UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2020~~2021 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)



Puerto Rico		66-0783622
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

Cupey Center Building,	Road 176, Kilometer 1.3,
San Juan,	Puerto Rico	00926
(Address of principal executive offices)		(Zip Code)

(~~787~~) (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:



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.

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 by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At October ~~23, 2020,~~20, 2021, there were ~~71,906,983~~71,969,856 outstanding shares of common stock of EVERTEC, Inc.

TABLE OF CONTENTS



		Page
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020	1
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	2
	Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	3
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2322
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3835
Item 4.	Controls and Procedures	3835
Part II. OTHER INFORMATION		4036
Item 1.	Legal Proceedings	4036
Item 1A.	Risk Factors	4036
Item 2.	Unregistered Sales of Equity in Securities and Use of Proceeds	4036
Item 3.	Defaults Upon Senior Securities	4036
Item 4.	Mine Safety Disclosures	4036
Item 5.	Other Information	4036
Item 6.	Exhibits	4137
SIGNATURES		4238

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.comas soon as reasonably practicable after filing such material with the SEC.~~

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of, and subject to the protection of, the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 important factors. Among the important 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~~Master Services Agreement ("MSA") 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 arising out of any disputes or in anticipation of the negotiation of the extension of the MSA, both in respect of the current term and any extension of the MSA;

•our dependence on our processing systems, technology infrastructure, security systems and fraudulent payment detection systems, as well as on our personnel and certain third parties with whom we do business, and the risks to our business if our systems are hacked or otherwise compromised;

•our ability to develop, install and adopt new software, technology and computing systems;

•a decreased client base due to consolidations and failures in the financial services industry;

•the credit risk of our merchant clients, for which we may also be liable;

•the continuing market position of the ATH network;

•a reduction in consumer confidence, whether as a result of a global economic downturn or otherwise, which leads to a decrease in consumer spending;

•our dependence on credit card associations, including any adverse changes in credit card association or network rules or fees;

•changes in the regulatory environment and changes in international, legal, tax, political, administrative or economic conditions;

•the geographical concentration of our business in Puerto Rico, including our business with the government of Puerto Rico and its instrumentalities, which are facing severe political and fiscal challenges;

•additional adverse changes in the general economic conditions in Puerto Rico, whether as a result of the government’s debt crisis or otherwise, including the continued migration of Puerto Ricans to the U.S. mainland, which could negatively affect our customer base, general consumer spending, our cost of operations and our ability to hire and retain qualified employees;

~~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 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~~earthquakes and other potential natural ~~disasters;~~disasters affecting our main markets in Latin America and the Caribbean;

•uncertainty related to the effect of the discontinuation of the London Interbank Offered Rate at the end of 2021;

•the ~~nature, timing and amount of any restatement; and~~

~~the~~continued impact of ~~a novel strain of coronavirus ("COVID-19"),~~the COVID-19 pandemic and measures taken in response to the outbreak, on our ~~revenues,~~resources, net income and liquidity due to current and future disruptions in operations as well as the macroeconomic instability caused by the ~~pandemic.~~pandemic; and

•the nature, timing and amount of any restatement.

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 important factors, including those set forth under “Item 1A. Risk Factors,” of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 1, 2021, as updated in our subsequent filings with the SEC, and 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, except as required by applicable law, we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.

Where You Can Find More Information

All reports we file with the SEC are available for download 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 free of charge upon request and make electronic copies of our reports available for download, free of charge, through our website at www.evertecinc.comas soon as reasonably practicable after filing such material with the SEC. Information contained on our website is not part of this Report.

EVERTEC, Inc. Unaudited Condensed Consolidated Balance Sheets

(~~Dollar amounts in~~In thousands, except for share information)


	September 30, 2020			December 31, 2019				September 30, 2021		December 31, 2020
Assets							Assets
Current Assets:							Current Assets:
Cash and cash equivalents	$	144,147		$	111,030		Cash and cash equivalents	$	244,129	$	202,649
Restricted cash	18,049			20,091			Restricted cash	18,664		18,456
Accounts receivable, net	111,852			106,812			Accounts receivable, net	95,548		95,727
Prepaid expenses and other assets	44,835			38,085			Prepaid expenses and other assets	44,733		42,214
Total current assets	318,883			276,018			Total current assets	403,074		359,046
Debt securities available-for-sale, at fair value							Debt securities available-for-sale, at fair value	3,060		—
Investment in equity investee	12,417			12,288			Investment in equity investee	11,248		12,835
Property and equipment, net	43,255			43,791			Property and equipment, net	42,780		43,538

Operating lease right-of-use asset	26,824			29,979			Operating lease right-of-use asset	22,625		27,538
Goodwill	395,048			399,487			Goodwill	394,536		397,670
Other intangible assets, net	222,085			241,937			Other intangible assets, net	219,615		219,909
Deferred tax asset	3,657			2,131			Deferred tax asset	4,993		5,730
Net investment in leases	394			722			Net investment in leases	178		301
Other long-term assets	5,511			5,323			Other long-term assets	6,384		6,012
Total assets	$	1,028,074		$	1,011,676		Total assets	$	1,108,493	$	1,072,579
Liabilities and stockholders’ equity							Liabilities and stockholders’ equity
Current Liabilities:							Current Liabilities:
Accrued liabilities	$	54,099		$	58,160		Accrued liabilities	$	68,555	$	58,033
Accounts payable	36,057			39,165			Accounts payable	34,069		43,348
Unearned income	19,800			20,668
Contract liability							Contract liability	21,304		24,958
Income tax payable	7,475			6,298			Income tax payable	4,597		6,573
Current portion of long-term debt	14,250			14,250			Current portion of long-term debt	18,375		14,250
Current portion of operating lease liability	5,877			5,773

Operating lease payable							Operating lease payable	5,900		5,830
Total current liabilities	137,558			144,314			Total current liabilities	152,800		152,992
Long-term debt	484,306			510,947			Long-term debt	449,435		481,041
Deferred tax liability	2,575			4,261			Deferred tax liability	1,819		2,748
Unearned income - long term	30,827			28,437
Contract liability - long term							Contract liability - long term	31,109		31,336
Operating lease liability - long-term	21,380			24,679			Operating lease liability - long-term	17,511		22,402
Derivative liability	27,370			14,452			Derivative liability	18,104		25,578
Other long-term liabilities	13,850			12,963			Other long-term liabilities	9,785		14,053
Total liabilities	717,866			740,053			Total liabilities	680,563		730,150
Commitments and contingencies (Note 13)
Commitments and contingencies (Note 14)							Commitments and contingencies (Note 14)	0		0
Stockholders’ equity							Stockholders’ equity
Preferred stock, par value $0.01; 2,000,000 shares authorized; none issued	0			0			Preferred stock, par value $0.01; 2,000,000 shares authorized; none issued	—		—
Common stock, par value $0.01; 206,000,000 shares authorized; 71,906,983 shares issued and outstanding as of September 30, 2020 (December 31, 2019 - 72,000,261)	719			720
Common stock, par value $0.01; 206,000,000 shares authorized; 71,969,856 shares issued and outstanding as of September 30, 2021 (December 31, 2020 - 72,137,678)							Common stock, par value $0.01; 206,000,000 shares authorized; 71,969,856 shares issued and outstanding as of September 30, 2021 (December 31, 2020 - 72,137,678)	719		721
Additional paid-in capital	6,552			0			Additional paid-in capital	3,708		5,340
Accumulated earnings	351,252			296,476			Accumulated earnings	468,533		379,934
Accumulated other comprehensive loss, net of tax	(52,386		)	(30,009		)	Accumulated other comprehensive loss, net of tax	(49,166)		(48,254)
Total EVERTEC, Inc. stockholders’ equity	306,137			267,187			Total EVERTEC, Inc. stockholders’ equity	423,794		337,741
Non-controlling interest	4,071			4,436			Non-controlling interest	4,136		4,688
Total equity	310,208			271,623			Total equity	427,930		342,429
Total liabilities and equity	$	1,028,074		$	1,011,676		Total liabilities and equity	$	1,108,493	$	1,072,579

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~~In thousands, except per share information)


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

Revenues (affiliates Note 15)	$	145,883	$	136,507	$	434,559	$	376,386

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization	62,995		57,854		182,180		168,900
Selling, general and administrative expenses	17,126		16,682		49,980		51,528
Depreciation and amortization	18,745		18,127		56,091		53,761
Total operating costs and expenses	98,866		92,663		288,251		274,189
Income from operations	47,017		43,844		146,308		102,197
Non-operating income (expenses)
Interest income	504		429		1,343		1,165
Interest expense	(5,684)		(5,867)		(17,248)		(18,829)
Earnings of equity method investment	411		202		1,307		733
Other income, net	146		2,486		2,719		2,766
Total non-operating expenses	(4,623)		(2,750)		(11,879)		(14,165)
Income before income taxes	42,394		41,094		134,429		88,032
Income tax expense	7,134		6,513		14,474		15,551
Net income	35,260		34,581		119,955		72,481
Less: Net (loss) income attributable to non-controlling interest	(54)		118		(59)		323
Net income attributable to EVERTEC, Inc.’s common stockholders	35,314		34,463		120,014		72,158
Other comprehensive income (loss), net of tax of $382, $(2), $817 and $(1,087)
Foreign currency translation adjustments	(6,942)		(3,245)		(7,823)		(10,483)
Gain (loss) on cash flow hedge	1,537		643		6,814		(11,894)
Unrealized gain on change in fair value of debt securities available-for-sale	8		—		97		—
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders	$	29,917	$	31,861	$	119,102	$	49,781
Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders	$	0.49	$	0.48	$	1.66	$	1.00
Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders	$	0.48	$	0.47	$	1.65	$	0.99

Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019

Revenues (affiliates Note 14) $ 136,507
$ 118,804
$ 376,386
$ 360,188

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization 57,854
51,878
168,900
154,498
Selling, general and administrative expenses 16,682
15,152
51,528
45,355
Depreciation and amortization 18,127
16,972
53,761
50,440
Total operating costs and expenses 92,663
84,002
274,189
250,293
Income from operations 43,844
34,802
102,197
109,895
Non-operating (expenses) income
Interest income 429
348
1,165
864
Interest expense (5,867 ) (7,267 ) (18,829 ) (22,191 )
Earnings of equity method investment 202
371
733
726
Other income (expense) 2,486
252
2,766
(619 )
Total non-operating expenses (2,750 ) (6,296 ) (14,165 ) (21,220 )
Income before income taxes 41,094
28,506
88,032
88,675
Income tax expense 6,513
3,720
15,551
10,018
Net income 34,581
24,786
72,481
78,657
Less: Net income attributable to non-controlling interest 118
32
323
201
Net income attributable to EVERTEC, Inc.’s common stockholders 34,463
24,754
72,158
78,456
Other comprehensive income (loss), net of tax of $123, $(278), $(964) and $(1,279)
Foreign currency translation adjustments (3,245 ) (576 ) (10,483 ) 3,714
Gain (loss) on cash flow hedges 643
(2,922 ) (11,894 ) (13,019 )
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders $ 31,861
$ 21,256
$ 49,781
$ 69,151
Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders $ 0.48
$ 0.34
$ 1.00
$ 1.09
Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders $ 0.47
$ 0.34
$ 0.99
$ 1.07

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~~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
Balance at December 31, 2020	72,137,678	$	721	$	5,340	$	379,934	$	(48,254)	$	4,688	$	342,429
Share-based compensation recognized	—	—		3,380		—		—		—		3,380
Repurchase of common stock	(382,974)	(4)		(1,290)		(12,974)		—		—		(14,268)
Restricted stock units delivered	411,739	4		(7,430)		(1,302)		—		—		(8,728)
Net income	—	—		—		35,503		—		101		35,604
Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,605)		—		—		(3,605)
Other comprehensive income (loss)	—	—		—		—		1,576		(381)		1,195
Balance at March 31, 2021	72,166,443	$	721	$	—	$	397,556	$	(46,678)	$	4,408	$	356,007
Share-based compensation recognized	—	—		3,855		—		—		—		3,855
Repurchase of common stock	(231,314)	(2)		(3,790)		(6,328)		—		—		(10,120)
Restricted stock units delivered	34,727	—		(65)		—		—		—		(65)
Net income	—	—		—		49,197		—		(106)		49,091
Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,608)		—		—		(3,608)
Other comprehensive income (loss)	—	—		—		—		2,909		(25)		2,884
Balance at June 30, 2021	71,969,856	$	719	$	—	$	436,817	$	(43,769)	$	4,277	$	398,044
Share-based compensation recognized	—	—		3,708		—		—		—		3,708


Net income	—	—		—		35,314		—		(54)		35,260
Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,598)		—		—		(3,598)
Other comprehensive loss	—	—		—		—		(5,397)		(87)		(5,484)

Balance at September 30, 2021	71,969,856	$	719	$	3,708	$	468,533	$	(49,166)	$	4,136	$	427,930


	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, 2019	72,000,261		$	720		$	0		$	296,476		$	(30,009	)	$	4,436		$	271,623		Balance at December 31, 2019	72,000,261	$	720	$	—	$	296,476	$	(30,009)	$	4,436	$	271,623
Share-based compensation recognized	—		—			3,483			—			—			—			3,483			Share-based compensation recognized	—	—		3,483		—		—		—		3,483
Repurchase of common stock	(336,022	)	(3		)	(775		)	(6,522		)	—			—			(7,300		)	Repurchase of common stock	(336,022)	(3)		(775)		(6,522)		—		—		(7,300)
Restricted stock units delivered, net of cashless	201,066		2			(2,708		)	—			—			—			(2,706		)
Restricted stock units delivered																					Restricted stock units delivered	201,066	2		(2,708)		—		—		—		(2,706)
Net income	—		—			—			22,211			—			64			22,275			Net income	—	—		—		22,211		—		64		22,275
Cash dividends declared on common stock, $0.05 per share	—		—			—			(3,600		)	—			—			(3,600		)	Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,600)		—		—		(3,600)
Other comprehensive loss	—		—			—			—			(20,164		)	(853		)	(21,017		)	Other comprehensive loss	—	—		—		—		(20,164)		(853)		(21,017)
Cumulative adjustment for the implementation of ASU 2016-13	—		—			—			(74		)	—			—			(74		)
Cumulative adjustment from the implementation of Current Expected Credit Loss model																					Cumulative adjustment from the implementation of Current Expected Credit Loss model	—	—		—		(74)		—		—		(74)
Balance at March 31, 2020	71,865,305		719			0			308,491			(50,173		)	3,647			262,684			Balance at March 31, 2020	71,865,305	$	719	$	—	$	308,491	$	(50,173)	$	3,647	$	262,684
Share-based compensation recognized	—		—			3,639			—			—			—			3,639			Share-based compensation recognized	—	—		3,639		—		—		—		3,639
Restricted stock units delivered, net of cashless	(2,445	)	—			(71		)	—			—			—			(71		)

