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EVTC Evertec

Filed: 30 Apr 21, 4:03pm
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 March 31, 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) 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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareEVTCNew 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
At April 22, 2021, there were 72,163,357 outstanding shares of common stock of EVERTEC, Inc.



TABLE OF CONTENTS
 


















All reports we file with the Securities and Exchange Commission ("SEC") are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC’s website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.evertecinc.com as soon as reasonably practicable after filing such material with the SEC.



FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of, and subject to the protection of, the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. Among the factors that significantly impact our business and could impact our business in the future are:

our reliance on our relationship with Popular, Inc. (“Popular”) for a significant portion of our revenues pursuant to our Master Services Agreement ("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 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;
operating an international business in Latin America and the Caribbean, in jurisdictions with potential political and economic instability;
our ability to protect our intellectual property rights against infringement and to defend ourselves against claims of infringement brought by third parties;
our ability to comply with U.S. federal, state, local and foreign regulatory requirements;
evolving industry standards and adverse changes in global economic, political and other conditions;
our 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;
the possibility that we could lose our preferential tax rate in Puerto Rico;
the possibility of future catastrophic hurricanes, earthquakes and other potential natural 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 continued impact of the COVID-19 pandemic and measures taken in response to the outbreak, on our resources, net income and liquidity due to current and future disruptions in operations as well as the macroeconomic instability caused by the 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 factors, including those set forth under “Item 1A. Risk Factors,” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report. These forward-looking statements speak only as of the date of this Report, and we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.







EVERTEC, Inc. Unaudited Condensed Consolidated Balance Sheets
(In thousands, except for share information)

March 31, 2021December 31, 2020
Assets
Current Assets:
Cash and cash equivalents$156,363 $202,649 
Restricted cash19,059 18,456 
Accounts receivable, net99,737 95,727 
Prepaid expenses and other assets44,573 42,214 
Total current assets319,732 359,046 
Debt securities available-for-sale, at fair value2,968 
Investment in equity investee12,867 12,835 
Property and equipment, net42,146 43,538 
Operating lease right-of-use asset25,604 27,538 
Goodwill396,298 397,670 
Other intangible assets, net229,972 219,909 
Deferred tax asset5,671 5,730 
Net investment in leases255 301 
Other long-term assets5,136 6,012 
Total assets$1,040,649 $1,072,579 
Liabilities and stockholders’ equity
Current Liabilities:
Accrued liabilities$56,600 $58,033 
Accounts payable26,998 43,348 
Contract liability25,319 24,958 
Income tax payable6,547 6,573 
Current portion of long-term debt15,625 14,250 
Operating lease payable5,491 5,830 
Total current liabilities136,580 152,992 
Long-term debt458,738 481,041 
Deferred tax liability2,151 2,748 
Contract liability - long term31,798 31,336 
Operating lease liability - long-term20,884 22,402 
Derivative liability21,012 25,578 
Other long-term liabilities13,479 14,053 
Total liabilities684,642 730,150 
Commitments and contingencies (Note 14)00
Stockholders’ equity
Preferred stock, par value $0.01; 2,000,000 shares authorized; NaN issued
Common stock, par value $0.01; 206,000,000 shares authorized; 72,166,443 shares issued and outstanding as of March 31, 2021 (December 31, 2020 - 72,137,678)721 721 
Additional paid-in capital5,340 
Accumulated earnings397,556 379,934 
Accumulated other comprehensive loss, net of tax(46,678)(48,254)
Total EVERTEC, Inc. stockholders’ equity351,599 337,741 
Non-controlling interest4,408 4,688 
Total equity356,007 342,429 
Total liabilities and equity$1,040,649 $1,072,579 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1

EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share information)
 

 Three months ended March 31,
 20212020
  
Revenues (affiliates Note 15)$139,528 $121,942 
Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization59,804 54,067 
Selling, general and administrative expenses16,102 17,317 
Depreciation and amortization18,623 17,795 
Total operating costs and expenses94,529 89,179 
Income from operations44,999 32,763 
Non-operating income (expenses)
Interest income389 363 
Interest expense(5,906)(6,779)
Earnings of equity method investment502 338 
Other income328 108 
Total non-operating expenses(4,687)(5,970)
Income before income taxes40,312 26,793 
Income tax expense4,708 4,518 
Net income35,604 22,275 
Less: Net income attributable to non-controlling interest101 64 
Net income attributable to EVERTEC, Inc.’s common stockholders35,503 22,211 
Other comprehensive (loss) income, net of tax of $423 and $1,085
Foreign currency translation adjustments(2,613)(8,305)
Gain (loss) on cash flow hedges4,189 (11,859)
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders$37,079 $2,047 
Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders$0.49 $0.31 
Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders$0.49 $0.30 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


2

EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
(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, 202072,137,678 $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 delivered411,739 (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, 202172,166,443 $721 $$397,556 $(46,678)$4,408 $356,007 
Number of
Shares of
Common
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Earnings
Accumulated 
Other
Comprehensive
Loss
Non-Controlling
Interest
Total
Stockholders’
Equity
Balance at December 31, 201972,000,261 $720 $$296,476 $(30,009)$4,436 $271,623 
Share-based compensation recognized— — 3,483 — — — 3,483 
Repurchase of common stock(336,022)(3)(775)(6,522)— — (7,300)
Restricted stock units delivered201,066 (2,708)— — — (2,706)
Net income— — — 22,211 — 64 22,275 
Cash dividends declared on common stock, $0.05 per share— — — (3,600)— — (3,600)
Other comprehensive loss— — — — (20,164)(853)(21,017)
Cumulative adjustment from the implementation of Current Expected Credit Loss model— — — (74)— — (74)
Balance at March 31, 202071,865,305 $719 $$308,491 $(50,173)$3,647 $262,684 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3

EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands) 
 Three months ended March 31,
 20212020
Cash flows from operating activities
Net income$35,604 $22,275 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization18,623 17,795 
Amortization of debt issue costs and accretion of discount569 621 
Operating lease amortization1,492 1,173 
(Release) provision for expected credit losses and sundry losses(184)104 
Deferred tax benefit(890)(1,080)
Share-based compensation3,380 3,483 
Loss on disposition of property and equipment and impairment of intangible1,042 81 
Earnings of equity method investment(502)(338)
Decrease (increase) in assets:
Accounts receivable, net(4,048)11,729 
Prepaid expenses and other assets(2,539)(1,836)
Other long-term assets833 (2,477)
(Decrease) increase in liabilities:
Accrued liabilities and accounts payable(18,457)(20,662)
Income tax payable82 3,307 
Contract liability1,185 1,075 
Operating lease liabilities(1,611)(1,409)
Other long-term liabilities167 84 
Total adjustments(858)11,650 
Net cash provided by operating activities34,746 33,925 
Cash flows from investing activities
Additions to software(11,971)(6,055)
Acquisition of customer relationship(14,750)
Property and equipment acquired(4,724)(3,357)
Acquisition of available-for-sale debt securities(2,968)
Net cash used in investing activities(34,413)(9,412)
Cash flows from financing activities
Statutory withholding taxes paid on share-based compensation(8,728)(2,706)
Repayment of short-term borrowings for purchase of equipment and software(758)(792)
Dividends paid(3,605)
Repurchase of common stock(14,268)(7,300)
Repayment of long-term debt(21,357)(20,560)
Net cash used in financing activities(48,716)(31,358)
Effect of foreign exchange rate on cash, cash equivalents and restricted cash2,700 828 
Net decrease in cash, cash equivalents and restricted cash(45,683)(6,017)
Cash, cash equivalents and restricted cash at beginning of the period221,105 131,121 
Cash, cash equivalents and restricted cash at end of the period$175,422 $125,104 
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents$156,363 $103,521 
Restricted cash19,059 21,583 
Cash, cash equivalents and restricted cash$175,422 $125,104 
Supplemental disclosure of cash flow information:
Cash paid for interest$5,982 $6,372 
Cash paid for income taxes5,621 2,083 
Supplemental disclosure of non-cash activities:
Payable due to vendor related to equipment and software acquired$1,260 $1,482 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

Notes to Unaudited Condensed Consolidated Financial Statements


 
5

Note 1 – The Company and Basis of Presentation

The Company

EVERTEC, Inc. and its subsidiaries (collectively the “Company,” or “EVERTEC”) is a leading full-service transaction-processing business in Puerto Rico, the Caribbean and Latin America. The Company is based in Puerto Rico and provides a broad range of merchant acquiring, payment 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 in Latin America. EVERTEC manages a system of electronic payment networks and offers a comprehensive suite of services for core bank, cash processing and fulfillment in Puerto 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.

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, 2020, included in the Company’s 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.

Note 2 – Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued updated guidance for Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles set out in ASC Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. The adoption of these amendments did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Accounting Pronouncements Issued Prior to 2021 and Not Yet Adopted

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 adoption of this guidance will not have an impact on the Company's unaudited condensed consolidated financial statements.




6

Note 3 – Debt Securities

Accounting 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 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 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.

Quarterly, for debt securities in an unrealized loss position that the 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 credit losses, limited to the amount by which the fair value is less than the amortized cost basis. If the Company determines that the decline in value is related to factors other than credit, the Company recognizes the impairment through OCI.

Debt securities were purchased close to the final trading day of the quarter ended March 31, 2021 and are held by a trust in the Costa Rica National Bank as a collateral requirement for 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 OCI, estimated fair value, and weighted average yield of debt securities available-for-sale by contractual maturity as of March 31, 2021 were as follows:

 March 31, 2021
(In thousands)Gross unrealized
Amortized costGainsLossesFair Value
Costa Rica Government Obligations
After 1 to 5 years$2,968 $2,968 

No debt securities were sold during the quarter ended March 31, 2021. A provision for credit losses was not required for the period presented above. Refer to Note 7 for disclosure requirements related to the fair value hierarchy.

Note 4 – Property and Equipment, net

Property and equipment, net consists of the following:
(In thousands)Useful life
in years
March 31, 2021December 31, 2020
Buildings30$1,424 $1,437 
Data processing equipment3 - 5125,942 124,897 
Furniture and equipment3 - 206,840 6,691 
Leasehold improvements5 -103,116 3,098 
137,322 136,123 
Less - accumulated depreciation and amortization(96,417)(93,826)
Depreciable assets, net40,905 42,297 
Land1,241 1,241 
Property and equipment, net$42,146 $43,538 

Depreciation and amortization expense related to property and equipment for three months ended March 31, 2021 amounted to $4.4 million compared to $4.2 million for the corresponding period in 2020.

