and compensation.
Depreciation and amortization
Depreciation and amortization expense amounted to $50.4 million, an increase of $3.1 million when compared with the prior year. The increase is due to the same reasons explained above for the quarter.
Non-operating income (expenses)
|
| | | | | | | | | | | | | | |
| Nine months ended September 30, | | | |
In thousands | 2019 | | 2018 | | Variance 2019 vs. 2018 |
| | | | | | | |
Interest income | $ | 864 |
| | $ | 526 |
| | $ | 338 |
| | 64 | % |
Interest expense | (22,191 | ) | | (22,901 | ) | | $ | 710 |
| | (3 | )% |
Earnings of equity method investment | 726 |
| | 612 |
| | $ | 114 |
| | 19 | % |
Other (expenses) income | (619 | ) | | 1,878 |
| | $ | (2,497 | ) | | (133 | )% |
Total non-operating expenses | $ | (21,220 | ) | | $ | (19,885 | ) | | $ | (1,335 | ) | | 7 | % |
Non-operating expenses increased by $1.3 million to $21.2 million when compared with the prior year period. The increase is driven by a decrease in Other income (expenses) of $2.5 million due to an increase in foreign exchange losses, partially offset by a decrease in interest expense as a result of improved rates from the debt refinancing completed in the fourth quarter of the prior year.
Income tax expense
|
| | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | |
In thousands | 2019 | | 2018 | | Variance 2019 vs. 2018 |
Income tax expense | $ | 10,018 |
| | $ | 10,349 |
| | $ | (331 | ) | | (3 | )% |
Income tax expense amounted to $10.0 million for the nine months ended September 30, 2019, a decrease of $0.3 million when compared with the prior year period. The effective tax rate for the period was 11.3%16.9%, compared with 13.5%12.5% in the prior year.2019 period. The decreaseincrease in the effective tax rate is a resultprimarily reflects the impact of a decrease in Puerto Rico taxes forCOVID-19 on the same reasons explained above for the quarter coupled withmix of business as well as a discrete tax item of approximately $0.5 million. Additionally, there may be some quarter-to-quarter volatility of our effective tax rate in LATAM, partially offset by an increase in foreign taxes for intercompany transactions.future quarters as our mix of income from multiple tax jurisdictions and related income forecasts change due to the potential effects of COVID-19.
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) 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 ATH debit network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed, and other processing services.
The Merchant Acquiring segment consists of revenues from services that allow merchants to accept electronic methods of payment. In the Merchant Acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees and rental fees from POS devices and other equipment, net of credit card interchange and assessment fees charged by credit cards associations (such as VISA or MasterCard) or payment networks. The discount fee is generally a percentage of the transaction value. EVERTEC also charges merchants for other services that are unrelated to the number of transactions or the transaction value.
The Business Solutions segment consists of revenues from a full suite of business process management solutions in various product areas such as core bank processing, network managed services,hosting and management, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived in part from a recurrent fixed fee and from fees based on the number of accounts on file (i.e. savings or checking accounts, loans, etc.) or computer resources utilized. Revenues from other processing services within the Business Solutions segment are generally
volume-based and depend on factors such as the number of accounts processed. In addition, EVERTEC is a reseller of hardware and software products and these resale transactions are generally non-recurring.
In addition to the four operating segments described above, Managementmanagement identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These 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 aswithin the “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and otherOther category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:
marketing,
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 the operating segments separate financial information to assess performance and to allocate resources. Management evaluates the operating results of each of its operating segments based upon revenues and Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA").EBITDA. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with Accounting Standards CodificationASC Topic 280, "Segment Reporting"Segment Reporting, given that it is reported to the CODM for purposes of allocating resources. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by revenues and adjusted EBITDA performance.EBITDA. As such, segment assets are not disclosed in the notes to the accompanying unaudited condensed consolidated financial statements.
The following tables set forth information about the Company’s operations by its four business segments for the periods indicated below.