Restricted stock units delivered																					Restricted stock units delivered	(2,445)	—		(71)		—		—		—		(71)
Net income	—		—			—			15,484			—			141			15,625			Net income	—	—		—		15,484		—		141		15,625
Cash dividends declared on common stock, $0.05 per share	—		—			—			(3,593		)	—			—			(3,593		)	Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,593)		—		—		(3,593)
Other comprehensive income	—		—			—			—			389			295			684
Other comprehensive loss																					Other comprehensive loss	—	—		—		—		389		295		684
Balance at June 30, 2020	71,862,860		719			3,568			320,382			(49,784		)	4,083			278,968			Balance at June 30, 2020	71,862,860	$	719	$	3,568	$	320,382	$	(49,784)	$	4,083	$	278,968
Share-based compensation recognized	—		—			3,663			—			—			—			3,663			Share-based compensation recognized	—	—		3,663		—		—		—		3,663
Restricted stock units delivered, net of cashless	43,385		0			(679		)	—			—			—			(679		)
Repurchase of common stock																					Repurchase of common stock	—	—		(679)		—		—		—		(679)
Restricted stock units delivered																					Restricted stock units delivered	43,385	—		—		—		—		—		—
Net income	—		—			—			34,463			—			118			34,581			Net income	—	—		—		34,463		—		118		34,581
Cash dividends declared on common stock, $0.05 per share	—		—			—			(3,593		)	—			—			(3,593		)	Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,593)		—		—		(3,593)
Other comprehensive loss	—		—			—			—			(2,602		)	(130		)	(2,732		)	Other comprehensive loss	—	—		—		—		(2,602)		(130)		(2,732)
Balance at September 30, 2020	71,906,245		$	719		$	6,552		$	351,252		$	(52,386	)	$	4,071		$	310,208		Balance at September 30, 2020	71,906,245	$	719	$	6,552	$	351,252	$	(52,386)	$	4,071	$	310,208

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

0

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 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

$ 0

$ 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 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

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~~In thousands)


	Nine months ended September 30,
	2021		2020

Cash flows from operating activities
Net income	$	119,955	$	72,481
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	56,091		53,761
Amortization of debt issue costs and accretion of discount	1,423		1,530
Operating lease amortization	4,443		4,377
Provision for expected credit losses and sundry losses	1,428		1,732
Deferred tax benefit	(1,119)		(2,082)
Share-based compensation	10,943		10,785
Gain from sale of assets	(778)		—
Loss on disposition of property and equipment and impairment of intangible	1,168		753
Earnings of equity method investment	(1,307)		(733)
Dividend received from equity method investment	1,183		—
(Increase) decrease in assets:
Accounts receivable, net	(593)		(7,096)
Prepaid expenses and other assets	(3,070)		(7,138)
Other long-term assets	(339)		284
(Decrease) increase in liabilities:
Accrued liabilities and accounts payable	(1,425)		(7,969)
Income tax payable	(2,685)		1,548
Contract liability	(2,654)		2,350
Operating lease liabilities	(4,107)		(5,720)
Other long-term liabilities	(2,702)		2,296
Total adjustments	55,900		48,678
Net cash provided by operating activities	175,855		121,159
Cash flows from investing activities

Additions to software	(31,004)		(23,521)
Acquisition of customer relationship	(14,750)		—
Property and equipment acquired	(12,388)		(13,402)
Proceeds from sales of property and equipment	805		3
Acquisition of available-for-sale debt securities	(2,968)		—
Net cash used in investing activities	(60,305)		(36,920)
Cash flows from financing activities
Statutory withholding taxes paid on share-based compensation	(8,793)		(3,456)


Repayment of short-term borrowings for purchase of equipment and software	(1,603)		(1,553)
Dividends paid	(10,811)		(10,786)

Repurchase of common stock	(24,388)		(7,300)
Repayment of long-term debt	(28,482)		(27,685)
Net cash used in financing activities	(74,077)		(50,780)
Effect of foreign exchange rate on cash, cash equivalents and restricted cash	215		(2,384)
Net increase in cash, cash equivalents and restricted cash	41,688		31,075
Cash, cash equivalents and restricted cash at beginning of the period	221,105		131,121
Cash, cash equivalents and restricted cash at end of the period	$	262,793	$	162,196
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	244,129	$	144,147
Restricted cash	18,664		18,049
Cash, cash equivalents and restricted cash	$	262,793	$	162,196
Supplemental disclosure of cash flow information:
Cash paid for interest	$	16,289	$	18,081
Cash paid for income taxes	19,468		15,257




Supplemental disclosure of non-cash activities:

Payable due to vendor related to equipment and software acquired	$	739	$	1,486

Nine months ended September 30,
2020 2019
Cash flows from operating activities

Net income
$ 72,481
$ 78,657
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
53,761
50,440
Amortization of debt issue costs and accretion of discount
1,530
1,256
Operating lease amortization 4,377
3,966
Provision for expected credit losses and sundry losses
1,732
3,224
Deferred tax benefit
(2,082 ) (4,197 )
Share-based compensation
10,785
10,168
Loss on disposition of property and equipment and other intangibles
753
691
Earnings of equity method investment
(733 ) (726 )
Dividend received from equity method investment
0
485
Decrease (increase) in assets:

Accounts receivable, net
(7,096 ) 6,475
Prepaid expenses and other assets
(7,138 ) (7,268 )
Other long-term assets
284
(1,450 )
(Decrease) increase in liabilities:

Accrued liabilities and accounts payable
(7,969 ) (6,834 )
Income tax payable
1,548
(2,080 )
Unearned income
2,350
6,718
Operating lease liabilities (5,720 ) (4,825 )
Other long-term liabilities
2,296
1,467
Total adjustments
48,678
57,510
Net cash provided by operating activities
121,159
136,167
Cash flows from investing activities

Additions to software
(23,521 ) (27,969 )
Property and equipment acquired
(13,402 ) (21,994 )
Proceeds from sales of property and equipment
3
101
Net cash used in investing activities
(36,920 ) (49,862 )
Cash flows from financing activities

Statutory withholding taxes paid on share-based compensation
(3,456 ) (6,304 )
Repayment of short-term borrowings for purchase of equipment and software
(1,553 ) (852 )
Dividends paid
(10,786 ) (10,824 )
Repurchase of common stock
(7,300 ) (28,449 )
Repayment of long-term debt
(27,685 ) (10,688 )
Net cash used in financing activities
(50,780 ) (57,117 )
Effect of foreign exchange rate on cash, cash equivalents and restricted cash (2,384 ) 0
Net increase in cash, cash equivalents and restricted cash
31,075
29,188
Cash, cash equivalents and restricted cash at beginning of the period
131,121
86,746
Cash, cash equivalents and restricted cash at end of the period
$ 162,196
$ 115,934
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents $ 144,147
$ 102,535
Restricted cash 18,049
13,399
Cash, cash equivalents and restricted cash $ 162,196
$ 115,934
Supplemental disclosure of cash flow information:
Cash paid for interest $ 18,081
$ 21,668
Cash paid for income taxes 15,257
12,535
Supplemental disclosure of non-cash activities:
Payable due to vendor related to equipment and software acquired $ 1,486
$ 2,707

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~~transaction-processing business in Puerto Rico, the Caribbean and Latin ~~America and the Caribbean.~~America. The Company is based in Puerto Rico and provides a broad range of merchant acquiring, payment ~~processing~~services and business process management services. The Company provides services across 26 countries in the region. EVERTEC owns and operates the ATH network, one of the leading personal identification number ("PIN") debit networks ~~and automated teller machine ("ATM")~~ in ~~the Caribbean and~~ Latin America. ~~In addition,~~ EVERTEC ~~provides~~manages a system of electronic payment networks and offers a comprehensive suite of services for core bank, cash processing and ~~cash processing~~fulfillment in Puerto ~~Rico and~~Rico. In addition, EVERTEC offers 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 Securities 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, ~~2019,~~2020, included in the Company’s ~~2019~~2020 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~~

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. 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 most of our employees will remain working remotely for an undetermined period, until it is deemed safe by management to return to our offices and as permitted or advised by local authorities in each country where the Company operates;

In connection with the Company's business continuity plan, the Company transitioned most of its 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;

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 $2.9 million deferral of payroll taxes during the allowed time under the CARES Act. Through September 30, 2020, the Company has deferred payroll taxes amounting to $1.7 million;

~~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, as may be required by governmental authorities, or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities. 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

In June 2016, the Financial Accounting Standards Board ("FASB") issued updated guidance for the measurement of credit losses on financial instruments, which replaces the incurred loss impairment model with a methodology that reflects expected credit losses Issued Prior to 2021 and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The main objective of this 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 amendments affect the Company's trade receivables. Additional disclosures about significant estimates and credit quality are also required. The Company adopted this new guidance effective January 1, 2020, using a modified retrospective approach through a cumulative-effect adjustment to accumulated earnings, considered immaterial to 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.

Not Yet Adopted

~~Refer to Note 3,~~
~~Current Expected Credit Losses, for discussions of the implementation of ASC Topic 326 with respect to the Company’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 constituting 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 (and hosting arrangements that include an internal-use software license). The updated guidance does not impact the accounting for the service element of a hosting arrangement that is a service contract. The Company adopted this guidance prospectively effective January 1, 2020 with respect to all implementation costs incurred in a cloud computing arrangement constituting a service contract.

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, ~~Revenue from Contracts with Customers. The Company adopted the amendments in this update effective January 1, 2020. All contracts after this date are being 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 all 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~~will not have an impact on the Company's unaudited condensed consolidated financial statements.

Note 3 – Debt Securities

Accounting ~~Pronouncements Issued Prior~~policy

Debt securities available-for-sale are accounted for under the provisions of ASC 320 Investments – Debt and Equity Securities, which requires that debt securities available-for-sale ("AFS") be carried at fair value on the Company’s unaudited condensed consolidated balance sheets with unrealized gains (losses) recorded through other comprehensive income (“OCI”). Debt securities in an unrealized loss position which the Company intends to ~~2020 and Not Yet Adopted~~sell or for which it is more likely than not that the Company will be required to sell before recovery of the amortized cost basis, are written down to fair value through income.

~~In December 2019,~~Quarterly, for debt securities in an unrealized loss position that the ~~FASB issued updated guidance~~Company does not intend or will, more likely than not, not be required to sell, the Company evaluates if the decline in fair value has resulted from credit losses or other factors. If it is determined that the decline in fair value is related to credit losses, the Company records an allowance 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 credit losses, limited

to the ~~general principles set out~~amount by which the fair value is less than the amortized cost basis. If the Company determines that the decline in ~~ASC Topic 740. The amendments also improve consistent application of and simplify GAAP for~~value is related to factors other ~~areas of ASC Topic 740 by clarifying and amending existing guidance. The amendments~~than credit, the Company recognizes the impairment through OCI.

Debt securities were purchased close to ~~this update are effective for fiscal years, and interim periods within such fiscal years, beginning after December 15, 2020. Early adoption~~the final trading day of the ~~amendments is permitted, including adoption~~quarter ended March 31, 2021 and are held by a trust in ~~any interim period~~the Costa Rica National Bank as a collateral requirement for ~~public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments~~settlement activities. The Company may substitute securities as needed but must maintain certain levels of collateral based on transaction volumes.

The amortized cost, gross unrealized gains and losses recorded in ~~an interim period should reflect any adjustments~~OCI, and estimated fair value as of September 30, 2021 were as follows:


	September 30, 2021
(In thousands)			Gross unrealized
	Amortized cost		Gains	Losses	Fair Value
Costa Rica Government Obligations
After 1 to 5 years	$	2,963	97	—	$	3,060

No debt securities were sold during the ~~beginning of~~quarter ended September 30, 2021. A provision for credit losses was not required for the ~~annual~~ period ~~that includes that interim period. Additionally, an entity that elects early adoption must adopt all~~presented above. Refer to Note 7 for disclosure requirements related to the ~~amendments in the same period. The Company is currently evaluating the impact, if any, of the adoption of this guidance on the consolidated financial statements.~~fair value hierarchy.

~~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 from contracts with customers. While contract assets and net investments in leases are also subject to the impairment requirements of ASC Topic 326, no impairment losses were recognized for these financial assets as of September 30, 2020.

To measure expected credit losses, trade receivables are grouped based on shared risk characteristics (i.e., the relevant industry sector and customer's geographical location) and days past due (i.e., delinquency status), while considering the following:

~~Customers in the same geographical location share similar risk characteristics associated with the macroeconomic environment of their country.~~

The Company has two main industry sectors: private and governmental. The private pool is comprised mainly of leading financial institutions, merchants and corporations, while the governmental pool is comprised by government agencies. The governmental customers possess different risk characteristics than private customers because although all invoices are due 30 days after issuance, governmental customers usually pay within 60 to 90 days after issuance (i.e., 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, to estimate the proportion of outstanding balances per aging bucket that ultimately will not be collected. This is used to determine the expectation of losses based on the history of uncollected trade receivables once the specific past due period is surpassed. The historical rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of customers to settle the receivables by applying a country risk premium as the forward-looking macroeconomic factor. Specific reserves are established for certain customers for which collection is doubtful.

~~Rollforward of the Allowance for Expected Current Credit Losses~~

~~The activity in the allowance for expected current credit losses on trade receivables during the period from January 1, 2020 to September 30, 2020, was as follows:~~

(In thousands) September 30, 2020
Balance at beginning of period $ 3,460
Current period provision for expected credit losses 1,058
Write-offs (1,428 )
Recoveries of amounts previously written-off 3
Balance at end of period $ 3,093

~~The Company does not have a delinquency threshold for writing-off trade receivables. The Company has a formal process for the review and approval of write-offs.~~

Impairment losses on trade receivables are presented as net impairment losses within cost of revenue, exclusive of depreciation and amortization in the unaudited condensed consolidated statement of income and comprehensive income. Subsequent recoveries of amounts previously written-off are credited against the allowance for expected current credit losses within accounts receivable, net on the unaudited condensed consolidated balance sheet.

Note 4 – Property and Equipment, net

Property and equipment, net consists of the following:


(In thousands)	Useful life in years	September 30, 2021		December 31, 2020
Buildings	30	$	1,394	$	1,437
Data processing equipment	3 - 5	132,832		124,897
Furniture and equipment	3 - 20	7,372		6,691
Leasehold improvements	5 -10	3,126		3,098
		144,724		136,123
Less - accumulated depreciation and amortization		(103,160)		(93,826)
Depreciable assets, net		41,564		42,297
Land		1,216		1,241
Property and equipment, net		$	42,780	$	43,538

(Dollar amounts in thousands) Useful life
in years September 30, 2020 December 31, 2019
Buildings 30 $ 1,458
$ 1,542
Data processing equipment 3 - 5 124,867
116,950
Furniture and equipment 3 - 20 7,081
6,936
Leasehold improvements 5 -10 3,008
2,814
136,414
128,242
Less - accumulated depreciation and amortization (94,421 ) (85,780 )
Depreciable assets, net 41,993
42,462
Land 1,262
1,329
Property and equipment, net $ 43,255
$ 43,791

Depreciation and amortization expense related to property and equipment for the three and nine months ended September 30, ~~2020~~2021 amounted to $4.2 million and $13.0 million, respectively, compared to $4.4 million and $12.9 million ~~respectively, compared to $4.1 million and $12.4 million~~ for the corresponding periods in ~~2019.~~2020.

During the nine months ended September 30, 2021, the Company recorded a loss on the disposition of damaged POS devices amounting to $0.5 million through cost of revenues.

