EVERTEC, INC.
10-Ks and 10-Qs
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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, 2022 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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | ||||||||||
| (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 class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
At April 22, 2022, there were 71,545,702 outstanding shares of common stock of EVERTEC, Inc.
TABLE OF CONTENTS
| Page | ||||||||
| Part I. FINANCIAL INFORMATION | ||||||||
| Item 1. | Financial Statements | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of, and subject to the protection of, the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various 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;
•the closing of the transactions contemplated by the Asset Purchase Agreement and related agreements with Popular and Banco Popular, pursuant to which we will sell certain assets that are currently used to provide services to Banco Popular;
•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 grant to Popular with respect to pricing or other key terms arising out of any disputes or in anticipation of the negotiation of the extension of the MSA, both in respect of the current term and any extension of the MSA;
•our dependence on our processing systems, technology infrastructure, security systems and fraudulent payment detection systems, as well as on our personnel and certain third parties with whom we do business, and the risks to our business if our systems are hacked or otherwise compromised;
•our ability to develop, install and adopt new software, technology and computing systems;
•a decreased client base due to consolidations and failures in the financial services industry;
•the credit risk of our merchant clients, for which we may also be liable;
•the continuing market position of the ATH network;
•a reduction in consumer confidence, whether as a result of a global economic downturn or otherwise, which leads to a decrease in consumer spending;
•our dependence on credit card associations, including any adverse changes in credit card association or network rules or fees;
•changes in the regulatory environment and changes in international, legal, tax, political, administrative or economic conditions;
•the geographical concentration of our business in Puerto Rico, including our business with the government of Puerto Rico and its instrumentalities, which are facing severe political and fiscal challenges;
•additional adverse changes in the general economic conditions in Puerto Rico, whether as a result of the government’s debt crisis or otherwise, including the continued migration of Puerto Ricans to the U.S. mainland, which could negatively affect our customer base, general consumer spending, our cost of operations and our ability to hire and retain qualified employees;
•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 secured credit facilities, as well as debt that could be incurred in the future;
•our ability to prevent a cybersecurity attack or breach to 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; and
•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.
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 “Part 1, Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2022, as updated in our subsequent filings with the SEC, and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report. These forward-looking statements speak only as of the date of this Report, and we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
WHERE YOU CAN FIND MORE INFORMATION
All reports we file with the 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 for download through our website at www.evertecinc.com as soon as reasonably practicable after filing such material with the SEC.
EVERTEC, Inc. Unaudited Condensed Consolidated Balance Sheets
(In thousands, except for share information)
| March 31, 2022 | December 31, 2021 | |||||||||||||
| Assets | ||||||||||||||
| Current Assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Accounts receivable, net | ||||||||||||||
| Prepaid expenses and other assets | ||||||||||||||
| Assets held-for-sale | ||||||||||||||
| Total current assets | ||||||||||||||
| Debt securities available-for-sale, at fair value | ||||||||||||||
| Investment in equity investee | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Operating lease right-of-use asset | ||||||||||||||
| Goodwill | ||||||||||||||
| Other intangible assets, net | ||||||||||||||
| Deferred tax asset | ||||||||||||||
| Net investment in leases | ||||||||||||||
| Other long-term assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and stockholders’ equity | ||||||||||||||
| Current Liabilities: | ||||||||||||||
| Accrued liabilities | $ | $ | ||||||||||||
| Accounts payable | ||||||||||||||
| Contract liability | ||||||||||||||
| Income tax payable | ||||||||||||||
| Current portion of long-term debt | ||||||||||||||
| Current portion of operating lease liability | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Deferred tax liability | ||||||||||||||
| Contract liability - long term | ||||||||||||||
| Operating lease liability - long-term | ||||||||||||||
| Derivative liability | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 14) | ||||||||||||||
| Stockholders’ equity | ||||||||||||||
Preferred stock, par value $ | ||||||||||||||
Common stock, par value $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated earnings | ||||||||||||||
| Accumulated other comprehensive loss, net of tax | ( | ( | ||||||||||||
| Total EVERTEC, Inc. stockholders’ equity | ||||||||||||||
| Non-controlling interest | ||||||||||||||
| Total equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
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, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Revenues (affiliates Note 15) | $ | $ | ||||||||||||
| Operating costs and expenses | ||||||||||||||
| Cost of revenues, exclusive of depreciation and amortization | ||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Total operating costs and expenses | ||||||||||||||
| Income from operations | ||||||||||||||
| Non-operating income (expenses) | ||||||||||||||
| Interest income | ||||||||||||||
| Interest expense | ( | ( | ||||||||||||
| Earnings of equity method investment | ||||||||||||||
| Other income, net | ||||||||||||||
| Total non-operating expenses | ( | ( | ||||||||||||
| Income before income taxes | ||||||||||||||
| Income tax expense | ||||||||||||||
| Net income | ||||||||||||||
| Less: Net (loss) income attributable to non-controlling interest | ( | |||||||||||||
| Net income attributable to EVERTEC, Inc.’s common stockholders | ||||||||||||||
Other comprehensive (loss) income, net of tax of $ | ||||||||||||||
| Foreign currency translation adjustments | ( | |||||||||||||
| Gain on cash flow hedges | ||||||||||||||
| Unrealized loss on change in fair value of debt securities available-for-sale | ( | |||||||||||||
| Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders | $ | $ | ||||||||||||
| Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders | $ | $ | ||||||||||||
| Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders | $ | $ | ||||||||||||
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, 2021 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
| Share-based compensation recognized | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Restricted stock units delivered | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock, $ | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
| Number of Shares of Common Stock | Common Stock | Additional Paid-in Capital | Accumulated Earnings | Accumulated Other Comprehensive Loss | Non-Controlling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
| Share-based compensation recognized | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Restricted stock units delivered | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock, $ | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
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, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash flows from operating activities | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Amortization of debt issue costs and accretion of discount | ||||||||||||||
| Operating lease amortization | ||||||||||||||