Comparison of the three months ended September 30,March 31, 2020 and 2019 and 2018
Payment Services - Puerto Rico & Caribbean
| | | Three months ended September 30, | Three months ended March 31, |
In thousands | 2019 | | 2018 | 2020 | | 2019 |
Revenues | $30,411 | | $28,951 | $29,887 | | $ | 32,017 |
|
Adjusted EBITDA | 18,377 | | 19,244 | 16,074 | | 21,263 |
Adjusted EBITDA Margin | | 53.8 | % | | 66.4 | % |
Payment Services - Puerto Rico & Caribbean segment revenue increasedrevenues for the three months ended March 31, 2020 decreased by $1.5$2.1 million to $30.4$29.9 million when compared withto the 20182019 period. The increasedecrease in revenues was driven by higherthe absence of the revenue from a one-time project in the prior year of $2.7 million and a decline in transaction volumes for POS and ATM coupled with new transaction fees,due to the impact of COVID-19, partially offset by delays in the renewal of a government contract.incremental revenue recognized from new services. Adjusted EBITDA decreased by $0.9$5.2 million to $18.4$16.1 million primarily due to an increase inlower revenue, higher operating expenses mainly professional servicesrelated to post-implementation costs from an electronic benefits project, and programming expenses, that entirely offset the increase in revenue and a decrease in bad debt expenses recorded in the prior year period.higher costs of sales directly related to new services.
Payment Services - Latin America
| | | Three months ended September 30, | Three months ended March 31, |
In thousands | 2019 | | 2018 | 2020 | | 2019 |
Revenues | $20,596 | | $18,907 | $21,640 | | $20,831 |
Adjusted EBITDA | 7,588 | | 6,551 | 8,242 | | 8,256 |
Adjusted EBITDA Margin | | 38.1 | % | | 39.6 | % |
Payment Services - Latin America segment revenuerevenues for the three months ended March 31, 2020 increased $1.7$0.8 million to $20.6$21.6 million driven mainly by higher intercompany software sale and developmentthe acquisition of PlacetoPay in December 2019, as well as organic growth. The increase in revenues from the Payment Services - Latin America segment to the Payment Services Puerto Rico & Caribbean segment,is partially offset by anticipated client attrition.attrition, negative impact from foreign exchange losses, in part due to COVID-19, and the absence of a one-time benefit from an intercompany license in the prior year. Adjusted EBITDA increased $1.0 millionhad a slight decrease when compared to the prior year period primarily due to the revenue associated to the one-time intercompany services and license sales, partially offset byrevenue in the impact of foreign exchange losses.prior year.
Merchant Acquiring
| | | Three months ended September 30, | Three months ended March 31, |
In thousands | 2019 | | 2018 | 2020 | | 2019 |
Revenues | $26,436 | | $24,486 | $25,121 | | $25,974 |
Adjusted EBITDA | 11,208 | | 10,948 | 11,284 | | 11,965 |
Adjusted EBITDA Margin | | 44.9 | % | | 46.1 | % |
Merchant Acquiring segment revenue increasedrevenues for the three months ended March 31, 2020 decreased $0.9 million to $26.4$25.1 million primarily driven primarily by pricing actions impacting bothlower sales volumes and a decline in spread and transactional revenue, partially offset by a lower average ticket and sales volume. Adjusted EBITDA increased $0.3 millionduring late March as a result of COVID-19. Adjusted EBITDA decreased $0.7 million reflecting the increased revenues, partially offset by higher internal processing costs due to an increaseimpact of lower transactional revenue and the shift in transactions.the mix of business towards industries with lower spread in the last weeks of March.
| | | Three months ended September 30, | Three months ended March 31, |
In thousands | 2019 | | 2018 | 2020 | | 2019 |
Revenues | $52,945 | | $48,831 | $55,943 | | $51,364 |
Adjusted EBITDA | 25,082 | | 21,744 | 27,445 | | 23,048 |
Adjusted EBITDA Margin | | 49.1 | % | | 44.9 | % |
Business Solutions segment revenuerevenues for the three months ended March 31, 2020 increased $4.1$4.6 million to $52.9$55.9 million. Revenue growth in the segment was driven by new services for both Popular and other one-time project implementations completed during the Governmentperiod of Puerto Rico and other projects completed in the quarter representing revenue of $2.0approximately $1.5 million. Adjusted EBITDA increased $3.3$4.4 million to $25.1$27.4 million when compared withto the prior year as a result of the higher revenues partially offset by an increase in operating expenses.
Comparison of the nine months ended September 30, 2019 and 2018
Payment Services - Puerto Rico & Caribbean
|
| | | |
| Nine months ended September 30, |
In thousands | 2019 | | 2018 |
Revenues | $92,910 | | $84,162 |
Adjusted EBITDA | 59,959 | | 54,912 |
Payment Services - Puerto Rico & Caribbean revenues increased by $8.7 million to $92.9 million. The increase in revenues was driven by the same reasons explained above for the quarter coupled with one-time revenue related to an electronic benefits contract of approximately $2.7 million. Adjusted EBITDA increased by $5.0 million mainly as a result of the increase in revenues, partially offset by higher operating expenses.
