EVERTEC, INC.
The following Management's Discussion and Analysis ("MD&A") covers: (i) the
results of operations for the three and six months ended months ended June 30,
2020 and 2019 and (ii) the financial condition as of June 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 inPuerto Rico , theCaribbean andLatin America , providing a broad range of merchant acquiring, payment services and business process management services. According to theSeptember 2019 Nilson Report , we are one of the largest merchant acquirers inLatin America based on total number of transactions and we believe we are the largest merchant acquirer in theCaribbean andCentral America . We serve 26 countries in the region out of 11 offices, including our headquarters inPuerto 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 inPuerto 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 inLatin America . We serve a diversified customer base of leading financial institutions, merchants, corporations and government agencies with "mission-critical" technology solutions that enable them to issue, process and accept transactions securely. We believe our business is well-positioned to continue to expand across the fast-growing Latin American region. We are differentiated, in part, by our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe this capability provides several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services, win new customers, develop new sales channels and enter new markets. We believe these competitive advantages include:
• Our ability to provide competitive products;
• Our ability to provide in one package a range of services that
traditionally had to be sourced from different vendors;
• Our ability to serve customers with disparate operations in several
geographies with technology solutions that enable them to manage their
business as one enterprise; and
• Our ability to capture and analyze data across the transaction processing
value chain and use that data to provide value-added services that are
differentiated from those offered by pure-play vendors that serve only one
portion of the transaction processing value chain (such as only merchant
acquiring or payment services).
Our broad suite of services spans the entire transaction processing value chain
and includes a range of front-end customer-facing solutions such as the
electronic capture and authorization of transactions at the point-of-sale, as
well as back-end support services such as the clearing and settlement of
transactions and account reconciliation for card issuers. These include: (i)
merchant acquiring services, which enable point of sales ("POS") and e-commerce
merchants to accept and process electronic
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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 asCarib Latam Holdings, Inc. ) is aPuerto Rico corporation organized inApril 2012 . Our main operating subsidiary,EVERTEC Group, LLC (formerly known asEVERTEC, LLC andEVERTEC, Inc. , hereinafter "EVERTEC Group "), was organized inPuerto Rico in 1988.EVERTEC Group was formerly a wholly-owned subsidiary of Popular. OnSeptember 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 inEVERTEC Group as part of a merger (the "Merger") andEVERTEC Group became a wholly-owned subsidiary of Holdings. OnApril 17, 2012 ,EVERTEC Group was converted from aPuerto Rico corporation to aPuerto 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 forPuerto Rico tax purposes. Concurrent with the Conversion, Holdings, which is our direct subsidiary, was also converted from aPuerto Rico corporation to aPuerto 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, includingEVERTEC 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 onSeptember 30, 2010 ,EVERTEC Group was 100% owned by Popular, the largest financial institution in theCaribbean , and operated substantially as an independent entity within Popular. After the consummation of the Merger, Popular retained an indirect ownership interest inEVERTEC 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 useEVERTEC 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 andCaribbean regions is lower relative to the matureU.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 inPuerto 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. 24
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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.