During the three months ended March 31, 2021, the Company recorded a loss on the disposition of damaged POS devices amounting to $0.4 million through cost of revenues.

Note 5 – Goodwill and Other Intangible Assets
7


The changes in the carrying amount of goodwill, allocated by operating segments, were as follows (see Note 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(1,372)(1,372)
Balance at March 31, 2021$160,972 $51,382 $138,121 $45,823 $396,298 

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 impairment losses were recognized as of March 31, 2021 or 2020.

The carrying amount of other intangible assets at March 31, 2021 and December 31, 2020 was as follows:
  March 31, 2021
(In thousands)Useful life in yearsGross
amount
Accumulated
amortization
Net carrying
amount
Customer relationships8 - 14$358,413 $(252,583)$105,830 
Trademarks2 - 1542,003 (35,770)6,233 
Software packages3 - 10299,068 (198,121)100,947 
Non-compete agreement1556,539 (39,577)16,962 
Other intangible assets, net$756,023 $(526,051)$229,972 
  December 31, 2020
(Dollar amounts in thousands)Useful life in years Gross
amount
Accumulated
amortization
Net carrying
amount
Customer relationships8 - 14$343,981 $(246,088)$97,893 
Trademarks2 - 1542,036 (35,467)6,569 
Software packages3 - 10289,205 (191,662)97,543 
Non-compete agreement1556,539 (38,635)17,904 
Other intangible assets, net$731,761 $(511,852)$219,909 

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 months ended March 31, 2021 amounted to $14.2 million compared to $13.6 million for the corresponding period in 2020. During the three month period ended March 31, 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 March 31, 2021 for the next five years is as follows:
(Dollar amounts in thousands)
Remaining 2021$41,040 
202248,467 
202343,316 
202432,584 
202511,299 

8

Note 6 – Debt and Short-Term Borrowings

Total debt at March 31, 2021 and December 31, 2020 follows:
(In thousands)March 31, 2021December 31, 2020
2023 Term A Loan bearing interest at a variable interest rate (LIBOR plus applicable margin(1)(2))
$178,804 $188,788 
2024 Term B Loan bearing interest at a variable interest rate (LIBOR plus applicable margin(1)(3))
295,559 306,503 
Note payable due January 1, 2022(1)
703 1,443 
Total debt$475,066 $496,734 
 
(1)Net of unaccreted discount and unamortized debt issue costs, as applicable.
(2)Applicable margin of 1.75% at March 31, 2021 and December 31, 2020.
(3)Subject to a minimum rate ("LIBOR floor") of 0% plus applicable margin of 3.50% at March 31, 2021 and December 31, 2020.

Secured Credit Facilities

On 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 years ended December 31, 2020 and 2019, respectively.

The unpaid principal balance at March 31, 2021 of the 2023 Term A Loan and the 2024 Term B Loan was $179.9 million and $298.3 million, respectively. The additional borrowing capacity under our Revolving Facility at March 31, 2021 was $117.0 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.

Notes Payable

In December 2019, EVERTEC Group entered into 2 non-interest bearing financing agreements amounting to $2.4 million to purchase software and maintenance. As of March 31, 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 March 31, 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 AgreementEffective date  Maturity Date  Notional Amount  Variable Rate  Fixed Rate
2018 SwapApril 2020November 2024$250 million1-month LIBOR2.89%

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

As of March 31, 2021 and December 31, 2020, the carrying amount of the derivative included on the Company's unaudited condensed consolidated balance sheets was $21.0 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.
9


During the three months ended March 31, 2021 and 2020, the Company reclassified losses of $1.7 million and $0.2 million, respectively, from accumulated other comprehensive loss into interest expense. Based on current LIBOR rates, the Company expects to reclassify losses of $6.9 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 classifying as a Level 2 asset within the fair value hierarchy. The fair value of debt securities at March 31, 2021 was $3.0 million.

Derivatives Instruments

The fair value of the Company's interest rate swap is estimated using Level 2 inputs under the fair value hierarchy. This derivative was in a liability position with a balance of $21.0 million and $25.6 million as of March 31, 2021 and December 31, 2020, respectively.

The following table presents the carrying value, as applicable, and estimated fair value for financial instruments at March 31, 2021 and December 31, 2020:
 March 31, 2021December 31, 2020
(In thousands)Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Financial assets:
Costa Rica government obligations$2,968 $2,968 $$
Financial liabilities:
Interest rate swap21,012 21,012 25,578 25,578 
2023 Term A Loan178,804 177,840 188,788 186,678 
2024 Term B Loan295,559 297,163 306,503 308,339 

The fair values of the term loans at March 31, 2021 and December 31, 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. 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 in 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 three months ended March 31, 2021: 
(In thousands)Foreign Currency
Translation
Adjustments
Cash Flow HedgesTotal
Balance - December 31, 2020, net of tax$(24,842)$(23,412)$(48,254)
Other comprehensive (loss) income before reclassifications(2,613)2,463 (150)
Effective portion reclassified to net income1,726 1,726 
Balance - March 31, 2021, net of tax$(27,455)$(19,223)$(46,678)

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Note 9 – Share-based Compensation

Long-term Incentive Plan ("LTIP")

During the three months ended March 31, 2019, 2020 and 2021, the Compensation Committee of the Company's Board of Directors ("Board") approved grants of restricted stock units (“RSUs”) to executives and certain employees pursuant to the 2019 LTIP, 2020 LTIP and 2021 LTIP, respectively, all under the terms of the Company's 2013 Equity Incentive Plan. Under the LTIPs, the Company granted RSUs to eligible participants as time-based awards and/or performance-based awards.