Note 5 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill, allocated by operating segments, were as follows (see Note ~~15)~~16):


(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total
Balance at December 31, 2020	$	160,972	$	52,754	$	138,121	$	45,823	$	397,670


Foreign currency translation adjustments	—		(3,134)		—		—		(3,134)
Balance at September 30, 2021	$	160,972	$	49,620	$	138,121	$	45,823	$	394,536

(In thousands) Payment
Services -
Puerto Rico & Caribbean Payment
Services -
Latin America Merchant
Acquiring, net Business
Solutions Total
Balance at December 31, 2019 $ 160,972
$ 54,571
$ 138,121
$ 45,823
$ 399,487
Foreign currency translation adjustments 0
(4,439 ) 0
0
(4,439 )
Balance at September 30, 2020 $ 160,972

$ 50,132

$ 138,121

$ 45,823

$ 395,048

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 is recorded for the excess of the carrying value over the fair value, limited to the recorded balance of goodwill. ~~NaN~~No impairment losses were recognized ~~as of~~for the periods ended September 30, 2021 or 2020.

The carrying amount of other intangible assets at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 was as follows:


		September 30, 2021
(In thousands)	Useful life in years	Gross amount		Accumulated amortization		Net carrying amount
Customer relationships	8 - 14	$	358,191	$	(266,047)	$	92,144
Trademarks	2 - 15	41,926		(36,385)		5,541
Software packages	3 - 10	317,799		(210,946)		106,853
Non-compete agreement	15	56,539		(41,462)		15,077
Other intangible assets, net		$	774,455	$	(554,840)	$	219,615


		September 30, 2020									December 31, 2020
(Dollar amounts in thousands)	Useful life in years	Gross amount		Accumulated amortization			Net carrying amount		(Dollar amounts in thousands)	Useful life in years	Gross amount		Accumulated amortization		Net carrying amount
Customer relationships	8 - 14	$	343,489	$	(239,718	)	$	103,771	Customer relationships	8 - 14	$	343,981	$	(246,088)	$	97,893
Trademarks	10 - 15	41,934		(35,164		)	6,770		Trademarks	2 - 15	42,036		(35,467)		6,569
Software packages	3 - 10	278,609		(185,911		)	92,698		Software packages	3 - 10	289,205		(191,662)		97,543
Non-compete agreement	15	56,539		(37,693		)	18,846		Non-compete agreement	15	56,539		(38,635)		17,904
Other intangible assets, net		$	720,571	$	(498,486	)	$	222,085	Other intangible assets, net		$	731,761	$	(511,852)	$	219,909

December 31, 2019
(Dollar amounts in thousands) Useful life in years Gross
amount Accumulated
amortization Net carrying
amount
Customer relationships 8 - 14 $ 344,883
$ (220,434 ) $ 124,449
Trademarks 2 - 15 42,025
(32,456 ) 9,569
Software packages 3 - 10 256,220
(169,974 ) 86,246
Non-compete agreement 15 56,539
(34,866 ) 21,673
Other intangible assets, net $ 699,667
$ (457,730 ) $ 241,937

During the first quarter of 2021, the Company acquired a customer relationship in Puerto Rico amounting to $14.8 million that will be amortized over ten years. Revenue and expenses in connection with this customer relationship are included as part of the Merchant Acquiring segment.

Amortization expense related to other intangibles for the three and nine months ended September 30, ~~2020~~2021 amounted to $14.5 million and $43.0 million, respectively, compared to $13.7 million and $40.8 million ~~respectively, compared to $12.9 million and $38.0 million~~ for the corresponding periods in ~~2019.~~2020. During the nine months period ended September 30, 2021, the Company recorded an impairment charge through cost of revenues amounting to $0.6 million for a software solution that will no longer be used. The impairment charge affected the Company’s Payment Services – Puerto Rico & Caribbean segment.

The estimated amortization expense of the balances outstanding at September 30, ~~2020~~2021 for the next five years is as follows:


(Dollar amounts in thousands)
Remaining 2021	$	14,146
2022	51,237
2023	45,918
2024	34,154
2025	11,731

(Dollar amounts in thousands)
Remaining 2020 $ 12,859
2021 48,703
2022 42,899
2023 37,704
2024 29,156

Note 6 – Debt and Short-Term Borrowings

Total debt at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 follows:


(In thousands)	September 30, 2020		December 31, 2019		(In thousands)	September 30, 2021		December 31, 2020
2023 Term A Loan bearing interest at a variable interest rate (LIBOR plus applicable margin⁽¹⁾⁽²⁾)	$	191,423	$	207,261	2023 Term A Loan bearing interest at a variable interest rate (LIBOR plus applicable margin(1)(2))	$	173,519	$	188,788
2024 Term B Loan bearing interest at a variable interest rate (LIBOR plus applicable margin⁽¹⁾⁽³⁾)	307,133		317,936		2024 Term B Loan bearing interest at a variable interest rate (LIBOR plus applicable margin(1)(3))	294,291		306,503
Note payable due April 30, 2021⁽¹⁾	78		175
Note payable due January 1, 2022⁽¹⁾	1,408		2,231

Notes payable due January 1, 2022(1)					Notes payable due January 1, 2022(1)	739		1,443
Total debt	$	500,042	$	527,603	Total debt	$	468,549	$	496,734


~~(1)~~	~~Net of unaccreted discount and unamortized debt issue costs, as applicable.~~


~~(2)~~	~~Applicable margin of 2.00% at September 30, 2020 and December 31, 2019.~~


~~(3)~~	~~Subject to a minimum rate ("LIBOR floor") of 0% plus applicable margin of 3.50% at September 30, 2020 and December 31, 2019.~~

(1)Net of unaccreted discount and unamortized debt issue costs, as applicable.

(2)Applicable margin of 1.75% at September 30, 2021 and December 31, 2020.

(3)Subject to a minimum rate ("LIBOR floor") of 0% plus applicable margin of 3.50% at September 30, 2021 and December 31, 2020.

Secured Credit Facilities

On November 27, 2018, EVERTEC and EVERTEC Group, LLC ("EVERTEC Group") (collectively, the “Borrower”) entered into a credit agreement providing for the secured credit facilities, consisting of a $220.0 million term loan A facility that matures on November 27, 2023 (the “2023 Term A Loan"), a $325.0 million term loan B facility that matures on November 27, 2024 (the “2024 Term 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 8, 2021 and March 5, 2020, in connection with this mandatory repayment clause, the Company repaid $17.8 million and $17.0 million, respectively, as a result of excess cash flow calculation performed for the ~~year~~years ended December 31, ~~2019.~~2020 and 2019, respectively.

The unpaid principal balance at September 30, ~~2020~~2021 of the 2023 Term A Loan and the 2024 Term B Loan was ~~$192.8~~$174.4 million and ~~$310.3~~$296.7 million, respectively. The additional borrowing capacity under our Revolving Facility at September 30, ~~2020~~2021 was ~~$101.7~~$119.1 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.

Notes Payable

In December 2019, EVERTEC Group entered into 2 non-interest bearing financing agreements amounting to $2.4 million to purchase software and maintenance. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the outstanding principal balance of the notes payable was $0.8 million and $1.5 million, ~~and $2.4 million,~~ respectively. ~~The current portion of these~~These notes isare included in accounts payable ~~and the long-term portion is included in other long-term liabilities~~ in the Company's unaudited condensed consolidated balance ~~sheet.~~sheets.

Interest Rate Swaps

As of September 30, ~~2020,~~2021, the Company has an interest rate swap agreement, entered into in December 2018, which converts 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

~~Swap Agreement~~

~~Effective date~~

~~Maturity Date~~

~~Notional Amount~~

~~Variable Rate~~

~~Fixed Rate~~

2018 Swap

April 2020

November 2024

$250 million

1-month LIBOR

2.89%

The Company has accounted for this agreement as a cash flow hedge.

Additionally, the Company had an interest rate swap agreement that matured in April 2020, with a notional amount of $200 million and a fixed rate of 1.9225%. The Company accounted for this swap as a cash flow hedge from inception to maturity.

As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the carrying amount of ~~derivatives~~the derivative included on the Company's unaudited condensed consolidated balance sheets was ~~$27.4~~$18.1 million and ~~$14.5~~$25.6 million, respectively. The fair value of ~~these derivatives~~this derivative is 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 three and nine months ended September 30, ~~2020,~~2021, the Company reclassified losses of ~~$1.7~~$1.8 million and ~~$3.3~~$5.3 million, respectively, from accumulated other comprehensive loss into interest ~~expense.~~expense compared to $1.7 million and $3.3 million for the corresponding periods in 2020. Based on current LIBOR rates, the Company expects to reclassify losses of ~~$6.8~~$7.0 million from accumulated other comprehensive loss into interest expense over the next 12 months.

The cash flow hedge is considered highly effective.

Note 7 – Financial Instruments and Fair Value Measurements

Recurring Fair Value Measurements

Debt Securities Available for Sale

The fair value of debt securities is estimated based on observable inputs, therefore classified as a Level 2 asset within the fair value hierarchy. The fair value of debt securities at September 30, 2021 was $3.1 million.

Derivatives Instruments

The fair value of the Company's interest rate ~~swaps are the only financial instruments measured at fair value on a recurring basis. The fair value~~swap is estimated using Level 2 inputs under the fair value hierarchy. ~~These derivatives were~~This derivative was in a liability position with ~~balances~~a balance of ~~$27.4~~$18.1 million and ~~$14.5~~$25.6 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

The following table presents the carrying value, as applicable, and estimated fair ~~values~~value for financial instruments at September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


	September 30, 2021				December 31, 2020
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Costa Rica government obligations	$	3,060	$	3,060	$	—	$	—
Financial liabilities:
Interest rate swap	18,104		18,104		25,578		25,578
2023 Term A Loan	173,519		172,402		188,788		186,678
2024 Term B Loan	294,291		296,657		306,503		308,339

September 30, 2020 December 31, 2019
(In thousands) Carrying
Amount Fair
Value Carrying
Amount Fair
Value
Financial liabilities:
Interest rate swap $ 27,370
$ 27,370
$ 14,452
$ 14,452
2023 Term A Loan 191,424
189,380
207,261
206,388
2024 Term B Loan 307,133
308,760
317,936
324,163

The fair values of the term loans at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 were obtained using prices provided by third party service providers. Their pricing is based on various inputs such 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 movements in the general high yield market, among other variants. The secured term loans are not measured at fair value on the balance sheets.

Note 8 – Equity

Accumulated Other Comprehensive Loss

The following table provides a summary of the changes in the balances of accumulated other comprehensive loss for the nine months ended September 30, ~~2020:~~2021:


(In thousands)	Foreign Currency Translation Adjustments		Cash Flow Hedges		Unrealized Gains on Debt Securities AFS		Total
Balance - December 31, 2020, net of tax	$	(24,842)	$	(23,412)	—		$	(48,254)
Other comprehensive (loss) income before reclassifications	(7,823)		1,540		97		(6,186)
Effective portion reclassified to net income	—		5,274		—		5,274
Balance - September 30, 2021, net of tax	$	(32,665)	$	(16,598)	$	97	$	(49,166)

(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 (10,483 ) (15,208 ) (25,691 )
Effective portion reclassified to net income 0
3,314
3,314
Balance - September 30, 2020, net of tax $ (27,355 ) $ (25,031 ) $ (52,386 )

Note 9 – Share-based Compensation

Long-term Incentive Plan ("LTIP")

~~During~~In the ~~three months ended March 31, 2018,~~first quarter of 2019, 2020 and ~~2020,~~2021, the Compensation Committee (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 ~~2018 LTIP,~~ 2019 LTIP, 2020 LTIP and ~~2020~~2021 LTIP, respectively, all under the terms of the Company's 2013 Equity Incentive Plan. Under the LTIPs, the Company granted ~~restricted stock units~~RSUs 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~~provides services to the Company onthrough the vesting date. Time-based awards vest over a period of three years in substantially equal installments commencing on the grant date and ending on February ~~28 of each year for the 2018 LTIP, February~~ 22 of each year for the 2019 LTIP, ~~and~~ February 27 of each year for the 2020 LTIP, and March 2 of each year for the 2021 LTIP.

For the performance-based awards under the ~~2018 LTIP,~~ 2019 LTIP, 2020 LTIP, and ~~2020~~2021 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 Adjusted EBITDA measure is based on annual targets and can produce a payout between 0% and 200%. The TSR modifier adjusts the shares earned based on the core Adjusted EBITDA performance upwards or downwards (+/- 25%) based on the Company’s relative TSR at the end of the three-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~~period and ~~market-based awards~~will vest ~~at the end of the performance period that commenced~~ on ~~February 28, 2018 for the 2018 LTIP, February 22, 2019 for the 2019 LTIP, and February 27, 2020 for the 2020 LTIP. The periods end on February 28, 2021 for the 2018 LTIP,~~ February 22, 2022 for the 2019 LTIP, ~~and~~ February 27, 2023 for the 2020 LTIP, and March 2, 2024 for the 2021 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 nine months ended September 30, ~~2020:~~2021:


Nonvested RSUs	Shares	Weighted-average grant date fair value
Nonvested at December 31, 2020	1,093,515	$	27.88
Granted	705,970	31.93
Vested	(683,706)	20.95
Forfeited	(27,845)	33.37
Nonvested at September 30, 2021	1,087,934	$	34.71

Nonvested restricted shares and RSUs Shares Weighted-average
grant date fair value
Nonvested at December 31, 2019 1,592,755
$ 20.71
Forfeited (149,811 ) 19.18
Vested (402,842 ) 26.98
Granted 413,733
31.62
Nonvested at September 30, 2020 1,453,835
$ 24.30

For the three and nine months ended September 30, ~~2020,~~2021, the Company recognized $3.7 million and ~~$10.8~~$10.9 million of share-based compensation expense, compared with ~~$3.5~~$3.7 million and ~~$10.2~~$10.8 million for the corresponding ~~periods~~period in ~~2019.~~2020.

As of September 30, ~~2020,~~2021, the maximum unrecognized cost for ~~restricted stock and~~ RSUs was ~~$19.9~~$23.1 million. The cost is expected to be recognized over a weighted average period of 1.9 years.

Note 10 – Revenues

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers into primary geographical markets, nature of the products and services, and timing of transfer of goods and services. The Company's operating segments are determined by the nature of the products and services the Company provides and the primary geographical markets in which the Company operates. Revenue disaggregated by segment is discussed in Note ~~15,~~16, Segment Information.

In the following tables, revenue for each segment, excluding intersegment revenues, is disaggregated by timing of revenue recognition for the periods indicated.


	Three months ended September 30, 2020											Three months ended September 30, 2021
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total		(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total
Timing of revenue recognition											Timing of revenue recognition
Products and services transferred at a point in time	$	43	$	357	$	0	$	4,824	$	5,224	Products and services transferred at a point in time	$	30	$	449	$	—	$	446	$	925
Products and services transferred over time	23,652		18,791		30,646		58,194		131,283		Products and services transferred over time	25,712		23,807		37,606		57,833		144,958
	$	23,695	$	19,148	$	30,646	$	63,018	$	136,507		$	25,742	$	24,256	$	37,606	$	58,279	$	145,883


	Three months ended September 30, 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	$	43	$	357	$	—	$	4,824	$	5,224
Products and services transferred over time	23,652		18,791		30,646		58,194		131,283
	$	23,695	$	19,148	$	30,646	$	63,018	$	136,507


	Three months ended September 30, 2019											Nine months ended September 30, 2021
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total		(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total
Timing of revenue recognition											Timing of revenue recognition
Products and services transferred at a point in time	$	43	$	228	$	0	$	2,939	$	3,210	Products and services transferred at a point in time	$	119	$	1,633	$	—	$	4,048	$	5,800
Products and services transferred over time	20,299		18,853		26,436		50,006		115,594		Products and services transferred over time	76,642		69,919		106,808		175,390		428,759
	$	20,342	$	19,081	$	26,436	$	52,945	$	118,804		$	76,761	$	71,552	$	106,808	$	179,438	$	434,559



	Nine months ended September 30, 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	$	80	$	994	$	—	$	7,886	$	8,960
Products and services transferred over time	63,838		56,487		80,532		166,569		367,426
	$	63,918	$	57,481	$	80,532	$	174,455	$	376,386

Nine months ended September 30, 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 $ 80
$ 994
$ 0
$ 7,886
$ 8,960
Products and services transferred over time 63,838
56,487
80,532
166,569
367,426
$ 63,918

$ 57,481

$ 80,532

$ 174,455

$ 376,386

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
$ 0
$ 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

Contract Balances

The following table provides information about contract assets from contracts with customers.