OnJune 30, 2016 , theU.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 overPuerto 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 ofPuerto 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 againstPuerto Rico and its instrumentalities, as well as any other judicial or administrative actions or proceedings to enforce or collect claims against the government ofPuerto Rico . OnMay 1, 2017 , the automatic stay expired. Promptly after the expiration of the stay, creditors of the government ofPuerto Rico filed various lawsuits involving defaults on more than$70 billion of bonds issued byPuerto Rico , having failed to reach a negotiated settlement on such defaults with the government ofPuerto Rico during the period of the automatic stay. OnMay 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 ofthe United States Code (the "Bankruptcy Code"); the Bankruptcy Code is not available to the Commonwealth or its instrumentalities. As the solution to the government ofPuerto 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 ofPuerto Rico and our card payment volumes. To date our receivables with the government ofPuerto 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 inLatin 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
InDecember 2019 , the outbreak of a novel strain of coronavirus ("COVID-19") was reported to have surfaced inWuhan, China . COVID-19 has since spread to nearly all regions of the world, including every state and territory ofthe United States . OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic, and shortly thereafter, foreign, federal, state and local governments and health officials in all markets whereEVERTEC operates declared states of emergency and implemented numerous public health measures to try to contain the virus, including curtailment of movement and commerce such as mandatory school and business closures, curfews, travel restrictions, "social or physical distancing" guidelines and "shelter-in-place" mandates. COVID-19 presents material uncertainty and risk with respect toEVERTEC'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
shelter-in-place directive on
which the Company operates has implemented some type of social distancing
measures. Management expects that most of our employees
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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
order to, among other things, maintain network operations oversight
functions, cash handling and other critical operations for our customers,
we have implemented safety measures including administering daily
temperature checks upon entry into the work site, providing protective
gear, developing safe social distancing workspaces and increasing overall
sanitation at our offices;
• As a precautionary measure, to increase the Company's cash position and
preserve its financial flexibility in light of the current uncertainty
resulting from the COVID-19 outbreak, the Company drew down
Revolving Facility in April. The Company fully repaid the Revolving
Facility since then;
• On May 1, 2020 , the Company commenced deferral of payroll taxes aspermitted under the Coronavirus Aid, Relief, and Economic Security Act of
2020 (the "CARES Act"); management anticipates a
payroll taxes during the allowed time under the CARES Act. Through June
30, 2020 , the Company has deferred payroll taxes amounting to $0.8
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 as a result. The Company continues to focus on new innovative solutions, such as contactless payment solutions and our gateway product inLatin 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 andEVERTEC'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
Three months ended June 30,
In thousands 2020 2019 Variance 2020 vs. 2019
Revenues $ 117,937 $ 122,548 $ (4,611 ) (4 )%
Operating costs and expenses
Cost of revenues, exclusive of
depreciation and amortization 56,979 52,601 4,378 8 %
Selling, general and administrative
expenses 17,529 15,064 2,465 16 %
Depreciation and amortization 17,839 17,195 644 4 %
Total operating costs and expenses 92,347 84,860 7,487 9 %
Income from operations $ 25,590 $ 37,688 $ (12,098 ) (32 )%
Revenues
Total revenues for the three months ended June 30, 2020 decreased by $4.6
million or 4% to $117.9 million when compared to the same period in the prior
year. Revenue decline during the three months reflected a slowdown in
transactions and volumes resulting from COVID-19 with sequential monthly
recovery as businesses reopened in Puerto Rico . Revenue during the three months
partially benefited from new services, mainly in Business Solutions. Prior year
revenue included hardware and software sales and the completion of several
projects for approximately $2.5 million that did not recur in the current year.
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Table of Contents Cost of Revenues Cost of revenues for the three months endedJune 30, 2020 amounted to$57.0 million , an increase of$4.4 million or 8% when compared to the same period in the prior year. The increase during the three months 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, partially offset by a decrease in provisions.
Selling, General and Administrative
Selling, general and administrative expenses for the three months endedJune 30, 2020 increased by$2.5 million or 16% 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 three months endedJune 30, 2020 amounted to$17.8 million , an increase of$0.6 million or 4% 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 June 30,
In thousands 2020 2019 Variance 2020 vs. 2019
Interest income $ 373 $ 257 $ 116 45 %
Interest expense (6,183 ) (7,373 ) 1,190 (16 )%
Earnings of equity method investment 193 133 60 45 %
Other income (expense) 172 (1,079 ) 1,251 (116 )%
Total non-operating expenses $ (5,445 ) $ (8,062 ) $ 2,617 (32 )%
Non-operating expenses for the three months ended June 30, 2020 decreased by
$2.6 million to $5.4 million when compared to the same period in the prior year.
The decrease is mainly related to a a $1.3 million increase in other income
(expense) as a result of foreign currency gains, compared with foreign currency
losses in the prior year, coupled with $1.2 million decrease in interest
expense, resulting from the scheduled amortization of debt and a reduction in
interest rates.
Income Tax Expense
Three months ended June 30,
In thousands 2020 2019 Variance 2020 vs. 2019
Income tax expense $ 4,520 $ 2,489 $ 2,031 82 %
Income tax expense for the three months ended June 30, 2020 amounted to $4.5
million , an increase of $2.0 million when compared to the same period in the
prior year. The effective tax rate for the period was 22.4%, compared with 8.4%
in the 2019 period. The increase in the effective tax rate primarily reflects
the impact of COVID-19 on the mix of business as well as a discrete tax item of
approximately $1 million and other taxable items in foreign jurisdictions.
