EVERTEC, Inc. - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020 or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER 001-35872
EVERTEC, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Puerto Rico | 66-0783622 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | ||
Cupey Center Building, | Road 176, Kilometer 1.3, | ||
San Juan, | Puerto Rico | 00926 | |
(Address of principal executive offices) | (Zip Code) | ||
(787) 759-9999
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | EVTC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ | |||||
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
At October 23, 2020, there were 71,906,983 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. | ||
All reports we file with the Securities and Exchange Commission ("SEC") are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC’s website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.evertecinc.com as soon as reasonably practicable after filing such material with the SEC.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of, and subject to the protection of, the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. Among the factors that significantly impact our business and could impact our business in the future are:
• | our reliance on our relationship with Popular, Inc. (“Popular”) for a significant portion of our revenues pursuant to our master services agreement with them, and to grow our merchant acquiring business; |
• | as a regulated institution, the likelihood we will be required to obtain regulatory approval before engaging in certain new activities or businesses, whether organically or by acquisition, and our potential inability to obtain such approval on a timely basis or at all, which may make transactions more expensive or impossible to complete, or make us less attractive to potential sellers; |
• | our ability to renew our client contracts on terms favorable to us, including our contract with Popular, and any significant concessions we may have to grant to Popular with respect to pricing or other key terms in anticipation of the negotiation of the extension of the MSA, both in respect of the current term and any extension of the MSA; |
• | our dependence on our processing systems, technology infrastructure, security systems and fraudulent payment detection systems, as well as on our personnel and certain third parties with whom we do business, and the risks to our business if our systems are hacked or otherwise compromised; |
• | our ability to develop, install and adopt new software, technology and computing systems; |
• | a decreased client base due to consolidations and failures in the financial services industry; |
• | the credit risk of our merchant clients, for which we may also be liable; |
• | the continuing market position of the ATH network; |
• | a reduction in consumer confidence, whether as a result of a global economic downturn or otherwise, which leads to a decrease in consumer spending; |
• | our dependence on credit card associations, including any adverse changes in credit card association or network rules or fees; |
• | changes in the regulatory environment and changes in international, legal, tax, political, administrative or economic conditions; |
• | the geographical concentration of our business in Puerto Rico, including our business with the government of Puerto Rico and its instrumentalities, which are facing severe political and fiscal challenges; |
• | additional adverse changes in the general economic conditions in Puerto Rico, whether as a result of the government’s debt crisis or otherwise, including the continued migration of Puerto Ricans to the U.S. mainland, which could negatively affect our customer base, general consumer spending, our cost of operations and our ability to hire and retain qualified employees; |
• | a protracted federal government shutdown may affect our financial performance; |
• | operating an international business in Latin America and the Caribbean, in jurisdictions with potential political and economic instability; |
• | our ability to execute our geographic expansion and acquisition strategies, including challenges in successfully acquiring new businesses and integrating and growing acquired businesses; |
• | our ability to protect our intellectual property rights against infringement and to defend ourselves against claims of infringement brought by third parties; |
• | our ability to recruit and retain the qualified personnel necessary to operate our business; |
• | our ability to comply with U.S. federal, state, local and foreign regulatory requirements; |
• | evolving industry standards and adverse changes in global economic, political and other conditions; |
• | our high level of indebtedness and restrictions contained in our debt agreements, including the senior secured credit facilities, as well as debt that could be incurred in the future; |
• | our ability to prevent a cybersecurity attack or breach in our information security; |
• | our ability to generate sufficient cash to service our indebtedness and to generate future profits; |
• | our ability to refinance our debt; |
• | the possibility that we could lose our preferential tax rate in Puerto Rico; |
• | the risk that the counterparty to our interest rate swap agreements fail to satisfy its obligations under the agreement; |
• | uncertainty of the pending debt restructuring process under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), as well as actions taken by the government of Puerto Rico or by the PROMESA Board to address the fiscal crisis in Puerto Rico; |
• | the aftermath of Hurricanes Irma and Maria and their continued impact on the economies of Puerto Rico and the Caribbean; |
• | the possibility of future catastrophic hurricanes affecting Puerto Rico and/or the Caribbean, as well as other potential natural disasters; |
• | uncertainty related to the effect of the discontinuation of the London Interbank Offered Rate at the end of 2021; |
• | the nature, timing and amount of any restatement; and |
• | the impact of a novel strain of coronavirus ("COVID-19"), and measures taken in response to the outbreak, on our revenues, 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 “Item 1A. Risk Factors,” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report. These forward-looking statements speak only as of the date of this Report, and we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
EVERTEC, Inc. Unaudited Condensed Consolidated Balance Sheets
(Dollar amounts in thousands, except for share information)
September 30, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 144,147 | $ | 111,030 | ||||
Restricted cash | 18,049 | 20,091 | ||||||
Accounts receivable, net | 111,852 | 106,812 | ||||||
Prepaid expenses and other assets | 44,835 | 38,085 | ||||||
Total current assets | 318,883 | 276,018 | ||||||
Investment in equity investee | 12,417 | 12,288 | ||||||
Property and equipment, net | 43,255 | 43,791 | ||||||
Operating lease right-of-use asset | 26,824 | 29,979 | ||||||
Goodwill | 395,048 | 399,487 | ||||||
Other intangible assets, net | 222,085 | 241,937 | ||||||
Deferred tax asset | 3,657 | 2,131 | ||||||
Net investment in leases | 394 | 722 | ||||||
Other long-term assets | 5,511 | 5,323 | ||||||
Total assets | $ | 1,028,074 | $ | 1,011,676 | ||||
Liabilities and stockholders’ equity | ||||||||
Current Liabilities: | ||||||||
Accrued liabilities | $ | 54,099 | $ | 58,160 | ||||
Accounts payable | 36,057 | 39,165 | ||||||
Unearned income | 19,800 | 20,668 | ||||||
Income tax payable | 7,475 | 6,298 | ||||||
Current portion of long-term debt | 14,250 | 14,250 | ||||||
Current portion of operating lease liability | 5,877 | 5,773 | ||||||
Total current liabilities | 137,558 | 144,314 | ||||||
Long-term debt | 484,306 | 510,947 | ||||||
Deferred tax liability | 2,575 | 4,261 | ||||||
Unearned income - long term | 30,827 | 28,437 | ||||||
Operating lease liability - long-term | 21,380 | 24,679 | ||||||
Derivative liability | 27,370 | 14,452 | ||||||
Other long-term liabilities | 13,850 | 12,963 | ||||||
Total liabilities | 717,866 | 740,053 | ||||||
Commitments and contingencies (Note 13) | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, par value $0.01; 2,000,000 shares authorized; none issued | — | — | ||||||
Common stock, par value $0.01; 206,000,000 shares authorized; 71,906,983 shares issued and outstanding as of September 30, 2020 (December 31, 2019 - 72,000,261) | 719 | 720 | ||||||
Additional paid-in capital | 6,552 | — | ||||||
Accumulated earnings | 351,252 | 296,476 | ||||||
Accumulated other comprehensive loss, net of tax | (52,386 | ) | (30,009 | ) | ||||
Total EVERTEC, Inc. stockholders’ equity | 306,137 | 267,187 | ||||||
Non-controlling interest | 4,071 | 4,436 | ||||||
Total equity | 310,208 | 271,623 | ||||||
Total liabilities and equity | $ | 1,028,074 | $ | 1,011,676 | ||||
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
(Dollar amounts in thousands, except per share information)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues (affiliates Note 14) | $ | 136,507 | $ | 118,804 | $ | 376,386 | $ | 360,188 | ||||||||
Operating costs and expenses | ||||||||||||||||
Cost of revenues, exclusive of depreciation and amortization | 57,854 | 51,878 | 168,900 | 154,498 | ||||||||||||
Selling, general and administrative expenses | 16,682 | 15,152 | 51,528 | 45,355 | ||||||||||||
Depreciation and amortization | 18,127 | 16,972 | 53,761 | 50,440 | ||||||||||||
Total operating costs and expenses | 92,663 | 84,002 | 274,189 | 250,293 | ||||||||||||
Income from operations | 43,844 | 34,802 | 102,197 | 109,895 | ||||||||||||
Non-operating (expenses) income | ||||||||||||||||
Interest income | 429 | 348 | 1,165 | 864 | ||||||||||||
Interest expense | (5,867 | ) | (7,267 | ) | (18,829 | ) | (22,191 | ) | ||||||||
Earnings of equity method investment | 202 | 371 | 733 | 726 | ||||||||||||
Other income (expense) | 2,486 | 252 | 2,766 | (619 | ) | |||||||||||
Total non-operating expenses | (2,750 | ) | (6,296 | ) | (14,165 | ) | (21,220 | ) | ||||||||
Income before income taxes | 41,094 | 28,506 | 88,032 | 88,675 | ||||||||||||
Income tax expense | 6,513 | 3,720 | 15,551 | 10,018 | ||||||||||||
Net income | 34,581 | 24,786 | 72,481 | 78,657 | ||||||||||||
Less: Net income attributable to non-controlling interest | 118 | 32 | 323 | 201 | ||||||||||||
Net income attributable to EVERTEC, Inc.’s common stockholders | 34,463 | 24,754 | 72,158 | 78,456 | ||||||||||||
Other comprehensive income (loss), net of tax of $123, $(278), $(964) and $(1,279) | ||||||||||||||||
Foreign currency translation adjustments | (3,245 | ) | (576 | ) | (10,483 | ) | 3,714 | |||||||||
Gain (loss) on cash flow hedges | 643 | (2,922 | ) | (11,894 | ) | (13,019 | ) | |||||||||
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders | $ | 31,861 | $ | 21,256 | $ | 49,781 | $ | 69,151 | ||||||||
Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders | $ | 0.48 | $ | 0.34 | $ | 1.00 | $ | 1.09 | ||||||||
Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders | $ | 0.47 | $ | 0.34 | $ | 0.99 | $ | 1.07 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollar amounts in thousands, except share information)
Number of Shares of Common Stock | Common Stock | Additional Paid-in Capital | Accumulated Earnings | Accumulated Other Comprehensive Loss | Non-Controlling Interest | Total Stockholders’ Equity | |||||||||||||||||||||
Balance at December 31, 2019 | 72,000,261 | $ | 720 | $ | — | $ | 296,476 | $ | (30,009 | ) | $ | 4,436 | $ | 271,623 | |||||||||||||
Share-based compensation recognized | — | — | 3,483 | — | — | — | 3,483 | ||||||||||||||||||||
Repurchase of common stock | (336,022 | ) | (3 | ) | (775 | ) | (6,522 | ) | — | — | (7,300 | ) | |||||||||||||||
Restricted stock units delivered, net of cashless | 201,066 | 2 | (2,708 | ) | — | — | — | (2,706 | ) | ||||||||||||||||||
Net income | — | — | — | 22,211 | — | 64 | 22,275 | ||||||||||||||||||||
Cash dividends declared on common stock, $0.05 per share | — | — | — | (3,600 | ) | — | — | (3,600 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | (20,164 | ) | (853 | ) | (21,017 | ) | |||||||||||||||||
Cumulative adjustment for the implementation of ASU 2016-13 | — | — | — | (74 | ) | — | — | (74 | ) | ||||||||||||||||||
Balance at March 31, 2020 | 71,865,305 | 719 | — | 308,491 | (50,173 | ) | 3,647 | 262,684 | |||||||||||||||||||
Share-based compensation recognized | — | — | 3,639 | — | — | — | 3,639 | ||||||||||||||||||||
Restricted stock units delivered, net of cashless | (2,445 | ) | — | (71 | ) | — | — | — | (71 | ) | |||||||||||||||||
Net income | — | — | — | 15,484 | — | 141 | 15,625 | ||||||||||||||||||||
Cash dividends declared on common stock, $0.05 per share | — | — | — | (3,593 | ) | — | — | (3,593 | ) | ||||||||||||||||||
Other comprehensive income | — | — | — | — | 389 | 295 | 684 | ||||||||||||||||||||
Balance at June 30, 2020 | 71,862,860 | 719 | 3,568 | 320,382 | (49,784 | ) | 4,083 | 278,968 | |||||||||||||||||||
Share-based compensation recognized | — | — | 3,663 | — | — | — | 3,663 | ||||||||||||||||||||
Restricted stock units delivered, net of cashless | 43,385 | — | (679 | ) | — | — | — | (679 | ) | ||||||||||||||||||
Net income | — | — | — | 34,463 | — | 118 | 34,581 | ||||||||||||||||||||
Cash dividends declared on common stock, $0.05 per share | — | — | — | (3,593 | ) | — | — | (3,593 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | (2,602 | ) | (130 | ) | (2,732 | ) | |||||||||||||||||
Balance at September 30, 2020 | 71,906,245 | $ | 719 | $ | 6,552 | $ | 351,252 | $ | (52,386 | ) | $ | 4,071 | $ | 310,208 | |||||||||||||
3
Number of Shares of Common Stock | Common Stock | Additional Paid-in Capital | Accumulated Earnings | Accumulated Other Comprehensive Loss | Non-Controlling Interest | Total Stockholders’ Equity | |||||||||||||||||||||
Balance at December 31, 2018 | 72,378,710 | $ | 723 | $ | 5,783 | $ | 228,742 | $ | (23,789 | ) | $ | 4,147 | $ | 215,606 | |||||||||||||
Share-based compensation recognized | — | — | 3,279 | — | — | — | 3,279 | ||||||||||||||||||||
Repurchase of common stock | (618,573 | ) | (6 | ) | (3,129 | ) | (14,351 | ) | — | — | (17,486 | ) | |||||||||||||||
Restricted stock units delivered | 507,308 | 5 | (5,933 | ) | — | — | — | (5,928 | ) | ||||||||||||||||||
Net income | — | — | — | 26,644 | — | 90 | 26,734 | ||||||||||||||||||||
Cash dividends declared on common stock, $0.05 per share | — | — | — | (3,617 | ) | — | — | (3,617 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | (2,090 | ) | — | (2,090 | ) | ||||||||||||||||||
Balance at March 31, 2019 | 72,267,445 | 722 | — | 237,418 | (25,879 | ) | 4,237 | 216,498 | |||||||||||||||||||
Share-based compensation recognized | — | — | 3,436 | — | — | — | 3,436 | ||||||||||||||||||||
Repurchase of common stock | (368,293 | ) | (4 | ) | (3,201 | ) | (7,505 | ) | — | — | (10,710 | ) | |||||||||||||||
Restricted stock units delivered | 38,364 | 1 | (235 | ) | — | — | — | (234 | ) | ||||||||||||||||||
Net income | — | — | — | 27,058 | — | 79 | 27,137 | ||||||||||||||||||||
Cash dividends declared on common stock, $0.05 per share | — | — | — | (3,610 | ) | — | — | (3,610 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | (3,717 | ) | — | (3,717 | ) | ||||||||||||||||||
Balance at June 30, 2019 | 71,937,516 | $ | 719 | $ | — | $ | 253,361 | $ | (29,596 | ) | $ | 4,316 | $ | 228,800 | |||||||||||||
Share-based compensation recognized | — | — | 3,453 | — | — | — | 3,453 | ||||||||||||||||||||
Repurchase of common stock | (8,120 | ) | — | (253 | ) | — | — | — | (253 | ) | |||||||||||||||||
Restricted stock units delivered | 18,167 | — | (142 | ) | — | — | — | (142 | ) | ||||||||||||||||||
Net income | — | — | — | 24,754 | — | 32 | 24,786 | ||||||||||||||||||||