(In thousands) September 30, 2020
December 31, 2019 $ 1,191
Services transferred to customers 2,790
Transfers to accounts receivable (1,740 )
September 30, 2020 $ 2,241


(In thousands)	September 30, 2021		December 31, 2020
Balance at beginning of period	$	2,796	$	1,191
Services transferred to customers	4,053		3,934
Transfers to accounts receivable	(4,246)		(2,329)
Balance at end of period	$	2,603	$	2,796

The current portion of contract assets is recorded as part of prepaid expenses and other assets, and the long-term portion is included in other long-term assets in the unaudited condensed consolidated balance sheets.

Accounts receivable, net at September 30, ~~2020~~2021 amounted to ~~$111.9~~$95.5 million. ~~Unearned income~~Contract liability and ~~unearned income~~contract liability - long term ~~which refer to contract liabilities,~~ at September 30, ~~2020~~2021 amounted to ~~$19.8~~$21.3 million and ~~$30.8~~$31.1 million, respectively, and may arise when consideration is received or due in advance from customers prior to performance. ~~Unearned income~~The contract liability is mainly ~~related to~~comprised of upfront fees for implementation or set up activities, including fees charged in pre-production periods in connection

with hosting services. Contract liabilities may also arise when consideration is received or ~~managed services.~~due in advance from customers prior to performance. During the three and nine months ended September 30, 2021, the Company recognized revenue of $5.3 million and $20.7 million, respectively that was included in the contract liability at December 31, 2020. During the three and nine months ended September 30, 2020, the Company recognized revenue of $3.9 million and $13.1 million, respectively that was included in ~~unearned income~~the contract liability at December 31, 2019. ~~During~~

Transaction price allocated to the ~~three and nine months ended September 30, 2019, the Company recognized revenue of $1.8 million and $13.1 million, respectively, that was included in unearned income at December 31, 2018.~~remaining performance obligations

The estimated aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially satisfied at September 30, ~~2020~~2021 is ~~$307.1~~$310.4 million. This amount primarily consists of professional service fees for implementation or set up activities related to managed services and maintenance services, typically recognized over the life of the contract, which varies from 2 to 5 years. It also includes professional service fees for customizations or development of on-premise licensing agreements, which are recognized over time based on inputs relative to the total expected inputs to satisfy a performance obligation.

Note 11 – Current Expected Credit Losses

Allowance for Current Expected Credit Losses

Trade receivables from contracts with customers are financial assets analyzed by the Company under the expected credit loss model. To measure expected credit losses, trade receivables are grouped based on shared risk characteristics (i.e., the relevant industry sector and customer's geographical location) and days past due (i.e., delinquency status), while considering the following:

•Customers in the same geographical location share similar risk characteristics associated with the macroeconomic environment of their country.

•The Company has two main industry sectors: private and governmental. The private pool is comprised mainly of leading financial institutions, merchants and corporations, while the governmental pool is comprised of government agencies. The governmental customers possess different risk characteristics than private customers because although all invoices are due 30 days after issuance, governmental customers usually pay within 60 to 90 days after issuance (i.e., approximately 30 to 60 more days than private customers).

•The expected credit loss rate is likely to increase as receivables move to older aging buckets. The Company used the following aging categories to estimate the risk of delinquency status: (i) 0 days past due; (ii) 1-30 days past due; (iii) 31-60 days past due; (iv) 61-90 days past due; and (v) over 90 days past due.

The credit losses of the Company’s trade receivables have been low historically and most balances are collected within one year. Therefore, the Company determined that the expected loss rates should be calculated using the historical loss rates adjusted by macroeconomic factors. The historical rates are calculated for each of the aging categories used for pooling trade receivables. To determine the collected portion of each bucket, the collection time of each trade receivable is identified, to estimate the proportion of outstanding balances per aging bucket that ultimately will not be collected. This is used to determine the expectation of losses based on the history of uncollected trade receivables once the specific past due period is surpassed. The historical rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of customers to settle the receivables by applying a country risk premium as the forward-looking macroeconomic factor. Specific reserves are established for certain customers for which collection is doubtful.

Rollforward of the Allowance for Expected Current Credit Losses

The following table provides information about the allowance for expected current credit losses on trade receivables.



(In thousands)	September 30, 2021		December 31, 2020
Balance at beginning of period	$	2,401	$	3,460
Current period provision for expected credit losses	534		832
Write-offs	(177)		(1,894)
Recoveries of amounts previously written-off	1		3
Balance at end of period	$	2,759	$	2,401

The Company does not have a delinquency threshold for writing-off trade receivables. The Company has a formal process for the review and approval of write-offs.

Impairment losses on trade receivables are presented as net impairment losses within cost of revenue, exclusive of depreciation and amortization in the unaudited condensed consolidated statements of income and comprehensive income. Subsequent recoveries of amounts previously written-off, when applicable are credited against the allowance for expected current credit losses within accounts receivable, net on the unaudited condensed consolidated balance sheets.

Note 12 – Income Tax

The components of income tax expense for the three and nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively, consisted of the following:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Current tax provision	$	7,306	$	7,381	$	15,593	$	17,633
Deferred tax benefit	(172)		(868)		(1,119)		(2,082)
Income tax expense	$	7,134	$	6,513	$	14,474	$	15,551

Three months ended September 30, Nine months ended September 30,
(In thousands) 2020 2019 2020 2019
Current tax provision $ 7,381
$ 6,096
$ 17,633
$ 14,215
Deferred tax benefit (868 ) (2,376 ) (2,082 ) (4,197 )
Income tax expense $ 6,513
$ 3,720
$ 15,551
$ 10,018

The Company conducts operations in Puerto Rico, the United States, and certain countries in Latin America. As a result, the income tax expense includes the effect of taxes paid to the government of Puerto Rico as well as foreign jurisdictions. The following table presents the components of income tax expense for the three and nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, and its segregation based on location of operations:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020

Current tax provision
Puerto Rico	$	2,328	$	3,280	$	3,363	$	6,487
United States	57		214		132		508
Foreign countries	4,921		3,887		12,098		10,638
Total current tax provision	$	7,306	$	7,381	$	15,593	$	17,633
Deferred tax (benefit) provision
Puerto Rico	$	(258)	$	(989)	$	(778)	$	(1,535)
United States	116		(68)		(71)		1,033
Foreign countries	(30)		189		(270)		(1,580)
Total deferred tax benefit	$	(172)	$	(868)	$	(1,119)	$	(2,082)

Three months ended September 30, Nine months ended September 30,
(In thousands) 2020 2019 2020 2019
Current tax provision
Puerto Rico $ 3,280
$ 2,117
$ 6,487
$ 5,433
United States 214
187
508
202
Foreign countries 3,887
3,792
10,638
8,580
Total current tax provision $ 7,381
$ 6,096
$ 17,633
$ 14,215
Deferred tax (benefit) provision
Puerto Rico $ (989 ) $ (1,583 ) $ (1,535 ) $ (3,178 )
United States (68 ) (169 ) 1,033
(168 )
Foreign countries 189
(624 ) (1,580 ) (851 )
Total deferred tax benefit $ (868 ) $ (2,376 ) $ (2,082 ) $ (4,197 )

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, ~~2020,~~2021, the Company has ~~$74.2~~$92.9 million of unremitted earnings from foreign ~~subsidiaries.~~subsidiaries, compared to $80.2 million as of December 31, 2020. The Company has not recognized a deferred tax liability on undistributed earnings for the Company’s foreign subsidiaries because these earnings are intended to be indefinitely reinvested.

As of September 30, ~~2020,~~2021, the gross deferred tax asset amounted to ~~$17.3~~$20.1 million and the gross deferred tax liability amounted to ~~$16.2~~$15.6 million, compared to ~~$12.8~~$22.0 million and ~~$15.0~~$19.0 million, respectively, as of December 31, ~~2019.~~2020. As of September 30, 2021, there is a valuation allowance against the gross deferred tax asset of approximately $1.3 million.

Income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate to the income before income taxes as a result of the following:


	Nine months ended September 30,
(In thousands)	2021		2020
Computed income tax at statutory rates	$	50,411	$	33,012
Differences in tax rates due to multiple jurisdictions	1,789		831
Effect of income subject to tax-exemption grant	(35,121)		(21,662)
Unrecognized tax (benefit) expense	(3,475)		1,173
Excess tax benefits on share-based compensation	(1,027)		(262)
Other, net	1,897		2,459
Income tax expense	$	14,474	$	15,551

Nine months ended September 30,
(In thousands) 2020 2019
Computed income tax at statutory rates $ 33,012
$ 33,253
Differences in tax rates due to multiple jurisdictions 831
405
Excess tax benefits on share-based compensation (262 ) (1,300 )
Effect of income subject to tax-exemption grant (21,662 ) (24,128 )
Unrecognized tax benefit 1,173
211
Other expense 2,459
1,577
Income tax expense $ 15,551
$ 10,018

~~Note 12 – 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,
(Dollar amounts in thousands, except per share information) 2020 2019 2020 2019
Net income attributable to EVERTEC, Inc.’s common stockholders $ 34,463
$ 24,754
$ 72,158
$ 78,456
Less: non-forfeitable dividends on restricted stock 0
2
0
2
Net income available to EVERTEC, Inc.’s common shareholders $ 34,463
$ 24,752
$ 72,158
$ 78,454
Weighted average common shares outstanding 71,886,439
71,942,403
71,921,069
72,148,312
Weighted average potential dilutive common shares ⁽¹⁾
1,115,341
1,372,301
1,128,748
1,382,553
Weighted average common shares outstanding - assuming dilution 73,001,780
73,314,704
73,049,817
73,530,865
Net income per common share - basic $ 0.48
$ 0.34
$ 1.00
$ 1.09
Net income per common share - diluted $ 0.47
$ 0.34
$ 0.99
$ 1.07


~~(1)~~	~~Potential common shares consist of common stock issuable under the assumed release of restricted stock awards using the treasury stock method.~~

On February 20, 2020, April 21, 2020, and July 24, 2020, the Company's Board declared quarterly cash dividends of $0.05 per share of common stock, which were paid on April 3, 2020, June 5, 2020 and September 4, 2020, respectively, to stockholders of record as of the close of business on March 4, 2020, May 4, 2020 and August 3, 2020, respectively.

Note 13 – 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,
(In thousands, except per share information)	2021		2020		2021		2020


Net income available to EVERTEC, Inc.’s common shareholders	$	35,314	$	34,463	$	120,014	$	72,158
Weighted average common shares outstanding	71,969,856		71,886,439		72,082,082		71,921,069
Weighted average potential dilutive common shares (1)	906,397		1,115,341		735,625		1,128,748
Weighted average common shares outstanding - assuming dilution	72,876,253		73,001,780		72,817,707		73,049,817
Net income per common share - basic	$	0.49	$	0.48	$	1.66	$	1.00
Net income per common share - diluted	$	0.48	$	0.47	$	1.65	$	0.99

(1)Potential common shares consist of common stock issuable under RSUs awards using the treasury stock method.

On February 18, 2021, April 22, 2021 and July 22, 2021, respectively the Company's Board declared quarterly cash dividends of $0.05 per share of common stock, which were paid on March 26, 2021, June 4, 2021 and September 3, 2021, respectively to stockholders of record as of the close of business on March 1, 2021, May 3, 2021 and August 2, 2021 , respectively.

Note 14 – 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, management 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.

~~For details of the Company's commitments, refer to Note 22,~~ ~~Commitments and Contingencies~~ ~~included in the Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.~~

~~Note 14 – Related Party Transactions~~

~~The following table presents the Company’s transactions with related parties for the three and nine months ended September 30, 2020 and 2019:~~

Three months ended September 30, Nine months ended September 30,
(Dollar amounts in thousands) 2020 2019 2020 2019
Total revenues ⁽¹⁾⁽²⁾
$ 57,343
$ 52,702
$ 165,703
$ 154,022
Cost of revenues $ 700
$ 1,719
$ 3,100
$ 3,580
Operating lease cost and other fees $ 2,053
$ 1,959
$ 6,094
$ 6,177
Interest earned from affiliate
Interest income $ 93
$ 43
$ 290
$ 98


~~(1)~~	~~Popular revenues as a percentage of total revenues were 42%, 44%, 44% and 43%, respectively, for each of the periods presented above.~~


~~(2)~~	~~Includes revenues generated from investee accounted for under the equity method of $0.1 million, $0.3 million, $0.5 million, and $0.8 million, respectively, for each of the periods presented above.~~

~~As of September 30, 2020 and December 31, 2019, EVERTEC had the following balances arising from transactions with related parties:~~

(Dollar amounts in thousands) September 30, 2020 December 31, 2019
Cash and restricted cash deposits in affiliated bank $ 80,149
$ 64,724
Other due to/from affiliate
Accounts receivable $ 26,944
$ 39,095
Prepaid expenses and other assets $ 4,466
$ 4,211
Operating lease right-of use assets $ 17,993
$ 20,617
Other long-term assets $ 11
$ 57
Accounts payable $ 4,523
$ 7,250
Unearned income $ 34,621
$ 35,489
Operating lease liabilities $ 18,442
$ 20,905

Note 15 – Related Party Transactions

The following table presents the Company’s transactions with related parties for the three and nine months ended September 30, 2021 and 2020:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Total revenues (1)(2)	$	60,091	$	57,343	$	182,344	$	165,703
Cost of revenues	$	624	$	700	$	2,242	$	3,100
Operating lease cost and other fees	$	1,958	$	2,053	$	5,482	$	6,094
Interest earned from affiliate
Interest income	$	184	$	93	$	422	$	290

(1)Popular revenues as a percentage of total revenues were 41%, 42%, 42% and 44%, respectively, for each of the periods presented above.

(2)Includes revenues generated from investee accounted for under the equity method of $0.2 million, $0.1 million, $0.3 million and $0.5 million, respectively, for each of the periods presented above.

As of September 30, 2021 and December 31, 2020, EVERTEC had the following balances arising from transactions with related parties:


(In thousands)	September 30, 2021		December 31, 2020
Cash and restricted cash deposits in affiliated bank	$	146,025	$	126,189
Other due to/from affiliate
Accounts receivable	$	30,179	$	28,419
Prepaid expenses and other assets	$	4,089	$	4,678
Operating lease right-of-use assets	$	14,359	$	17,099

Accounts payable	$	7,836	$	4,607
Contract liabilities	$	35,504	$	35,807
Operating lease liabilities	$	14,836	$	17,781

Note 16 – 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), ATH Movil (person-to-person and person-to-merchant digital transactions) and EBT (which principally consist of services to the government of Puerto Rico for the delivery of benefits to participants). For ATH debit network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed and other processing services. For EBT services, revenues are primarily derived from the number of beneficiaries on file.