Additionally, there may be some period-to-period volatility of our effective tax
rate in future quarters as our mix of income from multiple tax jurisdictions and
related income forecasts change due to the potential effects of COVID-19.
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Comparison of the six months ended
Six months ended June 30,
In thousands 2020 2019 Variance 2020 vs. 2019
Revenues $ 239,879 $ 241,384 $ (1,505 ) (1 )%
Operating costs and expenses
Cost of revenues, exclusive of
depreciation and amortization 111,046 102,620 8,426 8 %
Selling, general and administrative
expenses 34,846 30,203 4,643 15 %
Depreciation and amortization 35,634 33,468 2,166 6 %
Total operating costs and expenses 181,526 166,291
15,235 9 % Income from operations$ 58,353 $ 75,093 $ (16,740 ) (22 )% Revenues Total revenues for the six months endedJune 30, 2020 decreased by$1.5 million or 1% to$239.9 million when compared to the same period in the prior year. Revenue was impacted by a decrease in volumes and transactions resulting from COVID-19 and the prior year impact of revenue from a one-time project amounting to$2.7 million , partially offset by overall growth in the first two months of the year and monthly recovery as businesses reopened in June.
Cost of Revenues
Cost of revenues for the six months endedJune 30, 2020 amounted to$111.0 million , an increase of$8.4 million or 8% 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 six months endedJune 30, 2020 increased by$4.6 million or 15% 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 six months endedJune 30, 2020 amounted to$35.6 million , an increase of$2.2 million or 6% 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)
Six months ended June 30,
In thousands 2020 2019 Variance 2020 vs. 2019
Interest income $ 736 $ 516 $ 220 43 %
Interest expense (12,962 ) (14,924 ) 1,962 (13 )%
Earnings of equity method investment 531 355 176 50 %
Other income (expense) 280 (871 ) 1,151 (132 )%
Total non-operating expenses $ (11,415 ) $ (14,924 ) $ 3,509 (24 )%
Non-operating expenses for the six months ended June 30, 2020 decreased by $3.5
million to $11.4 million when compared to the same period in the prior year. The
decrease is mainly related to a $2.0 million decrease in interest expense,
resulting from
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the scheduled amortization of debt and a reduction in interest rates coupled with an increase in other income (expense) of$1.2 million for the same reason explained above for the three months. Income Tax Expense Six months ended June 30, In thousands 2020 2019 Variance 2020 vs. 2019 Income tax expense$ 9,038 $ 6,298 $ 2,740 44 % Income tax expense for the six months endedJune 30, 2020 amounted to$9.0 million , an increase of$2.7 million when compared to the same period in the prior year. The effective tax rate for the period was 19.3%, compared with 10.5% in the 2019 period. The increase in the effective tax rate primarily reflects the impact from discrete tax items of approximately$1.5 million , as well as, the impact of COVID-19 on the mix of business and other taxable items in foreign jurisdictions. Additionally, there may be some period-to-period volatility of our effective tax rate in future periods as our mix of income from multiple tax jurisdictions and related income forecasts change due to the potential effects of COVID-19. Segment Results of Operations
The Company operates in four business segments: Payment Services -
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 ofPuerto 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 asVISA 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 29
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generally volume-based and depend on factors such as the number of accounts
processed. In addition,
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
Payment Services -
Three months ended June 30,
In thousands 2020 2019
Revenues $27,461 $30,482
Adjusted EBITDA 13,276 20,319
Adjusted EBITDA Margin 48.3 % 66.7 %
Payment Services - Puerto Rico & Caribbean segment revenues for the three months
ended June 30, 2020 decreased by $3.0 million to $27.5 million when compared to
the same period in the prior year. The decrease in revenues was driven by 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
transactions and new services. Adjusted EBITDA decreased by $7.0 million to
$13.3 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.