Cash dividends declared on common stock, $0.05 per share | — | — | — | (3,597 | ) | — | — | (3,597 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | (3,498 | ) | (293 | ) | (3,791 | ) | |||||||||||||||||
Balance at September 30, 2019 | 71,947,563 | 719 | 3,058 | 274,518 | (33,094 | ) | 4,055 | 249,256 | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Nine months ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 72,481 | $ | 78,657 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 53,761 | 50,440 | ||||||
Amortization of debt issue costs and accretion of discount | 1,530 | 1,256 | ||||||
Operating lease amortization | 4,377 | 3,966 | ||||||
Provision for expected credit losses and sundry losses | 1,732 | 3,224 | ||||||
Deferred tax benefit | (2,082 | ) | (4,197 | ) | ||||
Share-based compensation | 10,785 | 10,168 | ||||||
Loss on disposition of property and equipment and other intangibles | 753 | 691 | ||||||
Earnings of equity method investment | (733 | ) | (726 | ) | ||||
Dividend received from equity method investment | — | 485 | ||||||
Decrease (increase) in assets: | ||||||||
Accounts receivable, net | (7,096 | ) | 6,475 | |||||
Prepaid expenses and other assets | (7,138 | ) | (7,268 | ) | ||||
Other long-term assets | 284 | (1,450 | ) | |||||
(Decrease) increase in liabilities: | ||||||||
Accrued liabilities and accounts payable | (7,969 | ) | (6,834 | ) | ||||
Income tax payable | 1,548 | (2,080 | ) | |||||
Unearned income | 2,350 | 6,718 | ||||||
Operating lease liabilities | (5,720 | ) | (4,825 | ) | ||||
Other long-term liabilities | 2,296 | 1,467 | ||||||
Total adjustments | 48,678 | 57,510 | ||||||
Net cash provided by operating activities | 121,159 | 136,167 | ||||||
Cash flows from investing activities | ||||||||
Additions to software | (23,521 | ) | (27,969 | ) | ||||
Property and equipment acquired | (13,402 | ) | (21,994 | ) | ||||
Proceeds from sales of property and equipment | 3 | 101 | ||||||
Net cash used in investing activities | (36,920 | ) | (49,862 | ) | ||||
Cash flows from financing activities | ||||||||
Statutory withholding taxes paid on share-based compensation | (3,456 | ) | (6,304 | ) | ||||
Repayment of short-term borrowings for purchase of equipment and software | (1,553 | ) | (852 | ) | ||||
Dividends paid | (10,786 | ) | (10,824 | ) | ||||
Repurchase of common stock | (7,300 | ) | (28,449 | ) | ||||
Repayment of long-term debt | (27,685 | ) | (10,688 | ) | ||||
Net cash used in financing activities | (50,780 | ) | (57,117 | ) | ||||
Effect of foreign exchange rate on cash, cash equivalents and restricted cash | (2,384 | ) | — | |||||
Net increase in cash, cash equivalents and restricted cash | 31,075 | 29,188 | ||||||
Cash, cash equivalents and restricted cash at beginning of the period | 131,121 | 86,746 | ||||||
Cash, cash equivalents and restricted cash at end of the period | $ | 162,196 | $ | 115,934 | ||||
Reconciliation of cash, cash equivalents and restricted cash | ||||||||
Cash and cash equivalents | $ | 144,147 | $ | 102,535 | ||||
Restricted cash | 18,049 | 13,399 | ||||||
Cash, cash equivalents and restricted cash | $ | 162,196 | $ | 115,934 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 18,081 | $ | 21,668 | ||||
Cash paid for income taxes | 15,257 | 12,535 | ||||||
Supplemental disclosure of non-cash activities: | ||||||||
Payable due to vendor related to equipment and software acquired | $ | 1,486 | $ | 2,707 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Notes to Unaudited Condensed Consolidated Financial Statements
6
Note 1 – The Company and Basis of Presentation
The Company
EVERTEC, Inc. (formerly known as Carib Latam Holdings, Inc.) and its subsidiaries (collectively the “Company,” or “EVERTEC”) is a leading full-service transaction processing business in Latin America and the Caribbean. The Company is based in Puerto Rico and provides a broad range of merchant acquiring, payment processing and business process management services. The Company provides services across 26 countries in the region. EVERTEC owns and operates the ATH network, one of the leading personal identification number ("PIN") debit networks and automated teller machine ("ATM") in the Caribbean and Latin America. In addition, EVERTEC provides a comprehensive suite of services for core bank processing and cash processing in Puerto Rico and technology outsourcing in all the regions the Company serves. EVERTEC serves a broad and diversified customer base of leading financial institutions, merchants, corporations and government agencies with solutions that are essential to their operations, enabling them to issue, process and accept transactions securely. EVERTEC's common stock is listed under the ticker symbol "EVTC" on the New York Stock Exchange.
Basis of Presentation
The unaudited condensed consolidated financial statements of EVERTEC have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the accompanying unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited condensed consolidated financial statements. Actual results could differ from these estimates.
Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted from these statements pursuant to the rules and regulations of the Securities and Exchange Commission and, accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Company for the year ended December 31, 2019, included in the Company’s 2019 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated financial statements, prepared in accordance with GAAP, contain all adjustments necessary for a fair presentation. Intercompany accounts and transactions are eliminated in consolidation.
Risks and Uncertainties due to COVID-19 Pandemic
COVID-19 presents material uncertainty and risk with respect to EVERTEC’s business, results of operations and cash flows, as well as with respect to changes in laws and regulations and government and regulatory policy. COVID-19’s impact on global economies could have a material adverse effect on (among other things) the profitability, capital and liquidity of the Company, particularly if consumer spending levels are depressed for a prolonged period of time. While the rapid development and fluidity of the situation prevents management from having clear visibility into the medium and long-term impacts, management believes possible effects may include, but are not limited to, disruption to the Company’s customers and revenue, absenteeism in the Company’s workforce, unavailability of products and supplies used in operations, and a decline in the value of assets held by the Company, including, among other things, tangible and intangible long-lived assets, and increased levels in the Company's current expected credit loss reserve.
Given the uncertain and rapidly evolving situation, management has taken certain precautionary measures intended to help minimize the risk of COVID-19 to the Company, its employees, and customers, including the following:
• | The Company deployed its business continuity plan for the entire organization a few days before the government of Puerto Rico enacted a shelter-in-place directive on March 16, 2020. Since then, every country in which the Company operates has implemented some type of social distancing measures. Management expects that most of our employees will remain working remotely for an undetermined period, until it is deemed safe by management to return to our offices and as permitted or advised by local authorities in each country where the Company operates; |
• | In connection with the Company's business continuity plan, the Company transitioned most of its employees to a work from home environment. For certain critical employees who are required to remain working on-site in order to, among other things, maintain network operations oversight functions, cash handling and other critical operations for our customers, we have implemented safety measures including administering daily temperature checks upon entry into the work site, providing protective gear, developing safe social distancing workspaces and increasing overall sanitation at our offices; |
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• | On May 1, 2020, the Company commenced deferral of payroll taxes as permitted under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act"); management anticipates a $2.9 million deferral of payroll taxes during the allowed time under the CARES Act. Through September 30, 2020, the Company has deferred payroll taxes amounting to $1.7 million; |
• | Management identified additional expense reductions that are intended to be implemented as necessary; and |
• | Management has suspended all non-essential travel for employees. |
While the Company anticipates that the foregoing measures are temporary, management cannot predict their duration, and management may elect or need to take additional precautions as more information related to COVID-19 becomes available, as may be required by governmental authorities, or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities. The extent to which the COVID-19 pandemic and EVERTEC’s precautionary measures in response to it, may impact the Company’s business, financial condition or results of operations will depend on the ongoing developments related to the pandemic and its direct and indirect consequences, all of which are highly uncertain and cannot be predicted at this time.
Note 2 – Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued updated guidance for the measurement of credit losses on financial instruments, which replaces the incurred loss impairment model with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The main objective of this update and subsequent clarifications and corrections, including ASU 2018-19, ASU 2019-04, ASU 2019-05, and ASU 2020-03, is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments affect the Company's trade receivables. Additional disclosures about significant estimates and credit quality are also required. The Company adopted this new guidance effective January 1, 2020, using a modified retrospective approach through a cumulative-effect adjustment to accumulated earnings, considered immaterial to the consolidated financial statements. Results for reporting periods beginning after January 1, 2020 are presented under the new guidance provided by Accounting Standards Codification ("ASC") Topic 326, while prior period amounts are not adjusted and continue to be reported under legacy GAAP.
Refer to Note 3, Current Expected Credit Losses, for discussions of the implementation of ASC Topic 326 with respect to the Company’s consolidated financial statements.
In August 2018, the FASB issued updated guidance for customer’s accounting for implementation, set-up and other upfront costs (collectively referred to as implementation costs) incurred in a cloud computing arrangement constituting a service contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The updated guidance does not impact the accounting for the service element of a hosting arrangement that is a service contract. The Company adopted this guidance prospectively effective January 1, 2020 with respect to all implementation costs incurred in a cloud computing arrangement constituting a service contract.
In November 2018, the FASB issued updated guidance to clarify the interaction between the guidance for collaborative arrangements and the updated revenue recognition guidance. The amendments in this update, among other things, provide guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under ASC Topic 606, Revenue from Contracts with Customers. The Company adopted the amendments in this update effective January 1, 2020. All contracts after this date are being evaluated under the updated guidance.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued updated guidance for ASC Topic 848, Reference Rate Reform, to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met for a limited period of time in order to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are elective and apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract
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modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments to this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating whether to elect the adoption of this guidance with respect to the consolidated financial statements.
Accounting Pronouncements Issued Prior to 2020 and Not Yet Adopted
In December 2019, the FASB issued updated guidance for ASC Topic 740, Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles set out in ASC Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. The amendments to this update are effective for fiscal years, and interim periods within such fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating the impact, if any, of the adoption of this guidance on the consolidated financial statements.
Note 3 – Current Expected Credit Losses
Allowance for Current Expected Credit Losses
The Company has only one type of financial asset that is subject to the expected credit loss model, which is trade receivables from contracts with customers. While contract assets and net investments in leases are also subject to the impairment requirements of ASC Topic 326, no impairment losses were recognized for these financial assets as of September 30, 2020.
To measure expected credit losses, trade receivables are grouped based on shared risk characteristics (i.e., the relevant industry sector and customer's geographical location) and days past due (i.e., delinquency status), while considering the following:
• | Customers in the same geographical location share similar risk characteristics associated with the macroeconomic environment of their country. |
• | The Company has two main industry sectors: private and governmental. The private pool is comprised mainly of leading financial institutions, merchants and corporations, while the governmental pool is comprised by government agencies. The governmental customers possess different risk characteristics than private customers because although all invoices are due 30 days after issuance, governmental customers usually pay within 60 to 90 days after issuance (i.e., between 30 to 60 more days than private customers). The Company provides to its customers a broad range of merchant acquiring, payment services and business process management services, which constitute mission-critical technology solutions enabling customers to issue, process and accept transactions securely. |
• | The expected credit loss rate is likely to increase as receivables move to older aging buckets. The Company used the following aging categories to estimate the risk of delinquency status: (i) 0 days past due; (ii) 1-30 days past due; (iii) 31-60 days past due; (iv) 61-90 days past due; and (v) over 90 days past due. |
The credit losses of the Company’s trade receivables have been historically low and most balances are collected within one year. Therefore, the Company determined that the expected loss rates should be calculated using the historical loss rates adjusted by macroeconomic factors. The historical rates are calculated for each of the aging categories used for pooling trade receivables. To determine the collected portion of each bucket, the collection time of each trade receivable is identified, to estimate the proportion of outstanding balances per aging bucket that ultimately will not be collected. This is used to determine the expectation of losses based on the history of uncollected trade receivables once the specific past due period is surpassed. The historical rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of customers to settle the receivables by applying a country risk premium as the forward-looking macroeconomic factor. Specific reserves are established for certain customers for which collection is doubtful.