The vesting of the RSUs is dependent upon service 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 provides services to the Company through 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 22 of each year for the 2019 LTIP, 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 2019 LTIP, 2020 LTIP, and 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 and will vest on February 22, 2022 for the 2019 LTIP, 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 three months ended March 31, 2021:
Nonvested restricted shares and RSUsSharesWeighted-average
grant date fair value
Nonvested at December 31, 20201,093,515 $27.88 
Granted659,598 31.10 
Vested(647,491)20.49 
Forfeited(293)22.90 
Nonvested at March 31, 20211,105,329 $34.14 

For the three months ended March 31, 2021, the Company recognized $3.4 million of share-based compensation expense, compared with $3.5 million for the corresponding period in 2020.

As of March 31, 2021, the maximum unrecognized cost for restricted stock and RSUs was $29.4 million. The cost is expected to be recognized over a weighted average period of 2.3 years.


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Note 10 – Revenues

Disaggregation of Revenue

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

In the following tables, revenue for each segment, excluding intersegment revenues, is disaggregated by timing of revenue recognition for the periods indicated.
Three months ended March 31, 2021
(In thousands)Payment Services - Puerto Rico & CaribbeanPayment Services - Latin AmericaMerchant Acquiring, netBusiness SolutionsTotal
Timing of revenue recognition
Products and services transferred at a point in time$78 $676 $$2,498 $3,252 
Products and services transferred over time24,782 22,621 30,867 58,006 136,276 
$24,860 $23,297 $30,867 $60,504 $139,528 

Three months ended March 31, 2020
(In thousands)Payment Services - Puerto Rico & CaribbeanPayment Services - Latin AmericaMerchant Acquiring, netBusiness SolutionsTotal
Timing of revenue recognition
Products and services transferred at a point in time$$431 $$297 $733 
Products and services transferred over time20,633 19,809 25,121 55,646 121,209 
$20,638 $20,240 $25,121 $55,943 $121,942 

Contract Balances

The following table provides information about contract assets from contracts with customers.
(In thousands)March 31, 2021December 31, 2020
Balance at beginning of period$2,796 $1,191 
Services transferred to customers1,140 3,934 
Transfers to accounts receivable(1,318)(2,329)
Balance at end of period$2,618 $2,796 

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

Accounts receivable, net at March 31, 2021 amounted to $99.7 million. Contract liability and contract liability - long term at March 31, 2021 amounted to $25.3 million and $31.8 million, respectively, and may arise when consideration is received or due in advance from customers prior to performance. The contract liability is mainly comprised of upfront fees for implementation or set up activities, including fees charged in pre-production periods in connection with hosting services. Contract liabilities may also arise when consideration is received or due in advance from customers prior to performance. During the three months ended March 31, 2021, the Company recognized revenue of $8.2 million that was included in the contract liability at
12

December 31, 2020. During the three months ended March 31, 2020, the Company recognized revenue of $5.2 million that was included in the contract liability at December 31, 2019.

Transaction price allocated to the remaining performance obligations

The estimated aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially satisfied at March 31, 2021 is $317.1 million. This amount primarily consists of professional service fees for implementation or set up activities related to managed services and maintenance services, typically recognized over the life of the contract, which varies from 2 to 5 years. It also includes professional service fees for customizations or development of on-premise licensing agreements, which are recognized over time based on inputs relative to the total expected inputs to satisfy a performance obligation.

Note 11 – Current Expected Credit Losses

Allowance for Current Expected Credit Losses

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

Customers in the same geographical location share similar risk characteristics associated with the macroeconomic environment of their country.
The Company has two main industry sectors: private and governmental. The private pool is comprised mainly of leading financial institutions, merchants and corporations, while the governmental pool is comprised of government agencies. The governmental customers possess different risk characteristics than private customers because although all invoices are due 30 days after issuance, governmental customers usually pay within 60 to 90 days after issuance (i.e., approximately 30 to 60 more days than private customers).
The expected credit loss rate is likely to increase as receivables move to older aging buckets. The Company used the following aging categories to estimate the risk of delinquency status: (i) 0 days past due; (ii) 1-30 days past due; (iii) 31-60 days past due; (iv) 61-90 days past due; and (v) over 90 days past due.