The Payment Services - Latin America segment revenues consist of revenues related to providing access to the ATH network of ATMs and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POS transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions), as well as licensed software solutions for risk and fraud management and card payment processing. For network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed, and other processing services.

The Merchant Acquiring segment consists of revenues from services that allow merchants to accept electronic methods of payment. In the Merchant Acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees and rental fees from POS devices and other equipment, net of credit card interchange and assessment fees charged by credit cards associations (such as VISA or MasterCard) or payment networks. The discount fee is generally a percentage of the transaction value. EVERTEC also charges merchants for other services that are unrelated to the number of transactions or the transaction value.

The Business Solutions segment consists of revenues from a full suite of business process management solutions in various product areas such as core bank processing, network hosting and management, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived in part from a recurrent fixed fee and from fees based on the number of accounts on file (i.e. savings or checking accounts, loans, etc.) or computer resources utilized. Revenues from other processing services within the Business Solutions segment are generally volume-based and depend on factors such as the number of accounts processed. In addition, EVERTEC is a reseller of hardware and software products and these resale transactions are generally non-recurring.

In addition to the 4 operating segments described above, management identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These areas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these areas are aggregated and presented within the “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and Other category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:

•marketing,

•corporate finance and accounting,

•human resources,

•legal,

•risk management functions,

•internal audit,

•corporate debt related costs,

•non-operating depreciation and amortization expenses generated as a result of merger and acquisition activity,

•intersegment revenues and expenses, and

•other non-recurring fees and expenses that are not considered when management evaluates financial performance at a segment level

The Chief Operating Decision Maker ("CODM") reviews the operating segments separate financial information to assess performance and to allocate resources. Management evaluates the operating results of each of its operating segments based upon revenues and Adjusted EBITDA. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with ASC Topic 280, Segment Reporting, given that it is reported to the CODM for purposes of allocating resources. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by revenues and Adjusted EBITDA. As such, segment assets are not disclosed in the notes to the accompanying unaudited condensed consolidated financial statements.

The following tables set forth information about the Company’s operations by its 4 business segments for the periods indicated:

Three months ended September 30, 2020
(In thousands) Payment
Services -
Puerto Rico & Caribbean Payment
Services -
Latin America Merchant
Acquiring, net Business
Solutions
Corporate and Other ⁽¹⁾
Total

Revenues $ 33,284
$ 21,241
$ 30,646
$ 63,018
$ (11,682 ) $ 136,507
Operating costs and expenses 19,045
18,284
15,643
35,276
4,415
92,663
Depreciation and amortization 3,349
2,936
477
4,372
6,993
18,127
Non-operating income (expenses) 127
2,959
161
411
(970 ) 2,688
EBITDA 17,715
8,852
15,641
32,524
(10,073 ) 64,659
Compensation and benefits ⁽²⁾
258
686
244
466
2,015
3,669
Transaction, refinancing and other fees ⁽³⁾
500
0
0
0
1,205
1,705
Adjusted EBITDA $ 18,473
$ 9,538
$ 15,885
$ 32,990
$ (6,853 ) $ 70,033


	Three months ended September 30, 2021
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Corporate and Other (1)		Total

Revenues	$	38,773	$	26,792	$	37,606	$	58,134	$	(15,422)	$	145,883
Operating costs and expenses	21,420		22,209		19,922		37,412		(2,097)		98,866
Depreciation and amortization	3,989		2,809		1,010		4,691		6,246		18,745
Non-operating income (expenses)	203		1,844		281		551		(2,322)		557
EBITDA	21,545		9,236		18,975		25,964		(9,401)		66,319
Compensation and benefits (2)	260		755		255		70		2,153		3,493
Transaction, refinancing and other fees (3)	—		—		—		—		(42)		(42)
Adjusted EBITDA	$	21,805	$	9,991	$	19,230	$	26,034	$	(7,290)	$	69,770

(1)Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $10.8 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring, intercompany software developments and transaction processing of $2.4 million from Payment Services - Latin America to both Payment Services - Puerto Rico & Caribbean and Business Solutions, and transaction processing and monitoring fees of $2.2 million from Payment Services - Puerto Rico & Caribbean to Payment Services - Latin America.

(2)Primarily represents share-based compensation.

(3)Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A, net of dividends received.


	Three months ended September 30, 2020
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Corporate and Other (1)		Total

Revenues	$	33,284	$	21,241	$	30,646	$	63,018	$	(11,682)	$	136,507
Operating costs and expenses	19,045		18,284		15,643		35,276		4,415		92,663
Depreciation and amortization	3,349		2,936		477		4,372		6,993		18,127
Non-operating income (expenses)	127		2,959		161		411		(970)		2,688
EBITDA	17,715		8,852		15,641		32,525		(10,074)		64,659
Compensation and benefits (2)	258		686		244		466		2,015		3,669
Transaction, refinancing and other fees (3)	500		—		—		—		1,205		1,705
Adjusted EBITDA	$	18,473	$	9,538	$	15,885	$	32,991	$	(6,854)	$	70,033

(1)Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $9.1 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $2.6 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean.

(2)Primarily represents share-based compensation.

(3)Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, a software impairment charge and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A.


~~(1)~~			Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $9.1 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $2.6 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $4.3 million.


	Nine months ended September 30, 2021
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Corporate and Other (1)		Total

Revenues	$	113,626	$	77,641	$	106,808	$	179,438	$	(42,954)	$	434,559
Operating costs and expenses	61,270		63,020		55,762		110,276		(2,077)		288,251
Depreciation and amortization	11,813		8,695		2,631		14,085		18,867		56,091
Non-operating income (expenses)	618		5,348		835		2,494		(5,269)		4,026
EBITDA	64,787		28,664		54,512		85,741		(27,279)		206,425
Compensation and benefits (2)	781		2,321		781		1,193		6,204		11,280
Transaction, refinancing and other fees (3)	660		—		—		(647)		1,202		1,215
Adjusted EBITDA	$	66,228	$	30,985	$	55,293	$	86,287	$	(19,873)	$	218,920


~~(2)~~			~~Primarily represents share-based compensation.~~

(1)Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $31.2 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $6.6 million from Payment Services - Latin America to both Payment Services - Puerto Rico & Caribbean and Business Solutions, and transaction processing and monitoring fees of $5.1 million from Payment Services - Puerto Rico & Caribbean to Payment Services - Latin America.

(2)Primarily represents share-based compensation and severance payments.


	Nine months ended September 30, 2020
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Corporate and Other (1)		Total

Revenues	$	90,632	$	62,678	$	80,531	$	174,455	$	(31,910)	$	376,386
Operating costs and expenses	53,904		53,882		42,579		105,901		17,923		274,189
Depreciation and amortization	9,791		8,508		1,431		13,049		20,982		53,761
Non-operating income (expenses)	62		4,297		473		1,482		(2,815)		3,499
EBITDA	46,581		21,601		39,856		83,085		(31,666)		159,457
Compensation and benefits (2)	742		2,263		695		1,374		5,846		10,920
Transaction, refinancing and other fees (3)	500		—		—		—		5,647		6,147
Adjusted EBITDA	$	47,823	$	23,864	$	40,551	$	84,459	$	(20,173)	$	176,524


~~(3)~~			Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, an impairment charge and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A.

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⁾
0
0
0
0
(372 ) (372 )
Adjusted EBITDA $ 18,377
$ 7,588
$ 11,208
$ 25,082
$ (6,775 ) $ 55,480

~~(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 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software sale and developments of $1.6 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $5.2 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.~~

(1)Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $25.4 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $6.5 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean.

(2)Primarily represents share-based compensation and severance payments.

Nine months ended September 30, 2020
(In thousands) Payment
Services -
Puerto Rico & Caribbean Payment
Services -
Latin America Merchant
Acquiring, net Business
Solutions
Corporate and Other ⁽¹⁾
Total

Revenues $ 90,632
$ 62,678
$ 80,531
$ 174,455
$ (31,910 ) $ 376,386
Operating costs and expenses 53,904
53,882
42,579
105,901
17,923
274,189
Depreciation and amortization 9,791
8,508
1,431
13,049
20,982
53,761
Non-operating income (expenses) 62
4,297
473
1,482
(2,815 ) 3,499
EBITDA 46,581
21,601
39,856
83,085
(31,666 ) 159,457
Compensation and benefits ⁽²⁾
742
2,263
695
1,374
5,846
10,920
Transaction, refinancing and other fees ⁽³⁾
500
0
0
0
5,647
6,147
Adjusted EBITDA $ 47,823
$ 23,864
$ 40,551
$ 84,459
$ (20,173 ) $ 176,524

~~(1)~~

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $25.4 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $6.5 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $13.7 million.


~~(2)~~	~~Primarily represents share-based compensation.~~


~~(3)~~	Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, an impairment charge and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A.

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⁾
0
2
0
0
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 Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software sale and developments of $4.9 million from Payment Services - Latin America to the Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $15.6 million.


~~(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,
(In thousands)	2021		2020		2021		2020
Total EBITDA	$	66,319	$	64,659	$	206,425	$	159,457
Less:
Income tax expense	7,134		6,513		14,474		15,551
Interest expense, net	5,180		5,438		15,905		17,664
Depreciation and amortization	18,745		18,127		56,091		53,761
Net income	$	35,260	$	34,581	$	119,955	$	72,481

Three months ended September 30, Nine months ended September 30,
(In thousands) 2020 2019 2020 2019
Total EBITDA $ 64,659
$ 52,397
$ 159,457
$ 160,442
Less:
Income tax expense 6,513
3,720
15,551
10,018
Interest expense, net 5,438
6,919
17,664
21,327
Depreciation and amortization 18,127
16,972
53,761
50,440
Net income $ 34,581
$ 24,786
$ 72,481
$ 78,657

~~Note 16 – Subsequent Events~~

On October 20, 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 4, 2020 to stockholders of record as of the close of business on November 2, 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, 2020 and 2019 and (ii) the financial condition as of September 30, 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, 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, providing a broad range of merchant acquiring, payment services and business process management services. According to the September 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 out of 11 offices, including our headquarters 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 across 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~~Note 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’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. On May 1, 2017, the automatic stay expired. Promptly after the expiration of the stay, creditors of the government of Puerto Rico 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 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 Rico’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 Rico and overall payment transaction volumes have not been significantly affected by the debt crisis, however we remain cautious.

– Subsequent Events

~~With respect to the macroeconomic trends described above, management currently estimates that we will continue to experience a revenue attrition in Latin America of approximately $3~~
million to $4 million for previously disclosed migrations anticipated in 2020. The clients' decisions, which were made prior to 2015, for these anticipated migrations were driven by a variety of historical factors, the most important of which was customer service experience. Management believes that these customer decisions are unlikely to change; however, timing is subject to change based on customers’ conversion schedules.

~~Impact of COVID-19 Pandemic~~

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.

~~into the work site, providing protective gear, developing safe social distancing workspaces and increasing overall sanitation at our offices;~~

~~Management identified additional expense reductions that are intended to be implemented as necessary; and~~

~~Management has suspended all non-essential travel for employees.~~

Consumer preference for digital payment solutions during the pandemic has continued to grow and the Company has benefited from an increase in transaction volumes for these types of payment solutions as a result. Similarly, there has been an acceleration of contactless and card not present transactions, which has required an evolution of our traditional ATM cards that require PIN entry. The Company continues to focus on new innovative solutions, such as contactless payment solutions and our gateway product in Latin America to further accelerate the consumer preference for digital solutions.

~~Results of Operations~~

~~Comparison of the three months ended~~ ~~September 30, 2020~~ ~~and~~ ~~2019~~

Three months ended September 30,
In thousands 2020 2019 Variance 2020 vs. 2019

Revenues $ 136,507
$ 118,804
$ 17,703
15 %
Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization 57,854
51,878
5,976
12 %
Selling, general and administrative expenses 16,682
15,152
1,530
10 %
Depreciation and amortization 18,127
16,972
1,155
7 %
Total operating costs and expenses 92,663
84,002
8,661
10 %
Income from operations $ 43,844
$ 34,802
$ 9,042
26 %

~~Revenues~~

Total revenues for the three months ended September 30, 2020 increased by $17.7 million or 15% to $136.5 million when compared to the same period in the prior year. Revenue increased across all of the Company's segments, benefiting from increased volumes and higher spreads, coupled with revenue generated from ATH Movil and ATH Movil Business, as well as, revenue generated in connection with Place to Pay which was acquired in December of the prior year. Revenue for the three months ended September 30, 2020 also includes $4.4 million of revenue recognized in connection with services provided to the Puerto Rico Department of Education.

~~Cost of Revenues~~

Cost of revenues for the three months ended September 30, 2020 amounted to $57.9 million, an increase of $6.0 million or 12% when compared to the same period in the prior year. The increase during the three months is primarily driven by an increase in equipment expenses as a result of increases in cloud services coupled with higher software and equipment maintenance.

Salaries and benefits also increased, driven by increased headcount and special incentives paid in connection with COVID-19. Cost of sales reflected an increase primarily related to hardware and software sales.

~~Selling, General and Administrative~~

Selling, general and administrative expenses for the three months ended September 30, 2020 increased by $1.5 million or 10% when compared to the same period in the prior year. The increase is almost entirely related to higher professional services.

~~Depreciation and Amortization~~

Depreciation and amortization expense for the three months ended September 30, 2020 amounted to $18.1 million, an increase of $1.2 million or 7% when compared to the same period in the prior year. Increased expense during the three months is driven by capital expenditures in the prior year as well as, key projects that went into production in the prior year.

~~Non-Operating Income (Expenses)~~

Three months ended September 30,
In thousands 2020 2019 Variance 2020 vs. 2019

Interest income $ 429
$ 348
$ 81
23 %
Interest expense (5,867 ) (7,267 ) 1,400
(19 )%
Earnings of equity method investment 202
371
(169 ) (46 )%
Other income 2,486
252
2,234
887 %
Total non-operating expenses $ (2,750 ) $ (6,296 ) $ 3,546
(56 )%

Non-operating expenses for the three months ended September 30, 2020 decreased by $3.5 million to $2.8 million when compared to the same period in the prior year. The decrease is mainly related to a $2.2 million increase in other income as a result of remeasurement of assets and liabilities denominated in US dollars, coupled with $1.4 million decrease in interest expense, resulting from the scheduled amortization of debt and a reduction in interest rates.

~~Income Tax Expense~~

Three months ended September 30,
In thousands 2020 2019 Variance 2020 vs. 2019
Income tax expense $ 6,513
$ 3,720
$ 2,793
75 %

Income tax expense for the three months ended September 30, 2020 amounted to $6.5 million, an increase of $2.8 million when compared to the same period in the prior year. The effective tax rate for the period was 15.8%, compared with 13.0% in the 2019 period. The increase in the effective tax rate primarily reflects the impact of discrete tax items recorded in the quarter amounting to approximately $1.0 million.