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Rollforward of the Allowance for Expected Current Credit Losses
The activity in the allowance for expected current credit losses on trade receivables during the period from January 1, 2020 to September 30, 2020, was as follows:
(In thousands) | September 30, 2020 | |||
Balance at beginning of period | $ | 3,460 | ||
Current period provision for expected credit losses | 1,058 | |||
Write-offs | (1,428 | ) | ||
Recoveries of amounts previously written-off | 3 | |||
Balance at end of period | $ | 3,093 | ||
The Company does not have a delinquency threshold for writing-off trade receivables. The Company has a formal process for the review and approval of write-offs.
Impairment losses on trade receivables are presented as net impairment losses within cost of revenue, exclusive of depreciation and amortization in the unaudited condensed consolidated statement of income and comprehensive income. Subsequent recoveries of amounts previously written-off are credited against the allowance for expected current credit losses within accounts receivable, net on the unaudited condensed consolidated balance sheet.
Note 4 – Property and Equipment, net
Property and equipment, net consists of the following:
(Dollar amounts in thousands) | Useful life in years | September 30, 2020 | December 31, 2019 | |||||||
Buildings | 30 | $ | 1,458 | $ | 1,542 | |||||
Data processing equipment | 3 - 5 | 124,867 | 116,950 | |||||||
Furniture and equipment | 3 - 20 | 7,081 | 6,936 | |||||||
Leasehold improvements | 5 -10 | 3,008 | 2,814 | |||||||
136,414 | 128,242 | |||||||||
Less - accumulated depreciation and amortization | (94,421 | ) | (85,780 | ) | ||||||
Depreciable assets, net | 41,993 | 42,462 | ||||||||
Land | 1,262 | 1,329 | ||||||||
Property and equipment, net | $ | 43,255 | $ | 43,791 | ||||||
Depreciation and amortization expense related to property and equipment for three and nine months ended September 30, 2020 amounted to $4.4 million and $12.9 million, respectively, compared to $4.1 million and $12.4 million for the corresponding periods in 2019.
Note 5 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill, allocated by operating segments, were as follows (see Note 15):
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Total | |||||||||||||||
Balance at December 31, 2019 | $ | 160,972 | $ | 54,571 | $ | 138,121 | $ | 45,823 | $ | 399,487 | ||||||||||
Foreign currency translation adjustments | — | (4,439 | ) | — | — | (4,439 | ) | |||||||||||||
Balance at September 30, 2020 | $ | 160,972 | $ | 50,132 | $ | 138,121 | $ | 45,823 | $ | 395,048 | ||||||||||
Goodwill is tested for impairment on an annual basis as of August 31, or more often if events or changes in circumstances indicate there may be impairment. The Company may test for goodwill impairment using a qualitative or a quantitative analysis. In the quantitative analysis, the Company compares the estimated fair value of the reporting units to their carrying values, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is
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not considered impaired. If the fair value does not exceed the carrying value, an impairment loss is recorded for the excess of the carrying value over the fair value, limited to the recorded balance of goodwill. No impairment losses were recognized as of September 30, 2020.
The carrying amount of other intangible assets at September 30, 2020 and December 31, 2019 was as follows:
September 30, 2020 | ||||||||||||||
(Dollar amounts in thousands) | Useful life in years | Gross amount | Accumulated amortization | Net carrying amount | ||||||||||
Customer relationships | 8 - 14 | $ | 343,489 | $ | (239,718 | ) | $ | 103,771 | ||||||
Trademarks | 10 - 15 | 41,934 | (35,164 | ) | 6,770 | |||||||||
Software packages | 3 - 10 | 278,609 | (185,911 | ) | 92,698 | |||||||||
Non-compete agreement | 15 | 56,539 | (37,693 | ) | 18,846 | |||||||||
Other intangible assets, net | $ | 720,571 | $ | (498,486 | ) | $ | 222,085 | |||||||
December 31, 2019 | ||||||||||||||
(Dollar amounts in thousands) | Useful life in years | Gross amount | Accumulated amortization | Net carrying amount | ||||||||||
Customer relationships | 8 - 14 | $ | 344,883 | $ | (220,434 | ) | $ | 124,449 | ||||||
Trademarks | 2 - 15 | 42,025 | (32,456 | ) | 9,569 | |||||||||
Software packages | 3 - 10 | 256,220 | (169,974 | ) | 86,246 | |||||||||
Non-compete agreement | 15 | 56,539 | (34,866 | ) | 21,673 | |||||||||
Other intangible assets, net | $ | 699,667 | $ | (457,730 | ) | $ | 241,937 | |||||||
Amortization expense related to other intangibles for the three and nine months ended September 30, 2020 amounted to $13.7 million and $40.8 million, respectively, compared to $12.9 million and $38.0 million for the corresponding periods in 2019.
The estimated amortization expense of the balances outstanding at September 30, 2020 for the next five years is as follows:
(Dollar amounts in thousands) | ||||
Remaining 2020 | $ | 12,859 | ||
2021 | 48,703 | |||
2022 | 42,899 | |||
2023 | 37,704 | |||
2024 | 29,156 | |||
Note 6 – Debt and Short-Term Borrowings
Total debt at September 30, 2020 and December 31, 2019 follows:
(In thousands) | September 30, 2020 | December 31, 2019 | ||||||
2023 Term A Loan bearing interest at a variable interest rate (LIBOR plus applicable margin(1)(2)) | $ | 191,423 | $ | 207,261 | ||||
2024 Term B Loan bearing interest at a variable interest rate (LIBOR plus applicable margin(1)(3)) | 307,133 | 317,936 | ||||||
Note payable due April 30, 2021(1) | 78 | 175 | ||||||
Note payable due January 1, 2022(1) | 1,408 | 2,231 | ||||||
Total debt | $ | 500,042 | $ | 527,603 | ||||
(1) | Net of unaccreted discount and unamortized debt issue costs, as applicable. |
(2) | Applicable margin of 2.00% at September 30, 2020 and December 31, 2019. |
(3) | Subject to a minimum rate ("LIBOR floor") of 0% plus applicable margin of 3.50% at September 30, 2020 and December 31, 2019. |
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Secured Credit Facilities
On November 27, 2018, EVERTEC and EVERTEC Group, LLC ("EVERTEC Group") (collectively, “Borrower”) entered into a credit agreement providing for the secured credit facilities, consisting of a $220.0 million term loan A facility that matures on November 27, 2023 (the “2023 Term A Loan"), a $325.0 million term loan B facility that matures on November 27, 2024 (the “2024 Term B Loan”), and a $125.0 million revolving credit facility (the “Revolving Facility”) that matures on November 27, 2023, with a syndicate of lenders and Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent, swingline lender and line of credit issuer (collectively the “2018 Credit Agreement”).
The 2018 Credit Agreement requires mandatory repayment of outstanding principal balances based on a percentage of excess cash flow, provided that no such payment shall be due if the resulting amount of the excess cash flow multiplied by the applicable percentage is less than $10 million. On March 5, 2020, in connection with this mandatory repayment clause, the Company repaid $17.0 million as a result of excess cash flow calculation performed for the year ended December 31, 2019.
The unpaid principal balance at September 30, 2020 of the 2023 Term A Loan and the 2024 Term B Loan was $192.8 million and $310.3 million, respectively. The additional borrowing capacity under our Revolving Facility at September 30, 2020 was $101.7 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
Notes Payable
In December 2019, EVERTEC Group entered into two non-interest bearing financing agreements amounting to $2.4 million to purchase software and maintenance. As of September 30, 2020 and December 31, 2019, the outstanding principal balance of the notes payable was $1.5 million and $2.4 million, respectively. The current portion of these notes is included in accounts payable and the long-term portion is included in other long-term liabilities in the Company's unaudited condensed consolidated balance sheet.
Interest Rate Swaps
As of September 30, 2020, the Company has an interest rate swap agreement, entered into in December 2018, which converts a portion of the interest rate payments on the Company's 2024 Term B Loan from variable to fixed:
Swap Agreement | Effective date | Maturity Date | Notional Amount | Variable Rate | Fixed Rate | |||||
2018 Swap | April 2020 | November 2024 | $250 million | 1-month LIBOR | 2.89% | |||||
The Company has accounted for this agreement as a cash flow hedge.
Additionally, the Company had an interest rate swap agreement that matured in April 2020, with a notional amount of $200 million and a fixed rate of 1.9225%. The Company accounted for this swap as a cash flow hedge from inception to maturity.
As of September 30, 2020 and December 31, 2019, the carrying amount of derivatives included on the Company's unaudited condensed consolidated balance sheets was $27.4 million and $14.5 million, respectively. The fair value of these derivatives is estimated using Level 2 inputs in the fair value hierarchy on a recurring basis. Refer to Note 8 for disclosure of losses recorded on cash flow hedging activities.
During the three and nine months ended September 30, 2020, the Company reclassified losses of $1.7 million and $3.3 million, respectively, from accumulated other comprehensive loss into interest expense. Based on current LIBOR rates, the Company expects to reclassify losses of $6.8 million from accumulated other comprehensive loss into interest expense over the next 12 months.
The cash flow hedge is considered highly effective.
Note 7 – Financial Instruments and Fair Value Measurements
Recurring Fair Value Measurements
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The Company's interest rate swaps are the only financial instruments measured at fair value on a recurring basis. The fair value is estimated using Level 2 inputs under the fair value hierarchy. These derivatives were in a liability position with balances of $27.4 million and $14.5 million as of September 30, 2020 and December 31, 2019, respectively.
The following table presents the carrying value, as applicable, and estimated fair values for financial instruments at September 30, 2020 and December 31, 2019:
September 30, 2020 | December 31, 2019 | |||||||||||||||
(In thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial liabilities: | ||||||||||||||||
Interest rate swap | $ | 27,370 | $ | 27,370 | $ | 14,452 | $ | 14,452 | ||||||||
2023 Term A Loan | 191,424 | 189,380 | 207,261 | 206,388 | ||||||||||||
2024 Term B Loan | 307,133 | 308,760 | 317,936 | 324,163 | ||||||||||||
The fair values of the term loans at September 30, 2020 and December 31, 2019 were obtained using prices provided by third party service providers. Their pricing is based on various inputs such as market quotes, recent trading activity in a non-active market or imputed prices. These inputs are considered Level 3 inputs under the fair value hierarchy. Future estimates of fair value may be negatively impacted by market reactions to COVID-19. Also, the pricing may include the use of an algorithm that could take into account movements in the general high yield market, among other variants.
Note 8 – Equity
Accumulated Other Comprehensive Loss
The following table provides a summary of the changes in the balances of accumulated other comprehensive loss for the nine months ended September 30, 2020:
(In thousands) | Foreign Currency Translation Adjustments | Cash Flow Hedges | Total | |||||||||
Balance - December 31, 2019, net of tax | $ | (16,872 | ) | $ | (13,137 | ) | $ | (30,009 | ) | |||
Other comprehensive loss before reclassifications | (10,483 | ) | (15,208 | ) | (25,691 | ) | ||||||
Effective portion reclassified to net income | — | 3,314 | 3,314 | |||||||||
Balance - September 30, 2020, net of tax | $ | (27,355 | ) | $ | (25,031 | ) | $ | (52,386 | ) | |||
Note 9 – Share-based Compensation
Long-term Incentive Plan ("LTIP")
During the three months ended March 31, 2018, 2019 and 2020, the Compensation Committee of the Company's Board of Directors ("Board") approved grants of restricted stock units (“RSUs”) to executives and certain employees pursuant to the 2018 LTIP, 2019 LTIP and 2020 LTIP, respectively, all under the terms of the Company's 2013 Equity Incentive Plan. Under the LTIPs, the Company granted restricted stock units to eligible participants as time-based awards and/or performance-based awards.
The vesting of the RSUs is dependent upon service, market, and/or performance conditions as defined in the grants. Employees that received time-based awards with service conditions are entitled to receive a specific number of shares of the Company’s common stock on the vesting date if the employee is providing services to the Company on the vesting date. Time-based awards vest over a period of three years in substantially equal installments commencing on the grant date and ending on February 28 of each year for the 2018 LTIP, February 22 of each year for the 2019 LTIP, and February 27 of each year for the 2020 LTIP.
For the performance-based awards under the 2018 LTIP, 2019 LTIP, and 2020 LTIP, the Compensation Committee established adjusted earnings before income taxes, depreciation and amortization ("Adjusted EBITDA") as the primary performance measure while maintaining focus on total shareholder return through the use of a market-based total shareholder return ("TSR") performance modifier. The TSR modifier adjusts the shares earned based on the core Adjusted EBITDA performance upwards or downwards (+/- 25%) based on the Company’s relative TSR at the end of the three-year performance period as compared to
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the companies in the Russell 2000 Index. The Adjusted EBITDA performance measure will be calculated for the one-year period commencing on January 1 of the year of the grant and ending on December 31 of the same year, relative to the goals set by the Compensation Committee for this same period. The shares earned will be subject to an additional two-year service vesting period.
Performance and market-based awards vest at the end of the performance period that commenced on February 28, 2018 for the 2018 LTIP, February 22, 2019 for the 2019 LTIP, and February 27, 2020 for the 2020 LTIP. The periods end on February 28, 2021 for the 2018 LTIP, February 22, 2022 for the 2019 LTIP and February 27, 2023 for the 2020 LTIP. Unless otherwise specified in the award agreement, or in an employment agreement, awards are forfeited if the employee voluntarily ceases to be employed by the Company prior to vesting.