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

Rollforward of the Allowance for Expected Current Credit Losses

The following table provides information about the allowance for expected current credit losses on trade receivables.
(In thousands)March 31, 2021December 31, 2020
Balance at beginning of period$2,401 $3,460 
Current period (release) provision for expected credit losses(27)832 
Write-offs(74)(1,894)
Recoveries of amounts previously written-off
Balance at end of period$2,300 $2,401 

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

Impairment losses on trade receivables are presented as net impairment losses within cost of revenue, exclusive of depreciation and amortization in the unaudited condensed consolidated statements of income and comprehensive income. Subsequent
13

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 months ended March 31, 2021 and 2020, respectively, consisted of the following:
 Three months ended March 31,
(In thousands)20212020
Current tax provision$5,598 $5,598 
Deferred tax benefit(890)(1,080)
Income tax expense$4,708 $4,518 

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 months ended March 31, 2021 and 2020, and its segregation based on location of operations:
 Three months ended March 31,
(In thousands)20212020
Current tax provision
Puerto Rico$1,604 $1,679 
United States30 155 
Foreign countries3,964 3,764 
Total current tax provision$5,598 $5,598 
Deferred tax benefit
Puerto Rico$(294)$(88)
United States(429)(25)
Foreign countries(167)(967)
Total deferred tax benefit$(890)$(1,080)

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 March 31, 2021, the Company has $84.3 million of unremitted earnings from foreign 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 March 31, 2021, the gross deferred tax asset amounted to $21.8 million and the gross deferred tax liability amounted to $17.3 million, compared to $22.0 million and $19.0 million, respectively, as of December 31, 2020. As of March 31, 2021, there is a valuation allowance against the gross deferred tax asset of approximately $1.0 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:
14

 Three months ended March 31,
(In thousands)20212020
Computed income tax at statutory rates$15,117 $10,047 
Differences in tax rates due to multiple jurisdictions560 256 
Effect of income subject to tax-exemption grant(10,332)(6,970)
Unrecognized tax (benefit) expense(123)101 
Excess tax benefits on share-based compensation(1,028)(213)
Other, net514 1,297 
Income tax expense$4,708 $4,518 

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 March 31,
(In thousands, except per share information)20212020
Net income attributable to EVERTEC, Inc.’s common stockholders$35,503 $22,211 
Less: non-forfeitable dividends on restricted stock
Net income available to EVERTEC, Inc.’s common shareholders$35,503 $22,205 
Weighted average common shares outstanding72,150,529 72,012,648 
Weighted average potential dilutive common shares (1)
798,872 1,280,357 
Weighted average common shares outstanding - assuming dilution72,949,401 73,293,005 
Net income per common share - basic$0.49 $0.31 
Net income per common share - diluted$0.49 $0.30 
 
(1)Potential common shares consist of common stock issuable under RSUs awards using the treasury stock method.

On February 18, 2021, the Company's Board declared quarterly cash dividends of $0.05 per share of common stock, which was paid on March 26, 2021, to stockholders of record as of the close of business on March 1, 2021.

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.

Note 15 – Related Party Transactions

The following table presents the Company’s transactions with related parties for the three months ended March 31, 2021 and 2020:
 Three months ended March 31,
(In thousands)20212020
Total revenues (1)(2)
$60,369 $54,572 
Cost of revenues$1,049 $618 
Operating lease cost and other fees$1,915 $1,981 
Interest earned from affiliate
Interest income$108 $89 
15

(1)Popular revenues as a percentage of total revenues were 44% and 45%, respectively, for each of the periods presented above.
(2)Includes revenues generated from investee accounted for under the equity method of $0.1 million and $0.3 million, respectively, for each of the periods presented above.

As of March 31, 2021 and December 31, 2020, EVERTEC had the following balances arising from transactions with related parties:
(In thousands)March 31, 2021December 31, 2020
Cash and restricted cash deposits in affiliated bank$78,712 $126,189 
Other due to/from affiliate
Accounts receivable$35,324 $28,419 
Prepaid expenses and other assets$4,125 $4,678 
Operating lease right-of-use assets$16,196 $17,099 
Accounts payable$2,427 $4,607 
Contract liabilities$36,802 $35,807 
Operating lease liabilities$16,633 $17,781 


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.

16

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 March 31, 2021
(In thousands)Payment
Services -
Puerto Rico & Caribbean
Payment
Services -
Latin America
Merchant
Acquiring, net
Business
Solutions
Corporate and Other (1)
Total
Revenues$36,264 $25,014 $30,867 $60,611 $(13,228)$139,528 
Operating costs and expenses20,489 19,846 16,466 36,689 1,039 94,529 
Depreciation and amortization3,942 2,934 654 4,794 6,299 18,623 
Non-operating income (expenses)185 1,108 231 553 (1,247)830 
EBITDA19,902 9,210 15,286 29,269 (9,215)64,452 
Compensation and benefits (2)
241 809 231 363 1,860 3,504 
Transaction, refinancing and other fees (3)
660 273 933 
Adjusted EBITDA$20,803 $10,019 $15,517 $29,632 $(7,082)$68,889 
17

(1)Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations.  Intersegment revenue eliminations predominantly reflect the $9.7 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring, intercompany software developments and transaction processing of $2.3 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean, and transaction processing and monitoring fees of $1.2 million from Payment Services - Puerto Rico & Caribbean to Payment Services - Latin America. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $3.5 million.
(2)Primarily represents share-based compensation.
(3)Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A and a software impairment charge.