Payment Services - Latin America
|
| | | |
| Nine months ended September 30, |
In thousands | 2019 | | 2018 |
Revenues | $62,533 | | $58,534 |
Adjusted EBITDA | 23,617 | | 18,340 |
Payment services - Latin America revenue increased $4.0 million to $62.5 million driven by higher intercompany software sale and development revenues from the Payment Services - Latin America segment to the Payment Services Puerto Rico & Caribbean segment, partially offset by one-time sales and revenue from completed implementations in the prior year that did not recur and by the impact from client attrition. Adjusted EBITDA increased $5.3 million when compared to the prior year period due to higher revenue associated to intercompany services and licenses sold to Payment Services - Puerto Rico & Caribbean segment, coupled with a decrease in operating expenses.
Merchant Acquiring
|
| | | |
| Nine months ended September 30, |
In thousands | 2019 | | 2018 |
Revenues | $79,203 | | $73,829 |
Adjusted EBITDA | 35,424 | | 34,438 |
Merchant acquiring revenues increased $5.4 million to $79.2 million when compared with the prior year period, driven by the same reasons above explained for the quarter coupled with electronic benefit disaster relief recovery funding that ended in March 2019. Increases in transactional fees contributed to higher net spreads versus the same period in the previous year. Adjusted EBITDA increased $1.0 million reflecting the increased revenues, partially offset by higher transaction processing charges and a lower average ticket.
Business Solutions
|
| | | |
| Nine months ended September 30, |
In thousands | 2019 | | 2018 |
Revenues | $159,492 | | $145,985 |
Adjusted EBITDA | 72,396 | | 68,061 |
Business solutions revenue increased by $13.5 million to $159.5 million when compared with the prior year mainly driven by the same reasons as in the quarter described above. These revenue increases were coupled with revenue from incremental managed services from the Government of Puerto Rico. Adjusted EBITDA increased $4.3 million as a result of the increase in revenue, partially offset by higher costs of sales and costs incurred related to support and maintenance hours for Business Solutions applications. Additionally, the Company incurred in higher maintenance expenses related to infrastructure supporting the Business Solutions segment as we continue to replace obsolete assets.revenues.
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 $125.0 million Revolving Facility, of which $116.9 million was available for borrowing as of September 30, 2019.March 31, 2020. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.
At September 30, 2019,As of March 31, 2020, we had cash and cash equivalents of $102.5$103.5 million, of which $55.9$57.9 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. We intend to indefinitely reinvest these funds outside of Puerto Rico, and based on our liquidity forecast, we will not 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 secured Revolving Credit Facility will be adequate to meet our liquidity needs for the next twelve months. However, our ability to fund future operating expenses, dividend payments, capital expenditures, mergers and acquisitions, and our ability to make scheduled payments of interest, to pay principal on or refinance our indebtedness and to satisfy any other of our present or future debt obligations will depend on our future operating performance, which may be affected by general economic, financial and other factors beyond our control.
| | | | Nine months ended September 30, | | Three months ended March 31, |
(In thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
| | | | | | | | |
Cash provided by operating activities | | $ | 136,167 |
| | $ | 128,443 |
| | $ | 33,925 |
| | $ | 29,339 |
|
Cash used in investing activities | | (49,862 | ) | | (24,990 | ) | | (9,412 | ) | | (13,956 | ) |
Cash used in financing activities | | (57,117 | ) | | (59,824 | ) | | (31,358 | ) | | (15,628 | ) |
Effect of foreign exchange rate on cash, cash equivalents and restricted cash | | | $ | 828 |
| | $ | — |
|
Increase in cash, cash equivalents and restricted cash | | $ | 29,188 |
| | $ | 43,629 |
| | $ | (6,017 | ) | | $ | (245 | ) |
Net cash provided by operating activities for the ninethree months ended September 30, 2019March 31, 2020 was $136.2$33.9 million compared with cash provided by operating activities of $128.4to $29.3 million for the corresponding 2018 period.period in 2019. The $7.7$4.6 million increase in cash provided by operating activities is primarily
driven by higher net income coupled with more cash received from accounts receivable.receivable driven by collections from customers and less cash used in income tax payments.
Net cash used in investing activities for the ninethree months ended September 30, 2019March 31, 2020 was $49.9$9.4 million compared with $25.0to $14.0 million for the corresponding period in 2018.2019. The $24.9$4.5 million increasedecrease is attributable to increases inlower capital expenditures.