The following table summarizes nonvested restricted shares and RSUs activity for the nine months ended September 30, 2020:
Nonvested restricted shares and RSUs | Shares | Weighted-average grant date fair value | |||||
Nonvested at December 31, 2019 | 1,592,755 | $ | 20.71 | ||||
Forfeited | (149,811 | ) | 19.18 | ||||
Vested | (402,842 | ) | 26.98 | ||||
Granted | 413,733 | 31.62 | |||||
Nonvested at September 30, 2020 | 1,453,835 | $ | 24.30 | ||||
For the three and nine months ended September 30, 2020, the Company recognized $3.7 million and $10.8 million of share-based compensation expense, compared with $3.5 million and $10.2 million for the corresponding periods in 2019.
As of September 30, 2020, the maximum unrecognized cost for restricted stock and RSUs was $19.9 million. The cost is expected to be recognized over a weighted average period of 1.9 years.
Note 10 – Revenues
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into primary geographical markets, nature of the products and services, and timing of transfer of goods and services. The Company's operating segments are determined by the nature of the products and services the Company provides and the primary geographical markets in which the Company operates. Revenue disaggregated by segment is discussed in Note 15, Segment Information.
In the following tables, revenue for each segment, excluding intersegment revenues, is disaggregated by timing of revenue recognition for the periods indicated.
Three months ended September 30, 2020 | |||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Total | ||||||||||||||
Timing of revenue recognition | |||||||||||||||||||
Products and services transferred at a point in time | $ | 43 | $ | 357 | $ | — | $ | 4,824 | $ | 5,224 | |||||||||
Products and services transferred over time | 23,652 | 18,791 | 30,646 | 58,194 | 131,283 | ||||||||||||||
$ | 23,695 | $ | 19,148 | $ | 30,646 | $ | 63,018 | $ | 136,507 | ||||||||||
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Three months ended September 30, 2019 | |||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Total | ||||||||||||||
Timing of revenue recognition | |||||||||||||||||||
Products and services transferred at a point in time | $ | 43 | $ | 228 | $ | — | $ | 2,939 | $ | 3,210 | |||||||||
Products and services transferred over time | 20,299 | 18,853 | 26,436 | 50,006 | 115,594 | ||||||||||||||
$ | 20,342 | $ | 19,081 | $ | 26,436 | $ | 52,945 | $ | 118,804 | ||||||||||
Nine months ended September 30, 2020 | |||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Total | ||||||||||||||
Timing of revenue recognition | |||||||||||||||||||
Products and services transferred at a point in time | $ | 80 | $ | 994 | $ | — | $ | 7,886 | $ | 8,960 | |||||||||
Products and services transferred over time | 63,838 | 56,487 | 80,532 | 166,569 | 367,426 | ||||||||||||||
$ | 63,918 | $ | 57,481 | $ | 80,532 | $ | 174,455 | $ | 376,386 | ||||||||||
Nine months ended September 30, 2019 | |||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Total | ||||||||||||||
Timing of revenue recognition | |||||||||||||||||||
Products and services transferred at a point in time | $ | 2,835 | $ | 419 | $ | — | $ | 6,590 | $ | 9,844 | |||||||||
Products and services transferred over time | 60,957 | 57,282 | 79,203 | 152,902 | 350,344 | ||||||||||||||
$ | 63,792 | $ | 57,701 | $ | 79,203 | $ | 159,492 | $ | 360,188 | ||||||||||
Contract Balances
The following table provides information about contract assets from contracts with customers.
(In thousands) | September 30, 2020 | ||
December 31, 2019 | $ | 1,191 | |
Services transferred to customers | 2,790 | ||
Transfers to accounts receivable | (1,740 | ) | |
September 30, 2020 | $ | 2,241 | |
The current portion of contract assets is recorded as part of prepaid expenses and other assets, and the long-term portion is included in other long-term assets in the unaudited condensed consolidated balance sheets.
Accounts receivable, net at September 30, 2020 amounted to $111.9 million. Unearned income and unearned income - long term, which refer to contract liabilities, at September 30, 2020 amounted to $19.8 million and $30.8 million, respectively, and may arise when consideration is received or due in advance from customers prior to performance. Unearned income is mainly related to upfront fees for implementation or set up activities, including fees charged in pre-production periods in connection
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with hosting or managed services. During the three and nine months ended September 30, 2020, the Company recognized revenue of $3.9 million and $13.1 million, respectively, that was included in unearned income at December 31, 2019. During the three and nine months ended September 30, 2019, the Company recognized revenue of $1.8 million and $13.1 million, respectively, that was included in unearned income at December 31, 2018.
The estimated aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially satisfied at September 30, 2020 is $307.1 million. This amount primarily consists of professional service fees for implementation or set up activities related to managed services and maintenance services, typically recognized over the life of the contract, which varies from 2 to 5 years. It also includes professional service fees for customizations or development of on-premise licensing agreements, which are recognized over time based on inputs relative to the total expected inputs to satisfy a performance obligation.
Note 11 – Income Tax
The components of income tax expense for the three and nine months ended September 30, 2020 and 2019, respectively, consisted of the following:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(In thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Current tax provision | $ | 7,381 | $ | 6,096 | $ | 17,633 | $ | 14,215 | ||||||||
Deferred tax benefit | (868 | ) | (2,376 | ) | (2,082 | ) | (4,197 | ) | ||||||||
Income tax expense | $ | 6,513 | $ | 3,720 | $ | 15,551 | $ | 10,018 | ||||||||
The Company conducts operations in Puerto Rico and certain countries in Latin America. As a result, the income tax expense includes the effect of taxes paid to the government of Puerto Rico as well as foreign jurisdictions. The following table presents the components of income tax expense for the three and nine months ended September 30, 2020 and 2019, and its segregation based on location of operations:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(In thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Current tax provision | ||||||||||||||||
Puerto Rico | $ | 3,280 | $ | 2,117 | $ | 6,487 | $ | 5,433 | ||||||||
United States | 214 | 187 | 508 | 202 | ||||||||||||
Foreign countries | 3,887 | 3,792 | 10,638 | 8,580 | ||||||||||||
Total current tax provision | $ | 7,381 | $ | 6,096 | $ | 17,633 | $ | 14,215 | ||||||||
Deferred tax (benefit) provision | ||||||||||||||||
Puerto Rico | $ | (989 | ) | $ | (1,583 | ) | $ | (1,535 | ) | $ | (3,178 | ) | ||||
United States | (68 | ) | (169 | ) | 1,033 | (168 | ) | |||||||||
Foreign countries | 189 | (624 | ) | (1,580 | ) | (851 | ) | |||||||||
Total deferred tax benefit | $ | (868 | ) | $ | (2,376 | ) | $ | (2,082 | ) | $ | (4,197 | ) | ||||
Taxes payable to foreign countries by EVERTEC’s subsidiaries will be paid by such subsidiary and the corresponding liability and expense will be presented in EVERTEC’s consolidated financial statements.
As of September 30, 2020, the Company has $74.2 million of unremitted earnings from foreign subsidiaries. The Company has not recognized a deferred tax liability on undistributed earnings for the Company’s foreign subsidiaries because these earnings are intended to be indefinitely reinvested.
As of September 30, 2020, the gross deferred tax asset amounted to $17.3 million and the gross deferred tax liability amounted to $16.2 million, compared to $12.8 million and $15.0 million, respectively, as of December 31, 2019.
Income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate to the income before income taxes as a result of the following:
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Nine months ended September 30, | ||||||||
(In thousands) | 2020 | 2019 | ||||||
Computed income tax at statutory rates | $ | 33,012 | $ | 33,253 | ||||
Differences in tax rates due to multiple jurisdictions | 831 | 405 | ||||||
Excess tax benefits on share-based compensation | (262 | ) | (1,300 | ) | ||||
Effect of income subject to tax-exemption grant | (21,662 | ) | (24,128 | ) | ||||
Unrecognized tax benefit | 1,173 | 211 | ||||||
Other expense | 2,459 | 1,577 | ||||||
Income tax expense | $ | 15,551 | $ | 10,018 | ||||
Note 12 – Net Income Per Common Share
The reconciliation of the numerator and denominator of the income per common share is as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(Dollar amounts in thousands, except per share information) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income attributable to EVERTEC, Inc.’s common stockholders | $ | 34,463 | $ | 24,754 | $ | 72,158 | $ | 78,456 | ||||||||
Less: non-forfeitable dividends on restricted stock | — | 2 | — | 2 | ||||||||||||
Net income available to EVERTEC, Inc.’s common shareholders | $ | 34,463 | $ | 24,752 | $ | 72,158 | $ | 78,454 | ||||||||
Weighted average common shares outstanding | 71,886,439 | 71,942,403 | 71,921,069 | 72,148,312 | ||||||||||||
Weighted average potential dilutive common shares (1) | 1,115,341 | 1,372,301 | 1,128,748 | 1,382,553 | ||||||||||||
Weighted average common shares outstanding - assuming dilution | 73,001,780 | 73,314,704 | 73,049,817 | 73,530,865 | ||||||||||||
Net income per common share - basic | $ | 0.48 | $ | 0.34 | $ | 1.00 | $ | 1.09 | ||||||||
Net income per common share - diluted | $ | 0.47 | $ | 0.34 | $ | 0.99 | $ | 1.07 | ||||||||
(1) | Potential common shares consist of common stock issuable under the assumed release of restricted stock awards using the treasury stock method. |
On February 20, 2020, April 21, 2020, and July 24, 2020, the Company's Board declared quarterly cash dividends of $0.05 per share of common stock, which were paid on April 3, 2020, June 5, 2020 and September 4, 2020, respectively, to stockholders of record as of the close of business on March 4, 2020, May 4, 2020 and August 3, 2020, respectively.
Note 13 – Commitments and Contingencies
EVERTEC is a defendant in a number of legal proceedings arising in the ordinary course of business. Based on the opinion of legal counsel and other factors, management believes that the final disposition of these matters will not have a material adverse effect on the business, results of operations, financial condition, or cash flows of the Company. The Company has identified certain claims as a result of which a loss may be incurred, but in the aggregate the loss would be insignificant. For other claims regarding proceedings that are in an initial phase, the Company is unable to estimate the range of possible loss, if any, but at this time believes that any loss related to such claims will not be material.
For details of the Company's commitments, refer to Note 22, Commitments and Contingencies included in the Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Note 14 – Related Party Transactions
The following table presents the Company’s transactions with related parties for the three and nine months ended September 30, 2020 and 2019:
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Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(Dollar amounts in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Total revenues (1)(2) | $ | 57,343 | $ | 52,702 | $ | 165,703 | $ | 154,022 | ||||||||
Cost of revenues | $ | 700 | $ | 1,719 | $ | 3,100 | $ | 3,580 | ||||||||
Operating lease cost and other fees | $ | 2,053 | $ | 1,959 | $ | 6,094 | $ | 6,177 | ||||||||
Interest earned from affiliate | ||||||||||||||||
Interest income | $ | 93 | $ | 43 | $ | 290 | $ | 98 | ||||||||
(1) | Popular revenues as a percentage of total revenues were 42%, 44%, 44% and 43%, respectively, for each of the periods presented above. |
(2) | Includes revenues generated from investee accounted for under the equity method of $0.1 million, $0.3 million, $0.5 million, and $0.8 million, respectively, for each of the periods presented above. |
As of September 30, 2020 and December 31, 2019, EVERTEC had the following balances arising from transactions with related parties:
(Dollar amounts in thousands) | September 30, 2020 | December 31, 2019 | ||||||
Cash and restricted cash deposits in affiliated bank | $ | 80,149 | $ | 64,724 | ||||
Other due to/from affiliate | ||||||||
Accounts receivable | $ | 26,944 | $ | 39,095 | ||||
Prepaid expenses and other assets | $ | 4,466 | $ | 4,211 | ||||
Operating lease right-of use assets | $ | 17,993 | $ | 20,617 | ||||
Other long-term assets | $ | 11 | $ | 57 | ||||
Accounts payable | $ | 4,523 | $ | 7,250 | ||||
Unearned income | $ | 34,621 | $ | 35,489 | ||||
Operating lease liabilities | $ | 18,442 | $ | 20,905 | ||||
Note 15 – 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) 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.
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The Payment Services - Latin America segment revenues consist of revenues related to providing access to the ATH network of ATMs and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POS transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions), as well as licensed software solutions for risk and fraud management and card payment processing. For network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed, and other processing services.
The Merchant Acquiring segment consists of revenues from services that allow merchants to accept electronic methods of payment. In the Merchant Acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees and rental fees from POS devices and other equipment, net of credit card interchange and assessment fees charged by credit cards associations (such as VISA or MasterCard) or payment networks. The discount fee is generally a percentage of the transaction value. EVERTEC also charges merchants for other services that are unrelated to the number of transactions or the transaction value.
The Business Solutions segment consists of revenues from a full suite of business process management solutions in various product areas such as core bank processing, network hosting and management, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived in part from a recurrent fixed fee and from fees based on the number of accounts on file (i.e. savings or checking accounts, loans, etc.) or computer resources utilized. Revenues from other processing services within the Business Solutions segment are generally volume-based and depend on factors such as the number of accounts processed. In addition, EVERTEC is a reseller of hardware and software products and these resale transactions are generally non-recurring.