Three months ended March 31, 2020
(In thousands)Payment
Services -
Puerto Rico & Caribbean
Payment
Services -
Latin America
Merchant
Acquiring, net
Business
Solutions
Corporate and Other (1)
Total
Revenues$29,887 $21,640 $25,121 $55,943 $(10,649)$121,942 
Operating costs and expenses17,406 17,651 14,706 33,617 5,799 89,179 
Depreciation and amortization3,249 2,757 499 4,296 6,994 17,795 
Non-operating income (expenses)113 754 154 387 (962)446 
EBITDA15,843 7,500 11,068 27,009 (10,416)51,004 
Compensation and benefits (2)
231 742 216 436 1,875 3,500 
Transaction, refinancing and other fees (3)
1,786 1,786 
Adjusted EBITDA$16,074 $8,242 $11,284 $27,445 $(6,755)$56,290 
(1)Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations.  Intersegment revenue eliminations predominantly reflect the $9.0 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $1.6 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $5.1 million.
(2)Primarily represents share-based compensation.
(3)Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A.


The reconciliation of EBITDA to consolidated net income is as follows:
 Three months ended March 31,
(In thousands)20212020
Total EBITDA$64,452 $51,004 
Less:
Income tax expense4,708 4,518 
Interest expense, net5,517 6,416 
Depreciation and amortization18,623 17,795 
Net income$35,604 $22,275 


Note 17 – Subsequent Events

On April 22, 2021, the Board declared a regular quarterly cash dividend of $0.05 per share on the Company’s outstanding shares of common stock. The dividend will be paid on June 4, 2021 to stockholders of record as of the close of business on May 3, 2021. The Board anticipates declaring this dividend in future quarters on a regular basis; however future declarations of dividends are subject to the Board’s approval and may be adjusted as business needs or market conditions change.
18

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 months ended March 31, 2021 and 2020 and (ii) the financial condition as of March 31, 2021. You should read the following discussion and analysis in conjunction with the audited consolidated financial statements (the “Audited Consolidated Financial Statements”) and related notes for the fiscal year ended December 31, 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, 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 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.

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
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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.

Relationship with Popular

On September 30, 2010, EVERTEC Group entered into a 15-year 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 Master Services Agreement.

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.

Results of Operations

Comparison of the three months ended March 31, 2021 and 2020
Three months ended March 31,
In thousands20212020Variance
Revenues$139,528 $121,942 $17,586 14 %
Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization59,804 54,067 5,737 11 %
Selling, general and administrative expenses16,102 17,317 (1,215)(7)%
Depreciation and amortization18,623 17,795 828 %
Total operating costs and expenses94,529 89,179 5,350 %
Income from operations$44,999 $32,763 $12,236 37 %


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Revenues

Total revenues for the three months ended March 31, 2021 increased by $17.6 million or 14% to $139.5 million when compared to the same period in the prior year, as revenue in the prior year period was impacted by the beginning of the pandemic. Revenue increased across all of the Company's segments, reflecting sales volume growth with a high average ticket, as well as continued growth in the Company's digital solutions, such as ATH Movil, in Puerto Rico, coupled with the impact of revenues generated from new client contracts in Latin America, as well as, hardware and software sales in the quarter amounting to $1 million.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2021 amounted to $59.8 million, an increase of $5.7 million or 11% when compared to the same period in the prior year. The increase during the three months is primarily driven by an increase in salaries and benefits, mainly due to increased headcount, coupled with an increase in cloud services. Additionally, cost of sales increased primarily due to hardware and software sales completed in the quarter.

Selling, General and Administrative

Selling, general and administrative expenses for the three months ended March 31, 2021 decreased by $1.2 million or 7% when compared to the same period in the prior year. The decrease is almost entirely related to a decrease in professional services, as prior year includes expenses incurred for corporate transactions.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended March 31, 2021 amounted to $18.6 million, an increase of $0.8 million or 5% when compared to the same period in the prior year. Increased expense during the three months is driven by an increase in software amortization driven by key projects that went into production in the prior year as well as increased capital expenditures.

Non-Operating Expenses
Three months ended March 31,
In thousands20212020Variance
Interest income$389 $363 $26 %
Interest expense(5,906)(6,779)873 13 %
Earnings of equity method investment502 338 164 49 %
Other income328 108 220 204 %
Total non-operating expenses$(4,687)$(5,970)$1,283 21 %

Non-operating expenses for the three months ended March 31, 2021 decreased by $1.3 million to $4.7 million when compared to the same period in the prior year. The decrease is mainly related to a $0.9 million decrease in interest expense, resulting from a reduction in interest rates and a lower outstanding balance in connection with debt repayments made during the prior year, coupled with a $0.2 million increase in other income driven by the favorable impact of foreign currency exchange.

Income Tax Expense
Three months ended March 31,
In thousands20212020Variance
Income tax expense$4,708 $4,518 $190 %

Income tax expense for the three months ended March 31, 2021 amounted to $4.7 million, an increase of $0.2 million when compared to the same period in the prior year. The effective tax rate for the period was 11.7%, compared with 16.9% in the 2020 period. The decrease in the effective tax rate primarily reflects the impact of COVID-19 on the mix of business in the prior year and the impact of additional net discrete tax items recorded in the current year quarter.
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Segment Results of Operations

The Company operates in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America (collectively "Payment Services segments"), Merchant Acquiring, and Business Solutions.