Net cash used in financing activities for the ninethree months ended September 30, 2019March 31, 2020 was $57.1$31.4 million compared with $59.8to $15.6 million for the corresponding 2018 period.period in 2019. The $2.7$15.7 million decreaseincrease was mainly relatedattributed to a $12.0$20.6 million paydown of long-term debt during the period, as well as a $15.0 million draw to our revolving facility in the prior year on the Revolving Facility, coupled withyear. The increase was partially offset by a $30.7 million decrease in cash used to paydown long-term debt. Thisrepurchase common stock by $10.2 million, a decrease was partially offset by cash dividends paid amounting to $10.8 million andin cash used for repurchases of common stock of $28.4 million, compared with $3.6 million in dividends paid in the prior year and no cash used for stock repurchases,dividend payments as quarterly dividend payments were made on April 3, 2020, and a $4.2$3.2 million increasedecrease in cash used for payment of statutory withholding taxes for share-based compensation.
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 $50.0$9.4 million and $25.0$14.0 million, forrespectively, during the ninethree months ended September 30, 2019March 31, 2020 and 2018, respectively. Capital2019. Generally, we fund 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 $50 million to $55 million in 2019.
Dividend Payments
On February 15, 2019 , April 25, 2019 and July 25, 2019, the20, 2020, our Board declared a regular quarterly cash dividend of $0.05 per share on the Company’s outstanding shares of common stock, which was paid on March 22, 2019, June 7, 2019 and September 6, 2019, respectively,April 3, 2020 to stockholders of record as of the close of business on February 26, 2019, May 6, 2019 and August 5, 2019, respectively.March 4, 2020.
On October 23, 2019, theApril 21, 2020, our 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 December 6, 2019,June 5, 2020 to stockholders of record as of the close of business on NovemberMay 4, 2019. Any declaration2020. The Board anticipates declaring this dividend in future quarters on a regular basis; however future declarations of dividends are subject to the Board’s approval and payment of future dividends to holders of our common stock willmay be at the discretion of our Board and will depend on many factors, including our financial condition, earnings, available cash,adjusted as business opportunities, legal requirements, restrictions in our debt agreements and other contracts, capital requirements, level of indebtedness and other factors that our Board deems relevant.needs or market conditions change.
Financial Obligations
Secured Credit Facilities
On November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement governingproviding for the secured credit facilities, consisting of a $220.0 million term loan A facility that matures on November 27, 2023 "2023(the “2023 Term A"A Loan”), a $325.0 million term loan B facility that matures on November 27, 2024 ("2024(the “2024 Term B"B Loan”), and a $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”).
The 2018 Credit Agreement require mandatory repayment of outstanding principal balances based on a percentage of 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 5, 2020, the Company repaid $17.0 million as a result of excess cash flows for the year ended December 31, 2019.
The unpaid principal balance at September 30, 2019March 31, 2020 of the 2023 Term A Loan and the 2024 Term B Loan was $211.8$198.3 million and $322.6$311.9 million, respectively. The additional borrowing capacity for theunder our Revolving Facility at September 30, 2019March 31, 2020 was $116.9 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility. On April 8, 2020, the Company drew down $30 million on its Revolving Credit Facility.
Notes payablePayable
In May 2016,December 2019, EVERTEC Group entered into atwo non-interest bearing financing agreementagreements amounting to $0.7$2.4 million to purchase software.software and maintenance. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the outstanding principal balance of the notenotes payable was $0.2$1.5 million and $0.3$2.4 million, respectively. The current portion of this notethese notes, which totaled $0.8 million as of March 31, 2020, is recorded as part ofincluded in accounts payable and the long-term portion is included in other long-term liabilities.liabilities in the Company's unaudited condensed consolidated balance sheet.
In January 2019, EVERTEC Group entered into a non-interest bearing financing agreement amounting to $10.0 million to purchase data processing equipment and maintenance. As of September 30, 2019, the outstanding principal balance of the note payable was $2.5 million, recorded as part of accounts payable.
Interest Rate Swaps
At September 30, 2019,As of March 31, 2020, the Company has the followinghad two interest rate swap agreements, convertingentered into in December 2015 and December 2018, both of which convert a portion of the interest rate exposurepayments on the Company's 2024 Term B Loanloan from variable to fixed:
|
| | | | | | | | | | |
Swap Agreement | | Effective date | | Maturity Date | | Notional Amount | | Variable Rate | | Fixed Rate |
2015 Swap | | January 2017 | | April 2020 | | $200 million | | 1-month LIBOR | | 1.9225% |
2018 Swap | | April 2020 | | November 2024 | | $250 million | | 1-month LIBOR | | 2.89% |
The Company has accounted for these transactions as cash flow hedges.