In addition to the four operating segments described above, management identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These areas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these areas are aggregated and presented within the “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and Other category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:
• | marketing, |
• | corporate finance and accounting, |
• | human resources, |
• | legal, |
• | risk management functions, |
• | 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:
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Three months ended September 30, 2020 | |||||||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Corporate and Other (1) | Total | |||||||||||||||||
Revenues | $ | 33,284 | $ | 21,241 | $ | 30,646 | $ | 63,018 | $ | (11,682 | ) | $ | 136,507 | ||||||||||
Operating costs and expenses | 19,045 | 18,284 | 15,643 | 35,276 | 4,415 | 92,663 | |||||||||||||||||
Depreciation and amortization | 3,349 | 2,936 | 477 | 4,372 | 6,993 | 18,127 | |||||||||||||||||
Non-operating income (expenses) | 127 | 2,959 | 161 | 411 | (970 | ) | 2,688 | ||||||||||||||||
EBITDA | 17,715 | 8,852 | 15,641 | 32,524 | (10,073 | ) | 64,659 | ||||||||||||||||
Compensation and benefits (2) | 258 | 686 | 244 | 466 | 2,015 | 3,669 | |||||||||||||||||
Transaction, refinancing and other fees (3) | 500 | — | — | — | 1,205 | 1,705 | |||||||||||||||||
Adjusted EBITDA | $ | 18,473 | $ | 9,538 | $ | 15,885 | $ | 32,990 | $ | (6,853 | ) | $ | 70,033 | ||||||||||
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $9.1 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $2.6 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $4.3 million. |
(2) | Primarily represents share-based compensation. |
(3) | Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, an impairment charge and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A. |
Three months ended September 30, 2019 | |||||||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Corporate and Other (1) | Total | |||||||||||||||||
Revenues | $ | 30,411 | $ | 20,596 | $ | 26,436 | $ | 52,945 | $ | (11,584 | ) | $ | 118,804 | ||||||||||
Operating costs and expenses | 15,821 | 11,943 | 15,978 | 32,259 | 8,001 | 84,002 | |||||||||||||||||
Depreciation and amortization | 3,093 | 2,650 | 457 | 3,780 | 6,992 | 16,972 | |||||||||||||||||
Non-operating income (expenses) | 410 | (3,824 | ) | 8 | 67 | 3,962 | 623 | ||||||||||||||||
EBITDA | 18,093 | 7,479 | 10,923 | 24,533 | (8,631 | ) | 52,397 | ||||||||||||||||
Compensation and benefits (2) | 284 | 109 | 285 | 549 | 2,228 | 3,455 | |||||||||||||||||
Transaction, refinancing and other fees (3) | — | — | — | — | (372 | ) | (372 | ) | |||||||||||||||
Adjusted EBITDA | $ | 18,377 | $ | 7,588 | $ | 11,208 | $ | 25,082 | $ | (6,775 | ) | $ | 55,480 | ||||||||||
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $10.0 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software sale and developments of $1.6 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $5.2 million. |
(2) | Primarily represents share-based compensation, other compensation expense and severance payments. |
(3) | Primarily represents the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received. |
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Nine months ended September 30, 2020 | |||||||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Corporate and Other (1) | Total | |||||||||||||||||
Revenues | $ | 90,632 | $ | 62,678 | $ | 80,531 | $ | 174,455 | $ | (31,910 | ) | $ | 376,386 | ||||||||||
Operating costs and expenses | 53,904 | 53,882 | 42,579 | 105,901 | 17,923 | 274,189 | |||||||||||||||||
Depreciation and amortization | 9,791 | 8,508 | 1,431 | 13,049 | 20,982 | 53,761 | |||||||||||||||||
Non-operating income (expenses) | 62 | 4,297 | 473 | 1,482 | (2,815 | ) | 3,499 | ||||||||||||||||
EBITDA | 46,581 | 21,601 | 39,856 | 83,085 | (31,666 | ) | 159,457 | ||||||||||||||||
Compensation and benefits (2) | 742 | 2,263 | 695 | 1,374 | 5,846 | 10,920 | |||||||||||||||||
Transaction, refinancing and other fees (3) | 500 | — | — | — | 5,647 | 6,147 | |||||||||||||||||
Adjusted EBITDA | $ | 47,823 | $ | 23,864 | $ | 40,551 | $ | 84,459 | $ | (20,173 | ) | $ | 176,524 | ||||||||||
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $25.4 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $6.5 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $13.7 million. |
(2) | Primarily represents share-based compensation. |
(3) | Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, an impairment charge and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A. |
Nine months ended September 30, 2019 | |||||||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Corporate and Other (1) | Total | |||||||||||||||||
Revenues | $ | 92,910 | $ | 62,533 | $ | 79,203 | $ | 159,492 | $ | (33,950 | ) | $ | 360,188 | ||||||||||
Operating costs and expenses | 43,666 | 47,170 | 45,926 | 101,128 | 12,403 | 250,293 | |||||||||||||||||
Depreciation and amortization | 8,476 | 7,393 | 1,348 | 12,113 | 21,110 | 50,440 | |||||||||||||||||
Non-operating income (expenses) | 1,461 | 411 | 39 | 287 | (2,091 | ) | 107 | ||||||||||||||||
EBITDA | 59,181 | 23,167 | 34,664 | 70,764 | (27,334 | ) | 160,442 | ||||||||||||||||
Compensation and benefits (2) | 778 | 448 | 760 | 1,632 | 6,774 | 10,392 | |||||||||||||||||
Transaction, refinancing and other fees (3) | — | 2 | — | — | 37 | 39 | |||||||||||||||||
Adjusted EBITDA | $ | 59,959 | $ | 23,617 | $ | 35,424 | $ | 72,396 | $ | (20,523 | ) | $ | 170,873 | ||||||||||
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $29.0 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software sale and developments of $4.9 million from Payment Services - Latin America to the Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $15.6 million. |
(2) | Primarily represents share-based compensation, other compensation expense and severance payments. |
(3) | Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received. |
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The reconciliation of EBITDA to consolidated net income is as follows:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
(In thousands) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Total EBITDA | $ | 64,659 | $ | 52,397 | $ | 159,457 | $ | 160,442 | |||||||
Less: | |||||||||||||||
Income tax expense | 6,513 | 3,720 | 15,551 | 10,018 | |||||||||||
Interest expense, net | 5,438 | 6,919 | 17,664 | 21,327 | |||||||||||
Depreciation and amortization | 18,127 | 16,972 | 53,761 | 50,440 | |||||||||||
Net income | $ | 34,581 | $ | 24,786 | $ | 72,481 | $ | 78,657 | |||||||
Note 16 – Subsequent Events
On October 20, 2020, the Board declared a regular quarterly cash dividend of $0.05 per share on the Company’s outstanding shares of common stock. The dividend will be paid on December 4, 2020 to stockholders of record as of the close of business on November 2, 2020. The Board anticipates declaring this dividend in future quarters on a regular basis; however future declarations of dividends are subject to the Board’s approval and may be adjusted as business needs or market conditions change.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (“MD&A”) covers: (i) the results of operations for the three and nine months ended September 30, 2020 and 2019 and (ii) the financial condition as of September 30, 2020. You should read the following discussion and analysis in conjunction with the audited consolidated financial statements (the “Audited Consolidated Financial Statements”) and related notes for the fiscal year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K and with the unaudited condensed consolidated financial statements (the “Unaudited Condensed Consolidated Financial Statements”) and related notes appearing elsewhere herein. This MD&A contains forward-looking statements that involve risks and uncertainties. Our actual results may differ from those indicated in the forward-looking statements. See “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with these statements.
Except as otherwise indicated or unless the context otherwise requires, (a) the terms “EVERTEC,” “we,” “us,” “our,” “our Company” and “the Company” refer to EVERTEC, Inc. and its subsidiaries on a consolidated basis, (b) the term “Holdings” refers to EVERTEC Intermediate Holdings, LLC, but not any of its subsidiaries and (c) the term “EVERTEC Group” refers to EVERTEC Group, LLC and its predecessor entities and their subsidiaries on a consolidated basis, including the operations of its predecessor entities prior to the Merger (as defined below). EVERTEC Inc.’s subsidiaries include Holdings, EVERTEC Group, EVERTEC Dominicana, SAS, Evertec Chile Holdings SpA (formerly known as Tecnopago SpA), Evertec Chile SpA (formerly known as EFT Group SpA), Evertec Chile Global SpA (formerly known as EFT Global Services SpA), Evertec Chile Servicios Profesionales SpA (formerly known as EFT Servicios Profesionales SpA), EFT Group S.A., Tecnopago España SL, Paytrue S.A., Caleidon, S.A., Evertec Brasil Solutions Informática Ltda. (formerly known as Paytrue Solutions Informática Ltda.), EVERTEC Panamá, S.A., EVERTEC Costa Rica, S.A. (“EVERTEC CR”), EVERTEC Guatemala, S.A., Evertec Colombia, SAS (formerly known as Processa, SAS), EVERTEC USA, LLC, EGM Ingeniería sin Fronteras, S.A.S. ("Place to Pay") and EVERTEC México Servicios de Procesamiento, S.A. de C.V. Neither EVERTEC nor Holdings conducts any operations other than with respect to its indirect or direct ownership of EVERTEC Group.
Executive Summary
EVERTEC is a leading full-service transaction processing business in Puerto Rico, the Caribbean and Latin America, providing a broad range of merchant acquiring, payment services and business process management services. According to the September 2019 Nilson Report, we are one of the largest merchant acquirers in Latin America based on total number of transactions and we believe we are the largest merchant acquirer in the Caribbean and Central America. We serve 26 countries in the region out of 11 offices, including our headquarters in Puerto Rico. We manage a system of electronic payment networks that process more than two billion transactions annually, and offer a comprehensive suite of services for core bank processing and cash processing in Puerto Rico and technology outsourcing in all the regions we serve. In addition, we own and operate the ATH network, one of the leading personal identification number ("PIN") debit networks in Latin America. We serve a diversified customer base of leading financial institutions, merchants, corporations and government agencies with “mission-critical” technology solutions that enable them to issue, process and accept transactions securely. We believe our business is well-positioned to continue to expand across the fast-growing Latin American region.
We are differentiated, in part, by our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe this capability provides several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services, win new customers, develop new sales channels and enter new markets. We believe these competitive advantages include:
• | Our ability to provide competitive products; |
• | Our ability to provide in one package a range of services that traditionally had to be sourced from different vendors; |
• | Our ability to serve customers with disparate operations across several geographies with technology solutions that enable them to manage their business as one enterprise; and |
• | Our ability to capture and analyze data across the transaction processing value chain and use that data to provide value-added services that are differentiated from those offered by pure-play vendors that serve only one portion of the transaction processing value chain (such as only merchant acquiring or payment services). |
Our broad suite of services spans the entire transaction processing value chain and includes a range of front-end customer-facing solutions such as the electronic capture and authorization of transactions at the point-of-sale, as well as back-end support services such as the clearing and settlement of transactions and account reconciliation for card issuers. These include: (i) merchant acquiring services, which enable point of sales (“POS”) and e-commerce merchants to accept and process electronic
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methods of payment such as debit, credit, prepaid and electronic benefit transfer (“EBT”) cards; (ii) payment processing services, which enable financial institutions and other issuers to manage, support and facilitate the processing of credit, debit, prepaid, automated teller machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide “mission-critical” technology solutions such as core bank processing, as well as IT outsourcing and cash management services to financial institutions, corporations and governments. We provide these services through scalable, end-to-end technology platforms that we manage and operate in-house and that generate significant operating efficiencies that enable us to maximize profitability.
We sell and distribute our services primarily through a proprietary direct sales force with established customer relationships. We continue to pursue joint ventures and merchant acquiring alliances. We benefit from an attractive business model, the hallmarks of which are recurring revenue, scalability, significant operating margins and moderate capital expenditure requirements. Our revenue is predominantly recurring in nature because of the mission-critical and embedded nature of the services we provide. In addition, we generally negotiate multi-year contracts with our customers. We believe our business model should enable us to continue to grow our business organically in the primary markets we serve without significant incremental capital expenditures.
Corporate Background
EVERTEC, Inc. ("EVERTEC", formerly known as Carib Latam Holdings, Inc.) is a Puerto Rico corporation organized in April 2012. Our main operating subsidiary, EVERTEC Group, LLC (formerly known as EVERTEC, LLC and EVERTEC, Inc., hereinafter “EVERTEC Group”), was organized in Puerto Rico in 1988. EVERTEC Group was formerly a wholly-owned subsidiary of Popular. On September 30, 2010, pursuant to an Agreement and Plan of Merger (as amended, the “Merger Agreement”), AP Carib Holdings, Ltd. (“Apollo”), an affiliate of Apollo Global Management LLC, acquired a 51% indirect ownership interest in EVERTEC Group as part of a merger (the “Merger”) and EVERTEC Group became a wholly-owned subsidiary of Holdings.
On April 17, 2012, EVERTEC Group was converted from a Puerto Rico corporation to a Puerto Rico limited liability company (the “Conversion”) for the purpose of improving its consolidated tax efficiency by taking advantage of changes to the Puerto Rico Internal Revenue Code, as amended (the “PR Code”), that permit limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Concurrent with the Conversion, Holdings, which is our direct subsidiary, was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company. Prior to these conversions, EVERTEC, Inc. was formed in order to act as the new parent company of Holdings and its subsidiaries, including EVERTEC Group. The transactions described above in this paragraph are collectively referred to as the “Reorganization”.
Separation from and Key Relationship with Popular
Prior to the Merger on September 30, 2010, EVERTEC Group was 100% owned by Popular, the largest financial institution in the Caribbean, and operated substantially as an independent entity within Popular. After the consummation of the Merger, Popular retained an indirect ownership interest in EVERTEC Group and is our largest customer. In connection with, and upon consummation of the Merger, EVERTEC Group entered into a 15-year Master Services Agreement (the “MSA”), and several related agreements with Popular. Under the terms of the MSA, Popular agreed to continue to use EVERTEC services on an ongoing and exclusive basis, for the duration of the agreement, on commercial terms consistent with those of our historical relationship. The anticipated negotiation of the MSA extension may result in Popular obtaining significant concessions from us with respect to pricing and other key terms, both in respect of the current term and any extension of the MSA, particularly as we approach 2025. Additionally, Popular granted us a right of first refusal on the development of certain new financial technology products and services for the duration of the MSA.