| (Release) provision for expected credit losses and sundry losses | ( | |||||||||||||
| Deferred tax benefit | ( | ( | ||||||||||||
| Share-based compensation | ||||||||||||||
| Loss on disposition of property and equipment and impairment of intangible | ||||||||||||||
| Earnings of equity method investment | ( | ( | ||||||||||||
| Decrease (increase) in assets: | ||||||||||||||
| Accounts receivable, net | ( | |||||||||||||
| Prepaid expenses and other assets | ( | ( | ||||||||||||
| Other long-term assets | ( | |||||||||||||
| (Decrease) increase in liabilities: | ||||||||||||||
| Accrued liabilities and accounts payable | ( | |||||||||||||
| Income tax payable | ||||||||||||||
| Contract liability | ||||||||||||||
| Operating lease liabilities | ( | |||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total adjustments | ( | |||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Cash flows from investing activities | ||||||||||||||
| Additions to software | ( | ( | ||||||||||||
| Acquisition of customer relationship | ( | |||||||||||||
| Property and equipment acquired | ( | ( | ||||||||||||
| Proceeds from sales of property and equipment | ||||||||||||||
| Acquisition of available-for-sale debt securities | ( | |||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities | ||||||||||||||
| Statutory withholding taxes paid on share-based compensation | ( | ( | ||||||||||||
| Repayment of short-term borrowings for purchase of equipment and software | ( | ( | ||||||||||||
| Dividends paid | ( | ( | ||||||||||||
| Repurchase of common stock | ( | ( | ||||||||||||
| Repayment of long-term debt | ( | ( | ||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| Effect of foreign exchange rate on cash, cash equivalents and restricted cash | ( | |||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | |||||||||||||
| Cash, cash equivalents and restricted cash at beginning of the period | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | $ | ||||||||||||
| Reconciliation of cash, cash equivalents and restricted cash | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||
| Cash paid for interest | $ | $ | ||||||||||||
| Cash paid for income taxes | ||||||||||||||
| Supplemental disclosure of non-cash activities: | ||||||||||||||
| Payable due to vendor related to equipment and software acquired | $ | $ | ||||||||||||
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
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, 2021, included in the Company’s 2021 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 – Held-for-Sale
On February 24, 2022, the Company entered into a definitive agreement with Banco Popular de Puerto Rico and its parent, Popular, to sell software and prepaid assets and transfer certain employees in connection with those assets (the "Disposal group"). As consideration for the sale of the Disposal Group, Popular will deliver Evertec stock held by Popular with an approximate value of $196.6 million (the "Popular Transaction"). The Popular Transaction is expected to close mid-year 2022, subject to customary closing conditions, and is expected to result in a gain.
Accounting Policy
An asset or a disposal group is classified as held for sale in the period in which the following criteria are met: (a) management commits to a plan to sell; (b) the asset or disposal group is available for sale in its present condition; (c) an active program to locate a buyer and other actions to complete the plan to sell have been initiated; (d) the sale of the asset or disposal group is probable within one year; (e) the asset or disposal group is being be actively marketed; and (f) it is unlikely that significant changes to the plan will be made or the plan will be withdrawn.
A disposal group is a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated, or if it is an operation within such a cash-generating unit.
Assets and disposal groups classified as held for sale are measured at the lower of carrying amount or fair value less costs to sell. Any excess of the carrying amount over the fair value less costs to sell is recognized as an impairment loss. Depreciation of assets that have been classified as held for sale is discontinued upon classification.
6
| March 31, 2022 | ||||||||
| (In thousands) | ||||||||
| Prepaid expenses and other assets | $ | |||||||
| Other intangible assets, net | ||||||||
| Goodwill | ||||||||
| Assets held-for-sale | $ | |||||||
Note 3 – Debt Securities
The amortized cost, gross unrealized gains and losses recorded in OCI and estimated fair value of debt securities available-for-sale by contractual maturity as of March 31, 2022 and December 31, 2021 were as follows:
| March 31, 2022 | ||||||||||||||||||||||||||
| (In thousands) | Gross unrealized | |||||||||||||||||||||||||
| Amortized cost | Gains | Losses | Fair Value | |||||||||||||||||||||||
| Costa Rica Government Obligations | ||||||||||||||||||||||||||
| After 1 to 5 years | $ | ( | $ | |||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| (In thousands) | Gross unrealized | |||||||||||||||||||||||||
| Amortized cost | Gains | Losses | Fair Value | |||||||||||||||||||||||
| Costa Rica Government Obligations | ||||||||||||||||||||||||||
| After 1 to 5 years | $ | $ | $ | $ | ||||||||||||||||||||||
Debt securities 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.
Note 4 – Property and Equipment, net
Property and equipment, net consists of the following:
| (In thousands) | Useful life in years | March 31, 2022 | December 31, 2021 | |||||||||||||||||
| Buildings | $ | $ | ||||||||||||||||||
| Data processing equipment | ||||||||||||||||||||
| Furniture and equipment | ||||||||||||||||||||
| Leasehold improvements | ||||||||||||||||||||
| Less - accumulated depreciation and amortization | ( | ( | ||||||||||||||||||
| Depreciable assets, net | ||||||||||||||||||||
| Land | ||||||||||||||||||||
| Property and equipment, net | $ | $ | ||||||||||||||||||
Depreciation and amortization expense related to property and equipment for three months ended March 31, 2022 amounted to $4.6 million compared to $4.4 million for the corresponding period in 2021.
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.
7
Note 5 – Goodwill and Other Intangible Assets
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, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Foreign currency translation adjustments | ||||||||||||||||||||||||||||||||
| Goodwill reclassified to held-for-sale | ( | ( | ||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
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 a qualitative analysis, the Company assesses whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount. In the quantitative analysis, the Company compares the estimated fair value of the reporting units to their carrying values, including goodwill. No
During the three months ended March 31, 2022, Goodwill of $5.8 million was reclassified to held-for-sale as part of the Popular Transaction, this commitment constitutes the sale of a business under ASC 805, refer to Note 2 – Held-for-Sale for further details.
The carrying amount of other intangible assets at March 31, 2022 and December 31, 2021 was as follows:
| March 31, 2022 | ||||||||||||||||||||||||||||||||
| (In thousands) | Useful life in years | Gross amount | Accumulated amortization | Assets reclassified to Held-for-Sale | Net carrying amount | |||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||
| Trademarks | ( | $ | ||||||||||||||||||||||||||||||
| Software packages | ( | ( | $ | |||||||||||||||||||||||||||||
| Non-compete agreement | ( | $ | ||||||||||||||||||||||||||||||
| Other intangible assets, net | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| (Dollar amounts in thousands) | Useful life in years | Gross amount | Accumulated amortization | Net carrying amount | ||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||||||||
| Trademarks | ( | |||||||||||||||||||||||||
| Software packages | ( | |||||||||||||||||||||||||
| Non-compete agreement | ( | |||||||||||||||||||||||||
| Other intangible assets, net | $ | $ | ( | $ | ||||||||||||||||||||||
Amortization expense related to other intangibles for the three months ended March 31, 2022 amounted to $14.5 million compared to $14.2 million for the corresponding period in 2021. 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.