At September 30, 2019
As of March 31, 2020 and December 31, 2018,2019, the carrying amount of derivatives was $27.4 million and $14.5 million, respectively, and is included in the derivativesother long-term liabilities on the Company’sCompany's unaudited condensed consolidated balance sheetssheets. The fair value of these derivatives is as follows:
|
| | | | | | | | |
(In thousands) | | September 30, 2019 | | December 31, 2018 |
Other long-term assets | | $ | — |
| �� | $ | 1,683 |
|
Other long-term liabilities | | $ | 16,687 |
| | $ | 4,059 |
|
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.During the ninethree months ended September 30, 2019,March 31, 2020, the Company reclassified gains of $0.7$0.2 million from accumulated other comprehensive loss into income through interest expense. Based on current LIBOR rates, the Company expects to reclassify gainslosses of $1.1$4.7 million from accumulated other comprehensive loss into income through interest expense over the next 12 months. Refer to Note 6 for tabular disclosure of the fair value of derivatives and to Note 7 for tabular disclosure of losses recorded on cash flow hedging activities.
The cash flow hedge ishedges are considered highly effective.
Covenant Compliance
As of September 30, 2019, theMarch 31, 2020, our secured leverage ratio was 2.121.99 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 Accounting Standards CodificationASC 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:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Twelve months ended | | Three months ended March 31, | | Twelve months ended |
(Dollar amounts in thousands, except per share information) | | 2019 | | 2018 | | 2019 | | 2018 | | September 30, 2019 | | 2020 | | 2019 | | March 31, 2020 |
Net income | | $ | 24,786 |
| | $ | 23,075 |
| | $ | 78,657 |
| | $ | 66,322 |
| | $ | 98,904 |
| | $ | 22,275 |
| | $ | 26,734 |
| | $ | 99,241 |
|
Income tax expense | | 3,720 |
| | 3,302 |
| | 10,018 |
| | 10,349 |
| | 12,265 |
| | 4,518 |
| | 3,809 |
| | 13,684 |
|
Interest expense, net | | 6,919 |
| | 7,352 |
| | 21,327 |
| | 22,375 |
| | 28,209 |
| | 6,416 |
| | 7,292 |
| | 26,718 |
|
Depreciation and amortization | | 16,972 |
| | 15,788 |
| | 50,440 |
| | 47,383 |
| | 66,124 |
| | 17,795 |
| | 16,273 |
| | 69,604 |
|
EBITDA | | 52,397 |
| | 49,517 |
| | 160,442 |
| | 146,429 |
| | 205,502 |
| | 51,004 |
| | 54,108 |
| | 209,247 |
|
Equity income (1) | | (372 | ) | | (238 | ) | | (241 | ) | | (179 | ) | | (321 | ) | | (338 | ) | | (222 | ) | | (567 | ) |
Compensation and benefits (2) | | 3,455 |
| | 2,368 |
| | 10,392 |
| | 10,670 |
| | 13,381 |
| | 3,500 |
| | 3,439 |
| | 13,859 |
|
Transaction, refinancing and other fees (3) | | — |
| | 453 |
| | 280 |
| | 2,916 |
| | 4,934 |
| | 2,124 |
| | 271 |
| | 2,351 |
|
Adjusted EBITDA | | 55,480 |
| | 52,100 |
| | 170,873 |
| | 159,836 |
| | 223,496 |
| | 56,290 |
| | 57,596 |
| | 224,890 |
|
Operating depreciation and amortization (4) | | (8,673 | ) | | (7,365 | ) | | (25,516 | ) | | (21,909 | ) | | (32,815 | ) | | (9,477 | ) | | (7,965 | ) | | (36,392 | ) |
Cash interest expense, net (5) | | (6,644 | ) | | (6,473 | ) | | (20,774 | ) | | (19,396 | ) | | (27,481 | ) | | (6,010 | ) | | (7,132 | ) | | (25,894 | ) |
Income tax expense (6) | | (5,509 | ) | | (4,558 | ) | | (15,454 | ) | | (15,492 | ) | | (19,476 | ) | | (7,178 | ) | | (5,300 | ) | | (22,117 | ) |
Non-controlling interest (7) | | (63 | ) | | (121 | ) | | (287 | ) | | (385 | ) | | (374 | ) | | (92 | ) | | (112 | ) | | (327 | ) |
Adjusted net income | | $ | 34,591 |
| | $ | 33,583 |
| | $ | 108,842 |
| | $ | 102,654 |
| | $ | 143,350 |
| | $ | 33,533 |
| | $ | 37,087 |
| | $ | 140,160 |
|
Net income per common share (GAAP): | | | | | |
| | | | | | | | | | |
Diluted | | $ | 0.34 |
| | $ | 0.31 |
| | $ | 1.07 |
| | $ | 0.89 |
| | | | $ | 0.30 |
| | $ | 0.36 |
| | |
Adjusted Earnings per common share (Non-GAAP): | | | | | |
| | | | | | | | | | |
Diluted | | $ | 0.47 |
| | $ | 0.45 |
| | $ | 1.48 |
| | $ | 1.38 |
| | | | $ | 0.46 |
| | $ | 0.50 |
| | |
Shares used in computing adjusted earnings per common share: | | | | | |
| | | | | | | | | | |
Diluted | | 73,314,704 |
| | 74,657,100 |
| | 73,530,865 |
| | 74,123,431 |
| | | | 73,293,005 |
| | 73,770,066 |
| | |
| |
1) | Represents the elimination of non-cash equity earnings from our 19.99% equity investment in Dominican Republic, Consorcio de Tarjetas Dominicanas S.A. ("CONTADO"), net of cash dividends received. |
| |