Factors and Trends Affecting the Results of Our Operations
The ongoing migration from cash and paper methods of payment to electronic payments continues to benefit the transaction-processing industry globally. We believe that the penetration of electronic payments in the markets in which we operate is significantly lower relative to the U.S. market, and that this ongoing shift will continue to generate substantial growth opportunities for our business. For example, currently the adoption of banking products, including electronic payments, in the Latin American and Caribbean regions is lower relative to the mature U.S. and European markets. We believe that the unbanked and underbanked population in our markets will continue to shrink, and therefore drive incremental penetration and growth of electronic payments in Puerto Rico and other Latin American regions. We also benefit from the trend of financial institutions and government agencies outsourcing technology systems and processes. Many medium- and small-size institutions in the Latin American markets in which we operate have outdated computer systems and updating these IT legacy systems is financially and logistically challenging, which presents a business opportunity for us.
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Finally, our financial condition and results of operations are, in part, dependent on the economic and general conditions of the geographies in which we operate.
On June 30, 2016, the U.S. President signed into law PROMESA. PROMESA establishes a fiscal oversight and the Oversight Board comprised of seven voting members appointed by the President. The Oversight Board has broad budgetary and financial powers over Puerto Rico’s budget, laws, financial plans and regulations, including the power to approve restructuring agreements with creditors, file petitions for restructuring and reform the electronic system for the tax collection. The Oversight Board will have ultimate authority in preparing the government of Puerto Rico’s budget and any issuance of future debt by the government and its instrumentalities. In addition, PROMESA imposes an automatic stay on all litigation against Puerto Rico and its instrumentalities, as well as any other judicial or administrative actions or proceedings to enforce or collect claims against the government of Puerto Rico. On May 1, 2017, the automatic stay expired. Promptly after the expiration of the stay, creditors of the government of Puerto Rico filed various lawsuits involving defaults on more than $70 billion of bonds issued by Puerto Rico, having failed to reach a negotiated settlement on such defaults with the government of Puerto Rico during the period of the automatic stay. On May 3, 2017, the Oversight Board filed a voluntary petition of relief on behalf of the Commonwealth pursuant to Title III of PROMESA for the restructuring of the Commonwealth’s debt. Subsequently, the Oversight Board filed voluntary petitions of relief pursuant to Title III of PROMESA on behalf certain public corporations and instrumentalities. Title III is an in-court debt restructuring proceeding similar to protections afforded debtors under Chapter 11 of the United States Code (the “Bankruptcy Code”); the Bankruptcy Code is not available to the Commonwealth or its instrumentalities.
As the solution to the government of Puerto Rico’s debt crisis remains unclear, we continue to carefully monitor our receivables with the government as well as monitor general economic trends to understand the impact the crisis has on the economy of Puerto Rico and our card payment volumes. To date our receivables with the government of Puerto Rico and overall payment transaction volumes have not been significantly affected by the debt crisis, however we remain cautious.
With respect to the macroeconomic trends described above, management currently estimates that we will continue to experience a revenue attrition in Latin America of approximately $3 million to $4 million for previously disclosed migrations anticipated in 2020. The clients' decisions, which were made prior to 2015, for these anticipated migrations were driven by a variety of historical factors, the most important of which was customer service experience. Management believes that these customer decisions are unlikely to change; however, timing is subject to change based on customers’ conversion schedules.
Impact of COVID-19 Pandemic
COVID-19 presents material uncertainty and risk with respect to EVERTEC’s business, results of operations and cash flows, as well as with respect to changes in laws and regulations and government and regulatory policy. As the spread of the pandemic persists, entities are experiencing conditions often associated with a general economic downturn. The outbreak has disrupted global financial markets and negatively affected supply and demand across a broad range of industries. COVID-19’s impact on global economies could have a material adverse effect on (among other things) the profitability, capital and liquidity of the Company, particularly if consumer spending levels are depressed for a prolonged period of time. While the rapid development and fluidity of the situation prevents management from having clear visibility into the medium and long-term impact, management believes possible effects may include, but are not limited to, disruption to the Company’s customers and revenue, absenteeism in the Company’s workforce, unavailability of products and supplies used in operations, a decline in the value of assets held by the Company, including, among other things, tangible and intangible long-lived assets, and increased levels in the Company's current expected credit loss reserve.
Given the uncertain and rapidly evolving situation, management has taken certain precautionary measures intended to help minimize the risk of COVID-19 to the Company, its employees, and customers, including the following:
• | The Company deployed its business continuity plan for the entire organization a few days before the government of Puerto Rico enacted a shelter-in-place directive on March 16, 2020. Since then, every country in which the Company operates has implemented some type of social distancing measures. Management expects that most of our employees will remain working remotely for an undetermined period, until it is deemed safe by management to return to our offices and as permitted or advised by local authorities in each country where the Company operates; |
• | In connection with the Company's business continuity plan, the Company transitioned most of its employees to a work from home environment. For certain critical employees who are required to remain working on-site in order to, among other things, maintain network operations oversight functions, cash handling and other critical operations for our customers, we have implemented safety measures including administering daily temperature checks upon entry |
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into the work site, providing protective gear, developing safe social distancing workspaces and increasing overall sanitation at our offices;
• | On May 1, 2020, the Company commenced deferral of payroll taxes as permitted under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act"); management anticipates a $2.9 million deferral of payroll taxes during the allowed time under the CARES Act. Through September 30, 2020, the Company has deferred payroll taxes amounting to $1.7 million; |
• | Management identified additional expense reductions that are intended to be implemented as necessary; and |
• | Management has suspended all non-essential travel for employees. |
Consumer preference for digital payment solutions during the pandemic has continued to grow and the Company has benefited from an increase in transaction volumes for these types of payment solutions as a result. Similarly, there has been an acceleration of contactless and card not present transactions, which has required an evolution of our traditional ATM cards that require PIN entry. The Company continues to focus on new innovative solutions, such as contactless payment solutions and our gateway product in Latin America to further accelerate the consumer preference for digital solutions.
While the Company anticipates that the foregoing measures are temporary, management cannot predict their duration, and management may elect or need to take additional precautions as more information related to COVID-19 becomes available, as may be required by governmental authorities, or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities. The extent to which the COVID-19 pandemic and EVERTEC’s precautionary measures in response to it, may impact the Company’s business, financial condition or results of operations will depend on the ongoing developments related to the pandemic and its direct and indirect consequences, all of which are highly uncertain and cannot be predicted at this time.
Results of Operations
Comparison of the three months ended September 30, 2020 and 2019
Three months ended September 30, | ||||||||||||||
In thousands | 2020 | 2019 | Variance 2020 vs. 2019 | |||||||||||
Revenues | $ | 136,507 | $ | 118,804 | $ | 17,703 | 15 | % | ||||||
Operating costs and expenses | ||||||||||||||
Cost of revenues, exclusive of depreciation and amortization | 57,854 | 51,878 | 5,976 | 12 | % | |||||||||
Selling, general and administrative expenses | 16,682 | 15,152 | 1,530 | 10 | % | |||||||||
Depreciation and amortization | 18,127 | 16,972 | 1,155 | 7 | % | |||||||||
Total operating costs and expenses | 92,663 | 84,002 | 8,661 | 10 | % | |||||||||
Income from operations | $ | 43,844 | $ | 34,802 | $ | 9,042 | 26 | % | ||||||
Revenues
Total revenues for the three months ended September 30, 2020 increased by $17.7 million or 15% to $136.5 million when compared to the same period in the prior year. Revenue increased across all of the Company's segments, benefiting from increased volumes and higher spreads, coupled with revenue generated from ATH Movil and ATH Movil Business, as well as, revenue generated in connection with Place to Pay which was acquired in December of the prior year. Revenue for the three months ended September 30, 2020 also includes $4.4 million of revenue recognized in connection with services provided to the Puerto Rico Department of Education.
Cost of Revenues
Cost of revenues for the three months ended September 30, 2020 amounted to $57.9 million, an increase of $6.0 million or 12% when compared to the same period in the prior year. The increase during the three months is primarily driven by an increase in equipment expenses as a result of increases in cloud services coupled with higher software and equipment maintenance.
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Salaries and benefits also increased, driven by increased headcount and special incentives paid in connection with COVID-19. Cost of sales reflected an increase primarily related to hardware and software sales.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended September 30, 2020 increased by $1.5 million or 10% when compared to the same period in the prior year. The increase is almost entirely related to higher professional services.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended September 30, 2020 amounted to $18.1 million, an increase of $1.2 million or 7% when compared to the same period in the prior year. Increased expense during the three months is driven by capital expenditures in the prior year as well as, key projects that went into production in the prior year.
Non-Operating Income (Expenses)
Three months ended September 30, | ||||||||||||||
In thousands | 2020 | 2019 | Variance 2020 vs. 2019 | |||||||||||
Interest income | $ | 429 | $ | 348 | $ | 81 | 23 | % | ||||||
Interest expense | (5,867 | ) | (7,267 | ) | 1,400 | (19 | )% | |||||||
Earnings of equity method investment | 202 | 371 | (169 | ) | (46 | )% | ||||||||
Other income | 2,486 | 252 | 2,234 | 887 | % | |||||||||
Total non-operating expenses | $ | (2,750 | ) | $ | (6,296 | ) | $ | 3,546 | (56 | )% | ||||
Non-operating expenses for the three months ended September 30, 2020 decreased by $3.5 million to $2.8 million when compared to the same period in the prior year. The decrease is mainly related to a $2.2 million increase in other income as a result of remeasurement of assets and liabilities denominated in US dollars, coupled with $1.4 million decrease in interest expense, resulting from the scheduled amortization of debt and a reduction in interest rates.
Income Tax Expense
Three months ended September 30, | ||||||||||||||
In thousands | 2020 | 2019 | Variance 2020 vs. 2019 | |||||||||||
Income tax expense | $ | 6,513 | $ | 3,720 | $ | 2,793 | 75 | % | ||||||
Income tax expense for the three months ended September 30, 2020 amounted to $6.5 million, an increase of $2.8 million when compared to the same period in the prior year. The effective tax rate for the period was 15.8%, compared with 13.0% in the 2019 period. The increase in the effective tax rate primarily reflects the impact of discrete tax items recorded in the quarter amounting to approximately $1.0 million.
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Comparison of the nine months ended September 30, 2020 and 2019
Nine months ended September 30, | ||||||||||||||
In thousands | 2020 | 2019 | Variance 2020 vs. 2019 | |||||||||||
Revenues | $ | 376,386 | $ | 360,188 | $ | 16,198 | 4 | % | ||||||
Operating costs and expenses | ||||||||||||||
Cost of revenues, exclusive of depreciation and amortization | 168,900 | 154,498 | 14,402 | 9 | % | |||||||||
Selling, general and administrative expenses | 51,528 | 45,355 | 6,173 | 14 | % | |||||||||
Depreciation and amortization | 53,761 | 50,440 | 3,321 | 7 | % | |||||||||
Total operating costs and expenses | 274,189 | 250,293 | 23,896 | 10 | % | |||||||||
Income from operations | $ | 102,197 | $ | 109,895 | $ | (7,698 | ) | (7 | )% | |||||
Revenues
Total revenues for the nine months ended September 30, 2020 increased by $16.2 million or 4% to $376.4 million when compared to the same period in the prior year. Revenue during the nine months ended September 30, 2020 was favorably impacted by higher sales volume and higher spreads in our merchant acquiring business, higher ATH Movil and ATH Movil Business transactions coupled with the impact of revenue recognized in connection with services to the Puerto Rico Department of Education mentioned above. These increases were partially offset by the prior year impact of revenue from a one-time project amounting to $2.7 million and revenue from hardware sales and the completion of several projects of approximately $4.5 million.
Cost of Revenues
Cost of revenues for the nine months ended September 30, 2020 amounted to $168.9 million, an increase of $14.4 million or 9% when compared to the same period in the prior year. The increase is primarily related to an increase in salaries and compensation costs, driven by increased headcount and special incentives paid in connection with COVID-19, coupled with increases in professional services related to programming fees and increases in cloud services.
Selling, General and Administrative
Selling, general and administrative expenses for the nine months ended September 30, 2020 increased by $6.2 million or 14% when compared to the same period in the prior year. The increase is primarily related to higher professional services.
Depreciation and Amortization
Depreciation and amortization expense for the nine months ended September 30, 2020 amounted to $53.8 million, an increase of $3.3 million or 7% when compared to the same period in the prior year. The increase is driven by higher capital expenditures in the prior year and software assets that went into production in the prior year.
Non-Operating Income (Expenses)
Nine months ended September 30, | ||||||||||||||
In thousands | 2020 | 2019 | Variance 2020 vs. 2019 | |||||||||||
Interest income | $ | 1,165 | $ | 864 | $ | 301 | 35 | % | ||||||
Interest expense | (18,829 | ) | (22,191 | ) | 3,362 | (15 | )% | |||||||
Earnings of equity method investment | 733 | 726 | 7 | 1 | % | |||||||||
Other income (expense) | 2,766 | (619 | ) | 3,385 | (547 | )% | ||||||||
Total non-operating expenses | $ | (14,165 | ) | $ | (21,220 | ) | $ | 7,055 | (33 | )% | ||||
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Non-operating expenses for the nine months ended September 30, 2020 decreased by $7.1 million to $14.2 million when compared to the same period in the prior year. The decrease is mainly related to a $3.4 million decrease in interest expense, resulting from the scheduled amortization of debt and a reduction in interest rates coupled with an increase in other income (expense) of $3.4 million for the same reason explained above for the three months.