~~Comparison of the nine months ended September 30, 2020 and 2019~~

Nine months ended September 30,
In thousands 2020 2019 Variance 2020 vs. 2019

Revenues $ 376,386
$ 360,188
$ 16,198
4 %
Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization 168,900
154,498
14,402
9 %
Selling, general and administrative expenses 51,528
45,355
6,173
14 %
Depreciation and amortization 53,761
50,440
3,321
7 %
Total operating costs and expenses 274,189
250,293
23,896
10 %
Income from operations $ 102,197
$ 109,895
$ (7,698 ) (7 )%

~~Revenues~~

Total revenues for the nine months ended September 30, 2020 increased by $16.2 million or 4% to $376.4 million when compared to the same period in the prior year. Revenue during the nine months ended September 30, 2020 was favorably impacted by higher sales volume and higher spreads in our merchant acquiring business, higher ATH Movil and ATH Movil Business transactions coupled with the impact of revenue recognized in connection with services to the Puerto Rico Department of Education mentioned above. These increases were partially offset by the prior year impact of revenue from a one-time project amounting to $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 for the nine months ended September 30, 2020 amounted to $168.9 million, an increase of $14.4 million or 9% when compared to the same period in the prior year. The increase is primarily related to an increase in salaries and compensation costs, driven by increased headcount and special incentives paid in connection with COVID-19, coupled with increases in professional services related to programming fees and increases in cloud services.

~~Selling, General and Administrative~~

Selling, general and administrative expenses for the nine months ended September 30, 2020 increased by $6.2 million or 14% when compared to the same period in the prior year. The increase is primarily related to higher professional services.

~~Depreciation and Amortization~~

Depreciation and amortization expense for the nine months ended September 30, 2020 amounted to $53.8 million, an increase of $3.3 million or 7% when compared to the same period in the prior year. The increase is driven by higher capital expenditures in the prior year and software assets that went into production in the prior year.

~~Non-Operating Income (Expenses)~~

Nine months ended September 30,
In thousands 2020 2019 Variance 2020 vs. 2019

Interest income $ 1,165
$ 864
$ 301
35 %
Interest expense (18,829 ) (22,191 ) 3,362
(15 )%
Earnings of equity method investment 733
726
7
1 %
Other income (expense) 2,766
(619 ) 3,385
(547 )%
Total non-operating expenses $ (14,165 ) $ (21,220 ) $ 7,055
(33 )%

Non-operating expenses for the nine months ended September 30, 2020 decreased by $7.1 million to $14.2 million when compared to the same period in the prior year. The decrease is mainly related to a $3.4 million decrease in interest expense, resulting from the scheduled amortization of debt and a reduction in interest rates coupled with an increase in other income (expense) of $3.4 million for the same reason explained above for the three months.

~~Income Tax Expense~~

Nine months ended September 30,
In thousands 2020 2019 Variance 2020 vs. 2019
Income tax expense $ 15,551
$ 10,018
$ 5,533
55 %

Income tax expense for the nine months ended September 30, 2020 amounted to $15.6 million, an increase of $5.5 million when compared to the same period in the prior year. The effective tax rate for the period was 17.7%, compared with 11.3% in the 2019 period. The increase in the effective tax rate primarily reflects the impact from discrete tax items of approximately $3.0 million, as well as, the impact of COVID-19 on the mix of business and other taxable items in foreign jurisdictions.

~~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.

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, management identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These areas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these areas are aggregated and presented within the “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and Other category consists of 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 EBITDA. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with ASC Topic 280, ~~Segment Reporting,~~ given that it is reported to the CODM for purposes of allocating resources. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by revenues and adjusted EBITDA. As such, segment assets are not disclosed in the notes to the accompanying unaudited condensed consolidated financial statements.

~~The following tables set forth information about the Company’s operations by its four business segments for the periods indicated below.~~

~~Comparison of the three months ended September 30, 2020 and 2019~~

~~Payment Services - Puerto Rico & Caribbean~~

Three months ended September 30,
In thousands 2020 2019
Revenues $33,284 $30,411
Adjusted EBITDA 18,473 18,377
Adjusted EBITDA Margin 55.5 % 60.4 %

Payment Services - Puerto Rico & Caribbean segment revenues for the three months ended September 30, 2020 increased by $2.9 million to $33.3 million when compared to the same period in the prior year. The increase in revenues was primarily driven by an incremental $2.3 million in revenue recognized from ATH Movil and ATH Movil Business and new services, partially offset by a decrease in POS and ATM transaction volumes, due to a higher average ticket and a shift in consumer behavior towards digital payment platforms. Adjusted EBITDA remained relatively flat at $18.5 million primarily due to higher operating expenses driven by higher equipment expenses coupled with higher costs of sales that almost entirely offset the increase in revenues.

~~Payment Services - Latin America~~

Three months ended September 30,
In thousands 2020 2019
Revenues $21,241 $20,596
Adjusted EBITDA 9,538 7,588
Adjusted EBITDA Margin 44.9 % 36.8 %

Payment Services - Latin America segment revenues for the three months ended September 30, 2020 increased $0.6 million to $21.2 million driven mainly by revenues generated by the acquisition of PlacetoPay in December 2019, partially offset by the decrease in transactional revenues due to COVID-19 coupled with client attrition and the negative impact of foreign currency. Adjusted EBITDA increased $2.0 million when compared to the same period in the prior year primarily due to the remeasurement of assets and liabilities denominated in US dollars.

~~Merchant Acquiring~~

Three months ended September 30,
In thousands 2020 2019
Revenues $30,646 $26,436
Adjusted EBITDA 15,885 11,208
Adjusted EBITDA Margin 51.8 % 42.4 %

Merchant Acquiring segment revenues for the three months ended September 30, 2020 increased $4.2 million to $30.6 million primarily driven by an increase in sales volume and an increase in spread partially due to the higher average ticket. Adjusted EBITDA increased $4.7 million reflecting the impact of lower operating expenses resulting from lower transactions with a higher average ticket.

~~Business Solutions~~

Three months ended September 30,
In thousands 2020 2019
Revenues $63,018 $52,945
Adjusted EBITDA 32,990 25,082
Adjusted EBITDA Margin 52.4 % 47.4 %

Business Solutions segment revenues for the three months ended September 30, 2020 increased $10.1 million to $63.0 million as a result of revenue recognized in connection with services to the Puerto Rico Department of Education amounting to $4.4 million coupled with an increase in services for Popular and increased network revenues, partially offset by a decrease in IT Consulting revenue as the prior year included revenue for a completed project. Adjusted EBITDA increased $7.9 million to $33.0 million as a result of the increase in revenue, partially offset by an increase in equipment expenses and maintenance costs coupled with increased costs of sales directly related to network revenues.

~~Comparison of the nine months ended September 30, 2020 and 2019~~

~~Payment Services - Puerto Rico & Caribbean~~

Nine months ended September 30,
In thousands 2020 2019
Revenues $90,632 $92,910
Adjusted EBITDA 47,823 59,959
Adjusted EBITDA Margin 52.8 % 64.5 %

Payment Services - Puerto Rico & Caribbean segment revenues for the nine months ended September 30, 2020 decreased by $2.3 million to $90.6 million when compared to the 2019 period. The decrease in revenues was driven by the absence of the revenue from a one-time project in the prior year of $2.7 million and a decline in transaction volumes due to the impact of COVID-19, partially offset by incremental revenue recognized from ATH Movil and ATH Movil Business and new services. Adjusted EBITDA decreased by $12.1 million to $47.8 million primarily due to lower revenue, higher operating expenses related to post-implementation costs from an electronic benefits project, and higher costs of sales directly related to new services.

~~Payment Services - Latin America~~

Nine months ended September 30,
In thousands 2020 2019
Revenues $62,678 $62,533
Adjusted EBITDA 23,864 23,617
Adjusted EBITDA Margin 38.1 % 37.8 %

Payment Services - Latin America segment revenues for the nine months ended September 30, 2020 remained relatively flat when compared to the prior year driven by revenues generated from the acquisition of Place to Pay in December 2019 partially offset by the negative impact of foreign currency, the decrease in transactional revenues due to COVID-19 coupled with client attrition. Adjusted EBITDA increased $0.2 million when compared to the same period in the prior year, primarily due to the increase in revenues.

~~Merchant Acquiring~~

Nine months ended September 30,
In thousands 2020 2019
Revenues $80,531 $79,203
Adjusted EBITDA 40,551 35,424
Adjusted EBITDA Margin 50.4 % 44.7 %

Merchant Acquiring segment revenues for the nine months ended September 30, 2020 increased $1.3 million to $80.5 million primarily driven by a higher spread as the average ticket increased when compared with the prior year, partially offset by a decrease in sales volumes and non-transactional revenue as a result of COVID-19. Adjusted EBITDA increased $5.1 million reflecting the impact of lower operating expenses resulting from lower transactions with a higher average ticket.

~~Business Solutions~~

Nine months ended September 30,
In thousands 2020 2019
Revenues $174,455 $159,492
Adjusted EBITDA 84,459 72,396
Adjusted EBITDA Margin 48.4 % 45.4 %

Business Solutions segment revenues for the nine months ended September 30, 2020 increased $15.0 million to $174.5 million. Revenue growth in the segment was driven by revenue recognized for the Puerto Rico Department of Education as discussed above, coupled with increased services to Popular and an increase in network services revenue, partially offset by $2.5 million in revenue for completed projects and hardware sales recognized in the prior year that did not recur. Adjusted EBITDA increased $12.1 million to $84.5 million compared to the same period in the prior year as a result of higher revenues, partially offset by higher equipment expenses and increased costs of sales related to the increase in network services.

~~Liquidity and Capital Resources~~

Our principal source of liquidity is cash generated from operations, and our primary liquidity requirements are the funding of working capital needs, capital expenditures, and acquisitions. We also have a $125.0 million Revolving Facility, of which $101.7 million was available for borrowing as of September 30, 2020. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.

As of September 30, 2020, we had cash and cash equivalents of $144.1 million, of which $67.6 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 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,
(In thousands) 2020 2019

Cash provided by operating activities $ 121,159
$ 136,167
Cash used in investing activities (36,920 ) (49,862 )
Cash used in financing activities (50,780 ) (57,117 )
Effect of foreign exchange rate on cash, cash equivalents and restricted cash $ (2,384 ) $ —
Increase in cash, cash equivalents and restricted cash $ 31,075
$ 29,188

Net cash provided by operating activities for the nine months ended September 30, 2020 was $121.2 million compared to $136.2 million for the same period in the prior year. The $15.0 million decrease in cash provided by operating activities is primarily driven by a decrease in collections from customers coupled with lower net income.

Net cash used in investing activities for the nine months ended September 30, 2020 was $36.9 million compared to $49.9 million for the same period in the prior year. The $12.9 million decrease is attributable to lower capital expenditures as the prior year included significant hardware purchases as the Company refreshed key infrastructure.

Net cash used in financing activities for the nine months ended September 30, 2020 was $50.8 million compared to $57.1 million for the same period in the prior year. The $6.3 million decrease was mainly attributed to a $21.1 million decrease in cash used to repurchase common stock and $2.8 million decrease in withholding taxes paid on share-based compensation. These decreases were partially offset by a $17.0 million increase in repayments of long-term debt.

~~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 $36.9 million and $50.0 million, respectively, during the nine months ended September 30, 2020 and 2019. Generally, we fund capital expenditures with cash flow generated from operations and, if necessary, borrowings under our Revolving Facility.

~~Dividend Payments~~

On February 20, 2020, April 21, 2020 and July 24, 2020, the Company's Board declared quarterly cash dividends of $0.05 per share of common stock, which were paid on April 3, 2020, June 5, 2020 and September 4, 2020, respectively, to stockholders of record as of the close of business on March 4, 2020, May 4, 2020 and August 3, 2020, respectively.

On October ~~20, 2020, our~~21, 2021, the Board declared a regular quarterly cash dividend of $0.05 per share on the Company’s outstanding shares of common stock. The dividend will be paid on December ~~4, 2020~~3, 2021 to stockholders of record as of the close of business on November ~~2, 2020.~~1, 2021. 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.

~~Financial Obligations~~

~~Secured Credit Facilities~~

On November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement providing for the secured credit facilities, consisting of a $220.0 million term loan A facility that matures on November 27, 2023 (the “2023 Term A Loan”), a $325.0 million term loan B facility that matures on November 27, 2024 (the “2024 Term 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 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, 2020 of the 2023 Term A Loan and the 2024 Term B Loan was $192.8 million and $310.3 million, respectively. The additional borrowing capacity under our Revolving Facility at September 30, 2020 was $101.7 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.

~~Notes Payable~~

In December 2019, EVERTEC Group entered into two non-interest bearing financing agreements amounting to $2.4 million to purchase software and maintenance. As of September 30, 2020 and December 31, 2019, the outstanding principal balance of the notes payable was $1.5 million and $2.4 million, respectively. The current portion of these notes is included in accounts payable and the long-term portion is included in other long-term liabilities in the Company's unaudited condensed consolidated balance sheet.

~~Interest Rate Swaps~~

As of September 30, 2020, the Company has an interest rate swap agreement, entered into in December 2018, which converts 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~~
~~2018 Swap~~	~~April 2020~~	~~November 2024~~	~~$250 million~~	~~1-month LIBOR~~	~~2.89%~~

~~The Company has accounted for this agreement as a cash flow hedge.~~

As of September 30, 2020 and December 31, 2019, the carrying amount of derivatives included on the Company's unaudited condensed consolidated balance sheets was $27.4 million and $14.5 million, respectively. The fair value of these derivatives is 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 three and nine months ended September 30, 2020, the Company reclassified losses of $1.7 million and $3.3 million, respectively, from accumulated other comprehensive loss into interest expense. Based on current LIBOR rates, the Company expects to reclassify losses of $6.8 million from accumulated other comprehensive loss into interest expense over the next 12 months.

~~The cash flow hedge is considered highly effective.~~

~~Covenant Compliance~~

As of September 30, 2020, our secured leverage ratio was 1.93 to 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 under our 2018 Credit Agreement.

~~Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share (Non-GAAP Measures)~~

We define “EBITDA” as earnings before interest, taxes, depreciation and amortization. We define “Adjusted EBITDA” as EBITDA further adjusted to exclude unusual items and other adjustments described below. Adjusted EBITDA by segment is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in conformity with ASC Topic 280, Segment Reporting, and is excluded from the definition of non-GAAP financial measures under the Securities and Exchange Commission's Regulation G and Item 10(e) of Regulation S-K. We define “Adjusted Net Income” as net income adjusted to exclude unusual items and other adjustments described below. We define “Adjusted Earnings per common share” as Adjusted Net Income divided by diluted shares outstanding.