The Payment Services - Puerto Rico & Caribbean segment revenues are comprised of revenues related to providing access to the ATH debit network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and point of sale ("POS") transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions), ATH Movil (person-to-person and person-to-merchant digital transactions) and EBT (which principally consist of services to the government of Puerto Rico 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 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,
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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 March 31, 2021 and 2020

Payment Services - Puerto Rico & Caribbean
Three months ended March 31,
In thousands20212020
Revenues$36,264$29,887
Adjusted EBITDA20,80316,074
Adjusted EBITDA Margin57.4 %53.8 %

Payment Services - Puerto Rico & Caribbean segment revenues for the three months ended March 31, 2021 increased by $6.4 million to $36.3 million 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. The increase in revenues was primarily driven by an incremental $2.5 million in revenue recognized from ATH Movil and ATH Movil Business as consumer preference continues to shift to digital payment products, as well as an increase in transaction processing and monitoring revenue recognized for services provided from the Payment Services - Puerto Rico & Caribbean segment to the Payment Services - Latin America Segment. Adjusted EBITDA increased by $4.7 million to $20.8 million driven by the increase in revenues, as well as a decrease in cost of sales, partially offset by higher operating expenses driven by higher equipment expenses.

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Payment Services - Latin America
Three months ended March 31,
In thousands20212020
Revenues$25,014$21,640
Adjusted EBITDA10,0198,242
Adjusted EBITDA Margin40.1 %38.1 %

Payment Services - Latin America segment revenues for the three months ended March 31, 2021 increased by $3.4 million to $25.0 million driven mainly by revenues generated by new client contracts, increased revenue for services related to card products and increased volume from PlacetoPay, partially offset by a decrease in ATM volumes coupled with client attrition. Adjusted EBITDA increased by $1.8 million when compared to the 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 to the Payment Services - Latin America Segment.

Merchant Acquiring
Three months ended March 31,
In thousands20212020
Revenues$30,867$25,121
Adjusted EBITDA15,51711,284
Adjusted EBITDA Margin50.3 %44.9 %

Merchant Acquiring segment revenues for the three months ended March 31, 2021 increased by $5.7 million to $30.9 million as the prior year quarter was impacted by lower sales volume and a decline in spread as a result of the beginning of the COVID-19 pandemic. The current year quarter reflected an increase in sales volume and an increase in spread partially due to the higher average ticket which continues to benefit from federal stimulus packages. Additionally, the current year quarter benefited slightly from the expanded relationship with FirstBank of Puerto Rico in connection with the acquisition of the customer relationship in the current year quarter. Adjusted EBITDA increased by $4.2 million driven by the increase in revenues, partially offset by an increase in operating expenses driven by the increased transaction volume.

Business Solutions
Three months ended March 31,
In thousands20212020
Revenues$60,611$55,943
Adjusted EBITDA29,63227,445
Adjusted EBITDA Margin48.9 %49.1 %

Business Solutions segment revenues for the three months ended March 31, 2021 increased by $4.7 million to $60.6 million as a result of an increase in IT consulting services revenue coupled with revenue recognized in the quarter for hardware and software sales. In addition, the current year quarter benefited from the shift to digital as mobile banking usage increases, resulting in an increase in core banking revenue. Adjusted EBITDA increased by $2.2 million to $29.6 million as a result of the increase in revenue, partially offset by an increase in costs of sales directly related to the hardware and software 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 $117.0 million was available for borrowing as of March 31, 2021. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.

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As of March 31, 2021, we had cash and cash equivalents of $156.4 million, of which $80.0 million resides in our subsidiaries located outside of Puerto Rico for purposes of (i) funding the respective subsidiary’s current business operations and (ii) funding potential future investment outside of Puerto Rico. 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.
 Three months ended March 31,
(In thousands)20212020
  
Cash provided by operating activities$34,746 $33,925 
Cash used in investing activities(34,413)(9,412)
Cash used in financing activities(48,716)(31,358)
Effect of foreign exchange rate on cash, cash equivalents and restricted cash2,700 828 
Increase in cash, cash equivalents and restricted cash$(45,683)$(6,017)

Net cash provided by operating activities for the three months ended March 31, 2021 was $34.7 million compared to $33.9 million for the same period in the prior year. The $0.8 million increase in cash provided by operating activities is primarily driven by the increase in net income, partially offset by a decrease in collections for accounts receivable.

Net cash used in investing activities for the three months ended March 31, 2021 was $34.4 million compared to $9.4 million for the same period in the prior year. The $25.0 million increase is primarily attributable to the acquisition of a $14.8 million customer relationship, an increase in additions to software of $5.9 million and the purchase of $3.0 million in available-for-sale debt securities during the quarter.

Net cash used in financing activities for the three months ended March 31, 2021 was $48.7 million compared to $31.4 million for the same period in the prior year. The $17.4 million increase was mainly attributed to an increase in cash used to repurchase common stock of $7.0 million, $6.0 million increase in withholding taxes paid on share-based compensation and cash dividends paid during the quarter amounting to $3.6 million.

Capital Resources

Our principal capital expenditures are for hardware and computer software (purchased and internally developed) and additions to property and equipment. We invested approximately $16.7 million and $9.4 million, respectively, during the three months ended March 31, 2021 and 2020. In addition, during the three month period ended March 31, 2021, the Company acquired a $14.8 million customer relationship as well as $3.0 million in available-for-sale debt securities. Generally, we fund capital expenditures with cash flow generated from operations and, if necessary, borrowings under our Revolving Facility.