Income Tax Expense
Nine months ended September 30, | ||||||||||||||
In thousands | 2020 | 2019 | Variance 2020 vs. 2019 | |||||||||||
Income tax expense | $ | 15,551 | $ | 10,018 | $ | 5,533 | 55 | % | ||||||
Income tax expense for the nine months ended September 30, 2020 amounted to $15.6 million, an increase of $5.5 million when compared to the same period in the prior year. The effective tax rate for the period was 17.7%, compared with 11.3% in the 2019 period. The increase in the effective tax rate primarily reflects the impact from discrete tax items of approximately $3.0 million, as well as, the impact of COVID-19 on the mix of business and other taxable items in foreign jurisdictions.
Segment Results of Operations
The Company operates in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America (collectively "Payment Services segments"), Merchant Acquiring, and Business Solutions.
The Payment Services - Puerto Rico & Caribbean segment revenues are comprised of revenues related to providing access to the ATH debit network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and point of sale ("POS") transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions) and EBT (which principally consist of services to the government of Puerto Rico for the delivery of benefits to participants). For ATH debit network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed and other processing services. For EBT services, revenues are primarily derived from the number of beneficiaries on file.
The Payment Services - Latin America segment revenues consist of revenues related to providing access to the ATH network of ATMs and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POS transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions), as well as licensed software solutions for risk and fraud management and card payment processing. For network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed, and other processing services.
The Merchant Acquiring segment consists of revenues from services that allow merchants to accept electronic methods of payment. In the Merchant Acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees and rental fees from POS devices and other equipment, net of credit card interchange and assessment fees charged by credit cards associations (such as VISA or MasterCard) or payment networks. The discount fee is generally a percentage of the transaction value. EVERTEC also charges merchants for other services that are unrelated to the number of transactions or the transaction value.
The Business Solutions segment consists of revenues from a full suite of business process management solutions in various product areas such as core bank processing, network hosting and management, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived in part from a recurrent fixed fee and from fees based on the number of accounts on file (i.e. savings or checking accounts, loans, etc.) or computer resources utilized. Revenues from other processing services within the Business Solutions segment are
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generally volume-based and depend on factors such as the number of accounts processed. In addition, EVERTEC is a reseller of hardware and software products and these resale transactions are generally non-recurring.
In addition to the four operating segments described above, management identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These areas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these areas are aggregated and presented within the “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and Other category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:
• | marketing, |
• | corporate finance and accounting, |
• | human resources, |
• | legal, |
• | risk management functions, |
• | internal audit, |
• | corporate debt related costs, |
• | non-operating depreciation and amortization expenses generated as a result of merger and acquisition activity, |
• | intersegment revenues and expenses, and |
• | other non-recurring fees and expenses that are not considered when management evaluates financial performance at a segment level |
The Chief Operating Decision Maker ("CODM") reviews the operating segments separate financial information to assess performance and to allocate resources. Management evaluates the operating results of each of its operating segments based upon revenues and Adjusted EBITDA. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with ASC Topic 280, Segment Reporting, given that it is reported to the CODM for purposes of allocating resources. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by revenues and adjusted EBITDA. As such, segment assets are not disclosed in the notes to the accompanying unaudited condensed consolidated financial statements.
The following tables set forth information about the Company’s operations by its four business segments for the periods indicated below.
Comparison of the three months ended September 30, 2020 and 2019
Payment Services - Puerto Rico & Caribbean
Three months ended September 30, | |||||
In thousands | 2020 | 2019 | |||
Revenues | $33,284 | $30,411 | |||
Adjusted EBITDA | 18,473 | 18,377 | |||
Adjusted EBITDA Margin | 55.5 | % | 60.4 | % | |
Payment Services - Puerto Rico & Caribbean segment revenues for the three months ended September 30, 2020 increased by $2.9 million to $33.3 million when compared to the same period in the prior year. The increase in revenues was primarily driven by an incremental $2.3 million in revenue recognized from ATH Movil and ATH Movil Business and new services, partially offset by a decrease in POS and ATM transaction volumes, due to a higher average ticket and a shift in consumer behavior towards digital payment platforms. Adjusted EBITDA remained relatively flat at $18.5 million primarily due to higher operating expenses driven by higher equipment expenses coupled with higher costs of sales that almost entirely offset the increase in revenues.
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Payment Services - Latin America
Three months ended September 30, | |||||
In thousands | 2020 | 2019 | |||
Revenues | $21,241 | $20,596 | |||
Adjusted EBITDA | 9,538 | 7,588 | |||
Adjusted EBITDA Margin | 44.9 | % | 36.8 | % | |
Payment Services - Latin America segment revenues for the three months ended September 30, 2020 increased $0.6 million to $21.2 million driven mainly by revenues generated by the acquisition of PlacetoPay in December 2019, partially offset by the decrease in transactional revenues due to COVID-19 coupled with client attrition and the negative impact of foreign currency. Adjusted EBITDA increased $2.0 million when compared to the same period in the prior year primarily due to the remeasurement of assets and liabilities denominated in US dollars.
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Merchant Acquiring
Three months ended September 30, | |||||
In thousands | 2020 | 2019 | |||
Revenues | $30,646 | $26,436 | |||
Adjusted EBITDA | 15,885 | 11,208 | |||
Adjusted EBITDA Margin | 51.8 | % | 42.4 | % | |
Merchant Acquiring segment revenues for the three months ended September 30, 2020 increased $4.2 million to $30.6 million primarily driven by an increase in sales volume and an increase in spread partially due to the higher average ticket. Adjusted EBITDA increased $4.7 million reflecting the impact of lower operating expenses resulting from lower transactions with a higher average ticket.
Business Solutions
Three months ended September 30, | |||||
In thousands | 2020 | 2019 | |||
Revenues | $63,018 | $52,945 | |||
Adjusted EBITDA | 32,990 | 25,082 | |||
Adjusted EBITDA Margin | 52.4 | % | 47.4 | % | |
Business Solutions segment revenues for the three months ended September 30, 2020 increased $10.1 million to $63.0 million as a result of revenue recognized in connection with services to the Puerto Rico Department of Education amounting to $4.4 million coupled with an increase in services for Popular and increased network revenues, partially offset by a decrease in IT Consulting revenue as the prior year included revenue for a completed project. Adjusted EBITDA increased $7.9 million to $33.0 million as a result of the increase in revenue, partially offset by an increase in equipment expenses and maintenance costs coupled with increased costs of sales directly related to network revenues.
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Comparison of the nine months ended September 30, 2020 and 2019
Payment Services - Puerto Rico & Caribbean
Nine months ended September 30, | |||||
In thousands | 2020 | 2019 | |||
Revenues | $90,632 | $92,910 | |||
Adjusted EBITDA | 47,823 | 59,959 | |||
Adjusted EBITDA Margin | 52.8 | % | 64.5 | % | |
Payment Services - Puerto Rico & Caribbean segment revenues for the nine months ended September 30, 2020 decreased by $2.3 million to $90.6 million when compared to the 2019 period. The decrease in revenues was driven by the absence of the revenue from a one-time project in the prior year of $2.7 million and a decline in transaction volumes due to the impact of COVID-19, partially offset by incremental revenue recognized from ATH Movil and ATH Movil Business and new services. Adjusted EBITDA decreased by $12.1 million to $47.8 million primarily due to lower revenue, higher operating expenses related to post-implementation costs from an electronic benefits project, and higher costs of sales directly related to new services.
Payment Services - Latin America
Nine months ended September 30, | |||||
In thousands | 2020 | 2019 | |||
Revenues | $62,678 | $62,533 | |||
Adjusted EBITDA | 23,864 | 23,617 | |||
Adjusted EBITDA Margin | 38.1 | % | 37.8 | % | |
Payment Services - Latin America segment revenues for the nine months ended September 30, 2020 remained relatively flat when compared to the prior year driven by revenues generated from the acquisition of Place to Pay in December 2019 partially offset by the negative impact of foreign currency, the decrease in transactional revenues due to COVID-19 coupled with client attrition. Adjusted EBITDA increased $0.2 million when compared to the same period in the prior year, primarily due to the increase in revenues.
Merchant Acquiring
Nine months ended September 30, | |||||
In thousands | 2020 | 2019 | |||
Revenues | $80,531 | $79,203 | |||
Adjusted EBITDA | 40,551 | 35,424 | |||
Adjusted EBITDA Margin | 50.4 | % | 44.7 | % | |
Merchant Acquiring segment revenues for the nine months ended September 30, 2020 increased $1.3 million to $80.5 million primarily driven by a higher spread as the average ticket increased when compared with the prior year, partially offset by a decrease in sales volumes and non-transactional revenue as a result of COVID-19. Adjusted EBITDA increased $5.1 million reflecting the impact of lower operating expenses resulting from lower transactions with a higher average ticket.
Business Solutions
Nine months ended September 30, | |||||
In thousands | 2020 | 2019 | |||
Revenues | $174,455 | $159,492 | |||
Adjusted EBITDA | 84,459 | 72,396 | |||
Adjusted EBITDA Margin | 48.4 | % | 45.4 | % | |
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Business Solutions segment revenues for the nine months ended September 30, 2020 increased $15.0 million to $174.5 million. Revenue growth in the segment was driven by revenue recognized for the Puerto Rico Department of Education as discussed above, coupled with increased services to Popular and an increase in network services revenue, partially offset by $2.5 million in revenue for completed projects and hardware sales recognized in the prior year that did not recur. Adjusted EBITDA increased $12.1 million to $84.5 million compared to the same period in the prior year as a result of higher revenues, partially offset by higher equipment expenses and increased costs of sales related to the increase in network services.
Liquidity and Capital Resources
Our principal source of liquidity is cash generated from operations, and our primary liquidity requirements are the funding of working capital needs, capital expenditures, and acquisitions. We also have a $125.0 million Revolving Facility, of which $101.7 million was available for borrowing as of September 30, 2020. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.
As of September 30, 2020, we had cash and cash equivalents of $144.1 million, of which $67.6 million resides in our subsidiaries located outside of Puerto Rico for purposes of (i) funding the respective subsidiary’s current business operations and (ii) funding potential future investment outside of Puerto Rico. We intend to indefinitely reinvest these funds outside of Puerto Rico, and based on our liquidity forecast, we will not need to repatriate this cash to fund the Puerto Rico operations or to meet debt-service obligations. However, if in the future we determine that we no longer need to maintain cash balances within our foreign subsidiaries, we may elect to distribute such cash to the Company in Puerto Rico. Distributions from the foreign subsidiaries to Puerto Rico may be subject to tax withholding and other tax consequences. Additionally, our credit agreement imposes certain restrictions on the distribution of dividends from subsidiaries.
Our primary use of cash is for operating expenses, working capital requirements, capital expenditures, dividend payments, share repurchases, debt service, acquisitions and other transactions as opportunities present themselves.
Based on our current level of operations, we believe our cash flows from operations and the available secured Revolving Facility will be adequate to meet our liquidity needs for the next twelve months. However, our ability to fund future operating expenses, dividend payments, capital expenditures, mergers and acquisitions, and our ability to make scheduled payments of interest, to pay principal on or refinance our indebtedness and to satisfy any other of our present or future debt obligations will depend on our future operating performance, which may be affected by general economic, financial and other factors beyond our control.
Nine months ended September 30, | ||||||||
(In thousands) | 2020 | 2019 | ||||||
Cash provided by operating activities | $ | 121,159 | $ | 136,167 | ||||
Cash used in investing activities | (36,920 | ) | (49,862 | ) | ||||
Cash used in financing activities | (50,780 | ) | (57,117 | ) | ||||
Effect of foreign exchange rate on cash, cash equivalents and restricted cash | $ | (2,384 | ) | $ | — | |||
Increase in cash, cash equivalents and restricted cash | $ | 31,075 | $ | 29,188 | ||||
Net cash provided by operating activities for the nine months ended September 30, 2020 was $121.2 million compared to $136.2 million for the same period in the prior year. The $15.0 million decrease in cash provided by operating activities is primarily driven by a decrease in collections from customers coupled with lower net income.
Net cash used in investing activities for the nine months ended September 30, 2020 was $36.9 million compared to $49.9 million for the same period in the prior year. The $12.9 million decrease is attributable to lower capital expenditures as the prior year included significant hardware purchases as the Company refreshed key infrastructure.
Net cash used in financing activities for the nine months ended September 30, 2020 was $50.8 million compared to $57.1 million for the same period in the prior year. The $6.3 million decrease was mainly attributed to a $21.1 million decrease in cash used to repurchase common stock and $2.8 million decrease in withholding taxes paid on share-based compensation. These decreases were partially offset by a $17.0 million increase in repayments of long-term debt.
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Capital Resources
Our principal capital expenditures are for hardware and computer software (purchased and internally developed) and additions to property and equipment. We invested approximately $36.9 million and $50.0 million, respectively, during the nine months ended September 30, 2020 and 2019. Generally, we fund capital expenditures with cash flow generated from operations and, if necessary, borrowings under our Revolving Facility.
Dividend Payments
On February 20, 2020, April 21, 2020 and July 24, 2020, the Company's Board declared quarterly cash dividends of $0.05 per share of common stock, which were paid on April 3, 2020, June 5, 2020 and September 4, 2020, respectively, to stockholders of record as of the close of business on March 4, 2020, May 4, 2020 and August 3, 2020, respectively.
On October 20, 2020, our Board declared a regular quarterly cash dividend of $0.05 per share on the Company’s outstanding shares of common stock. The dividend will be paid on December 4, 2020 to stockholders of record as of the close of business on November 2, 2020. The Board anticipates declaring this dividend in future quarters on a regular basis; however future declarations of dividends are subject to the Board’s approval and may be adjusted as business needs or market conditions change.