2) | Primarily represents share-based compensation of $3.5 million and $2.4 million for the quarters ended September 30, 2019 and 2018, respectively. Primarily represents share-based compensation and other compensation expense of $10.2 million and $9.7 million for the nine months ended September 30, 2019 and 2018 and severance payments of $0.2 million and $1.0 million for the same periods, respectively.payments. |
| |
3) | Represents fees and expenses associated with corporate transactions as defined in the Credit Agreement, recorded as part of selling, general and administrative expenses and cost of revenues.expenses. |
| |
4) | Represents operating depreciation and amortization expense, which excludes amounts generated as a result of merger and acquisition activity. |
| |
5) | Represents interest expense, less interest income, as they appear on our consolidated statements of income and comprehensive income, adjusted to exclude non-cash amortization of the debt issue costs, premium and accretion of discount. |
| |
6) | Represents income tax expense calculated on adjusted pre-tax income using the applicable GAAP tax rate, adjusted for certain discreetdiscrete items. |
| |
7) | Represents the 35% non-controlling equity interest in Evertec Colombia, net of amortization for intangibles created as part of the purchase. |
Off Balance
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company may enter into commercial commitments. With the exception of the letters of credit issued against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility, as of September 30, 2019,March 31, 2020, the Company did not have any off balanceoff-balance sheet items.
Seasonality
Our payment businesses generally experience moderate increased activity during the traditional holiday shopping periods and around other nationally recognized holidays, which follow consumer spending patterns.
Effect of Inflation
While inflationary increases in certain 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.
Interest rate risksRate Risks
We issued floating-rate debt which is subject to fluctuations in interest rates. Our secured credit facilities accrue interest at variable rates and only the 2024 Term B Loan is subject to a floor or a minimum rate. A 100 basis point increase in interest rates over our floor(s) on our debt balances outstanding as of September 30, 2019,March 31, 2020, under the secured credit facilities, would increase our annual interest expense by approximately $3.3$3.1 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.
In December 2015 and December 2018, we entered into interest rate swap agreements which convert a portion of our outstanding variable rate debt to fixed.
The interest rate swap exposes us to credit risk in the event that the counterparty to the swap agreement does not or cannot meet its obligations. The notional amount is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The loss would be limited to the amount that would have been received, if any, over the remaining life of the swap. The counterparty to the swap is a major US based financial institution and we expect the counterparty to be able to perform its obligations under the swap. We use derivative financial instruments for hedging purposes only and not for trading or speculative purposes
See Note 56 of the Unaudited Condensed Consolidated Financial Statements for additional information related to the senior secured credit facilities.
Foreign exchange riskExchange Risk
We conduct business in certain countries in Latin America. Some of this business is conducted in the countries’ local currencies. The resulting foreign currency translation adjustments, from operations for which the functional currency is other than the U.S. dollar, are reported in accumulated other comprehensive loss in the unaudited condensed consolidated balance sheets, except for highly inflationary environments in which the effects would be included in other operating income in the condensed consolidated statementssheets. As of income and comprehensive income. At September 30, 2019,March 31, 2020, the Company had $17.9$25.2 million in an unfavorable foreign currency translation adjustment as part
of accumulated other comprehensive loss compared with an unfavorable foreign currency translation adjustment of $21.6$16.9 million at December 31, 2018.2019. Unfavorable foreign currency translation adjustments at March 31, 2020 were impacted by the atypical volatility of foreign currencies brought on by the unstable macroeconomic conditions resulting from the COVID-19 pandemic.
