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MarketScreener Homepage  >  Equities  >  Nyse  >  EVERTEC, Inc.    EVTC   PR30040P1032

EVERTEC, INC.

(EVTC)
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EVERTEC : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/30/2020 | 03:41pm EST
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 2019Nilson 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.
.

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.

© Edgar Online, source Glimpses

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