During the three months ended March 31, 2022, Software amounting to $16.6 million was reclassified to held-for-sale as part of the Popular Transaction, refer to Note 2 – Held-for-Sale for further details.
8
| (Dollar amounts in thousands) | ||||||||
| Remaining 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
Note 6 – Debt and Short-Term Borrowings
Total debt at March 31, 2022 and December 31, 2021 follows:
| (In thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||
2023 Term A Loan bearing interest at a variable interest rate (LIBOR plus applicable margin(1)(2)) | $ | $ | ||||||||||||
2024 Term B Loan bearing interest at a variable interest rate (LIBOR plus applicable margin(1)(3)) | ||||||||||||||
Note payable due January 1, 2022(1) | ||||||||||||||
| Total debt | $ | $ | ||||||||||||
(1)Net of unaccreted discount and unamortized debt issue costs, as applicable.
(2)Applicable margin of 1.75
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 or if the leverage ratio is below 1.75 x. On March 8, 2021, in connection with this mandatory repayment clause, the Company repaid $17.8 million, as a result of excess cash flow calculation performed for the year ended December 31, 2020. No mandatory repayment was required in the first quarter of 2022 in connection with the excess cash flow calculation performed for the year ended December 31, 2021 as the leverage ratio was below 1.75 x.
The unpaid principal balance at March 31, 2022 of the 2023 Term A Loan and the 2024 Term B Loan was $167.5 million and $295.0 million, respectively. The additional borrowing capacity under our Revolving Facility at March 31, 2022 was $119.1 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
Notes Payable
In December 2019, EVERTEC Group entered into two non-interest bearing financing agreements amounting to $2.4 0.8 million. These notes were included in accounts payable in the Company's unaudited condensed consolidated balance sheets.
Interest Rate Swaps
9
| Swap Agreement | Effective date | Maturity Date | Notional Amount | Variable Rate | Fixed Rate | |||||||||||||||||||||||||||
| 2018 Swap | April 2020 | November 2024 | $ | 1-month LIBOR | ||||||||||||||||||||||||||||
The Company has accounted for this agreement as a cash flow hedge.
As of March 31, 2022 and December 31, 2021, the carrying amount of the derivative included on the Company's unaudited condensed consolidated balance sheets was $2.8 million and $13.4 million, respectively. The fair value of this derivative is estimated using Level 2 inputs in the fair value hierarchy on a recurring basis. Refer to Note 8 for disclosure of losses recorded on cash flow hedging activities.
During both the three months ended March 31, 2022 and 2021, the Company reclassified losses of $1.7 2.8 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 was $3.0
Derivative 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 $2.8 million and $13.4 million as of March 31, 2022 and December 31, 2021, respectively.
The following table presents the carrying value, as applicable, and estimated fair value for financial instruments at March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| (In thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||
| Costa Rica government obligations | $ | $ | $ | $ | ||||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||||||||
| Interest rate swap | ||||||||||||||||||||||||||
| 2023 Term A Loan | ||||||||||||||||||||||||||
| 2024 Term B Loan | ||||||||||||||||||||||||||
Note 8 – Equity
Accumulated Other Comprehensive Loss
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| (In thousands) | Foreign Currency Translation Adjustments | Cash Flow Hedges | Unrealized Gains (losses) on Debt Securities AFS | Total | ||||||||||||||||||||||
| Balance - December 31, 2021, net of tax | $ | ( | $ | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | |||||||||||||||||||||||||
| Effective portion reclassified to net income | ||||||||||||||||||||||||||
| Balance - March 31, 2022, net of tax | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||
Note 9 – Share-based Compensation
Long-term Incentive Plan ("LTIP")
During the three months ended March 31, 2020, 2021 and 2022, 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 2020 LTIP, 2021 LTIP and 2022 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 27 of each year for the 2020 LTIP, March 2 of each year for the 2021 LTIP, and February 25 of each year for the 2022 LTIP.
For the performance-based awards under the 2020 LTIP, 2021 LTIP, and 2022 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 27, 2023 for the 2020 LTIP, March 2, 2024 for the 2021 LTIP, and February 25, 2025 for the 2022 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 RSUs activity for the three months ended March 31, 2022:
| Nonvested RSUs | Shares | Weighted-average grant date fair value | ||||||||||||
| Nonvested at December 31, 2021 | $ | |||||||||||||
| Granted | ||||||||||||||
| Vested | ( | |||||||||||||
| Forfeited | ( | |||||||||||||
| Nonvested at March 31, 2022 | $ | |||||||||||||
For the three months ended March 31, 2022, the Company recognized $4.3 million of share-based compensation expense, compared with $3.4 million for the corresponding period in 2021.
11
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, 2022 | |||||||||||||||||||||||||||||
| (In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Total | ||||||||||||||||||||||||
| Timing of revenue recognition | |||||||||||||||||||||||||||||
| Products and services transferred at a point in time | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Products and services transferred over time | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Three months ended March 31, 2021 | |||||||||||||||||||||||||||||
| (In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Total | ||||||||||||||||||||||||
| Timing of revenue recognition | |||||||||||||||||||||||||||||
| Products and services transferred at a point in time | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Products and services transferred over time | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | |||||||||||||||||||||||||
Contract Balances
The following table provides information about contract assets from contracts with customers.
| (In thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Services transferred to customers | |||||||||||
| Transfers to accounts receivable | ( | ( | |||||||||
| Balance at end of period | $ | $ | |||||||||
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, 2022 amounted to $105.1 million. Contract liability and contract liability - long term at March 31, 2022 amounted to $21.4 million and $36.7 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, 2022, the Company recognized revenue of $7.1 million that was included in the contract liability at
12
December 31, 2021. During the three months ended March 31, 2021, the Company recognized revenue of $8.2 million that was included in the contract liability at December 31, 2020.