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Payment Services -
Three months ended June 30,
In thousands 2020 2019
Revenues $19,797 $21,106
Adjusted EBITDA 6,084 7,773
Adjusted EBITDA Margin 30.7 % 36.8 %
Payment Services - Latin America segment revenues for the three months ended
June 30, 2020 decreased $1.3 million to $19.8 million driven mainly by the
negative impact from foreign exchange losses and a decrease in transactional
revenues due to COVID-19, and client attrition, partially offset by revenues
generated by the acquisition of PlacetoPay in December 2019 . Adjusted EBITDA
decreased $1.7 million when compared to the same period in the prior year
primarily due to the decrease in revenue coupled with increased personnel costs
and increased operational costs from the PlacetoPay acquisition.
Merchant Acquiring
Three months ended June 30,
In thousands 2020 2019
Revenues $24,764 $26,793
Adjusted EBITDA 13,382 12,251
Adjusted EBITDA Margin 54.0 % 45.7 %
Merchant Acquiring segment revenues for the three months ended June 30, 2020
decreased $2.0 million to $24.8 million primarily driven by a decrease in sales
volumes and non-transactional revenue as a result of COVID-19, partially offset
by an increase in our net spread as our average ticket increased in comparison
to the prior year. Adjusted EBITDA increased $1.1 million reflecting the impact
of lower operating expenses driven by the decreased volumes and the higher
average ticket.
Business Solutions
Three months ended June 30,
In thousands 2020 2019
Revenues $55,495 $55,183
Adjusted EBITDA 24,024 24,266
Adjusted EBITDA Margin 43.3 % 44.0 %
Business Solutions segment revenues for the three months ended June 30, 2020
increased $0.3 million to $55.5 million as a result of an increase in services
for Popular and increased network revenues, partially offset by $2.5 million
recognized for completed projects and hardware sales in the prior year that did
not recur. Adjusted EBITDA decreased $0.2 million to $24.0 million as a result
of an increase in operating costs that completely offset the increase in
revenue.
Comparison of the six months ended
Payment Services -
Six months ended June 30,
In thousands 2020 2019
Revenues $57,348 $62,499
Adjusted EBITDA 29,350 41,582
Adjusted EBITDA Margin 51.2 % 66.5 %
Payment Services - Puerto Rico & Caribbean segment revenues for the six months
ended June 30, 2020 decreased by $5.2 million to $57.3 million when compared to
the 2019 period. The decrease in revenues was driven by the absence of the
revenue
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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 transactions and new services. Adjusted EBITDA decreased by$12.2 million to$29.4 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 -
Six months ended June 30,
In thousands 2020 2019
Revenues $41,437 $41,937
Adjusted EBITDA 14,326 16,029
Adjusted EBITDA Margin 34.6 % 38.2 %
Payment Services - Latin America segment revenues for the six months ended
June 30, 2020 decreased $0.5 million to $41.4 million driven by the negative
impact of foreign currency losses and the decrease in transactional revenues due
to COVID-19 coupled with client attrition, partially offset by revenues
generated from the acquisition of PlacetoPay in December 2019 . Adjusted EBITDA
decreased $1.7 million when compared to the same period in the prior year
primarily due to revenues generated by PlacetoPay at a lower margin, coupled
with increased personnel costs due to increased headcount and equipment
expenses.
Merchant Acquiring
Six months ended June 30,
In thousands 2020 2019
Revenues $49,885 $52,767
Adjusted EBITDA 24,666 24,216
Adjusted EBITDA Margin 49.4 % 45.9 %
Merchant Acquiring segment revenues for the six months ended June 30, 2020
decreased $2.9 million to $49.9 million primarily driven by a decrease in sales
volumes and non-transactional revenue as a result of COVID-19, partially offset
by a higher spread as the average ticket increased when compared with the prior
year. Adjusted EBITDA increased $0.5 million reflecting the impact of lower
operating expenses resulting from lower transactions with a higher average
ticket.
Business Solutions
Six months ended June 30,
In thousands 2020 2019
Revenues $111,438 $106,547
Adjusted EBITDA 51,469 47,314
Adjusted EBITDA Margin 46.2 % 44.4 %
Business Solutions segment revenues for the six months ended June 30, 2020
increased $4.9 million to $111.4 million . Revenue growth in the segment was
driven by 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 $4.2 million to $51.5 million compared to the same period in the prior
year as a result of higher revenues.