We present EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of ourselves and other companies in our industry. In addition, our presentation of Adjusted EBITDA is substantially consistent with the equivalent measurements that are contained in the senior secured credit facilities in testing EVERTEC Group’s compliance with covenants therein such as the 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
(Dollar amounts in thousands, except per share information) 2020 2019 2020 2019 September 30, 2020
Net income $ 34,581
$ 24,786
$ 72,481
$ 78,657
$ 97,524
Income tax expense 6,513
3,720
15,551
10,018
18,508
Interest expense, net 5,438
6,919
17,664
21,327
23,931
Depreciation and amortization 18,127
16,972
53,761
50,440
71,403
EBITDA 64,659
52,397
159,457
160,442
211,366
Equity income ⁽¹⁾
(202 ) (372 ) (733 ) (241 ) (943 )
Compensation and benefits⁽²⁾
3,669
3,455
10,920
10,392
14,326
Transaction, refinancing and other fees ⁽³⁾
1,907
—
6,880
280
7,098
Adjusted EBITDA 70,033
55,480
176,524
170,873
231,847
Operating depreciation and amortization ⁽⁴⁾
(9,888 ) (8,673 ) (28,943 ) (25,516 ) (38,307 )
Cash interest expense, net ⁽⁵⁾
(5,301 ) (6,644 ) (16,917 ) (20,774 ) (23,159 )
Income tax expense ⁽⁶⁾
(7,472 ) (5,509 ) (21,729 ) (15,454 ) (26,514 )
Non-controlling interest ⁽⁷⁾
(155 ) (63 ) (412 ) (287 ) (472 )
Adjusted net income $ 47,217
$ 34,591
$ 108,523
$ 108,842
$ 143,395
Net income per common share (GAAP):

Diluted $ 0.47
$ 0.34
$ 0.99
$ 1.07

Adjusted Earnings per common share (Non-GAAP):

Diluted $ 0.65
$ 0.47
$ 1.49
$ 1.48

Shares used in computing adjusted earnings per common share:

Diluted 73,001,780
73,314,704
73,049,817
73,530,865


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 dividends received.~~


2)	~~Primarily represents share-based compensation.~~


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 an impairment charge.~~


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 discrete items.~~


7)	~~Represents the 35% non-controlling equity interest in Evertec Colombia, net of amortization for intangibles created as part of the purchase.~~

~~Off-Balance Sheet Arrangements~~

In the ordinary course of business, the Company may enter into commercial commitments. 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, 2020, the Company did not have any off-balance sheet items.

~~Seasonality~~

Our payment businesses generally experience moderate increased activity during the traditional holiday shopping periods and around other nationally recognized holidays, which follow consumer spending patterns.

~~Effect of Inflation~~

While inflationary increases in certain 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 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, 2021 and 2020 and (ii) the financial condition as of September 30, 2021. You should read the following discussion and analysis in conjunction with the audited consolidated financial statements (the “Audited Consolidated Financial Statements”) and related notes for the fiscal year ended December 31, 2020, 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. 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, Evertec Placetopay, S.A.S. (formerly known as 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, providing a broad range of merchant acquiring, payment services and business process management services. According to the August 2020 Nilson Report, we are one of the largest merchant acquirers in Latin America based on total number of transactions and we believe we are the largest merchant acquirer in the Caribbean and Central America. We serve 26 countries out of 11 offices, including our headquarters in Puerto Rico. We own and operate the ATH network, one of the leading personal identification number ("PIN") debit networks in Latin America. We manage a system of electronic payment networks and offer a comprehensive suite of services for core banking, cash processing, and fulfillment in Puerto Rico, that process approximately three billion transactions annually. Additionally we offer technology outsourcing in all the regions we serve. We serve a diversified customer base of leading financial institutions, merchants, corporations and government agencies with “mission-critical” technology solutions that enable them to issue, process and accept transactions securely. We believe our business is well-positioned to continue to expand across the fast-growing Latin American region.

•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 across 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

Relationship with Popular

On September 30, 2010, EVERTEC Group entered into a 15-year Master Services Agreement ("MSA"), and several related agreements with Popular. Under the terms of the MSA, Popular agreed to use EVERTEC services on an ongoing exclusive basis for the duration of the agreement. Additionally, Popular granted us a right of first refusal on the development of certain new financial technology products and services for the duration of the MSA.

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, 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.

Results of Operations

Comparison of the three months ended September 30, 2021 and 2020


	Three months ended September 30,
In thousands	2021		2020		Variance

Revenues	$	145,883	$	136,507	$	9,376	7	%
Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization	62,995		57,854		5,141		9	%
Selling, general and administrative expenses	17,126		16,682		444		3	%
Depreciation and amortization	18,745		18,127		618		3	%
Total operating costs and expenses	98,866		92,663		6,203		7	%
Income from operations	$	47,017	$	43,844	$	3,173	7	%

Revenues

Total revenues for the three months ended September 30, 2021 increased by $9.4 million or 7% to $145.9 million when compared to the prior year quarter, primarily driven by transactional revenue growth in Puerto Rico as we continue to benefit from federal stimulus, and increased revenue from ATH Movil and ATH Movil Business. Revenue growth in Latin America is driven mainly by client implementations in the beginning of the current year, organic growth from existing customers and the continued expansion of Place to Pay. Prior year revenue includes $4.4 million recognized in connection with one-time services provided to the Puerto Rico Department of Education.

Cost of Revenues

Cost of revenues for the three months ended September 30, 2021 amounted to $63.0 million, an increase of $5.1 million or 9% when compared to the same period in the prior year. The increase during the three months was primarily driven by an increase in personnel costs, higher professional fees, and an increase in technology services.

Selling, General and Administrative

Selling, general and administrative expenses for the three months ended September 30, 2021 increased by $0.4 million or 3% when compared to the same period in the prior year. The increase is primarily driven by an increase in personnel costs, partially offset by a decrease on professional services.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended September 30, 2021 amounted to $18.7 million, an increase of $0.6 million or 3% when compared to the same period in the prior year. Increased expense during the three months is driven by software amortization due to key projects that went into production as well as increased capital expenditures.

Non-Operating Expenses


	Three months ended September 30,
In thousands	2021		2020		Variance

Interest income	$	504	$	429	$	75	17	%
Interest expense	(5,684)		(5,867)		183		3	%
Earnings of equity method investment	411		202		209		103	%
Other income, net	146		2,486		(2,340)		(94)	%
Total non-operating expenses	$	(4,623)	$	(2,750)	$	(1,873)	(68)	%

Non-operating expenses for the three months ended September 30, 2021 increased by $1.9 million to $4.6 million when compared to the same period in the prior year. The increase is related to a $2.3 million decrease in other income as the prior year includes the favorable impact of foreign currency exchange on remeasurement of assets and liabilities denominated in US dollars.

Income Tax Expense


	Three months ended September 30,
In thousands	2021		2020		Variance
Income tax expense	$	7,134	$	6,513	$	621	10	%

Income tax expense for the three months ended September 30, 2021 amounted to $7.1 million, an increase of $0.6 million when compared to the same period in the prior year. The effective tax rate for the period was 16.8%, compared with 15.8% in the 2020 period. The increase in the effective tax rate primarily reflects the impact of certain discrete items in the Company's Latin America operations.

Comparison of the nine months ended September 30, 2021 and 2020


	Nine months ended September 30,
In thousands	2021		2020		Variance

Revenues	$	434,559	$	376,386	$	58,173	15	%
Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization	182,180		168,900		13,280		8	%
Selling, general and administrative expenses	49,980		51,528		(1,548)		(3)	%
Depreciation and amortization	56,091		53,761		2,330		4	%
Total operating costs and expenses	288,251		274,189		14,062		5	%
Income from operations	$	146,308	$	102,197	$	44,111	43	%

Revenues

Total revenues for the nine months ended September 30, 2021 increased by $58.2 million or 15% to $434.6 million when compared to the same period in the prior year. Revenue increased across all of the Company's segments. The increase in Puerto Rico was primarily driven by transactional revenue growth which was positively impacted by incremental federal stimulus, increased consumer demand and the continuous adoption of the Company's digital solutions, mainly ATH Movil and ATH Movil Business. Latin America revenue growth was mainly driven from new business and projects that went into production, and organic growth from existing clients and the expansion of our payment gateway Place to Pay. Revenue in the prior year period was impacted by COVID-19 stay-at-home orders in all of the regions in which the Company operates.

Cost of Revenues

Cost of revenues for the nine months ended September 30, 2021 amounted to $182.2 million, an increase of $13.3 million or 8% when compared to the same period in the prior year. The increase is primarily driven by an increase in personnel costs, increases in technology services, higher professional services and an increase in costs of sales.

Selling, General and Administrative

Selling, general and administrative expenses for the nine months ended September 30, 2021 decreased by $1.5 million or 3% when compared to the same period in the prior year. The decrease is almost entirely related to a decrease in professional services as prior year includes expenses for corporate transactions, partially offset by an increase in personnel costs.

Depreciation and Amortization

Depreciation and amortization expense for the nine months ended September 30, 2021 amounted to $56.1 million, an increase of $2.3 million or 4% when compared to the same period in the prior year. Increased expense during the period is driven by the same factors explained above for the quarter.

Non-Operating Expenses


	Nine months ended September 30,
In thousands	2021		2020		Variance

Interest income	$	1,343	$	1,165	$	178	15	%
Interest expense	(17,248)		(18,829)		1,581		8	%
Earnings of equity method investment	1,307		733		574		78	%
Other income, net	2,719		2,766		(47)		(2)	%
Total non-operating expenses	$	(11,879)	$	(14,165)	$	2,286	16	%

Non-operating expenses for the nine months ended September 30, 2021 decreased by $2.3 million to $11.9 million when compared to the same period in the prior year, primarily due to a $1.6 million decrease in interest expense as a result of lower interest rates and a lower outstanding balance as a result of debt repayments completed in the prior year and in the first half of 2021.

Income Tax Expense


	Nine months ended September 30,
In thousands	2021	2020	Variance
Income tax expense	14,474	15,551	$	(1,077)	(7)	%

Income tax expense for the nine months ended September 30, 2021 amounted to $14.5 million, a decrease of $1.1 million when compared to the same period in the prior year. The effective tax rate for the period was 10.8% compared with 17.7% in the 2020 period. The decrease in the effective tax rate primarily reflects the impact from the reversal of a liability for uncertain tax positions as a result of the expiration of the statute of limitation in the current year, while the prior year was impacted by the revenue mix towards higher taxed businesses.

Segment Results of Operations

payment processing. For network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed, and other processing services.

•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 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, 2021 and 2020

Payment Services - Puerto Rico & Caribbean


	Three months ended September 30,
In thousands	2021		2020
Revenues	$38,773		$33,284
Adjusted EBITDA	21,805		18,473
Adjusted EBITDA Margin	56.2	%	55.5	%

Payment Services - Puerto Rico & Caribbean segment revenues for the three months ended September 30, 2021 increased by $5.5 million to $38.8 million when compared to the same period in the prior year, driven by increased transactional revenue from POS transactions, an incremental $0.9 million in revenue from ATH Movil and ATH Movil Business as consumer preference continues to shift towards digital payment products and an increase in transaction processing and monitoring revenue recognized for services provided to the Payment Services - Latin America Segment. Adjusted EBITDA increased by $3.3 million to $21.8 million driven by the increase in revenues, partially offset by higher operating expenses mainly higher technology services.

Payment Services - Latin America


	Three months ended September 30,
In thousands	2021		2020
Revenues	$26,792		$21,241
Adjusted EBITDA	9,991		9,538
Adjusted EBITDA Margin	37.3	%	44.9	%

Payment Services - Latin America segment revenues for the three months ended September 30, 2021 increased by $5.6 million to $26.8 million driven mainly by revenues generated by new client implementations that went into production in early 2021, expansion of services with existing clients and the continued expansion of Place to Pay, partially offset by anticipated client attrition. Adjusted EBITDA increased by $0.5 million when compared to the same period in the prior year primarily due to the increase in revenues, partially offset by lower non-operating income as the prior year included the favorable impact of the remeasurement of assets and liabilities denominated in US dollar and an increase in other operating taxes.

Merchant Acquiring


	Three months ended September 30,
In thousands	2021		2020
Revenues	$37,606		$30,646
Adjusted EBITDA	19,230		15,885
Adjusted EBITDA Margin	51.1	%	51.8	%

Merchant Acquiring segment revenues for the three months ended September 30, 2021 increased by $7.0 million to $37.6 million primarily driven by an increase in transactional revenue due to higher sales volume, as we continue to benefit from the impact of COVID related federal stimulus, and revenue generated from the expanded relationship with FirstBank. Adjusted EBITDA increased by $3.3 million driven by the increase in revenues, partially offset by an increase in operating expenses driven by the increased transaction volume and higher personnel costs.

Business Solutions


	Three months ended September 30,
In thousands	2021		2020
Revenues	$58,134		$63,018
Adjusted EBITDA	26,034		32,991
Adjusted EBITDA Margin	44.8	%	52.4	%

Business Solutions segment revenues for the three months ended September 30, 2021 decreased by $4.9 million to $58.1 million mainly as a result of the favorable impact in the prior year of a one-time contract with the Puerto Rico Department of Education that amounted to $4.4 million. Adjusted EBITDA decreased by $7.0 million to $26.0 million as a result of the impact of the aforementioned contract recorded net of expenses, and higher operating expenses.

Comparison of the nine months ended September 30, 2021 and 2020

Payment Services - Puerto Rico & Caribbean


	Nine months ended September 30,
In thousands	2021		2020
Revenues	$113,626		$90,632
Adjusted EBITDA	66,228		47,823
Adjusted EBITDA Margin	58.3	%	52.8	%

Payment Services - Puerto Rico & Caribbean segment revenues for the nine months ended September 30, 2021 increased by $23.0 million to $113.6 million, due to an increase in transactions when compared to the same period in the prior year which was impacted by a decline in transaction volumes due to the impact of COVID-19, while the current year is benefiting from incremental federal stimulus and increased consumer demand. Revenue during the year has also benefited from an incremental $5.1 million recognized from ATH Movil and ATH Movil Business, as well as an increase in transaction processing and monitoring revenue recognized for services provided to the Payment Services - Latin America Segment. Adjusted EBITDA increased by $18.4 million to $66.2 million driven by the increase in revenues, partially offset by higher operating expenses driven by higher equipment expenses.

Payment Services - Latin America


	Nine months ended September 30,
In thousands	2021		2020
Revenues	$77,641		$62,678
Adjusted EBITDA	30,985		23,864
Adjusted EBITDA Margin	39.9	%	38.1	%

Payment Services - Latin America segment revenues for the nine months ended September 30, 2021 increased by $15.0 million to $77.6 million driven mainly by revenues generated by new client implementations as well as expanded existing relationships and increased volume from Place to Pay, partially offset by client attrition. Adjusted EBITDA increased by $7.1 million when compared to the same period in the prior year primarily due to the increase in revenues, partially offset by an increase in fees for transaction processing and monitoring services from the Payment Services - Puerto Rico & Caribbean segment.

Merchant Acquiring


	Nine months ended September 30,
In thousands	2021		2020
Revenues	$106,808		$80,531
Adjusted EBITDA	$55,293		40,551
Adjusted EBITDA Margin	51.8	%	50.4	%

Merchant Acquiring segment revenues for the nine months ended September 30, 2021 increased by $26.3 million to $106.8 million as a result of an increase in transaction volumes that benefited from the impact of federal stimulus, while the prior year period was impacted by lower sales volume as a result of the beginning of the COVID-19 pandemic. Adjusted EBITDA increased by $14.7 million driven by the increase in revenues, partially offset by an increase in operating expenses driven by the increased transaction volume.

Business Solutions


	Nine months ended September 30,
In thousands	2021		2020
Revenues	$179,438		$174,455
Adjusted EBITDA	86,287		84,459
Adjusted EBITDA Margin	48.1	%	48.4	%

Business Solutions segment revenues for the nine months ended September 30, 2021 increased by $5.0 million to $179.4 million as a result of an increase in core banking revenues and an increase in IT consulting services revenue, as the Company continues to benefit from the shift to digital, partially offset by the impact in the prior year of the aforementioned one-time Department of Education contract. Adjusted EBITDA increased by $1.8 million to $86.3 million as a result of the increase in revenue, partially offset by an increase in costs of sales.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operations, and our primary liquidity requirements are the funding of working capital needs, capital expenditures, and acquisitions. We also have a $125.0 million Revolving Facility, of which $119.1 million was available for borrowing as of September 30, 2021. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.