Dividend Payments

On February 18, 2021, the Board declared quarterly cash dividends of $0.05 per share of common stock, which were paid on March 26, 2021, to stockholders of record as of the close of business on March 1, 2021.

On April 22, 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 June 4, 2021 to stockholders of record as of the close of business on
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May 3, 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 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 flows for the years ended December 31, 2020 and 2019.

The unpaid principal balance at March 31, 2021 of the 2023 Term A Loan and the 2024 Term B Loan was $179.9 million and $298.3 million, respectively. The additional borrowing capacity under our Revolving Facility at March 31, 2021 was $117.0 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.

Notes Payable

In December 2019, EVERTEC Group entered into two non-interest bearing financing agreements amounting to $2.4 million to purchase software and maintenance. As of March 31, 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 March 31, 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 AgreementEffective date  Maturity Date  Notional Amount  Variable Rate  Fixed Rate
2018 SwapApril 2020November 2024$250 million1-month LIBOR2.89%

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

As of March 31, 2021 and December 31, 2020, the carrying amount of the derivative included on the Company's unaudited condensed consolidated balance sheets was $21.0 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 7 for disclosure of losses recorded on cash flow hedging activities.

During the three months ended March 31, 2021 and 2020, the Company reclassified losses of $1.7 million and gains of $0.2 million, respectively, from accumulated other comprehensive loss into interest expense. Based on current LIBOR rates, the Company expects to reclassify losses of $6.9 million from accumulated other comprehensive loss into interest expense over the next 12 months.

The cash flow hedge is considered highly effective.

Covenant Compliance

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As of March 31, 2021, our secured leverage ratio was 1.68 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:
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Three months ended March 31,Twelve months ended
(In thousands, except per share information)20212020March 31, 2021
Net income$35,604 $22,275 $118,180 
Income tax expense4,708 4,518 19,192 
Interest expense, net5,517 6,416 22,673 
Depreciation and amortization18,623 17,795 72,346 
EBITDA64,452 51,004 232,391 
Equity income (1)
(502)(338)(1,300)
Compensation and benefits (2)
3,504 3,500 14,387 
Transaction, refinancing and other fees (3)
1,435 2,124 7,588 
Adjusted EBITDA68,889 56,290 253,066 
Operating depreciation and amortization (4)
(10,882)(9,477)(40,489)
Cash interest expense, net (5)
(5,076)(6,010)(21,351)
Income tax expense (6)
(7,756)(7,178)(27,770)
Non-controlling interest (7)
(143)(92)(597)
Adjusted net income$45,032 $33,533 $162,859 
Net income per common share (GAAP):
Diluted$0.49 $0.30 
Adjusted Earnings per common share (Non-GAAP):
Diluted$0.62 $0.46 
Shares used in computing adjusted earnings per common share:
Diluted72,949,401 73,293,005 
1)Represents the elimination of non-cash equity earnings from our 19.99% equity investment in Dominican Republic, Consorcio de Tarjetas Dominicanas S.A. ("CONTADO"). 
2)Primarily represents share-based compensation.
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 and a software 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 March 31, 2021, 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.

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Effect of Inflation

While inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have an impact on our operating results, inflation has had minimal net effect on our operating results during the last three years as overall inflation has been offset by increased selling process and cost reduction actions. We cannot assure you, however, that we will not be affected by general inflation in the future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 March 31, 2021, under the secured credit facilities, would increase our annual interest expense by approximately $2.8 million. The impact on future interest expense as a result of future changes in interest rates will depend largely on the gross amount of our borrowings at that time.

As of March 31, 2021, the Company has an interest rate swap agreement, entered into December 2018, which converts a portion of our outstanding variable rate debt to fixed.

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

See Note 6 of the Unaudited Condensed Consolidated Financial Statements for additional information related to the 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 March 31, 2021, the Company had $27.5 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss compared with an unfavorable foreign currency translation adjustment of $24.8 million at December 31, 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 March 31, 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 March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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 factors under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020.

The risks described in our Annual Report on Form 10-K for the year ended December 31, 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

The following table summarizes repurchases of the Company’s common stock in the three months period ended March 31, 2021:

PeriodTotal number of shares purchasedAverage price paid per share
Total number of shares purchased as part of a publicly announced program (1)
Approximate dollar value of shares that may yet be purchased under the program
1/1/2021-1/31/20218,700 35.7778,700 
2/1/2021-2/28/202126,820 36.51926,820 
3/1/2021-3/31/2021347,454 37.349347,454 
382,974 37.255382,974 85,732,181 

(1) On December 17, 2020, the Company announced that its Board approved an increase and extension to the current stock
repurchase program, authorizing the purchase of up to $100 million of the Company’s common stock and extended the
expiration to December 31, 2023.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.
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Item 6. Exhibits
 
*    Filed herewith.
**    Furnished herewith.
+     This exhibit is a management contract or a compensatory plan or arrangement.

 


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
EVERTEC, Inc.
(Registrant)
Date: April 30, 2021By:/s/ Morgan Schuessler
Morgan Schuessler
Chief Executive Officer
Date: April 30, 2021By:/s/ Joaquin A. Castrillo-Salgado
Joaquin A. Castrillo-Salgado
Chief Financial Officer (Principal Financial and Accounting Officer)

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