Item 4. Controls and Procedures
Evaluation of Disclosure 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) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2019,March 31, 2020, the Company’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
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, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As a result of COVID-19, the majority of our global workforce shifted to a primarily work from home environment beginning in March 2020. This change to remote working was rapid and included both our employees in Puerto Rico as well as our workforce across all regions in which we operate. While pre-existing controls were not specifically designed to operate in our current work from home operating environment, the Company has not identified any material changes in the Company’s internal control over financial reporting as a result from this new way of work. The Company is continually monitoring and assessing the COVID-19 situation to determine any potential impacts on the design and operating effectiveness of our internal controls 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
There have been no material changes from theWe previously disclosed risk factors previously disclosed under Item"Item 1A. of the Company’sRisk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. In addition to those risk factors and the other information included elsewhere in this report, investors should carefully consider the risk factors discussed below.
The outbreak of COVID-19 has had, and may have continue to have, a negative impact on the global economy and on our business, operations and results
The novel strain of coronavirus (COVID-19) first identified in Wuhan, China has now spread to nearly all regions around the world (including the markets where we conduct business) and was declared a pandemic by the World Health Organization on March 11, 2020. The outbreak, and measures taken to contain or mitigate it, have had dramatic adverse consequences for the economy, including on demand, operations, supply chains and financial markets. The nature and scope of the consequences to date are difficult to evaluate precisely, and their future course is impossible to predict with confidence. As such, COVID-19 has already had several significant effects on our business and our financial condition. The effects to date have included but are not limited to the following:
Significant decline in sales volumes and sales volumes mix in our Merchant Acquiring business;
Decreased number of POS and ATM transactions, and other services (e.g. Lockbox, ACH) affecting our Payments Services - Puerto Rico & Caribbean segment;
Changes in consumer behavior resulting from COVID-19, such as decreased consumer confidence and negative trends in consumer purchase patterns due to consumers’ disposable income, credit available and debt levels;
Decreased productivity due to travel bans, remote working policies or shelter-in-place orders; and
A slowdown of global economic activity, which has significantly impacted our customers, due to the crisis and governmental responses to the crisis.
Most of these effects began in mid-March and have continue to date, so the effects on the second quarter are likely to be more significant.
The effects of the COVID-19 crisis to our business could be aggravated if the crisis continues, and we could also see additional impacts that might include the following:
Lower than normal sales volumes and sales volumes mix in our merchant acquiring business;
Continued decreased number of POS and ATM transactions, and other services affecting our Payments Services - Puerto Rico & Caribbean segment;
The revenue streams for certain lines of business in the Business Solutions segment may be adversely affected, including but not limited to core banking, network services, IT consulting, cash processing and item processing, among others;
Reduced transactional revenue in our Payments Services - Latin America segment;
Impairments in our ability to deliver key projects on time, which may have an impact on our revenue for all segments during 2020 and beyond;
Negative effects of general macroeconomic conditions on consumer confidence, including the impacts of any recession, resulting from the COVID-19 pandemic, including significant reductions in consumer spending, which would result in a loss of profits and other material adverse effects;
Significant reductions in demand or significant volatility in demand for one or more of our products, which may be caused by the temporary inability of consumers to purchase or use our products due to illness or quarantine, which would result in a loss of profits and other material adverse effects; and
The impact of public concern regarding the risk of contracting COVID-19 on demand from consumers, including due to consumers not leaving their homes or otherwise shopping in a different manner than they historically have or because some of our consumers have lower discretionary income due to unemployment or reduced or limited work as a result of measures taken in response to the pandemic, which would result in a loss of profits and other material adverse effects
If these effects are sustained, they could have accounting consequences such as impairments of tangible and intangible long-lived assets. They could affect our ability to operate effective internal control over financial reporting. They could also affect our ability to execute our expansion plans or invest in product development.
The adverse effect on our business, operations, or financial results of any of the matters described above could be material.