As of September 30, 2021, we had cash and cash equivalents of $244.1 million, of which $87.8 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, debt service, acquisitions, dividend payments, share repurchases, and other transactions as opportunities present themselves.


	Nine months ended September 30,
(In thousands)	2021		2020

Cash provided by operating activities	$	175,855	$	121,159
Cash used in investing activities	(60,305)		(36,920)
Cash used in financing activities	(74,077)		(50,780)
Effect of foreign exchange rate on cash, cash equivalents and restricted cash	215		(2,384)
Increase in cash, cash equivalents and restricted cash	$	41,688	$	31,075

Net cash provided by operating activities for the nine months ended September 30, 2021 was $175.9 million compared to $121.2 million for the same period in the prior year. The $54.7 million increase in cash provided by operating activities is primarily driven by the increase in net income, an increase in collections for accounts receivable and a decrease in cash used to pay down accounts payable and accrued liabilities.

Net cash used in investing activities for the nine months ended September 30, 2021 was $60.3 million compared to $36.9 million for the same period in the prior year. The $23.4 million increase is primarily attributable to the acquisition of a $14.8 million customer relationship, an increase in additions to software of $7.5 million, and the purchase of $3.0 million in available-for-sale debt securities during the period.

Net cash used in financing activities for the nine months ended September 30, 2021 was $74.1 million compared to $50.8 million for the same period in the prior year. The $23.3 million increase was mainly attributed to an increase in cash used to repurchase common stock of $17.1 million and a $5.3 million increase in withholding taxes paid on 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 $43.4 million and $36.9 million, during the nine months ended September 30, 2021 and 2020, respectively. In addition, in 2021, the Company acquired a $14.8 million customer relationship as well as $3.0 million in available-for-sale debt securities. Generally, we fund capital expenditures with cash flow generated from operations and, if necessary, borrowings under our Revolving Facility.

Dividend Payments

On February 18, 2021, April 22, 2021 and July 22, 2021, respectively the Board declared quarterly cash dividends of $0.05 per share of common stock, which were paid on March 26, 2021, June 4, 2021 and September 3, 2021, respectively, to stockholders of record as of the close of business on March 1, 2021, May 3, 2021 and August 2, 2021, respectively.

On October 21, 2021, 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 3, 2021 to stockholders of record as of the close of business on November 1, 2021. 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.

Financial Obligations

Secured Credit Facilities

The 2018 Credit Agreement requires mandatory repayment of outstanding principal balances based on a percentage of excess cash flow, provided that no such payment shall be due if the resulting amount of the excess cash flow multiplied by the applicable percentage is less than $10 million. On March 8, 2021 and March 5, 2020, in connection with this mandatory repayment clause, the Company repaid $17.8 million and $17.0 million, respectively, as a result of excess cash flow calculation performed for the years ended December 31, 2020 and 2019, respectively.

The unpaid principal balance at September 30, 2021 of the 2023 Term A Loan and the 2024 Term B Loan was $174.4 million and $296.7 million, respectively. The additional borrowing capacity under our Revolving Facility at September 30, 2021 was $119.1 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.

Notes Payable

In December 2019, EVERTEC Group entered into two non-interest bearing financing agreements amounting to $2.4 million to purchase software and maintenance. As of September 30, 2021 and December 31, 2020, the outstanding principal balance of the notes payable was $0.8 million and $1.5 million, respectively. These notes are included in accounts payable in the Company's unaudited condensed consolidated balance sheets.

Interest Rate Swaps

As of September 30, 2021, the Company has an interest rate swap agreement, entered into in December 2018, which converts 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

2018 Swap

April 2020

November 2024

$250 million

1-month LIBOR

2.89%

The Company has accounted for this agreement as a cash flow hedge.

As of September 30, 2021 and December 31, 2020, the carrying amount of the derivative included on the Company's unaudited condensed consolidated balance sheets was $18.1 million and $25.6 million, respectively. The fair value of this derivative is 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 three and nine months ended September 30, 2021, the Company reclassified losses of $1.8 million and $5.3 million, respectively, from accumulated other comprehensive loss into interest expense compared to $1.7 million and $3.3 million for the corresponding period in 2020. Based on current LIBOR rates, the Company expects to reclassify losses of $7.0 million from accumulated other comprehensive loss into interest expense over the next 12 months.

The cash flow hedge is considered highly effective.

Covenant Compliance

As of September 30, 2021, our secured leverage ratio was 1.47 to 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 under our 2018 Credit Agreement.

Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share (Non-GAAP Measures)

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.

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
(In thousands, except per share information)	2021		2020		2021		2020		September 30, 2021
Net income	$	35,260	$	34,581	$	119,955	$	72,481	$	152,325
Income tax expense	7,134		6,513		14,474		15,551		17,925
Interest expense, net	5,180		5,438		15,905		17,664		21,813
Depreciation and amortization	18,745		18,127		56,091		53,761		73,848
EBITDA	66,319		64,659		206,425		159,457		265,911
Equity income (1)	(411)		(202)		10		(733)		(393)
Compensation and benefits (2)	3,493		3,669		11,280		10,920		14,743
Transaction, refinancing and other fees (3)	369		1,907		1,205		6,880		2,602
Adjusted EBITDA	69,770		70,033		218,920		176,524		282,863
Operating depreciation and amortization (4)	(10,779)		(9,888)		(32,385)		(28,943)		(42,526)
Cash interest expense, net (5)	(4,926)		(5,301)		(14,946)		(16,917)		(20,314)
Income tax expense (6)	(9,125)		(7,472)		(24,416)		(21,729)		(29,879)
Non-controlling interest (7)	17		(155)		(55)		(412)		(189)
Adjusted net income	$	44,957	$	47,217	$	147,118	$	108,523	$	189,955
Net income per common share (GAAP):
Diluted	$	0.48	$	0.47	$	1.65	$	0.99
Adjusted Earnings per common share (Non-GAAP):
Diluted	$	0.62	$	0.65	$	2.02	$	1.49
Shares used in computing adjusted earnings per common share:
Diluted	72,876,253		73,001,780		72,817,707		73,049,817

1)Represents the elimination of non-cash equity earnings from the Company's 19.99% equity investment in Dominican Republic, Consorcio de Tarjetas Dominicanas S.A. ("CONTADO"), net of cash dividends received.

2)Primarily represents share-based compensation and severance payments.

3)Represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, recorded as part of selling, general and administrative expenses, a software impairment charge and a gain from sale of assets.

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 condensed 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 discrete items.

7)Represents the 35% non-controlling equity interest in Evertec Colombia, net of amortization for intangibles created as part of the purchase.

Off-Balance Sheet Arrangements

In the ordinary course of business, the Company may enter into commercial commitments. 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, 2021, the Company did not have any off-balance sheet items.

Seasonality

Effect of Inflation

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks arising from our normal business activities. These market risks principally involve the possibility of 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 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, ~~2020,~~2021, under the secured credit facilities, would increase our annual interest expense by approximately ~~$3.0~~$2.7 million. The impact on future interest expense as a result of future changes in interest rates will depend largely on the gross amount of our borrowings at that time.

~~In December 2015 and December 2018, we entered into~~As of September 30, 2021, the Company has an interest rate swap ~~agreements~~agreement, entered into December 2018, which ~~convert~~converts a portion of our outstanding variable rate debt to fixed. ~~The interest rate swap entered into in December 2015 matured in April 2020.~~

The interest rate swap exposes us to credit risk in the event that the counterparty to the swap agreement does not or cannot meet its obligations. The notional amount is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The loss would be limited to the amount that would have been received, if any, over the remaining life of the swap. The counterparty to the swap is a major US based financial institution and we expect the counterparty to be able to perform its obligations under the swap. We use derivative financial instruments for hedging purposes only and not for trading or speculative purposes

See Note 6 of the Unaudited Condensed Consolidated Financial Statements for additional information related to the ~~senior~~ secured credit facilities.

Foreign Exchange Risk

We conduct business in certain countries in Latin America. Some of this business is conducted in the countries’ local currencies. The resulting foreign currency translation adjustments, from operations for which the functional currency is other than the U.S. dollar, are reported in accumulated other comprehensive loss in the unaudited condensed consolidated balance sheets. As of September 30, ~~2020,~~2021, the Company had ~~$27.4~~$32.7 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss compared with an unfavorable foreign currency translation adjustment of ~~$16.9~~$24.8 million at December 31, 2019. Unfavorable foreign currency translation adjustments at September 30, 2020 were impacted by the atypical volatility of foreign currencies brought on by the unstable macroeconomic conditions resulting from the COVID-19 pandemic.2020.

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, ~~2020,~~2021, 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, ~~2020~~2021 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

~~We previously disclosed risk~~Investing in our common shares involves a high degree of risk. In addition to the other information set forth in this Report, you should carefully consider the factors ~~under~~described in the section titled "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2019. In addition~~2020 (the "2020 Annual Report").There have been no material changes to ~~those risk factors and the other information included elsewhere in this report, investors should carefully consider~~ the risk factors ~~discussed~~described in ~~"Item 1A. Risk Factors"~~the 2020 Annual Report. If any of the risk factors described in our ~~Form 10-Q for~~2020 Annual Report actually materializes, our business, financial condition and results of operations could be materially adversely affected. In such an event, the ~~quarterly period ended June 30, 2020.~~market price of our common shares could decline and you may lose all or part of your investment.

The risks described in our 2020 Annual Report ~~on Form 10-K for the year ended December 31, 2019 and in our Form 10-Q for the quarterly period ended June 30, 2020,~~ 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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits















31.1*			CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*			CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**			CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**			CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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**			Inline Taxonomy Extension Schema
101.CAL XBRL**			Inline Taxonomy Extension Calculation Linkbase
101.DEF XBRL**			Inline Taxonomy Extension Definition Linkbase
101.LAB XBRL**			Inline Taxonomy Extension Label Linkbase
101.PRE XBRL**			Inline Taxonomy Extension Presentation Linkbase
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

** Furnished herewith.

+ This exhibit is a management contract or a compensatory plan or arrangement.

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)

		~~EVERTEC, Inc.~~ ~~(Registrant)~~

Date: October ~~30, 2020~~28, 2021	By:		/s/ Morgan Schuessler
				Morgan Schuessler Chief Executive Officer

Date: October ~~30, 2020~~28, 2021		By:		/s/ Joaquin A. Castrillo-Salgado
				Joaquin A. Castrillo-Salgado Chief Financial Officer (Principal Financial and Accounting Officer)



Note 1 - The Company and Basis of Presentation			7
Note 2 - Recent Accounting Pronouncements			87
Note 3 - ~~Current Expected Credit Losses~~Debt Securities			98
Note 4 - Property and Equipment, ~~Net~~net			108
Note 5 - Goodwill and Other Intangible Assets			108
Note 6 - Debt and Short-Term Borrowings			119
Note 7 - Financial Instruments and Fair Value Measurements			1211
Note 8 - Equity			1311
Note 9 - Share-based Compensation			1312
Note 10 - Revenues			1412
Note 11 - ~~Income Tax~~Current Expected Credit Losses			1614
Note 12 - Income Tax			15
Note 13 - Net Income per Common Share			1716
Note 1314 - Commitments and Contingencies			1716
Note 1415 - Related Party Transactions			1716
Note 1516 - Segment Information			1817
Note 1617 - Subsequent Events			2221



	Nine months ended September 30,
	2020			2019
Cash flows from operating activities
Net income	$	72,481		$	78,657
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	53,761			50,440
Amortization of debt issue costs and accretion of discount	1,530			1,256
Operating lease amortization	4,377			3,966
Provision for expected credit losses and sundry losses	1,732			3,224
Deferred tax benefit	(2,082		)	(4,197		)
Share-based compensation	10,785			10,168
Loss on disposition of property and equipment and other intangibles	753			691
Earnings of equity method investment	(733		)	(726		)
Dividend received from equity method investment	0			485
Decrease (increase) in assets:
Accounts receivable, net	(7,096		)	6,475
Prepaid expenses and other assets	(7,138		)	(7,268		)
Other long-term assets	284			(1,450		)
(Decrease) increase in liabilities:
Accrued liabilities and accounts payable	(7,969		)	(6,834		)
Income tax payable	1,548			(2,080		)
Unearned income	2,350			6,718
Operating lease liabilities	(5,720		)	(4,825		)
Other long-term liabilities	2,296			1,467
Total adjustments	48,678			57,510
Net cash provided by operating activities	121,159			136,167
Cash flows from investing activities
Additions to software	(23,521		)	(27,969		)
Property and equipment acquired	(13,402		)	(21,994		)
Proceeds from sales of property and equipment	3			101
Net cash used in investing activities	(36,920		)	(49,862		)
Cash flows from financing activities
Statutory withholding taxes paid on share-based compensation	(3,456		)	(6,304		)
Repayment of short-term borrowings for purchase of equipment and software	(1,553		)	(852		)
Dividends paid	(10,786		)	(10,824		)
Repurchase of common stock	(7,300		)	(28,449		)
Repayment of long-term debt	(27,685		)	(10,688		)
Net cash used in financing activities	(50,780		)	(57,117		)
Effect of foreign exchange rate on cash, cash equivalents and restricted cash	(2,384		)	0
Net increase in cash, cash equivalents and restricted cash	31,075			29,188
Cash, cash equivalents and restricted cash at beginning of the period	131,121			86,746
Cash, cash equivalents and restricted cash at end of the period	$	162,196		$	115,934
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	144,147		$	102,535
Restricted cash	18,049			13,399
Cash, cash equivalents and restricted cash	$	162,196		$	115,934
Supplemental disclosure of cash flow information:
Cash paid for interest	$	18,081		$	21,668
Cash paid for income taxes	15,257			12,535
Supplemental disclosure of non-cash activities:
Payable due to vendor related to equipment and software acquired	$	1,486		$	2,707



(Dollar amounts in thousands)
Remaining 2020	$	12,859
2021	48,703
2022	42,899
2023	37,704
2024	29,156



Nonvested restricted shares and RSUs	Shares		Weighted-average grant date fair value
Nonvested at December 31, 2019	1,592,755		$	20.71
Forfeited	(149,811	)	19.18
Vested	(402,842	)	26.98
Granted	413,733		31.62
Nonvested at September 30, 2020	1,453,835		$	24.30



	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	$	0	$	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



	Three months ended September 30,				Nine months ended September 30,
(Dollar amounts in thousands, except per share information)	2020		2019		2020		2019
Net income attributable to EVERTEC, Inc.’s common stockholders	$	34,463	$	24,754	$	72,158	$	78,456
Less: non-forfeitable dividends on restricted stock	0		2		0		2
Net income available to EVERTEC, Inc.’s common shareholders	$	34,463	$	24,752	$	72,158	$	78,454
Weighted average common shares outstanding	71,886,439		71,942,403		71,921,069		72,148,312
Weighted average potential dilutive common shares ⁽¹⁾	1,115,341		1,372,301		1,128,748		1,382,553
Weighted average common shares outstanding - assuming dilution	73,001,780		73,314,704		73,049,817		73,530,865
Net income per common share - basic	$	0.48	$	0.34	$	1.00	$	1.09
Net income per common share - diluted	$	0.47	$	0.34	$	0.99	$	1.07