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$86.7 32
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million was available for borrowing as of
As ofJune 30, 2020 , we had cash and cash equivalents of$146.9 million , of which$60.8 million resides in our subsidiaries located outside ofPuerto Rico for purposes of (i) funding the respective subsidiary's current business operations and (ii) funding potential future investment outside ofPuerto Rico . We intend to indefinitely reinvest these funds outside ofPuerto Rico , and based on our liquidity forecast, we will not need to repatriate this cash to fund thePuerto 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 inPuerto Rico . Distributions from the foreign subsidiaries toPuerto 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.
Six months ended June 30,
(In thousands) 2020 2019
Cash provided by operating activities $ 87,252 $ 75,950
Cash used in investing activities (18,447 ) (35,619 )
Cash used in financing activities (27,946 ) (49,528 )
Effect of foreign exchange rate on cash, cash
equivalents and restricted cash $ (2,890 ) $ -
Increase in cash, cash equivalents and restricted
cash $ 37,969 $ (9,197 )
Net cash provided by operating activities for the six months ended June 30, 2020
was $87.3 million compared to $76.0 million for the same period in the prior
year. The $11.3 million increase in cash provided by operating activities is
primarily driven by higher collections from customers coupled with a slight
decrease in cash used for income tax payments due to deferrals and waivers in
some countries related to COVID-19.
Net cash used in investing activities for the six months ended June 30, 2020 was
$18.4 million compared to $35.6 million for the same period in the prior year.
The $17.2 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 six months ended June 30, 2020 was
$27.9 million compared to $49.5 million for the same period in the prior year.
The $21.6 million decrease was mainly attributed to a net $15.0 million draw on
the Revolving Facility, coupled with a $20.9 million decrease in cash used to
repurchase common stock and $3.4 million decrease in withholding taxes paid on
share-based compensation. These decreases were partially offset by a $17.0
million increase in repayments of long-term debt.
Capital Resources
Our principal capital expenditures are for hardware and computer software (purchased and internally developed) and additions to property and equipment. We invested approximately$18.4 million and$35.6 million , respectively, during the six months endedJune 30, 2020 and 2019. Generally, we fund capital expenditures with cash flow generated from operations and, if necessary, borrowings under our Revolving Facility. 33
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Dividend Payments
OnFebruary 20, 2020 andApril 21, 2020 , the Company's Board declared quarterly cash dividends of$0.05 per share of common stock, which were paid onApril 3, 2020 andJune 5, 2020 , respectively, to stockholders of record as of the close of business onMarch 4, 2020 andMay 4, 2020 , respectively. OnJuly 24, 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 onSeptember 4, 2020 to stockholders of record as of the close of business onAugust 3, 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 OnNovember 27, 2018 ,EVERTEC andEVERTEC 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 onNovember 27, 2023 (the "2023 Term A Loan"), a$325.0 million term loan B facility that matures onNovember 27, 2024 (the "2024 Term B Loan"), and a$125.0 million revolving credit facility (the "Revolving Facility") that matures onNovember 27, 2023 , with a syndicate of lenders andBank 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 . OnMarch 5, 2020 , the Company repaid$17.0 million as a result of excess cash flows for the year endedDecember 31, 2019 . The unpaid principal balance atJune 30, 2020 of the 2023 Term A Loan and the 2024 Term B Loan was$195.5 million and$311.1 million , respectively. The additional borrowing capacity under our Revolving Facility atJune 30, 2020 was$86.7 million . The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
Notes Payable
InDecember 2019 ,EVERTEC Group entered into two non-interest bearing financing agreements amounting to$2.4 million to purchase software and maintenance. As ofJune 30, 2020 andDecember 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 ofJune 30, 2020 , the Company has an interest rate swap agreement, entered into inDecember 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 inApril 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 ofJune 30, 2020 andDecember 31, 2019 , the carrying amount of derivatives included in other long-term liabilities on the Company's unaudited condensed consolidated balance sheets was$28.1 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. 34
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During the three and six months endedJune 30, 2020 , the Company reclassified losses of$1.4 million and$1.6 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 ofJune 30, 2020 , our secured leverage ratio was 2.12 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 theSecurities 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 testingEVERTEC Group's compliance with covenants therein such as the secured leverage ratio. We use Adjusted Net Income to measure our overall profitability because we believe better reflects our comparable operating performance by excluding the impact of the non-cash amortization and depreciation that was created as a result of the Merger. In addition, in evaluating EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, you should be aware that in the future we may incur expenses such as those excluded in calculating them. Further, our presentation of these measures should not be construed as an inference that our future operating results will not be affected by unusual or nonrecurring items.