Financial Obligations
Secured Credit Facilities
On November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement providing for the secured credit facilities, consisting of a $220.0 million term loan A facility that matures on November 27, 2023 (the “2023 Term A Loan”), a $325.0 million term loan B facility that matures on November 27, 2024 (the “2024 Term B Loan”), and a $125.0 million revolving credit facility (the “Revolving Facility”) that matures on November 27, 2023, with a syndicate of lenders and Bank of America, N.A. (“Bank of America”), as administrative agent, collateral agent, swingline lender and line of credit issuer (collectively the “2018 Credit Agreement”).
The 2018 Credit Agreement require mandatory repayment of outstanding principal balances based on a percentage of excess cash flows provided that no such payment shall be due if the resulting amount of the excess cash flows multiplied by the applicable percentage is less than $10 million. On March 5, 2020, the Company repaid $17.0 million as a result of excess cash flows for the year ended December 31, 2019.
The unpaid principal balance at September 30, 2020 of the 2023 Term A Loan and the 2024 Term B Loan was $192.8 million and $310.3 million, respectively. The additional borrowing capacity under our Revolving Facility at September 30, 2020 was $101.7 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
Notes Payable
In December 2019, EVERTEC Group entered into two non-interest bearing financing agreements amounting to $2.4 million to purchase software and maintenance. As of September 30, 2020 and December 31, 2019, the outstanding principal balance of the notes payable was $1.5 million and $2.4 million, respectively. The current portion of these notes is included in accounts payable and the long-term portion is included in other long-term liabilities in the Company's unaudited condensed consolidated balance sheet.
Interest Rate Swaps
As of September 30, 2020, the Company has an interest rate swap agreement, entered into in December 2018, which converts a portion of the interest rate payments on the Company's 2024 Term B Loan from variable to fixed:
Swap Agreement | Effective date | Maturity Date | Notional Amount | Variable Rate | Fixed Rate | |||||
2018 Swap | April 2020 | November 2024 | $250 million | 1-month LIBOR | 2.89% | |||||
The Company has accounted for this agreement as a cash flow hedge.
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Additionally, the Company had an interest rate swap agreement that matured in April 2020, with a notional amount of $200 million and a fixed rate of 1.9225%. The Company accounted for this swap as a cash flow hedge from inception to maturity.
As of September 30, 2020 and December 31, 2019, the carrying amount of derivatives included on the Company's unaudited condensed consolidated balance sheets was $27.4 million and $14.5 million, respectively. The fair value of these derivatives is estimated using Level 2 inputs in the fair value hierarchy on a recurring basis. Refer to Note 8 for disclosure of losses recorded on cash flow hedging activities.
During the three and nine months ended September 30, 2020, the Company reclassified losses of $1.7 million and $3.3 million, respectively, from accumulated other comprehensive loss into interest expense. Based on current LIBOR rates, the Company expects to reclassify losses of $6.8 million from accumulated other comprehensive loss into interest expense over the next 12 months.
The cash flow hedge is considered highly effective.
Covenant Compliance
As of September 30, 2020, our secured leverage ratio was 1.93 to 1.00, as determined in accordance with the 2018 Credit Agreement. As of the date of filing of this Form 10-Q, no event has occurred that constitutes an Event of Default or Default under our 2018 Credit Agreement.
Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share (Non-GAAP Measures)
We define “EBITDA” as earnings before interest, taxes, depreciation and amortization. We define “Adjusted EBITDA” as EBITDA further adjusted to exclude unusual items and other adjustments described below. Adjusted EBITDA by segment is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in conformity with ASC Topic 280, Segment Reporting, and is excluded from the definition of non-GAAP financial measures under the Securities and Exchange Commission's Regulation G and Item 10(e) of Regulation S-K. We define “Adjusted Net Income” as net income adjusted to exclude unusual items and other adjustments described below. We define “Adjusted Earnings per common share” as Adjusted Net Income divided by diluted shares outstanding.
We present EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of ourselves and other companies in our industry. In addition, our presentation of Adjusted EBITDA is substantially consistent with the equivalent measurements that are contained in the senior secured credit facilities in testing EVERTEC Group’s compliance with covenants therein such as the secured leverage ratio. We use Adjusted Net Income to measure our overall profitability because we believe better reflects our comparable operating performance by excluding the impact of the non-cash amortization and depreciation that was created as a result of the Merger. In addition, in evaluating EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, you should be aware that in the future we may incur expenses such as those excluded in calculating them. Further, our presentation of these measures should not be construed as an inference that our future operating results will not be affected by unusual or nonrecurring items.
Some of the limitations of EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted earnings per common share are as follows:
• | they do not reflect cash outlays for capital expenditures or future contractual commitments; |
• | they do not reflect changes in, or cash requirements for, working capital; |
• | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; |
• | in the case of EBITDA and Adjusted EBITDA, they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness; |
• | in the case of EBITDA and Adjusted EBITDA, they do not reflect income tax expense or the cash necessary to pay income taxes; and |
• | other companies, including other companies in our industry, may not use EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per common share or may calculate EBITDA, Adjusted EBITDA, Adjusted Net |
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Income and Adjusted Earnings per common share differently than as presented in this Report, limiting their usefulness as a comparative measure.
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share are not measurements of liquidity or financial performance under GAAP. You should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share as alternatives to cash flows from operating activities or any other performance measures determined in accordance with GAAP, as an indicator of cash flows, as a measure of liquidity or as an alternative to operating or net income determined in accordance with GAAP.
A reconciliation of net income to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share is provided below:
Three months ended September 30, | Nine months ended September 30, | Twelve months ended | ||||||||||||||||||
(Dollar amounts in thousands, except per share information) | 2020 | 2019 | 2020 | 2019 | September 30, 2020 | |||||||||||||||
Net income | $ | 34,581 | $ | 24,786 | $ | 72,481 | $ | 78,657 | $ | 97,524 | ||||||||||
Income tax expense | 6,513 | 3,720 | 15,551 | 10,018 | 18,508 | |||||||||||||||
Interest expense, net | 5,438 | 6,919 | 17,664 | 21,327 | 23,931 | |||||||||||||||
Depreciation and amortization | 18,127 | 16,972 | 53,761 | 50,440 | 71,403 | |||||||||||||||
EBITDA | 64,659 | 52,397 | 159,457 | 160,442 | 211,366 | |||||||||||||||
Equity income (1) | (202 | ) | (372 | ) | (733 | ) | (241 | ) | (943 | ) | ||||||||||
Compensation and benefits (2) | 3,669 | 3,455 | 10,920 | 10,392 | 14,326 | |||||||||||||||
Transaction, refinancing and other fees (3) | 1,907 | — | 6,880 | 280 | 7,098 | |||||||||||||||
Adjusted EBITDA | 70,033 | 55,480 | 176,524 | 170,873 | 231,847 | |||||||||||||||
Operating depreciation and amortization (4) | (9,888 | ) | (8,673 | ) | (28,943 | ) | (25,516 | ) | (38,307 | ) | ||||||||||
Cash interest expense, net (5) | (5,301 | ) | (6,644 | ) | (16,917 | ) | (20,774 | ) | (23,159 | ) | ||||||||||
Income tax expense (6) | (7,472 | ) | (5,509 | ) | (21,729 | ) | (15,454 | ) | (26,514 | ) | ||||||||||
Non-controlling interest (7) | (155 | ) | (63 | ) | (412 | ) | (287 | ) | (472 | ) | ||||||||||
Adjusted net income | $ | 47,217 | $ | 34,591 | $ | 108,523 | $ | 108,842 | $ | 143,395 | ||||||||||
Net income per common share (GAAP): | ||||||||||||||||||||
Diluted | $ | 0.47 | $ | 0.34 | $ | 0.99 | $ | 1.07 | ||||||||||||
Adjusted Earnings per common share (Non-GAAP): | ||||||||||||||||||||
Diluted | $ | 0.65 | $ | 0.47 | $ | 1.49 | $ | 1.48 | ||||||||||||
Shares used in computing adjusted earnings per common share: | ||||||||||||||||||||
Diluted | 73,001,780 | 73,314,704 | 73,049,817 | 73,530,865 | ||||||||||||||||
1) | Represents the elimination of non-cash equity earnings from our 19.99% equity investment in Dominican Republic, Consorcio de Tarjetas Dominicanas S.A. ("CONTADO"), net of dividends received. |
2) | Primarily represents share-based compensation. |
3) | Represents fees and expenses associated with corporate transactions as defined in the Credit Agreement, recorded as part of selling, general and administrative expenses and an impairment charge. |
4) | Represents operating depreciation and amortization expense, which excludes amounts generated as a result of merger and acquisition activity. |
5) | Represents interest expense, less interest income, as they appear on our consolidated statements of income and comprehensive income, adjusted to exclude non-cash amortization of the debt issue costs, premium and accretion of discount. |
6) | Represents income tax expense calculated on adjusted pre-tax income using the applicable GAAP tax rate, adjusted for certain discrete items. |
7) | Represents the 35% non-controlling equity interest in Evertec Colombia, net of amortization for intangibles created as part of the purchase. |
Off-Balance Sheet Arrangements
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In the ordinary course of business, the Company may enter into commercial commitments. With the exception of the letters of credit issued against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility, as of September 30, 2020, the Company did not have any off-balance sheet items.
Seasonality
Our payment businesses generally experience moderate increased activity during the traditional holiday shopping periods and around other nationally recognized holidays, which follow consumer spending patterns.
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Effect of Inflation
While inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have an impact on our operating results, inflation has had minimal net effect on our operating results during the last three years as overall inflation has been offset by increased selling process and cost reduction actions. We cannot assure you, however, that we will not be affected by general inflation in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks arising from our normal business activities. These market risks principally involve the possibility of changes in interest rates that will adversely affect the value of our financial assets and liabilities or future cash flows and earnings. Market risk is the potential loss arising from adverse changes in market rates and prices.
Interest Rate Risks
We issued floating-rate debt which is subject to fluctuations in interest rates. Our secured credit facilities accrue interest at variable rates and only the 2024 Term B Loan is subject to a floor or a minimum rate. A 100 basis point increase in interest rates over our floor(s) on our debt balances outstanding as of September 30, 2020, under the secured credit facilities, would increase our annual interest expense by approximately $3.0 million. The impact on future interest expense as a result of future changes in interest rates will depend largely on the gross amount of our borrowings at that time.
In December 2015 and December 2018, we entered into interest rate swap agreements which convert a portion of our outstanding variable rate debt to fixed. The interest rate swap entered into in December 2015 matured in April 2020.
The interest rate swap exposes us to credit risk in the event that the counterparty to the swap agreement does not or cannot meet its obligations. The notional amount is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The loss would be limited to the amount that would have been received, if any, over the remaining life of the swap. The counterparty to the swap is a major US based financial institution and we expect the counterparty to be able to perform its obligations under the swap. We use derivative financial instruments for hedging purposes only and not for trading or speculative purposes
See Note 6 of the Unaudited Condensed Consolidated Financial Statements for additional information related to the senior secured credit facilities.
Foreign Exchange Risk
We conduct business in certain countries in Latin America. Some of this business is conducted in the countries’ local currencies. The resulting foreign currency translation adjustments, from operations for which the functional currency is other than the U.S. dollar, are reported in accumulated other comprehensive loss in the unaudited condensed consolidated balance sheets. As of September 30, 2020, the Company had $27.4 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss compared with an unfavorable foreign currency translation adjustment of $16.9 million at December 31, 2019. Unfavorable foreign currency translation adjustments at September 30, 2020 were impacted by the atypical volatility of foreign currencies brought on by the unstable macroeconomic conditions resulting from the COVID-19 pandemic.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company, under the direction of the Chief Executive Officer and the Chief Financial Officer, has established disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2020, the Company’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a -15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As a
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result of COVID-19, the majority of our global workforce shifted to a primarily work from home environment beginning in March 2020. This change to remote working was rapid and included both our employees in Puerto Rico as well as our workforce across all regions in which we operate. While pre-existing controls were not specifically designed to operate in our current work from home operating environment, the Company has not identified any material changes in the Company’s internal control over financial reporting as a result from this new way of work. The Company is continually monitoring and assessing the COVID-19 situation to determine any potential impacts on the design and operating effectiveness of our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are defendants in various lawsuits or arbitration proceedings arising in the ordinary course of business. Management believes, based on the opinion of legal counsel and other factors, that the aggregated liabilities, if any, arising from such actions will not have a material adverse effect on the financial condition, results of operations and the cash flows of the Company.
Item 1A. Risk Factors
We previously disclosed risk factors under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019. In addition to those risk factors and the other information included elsewhere in this report, investors should carefully consider the risk factors discussed in "Item 1A. Risk Factors" in our Form 10-Q for the quarterly period ended June 30, 2020.
The risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Form 10-Q for the quarterly period ended June 30, 2020, are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
31.1* | |
31.2* | |
32.1** | |
32.2** | |
101.INS XBRL** | Instance document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH XBRL** | Taxonomy Extension Schema |
101.CAL XBRL** | Taxonomy Extension Calculation Linkbase |
101.DEF XBRL** | Taxonomy Extension Definition Linkbase |
101.LAB XBRL** | Taxonomy Extension Label Linkbase |
101.PRE XBRL** | Taxonomy Extension Presentation Linkbase |
* Filed herewith.
** Furnished herewith.
+ This exhibit is a management contract or a compensatory plan or arrangement.
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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: October 30, 2020 | By: | /s/ Morgan Schuessler |
Morgan Schuessler Chief Executive Officer | ||
Date: October 30, 2020 | By: | /s/ Joaquin A. Castrillo-Salgado |
Joaquin A. Castrillo-Salgado Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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