Transaction price allocated to the remaining performance obligations
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, 2022 | December 31, 2021 | ||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||
| Current period (release) provision for expected credit losses | ( | |||||||||||||
| Write-offs | ( | ( | ||||||||||||
| Recoveries of amounts previously written-off | ||||||||||||||
| Balance at end of period | $ | $ | ||||||||||||
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
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Note 12 – Income Tax
The components of income tax expense for the three months ended March 31, 2022 and 2021, respectively, consisted of the following:
| Three months ended March 31, | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Current tax provision | $ | $ | ||||||||||||
| Deferred tax benefit | ( | ( | ||||||||||||
| Income tax expense | $ | $ | ||||||||||||
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, 2022 and 2021, and its segregation based on location of operations:
| Three months ended March 31, | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Current tax provision | ||||||||||||||
| Puerto Rico | $ | $ | ||||||||||||
| United States | ||||||||||||||
| Foreign countries | ||||||||||||||
| Total current tax provision | $ | $ | ||||||||||||
| Deferred tax benefit | ||||||||||||||
| Puerto Rico | $ | ( | $ | ( | ||||||||||
| United States | ( | ( | ||||||||||||
| Foreign countries | ( | ( | ||||||||||||
| Total deferred tax benefit | $ | ( | $ | ( | ||||||||||
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, 2022, the Company has $105.1 million of unremitted earnings from foreign subsidiaries, compared to $99.1 million as of December 31, 2021. 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, 2022, the gross deferred tax asset amounted to $21.3 million and the gross deferred tax liability amounted to $15.2 million, compared to $22.3 million and $16.3 million, respectively, as of December 31, 2021. As of March 31, 2022, and December 31, 2021, there is a valuation allowance against the gross deferred tax asset of approximately $1.7 million and $1.4 million, respectively.
The Company estimates that it is reasonably possible that the Puerto Rico liability for uncertain tax positions relating to the net operating loss created by transaction costs from mergers and acquisitions will decrease by approximately $3.6 million during 2022 as a result of the statute of limitations.
14
| Three months ended March 31, | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Computed income tax at statutory rates | $ | $ | ||||||||||||
| Differences in tax rates due to multiple jurisdictions | ||||||||||||||
| Effect of income subject to tax-exemption grant | ( | ( | ||||||||||||
| Unrecognized tax (benefit) expense | ( | |||||||||||||
| Excess tax benefits on share-based compensation | ( | ( | ||||||||||||
| Other, net | ( | |||||||||||||
| Income tax expense | $ | $ | ||||||||||||
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) | 2022 | 2021 | ||||||||||||
| Net income available to EVERTEC, Inc.’s common shareholders | $ | $ | ||||||||||||
| Weighted average common shares outstanding | ||||||||||||||
Weighted average potential dilutive common shares (1) | ||||||||||||||
| Weighted average common shares outstanding - assuming dilution | ||||||||||||||
| Net income per common share - basic | $ | $ | ||||||||||||
| Net income per common share - diluted | $ | $ | ||||||||||||
(1)Potential common shares consist of common stock issuable under RSUs awards using the treasury stock method.
Note 14 – Commitments and Contingencies
Note 15 – Related Party Transactions
The following table presents the Company’s transactions with related parties for the three months ended March 31, 2022 and 2021:
| Three months ended March 31, | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
Total revenues (1)(2) | $ | $ | ||||||||||||
| Cost of revenues | $ | $ | ||||||||||||
| Operating lease cost and other fees | $ | $ | ||||||||||||
| Interest earned from affiliate | ||||||||||||||
| Interest income | $ | $ | ||||||||||||
(1)Popular revenues as a percentage of total revenues were 43 % and 44 %, respectively, for each of the periods presented above.
(2)Includes revenues generated from investee accounted for under the equity method of $0.3 million and $0.1 million, respectively, for each of the periods presented above.
15
As of March 31, 2022 and December 31, 2021, EVERTEC had the following balances arising from transactions with related parties:
| (In thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Cash and restricted cash deposits in affiliated bank | $ | $ | ||||||||||||
| Other due to/from affiliate | ||||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Prepaid expenses and other assets | $ | $ | ||||||||||||
| Operating lease right-of-use assets | $ | $ | ||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Contract liabilities | $ | $ | ||||||||||||
| Operating lease liabilities | $ | $ | ||||||||||||
Note 16 – Segment Information
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 ATH Business (person-to-merchant) digital transactions and EBT (which principally consist of services to the government of Puerto Rico for the delivery of benefits to participants). For 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.), server capacity usage or computer resources utilized. Revenues from other processing services within the Business
16
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,
•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:
| Three months ended March 31, 2022 | |||||||||||||||||||||||||||||||||||
| (In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Corporate and Other (1) | Total | |||||||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Operating costs and expenses | |||||||||||||||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||||||||||||||
| Non-operating income (expenses) | ( | ||||||||||||||||||||||||||||||||||
| EBITDA | ( | ||||||||||||||||||||||||||||||||||
Compensation and benefits (2) | |||||||||||||||||||||||||||||||||||
Transaction, refinancing and other fees (3) | |||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
(1)Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $10.9 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring, intercompany software developments and transaction processing of $3.3 million from Payment Services- Latin America to both Payment Services- Puerto Rico & Caribbean and Business Solutions, and transaction processing and monitoring fees of $2.6 million from Payment Services - Puerto Rico & Caribbean to Payment Services - Latin America.
(2)Primarily represents share-based compensation.
17
(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.
| 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 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Operating costs and expenses | |||||||||||||||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||||||||||||||
| Non-operating income (expenses) | ( | ||||||||||||||||||||||||||||||||||
| EBITDA | ( | ||||||||||||||||||||||||||||||||||
Compensation and benefits (2) | |||||||||||||||||||||||||||||||||||
Transaction, refinancing and other fees (3) | |||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
(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 and 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.
(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. and a software impairment charge.
The reconciliation of EBITDA to consolidated net income is as follows:
| Three months ended March 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Total EBITDA | $ | $ | |||||||||
| Less: | |||||||||||
| Income tax expense | |||||||||||
| Interest expense, net | |||||||||||
| Depreciation and amortization | |||||||||||
| Net income | $ | $ | |||||||||
Note 17 – Subsequent Events
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) covers: (i) the results of operations for the three months ended March 31, 2022 and 2021 and (ii) the financial condition as of March 31, 2022. 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, 2021, included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 25, 2022 and with the unaudited condensed consolidated financial statements (the “Unaudited Condensed Consolidated Financial Statements”) and related notes appearing elsewhere herein. This MD&A contains forward-looking statements that involve risks and uncertainties. Our actual results may differ from those indicated in the forward-looking statements. See “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with these statements.