Some of the limitations of EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted earnings per common share are as follows:
• they do not reflect cash outlays for capital expenditures or future
contractual commitments;
• they do not reflect changes in, or cash requirements for, working capital;
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the
future, and EBITDA and Adjusted EBITDA do not reflect cash requirements
for such replacements;
• in the case of EBITDA and Adjusted EBITDA, they do not reflect interest
expense, or the cash requirements necessary to service interest, or
principal payments, on indebtedness;
• in the case of EBITDA and Adjusted EBITDA, they do not reflect income tax
expense or the cash necessary to pay income taxes; and
• other companies, including other companies in our industry, may not use
EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per
common share or may calculate EBITDA, Adjusted EBITDA, Adjusted Net Income
and Adjusted Earnings per common share differently than as presented in
this Report, limiting their usefulness as a comparative measure.
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common
share are not measurements of liquidity or financial performance under GAAP. You
should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted
Earnings per common share as alternatives to cash flows from operating
activities or any other performance measures determined in accordance with GAAP,
as an indicator of cash flows, as a measure of liquidity or as an alternative to
operating or net income determined in accordance with GAAP.
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A reconciliation of net income to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share is provided below:
Twelve months
Three months ended June 30, Six months ended June 30, ended
(Dollar amounts in
thousands, except per share
information) 2020 2019 2020 2019 June 30, 2020
Net income $ 15,625 $ 27,137 $ 37,900 $ 53,871 $ 87,729
Income tax expense 4,520 2,489 9,038 6,298 15,715
Interest expense, net 5,810 7,116 12,226 14,408 25,412
Depreciation and
amortization 17,839 17,195 35,634 33,468 70,248
EBITDA 43,794 53,937 94,798 108,045 199,104
Equity income (1) (193 ) 353 (531 ) 131 (1,113 )
Compensation and
benefits (2) 3,751 3,498 7,251 6,937 14,112
Transaction, refinancing
and other fees (3) 2,849 9 4,973 280 5,191
Adjusted EBITDA 50,201 57,797 106,491 115,393 217,294
Operating depreciation and
amortization (4) (9,578 ) (8,878 ) (19,055 ) (16,843 ) (37,092 )
Cash interest expense, net
(5) (5,606 ) (6,998 ) (11,616 ) (14,130 ) (24,502 )
Income tax expense (6) (7,079 ) (4,645 ) (14,257 ) (9,945 ) (24,551 )
Non-controlling interest
(7) (165 ) (112 ) (257 ) (224 ) (380 )
Adjusted net income $ 27,773 $ 37,164 $ 61,306 $ 74,251 $ 130,769
Net income per common share
(GAAP):
Diluted $ 0.21 $ 0.37 $ 0.52 $ 0.73
Adjusted Earnings per
common share (Non-GAAP):
Diluted $ 0.38 $ 0.51 $ 0.84 $ 1.01
Shares used in computing
adjusted earnings per
common share:
Diluted 72,774,365 73,300,553 73,019,219 73,649,933
1) Represents the elimination of non-cash equity earnings from our 19.99%
equity investment in
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.
4) Represents operating depreciation and amortization expense, which excludes
amounts generated as a result of merger and acquisition activity.
5) Represents interest expense, less interest income, as they appear on our
consolidated statements of income and comprehensive income, adjusted to
exclude non-cash amortization of the debt issue costs, premium and
accretion of discount.
6) Represents income tax expense calculated on adjusted pre-tax income using
the applicable GAAP tax rate, adjusted for certain discrete items.
7) Represents the 35% non-controlling equity interest in Evertec Colombia,
net of amortization for intangibles created as part of the purchase.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company may enter into commercial
commitments. With the exception of the letters of credit issued against the
Revolving Facility which reduce the additional borrowing capacity of the
Revolving Facility, as of
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.
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