The future impact of the COVID-19 crisis on our business, operations, or financial results is highly uncertain and will depend on numerous evolving factors that we cannot predict, including, but not limited to:
the duration, scope, and severity of the COVID-19 pandemic;
the disruption or delay of production and delivery of materials and products in our supply chain;
the impact of travel bans, work-from-home policies, or shelter-in-place orders;
the temporary or prolonged shutdown of manufacturing facilities or retail stores and decreased retail traffic;
staffing shortages;
general economic, financial, and industry conditions, particularly conditions relating to liquidity, financial performance, and related credit issues in all sectors of the economy (including but not limited to the retail sector), which may be amplified by the effects of COVID-19; and
the short, medium and long-term effects of COVID-19 on the global economy, particularly in the countries where we operate, including on consumer confidence and spending, unemployment and bankruptcy rates, financial markets and the availability of credit to us, our suppliers and our customers in the event that the extension of additional credit becomes necessary due to the continuation of the current state of affairs for a prolonged and undetermined period of time.
Remote work increases our risk of experiencing a material cyber-attack or other security-related incidents
To mitigate the spread of COVID-19, we have transitioned a significant subset of our employee population to a remote work environment, which may exacerbate various cybersecurity risks to our business, including an increased demand for information technology resources, an increased risk of phishing and other cybersecurity attacks, and an increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information. See the risk factor titled “We are subject to security breaches or other confidential data theft from our systems, which can adversely affect our reputation and business” in our 2019 Form 10-K for more details.
The risks described in our Annual Report on Form 10-K for the year ended December 31, 20182019 are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes repurchases of the Company’s common stock in the three months period ended September 30, 2019:March 31, 2020:
| | | | Total number of shares | | Average price paid | | Total number of shares purchased as part of a publicly | | Approximate dollar value of shares that may yet be purchased | | Total number of shares | | Average price paid | | Total number of shares purchased as part of a publicly | | Approximate dollar value of shares that may yet be purchased |
Period | | purchased | | per share | | announced program (1) | | under the program | | purchased | | per share | | announced program (1) | | under the program |
7/1/2019-7/31/2019 | | 8,020 |
| | $ | 30.920 |
| | 8,020 |
| | | |
9/1/2019-9/30/2019 | | 100 |
| | 30.970 |
| | 100 |
| | | |
3/1/2020-3/31/2020 | | | 336,022 |
| | $ | 21.73 |
| | 336,022 |
| | |
Total | | 8,120 |
| | $ | 30.920 |
| | 8,120 |
| | $ | 33,898,048 |
| | 336,022 |
| | $ | 21.73 |
| | 336,022 |
| | $ | 23,196,639 |
|
| |
(1) | On February 17, 2016, the Company announced that its Board of Directors approved an increase and extension to the current stock repurchase program, authorizing the purchase of up to $120 million of the Company’sCompany���s common stock and extended the expiration to December 31, 2017. On November 2, 2017, the Company's Board of Directors approved an extension to the expiration date of the current stock repurchase program to December 31, 2020. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
|
| |
10.1*+ | Form of IndemnificationRestricted Stock Unit Award Agreement for grant of restricted stock units to executive officers under the EVERTEC, Inc. 2013 Equity Incentive Plan, dated February 27, 2020, by and amongbetween EVERTEC, Inc. and its directors.the executive (applicable to Morgan M. Schuessler, Joaquín A. Castrillo, Rodrigo Del Castillo, Paola Pérez, Carlos J. Ramírez, Luis A. Rodríguez, Guillermo Rospigliosi, Philip E. Steurer, and Miguel Vizcarrondo. |
31.1* | |
31.2* | |
32.1** | |
32.2** | |
| |
101.INS XBRL** | Instance document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH XBRL** | Taxonomy Extension Schema |
101.CAL XBRL** | Taxonomy Extension Calculation Linkbase |
101.DEF XBRL** | Taxonomy Extension Definition Linkbase |
101.LAB XBRL** | Taxonomy Extension Label Linkbase |
101.PRE XBRL** | Taxonomy Extension Presentation Linkbase |
* Filed herewith.
** Furnished herewith.
+ This exhibit is a management contract or a compensatory plan or arrangement.
SIGNATURES
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.
|
| | |
| EVERTEC, Inc. (Registrant) |
| | |
Date: October 31, 2019May 8, 2020 | By: | /s/ Morgan Schuessler |
| | Morgan Schuessler Chief Executive Officer |
| | |
Date: October 31, 2019May 8, 2020 | By: | /s/ Joaquin A. Castrillo-Salgado |
| | Joaquin A. Castrillo-Salgado Chief Financial Officer (Principal Financial and Accounting Officer) |