Except as otherwise indicated or unless the context otherwise requires, (a) the terms “EVERTEC,” “we,” “us,” “our,” “our Company” and “the Company” refer to EVERTEC, Inc. and its subsidiaries on a consolidated basis, (b) the term “Holdings” refers to EVERTEC Intermediate Holdings, LLC, but not any of its subsidiaries and (c) the term “EVERTEC Group” refers to EVERTEC Group, LLC and its predecessor entities and their subsidiaries on a consolidated basis. EVERTEC Inc.’s subsidiaries include Holdings, EVERTEC Group, EVERTEC Dominicana, SAS, Evertec Chile Holdings SpA (formerly known as Tecnopago SpA), Evertec Chile SpA (formerly known as EFT Group SpA), Evertec Chile Global SpA (formerly known as EFT Global Services SpA), Evertec Chile Servicios Profesionales SpA (formerly known as EFT Servicios Profesionales SpA), EFT Group S.A., Tecnopago España SL, Paytrue S.A., Caleidon, S.A., Evertec Brasil Informática Ltda. (formerly known as Paytrue Solutions Informática Ltda.), EVERTEC Panamá, S.A., EVERTEC Costa Rica, S.A. (“EVERTEC CR”), EVERTEC Guatemala, S.A., Evertec Colombia, SAS (formerly known as Processa, SAS), EVERTEC USA, LLC, Evertec Placetopay, SAS (formerly known as EGM Ingeniería sin Fronteras, S.A.S. ("PlacetoPay")) 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. We believe that we are one of the largest merchant acquirers in Latin America based on total number of transactions and the largest merchant acquirer in the Caribbean. 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 and automated teller machine ("ATM") networks in the Caribbean and 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 over 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 leverage proprietary IP that enables us to be nimble and flexible when it comes to client requirements;
•Our ability to put forth Spanish speaking developers in front of our Spanish speaking customers making communication much more effective and integrations more efficient;
•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).
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Our broad suite of services spans the entire transaction-processing value chain and includes a range of front-end customer-facing solutions such as the electronic capture and authorization of transactions at the point-of-sale, as well as back-end support services such as the clearing and settlement of transactions and account reconciliation for card issuers. These include: (i) merchant acquiring services, which enable point of sales (“POS”) and e-commerce merchants to accept and process electronic methods of payment such as debit, credit, prepaid and electronic benefit transfer (“EBT”) cards; (ii) payment processing services, which enable financial institutions and other issuers to manage, support and facilitate the processing for credit, debit, prepaid, automated teller machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide “mission-critical” technology solutions such as core bank processing, as well as IT outsourcing and cash management services to financial institutions, corporations and governments. We provide these services through 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 MSA. On February 24, 2022, we entered into an agreement to modify and extend the main commercial agreements with Popular, including a 10-year extension of the Merchant Acquiring Independent Sales Organization Agreement (the “ISO Agreement”), a 5-year extension of the ATH Network Participation Agreement and a 3-year extension of the MSA. The ISO Agreement, which sets our merchant acquiring relationship with Popular, will now include revenue sharing provisions with Popular. The MSA modifications include the elimination of the exclusivity requirement, the inclusion of annual MSA minimums through 2028, a 10% discount on certain MSA services in October 2025 and adjustments to the existing CPI pricing escalator clause. We also entered into an agreement to sell Popular certain assets in exchange for Popular owned Evertec stock ("Popular Transaction"). As part of this transaction, Popular has agreed to take certain actions after closing to ensure that Evertec is no longer deemed a “subsidiary” of Popular for purposes of the Bank Holding Company Act, including reducing Popular's voting interest in Evertec to 4.5% over a period of three months after the close of the transaction through either the sale of shares or conversion to non-voting preferred shares. The Popular Transaction is expected to close mid-year 2022, at which point the contract extensions will become effective.
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, which, coupled with the ongoing shift from cash and paper methods of payment to electronic payments will continue to generate growth opportunities for our business. For example, currently the adoption of banking products, including electronic payments, in the Latin American and Caribbean region is lower relative to the mature U.S. and European markets. We believe that the unbanked and underbanked population in our markets will continue to shrink, and therefore drive incremental penetration and growth of electronic payments in Puerto Rico and other Latin American regions. We also benefit from the outsourcing of technology systems and processes trend for financial institutions and government. Many medium- and small-size institutions in the Latin American markets in which we operate have outdated computer systems and updating these IT legacy systems is financially and logistically challenging, which presents a business opportunity for us.
As a result of the COVID-19 pandemic, consumer preference has accelerated its shift away from cash and paper payment methods, noting increased demand for omni-channel payment services that facilitate cashless and contactless transactions. The ongoing migration from cash and paper methods of payment to electronic payments continues to benefit the transaction-processing industry globally. The markets in which we operate, particularly in the Latin American and Caribbean region continue to grow and consumer preference is driving an increase for electronic payments usage. Latin America is one of the fastest-growing mobile markets globally, with a growing base of tech-savvy customers that demonstrate a preference for credit cards, digital wallets, contactless payments, and other value-added offerings. The region's FinTech sector is driving change via new contactless payment technology that are becoming popular alternatives to cash payments. We continue to believe that the
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attractive characteristics of our markets and our position across multiple services and sectors will continue to drive growth and profitability in our businesses.
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, 2022 and 2021
| Three months ended March 31, | |||||||||||||||||||||||
| In thousands | 2022 | 2021 | Variance | ||||||||||||||||||||
| Revenues | $ | 150,248 | $ | 139,528 | $ | 10,720 | 8 | % | |||||||||||||||
| Operating costs and expenses | |||||||||||||||||||||||
| Cost of revenues, exclusive of depreciation and amortization | 64,659 | 59,804 | 4,855 | 8 | % | ||||||||||||||||||
| Selling, general and administrative expenses | 20,384 | 16,102 | 4,282 | 27 | % | ||||||||||||||||||
| Depreciation and amortization | 19,160 | 18,623 | 537 | 3 | % | ||||||||||||||||||
| Total operating costs and expenses | 104,203 | 94,529 | 9,674 | 10 | % | ||||||||||||||||||
| Income from operations | $ | 46,045 | $ | 44,999 | $ | 1,046 | 2 | % | |||||||||||||||
Revenues
Total revenues for the quarter ended March 31, 2022 was $150.2 million, an increase of 8% compared with $139.5 million in the prior year reflecting increases across all of the Company's segments. Revenue in Puerto Rico benefited from sales volume growth, driven by a full quarter of revenue contribution from the FirstBank expanded relationship, with a higher average ticket and slightly higher spread, as well as, growth in POS transactions processed and the continued growth of our digital solutions, ATH Movil and ATH Business. Revenue also benefited from the year over year CPI impact on the current Popular MSA and revenue generated from the printing contract entered into in the prior year. Latin America revenue reflected organic growth that includes revenue generated from new client contracts.
Cost of Revenues
Cost of revenues for the three months ended March 31, 2022 amounted to $64.7 million, an increase of $4.9 million or 8% when compared to the same period in the prior year. The increase during the three months is primarily driven by an increase in personnel costs, mainly due to increased headcount, and equipment expenses, mainly as a result of increases in repairs and maintenance of software and hardware, and an increase in cloud services as utilization continues to grow.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended March 31, 2022 increased by $4.3 million or 27% when compared to the same period in the prior year. The increase is driven by an increase in professional fees for corporate transactions and increased personnel costs.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31, 2022 amounted to $19.2 million, an increase of $0.5 million or 3% when compared to the same period in the prior year. Increased expense during the three months is driven by an increase in software amortization as a result of key projects that went into production in the prior years and an increase in the amortization of customer relationships.
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Non-Operating Expenses
| Three months ended March 31, | |||||||||||||||||||||||
| In thousands | 2022 | 2021 | Variance | ||||||||||||||||||||
| Interest income | $ | 667 | $ | 389 | $ | 278 | 71 | % | |||||||||||||||
| Interest expense | (5,547) | (5,906) | 359 | 6 | % | ||||||||||||||||||
| Earnings of equity method investment | 570 | 502 | 68 | 14 | % | ||||||||||||||||||
| Other income | 3,306 | 328 | 2,978 | 908 | % | ||||||||||||||||||
| Total non-operating expenses | $ | (1,004) | $ | (4,687) | $ | 3,683 | 79 | % | |||||||||||||||
Non-operating expenses for the three months ended March 31, 2022 decreased by $3.7 million to $1.0 million when compared to the same period in the prior year. The decrease is mainly related to a $3.0 million increase in other income driven by the favorable impact of the remeasurement of assets and liabilities denominated in US dollars and a $0.4 million decrease in interest expense, resulting from a reduction in interest rates and a lower outstanding balance.
Income Tax Expense
| Three months ended March 31, | |||||||||||||||||||||||
| In thousands | 2022 | 2021 | Variance | ||||||||||||||||||||
| Income tax expense | $ | 6,175 | $ | 4,708 | $ | 1,467 | 31 | % | |||||||||||||||
Income tax expense for the three months ended March 31, 2022 amounted to $6.2 million, an increase of $1.5 million when compared to the same period in the prior year. The effective tax rate for the period was 13.7%, compared with 11.7% in the 2021 period. The increase in the effective tax rate primarily reflects an increase in revenues in higher taxed jurisdictions, in addition to higher withholding taxes and the impact of higher net discrete tax items recorded in the prior year quarter.
Segment Results of Operations
The Company operates in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America (collectively "Payment Services segments"), Merchant Acquiring, and Business Solutions.
The Payment Services - Puerto Rico & Caribbean segment revenues are comprised of revenues related to providing access to the ATH debit network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and point of sale ("POS") transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions), ATH Movil (person-to-person) and ATH Business (person-to-merchant) digital transactions and EBT (which principally consist of services to the government of Puerto Rico for the delivery of benefits to participants). For 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
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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.), server capacity usage or computer resources utilized. Revenues from other processing services within the Business Solutions segment are generally volume-based and depend on factors such as the number of accounts processed. In addition, EVERTEC is a reseller of hardware and software products and these resale transactions are generally non-recurring.
In addition to the four operating segments described above, management identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These areas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these areas are aggregated and presented within the “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and Other category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:
•marketing,
•corporate finance and accounting,
•human resources,
•legal,
•risk management functions,
•internal audit,
•corporate debt related costs,
•non-operating depreciation and amortization expenses generated as a result of merger and acquisition activity,
•intersegment revenues and expenses, and
•other non-recurring fees and expenses that are not considered when management evaluates financial performance at a segment level
The Chief Operating Decision Maker ("CODM") reviews the operating segments separate financial information to assess performance and to allocate resources. Management evaluates the operating results of each of its operating segments based upon revenues and Adjusted EBITDA. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with ASC Topic 280, Segment Reporting, given that it is reported to the CODM for purposes of allocating resources. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by revenues and adjusted EBITDA. As such, segment assets are not disclosed in the notes to the accompanying unaudited condensed consolidated financial statements.
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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, 2022 and 2021
Payment Services - Puerto Rico & Caribbean
| Three months ended March 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Revenues | $40,008 | $36,264 | |||||||||
| Adjusted EBITDA | 23,781 | 20,803 | |||||||||
| Adjusted EBITDA Margin | 59.4 | % | 57.4 | % | |||||||
Payment Services - Puerto Rico & Caribbean segment revenues for the three months ended March 31, 2022 increased by $3.7 million to $40.0 million when compared to the same period in the prior year. The increase in revenues was primarily driven by an increase in POS processing and continued strong digital payments growth from ATH Movil and ATH Business, as well as an increase in transaction processing and monitoring revenue recognized for services provided to the Payment Services - Latin America Segment. Adjusted EBITDA increased by $3.0 million to $23.8 million driven by the increase in revenues partially offset by higher operating expenses, including costs related to POS equipment maintenance.
Payment Services - Latin America
| Three months ended March 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Revenues | $28,783 | $25,014 | |||||||||
| Adjusted EBITDA | 12,427 | 10,019 | |||||||||
| Adjusted EBITDA Margin | 43.2 | % | 40.1 | % | |||||||
Payment Services - Latin America segment revenues for the three months ended March 31, 2022 increased by $3.8 million to $28.8 million driven mainly by organic growth including revenue generated by new client contracts signed in prior years. Adjusted EBITDA increased by $2.4 million when compared to the same period in the prior year primarily due to the increase in revenues and the $3.1 million favorable impact of the remeasurement of assets and liabilities denominated in US dollars, partially offset by an increase in fees for transaction processing and monitoring services from the Payment Services - Puerto Rico & Caribbean segment.
Merchant Acquiring
| Three months ended March 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Revenues | $35,629 | $30,867 | |||||||||
| Adjusted EBITDA | 17,084 | 15,517 | |||||||||
| Adjusted EBITDA Margin | 47.9 | % | 50.3 | % | |||||||
Merchant Acquiring segment revenues for the three months ended March 31, 2022 increased by $4.8 million to $35.6 million mainly as a result of an increase in sales volume with a higher average ticket and a slightly higher spread per transaction. The higher volume was driven mainly by a full quarter contribution from the FirstBank expanded relationship, compared with one month in the prior year quarter. Adjusted EBITDA increased by $1.6 million driven by the increase in revenues, partially offset by higher operating costs from a full quarter of FirstBank and higher operating expenses.
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Business Solutions
| Three months ended March 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Revenues | $62,624 | $60,611 | |||||||||
| Adjusted EBITDA | 29,604 | 29,632 | |||||||||
| Adjusted EBITDA Margin | 47.3 | % | 48.9 | % | |||||||
Business Solutions segment revenues for the three months ended March 31, 2022 increased by $2.0 million to $62.6 million as a result of higher transactions and account volumes, and the benefit of the CPI impact on the current MSA. In addition, the quarter benefited from incremental printing volume resulting from the printing contract entered into in the prior year and that began to have an impact in the second half of 2021. These increases were partially offset by hardware and software sales as well as services provided to the Puerto Rico Department of Educations in the prior year quarter that did not recur. Adjusted EBITDA remained relatively flat at $29.6 million as the increase in revenue was offset by increased expenses, mainly software and hardware maintenance costs.
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, dividend payments, share repurchases, debt service, and acquisitions. We also have a $125.0 million Revolving Facility, of which $119.1 million was available for borrowing as of March 31, 2022. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.
As of March 31, 2022, we had cash and cash equivalents of $283.6 million, of which $103.7 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.
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) | 2022 | 2021 | ||||||||||||
| Cash provided by operating activities | $ | 70,350 | $ | 34,746 | ||||||||||
| Cash used in investing activities | (14,290) | (34,413) | ||||||||||||
| Cash used in financing activities | (36,169) | (48,716) | ||||||||||||
| Effect of foreign exchange rate on cash, cash equivalents and restricted cash | (1,903) | 2,700 | ||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | $ | 17,988 | $ | (45,683) | ||||||||||
Net cash provided by operating activities for the three months ended March 31, 2022 was $70.4 million compared to $34.7 million for the same period in the prior year. The $35.6 million increase in cash provided by operating activities is primarily driven by an increase in collections for accounts receivable as well as less cash used to pay down accounts payable and accrued liabilities as the Company continues to effectively manage working capital.
Net cash used in investing activities for the three months ended March 31, 2022 was $14.3 million compared to $34.4 million for the same period in the prior year. The $20.1 million decrease is primarily attributable to the acquisition in the prior year of a
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$14.8 million customer relationship and $3.0 million in available-for-sale debt securities in addition to a decrease in additions to software of $3.3 million.
Net cash used in financing activities for the three months ended March 31, 2022 was $36.2 million compared to $48.7 million for the same period in the prior year. The $12.5 million decrease was mainly attributed to a decrease of $16.4 million in cash used to pay down long-term debt and a $3.1 million decrease in withholding taxes paid on share-based compensation partially offset by an increase in cash used to repurchase common stock of $6.9 million.
Capital Resources
Our principal capital expenditures are for hardware and computer software (purchased and internally developed) and additions to property and equipment. During the three months ended March 31, 2022 and 2021, we invested approximately $14.3 million and $16.7 million, respectively. 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 15, 2022, the Board declared quarterly cash dividends of $0.05 per share of common stock, which were paid on March 25, 2022, to stockholders of record as of the close of business on February 25, 2022.
On April 21, 2022, 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 3, 2022 to stockholders of record as of the close of business on May 2, 2022. 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 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 or if the leverage ratio is below 1.75x. On March 8, 2021, in connection with this mandatory repayment clause, the Company repaid $17.8 million, as a result of excess cash flow calculation performed for the year ended December 31, 2020. No mandatory repayment was required in the first quarter of 2022 in connection with the excess cash flow calculation performed for the year ended December 31, 2021 as the leverage ratio was below 1.75x.
The unpaid principal balance at March 31, 2022 of the 2023 Term A Loan and the 2024 Term B Loan was $167.5 million and $295.0 million, respectively. The additional borrowing capacity under our Revolving Facility at March 31, 2022 was $119.1 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
Notes Payable
In December 2019, EVERTEC Group entered into two non-interest bearing financing agreements amounting to $2.4 million to purchase software and maintenance, which were fully repaid in January 2022. As of December 31, 2021, the outstanding principal balance of the notes payable was $0.8 million. These notes were included in accounts payable in the Company's unaudited condensed consolidated balance sheets.
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Interest Rate Swaps
As of March 31, 2022, the Company has an interest rate swap agreement, entered into in December 2018, which converts a portion of the interest rate payments on the Company's 2024 Term B Loan from variable to fixed:
| Swap Agreement | Effective date | Maturity Date | Notional Amount | Variable Rate | Fixed Rate | |||||||||||||||||||||||||||
| 2018 Swap | April 2020 | November 2024 | $250 million | 1-month LIBOR | 2.89% | |||||||||||||||||||||||||||
The Company has accounted for this agreement as a cash flow hedge.
As of March 31, 2022 and December 31, 2021, the carrying amount of the derivative included on the Company's unaudited condensed consolidated balance sheets was $2.8 million and $13.4 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 of the unaudited condensed consolidated financial statements for disclosure of losses recorded on cash flow hedging activities.
During the three months ended March 31, 2022 and 2021, the Company reclassified losses of $1.7 million and losses of $1.7 million, respectively, from accumulated other comprehensive loss into interest expense. Based on current LIBOR rates, the Company expects to reclassify losses of $2.8 million from accumulated other comprehensive loss into interest expense over the next 12 months.
The cash flow hedge is considered highly effective.
Covenant Compliance
As of March 31, 2022, our secured leverage ratio was 1.36 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 merger and acquisition activity. In addition, in evaluating EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, you should be aware that in the future 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;
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•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements;
•in the case of EBITDA and Adjusted EBITDA, they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness;
•in the case of EBITDA and Adjusted EBITDA, they do not reflect income tax expense or the cash necessary to pay income taxes; and
•other companies, including other companies in our industry, may not use EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per common share or may calculate EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share differently than as presented in this Report, limiting their usefulness as a comparative measure.
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share are not measurements of liquidity or financial performance under GAAP. You should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share as alternatives to cash flows from operating activities or any other performance measures determined in accordance with GAAP, as an indicator of cash flows, as a measure of liquidity or as an alternative to operating or net income determined in accordance with GAAP.
A reconciliation of net income to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share is provided below:
| Three months ended March 31, | Twelve months ended | |||||||||||||||||||
| (In thousands, except per share information) | 2022 | 2021 | March 31, 2022 | |||||||||||||||||
| Net income | $ | 38,866 | $ | 35,604 | $ | 164,405 | ||||||||||||||
| Income tax expense | 6,175 | 4,708 | 22,029 | |||||||||||||||||
| Interest expense, net | 4,880 | 5,517 | 20,284 | |||||||||||||||||
| Depreciation and amortization | 19,160 | 18,623 | 75,607 | |||||||||||||||||
| EBITDA | 69,081 | 64,452 | 282,325 | |||||||||||||||||
Equity income (1) | (570) | (502) | (463) | |||||||||||||||||
Compensation and benefits (2) | 4,279 | 3,504 | 15,919 | |||||||||||||||||
Transaction, refinancing and other fees (3) | 2,595 | 1,435 | 3,533 | |||||||||||||||||
| Adjusted EBITDA | 75,385 | 68,889 | 301,314 | |||||||||||||||||
Operating depreciation and amortization (4) | (11,252) | (10,882) | (43,808) | |||||||||||||||||
Cash interest expense, net (5) | (4,629) | (5,076) | (19,357) | |||||||||||||||||
Income tax expense (6) | (8,677) | (7,756) | (32,605) | |||||||||||||||||
Non-controlling interest (7) | 10 | (143) | (8) | |||||||||||||||||
| Adjusted net income | $ | 50,837 | $ | 45,032 | $ | 205,536 | ||||||||||||||
| Net income per common share (GAAP): | ||||||||||||||||||||
| Diluted | $ | 0.53 | $ | 0.49 | ||||||||||||||||
| Adjusted Earnings per common share (Non-GAAP): | ||||||||||||||||||||
| Diluted | $ | 0.70 | $ | 0.62 | ||||||||||||||||
| Shares used in computing adjusted earnings per common share: | ||||||||||||||||||||
| Diluted | 72,853,216 | 72,949,401 | ||||||||||||||||||
1)Represents the elimination of non-cash equity earnings from our 19.99% equity investment in Dominican Republic, Consorcio de Tarjetas Dominicanas S.A. ("CONTADO"), net of cash dividends received.
2)Primarily represents share-based compensation and severance payments.
3)Represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, recorded as part of selling, general and administrative expenses, a software impairment charge and a gain from sale of assets.
4)Represents operating depreciation and amortization expense, which excludes amounts generated as a result of merger and acquisition activity.
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5)Represents interest expense, less interest income, as they appear on the condensed consolidated statements of income and comprehensive income, adjusted to exclude non-cash amortization of the debt issue costs, premium and accretion of discount.
6)Represents income tax expense calculated on adjusted pre-tax income using the applicable GAAP tax rate, adjusted for certain discrete items.
7)Represents the 35% non-controlling equity interest in Evertec Colombia, net of amortization for intangibles created as part of the purchase.
Seasonality
Our payment businesses generally experience moderate increased activity during the traditional holiday shopping periods and around other nationally recognized holidays, which follow consumer spending patterns.
Effect of Inflation
While inflation has had minimal net effect on our operating results during the last three years given that overall inflation has been offset by sales and cost reduction actions, the rate of inflation can impact certain input costs, such as occupancy, labor and benefits, and general administrative costs, which may not be readily recoverable from our customers and could affect our results of operations and financial condition. In addition, if inflation were to result in rising interest rates, it could result in an adverse effect on our cost of funding due to increased interest expense on our outstanding debt.
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, 2022, under the secured credit facilities, would increase our annual interest expense by approximately $2.6 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, 2022, 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 US dollar, are reported in accumulated other comprehensive loss in the unaudited condensed consolidated balance sheets. As of March 31, 2022, the Company had $33.8 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss compared with an unfavorable foreign currency translation adjustment of $36.0 million as of December 31, 2021.
Item 4. Controls and Procedures
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Evaluation of Disclosure Controls and Procedures
Management, under the direction of the Chief Executive Officer and the Chief Financial Officer, has evaluated, as of the end of the period covered by this Report on Form 10-Q, disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-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, 2022, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no 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, 2022 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
There have been no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 25, 2022. For a discussion of the potential risks and uncertainties related to us, see "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021.
The risks described in our Annual Report on Form 10-K for the year ended December 31, 2021 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 month period ended March 31, 2022:
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of a publicly announced program (1) | Approximate dollar value of shares that may yet be purchased under the program | ||||||||||||||||||||||
| 3/1/2022-3/31/2022 | 521,643 | 40.60 | 521,643 | |||||||||||||||||||||||
| 521,643 | 40.60 | 521,643 | 128,821,747 | |||||||||||||||||||||||
(1) On February 24, 2022, the Company announced that its Board approved an increase to the current stock
repurchase program, authorizing the purchase of up to an aggregate of $150 million of the Company’s common stock under the program which expires on 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
| 10.1*+ | ||||||||
| 10.2 | Share Purchase Agreement (Contrato de Compraventa de Acciones) dated as of February 24, 2022, by and between Evertec Group, LLC and Fondo de Inversiones Privado IG Capital, Inversiones Cuatro R Limitada, Inversiones Rivers Limitada, and Inversiones Brela Limitada [English translation] (incorporated by reference to Exhibit 10.1 of EVERTEC, Inc.’s Current Report on Form 8-K filed on February 24, 2022, File No. 001-35872). | |||||||
| 10.3+ | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101.INS XBRL** | Instance document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH XBRL** | Inline Taxonomy Extension Schema | |||||||
| 101.CAL XBRL** | Inline Taxonomy Extension Calculation Linkbase | |||||||
| 101.DEF XBRL** | Inline Taxonomy Extension Definition Linkbase | |||||||
| 101.LAB XBRL** | Inline Taxonomy Extension Label Linkbase | |||||||
| 101.PRE XBRL** | Inline Taxonomy Extension Presentation Linkbase | |||||||
| 104** | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* Filed herewith.
** Furnished herewith.
+ This exhibit is a management contract or a compensatory plan or arrangement.
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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 29, 2022 | By: | /s/ Morgan Schuessler | ||||||
| Morgan Schuessler Chief Executive Officer | ||||||||
| Date: April 29, 2022 | By: | /s/ Joaquin A. Castrillo-Salgado | ||||||
| Joaquin A. Castrillo-Salgado Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
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TABLE OF CONTENTS
Note 1 The Company and Basis Of PresentationNote 2 Held-for-saleNote 3 Debt SecuritiesNote 4 Property and Equipment, NetNote 5 Goodwill and Other Intangible AssetsNote 6 Debt and Short-term BorrowingsNote 7 Financial Instruments and Fair Value MeasurementsNote 8 EquityNote 9 Share-based CompensationNote 10 RevenuesNote 11 Current Expected Credit LossesNote 12 Income TaxNote 13 Net Income Per Common ShareNote 14 Commitments and ContingenciesNote 15 Related Party TransactionsNote 16 Segment InformationNote 17 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits