☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2019
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Puerto Rico | 66-0783622 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | ||
Cupey Center Building, | Road 176, Kilometer 1.3,
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San Juan, | Puerto Rico | 00926
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(Address of principal executive offices) | (Zip Code) |
(787)
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | EVTC | New York Stock Exchange |
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
2019.
Part III incorporates certain information by reference to
are incorporated by reference in Part III.
2016
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Item 10—Directors, Executive Officers and Corporate Governance | ||||
SAS,SAS), EVERTEC USA, LLC, EGM Ingeniería sin Fronteras, S.A.S. ("PlacetoPay") and EVERTEC México Servicios de Procesamiento, S.A. de C.V. Neither EVERTEC nor Holdings conducts any operations other than with respect to its indirect or direct ownership of EVERTEC Group.(which includes Central America and the Caribbean, unless otherwise specified), providing a broad range of merchant acquiring, payment processingservices and business process management services. According to the September 20162019 Nilson Report, we are one of the largest merchant acquirers in Latin America based on total number of transactions and we believe we are the largest merchant acquirer in the Caribbean and Central America. We serve 1826 countries in the region fromout of 11 offices, including our baseheadquarters 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, cash processing and technology outsourcing. 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.single-source 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:best in classcompetitive products;
electronic benefit transfer (“EBT”) cards; (ii) payment processing services, which enable financial institutions and other issuers to manage, support and facilitate the processing for credit, debit, prepaid, automated teller machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide “mission-critical” technology solutions such as core bank processing, as well as IT outsourcing and cash management services to financial institutions, corporations and governments. We provide these services through a scalable, end-to-end technology platforms that we manage and operate in-house and that generatesgenerate significant operating efficiencies that enable us to maximize profitability.
We benefit from an attractive business model, the
We generate revenues based primarily on transaction or discount fees paid by our merchants and financial institutions in our merchant acquiring and payment processing segments and on transaction fees or fees based on number of accounts on file in our business solutions segment. Our total revenues increased from $358.4 million for the year ended December 31, 2013 to $389.5 million for the year ended December 31, 2016, representing a compound annual growth rate (“CAGR”) of 2.81%. Our Adjusted EBITDA (as defined in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per common share”) increased from $177.7 million for the year ended December 31, 2013 to $187.6 million for the year ended December 31, 2016, representing a CAGR of 1.82%. Our Adjusted Net Income (as defined in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per common share”) increased from $116.0 million for the year ended December 31, 2013 to $124.7 million for the year ended December 31, 2016, representing a CAGR of 2.41%.
offering.
and drive an increase in card (like(e.g., debit, credit, prepayment, and EBT) and electronic payments usage. According to the July 2015 Nilson Report, Latin American purchase transactions on cards are projected to increase by 46% from 14.37 billion in 2013 to 21.02 billion in 2018. According to the 20152019 World Payments Report, non-cash payment volumes in Latin America increased to 43.1 billion in 2017 from 39.8 billion in 2016, representing a growth rate of 8%. A growing base of young and Internet-savvy customers and e-commerce growth are defining the Latin America payments landscape with credit card penetration, digital wallets, and other value-added offerings. Debit card transactions in Latin America grew by 8.6%, while14% in 2017. Latin American non-cash markets continued to be poised for growth despite recovering economies, as non-cash transactions are expected to grow 6% through 2022. The region's FinTech sector is driving change via new financial inclusion initiatives and mobile payment platforms that are becoming popular alternatives to cash payments. In North America, non-cash payments outperformed GDP growthgrew by 4.6%. While there was a slight decline5.1% in growth in non-cash payment transactions in Latin2017, are projected to grow 4.7% through 2022 and North America is expected to cede the growth rate remains at a higher rate than any market considered mature. The CAGRposition as the region with the largest number of non-cash transactions in Latin America from 2010 to 2014 was 10.6%. While in the past mature markets have dominated non-cash transaction volumes, a shift in balance is occurring as the developing markets’ share of global non-cash transaction volumes have increased from 12% to 27%. Latin America’s share of non-cash transaction volumes grew from 25.6 billion in 2010 to 38.3 billion in 2014. If current trends continue, developing markets’ share of global non-cash volumes is expected to increase from 27% in 2013 to 33%emerging Asia by 2020. We continue to believe that the attractive characteristics of our markets and our leadership positionsposition across multiple services and sectors will continue to drive growth and profitability in our businesses.
Diversified Business Model across the Transaction Processing Value Chain
Our leadership position in the region is driven in part by our diversified business model which provides a range of merchant acquiring, payment processing and business solutions services to financial institutions, merchants, corporations and government agencies across different geographies. We offer end-to-end technology solutions through a single provider and we have the ability to tailor and customize the features and functionality of our products and services to the specific requirements of our customers in various industries and across geographic markets. We believe the breadth of our offerings enables us to penetrate our customer base from a variety of perspectives and positions us favorably to cross-sell our other offerings over time. For example, we may host a client’s electronic cash register software (part of the business solutions segment), acquire transactions that originate at that electronic cash register (part of the merchant acquiring segment), route the transaction through the ATH network (part of the payment processing segment), and finally settle the transaction between the client and the issuer bank (part of the payment processing segment). In addition, we can serve customers with disparate operations in several geographies with a single integrated technology solution that enables them to access one processing platform and manage their business as one enterprise. We believe these services are becoming increasingly complementary and integrated as our customers seek to capture, analyze and monetize the vast amounts of data that they process across their enterprises. As a result, we are able to capture significant value across the transaction processing value chain and believe that this combination of attributes represents a differentiated value proposition vis-à-vis our competitors who have a limited product and service offering.
Platform
technology improvements and capitalizing on cross-selling opportunities. We have combined new leadership at EVERTEC, bringing many years of industry experience, with long-standing leadership at the operating business level. In April 2015, Morgan M. Schuessler, Jr., former President of International for Global Payments, Inc., joined our management team as President and Chief Executive Officer. In May 2015, Mariana Lischner Goldvarg joined the Company as President for our Latin America operations. Prior to joining the Company, she served as President of Equifax Latin America. In September 2015, Peter J.S. Smith, former Chief Accounting Officer of Fidelity National Information Services, joined our management team as Chief Financial Officer. In 2012, Philip Steurer, former Senior Vice President of Latin America for First Data Corporation, joined our management team as our Chief Operating Officer. Our management has extensive experience managing and growing transaction processing businesses in Latin America as well as North America, Asia and Europe. Collectively, our management team benefits from an average of over 20 years of industry experience and we believe they are well positioned to continue to drive growth across business lines and regions. In 2016, Guillermo Rospigliosi, former Managing Director for Latin America at CyberSource, a Visa subsidiary, joined the company as the Executive Vice President of Product Management & Marketing of EVERTEC, with 20 years of experience in the Payments, Financial Services, Innovation, and Technology sectors.
services.
Our Merchant Acquiring business generated $91.2 million, or 23.4%, of total revenues and $31.1 million, or 22.2%, of total segment income from operations for the year ended December 31, 2016.
Services
2019.
Our Payment Processing business accounted for $111.5 million, or 28.6%, of total revenues and $52.1 million, or 37.2%, of total segment income from operations for the year ended December 31, 2016.
Our Business Solutions business accounted for $186.8 million, or 47.9%, of total revenues and $56.8 million, or 40.6%, of total segment income from operations for the year ended December 31, 2016.
For additional information regarding the Company’s segments refer to Note 22 of the Audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
stoppages in connection with employee matters.
Oversight by the
Regulations
As long as
As long as
“Durbin “Durbin Amendment”) imposesimposed new restrictions on card networks and debit card issuers. More specifically, the Durbin Amendment provides that the interchange transaction fees that a card issuer or payment network may receive or charge for an electronic debit transaction must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing, clearing and settling the transaction.
TheReserve’s regulations (a) limit debit transaction interchange fees to $.21 + (5 bps times the value of the transactions) + $.01 (as a fraud adjustment for issuers that have in place policies and measures to address fraud); (b) require that issuers must enable at least two unaffiliated payment card networks on their debit cards without regard to authentication method; and (c) prohibit card issuers and payment card networks from entering into exclusivity arrangements for debit card processing and restrict card issuers and payment networks from inhibiting the ability of merchants to direct the routing of debit card transactions over networks of their choice. The Dodd-Frank Act also allows merchants to set minimum dollar amounts (currently, not to exceed $10) for the acceptance of a credit card and provide discounts or incentives to entice consumers to pay with various payment methods, such as cash, checks, debit cards or credit cards, as the merchant prefers.
The Dodd-Frank Act assigned most of the regulatory responsibilities previously exercised by the federal banking regulators and other agencies with respect to consumer financial products and services and other additional powers to the CFPB. In addition to rulemaking authority over several enumerated federal consumer financial protection laws, the CFPB is authorized to issue rules prohibiting unfair, deceptive or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service, and has authority to enforce consumer financial protection laws and CFPB rules. We are subject to regulation and enforcement by the CFPB because we are an affiliate of Banco Popular (which is an insured depository institution with greater than $10 billion in assets) for bank regulatory purposes and because we are a service provider to insured depository institutions with assets of $10 billion or more in connection with their consumer financial products and to entities that are larger participants in markets for consumer financial products and services. CFPB rules, examinations and enforcement actions may require us to adjust our activities and may increase our compliance costs. Various proposals have been made to either eliminate or restructure the CFPB. It is possible that during the current administration one or more of the various proposals could become law. It is unclear whether or how any such change could affect the manner in which our consumer product and service activities in which we engage. One possibility is that regulatory responsibility would be reallocated to the various bank regulatory agencies.
In addition to oversight by the Federal Reserve Board, our
and Information Security Regulations
business."
We may also be subject to enforcement actions and as a result may incur losses and liabilities that may impact our business.
and acquirers in the payment industry. Compliance deadlines for EMV mandates vary by country and by payment network. We have invested significant resources and man-hours to develop and implement this methodology in all our payment related platforms. However, we are not certain if or when our financial institution customers will use or accept the methodology and the time it will take for this technology to be rolled-out to all customer ATM and POS devices connected to our platforms or adopted by our card issuing clients. Non-compliance with EMV mandates could result in lost business or financial losses from fraud or fines from network operators. We are also subject to network operating rules promulgated by the National Automated Clearing House Association relating to payment transactions processed by us using the Automated Clearing House Network and to various government laws regarding such operations, including laws pertaining to EBT.
The public may read and copy any materials EVERTEC files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. In addition, the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
financial condition and results of operations. Popular, which expires in 2025. income. us, facilities, and, if we incur additional amounts of debt, it could exacerbate the risks associated with our substantial indebtedness.somerisks that we believe are material to our stockholders and prospective stockholders. The occurrence of any of the more important risk factors that could affectfollowing risks might cause our business, financial condition, operating resultsstockholders to lose all or cash flow. However,other factors, besides those discussed below or elsewherea part of their investment in this Report or other of our reports filed with or furnished to the Securities and Exchange Commission (“SEC”), also could adversely affect our business, financial condition, operating results or cash flow.Company. We cannot assure you that the risk factors described below or elsewhere in this document are a complete set of all potential risks we may face; additional risks and uncertainties not presently known to us or not believed by us to be material may also negatively impact us. Theseaffect our business results, financial condition, results of operations, cash flows, and the trading price of our common stock. Some statements in this report, including statements in the following risk factors also serve to describe factors which may cause our results to differ materially from those discussed in forward looking statements included herein or in other documents or statements that make reference to this Annual Report on Form 10-K.section, constitute forward-looking statements. Please also refer to the section titled “Forward Looking Statements” inat the beginning of this Annual Report on Form 10-K.2016,2019, products and services billed to Popular accounted for approximately 45%43% of our total revenues, of which approximately 83% (or approximately 37% of total revenues) are derived from core bank processing and related services for Popular and approximately 17% (or approximately 8% of total revenues) are transaction processing activities driven by third parties.revenues. The majority of Popular’s business is presented in the Business Solutions segment. If Popular were to terminate, fail to perform under (in whole or in part), or fail to renew the Master Services Agreement (“MSA”), which currently expires in 2025, or our other material agreements with Popular, our revenues could be materially reduced and our profitability and cash flows could also be materially reduced, all of which in turn, could potentially limitwould have a material adverse impact on our ability to renegotiate our debt.Popular.services.services to merchants. We rely on the continuing growth of our merchant relationships, which in turn is dependent upon our alliance with Banco Popular and other distribution channels. There can be no guarantee that this growth will continue and the loss or deterioration of these relationships, whether due to the termination of the ISO Agreement or otherwise, could negatively impact our business and result in a reduction of our revenue and profit.aton favorable terms we could lose clients andor at all, our results of operations and financial condition may be adversely affected.theour Master Services Agreement with Popular, which has a term of 15 years, and approximately 9 years remaining on the contract, and provide for termination fees upon early termination.Popular. Our government contracts generally run for one year withoutand do not include automatic renewal periods due to requirements of the government procurement rules and related fiscal funding requirements. Our standard merchant contract has an initial term of one orup to three years, with automatic one-year renewal periods. At the end of the contract term, clients have the opportunity tocan renew or renegotiate their contracts withand tobut may also consider whether to engage one of our competitors to provide products and services. If we are not successful in achieving high renewal rates andand/or contract terms that are favorable to us, our results of operations and financial condition may be adversely affected.facilities.2016,2019, the total principal amount of our indebtedness was approximately $659.5$530.9 million. Our high degree of leverage could have important consequences for you,a significant impact on us, including:
For the year ended December 31, 2016, our cash interest expense on the senior secured credit facilities amounted to $22.5 million. Our interest expense could increase if interest rates increase because the entire amount of the indebtedness under the senior secured credit facilities bears interest at a variable rate. At December 31, 2016, we had approximately $659.5 million aggregate principal amount of variable rate indebtedness under the senior secured credit facilities of which $200 million is fixed with an interest rate swap. A 100 basis point increase in interest rates over our floor(s) on our debt balances outstanding as of December 31, 2016 under the senior secured credit facilities would increase our annual interest expense by approximately $4.6 million when taking into consideration the referenced fixed interest rate swap.
sources of operational risk to us, including relating to breakdowns or failures of such parties’ own systems or employees. Any of these occurrences could diminish our ability to operate one or more of our businesses, or result in potential liability to clients, reputational damage and regulatory intervention or fines, any of which could materially adversely affect legal liability. The goodwill impairment evaluation process requires us to make estimates and assumptions with regards to the fair value of our reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact our results of operations and the reporting unit where the goodwill is recorded. business. similar negative effects. clients, which could adversely affect our revenues. Further, if our clients fail or merge with or are acquired by other entities that are not our clients, or that use fewer of our services, they may discontinue or reduce their use of our services. It is also possible that the larger banks or financial institutions resulting from mergers or consolidations would have greater leverage customers and businesses. In order to consistently increase and maintain our profitability, businesses and consumers must continue to use electronic and digital payment methods that we process, including credit and debit cards. circumstances. subject to regulation because of our activities in the countries where we carry them out and because of our relationship with Popular, and at times we are also affected by the laws, rules and regulations to which our customers are subject. Failure to comply with any of these laws, rules and regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of common stock.haveexperience other significant shortcomings or limitations, weour ability to serve our clients and accordingly our results of operations could be materially adversely affected. Such failures or shortcomings could be the result of events that are wholly or partially beyond our control, which may include, for example, computer viruses, fires, electrical or telecommunications outages, natural disasters, disease pandemics, terrorist acts or other unanticipated damage to property or physical assets. Any such failure or shortcoming could also damage our reputation, require us to expend significant resources to correct the defect, and may result in liability to third parties, especially since some of our contractual agreements with financial institutions require the crediting of certain fees if our systems do not meet certain specified service levels.WeOur operations could be materially adversely affected if one of ouror more employees causescause a significant operational breakdown or failure, either intentionally or as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. Thirderror. Suppliers and third parties with which we do business could also beus.Weour financial condition or results of operations.be subjectaffect our employees, our clients and our suppliers in ways which could materially adversely affect our financial condition or results of operations.disruptionsthe collection, storage, handling, use, disclosure, transfer, and security of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses or electrical or telecommunications outages, natural disasters, disease pandemics or other unanticipated damagepersonal data continues to property or physical assets. Such an incident occurred on January 9, 2016, when our payments network suffered a two hour interruption of service. Such disruptions may give rise to lossesevolve, and regulatory scrutiny in service to customers and loss or liability to us. In addition, therethis area is increasing around the risk that our controls and proceduresworld. Significant uncertainty exists as well as business continuityprivacy and data protection laws may differ from country to country and may create inconsistent or conflicting requirements. Our ongoing efforts to comply with privacy, cybersecurity, and data protection laws may entail expenses, may divert resources from other initiatives and projects, and could limit the services we are able to offer. Enforcement actions and investigations by regulatory authorities related to data security systems prove to be inadequate. Any such failureincidents and privacy actions or investigations could affect our operations, damage our reputation and materially adversely affectimpact us through increased costs or restrictions on our results of operations by requiring us to expendbusiness, and noncompliance could result in regulatory penalties and significant resources to correct the defect, by causing a loss of confidence in our services that leads to a decrease in use of our services, and by exposing us to litigation, regulatory fines, penalties or other sanctions or losses not covered by insurance.theU.S. generally accepted accounting principles in the United States of America (“GAAP”), definitive useful life intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.For 2016, the Company used a “qualitative assessment” option or “step zero” for the goodwill impairment test for all of its reporting units. With this process, the Company first assesses whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount. If the answer is no, then the fair value of the reporting unit does not need to be measured, and step one and step two are bypassed. In assessing the fair value of a reporting unit, which is based on the nature of the business and reporting unit’s current and expected financial performance, the Company uses a combination of factors such as general macroeconomic conditions, industry and market conditions, overall financial performance and the entity and reporting unit specific events. In 2016, step one and step two were bypassed for all reporting units.fourten years, including our separation from Popular following the Merger, our initial public offering in April 2013 and our listing on the New York Stock Exchange (“NYSE”). Accordingly, we may not be fully effective in identifying, monitoring and managing our risks. In some cases, the information we use to perform our risk assessments may not be accurate, complete or up-to-date. In other cases, our risk assessments may depend upon information that we may not have or cannot obtain. If we are not fully effective or we are not always successful in identifying all risks to which we are or may be exposed, we could be subject to losses, penalties, litigation or regulatory actions that could harm our reputation or have a material adverse effect on our business, financial conditions and results of operations.Securityown failure to comply with privacy regulationssystems, which can adversely affect our reputation and industry security requirements imposed on providers of services to financial institutions and card processing services could harm our business by disrupting our delivery of services and damaging our reputation.businesscustomer information of our customers. In addition, we collectand personal consumer data, such as names and addresses, social security numbers, driver’s license numbers, cardholder data and payment history records. We also operate payment, cash access and electronic card systems. Attacks on information technology systems continue to grow in frequency, complexity and sophistication, a trend we expect will continue. The uninterrupted operationobjectives of our informationthese attacks include, among other things, gaining unauthorized access to systems to facilitate financial fraud, disrupt operations, cause denial of service events, corrupt data, and the confidentialitysteal non-public information. Such attacks have become a point of the customer/consumer information that resides on such systems are critical to the successful operations of our business. focus for individuals, businesses and governmental entities.operations.businesses. These risks are increased when we transmit information over the Internet. OurInternet as our visibility in the global payments industry may attract hackers to conduct attacks on our systems that could compromisesystems. Our security measures may also be breached due to the security of our data or could cause interruptions in the operations of our businesses and subject us to increased costs, litigation and other liabilities. There is also a possibility of mishandling or misuse of information; for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees acting contrary to our policies or whereas a result of a fault in our systems.information is intercepted or otherwise improperly taken by third parties. An information breach in the system andas loss of confidential information such as credit card numbers and related information, could have a longer and more significant impactmaterial adverse effect on the business operations than a hardware failureour reputation and could result in claims against us for misusea loss of personal information, such as identity theft.Additionally, ascustomers throughout the years. Some of our systems have experienced past security breaches and, although they did not have a providermaterial adverse effect on our operating results or reputation, there can be no assurance of services to financial institutions, such as card processing services, we are subject directly (or indirectly through our clients) to the same laws, regulations, industry standards and limitations on disclosure of the information we receive from our customers that apply to the customers themselves. If we fail to comply with these regulations, standards and limitations, we could be exposed to claims for breach of contract, fines, governmental proceedings, or prohibitions on card processing services. In addition, as more restrictive privacy laws, rules or industry security requirements are adopteda similar result in the future on the federalfuture. We cannot assure you that our security measures will prevent security breaches or local level or by a specific industry body, the change could have an adverse impact on us through increased costs or restrictions on business processes. We may be required to expend significant capital and other resources to comply with mandatory privacy and security standards required by law, industry standards or contracts.Any inabilitythat failure to prevent security or privacy breaches or failure to comply with privacy regulations and industry security requirements could cause our existing customers to lose confidence in our systems and terminate their agreements with us, and could inhibit our ability to attract new customers, damage our reputation and/or adversely impact our relationship with administrative agencies.We may experience breakdowns in our processing systems that could damage customer relations and expose us to liability.We depend heavily on the reliability of our processing systems in our core businesses. A system outage or data loss, regardless of reason, couldthem will not have a material adverse effect on our business, results of operations, financial condition and resultsreputation. In addition, any breaches of operations. Not only would we suffer damage to our reputation in the event of a system outagenetwork or data loss, but we may also be liable to third parties. Some ofsecurity at our contractual agreements with financial institutions require the crediting of certain fees if our systems do not meet certain specified service levels. To successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Events that could cause system interruptions include, but are not limited to, fire, natural disasters, telecommunications failure, computer viruses, terrorist acts and war. Although we have taken steps to protect against data loss and system failures, there is still risk that we may lose critical datacustomers, partners or experience system failures. We perform the vast majority of disaster recovery operations ourselves, though we utilize select third parties for some aspects of recovery. To the extent we outsource our disaster recovery, we are at risk of the vendor’s unresponsiveness in the event of breakdowns in our systems. Furthermore, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.Lack of system integrity, fraudulent payments or credit quality related to funds settlement could result in a financial loss.We settle funds on behalf of financial institutions, other businesses and consumers and process funds transactions from clients, card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by us include debit card, credit card, electronic bill payment transactions, ACH payments, electronic benefits transfer transactions and check clearing that supports consumers, financial institutions and other businesses. These payment activities rely upon the technology infrastructure that facilitates the verification of activity with counterparties, the facilitation of the payment and, in some cases, the detection or prevention of fraudulent payments. If the continuity of operations, integrity of processing, or ability to detect or prevent fraudulent payments were compromised this could result in a financial loss to us.We may experience defects, development delays, installation difficulties, system failure, or other service disruptions with respect to our technology solutions, which would harm our business and reputation and expose us to potential liability.Many of our services are based on sophisticated software, technology and computing systems, and we may encounter delays when developing new technology solutions and services. Further, the technology solutions underlying our services have occasionally contained and may in the future contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technologies on platforms used by our customers. Finally, our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry and computer viruses or other cyber-attacks. Attacks on information technology systems continue to grow in frequency, complexity and sophistication, a trend we expect will continue. Such attacks have become a point of focus for individuals, businesses and governmental entities. The objectives of these attacks include, among other things, gaining unauthorized access to systems to facilitate financial fraud, disrupt operations, cause denial of service events, corrupt data, and steal non-public information.As part of our business, we electronically receive, process, store and transmit a wide range of confidential information, including sensitive customer information and personal consumer data. We also operate payment, cash access and electronic card systems. A successful cyber-attack on our system could result in: (1) interruption of business operations; (2) delay in market acceptance; (3) additional development and remediation costs; (4) diversion of technical and other resources; (5) loss of customers; (6) negative publicity and loss of reputation; or (7) exposure to liability claims.Any one or more of the foregoingvendors could have a material adverse effect on our business, financial condition and results of operations.in negotiatingto negotiate terms withless favorable to us or could decide to perform in-house some or all of the services which we currently provide or could provide. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.this amountamounts paid to cardholders in the form of refunds or chargebacks from the merchant, due to the merchant’s insolvency or other reasons, we will bear the loss for the amount of the refund or chargeback paid to the cardholder.those amounts. Notwithstanding our adherence to it is possible that a default on suchpayment obligations by one or more of our merchants could have a material adverse effect on our business. or changes in consumer spending or payment preferences could adversely affect our business.either as a result of increased competition a decrease in consumer spending or a shift in consumer payment preferences, could have a material adverse effect on our business. We may face increased competition in the future as new companies enter the market and existing competitors expand their services. Some of these competitors could have greater overall financial, technical and marketing resources than us, which could enhance their ability to finance acquisitions, fund internal growth and respond more quickly to professional and technological changes. Some competitors could have or may develop a lower cost structure. New competitors or alliances among competitors could emerge, resulting in a loss of business for us and a corresponding decline in revenues and profit margin. Further, ifcompetitors.respect to which we must comply. The termination of Banco Popular’s or our subsidiaries’ member registration or our subsidiaries’ status as a certified service provider, or any changes in card association or other network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit our ability to provide transaction processing services to or through our customers, could have an adverse effect on our business, operating results and financial condition.processingservices businesses. It is possible that competitiveCompetitive pressureswill could result in our merchant acquiring and payment processingservices businesses absorbing a portion of such increases in the future, which would increase our operating costs, reduce our profit margin and adversely affect our business, operating results and financial condition.Our revenues from the sale of services to merchants that accept Visa, Discover and MasterCard cards are dependent upon our continued Visa, Discover and MasterCard registration and financial institution sponsorship.In order to provide our Visa, Discover and MasterCard transaction processing services, we must be registered as a merchant processor of Visa, Discover and MasterCard. These designations are dependent upon our being sponsored by member banks of those organizations. If our sponsor banks should stop providing sponsorship for us, we would need to find another financial institution to serve as a sponsor, which could prove to be difficult and/or more expensive. If we are unable to find a replacement financial institution to provide sponsorship we may no longer be able to provide processing services to the affected customers which would negatively impact our revenues and earnings.BHCBank Holding Company Act for as long asof 1956 (the “BHC Act”), to the extent that we are deemed to be controlled by Popular, we will be subject to regulation, supervision and examination by the U.S. federal banking regulators,Federal Reserve Board, and our activities will be limited to those permissible for Popular. Furthermore, as a technology service provider to regulated financial institutions, we are subject to additional regulatory oversightunder the BHC Act and examination. As a regulated institution, werelated regulations. We may be required to obtain regulatory approval before engaging in certain new activities or businesses, whether organically or by acquisition.For so long as deemed to be a “subsidiary” of Popular for purposes of the Bank Holding Company Act of 1956 (the “BHC Act”), in other words deemed to be controlled by Popular pursuant to regulation and guidance under the BHC Act, we will be subject to regulation, supervision and supervisionexamination by the Federal Reserve Board. The BHC Act defines “control” differently than GAAP. AsGAAP, and “control” can be found based on a deemed subsidiary, we may conduct only those activities that are authorized for our deemed parent, which depend on whether it is treated as a bank holding company or a financial holding company. The activities that are permissible for subsidiariesvariety of bank holding companies are those that are treated as closely related to banking; those that are permissible for subsidiaries of financial holding companies generally include activities that are financial in nature or complementary to financial activities. In addition, we are subject to regulatory oversightfacts and examination by the Federal Financial Institution Examination Council because we are a technology service provider to regulated financial institutions, including Banco Popular.andincluding the manner in which we conduct our business or may undertake such activities or acquisitions, may not be permissible for us under the BHC Act, the Federal Reserve Board’s Regulation K or other relevantapplicable U.S. federal banking laws or may require the approval of the Federal Reserve Board or any otheranother applicable U.S. federal banking regulator. In addition, dealspotential acquisitions may take longer, be more costly, or make us less attractive as a buyer. Additional regulatory requirements may be imposed if Popular is subject to any enforcement action. More generally, the Federal Reserve Board has broad powers to approve, deny or refuse to act upon applications or notices submitted by Popular on our behalf with respect to new activities, the acquisition of businesses or assets, or the reconfiguration of existing operations. Any such action by the Federal Reserve Board may also depend on our ability to comply with the standards imposed by our regulators. There can be no assurance that any required regulatory approvals will be obtained. In addition, further restrictions placedobtained, or that they will be obtained without regulatory conditions. Additional regulatory requirements may be imposed on our activities or acquisitions to the extent we are controlled by Popular as a result ofand Popular is subject to any supervisory or enforcement actions may restrict us or our activities in certain circumstances,action, even if thesethe supervisory actions are unrelated to conductus or to our business.service,one or more of the services we provide, and/or the imposition of civil and criminal penalties, including fines, all of which could have an adverse effect on our financial condition. In addition, even an inadvertent failure by us to comply with laws, rules and regulations, as well as rapidly evolving social expectations of corporate fairness, could damage our reputation or brands.increasingcontinued scrutiny by the U.S. Congress of the manner in which payment card networks and card issuers set various fees, from which some of our customers derive significant revenue. For example, on July 21, 2010, the Dodd-Frank Act was signed into law in the United States. The Durbin Amendment contains requirements relating to payment card networks. To implement this provision, the Federal Reserve adopted rules which took effect on October 1, 2011 and April 1, 2012. These rules, among other things, place certain restrictions on the interchange transaction fees that a card issuer can receive for an electronic debit transaction originated at a merchant and also places various exclusivity prohibitions and routing requirements on such transactions. To date, the Durbin Amendment has had mixed implications for our business, but the overall net impact has been positive due to lower interchange costs improving the overall margins of the business. However, we cannot assure you that this trend will continue, and we believe that any future impact (positive or negative) resulting from the Durbin Amendment and subsequent developments is uncertain due to the competitive landscape in which we operate. Further, banking regulators have been strengthening their examination guidelines with respect to relationships between banks and their third-party service providers, such as EVERTEC.us. Any such heightened supervision of our relationship with Popular could have an effect on our contractual relationship with Popular as well as on the standards applied in the evaluation of our services. See “Item 1. Business—GovernmentBusiness-Government Regulation and Payment Network Rules—RegulatoryRules-Regulatory Reform and Other Legislative Initiatives.” We have structured our business in accordance with existing tax laws and interpretationssuch laws. Changes in tax laws or their interpretations could decreasePuerto Rico’s fiscal crisis continues. The expiration of the valueautomatic stay on litigation to collect claims against the Government on May 1, 2017, the initiation of revenues we receivecreditor litigation promptly thereafter and the amountGovernment’s filing for bankruptcy protection on May 3, 2017, are all expected to further slow the Puerto Rico economy, increase emigration from Puerto Rico, increase the risk of our cash flownon-payment of Government obligations and negatively affect the economy and consumer spending, which could have a material adverse impacteffect on our business.Our business concentration in Puerto Rico and the trading price of our business with the government of Puerto Rico expose us to significant risks. fiscal years ended December 31, 20162019 and 2015,2018, approximately 84%81% and 86%79%, respectively, of our total revenues were generated from our operations in Puerto Rico. In addition, some revenues that are generated from our operations outside Puerto Rico are dependent upon our operations in Puerto Rico. As a result, our financial condition and results of operations are highly dependent on the economic and political conditions in Puerto Rico, and could be significantly adversely impacted by adverse economic or political developments in Puerto Rico.In 2016, the government of Puerto Rico was our second largest customer representing approximately 7% of our total revenues. Revenues from the government of Puerto Rico come from numerous agencies and public corporations. We believe a substantial portion of the services we provide to the government of Puerto Rico are mission-critical or essential. Some of the government-sponsored initiatives we provide are indirectly funded in part by U.S. federal government programs. The government of Puerto Rico is currently experiencing a fiscal crisis (as described further in the following risk factor). A federal law adopted in June 2016 creates an Oversight Board with broad budgetary and financial powers over Puerto Rico’s budget, laws, financial plans and regulation, and imposes an automatic temporary stay on all litigation against Puerto Rico and its instrumentalities to enforce or collect claims against the Puerto Rico government. If the Puerto Rico government defaults in payment, delays or withholds payment to us, we may not be able to enforce our claims against the government until the stay is lifted and may not be able to recover the full amount on the receivables due to us. In addition, the Puerto Ricogovernment may elect not to renew contracts for our services, or the Oversight Board may decide not to approve the budget for them. While we believe that the government of Puerto Rico will continue to engage our services despite the challenging financial situation it is currently facing, a failure of the government to do so or the Oversight Board to approve the required budget could have a material adverse impact on our financial condition and results of operations.In addition, severe weather conditions that are prevalent in tropical climates and other natural disasters, could negatively affect, among other things, our ability to provide services, as well as our physical locations, property and equipment, and could have a material adverse effect on our financial condition and results of operations.A prolongation of the Government of Puerto Rico’s fiscal crisis, or worsening of the crisis, could slow the Puerto Rico economy, delay Government payments and negatively affect consumer spending.The Commonwealth of Puerto Rico has been in economic recession since 2006. In August 2015, the governmentPuerto Rico defaulted for the first time on the Public Finance Corporation bonds. In April 2016, the Puerto Rico governor signed a debt moratorium law that gave the governor emergency powers to deal with the fiscal crisis, including the ability to declare a moratorium on any debt payment. On June 30, 2016, the U.S. President signed into law the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). PROMESA establishes a fiscal oversight and management board (the “Oversight Board”) comprised of seven voting members appointed by the President. The Oversight Board was constituted in September of 2016, 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 BoardPROMESA also has ultimate authority in preparing the Puerto Rico government’s budget and any issuance of future debt by the government and its instrumentalities. In addition, PROMESA imposesimposed 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 Puerto Rico government. Thisis currently in effect up toimposed by PROMESA expired and creditors of the Puerto Rico government filed various lawsuits involving defaults on more than $70 billion of bonds issued by Puerto Rico. On May 3, 2017, Puerto Rico filed for bankruptcy-like protection under Title III of PROMESA.extendedno assurance that meaningful negotiations will occur or that any consensual agreement will be reached or by what date. Importantly, there also can be no assurance as to the financial outcome or timing ofOversight BoardU.S. Congress or the U.S. District CourtPresident.Rico.As long asRico’s economic recession, and to further curtail the fiscal crisis endures,ability of the Commonwealth of Puerto Rico and its instrumentalities, subject to the oversight of the Oversight Board (collectively, the “Government”), may be unable to access the capital markets to place new debt or roll its upcoming maturities, andfuture maturities. Additionally, potential Government actions such as further reductions in spending or the Government may reduce spending, imposeimposition of new taxes may further deepen the current economic crisis, lead to an increase in unemployment rates, and take other actions which could slowresult in a continued decline in population and in the economy. A prolonged recessionfuture fiscal measures may negativelywhen a restructuring plan will get approved or when Puerto Rico will resolve its current debt situation.business. The continuing challenging economic environment could affectcommon stock, adversely impact our customer base, depress general consumer spending and lengthendelay the Government’s payments thus increasing our Government accounts receivables; these outcomes, if realized,receivables, and potentially impair the collectability of those accounts receivable, all of which, individually or in the aggregate, could potentially have a material adverse effect on our business, financial condition and results of operations.At December 31, 2016, the Company has no direct exposure to the Government’s debt obligations, including those of its instrumentalities or municipalities. The Company has accounts receivable with the Puerto Rico government and its agencies amounting to $18.0 million as As of December 31, 2016 down2019, we had net receivables of $8.9 million from $18.4 millionPuerto Rico and certain public corporations.December 31, 2015.Therereestablishment of regular day-to-day commerce, have severely impacted the economies of Puerto Rico and the Caribbean. It is unknown how long it will take for the business communities, resident populations and the economies to fully recover. Puerto Rico’s current situation following Hurricane Maria could further accelerate the ongoing emigration trend of Puerto Rico residents to the United States. A prolonged delay in the repairs to the islands’ infrastructures, decline in business volume and any other economic declines due to Hurricanes Irma and Maria and their aftermaths may impact demand for our services and could have a material adverse effect on our business and results of operations.
results of operations.
These regulations also prohibit improper payments or offers of payments to foreign governments and their officials and political parties by the United States and other business entities for the purpose of obtaining or retaining business. We have operations and deal with government entities and financial institutions in countries known to experience corruption, particularly certain emerging countries in Latin America, and further international expansion may involve more of these countries. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees or consultants that could be in violation of various laws including the FCPA, even though these parties are not always subject to our control. Our existing safeguards and any future improvements may prove to be less than effective, and our employees or consultants may engage in conduct for which we may be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.
On June 25, 2010, EVERTEC Group discovered potential violations of the Cuban Assets Control Regulations (“CACR”), which are administered by OFAC, which occurred due to an oversight in the activation of screening parameters for two customers located in Haiti and Belize. Upon discovery of these potential violations, EVERTEC Group initiated an internal review and submitted an initial notice of voluntary self-disclosure to OFAC on July 1, 2010. OFAC responded to this initial report with requests for additional information. EVERTEC Group provided the information requested on September 24, 2010 in its final notice of voluntary self-disclosure, which also included information on the remedial measures and new and enhanced internal controls adopted by EVERTEC Group to avoid this situation in the future. These potential violations involved a small number of processed transactions from Cuba compared to the overall number of transactions processed for these
customers during the two-month period in which the screening failures occurred. We cannot predict the timing or ultimate outcome of the OFAC review, the total costs to be incurred in response to this review, the potential impact on our personnel, the effect of implementing any further measures that may be necessary to ensure full compliance with U.S. sanctions regulations, or to what extent, if at all, we could be subject to penalties or other governmental investigations.
Separately, on September 15, 2010, EVERTEC Group submitted an initial notice of voluntary self-disclosure to OFAC regarding certain activities of its former Venezuelan subsidiary, EVERTEC de Venezuela, C.A. (which ceased being a subsidiary of EVERTEC Group after the closing of the Merger and is now known as Tarjetas y Transacciones en Red TRANRED, C.A. (“Tranred”)) and EVERTEC Group’s Costa Rican subsidiary (which continues to be a subsidiary of EVERTEC Group after the closing of the Merger). This initial self-disclosure informed OFAC that these subsidiaries appeared to have been involved in processing Cuba-related credit card transactions that EVERTEC Group and the subsidiary believed they could not reject under governing local law and policies, but which nevertheless may not be consistent with the CACR. With respect to EVERTEC Group and its former Venezuelan subsidiary, we disclosed that they completely ceased processing Cuba-related transactions for financial institutions operating in Venezuela on September 4, 2010. We also disclosed that EVERTEC Group’s Costa Rican subsidiary completely ceased processing Cuba-related credit card transactions for financial institutions operating in Costa Rica in January 2009. In addition, it was also disclosed that EVERTEC Group’s Costa Rican subsidiary’s switch had served as a conduit through which information about Cuban-related debit card transactions was transmitted to credit card associations and issuer banks, which made the decisions to approve or reject the transactions.
On November 15, 2010, EVERTEC Group submitted its final notice of voluntary self-disclosure on these transactions to OFAC. The final report indicated the measures that we had taken to determine the amount of the credit transactions relating to Cuba that had not been rejected between 2007 and 2010. In addition, we confirmed that EVERTEC Group terminated the routing of the Cuban-related debit card transaction information through its Costa Rican subsidiary on September 30, 2010. While the credit and debit card transactions at issue represent a small proportion of the overall number of transactions processed for these financial institutions, the transactions occurred over an extended period of time.
On August 7, 2013, Popular submitted a voluntary self-disclosure to OFAC regarding certain routed debit card transactions by Tranred between October 2012 and May 2013 that may be in violation of the CACR. The voluntary self-disclosure also states that transactions constitute a small number of transactions compared to the overall number of transactions Tranred processed, and are representative of transactions that may have occurred prior to October 2010 when the entity was subject to the ownership and control of EVERTEC. We have been advised by Popular that effective May 2013, Tranred implemented a new control filter in its debit card transactions routing system to prevent the routing by Tranred of any debit card transaction originating in Cuba.
Should OFAC determine that certain activities identified in the voluntary self-disclosures described above constituted violations of the CACR, civil or criminal penalties could be assessed against EVERTEC Group and/or its subsidiary. Since November 15, 2010, there have been no communications between OFAC and EVERTEC Group regarding the transactions included in the above described voluntary self-disclosures.
Popular agreed to specific indemnification obligations with respect to all of the matters described above and certain other matters, in each case, subject to the terms and conditions contained in the Merger Agreement and/or contained in the Venezuela Transition Services Agreement, dated September 29, 2010, as amended. However, we cannot assure you that we will be able to fully collect any claims made with respect to such indemnities or that Popular and/or Tranred will satisfy its indemnification obligations to us.
In addition, in connection with any acquisitions, we must comply with U.S. federal and other antitrust and/or competition law requirements.
selling our services and products, or prevent us from preventing others from selling competing services, and may result in a material adverse effect on our business, financial condition and results of operations.
If our applications or services or third party applications upon which we rely are found to infringe the proprietary rights of others, we may be required to change our business practices and may also become subject to significant costs and monetary penalties.
As our IT applications and services develop, we are increasingly subject to potential claims for intellectual property infringement, for example, patent or copyright infringement. AnyManaging any such claims,challenges, even if lackingthey lack merit, could: (i) be expensive and time-consuming to defend; (ii) cause us to cease making, licensing or using software or applications that incorporate the challenged intellectual property; (iii) require us to redesign our software or applications, if feasible; (iv) divert management’s attention and resources; and (v) require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies. Unfavorable resolutionFurthermore, the laws of these claimscertain foreign countries in which we do business or contemplate doing business in the future may not protect intellectual property rights to the same extent as do the laws of the United States or Puerto Rico. Adverse determinations in judicial or administrative proceedings related to intellectual property or licenses could prevent us from selling our services and products, or prevent us from preventing others from selling competing services, impose liability costs on us, or result in a non-favorable settlement, all of which could result in us being restricted from delivering the related servicea material adverse effect on our business, financial condition and products, liable for damages, or otherwise result in a settlement that could be material to us.
results of operations.
In February 2016, the Department of Justice of the Commonwealth of Puerto Rico announced that it initiated a formal investigation into whether we had engaged in conduct that interferes with free competition with respect to the products and services we provide within the Commonwealth of Puerto Rico and which conduct could constitute a violation of the Puerto Rico Anti-Monopoly Act, Law 77 of June 25, 1964. In August 2016, we received official confirmation that the Puerto Rico Department of Justice had formally closed its investigation and concluded that we had not engaged in such conduct. However, there can be no assurance that another such investigation will not be initiated in the future. If there is another such investigation, an adverse finding could lead to restrictions on our business, or our being required to take action, that has a materially adverse effect on our financial condition and results of operations. Any such effect, or the perception by investors as to the likelihood of such an effect, could have a material adverse effect on our stock price.
The market for our electronic commerce services is evolving and may not continue to develop or grow rapidly enough for us to maintain and increase our profitability.
If the number of electronic commerce transactions does not continue to grow or if consumers or businesses do not continue to adopt our services, it could have a material adverse effect on the profitability of our business, financial condition and results of operations. We believe future growth in the electronic commerce market will be driven by the cost, ease-of-use, and quality of products and services offered to consumers and businesses. In order to consistently increase and maintain our profitability, consumers and businesses must continue to adopt our services.
operations.
Any declaration and payment of future dividends to holders of our common stock may be limited by restrictive covenants of our debt agreements, and will be at the sole discretion of our Board and will also depend on many factors.
Any declaration and payment of future dividends to holders of our common stock may be limited by restrictive covenants of our debt agreements, and will be at the sole discretion of our Board and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our Board deems relevant. The terms of our senior secured credit facilities may restrict our ability to pay cash dividends on our common stock. We are prohibited from paying any cash dividend on our common stock unless we satisfy certain conditions. The senior secured credit facilities also include limitations on the ability of our subsidiaries to pay dividends to us. Furthermore, we will be permitted under the termsThe earnings from, or other available assets of, our debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. The agreements governing our current and future indebtednesssubsidiaries may not permitbe sufficient to pay dividends or make distributions or loans or enable us to pay any dividends on our common stock.
The requirements of havingstock or other obligations.
Upon completioncompany, we are exposed to risks relating to evaluations of our initial public offering in April 2013, we became subject to additional reporting requirementscontrols required by Section 404 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),Sarbanes-Oxley Act.
We are required to maintain effective internal controls over financial reporting, which could place a strain on our resources, and our failure to do so could require a restatement of our financials and lead to a potential default under our credit facility or a delisting from NYSE.
The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. These requirements may place a strain on our systems and resources. Under Section 404 of the Sarbanes-Oxley Act, we are required to include a report of managementmay default on our internal control over financial reporting incredit facility and be subject to sanctions or investigation by regulatory authorities, including the SEC. Any action of this Annual Report on Form 10-K for the year ended December 31, 2016. In order to maintain and improve the effectiveness oftype could adversely affect our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight is required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
If we are unable to conclude that our disclosure controls and procedures and internal control over financial reporting are effective, or if our independent public accounting firm is unable to provide us with an unqualified report on our internal control over financial reporting in future years, investors may loseinvestors’ confidence in our financial reportscompany, and could cause our stock price mayto decline. In addition, a material weakness in our internal controls over financial reporting could lead to the occurrence of material misstatements in our financial statements and we could be required to restate our financial results. Our failure to file timely and file materially complete and accurate financial information in our reports with the SEC could lead to a number of adverse consequences, including a loss of confidence by our investors, a default under our credit facility, or a violation of NYSE’s listing rules that could lead to our delisting. Any of these results could have a material adverse effect on our business and results of operations and on the trading price of our common stock.
In addition, we have filed a Form S-8 under the Securities Act covering 12,089,382 shares of our common stock reserved for issuance under our Carib Holdings, Inc. 2010 Equity Incentive Plan (or the 2010 Plan), and our EVERTEC, Inc. 2013 Equity Incentive plan (or the 2013 Plan) and certain options and restricted stock granted outside of these plans (which we refer to as the Equity Plans), but subject to the terms and conditions of the 2010 Plan. Accordingly, shares of our common stock registered under such registration statement may become available for sale in the open market upon grants under the Equity Incentive Plans, subject to vesting restrictions, Rule 144 limitations applicable to our affiliates and the contractual lock-up provisions described below.
If securities analysts stop publishing research or reports about our company, or if they issue unfavorable commentary about us or our industry or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock will depend in part on the research and reports that third party securities analysts publish about our company and our industry. One or more analysts could downgrade our common stock or issue other negative commentary about our company or our industry. In addition, we may be unable or slow to attract research coverage. Alternatively, if one or more of these analysts cease coverage of our company, we could lose visibility in the market. As a result of one or more of these factors, the trading price of our common stock could decline.
In addition to the $72$116.9 million which was available for borrowing under our revolving credit facility as of December 31, 2016,2019, the terms of the senior secured credit facilities enable us to increase the amount available under the term loan and/or revolving credit facilities if we are able to obtain loan commitments from banks and satisfy certain other conditions. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we face would increase.
A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions and, in the case of our revolving credit facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under the senior secured credit facilities, the lenders could elect to declare all amounts outstanding under the senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under the senior secured credit facilities. If the lenders under the senior secured credit facilities accelerate the repayment of borrowings, the proceeds from the sale or foreclosure upon such assets will first be used to repay debt under our senior secured credit facilities and we may not have sufficient assets to repay our unsecured indebtedness thereafter. As a result, our common stock could become worthless.
processingservices business. We also lease space in 914 other locations across Latin America and the Caribbean, including our headquarters in San Juan, Puerto Rico and various data centers and office facilities to meet our sales and operating needs. We believe that our properties are in good operating condition and adequately serve our current business operations. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion.
aggregateaggregated liabilities, if any, arising from such actions will not have a material adverse effect on the financial condition, results of operations and the cash flows of the Company.
2016 First Quarter Second Quarter Third Quarter Fourth Quarter 2015 First Quarter Second Quarter Third Quarter Fourth Quarter paying cash dividends. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board and will depend on many factors, including our financial condition, earnings, available cash, business opportunities, legal requirements, restrictions in our debt agreements and other contracts, capital requirements, level of indebtedness and other factors that our Board deems relevant. The covenants of our senior secured credit facilities may limit our ability to pay dividends on our common stock and limit the ability of our subsidiaries to pay dividends to us if we do not meet required performance metrics contained in our debt agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Obligations.” interests. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Obligations.” Period 2/1/2016 - 2/29/2016 6/1/2016 - 6/30/2016 8/1/2016 - 8/31/2016 9/1/2016 - 9/30/2016 11/1/2016 - 11/30/2016 12/1/2016 - 12/31/2016 “EVTC”"EVTC".following table sets forth the high and low sales pricesCompany has a history of our common stock as reported by the NYSE, for each full quarterly period within the two most recent fiscal years. As of February 17, 2017, the approximate number of record holders of our common stock was 202. The closing price as reported on the NYSE of our common stock on such date was $17.20 per share. Price Range High Low $ 16.63 $ 11.27 16.32 12.98 17.62 15.13 18.60 14.15 22.87 19.36 23.12 20.13 21.71 17.42 19.66 14.93 DividendsWe currently have a policy under which we pay a regular quarterly dividend on our common stock, subject to the declaration thereof each quarter by our Board. The following table provides a detail of dividend information for 2016 and 2015:Declaration DateRecord DatePayment DateDividendper shareFebruary 18, 2015March 2, 2015March 19, 20150.10May 6, 2015May 18, 2015June 5, 20150.10August 5, 2015August 17, 2015September 3, 20150.10November 4, 2015November 16, 2015December 4, 20150.10February 17, 2016February 29, 2016March 17, 20160.10May 11, 2016May 23, 2016June 10, 20160.10July 28, 2016August 9, 2016September 2, 20160.10October 27, 2016November 14, 2016December 2, 20160.10Group’sInc.’s ability to pay distributions on its equity Total number of
shares purchased Average price paid
per share Total shares purchased
as part of a publicly
announced program Aproximate dollar value of
shares that may yet be
purchased under the
program(1) 212,863 11.555 212,863 830,516 15.827 830,516 210,000 16.980 210,000 625,285 16.836 625,285 428,863 15.701 428,863 196,900 17.861 196,900 2,504,427 $ 15.950 2,504,427 $ 80,012,223 Average price paid Period purchased per share under the program 10/1/2019-10/31/2019 21,720 $ 30.644 21,720 11/1/2019-11/30/2019 76,283 30.543 76,283 12/1/2019-12/31/2019 11,400 30.914 11,400 Total 109,403 $ 30.602 109,403 $ 30,550,139 (1)On September 24, 2014, the Company announced a stock repurchase program authorizing the purchase of up to $75 million of the Company’s common stock over the next twelve months. (1) On February 17, 2016, the Company announced that its Board of Directors approved an increase and extension to the current stock repurchase program, authorizing the purchase of up to $120 million of the Company’s common stock and extended the expiration to December 31, 2017. On November 2, 2017, the Company's Board approved an extension to the expiration date of the current stock repurchase program to December 31, 2020.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (A) | Weighted-average exercise price of outstanding options, warrants and rights (B) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A)) (C) | |||||||||
Equity compensation plans approved by security holders | N/A | N/A | N/A | |||||||||
Equity compensation plans not approved by security holders | 20,000 | $ | 6.04 | 6,648,508 |
2019:
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (A) | Weighted-average exercise price of outstanding options, warrants and rights (B) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A)) (C) | |||||
Equity compensation plans approved by security holders (1) | 1,592,755 | $0.00 | 3,380,212 | |||||
Equity compensation plans not approved by security holders | N/A | N/A | N/A |
(1) | The Company's equity plans were approved by the two sole stockholders prior to the Company's initial public offering, Apollo and Popular. |
Statements of Income Data: Revenues: Merchant Acquiring, net Payment Processing Business Solutions Total revenues Operating costs and expenses Cost of revenues, exclusive of depreciation and amortization shown below Selling, general and administrative expenses Depreciation and amortization Total operating costs and expenses Income from operations Interest income Interest expense (Losses) earnings of equity method investment Other income (expenses) Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Less: Net income attributable to non-controlling interest Net income (loss) attributable to EVERTEC Inc.’s common stockholders Net income (loss) per common share—basic Net income (loss) per common share—diluted Cash dividends declared per common share(1) Balance Sheet Data: Cash Total assets Total long-term liabilities Total debt Total equity2015 and 20142015 have been derived from the audited consolidated financial statements of EVERTEC, included in thisour Annual ReportReports on Form 10-K. Year ended December 31, (Dollar amounts in thousands, except per share data) 2016 2015 2014 2013 2012 $ 91,248 $ 85,411 $ 79,136 $ 73,616 $ 69,591 111,507 108,320 104,713 100,104 95,607 186,752 179,797 177,939 184,682 175,437 389,507 373,528 361,788 358,402 340,635 175,809 167,916 157,537 162,980 159,183 46,986 37,278 41,276 38,810 31,686 59,567 64,974 65,988 70,366 71,492 282,362 270,168 264,801 272,156 262,361 107,145 103,360 96,987 86,246 78,274 377 495 328 236 320 (24,617 ) (24,266 ) (25,772 ) (37,417 ) (54,721 ) (52 ) 147 1,140 935 564 544 2,306 2,375 (75,682 ) (8,491 ) 83,397 82,042 75,058 (25,682 ) 15,946 8,271 (3,335 ) 8,901 1,435 (59,136 ) 75,126 85,377 66,157 (27,117 ) 75,082 90 — — — — $ 75,036 $ 85,377 $ 66,157 $ (27,117 ) $ 75,082 $ 1.01 $ 1.11 $ 0.84 $ (0.34 ) $ 1.03 $ 1.01 $ 1.11 $ 0.84 $ (0.34 ) $ 0.98 $ 0.40 $ 0.40 $ 0.40 $ 0.20 $ 4.39 (1)Adjusted to reflect the two for one stock split effective April 1, 2013. December 31, (Dollar amounts in thousands) 2016 2015 2014 2013 2012 $ 51,920 $ 28,747 $ 32,114 $ 22,275 $ 25,634 885,662 863,654 885,321 918,863 978,525 648,324 662,939 691,085 705,872 759,387 650,759 662,699 681,240 725,648 746,787 108,175 98,214 94,840 87,972 101,593 Year ended December 31, (Dollar amounts in thousands, except per share data) 2019 2018 2017 2016 2015 Statements of Income Data: Revenues $ 487,374 $ 453,869 $ 407,144 $ 389,507 $ 373,528 Operating costs and expenses Cost of revenues, exclusive of depreciation and amortization shown below 213,379 196,957 200,650 175,809 167,916 Selling, general and administrative expenses 61,411 68,717 56,161 46,986 37,278 Depreciation and amortization 68,082 63,067 64,250 59,567 64,974 Total operating costs and expenses 342,872 328,741 321,061 282,362 270,168 Income from operations 144,502 125,128 86,083 107,145 103,360 Interest income 1,217 787 716 377 495 Interest expense (28,811 ) (30,044 ) (29,861 ) (24,617 ) (24,266 ) Earnings (losses) of equity method investment 936 692 604 (52 ) 147 Other (expenses) income (1,169 ) 2,602 2,657 544 2,306 Income before income taxes 116,675 99,165 60,199 83,397 82,042 Income tax expense (benefit) 12,975 12,596 4,780 8,271 (3,335 ) Net income 103,700 86,569 55,419 75,126 85,377 Less: Net income attributable to non-controlling interest 231 299 365 90 — Net income attributable to EVERTEC, Inc.’s common stockholders $ 103,469 $ 86,270 $ 55,054 $ 75,036 $ 85,377 Net income per common share—basic $ 1.44 $ 1.19 $ 0.76 $ 1.01 $ 1.11 Net income per common share—diluted $ 1.41 $ 1.16 $ 0.76 $ 1.01 $ 1.11 December 31, 2019 2018 2017 2016 2015 Balance Sheet Data: Cash and cash equivalents $111,030 $69,973 $50,423 $51,920 $28,747 Total assets 1,011,676 927,292 902,788 885,662 863,654 Total long-term liabilities 595,739 574,981 607,596 648,324 662,939 Total debt 527,603 538,606 616,740 650,759 662,699 Total equity 271,623 215,606 147,976 108,175 98,214
2016, 20152019, 2018 and 2014;2017 and (ii) the financial condition as of December 31, 20162019 and 2015.2018. See Note 1 of the Notes to Audited Consolidated Financial Statements for additional information about the Company and the basis of presentation of our financial statements. You should read the following discussion and analysis in conjunction with the 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.processingservices and business process management services. According to the September 20162019 Nilson Report, we are one of the largest merchant acquirers in Latin America based on total number of transactions and we believe we are the largest merchant acquirer in the Caribbean and Central America. We serve 1826 countries in the region fromout of 11 offices, including our baseheadquarters 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, cash processing and technology outsourcing. 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.single-source 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:
We benefit from an attractive business model, the hallmarks of which are recurring revenue, scalability, significant operating margins and lowmoderate 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. OurWe believe our business model enablesshould enable us to continue to grow our business organically in the primary markets we serve without significant incremental capital expenditures.
2016
2019. 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.
On November 4, 2016, EVERTEC Group, together with certain other directEGM Ingeniería Sin Fronteras, S.A.S., commercially known as PlacetoPay. PlacetoPay is a gateway and indirect subsidiaries of the Company, entered into a third amendment to the Credit Agreement, dated as of April 17, 2013. Among other things, the amendment to the Credit Agreement extends the maturity of (a) approximately $219 million of the Borrower’s existing approximately $250 million of term loan A facility to January 17, 2020 and (b) $65 million of the Borrower’s existing $100 million of revolving credit facility to January 17, 2020. The remaining approximately $30 million of term loan A facility and the $35 million of revolving credit facility that were not extended will remainpayment service provider based in place and mature as originally scheduled on April 17, 2018.
On December 14, 2016, the Company completed the purchase of certain assets, including the customer relationship, of Accuprint, Inc., a data management and printing services company in Puerto Rico.
Medellin, Colombia.
agencies to outsource 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.
The Puerto Rico government is experiencing a debt crisis and has defaulted on several of its debt payments, stating that it is unable to both service its debt and continue to provide essential services to its citizens. An emergency moratorium on debt payments was implemented by the Puerto Rico government to ensure continuity of essential services to Puerto Rico citizens. The Puerto Rican government is a large customer of ours and many Puerto Rican businesses and if it is unable to pay its obligations as they become due or at all, this will likely have an adverse impact on the island’s economy.
Rico will resolve its current debt situation.
We are also concerned
Post hurricane recovery expectations by the local government and the Oversight Board consider a significant amount of disaster recovery funding that will impact the island and the economy over the next years. However, the actual amounts to be deployed, the timing in which they will become available and the impact to the Puerto Rico economy remain unclear. We will continue to monitor progress on these funds but remain cautious as to the amount and impact they will have in our business.
Policies
recognition
The Company has two main categories of revenues according to the type of transactions EVERTEC enters into with the Company’s customers: (a) transaction-based fees and (b) fixed fees and time and material.
Transaction-based fees
The Company provides services that generate transaction-based fees. Typically transaction-based fees depend on factors such as number of accounts or transactions processed. These factors typically consist of a fee per transaction or item processed, a percentage of dollar volume processed or a fee per account on file, or some combination thereof. Revenue derived from the transaction-based fee contracts are recognized when the underlying transaction is processed, which constitutes delivery of service.
Revenues from business contracts in the Company’s Merchant Acquiring segment are primarily comprised of discount fees charged to the merchants based on the sales amount of transactions processed. Revenues include a discount fee and membership fees charged to merchants and debit network fees as well as point-of-sale (“POS”) rental fees. Pursuant to the guidance from ASC 605-45-45,Revenue Recognition–Principal Agent Considerations, EVERTEC records Merchant Acquiring revenues net of interchange and assessments charged by the credit and debit card network associations and recognizes such revenues at the time of the sale (when a transaction is processed).
Payment processing revenues are comprised of revenues related to providing access to the ATH networkdetermination.
Transaction-based fees within EVERTEC’s Business Solutions segment consist of revenues from business process management solutions including core bank processing, business process outsourcing, item and cash processing, and fulfillment. Transaction-based fee revenues generated by the Company’s core bank processing services are derived from fees based on various factors such as the number of accounts on file (e.g. savings or checking accounts, loans, etc.), and the number of transactions processed or registered users (e.g. for online banking services). For services dependent on the number of transactions processed, revenues are recognized as the underlying transactions are processed. For services dependent on the number of users or accounts on file, revenues are recognized on a monthly basis based on the number of accounts on file each month. Item and cash processing revenues are based upon the number of items (e.g. checks) processed and revenues are recognized when the underlying item is processed. Fulfillment services include technical and operational resources for producing and distributing variable print documents such as statements, bills, checks and benefits summaries. Fulfillment revenues are based upon the number pages for printing services and the number of envelopes processed for mailing services. Revenues are recognized as services are delivered based on a fee per page printed or envelope mailed, as applicable.
Fixed fees and time and material
The Company also provides services that generate a fixed fee per month or fees based on time and expenses incurred. These services are mostly provided in EVERTEC’s Business Solutions segment. Revenues are generated from EVERTEC’s core bank solutions, network hosting and management and IT consulting services.
In core bank solutions, the Company mostly provides access to applications and services such as back-up or recovery, hosting and maintenance that enable a bank to operate the related hosted services accessing the Company’s IT infrastructure. These contracts generally contain multiple elements or deliverables which are evaluated by EVERTEC and revenues are recognized according to the applicable guidance. Revenue is derived from fixed fees charged for the use of hosted services and are recognized on a monthly basis as delivered. Set-up fees are billed to the customer when the service is rendered; however, they are deferred and recognized as revenues over the term of the arrangement or the expected period of the customer relationship, whichever is longer, as set-up services rarely provide value to the customer on a stand-alone basis and are interrelated with the service to be provided under the contract.
In network hosting and management, EVERTEC provides hosting services for network infrastructure at EVETEC’s facilities; automated monitoring services; maintenance of call centers; interactive voice response solutions, among other related services. Revenues are primarily derived from monthly fees as services are delivered. Set-up fees are billed up-front to the customer when the set-up service is rendered; however, they are deferred and recognized as revenues over the term of the arrangement or the expected period of the customer relationship, whichever is longer, as set-up services rarely provide value to the customer on a stand-alone basis and are interrelated with the service under the contract. There are some arrangements under this line of service category that may contain undelivered elements. In such cases, the undelivered elements are evaluated and recognized when the services are delivered or at the time that all deliverables under the contract have been delivered.
IT consulting services revenue primarily consists of time billings based upon the number of hours dedicated to each client. Revenue from time billings are recognized as services are delivered.
EVERTEC also charges members of the ATH network an annual membership fee; however, these fees are deferred and recognized as revenues on a straight-line basis over the year and recorded in the Company’s Payment Processing segment. In addition, occasionally EVERTEC is a reseller of hardware and software products and revenues from these resale transactions are recognized when such product is delivered and accepted by the client.
Service level arrangements
The Company’s service contracts may include service level arrangements (“SLA”) generally allowing the customer to receive a credit for part of the service fee when the Company has not provided the agreed level of services. The SLA performance obligation is committed on a monthly basis, thus SLA performance is monitored and assessed for compliance with arrangements on a monthly basis, including determination and accounting for its economic impact, if any.
Goodwill and Other Intangible Assets
intangible assets
For 2016, the Company used a “qualitative assessment” option or “step zero” for the goodwill impairment test for all of its reporting units. With this process, the
In the past,accounting standards update that simplifies the goodwill impairment test, used was a two-step process at each reporting unit level. The first stepthe quantitative goodwill impairment test, used to identify potentialboth the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the Company determines to perform a quantitative impairment test, a third-party may be engaged to prepare an independent valuation of each reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not considered impaired andimpaired. If the second stepcarrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the impairment test is not necessary. Iftotal amount of goodwill allocated to that reporting unit. Additionally, the Company shall consider the income tax effect from any tax-deductible goodwill on the carrying amount of the reporting unit, exceeds the fair value, there is an indication of potential impairment and the second step ofif applicable, when measuring the goodwill impairment analysis is required. The second step consists of comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.
loss. For the years ended December 31, 2016, 20152019, 2018 and 2014,2017, no impairment losses associated with goodwill were recognized.
The customer relationship assetsagreement. Customer relationships were valued using the excess earnings method under the income approach. Trademark assets were valued using the relief-from-royalty method under the income approach. SoftwareInternally developed software packages, which include capitalized software development costs, wereare recorded at cost.cost, while software packages acquired as part of a business combination were valued using the relief-from-royalty method under the income approach. The non-compete agreement was valued based on the estimated impact that theoretical competition would have on revenues and expenses.
tax positions, and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Deferred tax assets and liabilities represent the future effects on income taxes that result from temporary differences and carryforwards that exist at the end of a period. Deferred tax assets and liabilities are measured using enacted tax rates and provisions of the enacted tax law and are not discounted to reflect the time-value of money. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income and comprehensive income in the period that includes the enactment date. A deferred tax valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax asset will not be realized.
Share-based Compensation
The Company estimates the fair value of stock-based awards, on a contemporaneous basis, at the date they are granted using the Black-Scholes-Merton option pricing model for Tranche A options and the Monte Carlo simulation analysis for Tranche B and Tranche C options and market based restricted stock units (“RSUs”) using the following assumptions: (1) stock price; (2) risk-free rate; (3) expected volatility; (4) expected annual dividend yield and (5) expected term. The risk-free rate is based on the U.S. Constant Maturities Treasury Interest Rate as of the grant date or the yield of a 2-year or 3-year Treasury bond, as applicable. The expected volatility is based on a combination of historical volatility and implied volatility from publicly traded companies in the Company’s industry. The expected annual dividend yield is based on management’s expectations of future dividends as of the grant date and, in certain cases, assumes that those dividends will be reinvested over the performance period. The expected term for stock options granted under the 2010 Plan was based on the vesting time of the options. For the stock options granted under the 2013 Plan, the simplified method was used to estimate the expected term, given that the Company did not have appropriate exercise data on which to base the estimate nor is exercise data relating to employees of comparable companies easily obtainable. Performance and time based RSUs and restricted stock are valued based on the market price of the Company’s stock at the grant date.
Upon option exercise or restricted stock or RSUs release, participants may elect to “net share settle”. Rather than requiring the participant to deliver cash to satisfy the exercise price, for options exercise, and statutory minimum tax withholdings, the Company withholds a sufficient number of shares to cover these amounts and delivers the net shares to the participant. The Company recognizes the associated tax withholding obligation as a reduction of additional paid-in capital.
As compensation expense is recognized, a deferred tax asset is established. At the time stock options are exercised, restricted stock or RSUs are released, a current tax deduction arises based on the value at the time of exercise or release. This deduction may exceed the associated deferred tax asset, resulting in a “windfall tax benefit”. The windfall is recognized in the consolidated balance sheets as an increase to additional paid-in capital, and is included in the consolidated statements of cash flows as a financing inflow.
In determining the amount of cash tax savings realized from the excess share-based compensation deductions, the Company follows the tax law ordering approach. Under this approach, the utilization of excess tax deductions
associated with share-based awards is dictated by provision in the tax law that identify the sequence in which such benefits are utilized for tax purposes.
Adjusted EBITDA at the segment level 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 Accounting Standards Codification 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.
Overview of
Year ended December 31, | |||||||||||||||||||||||||
(In thousands) | 2019 | 2018 | 2017 | Variance 2019 vs. 2018 | Variance 2018 vs. 2017 | ||||||||||||||||||||
Revenues | $ | 487,374 | $ | 453,869 | $ | 407,144 | $ | 33,505 | 7 | % | $ | 46,725 | 11 | % | |||||||||||
Operating costs and expenses | |||||||||||||||||||||||||
Cost of revenues, exclusive of depreciation and amortization shown below | 213,379 | 196,957 | 200,650 | 16,422 | 8 | % | (3,693 | ) | (2 | )% | |||||||||||||||
Selling, general and administrative expenses | 61,411 | 68,717 | 56,161 | (7,306 | ) | (11 | )% | 12,556 | 22 | % | |||||||||||||||
Depreciation and amortization | 68,082 | 63,067 | 64,250 | 5,015 | 8 | % | (1,183 | ) | (2 | )% | |||||||||||||||
Total operating costs and expenses | 342,872 | 328,741 | 321,061 | 14,131 | 4 | % | 7,680 | 2 | % | ||||||||||||||||
Income from operations | $ | 144,502 | $ | 125,128 | $ | 86,083 | $ | 19,374 | 15 | % | $ | 39,045 | 45 | % |
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(In thousands) | 2019 | 2018 | 2017 | Variance 2019 vs. 2018 | Variance 2018 vs. 2017 | ||||||||||||||||||||
Interest income | $ | 1,217 | $ | 787 | $ | 716 | $ | 430 | 55 | % | $ | 71 | 10 | % | |||||||||||
Interest expense | (28,811 | ) | (30,044 | ) | (29,861 | ) | 1,233 | (4 | )% | (183 | ) | 1 | % | ||||||||||||
Earnings of equity method investment | 936 | 692 | 604 | 244 | 35 | % | 88 | 15 | % | ||||||||||||||||
Other (expenses) income | (1,169 | ) | 2,602 | 2,657 | (3,771 | ) | (145 | )% | (55 | ) | (2 | )% | |||||||||||||
Total non-operating expenses | $ | (27,827 | ) | $ | (25,963 | ) | $ | (25,884 | ) | $ | (1,864 | ) | 7 | % | $ | (79 | ) | — | % |
Year ended December 31, | |||||||||||||||||||||||||
(In thousands) | 2019 | 2018 | 2017 | Variance 2019 vs. 2018 | Variance 2018 vs. 2017 | ||||||||||||||||||||
Income tax expense | $ | 12,975 | $ | 12,596 | $ | 4,780 | $ | 379 | 3 | % | $ | 7,816 | 164 | % |
four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America, Merchant Acquiring, net. Merchant Acquiring revenue consistsand Business Solutions.
Payment Processing. Payment Processing revenue comprises incomerevenues 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.
We generally enter into one to five year contracts with our privatecard payment processing clients and one year contracts with our government payment processing clients.processing. For ATH network and processing services, revenue isrevenues are primarily driven mainly by the number of transactions processed. Revenue isRevenues are derived mainlyprimarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenue isrevenues are primarily dependent mostly upon the number of cardholder accounts on file, transactions and authorizations processed, the
number of cards embossed, and other processing services. For EBT
Business Solutions.transactions or the transaction value.
segment are generally volume-based and depend on factors such as the number of accounts processed. In addition, we areEVERTEC is a reseller of hardware and software products;products and these resale transactions are generally one-time transactions. Revenue from sales of hardware or software products is recognized oncenon-recurring.
Cost of revenues. This caption includes the costs directly associated with providing services to customers, as well as, product and software sales, including software licensing and maintenance costs; telecommunications costs; personnel and infrastructure costs to develop and maintain applications, operate computer networks and provide associated customer support;operating segments. The Corporate and other operating expenses.
Selling, general and administrative. This captioncategory consists mainly of salaries, wages and relatedcorporate overhead expenses, paid to sales personnel, administrative employees and management, advertising and promotional costs, audit and legal fees,intersegment eliminations, certain leveraged activities and other selling expenses.
Depreciationnon-operating and amortization. This caption consists of ourmiscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:
Results of Operations
The following tables set forth certain consolidatedoperating 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 Earnings before Interest, Taxes, Depreciation and Amortization ("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 Accounting Standards Codification Topic 280, "Segment Reporting" given that it is reported to the CODM for the years ended December 31, 2016, 2015 and 2014. These tables and the related discussion should be read in conjunction with the information contained in our Audited Consolidated Financial Statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.
Comparisonpurposes of the years ended December 31, 2016 and 2015
The following tables present the components of our audited consolidated statements of income and comprehensive income by business segment and the change in those amounts for the years ended December 31, 2016 and 2015.
Revenues
Years ended December 31, | ||||||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | Variance | |||||||||||||
Merchant Acquiring, net | $ | 91,248 | $ | 85,411 | $ | 5,837 | 7 | % | ||||||||
Payment Processing | 111,507 | 108,320 | 3,187 | 3 | % | |||||||||||
Business Solutions | 186,752 | 179,797 | 6,955 | 4 | % | |||||||||||
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Total revenues | $ | 389,507 | $ | 373,528 | $ | 15,979 | 4 | % | ||||||||
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Total revenues increased by $16.0 million to $389.5 million when compared with 2015.
Merchant Acquiring revenue increased $5.8 million or 7% when compared with the prior year. The revenue growth was drivenallocating resources. Segment asset disclosure is not used by the addition of the FirstBank of Puerto Rico (“FirstBank”) merchant portfolio in the fourth quarter of 2015, partially offset by a contract change for a merchant acquiring customer to payment processing, lower average ticket as well as other merchant mix shifts.
Payment Processing revenue increased by $3.2 million or 3% primarily driven by an increase in transactions processed over the ATH® debit network and revenue related to the Processa acquisition. These increases were partially offset by a reduction related to the shift in revenue from FirstBank from payment processing to merchant acquiring in 2016, as wellCODM as a decrease in revenues due to a delayed project amounting to approximately $4.5 million and lower revenues frommeasure of segment performance since the government lottery tax contract terminated in the fourth quarter of 2015.
Business Solutions revenue increased approximately $7.0 million or 4% when compared with 2015. The increasesegment evaluation is primarily driven by revenues from core banking activities related to an increase in volume and new services provided. In addition, revenues grew modestly in network services, business process outsourcing and IT Consulting. This growth was partially offset by a decrease in revenue from cash and item processing services.
Operating costs and expenses
Years ended December 31, | ||||||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | Variance | |||||||||||||
Cost of revenues, exclusive of depreciation and amortization shown below | $ | 175,809 | $ | 167,916 | $ | 7,893 | 5 | % | ||||||||
Selling, general and administrative expenses | 46,986 | 37,278 | 9,708 | 26 | % | |||||||||||
Depreciation and amortization | 59,567 | 64,974 | (5,407 | ) | -8 | % | ||||||||||
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Total operating costs and expenses | $ | 282,362 | $ | 270,168 | $ | 12,194 | 5 | % | ||||||||
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Operating costs and expenses increased by $12.2 million or 5% to $282.4 million for the year ended December 31, 2016. The increase is primarily driven by a $17.6 million increase in cost of revenues and selling general and administrative expenses, partially offset by a decrease of $5.4 million in depreciation and amortization.
Cost of revenues increased 5% to $175.8 million and was primarily driven by a $4.9 million increase in expenses for revenue sharing referral agreements with certain banks in Puerto Rico and increases in equipment expenses, professional fees and other operating taxes. These increases were partially offset by a $4.5 million decrease in compensation expense as the prior year period includes severance payments as part of voluntary termination offers extended to certain employees which included special termination benefits.
Selling, general and administrative expenses increased by $9.7 million primarily driven by a $4.5 million increase in salaries and benefits including higher share based compensation, coupled with a $3.0 million increase in professional fees mostly due to costs incurred in connection with the restatement.
Depreciation and amortization expense decreased by $5.4 million or 8% compared with 2015. The decrease resulted from lower amortization of software packages primarily related to software acquired as part of the Merger that became fully amortized during the third quarter of 2015.
Income from operations
The following table presents income from operations by reportable segments.
Years ended December 31, | ||||||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | Variance | |||||||||||||
Segment income from operations | ||||||||||||||||
Merchant Acquiring, net | $ | 31,051 | $ | 36,466 | $ | (5,415 | ) | -15 | % | |||||||
Payment Processing | 52,071 | 55,429 | (3,358 | ) | -6 | % | ||||||||||
Business Solutions | 56,794 | 50,200 | 6,594 | 13 | % | |||||||||||
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Total segment income from operations | 139,916 | 142,095 | (2,179 | ) | -2 | % | ||||||||||
Merger related depreciation and amortization and other unallocated expenses(1) | (32,771 | ) | (38,735 | ) | 5,964 | -15 | % | |||||||||
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Income from operations | $ | 107,145 | $ | 103,360 | $ | 3,785 | 4 | % | ||||||||
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Income from operations increased $3.8 million or 4% compared with 2015. The increase was primarily driven by Business Solutions as revenuesadjusted EBITDA performance. As such, segment assets are not disclosed in the segment increased year over year while maintaining operating expenses relatively stable and reducing depreciation and amortization expenses. In addition, Merger related depreciation and amortization decreased as some assets were fully amortized towardsnotes to the end of the prior year. These positive variances were partially offset by a decrease in income from operations in our Merchant Acquiring segments as a result of the aforementioned contract change for a merchant acquiring customer to payment processing coupled with revenues at lower margins from FirstBank. The FirstBank relationship also resulted in increased amortization expense from the customer relationship intangible asset recognized as part of the acquisition. In addition, we experience reduced margin contribution due to increased transactions at a lower ticket price and merchant mix shifts that reduced net revenue. The Payment Processing segment was impacted by the aforementioned project delay which decreased revenues by approximately $4.5 million coupled with an increase in depreciation and amortization expense.
accompanying condensed consolidated financial statements.
Year ended December 31, | ||||||||
(In thousands) | 2019 | 2018 | 2017 | |||||
Revenues | $125,544 | $114,119 | $101,687 | |||||
Adjusted EBITDA | 78,609 | 75,104 | 58,534 | |||||
Adjusted EBITDA margin | 62.6 | % | 65.8 | % | 57.6 | % |
Year ended December 31, | ||||||||
(In thousands) | 2019 | 2018 | 2017 | |||||
Revenues | $84,453 | $80,899 | $62,702 | |||||
Adjusted EBITDA | 30,679 | 27,727 | 17,558 | |||||
Adjusted EBITDA margin | 36.3 | % | 34.3 | % | 28.0 | % |
Year ended December 31, | ||||||||
(In thousands) | 2019 | 2018 | 2017 | |||||
Revenues | $106,388 | $99,655 | $85,778 | |||||
Adjusted EBITDA | 47,156 | 46,516 | 37,497 | |||||
Adjusted EBITDA margin | 44.3 | % | 46.7 | % | 43.7 | % |
Non-operating expenses
Years ended December 31, | ||||||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | Variance | |||||||||||||
Non-operating income (expenses) | ||||||||||||||||
Interest income | $ | 377 | $ | 495 | $ | (118 | ) | -24 | % | |||||||
Interest expense | (24,617 | ) | (24,266 | ) | (351 | ) | 1 | % | ||||||||
(Losses) earnings of equity method investment | (52 | ) | 147 | (199 | ) | -135 | % | |||||||||
Other income, net | 544 | 2,306 | (1,762 | ) | -76 | % | ||||||||||
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Total non-operating expenses | $ | (23,748 | ) | $ | (21,318 | ) | $ | (2,430 | ) | 11 | % | |||||
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Total non-operating expenses increased $2.4a declining average ticket.
Year ended December 31, | ||||||||
(In thousands) | 2019 | 2018 | 2017 | |||||
Revenues | $216,662 | $197,602 | $189,077 | |||||
Adjusted EBITDA | 97,421 | 87,813 | 86,790 | |||||
Adjusted EBITDA margin | 45.0 | % | 44.4 | % | 45.9 | % |
expense and a $0.2 million decrease in earnings from our equity method investment in the Dominican Republic, Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”).
Income tax expense (benefit)
Income tax expense for the year ended December 31, 2016 amounted to approximately $8.3 million compared with an income tax benefit of $3.3 million in 2015. The effective tax rate in 2016 was approximately 10%. The prior year tax benefit reflects the reversal of tax liability related to an uncertain tax position for which the statute of limitations expired during the third quarter of 2015.
See Note 18 of the Audited Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information regarding income taxes.
Comparison of the years ended December 31, 2015 and 2014
The following tables present the components of our audited consolidated statements of income and comprehensive income by business segment and the change in those amounts for the years ended December 31, 2015 and 2014.
Revenues
Years ended December 31, | ||||||||||||||||
(Dollar amounts in thousands) | 2015 | 2014 | Variance | |||||||||||||
Merchant Acquiring, net | $ | 85,411 | $ | 79,136 | $ | 6,275 | 8 | % | ||||||||
Payment Processing | 108,320 | 104,713 | 3,607 | 3 | % | |||||||||||
Business Solutions | 179,797 | 177,939 | 1,858 | 1 | % | |||||||||||
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Total revenues | $ | 373,528 | $ | 361,788 | $ | 11,740 | 3 | % | ||||||||
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Total revenuesyear. Adjusted EBITDA increased by $11.7 $9.6
Merchant Acquiring revenue increased $6.3 million or 8% when compared with the prior year. The revenue growth was primarily related to an increase in sales volumes for existing merchants coupled with the addition of the FirstBank of Puerto Rico (“FirstBank”) merchant portfolio and an overall improvement in spread.
Payment Processing revenue increased by $3.6 million or 3%. Revenue growth was driven mainly by an increase in ATH and POS network and processing transactions, partially offset by reduced revenues from contracts with the Puerto Rico government.
Business Solutions revenue increased $1.9 million or 1% when compared with 2014. The increase is primarily driven by an increase in revenues from core banking activities, partially offset by a decrease in IT Consulting and IT Management services.
Operating costs and expenses
Years ended December 31, | ||||||||||||||||
(Dollar amounts in thousands) | 2015 | 2014 | Variance | |||||||||||||
Cost of revenues, exclusive of depreciation and amortization shown below | $ | 167,916 | $ | 157,537 | $ | 10,379 | 7 | % | ||||||||
Selling, general and administrative expenses | 37,278 | 41,276 | (3,998 | ) | -10 | % | ||||||||||
Depreciation and amortization | 64,974 | 65,988 | (1,014 | ) | -2 | % | ||||||||||
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Total operating costs and expenses | $ | 270,168 | $ | 264,801 | $ | 5,367 | 2 | % | ||||||||
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Operating costs and expenses increased by $5.4 million or 2% to $270.2 million for the year ended December 31, 2015. The increase is primarily driven by a $10.4 million increase in cost of revenues, partially offset by a decrease of $4.0 million and $1.0 million in selling, general and administrative expenses and depreciation and amortization, respectively.
Cost of revenues increased 7% when compared with 2014. The increase was primarily driven by a $7.4 million increase in salaries and other benefits as a result of severance payments primarily related to the voluntary termination offers extended to certain employees during 2015 coupled with an increase in share based compensation. Other operating expenses increased by $2.3 million primarily driven by an increase in bad debt expense and operational losses in addition to expenses recorded as a result of the revenue sharing agreement entered into with FirstBank in connection with the purchase of the merchant portfolio during the fourth quarter of 2015. Additionally, professional fees increased by $1.2 million as a result of an increase in project development costs related to a card issuing platform initiative.
Selling, general and administrative expenses decreased 10% when compared with the prior year. The decrease was primarily driven by non-recurring expenses recorded in 2014 amounting to $7.9 million associated to the CEO succession and acceleration of vesting of certain stock options, and a $1.1 million decrease in professional expenses related to the debt offering that was withdrawn. This decrease washigher revenues, partially offset by an increase in salaries related to higher share based compensation and the impactoperating expenses, including increased cost of severance payments made related to the aforementioned voluntary termination offers.
Depreciation and amortization expense decreased by 2% compared with 2014. The decrease resulted from lower amortization of software packages.
Income from operations
The following table presents income from operations by reportable segments.
Years ended December 31, | ||||||||||||||||
(Dollar amounts in thousands) | 2015 | 2014 | Variance | |||||||||||||
Segment income from operations | ||||||||||||||||
Merchant Acquiring, net | $ | 36,466 | $ | 34,362 | $ | 2,104 | 6 | % | ||||||||
Payment Processing | 55,429 | 58,796 | (3,367 | ) | -6 | % | ||||||||||
Business Solutions | 50,200 | 48,299 | 1,901 | 4 | % | |||||||||||
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Total segment income from operations | 142,095 | 141,457 | 638 | 0 | % | |||||||||||
Merger related depreciation and amortization and other unallocated expenses(1) | (38,735 | ) | (44,470 | ) | 5,735 | -13 | % | |||||||||
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Income from operations | $ | 103,360 | $ | 96,987 | $ | 6,373 | 7 | % | ||||||||
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Income from operations increased $6.4 million or 7% compared with 2014. The increase in income from operations was primarily driven by an increase in income from Merchant Acquiring and Business Solutions, coupled with a decrease in Merger related depreciation and amortization and other unallocated expenses, partially offset by a decrease in income from Payment Processing. Merchant Acquiring income increased by $2.1 million, primarily driven by an increase in sales volume and spread coupled with increased business from the FirstBank merchant portfolio purchased during the fourth quarter of 2015. Business Solutions income increased by $1.9 million as a result of an increase in Core Banking revenues primarily from the Doral Bank consolidation as well as new projects with Popular. Payment Processing income decreased by $3.4 million as a
result of certain repricings that occurred during the fourth quarter of 2014 and reduced revenues from contracts with the Puerto Rico government.
See Note 22 of the Audited Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information on the Company’s reportable segments and for a reconciliation of income from operations to net income.
Non-operating expenses
Years ended December 31, | ||||||||||||||||
(Dollar amounts in thousands) | 2015 | 2014 | Variance | |||||||||||||
Non-operating income (expenses) | ||||||||||||||||
Interest income | $ | 495 | $ | 328 | $ | 167 | 51 | % | ||||||||
Interest expense | (24,266 | ) | (25,772 | ) | 1,506 | -6 | % | |||||||||
Earnings of equity method investment | 147 | 1,140 | (993 | ) | -87 | % | ||||||||||
Other income (expenses) | 2,306 | 2,375 | (69 | ) | -3 | % | ||||||||||
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Total non-operating expenses | $ | (21,318 | ) | $ | (21,929 | ) | $ | 611 | -3 | % | ||||||
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Total non-operating expenses decreased $0.6 million when compared with the prior year. The decrease is primarily driven by a $1.5 million decrease in interest expense mainly as a result of a decrease of 25 basis points in the interest rate as a result of the senior secured leverage ratio decreasing below 3.50x coupled with a lower outstanding loan balance. The decrease was partially offset by a $1.0 million decrease in earnings from our equity method investment in the Dominican Republic, CONTADO.
Income tax (benefit) expense
Income tax benefit for the year ended December 31, 2015 amounted to approximately $3.3 million compared with an income tax expense of $8.9 million in 2014. The $12.6 million increase in tax benefit is primarily driven by the reversal of liabilities related to an uncertain tax position for which the statute of limitations expired during the third quarter of 2015.
See Note 18 of the Notes to Audited Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information regarding income taxes.
sales.
2019. The Company issues letters of credit against our revolving credit facility which reduce our availability of funds to be drawn.
Additionally, our credit agreement imposes certain restrictions on the distribution of dividends from subsidiaries.
The following table presents our cash flows from operations, investing and financing activities for the years ended December 31, 2016 and 2015:
Years ended December 31, | ||||||||
(Dollar amounts in thousands) | 2016 | 2015 | ||||||
Cash provided by operating activities | $ | 168,054 | $ | 162,419 | ||||
Cash used in investing activities | (54,083 | ) | (53,068 | ) | ||||
Cash used in financing activities | (90,798 | ) | (112,718 | ) | ||||
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Increase (decrease) in cash | $ | 23,173 | $ | (3,367 | ) | |||
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Net cash provided by operating activities for the year ended December 31, 2016 was $168.1 million, an increase of $5.6 million compared with 2015. The increase was driven by less cash used to pay accounts payable and accrued liabilities and an increase in unearned income.
Net cash used in investing activities amounted to $54.1 million, primarily driven by additions to software amounting to $23.8 million, acquisitions of property and equipment of $18.5 million and the completion of the Processa and the Accuprint purchase transactions for $15.6 million in cash.
Net cash used in financing activities for the year ended December 31, 2016 amounted to $90.8 million, a decrease of $21.9 million when compared with the prior year. The decrease is driven by less cash used in the repurchase of common stock, coupled with an increase in cash provided by short-term borrowings partially offset by cash paid during the year for amendments made to the Company’s debt agreement, credit amendment fees of $3.6 million and debt issue costs of $4.8 million.
Comparison of the years ended December 31, 2015 and 2014
2018
Years ended December 31, | ||||||||
(Dollar amounts in thousands) | 2015 | 2014 | ||||||
Cash provided by operating activities | $ | 162,419 | $ | 139,819 | ||||
Cash used in investing activities | (53,068 | ) | (25,831 | ) | ||||
Cash used in financing activities | (112,718 | ) | (104,149 | ) | ||||
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(Decrease) increase in cash | $ | (3,367 | ) | $ | 9,839 | |||
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2018:
Years ended December 31, | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Cash provided by operating activities | $ | 179,949 | $ | 172,734 | ||||
Cash used in investing activities | (65,347 | ) | (41,300 | ) | ||||
Cash used in financing activities | (70,227 | ) | (105,055 | ) | ||||
Increase in cash, cash equivalents and restricted cash | $ | 44,375 | $ | 26,379 |
received.
We currently have a policy under which we pay
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2018:
Declaration Date | Record Date | Payment Date | Dividend per share | |||||
July 26, 2018 | August 6, 2018 | September 7, 2018 | $ | 0.05 | ||||
October 25, 2018 | November 5, 2018 | December 7, 2018 | 0.05 | |||||
February 15, 2019 | February 26, 2019 | March 22, 2019 | 0.05 | |||||
April 25, 2019 | May 6, 2019 | June 7, 2019 | 0.05 | |||||
July 25, 2019 | August 5, 2019 | September 6, 2019 | 0.05 | |||||
October 23, 2019 | November 4, 2019 | December 6, 2019 | 0.05 |
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 material terms and conditions of the senior secured credit facilities are summarized below.
The Term A Loan requires principal payments onprovides for amortization in the last business dayamount of each quarter equal to (a) 1.250%1.25% of the original principal amount commencing on September 30, 2013 through June 30, 2016; (b) 1.875% of the original principal amount from September 30, 2016 through June 30, 2017; (c) 2.50% of the original principal amount from September 30, 2017 through March 31, 2018; and (d) the remaining outstanding principal amount on the maturity of the2023 Term A Loan on April 17, 2018. Interest is based on EVERTEC Group LLC’s (“EVERTEC Group”) first lien secured net leverage ratio and payable at a rate equal to, at the Company’s option, either (a) LIBOR Rate plus an applicable margin ranging from 2.00% to 2.50%, or (b) Alternate Base Rate (“ABR”), as defined in the 2013 Credit Agreement, plus an applicable margin ranging from 1.00% to 1.50%. The Term A Loan has no LIBOR or Base Rate minimum or floor.
Term B Loan
The Term B Loan requires principal payments on the last business day of each quarter equal to 0.250% of the original principal amount commencing on September 30, 2013 and the remaining outstanding principal amount on the maturity of the Term B Loan on April 17, 2020. Interest is based on EVERTEC Group’s first lien secured net leverage ratio and payable at a rate equal to, at the Company’s option, either (a) LIBOR Rate plus an applicable margin ranging from 2.50% to 2.75%, or (b) Base Rate plus an applicable margin ranging from 1.50% to 1.75%. The LIBOR Rate and Base Rate are subject to floors of 0.75% and 1.75%, respectively.
Revolving Credit Facility
The revolving credit facility has an available balance up to $100.0 million, with an interest rate on loans calculated the same as the applicable Term A Loan rate. The facility matures on April 17, 2018 and has a “commitment fee” payable one business day after the last business day of each quarter calculated based on the daily unused commitment during the preceding quarter. The commitment fee for the unused portion of this facility ranges from 0.125% to 0.375% and is based on EVERTEC Group’s first lien secured net leverage ratio.
All loans may be prepaid without premium or penalty.
The senior secured credit facilities contain various restrictive covenants. As a result of the Third Amendment (as defined below), the Term A Loan and the revolving credit facility (subject to certain exceptions) require the Company to maintain on a quarterly basis a specified maximum senior secured leverage ratio of up to 4.75 to 1.00 as defined in the 2013 Credit Agreement (total first lien secured debt to adjusted EBITDA) until September 30, 2018 and 4.25 to 1.00 for any fiscal quarter ending thereafter. In addition, the 2013 Credit Agreement, among other things: (a) limits the Company’s ability and the ability of the Company’s subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, as all net assets are restricted, and enter into certain transactions with affiliates; (b) restricts the Company’s ability to enter into agreements that would restrict the ability of the Company’s subsidiaries to pay dividends or make certain payments to EVERTEC; and (c) places restrictions on the Company’s ability and the ability of the Company’s subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of the Company’s assets.
Amendments to the 2013 Credit Agreement
During the second quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiaries of the Company, entered into a second amendment and waiver to the outstanding Credit Agreement (the “Second Amendment”). The Company paid each lender that consented to the amendment a fee equal to 0.50% of the aggregate principal amount of outstanding term loans and revolving commitments held by such lender. The credit amendment fees paid during the second quarter of 2016 amounted to $3.6 million.
During the fourth quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiaries of the Company, entered into a third amendment (the “Third Amendment”) to the 2013 Credit Agreement. The Third Amendment extends the maturity of (a) approximately $219 million of EVERTEC Group’s existing approximately $250 million of Term A loan facility to January 17, 2020 (the “2020 Term A loan”) and (b) $65 million of EVERTEC Group’s existing $100 million of revolving credit facility to January 17, 2020. The remaining approximately $30 million of Term A loan (the “2018 Term A loan”) and the $35 million of revolving credit facility that were not extended will remain in place and mature as originally scheduled on April 17, 2018. The Term B loan facility will remain in place and mature as originally scheduled on April 17, 2020 (collectively, the “Senior Secured term loans”).
Under the terms of the Third Amendment, the 2018 Term A Loan amortizes on a basis of 1.875% of the original principal amount beginning in the third quarter of 2016 and during each of the next three first twelve quarters starting from the quarter ending March 31, 2019, 1.875% during each of the four subsequent
$2.6 million.
See Note 11 The Company issues letters of credit against the revolving credit facility which reduce the additional borrowing capacity of the Audited Consolidated Financial Statements appearing elsewhererevolving credit facility.
Notematerial indebtedness.
Interest Rate Swap
Swap Agreement | Effective date | Maturity Date | Notional Amount | Variable Rate | Fixed Rate | ||||||||||
2015 Swap | |||||||||||||||
January 2017 | April 2020 | $ | 200 million | 1-month LIBOR | 1.9225% | ||||||||||
2018 Swap | November 2024 | $250 million | 1-month LIBOR | 2.89% |
As ofhedges.
(Dollar amounts in thousands) | December 31, 2016 | December 31, 2015 | ||||||
Other long-term liabilities | $ | 1,964 | $ | 515 |
(In thousands) | December 31, 2019 | December 31, 2018 | ||||||
Other long-term assets | $ | — | $ | 1,683 | ||||
Other long-term liabilities | 14,452 | 4,059 |
(In thousands) | December 31, 2019 | |||
Interest expense | $ | 677 |
effective.
The credit facilities contain various restrictive covenants. The Term A Loan and the revolving facility (subject to certain exceptions) require EVERTEC Group to maintain on a quarterly basis a specified maximum senior secured leverage ratio of up to 4.75 to 1.00 as defined in the third amendment to the 2013 Credit Agreement (total first lien senior secured debt to Adjusted EBITDA) until September 30, 2018 and 4.25 to 1.00 for any fiscal quarter ending thereafter. In addition, the 2013 Credit Agreement, among other things: (a) limits EVERTEC Group’s ability and the ability of its subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (b) restricts EVERTEC Group’s ability to enter into agreements that would restrict the ability of its subsidiaries to pay dividends or make certain payments to its parent company; and (c) places restrictions on EVERTEC Group’s ability and the ability of its subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of their assets. However, all of the covenants in these agreements are subject to significant exceptions.
We define “Adjusted Earnings per common share” as Adjusted Net Income divided by diluted shares outstanding.
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 seniortotal secured net leverage ratio. We use Adjusted Net Income to measure our overall profitability because we believe it 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, and 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.
(Dollar amounts in thousands, except per share data) | Year ended December 31, 2016 | |||
Net Income | $ | 75,126 | ||
Income tax expense | 8,271 | |||
Interest expense, net | 24,240 | |||
Depreciation and amortization | 59,567 | |||
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EBITDA | 167,204 | |||
Software maintenance reimbursement and other costs(1) | 521 | |||
Equity income(2) | (19 | ) | ||
Compensation and benefits(3) | 10,482 | |||
Transaction, refinancing and other non-recurring fees(4) | 7,579 | |||
Restatement related expenses(5) | 1,837 | |||
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Adjusted EBITDA | 187,604 | |||
Operating depreciation and amortization(6) | (28,468 | ) | ||
Cash interest expense, net(7) | (20,468 | ) | ||
Income tax expense(8) | (13,752 | ) | ||
Non-controlling interest(9) | (258 | ) | ||
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Adjusted Net Income | $ | 124,658 | ||
Net Income per common share (GAAP): | ||||
Diluted | $ | 1.01 | ||
Adjusted Earnings per common share (Non-GAAP): | ||||
Diluted | $ | 1.67 | ||
Shares used in computing Adjusted Net Income per common share: | ||||
Diluted | 74,473,369 |
Year Ended December 31, 2019 | ||||
(Dollar amounts in thousands) | ||||
Net income | $ | 103,700 | ||
Income tax expense | 12,975 | |||
Interest expense, net | 27,594 | |||
Depreciation and amortization | 68,082 | |||
EBITDA | 212,351 | |||
Equity income (1) | (451 | ) | ||
Compensation and benefits (2) | 13,798 | |||
Transaction, refinancing and other fees (3) | 498 | |||
Adjusted EBITDA | 226,196 | |||
Operating depreciation and amortization (4) | (34,880 | ) | ||
Cash interest expense, net (5) | (27,016 | ) | ||
Income tax expense (6) | (20,239 | ) | ||
Non-controlling interest (7) | (347 | ) | ||
Adjusted net income | $ | 143,714 | ||
Net income per common share (GAAP): | ||||
Diluted | $ | 1.41 | ||
Adjusted Earnings per common share (Non-GAAP): | ||||
Diluted | $ | 1.96 | ||
Shares used in computing adjusted earnings per common share: | ||||
Diluted | 73,475,763 |
1) | Represents the elimination of non-cash equity earnings from our 19.99% equity investment in |
2) | Primarily represents share-based compensation and |
3) | Represents fees and expenses associated with corporate transactions as defined in the Credit Agreement, |
Represents operating depreciation and amortization expense, which excludes amounts generated as a result of the |
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 |
7) | Represents the 35% non-controlling equity interest in |
Long-term debt(1) Operating leases(2) Short-term borrowings(3) Other long-term liabilities Total 20162019 are as follows: Payment due by periods (Dollar amounts in thousands) Total Less than
1 year 1-3 years 3-5 years After
5 years $ 692,604 $ 39,932 $ 108,098 $ 544,574 $ — 23,472 6,971 13,953 2,144 404 28,277 28,277 — — — 4,448 3,204 1,055 189 — $ 748,801 $ 78,384 $ 123,106 $ 546,907 $ 404 Payment due by periods (In thousands) Total Less than
1 year 1-3 years 3-5 years After 5 years $ 642,869 $ 39,728 $ 279,355 $ 323,786 $ — 34,669 6,574 16,803 8,927 2,365 Other long-term liabilities 2,622 1,061 1,561 — — Total $ 680,160 $ 47,363 $ 297,719 $ 332,713 $ 2,365 (1) Long-term debt includes principal balance of $530.8 million and the payments of cash interest (based on interest rates as of December 31, 20162019 for variable rate debt) and aggregate principal amount of the senior secured term loan facilities, as well as commitments fees related to the unused portion of our senior secured revolving credit facility, as required under the terms of the long-term debt agreements.(2) Includes certain facilities and equipment under operating leases. See Note 2122 of the Notes to Audited Consolidated Financial Statements for additional information regarding operating lease obligations.(3)Excludes the payments of cash interest related to the outstanding portion of the senior secured revolving credit facility as of December 31, 2016.
The table above excludes other obligations that we may have classified as other long term liabilities in our consolidated balance sheet, because the timing of the related payments is not determinable or because there is no contractual obligation associated with the underlying obligations.
See Note 18 of the Audited Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K for additional information related to this off balance sheet item.
items.
holidays, which follow consumer spending patterns.
liabilities or future cash flows and fixed.earnings.earnings, and foreign exchange risk that may result in unfavorable foreign currency translation adjustments. Market risk is the potential loss arising from adverse changes in market rates and prices.2016,2019, under the senior secured credit facilities would increase our annual interest expense by approximately $4.6 million in 2017.$3.3 million. The impact on future interest expense as a result of future changes in interest rates will depend largely on the gross amount of our borrowings at that time.an interest rate swap agreement withagreements which convert a notional amount of $200 million, which represents approximately 30%portion of our outstanding debt. Under this agreement, commencing January 1, 2017, we will receive avariable rate equaldebt to the LIBOR rate applicable to our Term B loan, and pay a fixed rate equal to 1.9225%. The net effect of the swap agreement is to fix the interest rate on $200 million of our Term B loan at 4.4225%, beginning January 1, 2017 and ending when the Term B loan matures, in April 2020.1112 of the Notes to Audited Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K for additional information related to the senior secured credit facilities.2016,2019, the Company had $10.4$16.9 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss compared to an unfavorable foreign currency translation adjustment of $7.1$21.6 million at December 31, 2015.2018.
Revenues Operating costs and expenses Income from operations Non-operating expenses Income before income taxes Income tax expense Net income Net income attributable to EVERTEC, Inc.’s common stockholders Net income per common share—basic Net income per common share—diluted Revenues Operating costs and expenses Income from operations Non-operating expenses Income before income taxes Income tax expense (benefit) Net income Net income per common share—basic Net income per common share—diluted Quarters ended, (Dollar amounts in thousands, except per share data) March 31,
2016 June 30,
2016 September 30,
2016 December 31,
2016 $ 95,479 $ 97,672 $ 94,467 $ 101,889 68,913 69,480 67,460 76,509 26,566 28,192 27,007 25,380 (5,523 ) (5,157 ) (5,657 ) (7,411 ) 21,043 23,035 21,350 17,969 1,876 2,801 1,639 1,955 $ 19,167 $ 20,234 $ 19,711 $ 16,014 $ 19,148 $ 20,235 $ 19,680 $ 15,972 $ 0.26 $ 0.27 $ 0.27 $ 0.22 $ 0.26 $ 0.27 $ 0.26 $ 0.22 Quarters ended, (Dollar amounts in thousands, except per share data) March 31,
2015 June 30,
2015 September 30,
2015 December 31,
2015 $ 91,497 $ 93,405 $ 92,941 $ 95,685 64,481 65,958 71,467 68,262 27,016 27,447 21,474 27,423 (5,697 ) (5,236 ) (5,485 ) (4,900 ) 21,319 22,211 15,989 22,523 2,775 2,645 (9,347 ) 592 $ 18,544 $ 19,566 $ 25,336 $ 21,931 $ 0.24 $ 0.25 $ 0.33 $ 0.29 $ 0.24 $ 0.25 $ 0.33 $ 0.29 Quarters ended, (Dollar amounts in thousands, except per share data) March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 Revenues $ 118,836 $ 122,548 $ 118,804 $ 127,186 Operating costs and expenses 81,431 84,860 84,002 92,579 Income from operations 37,405 37,688 34,802 34,607 Non-operating expenses (6,862 ) (8,062 ) (6,296 ) (6,607 ) Income before income taxes 30,543 29,626 28,506 28,000 Income tax expense 3,809 2,489 3,720 2,957 Net income $ 26,734 $ 27,137 $ 24,786 $ 25,043 Net income attributable to EVERTEC, Inc.’s common stockholders $ 26,644 $ 27,058 $ 24,754 $ 25,013 Net income per common share - basic $ 0.37 $ 0.38 $ 0.34 $ 0.35 Net income per common share - diluted $ 0.36 $ 0.37 $ 0.34 $ 0.34 Quarters ended, (Dollar amounts in thousands, except per share data) March 31, 2018 June 30, 2018 September 30, 2018 December 31, 2018 Revenues $ 110,274 $ 113,347 $ 112,017 $ 118,231 Operating costs and expenses 76,719 82,707 79,656 89,659 Income from operations 33,555 30,640 32,361 28,572 Non-operating expenses (6,506 ) (7,395 ) (5,984 ) (6,078 ) Income before income taxes 27,049 23,245 26,377 22,494 Income tax expense 3,935 3,112 3,302 2,247 Net income $ 23,114 $ 20,133 $ 23,075 $ 20,247 Net income attributable to EVERTEC, Inc.’s common stockholders $ 23,022 $ 20,052 $ 22,997 $ 20,199 Net income per common share - basic $ 0.32 $ 0.28 $ 0.32 $ 0.27 Net income per common share - diluted $ 0.31 $ 0.27 $ 0.31 $ 0.27
that are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of December 31, 2016 was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer.. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2016,2019, the Company’s disclosure controls and procedures are effective.have not been anywere no changes except as provided below, in the Company’sour internal control over financial reporting that occurred during the quarter ended December 31, 20162019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.In our Annual Report on Form 10-K for the year ended December 31, 2015, management identified a material weakness in our internal control over financial reporting. In response to this material weakness, management implemented the following remediation actions to address the control deficiency identified in 2015.Enhanced control procedures to ensure completeness of documented analyses supporting material tax positions taken by the company.
Management has determined that the remediation actions discussed above were effectively designed and demonstrated effective operation for a sufficient period of time to enable the Company to conclude that the 2015 material weakness regarding its internal controls associated with the assessment and monitoring of uncertain tax positions and potential obligations has been remediated as of December 31, 2016.
Management’s Report on Internal Control Over Financial Reporting
with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
this Item 10 will be included in EVERTEC’sEVERTEC's proxy statement, to be filed pursuant to Regulation 14A14 A within 120 days after the end of the 20162019 fiscal year, and is incorporated herein by reference.
this Item 11 will be included in EVERTEC’sEVERTEC's proxy statement, to be filed pursuant to Regulation 14A14 A within 120 days after the end of the 20162019 fiscal year, and is incorporated herein by reference.
and Director Independence this Item 12 will be included in EVERTEC’sEVERTEC's proxy statement, to be filed pursuant to Regulation 14A14 A within 120 days after the end of the 20162019 fiscal year, and is incorporated herein by reference. this Item 13 will be included in EVERTEC’sEVERTEC's proxy statement, to be filed pursuant to Regulation 14A14 A within 120 days after the end of the 20162019 fiscal year, and is incorporated herein by reference.
this Item 14 will be included in EVERTEC’sEVERTEC's proxy statement, to be filed pursuant to Regulation 14A14 A within 120 days after the end of the 20162019 fiscal year, and is incorporated herein by reference.
Firms,Firm, are included in Part II, Item 8, Financial Statements and Supplementary Data:FirmsFirm
• | Consolidated Balance Sheets as of December 31, 2019 and 2018 |
• | Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2019, 2018 and 2017 |
• | Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017 |
• | Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 |
| Description | |
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10.12+ | ||
10.13* | ||
10.14* | ||
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10.16+ | ||
10.17+ | ||
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10.20+ | ||
10.21*+ | ||
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10.26+ | ||
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10.28 | ||
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21.1* | ||
23.1* | ||
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31.1* | ||
31.2* | ||
32.1** | ||
32.2** |
101.INS XBRL** | Instance document | |
101.SCH XBRL** | Taxonomy Extension Schema | |
101.CAL XBRL** | Taxonomy Extension Calculation Linkbase | |
101.DEF XBRL** | Taxonomy Extension Definition Linkbase | |
101.LAB XBRL** | Taxonomy Extension Label Linkbase | |
101.PRE XBRL** | Taxonomy Extension Presentation Linkbase |
EVERTEC, Inc. | |||||||||
Date: February 27, 2020 | By: | /s/ Morgan M. Schuessler, Jr. | |||||||
Morgan M. Schuessler, Jr. | |||||||||
Chief Executive Officer |
Signature | Title | Date | ||
/s/ Morgan M. Schuessler, Jr.
| Chief Executive Officer (Principal Executive | February | ||
Morgan M. Schuessler, Jr. | Officer) | |||
/s/
| Chief Financial Officer (Principal Financial and | February 27, 2020 | ||
Joaquin A. Castrillo-Salgado | Accounting Officer) | |||
/s/ Frank G. D’Angelo
| Chairman of the Board | February | ||
| ||||
/s/ Iván Pagán | Director | February | ||
Iván Pagán | ||||
/s/ Alan H. Schumacher
| Director | February | ||
Alan H. Schumacher | ||||
/s/ Thomas W. Swidarski
| Director | February | ||
Thomas W. Swidarski | ||||
/s/ Jorge A. Junquera
| Director | February | ||
| ||||
/s/ Aldo Polak | Director | February | ||
Aldo Polak | ||||
/s/ Olga M. Botero
| Director | February | ||
Olga M. Botero | ||||
/s/ Brian J. Smith
| Director | February | ||
Brian J. Smith |
EVERTEC, Inc.
2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
In
We have also audited, in accordance withmost recent fair value calculation, that affect the standardsfair value or carrying amount of each reporting unit to determine whether it was more likely than not that the Public Company Accounting Oversight Board (United States), thefair value of a reporting unit was less than its carrying amount. The Company’s internal control over financial reportinggoodwill was $399.5 million as of December 31, 2016, based2019, of which $54.6 million was allocated to the Payment Services - Latin America reporting unit. Based on the criteria establishedqualitative assessment performed, the Company concluded that it was not more likely than not that the fair value of each reporting unit was less than its carrying amount.
discount rate used by management in the last quantitative assessment performed by the Company.
27, 2020
E399793
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of EVERTEC, Inc.
In our opinion, the consolidated statement of income and comprehensive income, of changes in stockholders’ equity and of cash flows for the year ended December 31, 2014, present fairly, in all material respects, the results of operations and cash flows of EVERTEC, INC. and its subsidiaries for the year ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a) (2) for the year ended December 31, 2014 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility oforiginal.
/s/ PricewaterhouseCoopers LLP
San Juan, Puerto Rico
March 2, 2015, except for the effects of the restatement discussed in Note 1 (not presented herein) to the consolidated financial statements appearing under Item 8 of the Company’s 2015 annual report on Form 10-K and the effect of the restatement discussed in Note 1 (not presented herein) to the financial statement schedule appearing under Item 15 (a) (2) of the Company’s 2015 annual report on Form 10-K, as to which the date is May 26, 2016
CERTIFIED PUBLIC ACCOUNTANTS (OF PUERTO RICO)
License No. LLP-216 Expires Dec. 1, 2019
Stamp E257025 of the Puerto Rico Society of Certified Public Accountants has been affixed to the file copy of this report
auditor since 2015.
EVERTEC, Inc.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2016, of the Company and our report dated February 24, 2017 expressed an unqualified opinion on those financial statements and financial statement schedule.
27, 2020
E399794
December 31, 2016 | December 31, 2015 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash | $ | 51,920 | $ | 28,747 | ||||
Restricted cash | 8,112 | 11,818 | ||||||
Accounts receivable, net | 77,803 | 73,715 | ||||||
Deferred tax asset | — | 1,685 | ||||||
Prepaid expenses and other assets | 20,430 | 18,758 | ||||||
|
|
|
| |||||
Total current assets | 158,265 | 134,723 | ||||||
Investment in equity investee | 12,252 | 12,264 | ||||||
Property and equipment, net | 38,930 | 34,128 | ||||||
Goodwill | 370,986 | 368,133 | ||||||
Other intangible assets, net | 299,119 | 312,059 | ||||||
Long-term deferred tax asset | 805 | — | ||||||
Other long-term assets | 5,305 | 2,347 | ||||||
|
|
|
| |||||
Total assets | $ | 885,662 | $ | 863,654 | ||||
|
|
|
| |||||
Liabilities and stockholders’ equity | ||||||||
Current Liabilities: | ||||||||
Accrued liabilities | $ | 34,243 | $ | 37,308 | ||||
Accounts payable | 40,845 | 21,216 | ||||||
Unearned income | 4,531 | 2,877 | ||||||
Income tax payable | 1,755 | 1,350 | ||||||
Current portion of long-term debt | 19,789 | 22,750 | ||||||
Short-term borrowings | 28,000 | 17,000 | ||||||
|
|
|
| |||||
Total current liabilities | 129,163 | 102,501 | ||||||
Long-term debt | 599,667 | 619,297 | ||||||
Long-term deferred tax liability | 14,978 | 20,614 | ||||||
Unearned income—long-term | 17,303 | 10,939 | ||||||
Other long-term liabilities | 16,376 | 12,089 | ||||||
|
|
|
| |||||
Total liabilities | 777,487 | 765,440 | ||||||
|
|
|
| |||||
Commitments and contingencies (Notes 18 and 21) | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, par value $0.01; 2,000,000 shares authorized; none issued | — | — | ||||||
Common stock, par value $0.01; 206,000,000 shares authorized; 72,635,032 shares issued and outstanding at December 31, 2016 (December 31, 2015—74,988,210) | 726 | 750 | ||||||
Additional paid-in capital | — | 9,718 | ||||||
Accumulated earnings | 116,341 | 95,328 | ||||||
Accumulated other comprehensive loss, net of tax | (12,391 | ) | (7,582 | ) | ||||
|
|
|
| |||||
Total EVERTEC, Inc stockholders’ equity | 104,676 | 98,214 | ||||||
Non-controlling interest | 3,499 | — | ||||||
|
|
|
| |||||
Total equity | 108,175 | 98,214 | ||||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 885,662 | $ | 863,654 | ||||
|
|
|
|
December 31, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 111,030 | $ | 69,973 | ||||
Restricted cash | 20,091 | 16,773 | ||||||
Accounts receivable, net | 106,812 | 100,323 | ||||||
Prepaid expenses and other assets | 38,085 | 29,124 | ||||||
Total current assets | 276,018 | 216,193 | ||||||
Investment in equity investee | 12,288 | 12,149 | ||||||
Property and equipment, net | 43,791 | 36,763 | ||||||
Operating lease right-of-use asset | 29,979 | — | ||||||
Goodwill | 399,487 | 394,644 | ||||||
Other intangible assets, net | 241,937 | 259,269 | ||||||
Deferred tax asset | 2,131 | 1,917 | ||||||
Net investment in lease | 722 | 1,060 | ||||||
Other long-term assets | 5,323 | 5,297 | ||||||
Total assets | $ | 1,011,676 | $ | 927,292 | ||||
Liabilities and stockholders’ equity | ||||||||
Current Liabilities: | ||||||||
Accrued liabilities | $ | 58,160 | $ | 57,006 | ||||
Accounts payable | 39,165 | 47,272 | ||||||
Unearned income | 20,668 | 11,527 | ||||||
Income tax payable | 6,298 | 6,650 | ||||||
Current portion of long-term debt | 14,250 | 14,250 | ||||||
Current portion of operating lease liability | 5,773 | — | ||||||
Total current liabilities | 144,314 | 136,705 | ||||||
Long-term debt | 510,947 | 524,056 | ||||||
Deferred tax liability | 4,261 | 9,950 | ||||||
Unearned income - long term | 28,437 | 26,075 | ||||||
Operating lease liability - long-term | 24,679 | — | ||||||
Other long-term liabilities | 27,415 | 14,900 | ||||||
Total liabilities | 740,053 | 711,686 | ||||||
Commitments and contingencies (Note 22) | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, par value $0.01; 2,000,000 shares authorized; none issued | — | — | ||||||
Common stock, par value $0.01; 206,000,000 shares authorized; 72,000,261 shares issued and outstanding at December 31, 2019 (December 31, 2018 - 72,378,710) | 720 | 723 | ||||||
Additional paid-in capital | — | 5,783 | ||||||
Accumulated earnings | 296,476 | 228,742 | ||||||
Accumulated other comprehensive loss, net of tax | (30,009 | ) | (23,789 | ) | ||||
Total EVERTEC, Inc. stockholders’ equity | 267,187 | 211,459 | ||||||
Non-controlling interest | 4,436 | 4,147 | ||||||
Total equity | 271,623 | 215,606 | ||||||
Total liabilities and equity | $ | 1,011,676 | $ | 927,292 |
Years ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Revenues | ||||||||||||
Merchant Acquiring, net | $ | 91,248 | $ | 85,411 | $ | 79,136 | ||||||
Payment Processing (from affiliates: $32,485, $30,504 and $27,094) | 111,507 | 108,320 | 104,713 | |||||||||
Business Solutions (from affiliates: $143,988, $138,929 and $137,242) | 186,752 | 179,797 | 177,939 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 389,507 | 373,528 | 361,788 | |||||||||
|
|
|
|
|
| |||||||
Operating costs and expenses | ||||||||||||
Cost of revenues, exclusive of depreciation and amortization shown below | 175,809 | 167,916 | 157,537 | |||||||||
Selling, general and administrative expenses | 46,986 | 37,278 | 41,276 | |||||||||
Depreciation and amortization | 59,567 | 64,974 | 65,988 | |||||||||
|
|
|
|
|
| |||||||
Total operating costs and expenses | 282,362 | 270,168 | 264,801 | |||||||||
|
|
|
|
|
| |||||||
Income from operations | 107,145 | 103,360 | 96,987 | |||||||||
|
|
|
|
|
| |||||||
Non-operating income (expenses) | ||||||||||||
Interest income | 377 | 495 | 328 | |||||||||
Interest expense | (24,617 | ) | (24,266 | ) | (25,772 | ) | ||||||
(Losses) earnings of equity method investment | (52 | ) | 147 | 1,140 | ||||||||
Other income, net | 544 | 2,306 | 2,375 | |||||||||
|
|
|
|
|
| |||||||
Total non-operating expenses | (23,748 | ) | (21,318 | ) | (21,929 | ) | ||||||
|
|
|
|
|
| |||||||
Income before income taxes | 83,397 | 82,042 | 75,058 | |||||||||
Income tax expense (benefit) | 8,271 | (3,335 | ) | 8,901 | ||||||||
|
|
|
|
|
| |||||||
Net income | 75,126 | 85,377 | 66,157 | |||||||||
Less: Net income attributable to non-controlling interest | 90 | — | — | |||||||||
|
|
|
|
|
| |||||||
Net income attributable to EVERTEC, Inc.’s common stockholders | 75,036 | 85,377 | 66,157 | |||||||||
Other comprehensive (loss) income, net of tax of $176, $8 and $4 | . | |||||||||||
Foreign currency translation adjustments | (3,360 | ) | (545 | ) | (6,948 | ) | ||||||
Loss on cash flow hedge | (1,449 | ) | (515 | ) | — | |||||||
|
|
|
|
|
| |||||||
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders | $ | 70,227 | $ | 84,317 | $ | 59,209 | ||||||
|
|
|
|
|
| |||||||
Net income per common share—basic attributable to EVERTEC, Inc.’s common stockholders | $ | 1.01 | $ | 1.11 | $ | 0.84 | ||||||
|
|
|
|
|
| |||||||
Net income per common share—diluted attributable to EVERTEC, Inc.’s common stockholders | $ | 1.01 | $ | 1.11 | $ | 0.84 | ||||||
|
|
|
|
|
| |||||||
Cash dividends declared per share | $ | 0.40 | $ | 0.40 | $ | 0.40 | ||||||
|
|
|
|
|
|
Years ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues (affiliates Note 21) | $ | 487,374 | $ | 453,869 | $ | 407,144 | ||||||
Operating costs and expenses | ||||||||||||
Cost of revenues, exclusive of depreciation and amortization shown below | 213,379 | 196,957 | 200,650 | |||||||||
Selling, general and administrative expenses | 61,411 | 68,717 | 56,161 | |||||||||
Depreciation and amortization | 68,082 | 63,067 | 64,250 | |||||||||
Total operating costs and expenses | 342,872 | 328,741 | 321,061 | |||||||||
Income from operations | 144,502 | 125,128 | 86,083 | |||||||||
Non-operating income (expenses) | ||||||||||||
Interest income | 1,217 | 787 | 716 | |||||||||
Interest expense | (28,811 | ) | (30,044 | ) | (29,861 | ) | ||||||
Earnings of equity method investment | 936 | 692 | 604 | |||||||||
Other (expenses) income | (1,169 | ) | 2,602 | 2,657 | ||||||||
Total non-operating expenses | (27,827 | ) | (25,963 | ) | (25,884 | ) | ||||||
Income before income taxes | 116,675 | 99,165 | 60,199 | |||||||||
Income tax expense | 12,975 | 12,596 | 4,780 | |||||||||
Net income | 103,700 | 86,569 | 55,419 | |||||||||
Less: Net income attributable to non-controlling interest | 231 | 299 | 365 | |||||||||
Net income attributable to EVERTEC, Inc.’s common stockholders | 103,469 | 86,270 | 55,054 | |||||||||
Other comprehensive (loss) income, net of tax of $1,070, $345 and $122 | ||||||||||||
Foreign currency translation adjustments | 4,754 | (10,564 | ) | (635 | ) | |||||||
(Loss) gain on cash flow hedges | (10,974 | ) | (2,377 | ) | 2,178 | |||||||
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders | $ | 97,249 | $ | 73,329 | $ | 56,597 | ||||||
Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders | $ | 1.44 | $ | 1.19 | $ | 0.76 | ||||||
Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders | $ | 1.41 | $ | 1.16 | $ | 0.76 |
Number of Shares of Common Stock | Common Stock | Additional Paid-in Capital | Accumulated Earnings | Accumulated Other Comprehensive (Loss) Income | Non-Controlling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||
Balance at December 31, 2013 | 78,286,465 | $ | 783 | $ | 80,718 | $ | 6,045 | $ | 426 | $ | — | $ | 87,972 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Share-based compensation recognized | — | — | 4,587 | — | — | — | 4,587 | |||||||||||||||||||||
Tax windfall benefit on share-based compensation | — | — | 3,669 | — | — | — | 3,669 | |||||||||||||||||||||
Stock options exercised, net of cashless exercise | 799,885 | 8 | (1,440 | ) | — | — | — | (1,432 | ) | |||||||||||||||||||
Restricted stock units delivered | 7,988 | — | (26 | ) | — | — | — | (26 | ) | |||||||||||||||||||
Repurchase of common stock | (1,201,194 | ) | (12 | ) | (26,185 | ) | — | — | — | (26,197 | ) | |||||||||||||||||
Net income | — | — | — | 66,157 | — | — | 66,157 | |||||||||||||||||||||
Dividend(1) | — | — | 21 | — | — | — | 21 | |||||||||||||||||||||
Cash dividends paid on common stock | — | — | — | (31,359 | ) | — | — | (31,359 | ) | |||||||||||||||||||
Cash settlement of stock options | — | — | (1,604 | ) | — | — | — | (1,604 | ) | |||||||||||||||||||
Other comprehensive loss | — | — | — | — | (6,948 | ) | — | (6,948 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2014 | 77,893,144 | 779 | 59,740 | 40,843 | (6,522 | ) | — | 94,840 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Share-based compensation recognized | — | — | 5,204 | — | — | — | 5,204 | |||||||||||||||||||||
Repurchase of common stock | (3,012,826 | ) | (30 | ) | (54,919 | ) | — | — | — | (54,949 | ) | |||||||||||||||||
Restricted stock grants and units delivered, net of cashless exercise | 107,892 | 1 | (307 | ) | — | — | — | (306 | ) | |||||||||||||||||||
Net income | — | — | — | 85,377 | — | — | 85,377 | |||||||||||||||||||||
Cash dividends declared on common stock | — | — | — | (30,892 | ) | — | — | (30,892 | ) | |||||||||||||||||||
Other comprehensive loss | — | — | — | — | (1,060 | ) | — | (1,060 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2015 | 74,988,210 | 750 | 9,718 | 95,328 | (7,582 | ) | — | 98,214 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Share-based compensation recognized | — | — | 6,408 | — | — | — | 6,408 | |||||||||||||||||||||
Repurchase of common stock | (2,504,427 | ) | (25 | ) | (15,594 | ) | (24,327 | ) | — | — | (39,946 | ) | ||||||||||||||||
Stock options exercised, net of cashless exercise | 8,393 | — | (79 | ) | — | — | — | (79 | ) | |||||||||||||||||||
Restricted stock grants and units delivered, net of cashless | 142,856 | 1 | (471 | ) | — | — | — | (470 | ) | |||||||||||||||||||
Net income | — | — | — | 75,036 | — | 90 | 75,126 | |||||||||||||||||||||
Non-controlling interest on acquisition | — | — | — | — | — | 3,409 | 3,409 | |||||||||||||||||||||
Cash dividends declared on common stock | — | — | — | (29,696 | ) | — | — | (29,696 | ) | |||||||||||||||||||
Dividend reversal for forfeited options | — | — | 18 | — | — | — | 18 | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (4,809 | ) | — | (4,809 | ) | |||||||||||||||||||
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Balance at December 31, 2016 | 72,635,032 | $ | 726 | $ | — | $ | 116,341 | $ | (12,391 | ) | $ | 3,499 | $ | 108,175 | ||||||||||||||
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Number of Shares of Common Stock | Common Stock | Additional Paid-in Capital | Accumulated Earnings | Accumulated Other Comprehensive Loss | Non-Controlling Interest | Total Stockholders’ Equity | |||||||||||||||||||||
Balance at December 31, 2016 | 72,635,032 | $ | 726 | $ | — | $ | 116,341 | $ | (12,391 | ) | $ | 3,499 | $ | 108,175 | |||||||||||||
Cumulative adjustment from the implementation of ASU 2016-09 | 4,203 | 4,203 | |||||||||||||||||||||||||
Share-based compensation recognized | — | — | 9,642 | — | — | — | 9,642 | ||||||||||||||||||||
Repurchase of common stock | (465,240 | ) | (5 | ) | (2,702 | ) | (4,964 | ) | — | — | (7,671 | ) | |||||||||||||||
Stock options exercised, net of cashless exercise | 8,798 | — | (91 | ) | — | — | — | (91 | ) | ||||||||||||||||||
Restricted stock grants and units delivered, net of cashless exercise | 215,343 | 2 | (1,499 | ) | — | — | — | (1,497 | ) | ||||||||||||||||||
Net income | — | — | — | 55,054 | — | 365 | 55,419 | ||||||||||||||||||||
Cash dividends declared on common stock, $0.30 per share | — | — | — | (21,747 | ) | — | — | (21,747 | ) | ||||||||||||||||||
Other comprehensive income | — | — | — | — | 1,543 | 1,543 | |||||||||||||||||||||
Balance at December 31, 2017 | 72,393,933 | 723 | 5,350 | 148,887 | (10,848 | ) | 3,864 | 147,976 | |||||||||||||||||||
Cumulative adjustment from the implementation of ASC 606 | — | — | — | 858 | — | (16 | ) | 842 | |||||||||||||||||||
Share-based compensation recognized | — | — | 12,592 | — | — | — | 12,592 | ||||||||||||||||||||
Repurchase of common stock | (367,403 | ) | (4 | ) | (9,996 | ) | — | — | — | (10,000 | ) | ||||||||||||||||
Restricted stock grants and units delivered, net of cashless exercise | 352,180 | 4 | (2,163 | ) | — | — | — | (2,159 | ) | ||||||||||||||||||
Net income | — | — | — | 86,270 | — | 299 | 86,569 | ||||||||||||||||||||
Cash dividends declared on common stock, $0.10 per share | — | — | — | (7,273 | ) | — | — | (7,273 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | (12,941 | ) | — | (12,941 | ) | ||||||||||||||||||
Balance at December 31, 2018 | 72,378,710 | 723 | 5,783 | 228,742 | (23,789 | ) | 4,147 | 215,606 | |||||||||||||||||||
Share-based compensation recognized | — | — | 13,570 | — | — | — | 13,570 | ||||||||||||||||||||
Repurchase of common stock | (1,104,389 | ) | (11 | ) | (10,496 | ) | (21,315 | ) | — | — | (31,822 | ) | |||||||||||||||
Restricted stock units delivered, net of cashless | 725,940 | 8 | (8,857 | ) | — | — | — | (8,849 | ) | ||||||||||||||||||
Net income | — | — | — | 103,469 | — | 231 | 103,700 | ||||||||||||||||||||
Cash dividends declared on common stock, $0.20 per share | — | — | — | (14,420 | ) | — | — | (14,420 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | (6,220 | ) | 58 | (6,162 | ) | ||||||||||||||||||
Balance at December 31, 2019 | 72,000,261 | $ | 720 | $ | — | $ | 296,476 | $ | (30,009 | ) | $ | 4,436 | $ | 271,623 |
Years ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 75,126 | $ | 85,377 | $ | 66,157 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 59,567 | 64,974 | 65,988 | |||||||||
Amortization of debt issue costs and accretion of discount | 4,334 | 3,329 | 3,094 | |||||||||
Loss on extinguishment of debt | 1,476 | — | — | |||||||||
Provision for doubtful accounts and sundry losses | 1,990 | 2,130 | 1,360 | |||||||||
Deferred tax benefit | (4,594 | ) | (3,090 | ) | (3,701 | ) | ||||||
Share-based compensation | 6,408 | 5,204 | 4,587 | |||||||||
Loss on disposal of property and equipment and other intangibles | 453 | 143 | 734 | |||||||||
Loss on impairment of software | 2,277 | — | — | |||||||||
Losses (earnings) of equity method investment | 52 | (147 | ) | (1,140 | ) | |||||||
Dividend received from equity method investment | — | — | 326 | |||||||||
(Increase) decrease in assets: | ||||||||||||
Accounts receivable, net | (2,583 | ) | (4,482 | ) | (5,587 | ) | ||||||
Prepaid expenses and other assets | (1,426 | ) | (146 | ) | 65 | |||||||
Other long-term assets | (1,790 | ) | (70 | ) | 3,365 | |||||||
Increase (decrease) in liabilities: | ||||||||||||
Accounts payable and accrued liabilities | 14,594 | 15,947 | (3,925 | ) | ||||||||
Income tax payable | 405 | (606 | ) | 1,697 | ||||||||
Unearned income | 8,018 | 2,207 | 3,571 | |||||||||
Other long-term liabilities | 3,747 | (8,351 | ) | 3,228 | ||||||||
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Total adjustments | 92,928 | 77,042 | 73,662 | |||||||||
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Net cash provided by operating activities | 168,054 | 162,419 | 139,819 | |||||||||
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Cash flows from investing activities | ||||||||||||
Net decrease (increase) in restricted cash | 3,705 | (6,100 | ) | (285 | ) | |||||||
Additions to software and purchase of customer relationship | (23,819 | ) | (25,960 | ) | (14,707 | ) | ||||||
Acquisitions, net of cash acquired | (15,600 | ) | — | — | ||||||||
Property and equipment acquired | (18,450 | ) | (21,022 | ) | (10,898 | ) | ||||||
Proceeds from sales of property and equipment | 81 | 14 | 59 | |||||||||
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Net cash used in investing activities | (54,083 | ) | (53,068 | ) | (25,831 | ) | ||||||
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Cash flows from financing activities | ||||||||||||
Proceeds from issuance of long-term debt | 75,763 | — | — | |||||||||
Debt issuance costs | (4,830 | ) | — | — | ||||||||
Net increase (decrease) in short-term borrowings | 11,000 | (6,000 | ) | (27,000 | ) | |||||||
Repayments of borrowings for purchase of equipment and software | (2,213 | ) | (1,542 | ) | (1,200 | ) | ||||||
Dividends paid | (29,696 | ) | (30,921 | ) | (31,359 | ) | ||||||
Statutory minimum withholding taxes paid on share-based compensation | (548 | ) | (306 | ) | (2,001 | ) | ||||||
Tax windfall benefits on share-based compensation | — | — | 3,669 | |||||||||
Issuance of common stock | — | — | 543 | |||||||||
Repurchase of common stock | (39,946 | ) | (54,949 | ) | (26,197 | ) | ||||||
Settlement of stock options | — | — | (1,604 | ) | ||||||||
Repayment of long-term debt | (96,741 | ) | (19,000 | ) | (19,000 | ) | ||||||
Credit amendment fees | (3,587 | ) | — | — | ||||||||
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Net cash used in financing activities | (90,798 | ) | (112,718 | ) | (104,149 | ) | ||||||
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Net increase (decrease) in cash | 23,173 | (3,367 | ) | 9,839 | ||||||||
Cash at beginning of the period | 28,747 | 32,114 | 22,275 | |||||||||
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Cash at end of the period | $ | 51,920 | $ | 28,747 | $ | 32,114 | ||||||
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Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for interest | $ | 22,535 | $ | 21,497 | $ | 24,280 | ||||||
Cash paid for income taxes | 8,697 | 5,682 | 976 | |||||||||
Supplemental disclosure of non-cash activities: | ||||||||||||
Payable due to vendor related to property and equipment and software acquired | 3,302 | 3,638 | 6,115 |
Years ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 103,700 | $ | 86,569 | $ | 55,419 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 68,082 | 63,067 | 64,250 | |||||||||
Amortization of debt issue costs and accretion of discount | 2,988 | 4,316 | 5,128 | |||||||||
Operating lease amortization | 6,161 | — | — | |||||||||
Loss on extinguishment of debt | — | 2,645 | — | |||||||||
Provision for doubtful accounts and sundry losses | 3,939 | 2,112 | 843 | |||||||||
Deferred tax benefit | (6,391 | ) | (4,611 | ) | (4,306 | ) | ||||||
Share-based compensation | 13,570 | 12,592 | 9,642 | |||||||||
Loss on impairment of software | — | — | 11,441 | |||||||||
Loss on disposition of property and equipment and other intangibles | 893 | 109 | 430 | |||||||||
Earnings of equity method investment | (936 | ) | (692 | ) | (604 | ) | ||||||
Dividend received from equity method investment | 485 | 390 | — | |||||||||
(Increase) decrease in assets: | ||||||||||||
Accounts receivable | (7,851 | ) | (18,181 | ) | (2,099 | ) | ||||||
Prepaid expenses and other assets | (8,770 | ) | (3,911 | ) | (4,048 | ) | ||||||
Other long-term assets | (1,750 | ) | (4,432 | ) | 1,654 | |||||||
Increase (decrease) in liabilities: | ||||||||||||
Accounts payable and accrued liabilities | (215 | ) | 16,057 | (870 | ) | |||||||
Income tax payable | (596 | ) | 5,245 | (349 | ) | |||||||
Unearned income | 11,504 | 7,021 | 8,444 | |||||||||
Operating lease liabilities | (6,055 | ) | — | — | ||||||||
Other long-term liabilities | 1,191 | 4,438 | 811 | |||||||||
Total adjustments | 76,249 | 86,165 | 90,367 | |||||||||
Net cash provided by operating activities | 179,949 | 172,734 | 145,786 | |||||||||
Cash flows from investing activities | ||||||||||||
Additions to software | (36,871 | ) | (27,386 | ) | (22,174 | ) | ||||||
Acquisitions, net of cash acquired | (5,585 | ) | — | (42,836 | ) | |||||||
Property and equipment acquired | (23,002 | ) | (13,933 | ) | (11,290 | ) | ||||||
Proceeds from sales of property and equipment | 111 | 19 | 32 | |||||||||
Net cash used in investing activities | (65,347 | ) | (41,300 | ) | (76,268 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Proceeds from issuance of long-term debt | — | 545,000 | — | |||||||||
Debt issuance costs | — | (4,418 | ) | — | ||||||||
Net decrease in short-term borrowings | — | (12,000 | ) | (16,000 | ) | |||||||
Repayments of borrowings for purchase of equipment and software | (886 | ) | (720 | ) | (2,373 | ) | ||||||
Dividends paid | (14,420 | ) | (7,273 | ) | (21,762 | ) | ||||||
Withholding taxes paid on share-based compensation | (8,849 | ) | (2,159 | ) | (1,588 | ) | ||||||
Repurchase of common stock | (31,822 | ) | (10,000 | ) | (7,671 | ) | ||||||
Repayment of long-term debt | (14,250 | ) | (613,485 | ) | (19,789 | ) | ||||||
Net cash used in financing activities | (70,227 | ) | (105,055 | ) | (69,183 | ) | ||||||
Net increase in cash, cash equivalents and restricted cash | 44,375 | 26,379 | 335 | |||||||||
Cash, cash equivalents and restricted cash at beginning of the period | 86,746 | 60,367 | 60,032 | |||||||||
Cash, cash equivalents and restricted cash at end of the period | $ | 131,121 | $ | 86,746 | $ | 60,367 | ||||||
Reconciliation of cash, cash equivalents and restricted cash | ||||||||||||
Cash and cash equivalents | $ | 111,030 | $ | 69,973 | $ | 50,423 | ||||||
Restricted cash | 20,091 | 16,773 | 9,944 | |||||||||
Cash, cash equivalents and restricted cash | $ | 131,121 | $ | 86,746 | $ | 60,367 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for interest | 28,233 | 26,891 | 25,379 | |||||||||
Cash paid for income taxes | 18,703 | 9,750 | 9,930 | |||||||||
Supplemental disclosure of non-cash activities: | ||||||||||||
Payable due to vendor related to property and equipment and software acquired | 2,622 | 317 | 1,037 |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
EVERTEC, Inc. Notes to Consolidated Financial Statements
Actual results could differ from those estimates.
EVERTEC, Inc. Notes to Consolidated Financial Statements
EVERTEC, Inc. Notes to Consolidated Financial Statements |
The Company has two main categories of revenues according to the type of transactions EVERTEC enters into with the Company’s customers: (a) transaction-based fees and (b) fixed fees and time and material.
Transaction-based fees
The Company provides services that generate transaction-based fees. Typically transaction-based fees depend on factors such as number of accounts or transactions processed. These factors typically consist of a fee per transaction or item processed, a percentage of dollar volume processed or a fee per account on file, or some combination thereof. Revenue derived from the transaction-based fee contracts are recognized when the underlying transaction is processed, which constitutes delivery of service.
Revenues from business contracts in the Company’s Merchant Acquiring segment are primarily comprised of discount fees charged to the merchants based on the sales amount of transactions processed. Revenues include a discount fee and membership fees charged to merchants and debit network fees as well as point-of-sale (“POS”) rental fees. Pursuant to the guidance from ASC 605-45-45,Revenue Recognition—Principal Agent Considerations, EVERTEC records Merchant Acquiring revenues net of interchange and assessments charged by the credit and debit card network associations and recognizes such revenues at the time of the sale (when a transaction is processed).
Payment processing revenues are comprised of revenues related to providing access to the ATH network and other card networks to financial institutions, and related services. Payment processing revenues also include revenues from card issuer processing services (such as credit and debit card processing, authorization and settlement, and fraud monitoring and control to debit or credit card issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions) and electronic benefit transfer (“EBT”) (which principally consists of services to the Puerto Rico government for the delivery of government benefits to participants). Revenues in EVERTEC’s Payment Processing segment are primarily comprised of fees per transaction processed or per account on file, or a combination of both, and are recognized at the time transactions are processed or on a monthly basis for accounts on file.
Transaction-based fees within EVERTEC’s Business Solutions segment consist of revenues from business process management solutions including core bank processing, business process outsourcing, item and cash processing, and fulfillment. Transaction-based fee revenues generated by the Company’s core bank processing services are derived from fees based on various factors such as the number of accounts on file (e.g. savings or checking accounts, loans, etc.), and the number of transactions processed or registered users (e.g. for online
EVERTEC, Inc. Notes to Consolidated Financial Statements
banking services). For services dependent on the number of transactions processed, revenues are recognized as the underlying transactions are processed. For services dependent on the number of users or accounts on file, revenues are recognized on a monthly basis based on the number of accounts on file each month. Item and cash processing revenues are based upon the number of items (e.g. checks) processed and revenues are recognized when the underlying item is processed. Fulfillment services include technical and operational resources for producing and distributing variable print documents such as statements, bills, checks and benefits summaries. Fulfillment revenues are based upon the number pages for printing services and the number of envelopes processed for mailing services. Revenues are recognized as services are delivered based on a fee per page printed or envelope mailed, as applicable.
Fixed fees and time and material
The Company also provides services that generate a fixed fee per month or fees based on time and expenses incurred. These services are mostly provided in EVERTEC’s Business Solutions segment. Revenues are generated from EVERTEC’s core bank solutions, network hosting and management and IT consulting services.
In core bank solutions, the Company mostly provides access to applications and services such as back-up or recovery, hosting and maintenance that enable a bank to operate the related hosted services accessing the Company’s IT infrastructure. These contracts generally contain multiple elements or deliverables which are evaluated by EVERTEC and revenues are recognized according to the applicable guidance. Revenue is derived from fixed fees charged for the use of hosted services and are recognized on a monthly basis as delivered. Set-up fees are billed to the customer when the service is rendered; however, they are deferred and recognized as revenues over the term of the arrangement or the expected period of the customer relationship, whichever is longer, as set-up services rarely provide value to the customer on a stand-alone basis and are interrelated with the service to be provided under the contract.
In network hosting and management, EVERTEC provides hosting services for network infrastructure at EVETEC’s facilities; automated monitoring services; maintenance of call centers; interactive voice response solutions, among other related services. Revenues are primarily derived from monthly fees as services are delivered. Set-up fees are billed up-front to the customer when the set-up service is rendered; however, they are deferred and recognized as revenues over the term of the arrangement or the expected period of the customer relationship, whichever is longer, as set-up services rarely provide value to the customer on a stand-alone basis and are interrelated with the service under the contract. There are some arrangements under this line of service category that may contain undelivered elements. In such cases, the undelivered elements are evaluated and recognized when the services are delivered or at the time that all deliverables under the contract have been delivered.
IT consulting services revenue primarily consists of time billings based upon the number of hours dedicated to each client. Revenue from time billings are recognized as services are delivered.
EVERTEC also charges members of the ATH network an annual membership fee; however, these fees are deferred and recognized as revenues on a straight-line basis over the year and recorded in the Company’s Payment Processing segment. In addition, occasionally EVERTEC is a reseller of hardware and software products and revenues from these resale transactions are recognized when such product is delivered and accepted by the client.
Service level arrangements
The Company’s service contracts may include service level arrangements (“SLA”) generally allowing the customer to receive a credit for part of the service fee when the Company has not provided the agreed level of
EVERTEC, Inc. Notes to Consolidated Financial Statements
services. The SLA performance obligation is committed on a monthly basis, thus SLA performance is monitored and assessed for compliance with arrangements on a monthly basis, including determination and accounting for its economic impact, if any.
determination.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
EVERTEC Group LLC’s (“EVERTEC Group”), EVERTEC’s main operating subsidiary,
EVERTEC, Inc. Notes to Consolidated Financial Statements
estimation that the likelihood of successful development and implementation reaches a provable level. Tasks that are generally capitalized are as follows: (a) system design of a chosen path including software configuration and software interfaces; (b) employee costs directly associated with the internal-use computer software project; (c) software development (coding) and software and system testing and verification; (d) system installation; and (e) enhancements that add function and are considered permanent. These tasks are capitalized and amortized using the straight line method over its estimated useful life, which range from three to ten years and is included in depreciation and amortization in the consolidated statements of income and comprehensive income.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
For 2016, the Company used a “qualitative assessment” option or “step zero” for the goodwill impairment test for all of its reporting units. With this process, the
In the past, thequalitative assessment in any subsequent period. The quantitative goodwill impairment test, used was a two-step process at each reporting unit level. The first step used to identify potentialboth the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the Company determines to perform a quantitative impairment test, a third-party valuator may be engaged to prepare an independent valuation of each reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not considered impaired andimpaired. If the second stepcarrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the impairment test is not necessary. Iftotal amount of goodwill allocated to that reporting unit. Additionally, the Company shall consider the income tax effect from any tax-deductible goodwill on the carrying amount of the reporting unit, exceeds the fair value, there is an indication of potential impairment and the second step ofif applicable, when measuring the goodwill impairment analysis is required. The second step consists of comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.
loss. For the years ended December 31, 2016, 20152019, 2018 and 2014, no2017, 0 impairment losses associated with goodwill were recognized.
EVERTEC, Inc. Notes to Consolidated Financial Statements
The customer relationship assetsagreement. Customer relationships were valued using the excess earnings method under the income approach. Trademark assets were valued using the relief-from-royalty method under the income approach. SoftwareInternally developed software packages, which include capitalized software development costs, wereare recorded at cost.cost, while software packages acquired as part of a business combination were valued using the relief-from-royalty method under the income approach. The non-compete agreement was valued based on the estimated impact that theoretical competition would have on revenues and expenses.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
EVERTEC, Inc. Notes to Consolidated Financial Statements
financial statements may differ from the amount taken or expected to be taken in the tax return resulting in unrecognized tax benefits (“UTBs”). The Company recognizes the interest and penalties associated with UTBs as part of the provision for income taxes on its consolidated statements of income and comprehensive income. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheets.
and cash equivalents
banks and certificates of deposits with original maturities of three months or less.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
EVERTEC, Inc. Notes to Consolidated Financial Statements
given that the Company did not have appropriate exercise data on which to base the estimate nor is exercise data relating to employees of comparable companies easily obtainable. Performance and time based RSUs and restricted stock are valued based on the market price of the Company’s stock at the grant date.
As compensation expense is recognized, a deferred tax asset is established. At the time stock options are exercised, restricted stock or RSUs are released, a current tax deduction arises based on the value at the time of exercise or release. This deduction may exceed the associated deferred tax asset, resulting in a “windfall tax benefit”. The windfall is recognized in the consolidated balance sheets as an increase to additional paid-in capital, and is included in the consolidated statements of cash flows as a financing inflow.
In determining the amount of cash tax savings realized from the excess share-based compensation deductions, the Company follows the tax law ordering approach. Under this approach, the utilization of excess tax deductions associated with share-based awards is dictated by provision in the tax law that identify the sequence in which such benefits are utilized for tax purposes.
compensation.
In April 2015, the FASB issued guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction offor all leases, notwithstanding the carrying amount of the debt liability, consistent with debt discounts. This guidance was effective for fiscal years beginning after December 15, 2015 and interim
EVERTEC, Inc. Notes to Consolidated Financial Statements
periods within those fiscal years. The Company adopted the guidance on January 1, 2016 and appliedlease classification. Under the standard, retrospectively. The balance sheet presented has been adjustedorganizations are required to reflectprovide disclosures with the period specific effectsobjective of the adoptionenabling users of the guidance. Specifically, debt issue costs of $6.0 million and $6.4 million for March 31, 2016, the adoption date, and December 31, 2015, respectively, were reclassified from other long-term assets to long-term debt within our unaudited Consolidated Condensed Balance Sheets.
In September 2015, the FASB issued updated guidance for Business Combinations and eliminated the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. This guidance was effective for annual periods and interim periods within that period beginning after December 15, 2015. The Company adopted this guidance on January 1, 2016 with no impact.
In November 2015, the FASB issued updated guidance to simplify the classification of deferred income taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. The amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. If an entity applies the guidance prospectively, the entity should disclose in the first interim and first annual period of change, the nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively adjusted. If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual period of change the nature of and reason for the change in accounting principle and quantitative information about the effects of the accounting change on prior periods. The Company adopted this guidance on its balance sheet at June 30, 2016. The Company applied this guidance prospectively and the guidance was not retrospectively adjusted on the December 31, 2015 balance sheets. This guidance was adopted to simplify the presentation of deferred tax assets and liabilities.
Recently issued accounting pronouncements
The FASB has issued the following accounting pronouncements and guidance relevant to the Company’s operations:
In February 2016, the FASB issued updated guidance for financial reporting about leasing transactions. The amendments in this Update require a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. In addition, the Update requires that both financing and operating leases be recognized on the balance sheet. The guidance also requires disclosures to help investors and other financial statement users better understandassess the amount, timing, and uncertainty of cash flows arising from leases. For lessors, this amended guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. In January 2018, July 2018 and March 2019, the FASB issued Accounting Standards Update (“ASU”) 2018-01, 2018-10, 2018-11 and 2019-01, to amend narrow aspects of the standard, to add new and optional transition method for the adoption of the standard and provide lessors with a practical expedient, among others. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The amendments in this Updatestandards are effective for public reporting companies for annual periods, and interim periods within annual periods beginning after December 15, 2018 and replaced the leasing guidance of Topic 840. The Company adopted the standard effective January 1, 2019 using the modified retrospective transition approach and the transition provisions provided by ASU 2018-11. In addition, the Company applied all the practical expedients available for transition, except for the practical expedient pertaining to land easements, since it was not applicable to the Company. Accordingly, the Company accounted for its existing leases without reassessing whether (a) the contract contains a lease under Topic 842, (b) the lease classification was different in accordance to Topic 842, and (c) initial direct costs before transition met the definition of the new leasing standard. For the lease terms determination, the Company considered all facts and circumstances from the lease contract inception up to the effective date of Topic 842. The Company, as a lessee, changed the characterization of the asset recognized for capital leases under ASC 840 to a ROU asset, and the obligation to a lease liability. The Company recognized lease liabilities of $36.2 million, with corresponding ROU assets for the same amount based on the present value of the remaining lease payments of
EVERTEC, Inc. Notes to Consolidated Financial Statements |
EVERTEC, Inc. Notes to Consolidated Financial Statements
hedging relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met.guidance. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating the impact, if any, of the adoption of this guidance on the consolidated financial statements.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
guidance in this update to all implementation costs incurred in a cloud computing arrangement that is a service contract.
In March 2016, the FASB issued updated guidance for revenue from contractsretrospectively with customers’ principal versus agent considerations (reporting gross versus net). The amendments clarify the implementation guidance on principal versus agent considerations and are intended to improve the operability and understandability of the implementation guidance. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09,Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
In March 2016, the FASB issued updated guidance for accounting for employee share based payments. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
In June 2016, the FASB issued updated guidance for the measurement of credit losses on financial instruments. The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset or assets to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this Update earlier
EVERTEC, Inc. Notes to Consolidated Financial Statements
as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as ofat the beginning of the first reportingearliest period in which the guidance is effective (that is, a modified-retrospective approach).presented. The Company is currently evaluating the impact of theadopted this guidance effective January 1, 2020. The adoption of this guidance did not have an impact on itsthe consolidated financial statements, if any.
statements.
In October 2016, the FASB issued updated guidance for tax treatment of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The Board decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this Update do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. For public business entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in this Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
In October 2016, the FASB issued updated guidance for the consolidation of variable interest entities (“VIEs”) for which interests are held through related parties that are under common control. The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate a VIE within the Variable Interest Entities Subsections of Subtopic 810-10, Consolidation—Overall, in certain situations involving entities under common control. Specifically, the amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a reporting entity that is a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period,
EVERTEC, Inc. Notes to Consolidated Financial Statements
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements, if any.
In November 2016, the FASB issued guidance regarding the classification of transactions involving restricted cash on the statement of cash flows. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling thebeginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company will adopt this guidance on its consolidated statement of cash flows.
In January 2017, the FASB issued guidance clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments in this Update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively on or after the effective date. Early application of the amendments in this Update is allowed in specific circumstances. The Company will adopt this guidance on future acquisitions.
In January 2017, the FASB issued updated guidance to simplify the test for goodwill impairment. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. The amendments in this Update are effective for annual and interim goodwill impairment tests performed in fiscal years, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates afterThe Company adopted this guidance effective January 1, 2017. 2020. Contracts are evaluated under the updated guidance.
Accounting pronouncements issued prior to 2016the recognition, presentation and not yet adopted
During 2014, the FASB issued new guidance fordisclosure of revenue from contracts with customers, in consolidated financial statements.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
EVERTEC, Inc. Notes to Consolidated Financial Statements
or retrospectively with the cumulative effectassistance of initially applying the guidancedifferent business areas. This assessment is performed considering past transactions and/or reasonably available information, including market conditions, trends or other company or customer specific factors, among others.
December 31, 2019 | |||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Total | ||||||||||||||
Timing of revenue recognition | |||||||||||||||||||
Products and services transferred at a point in time | $ | 3,041 | $ | 3,811 | $ | — | $ | 10,421 | $ | 17,273 | |||||||||
Products and services transferred over time | 82,487 | 74,985 | 106,388 | 206,241 | 470,101 | ||||||||||||||
$ | 85,528 | $ | 78,796 | $ | 106,388 | $ | 216,662 | $ | 487,374 |
December 31, 2018 | |||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Total | ||||||||||||||
Timing of revenue recognition | |||||||||||||||||||
Products and services transferred at a point in time | $ | 293 | $ | 2,864 | $ | — | $ | 7,329 | $ | 10,486 | |||||||||
Products and services transferred over time | 77,744 | 75,706 | 99,655 | 190,278 | 443,383 | ||||||||||||||
$ | 78,037 | $ | 78,570 | $ | 99,655 | $ | 197,607 | $ | 453,869 |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
(In thousands) | Contract Assets | ||
Balance at beginning of period | $ | 996 | |
Services transferred to customers | 781 | ||
Transfers to accounts receivable | (586 | ) | |
December 31, 2019 | $ | 1,191 |
Management is currently in the processrecorded as part of evaluating the potential impact this new guidance will have on the Company’s financial statements. Management has not completed this evaluation and therefore, cannot conclude whether the guidance will have a significant impact on the financial statements at this time. However, based on preliminary work completed at this time, Management is considering the implications that the new standard may have in the following areas:
At this time, Management is not able to reasonably estimate the impact that adoption is expected to have.
The Company’s implementation process is ongoing. Significant activitiesperformance obligations that are in process areunsatisfied or partially satisfied at December 31, 2019 is $305.4 million. This amount primarily consists of professional service fees for implementation or set up activities related to hosting services and maintenance services, typically recognized over the calculationlife of the transition adjustment, draftingcontract which vary from 2 to 5 years. It also includes professional service fees for customizations or development of on-premise licensing agreements, which are recognized over time based on inputs relative to the total expected inputs to satisfy a performance obligation.
cash equivalents
EVERTEC, Inc. Notes to Consolidated Financial Statements
EVERTEC, Inc. Notes to Consolidated Financial Statements |
December 31, | ||||||||
(Dollar amounts in thousands) | 2016 | 2015 | ||||||
Trade | $ | 52,663 | $ | 52,652 | ||||
Due from affiliates, net | 20,971 | 16,886 | ||||||
Settlement assets | 5,938 | 6,304 | ||||||
Other | 144 | 123 | ||||||
Less: allowance for doubtful accounts | (1,913 | ) | (2,250 | ) | ||||
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Accounts receivable, net | $ | 77,803 | $ | 73,715 | ||||
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At December 31, 2016 and 2015, the Company had receivables from the government of Puerto Rico amounting to $18.0 million and $18.4 million, respectively, included as part of Trade receivables.
December 31, | |||||||
(In thousands) | 2019 | 2018 | |||||
Trade | $ | 58,493 | $ | 61,082 | |||
Due from affiliates, net | 39,095 | 25,703 | |||||
Settlement assets | 12,353 | 15,118 | |||||
Other | 232 | 304 | |||||
Less: allowance for doubtful accounts | (3,361 | ) | (1,884 | ) | |||
Accounts receivable, net | $ | 106,812 | $ | 100,323 |
December 31, | ||||||||
(Dollar amounts in thousands) | 2016 | 2015 | ||||||
Software licenses and maintenance contracts | $ | 8,302 | $ | 6,526 | ||||
Deferred project costs | 3,113 | 4,067 | ||||||
Guarantee deposits | 3,396 | 2,404 | ||||||
Insurance | 1,272 | 1,313 | ||||||
Prepaid income taxes | 1,362 | 1,259 | ||||||
Taxes other than income | 1,358 | 1,042 | ||||||
Postage | 296 | 751 | ||||||
Other | 1,331 | 1,396 | ||||||
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Prepaid expenses and other assets | $ | 20,430 | $ | 18,758 | ||||
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December 31, | |||||||
(In thousands) | 2019 | 2018 | |||||
Software licenses and maintenance contracts | $ | 11,585 | $ | 9,961 | |||
Deferred project costs | 10,060 | 4,283 | |||||
Guarantee deposits | 4,899 | 4,611 | |||||
Insurance | 2,007 | 1,229 | |||||
Prepaid income taxes | 2,029 | 1,646 | |||||
Taxes other than income | 2,128 | 1,710 | |||||
Postage | 1,630 | 2,150 | |||||
Other | 3,747 | 3,534 | |||||
Prepaid expenses and other assets | $ | 38,085 | $ | 29,124 |
EVERTEC, Inc. Notes to Consolidated Financial Statements
income for the years ended 2015December 31, 2019, 2018 and 2014,2017, respectively. For the yearyears ended December 31, 2014,2019 and 2018, the Company received $0.3$0.5 million and $0.4 million, respectively, in dividends from CONTADO. NoNaN dividends were received during 2015 or 2016.
2017.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
Useful life in years | December 31, | |||||||||
(Dollar amounts in thousands) | 2016 | 2015 | ||||||||
Buildings | 30 | $ | 1,559 | $ | 1,606 | |||||
Data processing equipment | 3 - 5 | 105,052 | 94,523 | |||||||
Furniture and equipment | 3 - 20 | 7,311 | 8,170 | |||||||
Leasehold improvements | 5 - 10 | 3,057 | 3,649 | |||||||
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116,979 | 107,948 | |||||||||
Less—accumulated depreciation and amortization | (79,431 | ) | (75,244 | ) | ||||||
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Depreciable assets, net | 37,548 | 32,704 | ||||||||
Land | 1,382 | 1,424 | ||||||||
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Property and equipment, net | $ | 38,930 | $ | 34,128 | ||||||
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Useful life in years | December 31, | ||||||||
(Dollar amounts in thousands) | 2019 | 2018 | |||||||
Buildings | 30 | $ | 1,542 | $ | 1,440 | ||||
Data processing equipment | 3 - 5 | 116,950 | 110,673 | ||||||
Furniture and equipment | 3 - 20 | 6,936 | 7,761 | ||||||
Leasehold improvements | 5 -10 | 2,814 | 2,625 | ||||||
128,242 | 122,499 | ||||||||
Less—accumulated depreciation and amortization | (85,780 | ) | (86,990 | ) | |||||
Depreciable assets, net | 42,462 | 35,509 | |||||||
Land | 1,329 | 1,254 | |||||||
Property and equipment, net | $ | 43,791 | $ | 36,763 |
(Dollar amounts in thousands) | Merchant acquiring, net | Payment processing | Business solutions | Total | ||||||||||||
Balance at December 31, 2014 | $ | 138,121 | $ | 184,228 | $ | 46,488 | $ | 368,837 | ||||||||
Foreign currency translation adjustments | — | (732 | ) | 28 | (704 | ) | ||||||||||
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Balance at December 31, 2015 | 138,121 | 183,496 | 46,516 | 368,133 | ||||||||||||
Goodwill attributable to acquisition | — | 4,991 | — | 4,991 | ||||||||||||
Foreign currency translation adjustments | — | (1,799 | ) | (339 | ) | (2,138 | ) | |||||||||
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Balance at December 31, 2016 | $ | 138,121 | $ | 186,688 | $ | 46,177 | $ | 370,986 | ||||||||
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(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Total | ||||||||||||||
Balance at December 31, 2017 | $ | 160,972 | $ | 53,659 | $ | 138,121 | $ | 45,823 | $ | 398,575 | |||||||||
Foreign currency translation adjustments | — | (3,931 | ) | — | — | (3,931 | ) | ||||||||||||
Balance at December 31, 2018 | 160,972 | 49,728 | 138,121 | 45,823 | 394,644 | ||||||||||||||
Goodwill attributable to acquisition | — | 3,719 | — | — | 3,719 | ||||||||||||||
Foreign currency translation adjustments | — | 1,124 | — | — | 1,124 | ||||||||||||||
Balance at December 31, 2019 | $ | 160,972 | $ | 54,571 | $ | 138,121 | $ | 45,823 | $ | 399,487 |
EVERTEC, Inc. Notes to Consolidated Financial Statements
(“Step 2”) consists of comparing the implied fair value of the reporting units withdoes not exceed the carrying value, an impairment loss equaling the excess amount is recorded, limited to the recorded balance of that goodwill.
The Company conductedperformed a qualitative assessment of each reporting unit’s fair value, or step zero process,analysis as of August 31, 2016. As part of2019 by which the Company’s qualitative assessment, EVERTEC considered the results for the Company’s 2015 impairment test (which indicated that the fair value of each reporting unit was in excess of it carrying amount by 120.9%—145.5%) as well as current market conditions and changes in the carrying amount of the Company’s reporting units that occurred subsequent to the 2015 impairment test. Based on the results of this qualitative assessment, EVERTEC believes the fair value of goodwill for each of the Company’s reporting units continues to exceed their respective carrying amounts andCompany concluded that it was not necessarymore likely than not that the fair
EVERTEC, Inc. Notes to Consolidated Financial Statements |
recorded in 2019, 2018 or 2017. For details regarding goodwill attributable to acquisition, refer to Note 10-Other Intangible Assets, net.
(Dollar amounts in thousands) | December 31, 2016 | |||||||||||||
Useful life in years | Gross amount | Accumulated amortization | Net carrying amount | |||||||||||
Customer relationships | 8 - 14 | $ | 334,455 | $ | (141,829 | ) | $ | 192,626 | ||||||
Trademark | 10 - 15 | 39,950 | (21,650 | ) | 18,300 | |||||||||
Software packages | 3 - 10 | 176,267 | (121,055 | ) | 55,212 | |||||||||
Non-compete agreement | 15 | 56,539 | (23,558 | ) | 32,981 | |||||||||
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Other intangible assets, net | $ | 607,211 | $ | (308,092 | ) | $ | 299,119 | |||||||
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(Dollar amounts in thousands) | December 31, 2015 | |||||||||||||
Useful life in years | Gross amount | Accumulated amortization | Net carrying amount | |||||||||||
Customer relationships | 10 - 14 | $ | 322,632 | $ | (117,963 | ) | $ | 204,669 | ||||||
Trademark | 10 - 15 | 39,950 | (18,186 | ) | 21,764 | |||||||||
Software packages | 3 - 10 | 155,611 | (106,735 | ) | 48,876 | |||||||||
Non-compete agreement | 15 | 56,539 | (19,789 | ) | 36,750 | |||||||||
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Other intangible assets, net | $ | 574,732 | $ | (262,673 | ) | $ | 312,059 | |||||||
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The Company completed two acquisitions in 2016 that were not significant, individually or in the aggregate, a 65% equity interest in Processa, S.A.S, a Colombian payment processing company for $6.4 million, including a customer relationship of $3.1 million, and Accuprint, Inc, a data management and printing services company for $9.7 million, including a customer relationship of $9.1 million. In connection with the Accurpint, Inc purchase, the Company has recorded a contingent liability of $1.1 million. The results of operations and financial position of these entities are included in the Consolidated Financial Statements from and after the date of acquisition. During 2015, the Company acquired a customer relationship amounting to $10.0 million.
Useful life in years | December 31, 2019 | ||||||||||||
(In thousands) | Gross amount | Accumulated amortization | Net carrying amount | ||||||||||
Customer relationships | 8 - 14 | $ | 344,883 | $ | (220,434 | ) | $ | 124,449 | |||||
Trademark | 2 - 15 | 42,025 | (32,456 | ) | 9,569 | ||||||||
Software packages | 3 -10 | 256,220 | (169,974 | ) | 86,246 | ||||||||
Non-compete agreement | 15 | 56,539 | (34,866 | ) | 21,673 | ||||||||
Other intangible assets, net | $ | 699,667 | $ | (457,730 | ) | $ | 241,937 |
Useful life in years | December 31, 2018 | ||||||||||||
(In thousands) | Gross amount | Accumulated amortization | Net carrying amount | ||||||||||
Customer relationships | 8 - 14 | $ | 342,738 | $ | (194,570 | ) | $ | 148,168 | |||||
Trademark | 2 - 15 | 41,357 | (28,888 | ) | 12,469 | ||||||||
Software packages | 3 -10 | 224,855 | (151,666 | ) | 73,189 | ||||||||
Non-compete agreement | 15 | 56,539 | (31,096 | ) | 25,443 | ||||||||
Other intangible assets, net | $ | 665,489 | $ | (406,220 | ) | $ | 259,269 |
EVERTEC, Inc. Notes to Consolidated Financial Statements
loss of $2.3 million related to software. The estimated amortization expenses of balances outstanding at December 31, 20162019 for the next five years are as follows:
(Dollar amounts in thousands) | ||||
2017 | $ | 43,723 | ||
2018 | 39,516 | |||
2019 | 36,247 | |||
2020 | 33,621 | |||
2021 | 32,465 |
(In thousands) | |||
2020 | $ | 50,894 | |
2021 | 45,582 | ||
2022 | 40,459 | ||
2023 | 36,883 | ||
2024 | 28,052 |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
As of December 31, 2015, other long-term assets included $1.3 million related to deferred debt-issuance costs related to the revolving credit facility and $1.7 million related to the long-term portion of certain software and maintenance contracts.
million.
December 31, | ||||||||
(Dollar amounts in thousands) | 2016 | 2015 | ||||||
Senior Secured Credit Facility (Term A) due on April 17, 2018 paying interest at a variable interest rate (London InterBank Offered Rate (“LIBOR”) plus applicable margin (1)(3)) | $ | — | $ | 260,324 | ||||
Senior Secured Credit Facility (2018 Term A) due on April 17, 2018 paying interest at a variable interest rate (London InterBank Offered Rate (“LIBOR”) plus applicable margin (1)(3)) | 28,721 | — | ||||||
Senior Secured Credit Facility (2020 Term A) due on January 17, 2020 paying interest at a variable interest rate (London InterBank Offered Rate (“LIBOR”) plus applicable margin (3)(4)) | 212,661 | — | ||||||
Senior Secured Credit Facility (Term B) due on April 17, 2020 paying interest at a variable interest rate (LIBOR plus applicable margin (2)(3)) | 378,074 | 381,723 | ||||||
Senior Secured Revolving Credit Facility(6) | 28,000 | 17,000 | ||||||
Note Payable due on October 1, 2017(3) | 1,524 | 2,967 | ||||||
Note Payable due on July 31, 2017(3) | 357 | 685 | ||||||
Note Payable due on August 31, 2019(5) | 890 | — | ||||||
Note Payable due on April 30, 2021(3) | 532 | — | ||||||
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Total debt | $ | 650,759 | $ | 662,699 | ||||
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December 31, | |||||||
(In thousands) | 2019 | 2018 | |||||
Senior Secured Credit Facility (2023 Term A) due on November 27, 2023 paying interest at a variable interest rate (LIBOR plus applicable margin(1)(2)) | $ | 207,261 | $ | 217,791 | |||
Senior Secured Credit Facility (2024 Term B) due on November 27, 2024 paying interest at a variable interest rate (LIBOR plus applicable margin(1)(3)) | 317,936 | 320,515 | |||||
Senior Secured Revolving Credit Facility(2) | — | — | |||||
Note Payable due on April 30, 2021(1) | 175 | 300 | |||||
Notes Payable due on January 1, 2022(1) | 2,231 | — | |||||
Total debt | $ | 527,603 | $ | 538,606 |
Net of unaccreted discount and unamortized debt issue costs, as applicable. |
(2) | Applicable margin of |
EVERTEC, Inc. Notes to Consolidated Financial Statements
(3) | Subject to a minimum rate (“LIBOR floor”) of 0.0% plus applicable margin of 3.50% at December 31, 2019 and December 31, 2018. |
(Dollar amounts in thousands) | ||||
2017 | $ | 50,162 | ||
2018 | 46,953 | |||
2019 | 24,924 | |||
2020 | 540,820 | |||
2021 | 45 |
(In thousands) | ||||
2020 | $ | 15,311 | ||
2021 | 15,053 | |||
2022 | 20,508 | |||
2023 | 173,750 | |||
2024 | 308,750 |
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 material terms and conditions of the senior secured credit facilities are summarized below.
The Term A Loan requires principal payments onprovides for amortization in the last business dayamount of each quarter equal to (a) 1.250%1.25% of the original principal amount commencing on September 30, 2013 through June 30, 2016; (b) 1.875% of the original principal amount from September 30, 2016 through June 30, 2017; (c) 2.50%2023 Term A during
EVERTEC, Inc. Notes to Consolidated Financial Statements |
Term B Loan
The Term B Loan requires principal payments on the last business day of each quarter equal to 0.250% of the original principal amount commencing on September 30, 2013 and the remaining outstanding principal amount on the maturity of the Term B Loan on April 17, 2020. Interest is based on EVERTEC Group’s first lien secured net leverage ratio and payable at a rate equal to, at the Company’s option, either (a) LIBOR Rate plus an applicable margin ranging from 2.50% to 2.75%, or (b) Base Rate plus an applicable margin ranging from 1.50% to 1.75%. The LIBOR Rate and Base Rate are subject to floors of 0.75% and 1.75%, respectively.
Revolving Credit Facility
The revolving credit facility has an available balance up to $100.0 million, with an interest rate on loans calculated the same as the applicable Term A Loan rate. The facility matures on April 17, 2018 and has a “commitment fee” payable one business day after the last business day of each quarter calculated based on the daily unused commitment during the preceding quarter. The commitment fee for the unused portion of this facility ranges from 0.125% to 0.375% and is based on EVERTEC Group’s first lien secured net leverage ratio.
All loans may be prepaid without premium or penalty.
The senior secured credit facilities contain various restrictive covenants. As a result of the Third Amendment (as defined below), the Term A Loan and the revolving credit facility (subject to certain exceptions) require the Company to maintain on a quarterly basis a specified maximum senior secured leverage ratio of up to 4.75 to 1.00 as defined in the 2013 Credit Agreement (total first lien secured debt to adjusted EBITDA) until
EVERTEC, Inc. Notes to Consolidated Financial Statements
September 30, 2018 and 4.25 to 1.00 for any fiscal quarter ending thereafter. In addition, substantially all of the Company’s assets are pledged to secure the Company’s obligations under the 2013 Credit agreement and, among other things, the 2013 Credit Agreement: (a) limits the Company’s ability and the ability of the Company’s subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, as all net assets are restricted, and enter into certain transactions with affiliates; (b) restricts the Company’s ability to enter into agreements that would restrict the ability of the Company’s subsidiaries to pay dividends or make certain payments to EVERTEC; and (c) places restrictions on the Company’s ability and the ability of the Company’s subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of the Company’s assets.
Amendments to the 2013 Credit Agreement
During the second quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiaries of the Company, entered into a second amendment and waiver to the outstanding Credit Agreement (the “Second Amendment”). The Company paid each lender that consented to the amendment a fee equal to 0.50% of the aggregate principal amount of outstanding term loans and revolving commitments held by such lender. The credit amendment fees paid during the second quarter of 2016 amounted to $3.6 million.
During the fourth quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiaries of the Company, entered into a third amendment (the “Third Amendment”) to the 2013 Credit Agreement. The Third Amendment extends the maturity of (a) approximately $219 million of EVERTEC Group’s existing approximately $250 million of Term A loan facility to January 17, 2020 (the “2020 Term A loan”) and (b) $65 million of EVERTEC Group’s existing $100 million of revolving credit facility to January 17, 2020. The remaining approximately $30 million of Term A loan (the “2018 Term A loan”) and the $35 million of revolving credit facility that were not extended will remain in place and mature as originally scheduled on April 17, 2018. The Term B loan facility will remain in place and mature as originally scheduled on April 17, 2020 (collectively, the “Senior Secured term loans”).
Under the terms of the Third Amendment, the 2018 Term A Loan amortizes on a basis of2019, 1.875% of the original principal amount beginning in the third quarter of 2016 and during each of the next threefour subsequent quarters and 2.50% of the original principal amount during each of the final three quarters, with the balance payable on the final maturity date.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
$2.6 million.
EVERTEC, Inc. Notes to Consolidated Financial Statements
The Company issues letters of credit against the revolving credit facility which reduce the additional borrowing capacity of the revolving credit facility.
Interest Rate Swap
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| Variable Rate | Fixed Rate | |||||
2015 Swap | January 2017 | April 2020 | $200 million | 1-month LIBOR | 1.9225% | |||||
2018 Swap | April 2020 | November 2024 | $250 million | 1-month LIBOR | 2.89% |
As ofhedges.
(Dollar amounts in thousands) | December 31, 2016 | December 31, 2015 | ||||||
Other long-term liabilities | $ | 1,964 | $ | 515 |
(In thousands) | December 31, 2019 | December 31, 2018 | ||||||
Other long-term assets | $ | — | $ | 1,683 | ||||
Other long-term liabilities | 14,452 | 4,059 |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
(In thousands) | December 31, 2019 | |||
Interest expense | $ | 677 |
effective.
EVERTEC, Inc. Notes to Consolidated Financial Statements
valuation adjustments to those deemed necessary to ensure that the financial instrument’s fair value adequately represents the price that would be received or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit quality and liquidity as well as other criteria. The estimated fair value amounts are subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair value could affect the results. The fair value measurement levels are not indicative of risk of investment.
(Dollar amounts in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
December 31, 2016 | ||||||||||||||||
Financial liabilities: | ||||||||||||||||
Interest rate swap | $ | — | $ | 1,964 | $ | — | $ | 1,964 | ||||||||
December 31, 2015 | ||||||||||||||||
Financial liabilities: | ||||||||||||||||
Interest rate swap | — | 515 | — | 515 |
(In thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
December 31, 2019 | |||||||||||||||
Financial liability: | |||||||||||||||
Interest rate swap | $ | — | $ | 14,452 | $ | — | $ | 14,452 | |||||||
December 31, 2018 | |||||||||||||||
Financial asset: | |||||||||||||||
Interest rate swap | — | 1,683 | — | 1,683 | |||||||||||
Financial liability: | |||||||||||||||
Interest rate swap | — | 4,059 | — | 4,059 |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
December 31, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
(Dollar amounts in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial liabilities: | ||||||||||||||||
Interest rate swap | $ | 1,964 | $ | 1,964 | $ | 515 | $ | 515 | ||||||||
Senior secured Term A Loan | — | — | 260,324 | 250,688 | ||||||||||||
Senior secured Term B Loan | 378,074 | 383,491 | 381,723 | 373,749 | ||||||||||||
2018 Term A Loan | 28,721 | 29,268 | — | — | ||||||||||||
2020 Term A Loan | 212,661 | 213,872 | — | — |
2018:
December 31, | |||||||||||||||
2019 | 2018 | ||||||||||||||
(In thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||
Financial asset: | |||||||||||||||
Interest rate swap | $ | — | $ | — | $ | 1,683 | $ | 1,683 | |||||||
Financial liabilities: | |||||||||||||||
Interest rate swap | 14,452 | 14,452 | 4,059 | 4,059 | |||||||||||
2023 Term A | 207,261 | 206,388 | 217,791 | 218,625 | |||||||||||
2024 Term B | 317,936 | 324,163 | 320,515 | 319,517 |
EVERTEC, Inc. Notes to Consolidated Financial Statements
2017.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
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EVERTEC, Inc. Notes to Consolidated Financial Statements
Declaration Date | Record Date | Payment Date | Dividend per share | |||||
July 26, 2018 | August 6, 2018 | September 7, 2018 | $ | 0.05 | ||||
October 25, 2018 | November 5, 2018 | December 7, 2018 | 0.05 | |||||
February 15, 2019 | February 26, 2019 | March 22, 2019 | 0.05 | |||||
April 25, 2019 | May 6, 2019 | June 7, 2019 | 0.05 | |||||
July 25, 2019 | August 5, 2019 | September 6, 2019 | 0.05 | |||||
October 23, 2019 | November 4, 2019 | December 6, 2019 | 0.05 |
Foreign Currency Translation Adjustments | Cash Flow Hedge | Total | ||||||||||
Balance—December 31, 2014 | $ | (6,522 | ) | $ | — | $ | (6,522 | ) | ||||
Additions: | (545 | ) | (515 | ) | (1,060 | ) | ||||||
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Balance—December 31, 2015 | (7,067 | ) | (515 | ) | (7,582 | ) | ||||||
Additions: | (3,360 | ) | (1,449 | ) | (4,809 | ) | ||||||
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Balance—December 31, 2016 | $ | (10,427 | ) | $ | (1,964 | ) | $ | (12,391 | ) | |||
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2018:
Foreign Currency Translation Adjustments | Cash Flow Hedge | Total | |||||||||
Balance - December 31, 2017, net of tax | $ | (11,062 | ) | $ | 214 | $ | (10,848 | ) | |||
Other comprehensive loss before reclassifications | (10,564 | ) | (2,273 | ) | (12,837 | ) | |||||
Amount reclassified to Net Income | — | (104 | ) | (104 | ) | ||||||
Balance - December 31, 2018, net of tax | (21,626 | ) | (2,163 | ) | (23,789 | ) | |||||
Other comprehensive income (loss) before reclassifications | 4,754 | (10,297 | ) | (5,543 | ) | ||||||
Amount reclassified to Net Income | — | (677 | ) | (677 | ) | ||||||
Balance - December 31, 2019, net of tax | $ | (16,872 | ) | $ | (13,137 | ) | $ | (30,009 | ) |
Equity Incentive Plans
On September 30, 2010, Holdings Board of Directors adopted the Carib Holdings, Inc. 2010 Equity
In connection with the Company’s initial public offering, the Company adopted the EVERTEC, Inc. 2013 Equity Incentive Plan (the “2013 Plan” and, together with the 2010 Plan, the “Equity Incentive Plans”). Under the 2013 Plan, 5,956,882 shares of its common stock are reserved for issuance upon exercise and grants of stock options, restricted stocks and other equity awards. In connection with the adoption of the 2013 Plan, the 2010 Plan remains in effect. However, no new awards will be granted under the 2010 Plan. The Equity Incentive Plans have a contractual term of ten years.
Long-term Incentive Plan
In the first quarter of 2016, the Compensation Committee of the Board of Directors approved grants of RSUs to executives and certain employees pursuant to the 2016 Long-Term Incentive Program (“2016 LTIP”) under the terms of our 2013 Equity Incentive Plan. Under the 2016 LTIP, the Company granted restricted stock units to eligible participants as time-based awards and/or performance-based awards.
EVERTEC, Inc. Notes to Consolidated Financial Statements
Employees that received
EVERTEC, Inc. Notes to Consolidated Financial Statements |
The following table summarizes the stock options activity for the years ended December 31, 2016, 2015 and 2014:
Shares | Weighted-average exercise prices | |||||||
Outstanding at December 31, 2013 | 1,285,536 | $ | 4.77 | |||||
Granted | 100,000 | 24.01 | ||||||
Forfeitures | (31,164 | ) | 1.30 | |||||
Exercised(1) | (945,040 | ) | 1.96 | |||||
Repurchased | (93,332 | ) | 4.83 | |||||
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Outstanding at December 31, 2014 | 316,000 | $ | 19.56 | |||||
Expired | (50,000 | ) | 23.36 | |||||
Forfeitures | (126,000 | ) | 18.81 | |||||
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Outstanding at December 31, 2015 | 140,000 | $ | 18.88 | |||||
Forfeitures | (33,333 | ) | 24.01 | |||||
Exercised | (20,000 | ) | 6.04 | |||||
Expired | (66,667 | ) | 24.01 | |||||
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Outstanding at December 31, 2016 | 20,000 | $ | 6.04 | |||||
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Exercisable at December 31, 2016 | — | $ | — | |||||
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The following table presents information about fully vested stock options for the years ended December 31, 2016, 2015 and 2014:
Years ended December 31, | ||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||
Shares | Weighted average exercise price | Shares | Weighted average exercise price | Shares | Weighted average exercise price | |||||||||||||||||||
Vested stock options(1)(2)(3) | — | $ | — | 33,333 | $ | 24.01 | 766,995 | $ | 3.75 |
EVERTEC, Inc. Notes to Consolidated Financial Statements
Management uses the fair value method of recording stock-based compensation as described in the guidance for stock compensation in ASC topic 718. No stock options were granted in 2016 and 2015. The fair value of stock options granted during 2014, was estimated using the Black-Scholes-Merton (“BSM”) option pricing model, with the following assumptions:
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The risk-free rate is based on the U.S. Constant Maturities Treasury Interest Rate as of the grant date. The expected volatility is based on a combination of historical volatility and implied volatility from public trade companies in the Company’s industry. The expected annual dividend yield is based on management’s expectations of future dividends as of the grant date. The expected term for stock options granted under the 2010 Plan was based on the vesting time of the options. For the stock options granted under the 2013 Plan, the simplified method was used to estimate the expected term.
Nonvested restricted shares and RSUs | Shares | Weighted-average grant date fair value | ||||||
Nonvested at December 31, 2013 | 9,133 | $ | 26.64 | |||||
Granted | 23,252 | 22.04 | ||||||
Vested | (9,133 | ) | 24.64 | |||||
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Nonvested at December 31, 2014 | 23,252 | $ | 22.04 | |||||
Granted | 596,238 | 22.24 | ||||||
Vested | (94,550 | ) | 21.33 | |||||
Forfeited | (33,214 | ) | 23.61 | |||||
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Nonvested at December 31, 2015 | 491,726 | $ | 22.32 | |||||
Granted | 907,320 | 12.02 | ||||||
Vested | (154,820 | ) | 20.97 | |||||
Forfeited | (31,862 | ) | 18.61 | |||||
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Nonvested at December 31, 2016 | 1,212,364 | $ | 14.88 | |||||
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2017:
Nonvested restricted shares and RSUs | Shares | Weighted-average grant date fair value | |||||
Nonvested at December 31, 2016 | 1,212,364 | $ | 14.88 | ||||
Granted | 1,584,241 | 15.37 | |||||
Vested | (315,953 | ) | 15.30 | ||||
Forfeited | (139,760 | ) | 16.06 | ||||
Nonvested at December 31, 2017 | 2,340,892 | 15.08 | |||||
Granted | 636,322 | 17.07 | |||||
Vested | (468,064 | ) | 18.41 | ||||
Forfeited | (472,987 | ) | 16.55 | ||||
Nonvested at December 31, 2018 | 2,036,163 | 15.09 | |||||
Granted | 517,153 | 30.84 | |||||
Vested | (931,389 | ) | 29.32 | ||||
Forfeited | (29,172 | ) | 16.52 | ||||
Nonvested at December 31, 2019 | 1,592,755 | $ | — |
Years ended December 31, | ||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | 2014 | |||||||||
Share-based compensation recognized, net Stock options | $ | 60 | $ | 192 | $ | 4,305 | ||||||
Restricted shares and RSUs | 6,355 | 5,010 | 282 |
Pursuant to the terms of the 2010 Plan, Tranche A stock options will generally vest in five equal installments, except for some grants as specified in the stock agreement, Tranche B options granted to employees and certain
EVERTEC, Inc. Notes to Consolidated Financial Statements
directors would vest at such time as the Investor Internal Rate of Return (“IRR”) equals or exceeds 25%, except for one grant that vests upon a 20% IRR, based on cash proceeds received by Apollo Investment Fund VII, L.P. (the “Investor”), and Tranche C options would vest at such time as the IRR equals or exceeds 30% based on cash proceeds received by the Investor.
Years ended December 31, | |||||||||||
(In thousands) | 2019 | 2018 | 2017 | ||||||||
Share-based compensation recognized, net | |||||||||||
Stock options | $ | — | $ | — | $ | 6 | |||||
Restricted shares and RSUs | 13,570 | 12,592 | 9,636 |
At December 31, 2016, the maximum unrecognized cost for restricted stock and RSUsunits was $11.3 million.$17.7 million as of December 31, 2019. The cost is expected to be recognized over a weighted average period of 1.791.95 years.
(Expenses)
losses.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
loss on extinguishment of debt.
gains.
EVERTEC, Inc. Notes to Consolidated Financial Statements
by taking into account any applicable net operating losses or other tax attributes of Holdings or EVERTEC, Inc. that reduce Holdings’ or EVERTEC, Inc.’s taxes in such period. The Tax Payment Agreement provides that the payments thereunder shall not exceed the net amount of Taxes that Holdings and EVERTEC, Inc. actually owe to the appropriate taxing authority for a taxable period. Further, the Tax Payment Agreement provides that if Holdings or EVERTEC, Inc. receives a tax refund attributable to any taxable period or portion thereof occurring on or after the Effective Date, EVERTEC, Inc. shall be required to recalculate the payment for such period required to be made by EVERTEC Group to Holdings or EVERTEC, Inc. If the payment, as recalculated, is less than the amount of the payment EVERTEC Group already made to Holdings or EVERTEC, Inc. in respect of such period, Holdings or EVERTEC, Inc. shall promptly make a payment to EVERTEC Group in the amount of such difference.
Years ended December 31, | ||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | 2014 | |||||||||
Current tax provision (benefit) | $ | 12,865 | $ | (245 | ) | $ | 12,602 | |||||
Deferred tax benefit | (4,594 | ) | (3,090 | ) | (3,701 | ) | ||||||
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Income tax expense (benefit) | $ | 8,271 | $ | (3,335 | ) | $ | 8,901 | |||||
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Years ended December 31, | |||||||||||
(In thousands) | 2019 | 2018 | 2017 | ||||||||
Current tax provision | $ | 19,366 | $ | 17,207 | $ | 9,086 | |||||
Deferred tax benefit | (6,391 | ) | (4,611 | ) | (4,306 | ) | |||||
Income tax expense | $ | 12,975 | $ | 12,596 | $ | 4,780 |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
Years ended December 31, | ||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | 2014 | |||||||||
Income before income tax provision (benefit) | ||||||||||||
Puerto Rico | $ | 70,899 | $ | 73,327 | $ | 61,759 | ||||||
United States | 2,670 | 1,879 | 2,131 | |||||||||
Foreign countries | 9,828 | 6,836 | 11,168 | |||||||||
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Total income before income tax provision (benefit) | $ | 83,397 | $ | 82,042 | $ | 75,058 | ||||||
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Current tax provision (benefit) | ||||||||||||
Puerto Rico | 7,072 | (3,500 | ) | 8,090 | ||||||||
United States | 567 | 413 | (517 | ) | ||||||||
Foreign countries | 5,226 | 2,842 | 5,029 | |||||||||
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Total current tax provision (benefit) | $ | 12,865 | $ | (245 | ) | $ | 12,602 | |||||
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Deferred tax benefit | ||||||||||||
Puerto Rico | (2,874 | ) | (2,169 | ) | (1,933 | ) | ||||||
United States | (259 | ) | (114 | ) | (124 | ) | ||||||
Foreign countries | (1,461 | ) | (807 | ) | (1,644 | ) | ||||||
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Total deferred tax benefit | $ | (4,594 | ) | $ | (3,090 | ) | $ | (3,701 | ) | |||
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Years ended December 31, | |||||||||||
(In thousands) | 2019 | 2018 | 2017 | ||||||||
Income before income tax provision | |||||||||||
Puerto Rico | $ | 89,667 | $ | 77,176 | $ | 47,347 | |||||
United States | 4,047 | 3,199 | 3,089 | ||||||||
Foreign countries | 22,961 | 18,790 | 9,763 | ||||||||
Total income before income tax provision | $ | 116,675 | $ | 99,165 | $ | 60,199 | |||||
Current tax provision | |||||||||||
Puerto Rico | $ | 7,550 | $ | 6,841 | $ | 1,892 | |||||
United States | 339 | 599 | 292 | ||||||||
Foreign countries | 11,477 | 9,767 | 6,902 | ||||||||
Total current tax provision | $ | 19,366 | $ | 17,207 | $ | 9,086 | |||||
Deferred tax benefit | |||||||||||
Puerto Rico | $ | (4,109 | ) | $ | (2,904 | ) | $ | (3,176 | ) | ||
United States | (216 | ) | (584 | ) | (184 | ) | |||||
Foreign countries | (2,066 | ) | (1,123 | ) | (946 | ) | |||||
Total deferred tax benefit | $ | (6,391 | ) | $ | (4,611 | ) | $ | (4,306 | ) |
EVERTEC, Inc. Notes to Consolidated Financial Statements
fully taxable operations of EVERTEC in Puerto Rico. In addition, Act 40 establishedAs a national gross receiptsresult of this tax based on gross revenues that is includedrate decrease, the deferred taxes were reevaluated as part of December 31, 2018, the alternative minimum tax (“AMT”) calculation. On July 1, 2014, the Governor enacted Act 77 introducing a numberimpact of substantial amendments, including a deduction for the national gross receipts tax instead of including it as part of the computation of the AMT as previously required by Act 40 . On December 22, 2014 the Governor enacted law Act 238 providing a number of technical amendments to Act 77 including the elimination the national gross receipts tax for years 2015 and forward.
this reevaluation was considered immaterial.
The grant establishes a base taxable income amount with respect to EVERTEC Group’s industrialobligations. Industrial development income which amount will continue to be subject to the ordinary income tax rate under existing law. Applicable taxable income in excess of the established base taxable income amount will bethis grant is subject to a preferential rate of 4%. The base taxable income amount will be ratably reduced to zero by the fourth taxable year at which point all of EVERTEC Group’s applicable industrial development income will be taxed at the preferential rate of 4% for the remaining period of the grant.
EVERTEC, Inc. Notes to Consolidated Financial Statements |
EVERTEC, Inc. Notes to Consolidated Financial Statements
2018.
December 31, | ||||||||
(Dollar amounts in thousands) | 2016 | 2015 | ||||||
Deferred tax assets (“DTA”) | ||||||||
Allowance for doubtful accounts | $ | 265 | $ | 420 | ||||
Unearned Income | 2,023 | 1,315 | ||||||
Investment in equity investee | 385 | 292 | ||||||
Alternative minimum tax | 176 | 400 | ||||||
Share based compensation | 697 | 379 | ||||||
Debt Issuance Costs | 127 | — | ||||||
General Reserves | 474 | 87 | ||||||
Derivative liability | 172 | — | ||||||
Other temporary assets | 704 | 592 | ||||||
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Total gross deferred tax assets | 5,023 | 3,485 | ||||||
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Deferred tax liabilities (“DTL”) | ||||||||
Deferred compensation | $ | 1,458 | $ | 1,270 | ||||
Difference between the assigned values and the tax basis of assets and liabilities recognized in purchase | 17,738 | 21,144 | ||||||
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Total gross deferred tax liabilities | 19,196 | 22,414 | ||||||
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Deferred tax liability, net | $ | (14,173 | ) | $ | (18,929 | ) | ||
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December 31, | |||||||
(In thousands) | 2019 | 2018 | |||||
Deferred tax assets (“DTA”) | |||||||
Allowance for doubtful accounts | $ | 271 | $ | 170 | |||
Unearned income | 6,807 | 4,394 | |||||
Investment in equity subsidiary | 51 | 220 | |||||
Share-based compensation | 1,222 | 1,684 | |||||
Debt issuance costs | 249 | 309 | |||||
Accrued liabilities | 1,034 | 1,257 | |||||
Derivative liability | 1,220 | 351 | |||||
Accrual of contract maintenance cost | 134 | 157 | |||||
Impairment of asset | 289 | 289 | |||||
Other | 1,546 | 1,976 | |||||
Total gross deferred tax assets | 12,823 | 10,807 | |||||
Deferred tax liabilities (“DTL”) | |||||||
Capitalized salaries | 1,828 | 1,756 | |||||
Derivative asset | — | 185 | |||||
Difference between the assigned values and the tax basis of assets and liabilities recognized in business combinations | 12,568 | 16,240 | |||||
Other | 557 | 659 | |||||
Total gross deferred tax liabilities | 14,953 | 18,840 | |||||
Deferred tax liability, net | $ | (2,130 | ) | $ | (8,033 | ) |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
Years ended December 31, | ||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | 2014 | |||||||||
Balance, beginning of year | $ | 12,847 | $ | 19,859 | $ | 20,616 | ||||||
Gross increases—tax positions in prior period | — | 53 | — | |||||||||
Gross decreases—tax positions in prior period | (345 | ) | — | (757 | ) | |||||||
Lapse of statute of limitations | (283 | ) | (7,065 | ) | — | |||||||
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Balance, end of year | 12,219 | 12,847 | 19,859 | |||||||||
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EVERTEC, Inc. Notes to Consolidated Financial Statements
UTPs:
Years ended December 31, | |||||||||||
(In thousands) | 2019 | 2018 | 2017 | ||||||||
Balance, beginning of year | $ | 9,238 | $ | 9,148 | $ | 12,219 | |||||
Gross increases—tax positions in prior period | — | 578 | — | ||||||||
Gross decreases—tax positions in prior period | (92 | ) | (488 | ) | — | ||||||
Lapse of statute of limitations | — | — | (3,071 | ) | |||||||
Balance, end of year | $ | 9,146 | $ | 9,238 | $ | 9,148 |
Years ended December 31, | ||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | 2014 | |||||||||
Computed income tax at statutory rates | $ | 32,525 | $ | 31,996 | $ | 29,435 | ||||||
Benefit of net tax-exempt interest income | (52 | ) | (284 | ) | — | |||||||
Differences in tax rates due to multiple jurisdictions | 32 | 37 | (942 | ) | ||||||||
Tax (benefit) expense due to a change in estimate | 258 | (201 | ) | (916 | ) | |||||||
Adjustment to deferred taxes due to changes in enacted tax rate and tax grant | — | — | (731 | ) | ||||||||
Effect of net disallowed operating losses in foreign entities | — | 103 | 83 | |||||||||
Effect of income subject to tax-exemption grant | (24,866 | ) | (23,375 | ) | (19,858 | ) | ||||||
Unrecognized tax benefit | 373 | (11,626 | ) | 1,830 | ||||||||
Other | 1 | 15 | — | |||||||||
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Income tax expense (benefit) | $ | 8,271 | $ | (3,335 | ) | $ | 8,901 | |||||
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EVERTEC, Inc. Notes to Consolidated Financial Statements
Years ended December 31, | |||||||||||
(In thousands) | 2019 | 2018 | 2017 | ||||||||
Computed income tax at statutory rates | $ | 43,753 | $ | 38,674 | $ | 23,477 | |||||
Benefit of net tax-exempt interest income | (126 | ) | (50 | ) | (56 | ) | |||||
Differences in tax rates due to multiple jurisdictions | 1,058 | (678 | ) | 2,353 | |||||||
Tax (benefit) expense due to a change in estimate | (84 | ) | 467 | (334 | ) | ||||||
Effect of income subject to tax-exemption grant | (31,424 | ) | (26,260 | ) | (16,832 | ) | |||||
Unrecognized tax (benefit) expense | (32 | ) | 443 | (3,828 | ) | ||||||
Other | (170 | ) | — | — | |||||||
Income tax expense | $ | 12,975 | $ | 12,596 | $ | 4,780 |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
Years ended December 31, | ||||||||||||
(Dollar amounts in thousands, except per share data) | 2016 | 2015 | 2014 | |||||||||
Net income attributable to EVERTEC, Inc.’s common stockholders | $ | 75,036 | $ | 85,377 | $ | 66,157 | ||||||
Less: non-forfeitable dividends on restricted stock | 12 | 9 | — | |||||||||
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Net income available to common shareholders | $ | 75,024 | $ | 85,368 | $ | 66,157 | ||||||
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Weighted average common shares outstanding | 74,132,863 | 77,066,459 | 78,337,152 | |||||||||
Weighted average potential dilutive common shares(1) | 340,506 | 114,664 | 553,987 | |||||||||
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Weighted average common shares outstanding—assuming dilution | 74,473,369 | 77,181,123 | 78,891,139 | |||||||||
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Net income per common share—basic | $ | 1.01 | $ | 1.11 | $ | 0.84 | ||||||
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Net income per common share—diluted | $ | 1.01 | $ | 1.11 | $ | 0.84 | ||||||
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Years ended December 31, | |||||||||||
(Dollar amounts in thousands, except share and per share data) | 2019 | 2018 | 2017 | ||||||||
Net income attributable to EVERTEC, Inc.’s common stockholders | $ | 103,469 | $ | 86,270 | $ | 55,054 | |||||
Less: non-forfeitable dividends on restricted stock | 3 | 4 | 10 | ||||||||
Net income available to common shareholders | $ | 103,466 | $ | 86,266 | $ | 55,044 | |||||
Weighted average common shares outstanding | 72,099,755 | 72,607,321 | 72,479,807 | ||||||||
Weighted average potential dilutive common shares (1) | 1,376,008 | 1,812,789 | 392,381 | ||||||||
Weighted average common shares outstanding—assuming dilution | 73,475,763 | 74,420,110 | 72,872,188 | ||||||||
Net income per common share—basic | $ | 1.44 | $ | 1.19 | $ | 0.76 | |||||
Net income per common share—diluted | $ | 1.41 | $ | 1.16 | $ | 0.76 |
(1) | Potential common shares consist of common stock issuable under the assumed exercise of stock options |
2018.
Years ended December 31, | ||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | 2014 | |||||||||
Total revenues(1)(2) | $ | 176,473 | $ | 169,433 | $ | 164,336 | ||||||
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Cost of revenues | $ | 2,180 | $ | 1,701 | $ | 1,946 | ||||||
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Rent and other fees | $ | 8,110 | $ | 7,880 | $ | 7,928 | ||||||
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Interest earned from and charged by affiliateInterest income | $ | 211 | $ | 206 | $ | 197 | ||||||
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Years ended December 31, | |||||||||||
(Dollar amounts in thousands) | 2019 | 2018 | 2017 | ||||||||
Total revenues (1)(2) | $ | 209,053 | $ | 188,060 | $ | 177,213 | |||||
Cost of revenues | $ | 5,094 | $ | 3,422 | $ | 2,929 | |||||
Rent and other fees | $ | 8,519 | $ | 8,046 | $ | 7,803 | |||||
Interest earned from an affiliate | |||||||||||
Interest income | $ | 161 | $ | 147 | $ | 154 |
(1) | Total revenues from Popular as a percentage of revenues were |
(2) | Includes revenues generated from investee accounted for under the equity method of |
EVERTEC, Inc. Notes to Consolidated Financial Statements
EVERTEC, Inc. Notes to Consolidated Financial Statements |
December 31, | ||||||||
(Dollar amounts in thousands) | 2016 | 2015 | ||||||
Cash and restricted cash deposits in affiliated bank | $ | 15,918 | $ | 23,872 | ||||
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Other due/to from affiliate | ||||||||
Accounts receivable | $ | 21,461 | $ | 20,196 | ||||
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Prepaid expenses and other assets | $ | 699 | $ | 867 | ||||
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Other long-term assets | $ | 554 | $ | — | ||||
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Accounts payable | $ | 6,300 | $ | 2,687 | ||||
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Unearned income | $ | 14,383 | $ | 11,970 | ||||
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Other long-term liabilities | $ | — | $ | 14 | ||||
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December 31, | |||||||
(In thousands) | 2019 | 2018 | |||||
Cash and restricted cash deposits in affiliated bank | $ | 64,724 | $ | 29,136 | |||
Other due/to from affiliate | |||||||
Accounts receivable | $ | 39,095 | $ | 25,714 | |||
Prepaid expenses and other assets | $ | 4,211 | $ | 2,796 | |||
Operating lease right-of use assets | $ | 20,617 | $ | — | |||
Other long-term assets | $ | 57 | $ | 166 | |||
Accounts payable | $ | 7,250 | $ | 6,344 | |||
Unearned income | $ | 35,489 | $ | 25,401 | |||
Operating lease liabilities | $ | 20,905 | $ | — |
The Company leases certain facilities and equipment under operating leases. Most leases contain renewal options for varying periods. Future minimum rental payments on such operating leases at December 31, 2016 are as follows:
(Dollar amounts in thousands) | Unrelated parties | Related party | Minimum future rentals to related parties and unrelated parties | |||||||||
2017 | $ | 402 | $ | 6,569 | $ | 6,971 | ||||||
2018 | 124 | 6,775 | 6,899 | |||||||||
2019 | 67 | 6,987 | 7,054 | |||||||||
2020 | — | 2,144 | 2,144 | |||||||||
2021 and thereafter | — | 404 | 404 | |||||||||
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$ | 593 | $ | 22,879 | $ | 23,472 | |||||||
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Certain lease agreements contain provisions for future rent increases. The total amount of rental payments due over the lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is recorded as a deferred rent obligation. There was no deferred rent obligation as of December 31, 2016.
Rent expense of office facilities and real estate for the years ended December 31, 2016, 2015 and 2014 amounted to $8.2 million, $8.1 million and $8.2 million, respectively. Also, rent expense for telecommunications and other equipment for the years ended December 31, 2016, 2015 and 2014 amounted to $6.2 million, $5.4 million and $6.1 million, respectively.
EVERTEC, Inc. Notes to Consolidated Financial Statements
EVERTEC, Inc. Notes to Consolidated Financial Statements |
Twelve months ended | ||||
December 31, 2019 | ||||
(in thousands) | ||||
Operating lease cost | $ | 7,573 | ||
Finance lease cost | ||||
Amortization of right-of-use assets | 255 | |||
Interest on lease liabilities | 24 | |||
Variable lease cost | 2,515 | |||
$ | 10,367 |
(In thousands) | ||||
Right-of-use assets obtained in exchange for operating lease obligations: | $ | 940 | ||
Weighted average remaining lease term, in years | ||||
Operating leases | 6 | |||
Finance leases | 1 | |||
Weighted Average Discount Rate | ||||
Operating leases | 4.7 | % | ||
Finance leases | 4.2 | % |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
(In thousands) | Operating Leases | Finance Leases | ||||||
2020 | $ | 6,574 | $ | 307 | ||||
2021 | 5,824 | 34 | ||||||
2022 | 5,483 | 2 | ||||||
2023 | 5,496 | — | ||||||
2024 | 4,995 | — | ||||||
Thereafter | 6,297 | — | ||||||
Total future minimum lease payments | 34,669 | 343 | ||||||
Less: imputed interest | (4,217 | ) | (35 | ) | ||||
Total | $ | 30,452 | $ | 308 | ||||
Reported as of December 31, 2019 | ||||||||
Accrued liabilities | $ | — | $ | 276 | ||||
Operating lease liability - current | 5,773 | — | ||||||
Operating lease liability - long-term | 24,679 | — | ||||||
Other long-term liabilities | — | 32 | ||||||
$ | 30,452 | $ | 308 |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
The Payment Processing segment revenues are comprised of revenues related to providing access to the ATH network 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. Payment Processing 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 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 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.
non-recurring.
Management evaluates the operating results of each of its reportableoperating segments based upon revenues and Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"). Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted EBITDA, as it relates to operating income.segments, is presented in conformity with Accounting Standards Codification 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 earnings.revenues and adjusted EBITDA performance. As such, segment assets are not disclosed in the notes to the accompanying consolidated financial statements.
EVERTEC, Inc. Notes to Consolidated Financial Statements
EVERTEC, Inc. Notes to Consolidated Financial Statements |
(Dollar amounts in thousands) | Merchant Acquiring, net | Payment Processing | Business Solutions | Other | Total | |||||||||||||||
Year ended December 31, 2016 | ||||||||||||||||||||
Revenues | $ | 91,248 | $ | 144,366 | $ | 186,752 | $ | (32,859 | ) (1) | $ | 389,507 | |||||||||
Income from operations | 31,051 | 52,071 | 56,794 | (32,771 | ) (2) | 107,145 | ||||||||||||||
Year ended December 31, 2015 | ||||||||||||||||||||
Revenues | 85,411 | 136,566 | 179,797 | (28,246 | ) (1) | 373,528 | ||||||||||||||
Income from operations | 36,466 | 55,429 | 50,200 | (38,735 | ) (2) | 103,360 | ||||||||||||||
Year ended December 31, 2014 | ||||||||||||||||||||
Revenues | 79,136 | 131,381 | 177,939 | (26,668 | ) (1) | 361,788 | ||||||||||||||
Income from operations | 34,362 | 58,796 | 48,299 | (44,470 | ) (2) | 96,987 |
December 31, 2019 | |||||||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Corporate and Other (1) | Total | |||||||||||||||||
Revenues | $ | 125,544 | $ | 84,453 | $ | 106,388 | $ | 216,662 | $ | (45,673 | ) | $ | 487,374 | ||||||||||
Operating costs and expenses | 61,396 | 65,701 | 62,098 | 138,224 | 15,453 | 342,872 | |||||||||||||||||
Depreciation and amortization | 11,646 | 9,930 | 1,814 | 16,529 | 28,163 | 68,082 | |||||||||||||||||
Non-operating income (expenses) | 1,781 | 286 | 48 | 340 | (2,688 | ) | (233 | ) | |||||||||||||||
EBITDA | 77,575 | 28,968 | 46,152 | 95,307 | (35,651 | ) | 212,351 | ||||||||||||||||
Compensation and benefits (2) | 1,034 | 1,501 | 1,004 | 2,114 | 8,145 | 13,798 | |||||||||||||||||
Transaction, refinancing, and other fees (3) | — | 210 | — | — | (163 | ) | 47 | ||||||||||||||||
Adjusted EBITDA | $ | 78,609 | $ | 30,679 | $ | 47,156 | $ | 97,421 | $ | (27,669 | ) | $ | 226,196 |
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment eliminations predominantly reflect the $39.0 million processing fee from Payments Services - Puerto Rico and Caribbean to Merchant Acquiring, intercompany software sale and developments of $6.7 million from Payment Services- Latin America to Payment Services- Puerto Rico & Caribbean and cost transfer fees from Corporate and Other to Payment Services Latin America for leveraged services and management fees. |
(2) | Primarily represents share-based compensation and other compensation expense and severance payments. |
(3) | Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received. |
December 31, 2018 | |||||||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Corporate and Other (1) | Total | |||||||||||||||||
Revenues | $ | 114,119 | $ | 80,899 | $ | 99,655 | $ | 197,602 | $ | (38,406 | ) | $ | 453,869 | ||||||||||
Operating costs and expenses | 52,006 | 75,240 | 55,778 | 126,232 | 19,485 | 328,741 | |||||||||||||||||
Depreciation and amortization | 9,734 | 9,284 | 1,698 | 13,878 | 28,473 | 63,067 | |||||||||||||||||
Non-operating income (expenses) | 2,420 | 11,750 | 3 | 477 | (11,356 | ) | 3,294 | ||||||||||||||||
EBITDA | 74,267 | 26,693 | 45,578 | 85,725 | (40,774 | ) | 191,489 | ||||||||||||||||
Compensation and benefits (2) | 1,087 | 1,034 | 938 | 2,088 | 8,512 | 13,659 | |||||||||||||||||
Transaction, refinancing, exit activity and other fees (3) | (250 | ) | — | — | — | 7,561 | 7,311 | ||||||||||||||||
Adjusted EBITDA | $ | 75,104 | $ | 27,727 | $ | 46,516 | $ | 87,813 | $ | (24,701 | ) | $ | 212,459 |
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment |
(2) | Primarily represents share-based compensation and other compensation expense and severance payments. |
EVERTEC, Inc. Notes to Consolidated Financial Statements |
(3) | Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, relief contributions related to the 2017 hurricanes and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received. |
December 31, 2017 | |||||||||||||||||||||||
(In thousands) | Payment Services - Puerto Rico & Caribbean | Payment Services - Latin America | Merchant Acquiring, net | Business Solutions | Corporate and Other (1) | Total | |||||||||||||||||
Revenues | $ | 101,687 | $ | 62,702 | $ | 85,778 | $ | 189,077 | $ | (32,100 | ) | $ | 407,144 | ||||||||||
Operating costs and expenses | 57,463 | 66,786 | 57,574 | 119,761 | 19,477 | 321,061 | |||||||||||||||||
Depreciation and amortization | 8,993 | 8,880 | 2,254 | 15,774 | 28,349 | 64,250 | |||||||||||||||||
Non-operating income (expenses) | 2,229 | 8,726 | 1 | 13 | (7,708 | ) | 3,261 | ||||||||||||||||
EBITDA | 55,446 | 13,522 | 30,459 | 85,103 | (30,936 | ) | 153,594 | ||||||||||||||||
Compensation and benefits (2) | 589 | 816 | 573 | 1,687 | 6,090 | 9,755 | |||||||||||||||||
Transaction, refinancing, and other fees (3) | 2,499 | 3,220 | 6,465 | — | 2,495 | 14,679 | |||||||||||||||||
Adjusted EBITDA | $ | 58,534 | $ | 17,558 | $ | 37,497 | $ | 86,790 | $ | (22,351 | ) | $ | 178,028 |
(1) | Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating |
(2) | Primarily represents share-based compensation and other compensation expense and severance payments. |
(3) | Primarily represents fees and expenses |
Years ended December 31, | ||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | 2014 | |||||||||
Segment income from operations | ||||||||||||
Merchant Acquiring | $ | 31,051 | $ | 36,466 | $ | 34,362 | ||||||
Payment Processing | 52,071 | 55,429 | 58,796 | |||||||||
Business Solutions | 56,794 | 50,200 | 48,299 | |||||||||
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Total segment income from operations | 139,916 | 142,095 | 141,457 | |||||||||
Merger related depreciation and amortization and other unallocated expenses(1) | (32,771 | ) | (38,735 | ) | (44,470 | ) | ||||||
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Income from operations | $ | 107,145 | $ | 103,360 | $ | 96,987 | ||||||
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Interest expense, net | (24,240 | ) | (23,771 | ) | (25,444 | ) | ||||||
Earnings of equity method investment | (52 | ) | 147 | 1,140 | ||||||||
Other income (expenses) | 544 | 2,306 | 2,375 | |||||||||
Income tax (expense) benefit | (8,271 | ) | 3,335 | (8,901 | ) | |||||||
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Net income | $ | 75,126 | $ | 85,377 | $ | 66,157 | ||||||
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EVERTEC, Inc. Notes to Consolidated Financial Statements
Years ended December 31, | |||||||||||
(In thousands) | 2019 | 2018 | 2017 | ||||||||
Total EBITDA | $ | 212,351 | $ | 191,489 | $ | 153,594 | |||||
Less: | |||||||||||
Income tax expense | 12,975 | 12,596 | 4,780 | ||||||||
Interest expense, net | 27,594 | 29,257 | 29,145 | ||||||||
Depreciation and amortization | 68,082 | 63,067 | 64,250 | ||||||||
Net Income | $ | 103,700 | $ | 86,569 | $ | 55,419 |
Years ended December 31, | ||||||||||||
(Dollar amounts in thousands) | 2016 | 2015 | 2014 | |||||||||
Revenues(1) | ||||||||||||
Puerto Rico | $ | 326,073 | $ | 322,319 | $ | 313,228 | ||||||
Caribbean | 16,272 | 12,154 | 13,752 | |||||||||
Latin America | 47,162 | 39,055 | 34,808 | |||||||||
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Total revenues | $ | 389,507 | $ | 373,528 | $ | 361,788 | ||||||
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Years ended December 31, | |||||||||||
(Dollar amounts in thousands) | 2019 | 2018 | 2017 | ||||||||
Revenues (1) | |||||||||||
Puerto Rico | $ | 392,628 | $ | 358,436 | $ | 329,533 | |||||
Caribbean | 15,950 | 15,672 | 14,909 | ||||||||
Latin America | 78,796 | 79,761 | 62,702 | ||||||||
Total revenues | $ | 487,374 | $ | 453,869 | $ | 407,144 |
(1) | Revenues are based on subsidiaries’ country of domicile. |
21. 2017. Assets Current assets: Cash Accounts receivable, net Prepaid expenses and other assets Prepaid income tax Deferred tax asset Total current assets Investment in subsidiaries, at equity Total assets Liabilities and stockholders’ equity Current liabilities: Accrued liabilities Accounts payable Income tax payable Total current liabilities Long-term deferred tax liability, net Other long-term liabilities Total liabilities Stockholders’ equity: Common stock Additional paid-in capital Accumulated earnings Accumulated other comprehensive loss, net of tax Total equity Total liabilities and stockholders’ equity Non-operating income (expenses) Equity in earnings of subsidiaries Interest income Other expenses Income before income taxes Income tax (benefit) expense Net income Other comprehensive (loss) income, net of tax Foreign currency translation adjustments Loss on cash flow hedge Total comprehensive income Cash flows from operating activities Cash flows from financing activities Dividends paid Repurchase of common stock Statutory minimum withholding taxes paid on share-based compensation Tax windfall benefits on share-based compensation Issuance of common stock Settlement of stock options Net cash used in financing activities Net increase in cash Cash at beginning of the period Cash at end of the period EVERTEC, Inc. Notes to Consolidated Financial Statements 2016, 20152019, 2018 and 2014,2017, the Company had one major customer which accounted for approximately $174.4$208.0 million or 45%43%, $167.3$186.8 million or 45%41%, and $161.8$175.4 million or 45%43%, respectively, of total revenues. See Note 20., 9% and 10% of the Company’s total revenues for each the years ended December 31, 2016, 20152019, 2018 and 2014, respectively.23—24—Subsequent Events17, 2017,20, 2020, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.10$0.05 per share on the Company’s outstanding shares of common stock. The dividend will be paid on April 3, 2020 to stockholders of record as of the close of business on March 4, 2020. The Board anticipates declaring this dividend in future quarters on a regular basis; however future declarations of dividends are subject to boardBoard of directors’Directors’ approval and may be adjusted as business needs or market conditions change. The cash dividend of $0.10 per share will be paid on March 20, 2017 to stockholders of record as of the close of business on March 1, 2017.On the same day, EVERTEC Group entered into a share purchase promise agreement (Contrato de Promesa de Compraventa de Acciones) by and among Fondo de Inversión Privado Mater, Inversiones San Bernardo SpA, Inversiones Supernova SpA, Inversiones y Asesorías Bayona Limitada, Inversiones Hagerdorn y Morales Limitada, Christian Hagedorn Hitschfeld and Inversiones Vaimaca Limitada (the “Selling Shareholder”) to purchase directly or indirectly 100% of the share capital of EFT Group S.A., a Chilean-based company known commercially as PayGroup at a purchase price of approximately CLP 26,918 million, or approximately US $42 million at current exchange rates, subject to customary adjustments. PayGroup is a payment processing and software company serving primarily financial institutions throughout Latin America.The transaction is subject to customary closing conditions, including receipt of US federal bank regulatory approval, and a special provision that allows the selling shareholders to terminate the transaction if US federal bank regulatory approval has not been secured by June 12, 2017, in which case EVERTEC must pay a penalty of approximately US $2 million. Receipt of US federal bank regulatory approval is dependent on factors outside the control of EVERTEC. There is no assurance that such approval will be obtained by June 12, 2017 or at all.Schedule I December 31, (Dollar amounts in thousands) 2016 2015 $ 3,278 $ 1,673 — 2,068 377 109 21 — — 849 3,676 4,699 126,227 119,605 $ 129,903 $ 124,304 $ 1,697 $ 221 79 47 — 1,111 1,776 1,379 11,641 15,484 11,810 9,227 25,227 26,090 726 750 — 9,718 116,341 95,328 (12,391 ) (7,582 ) 104,676 — $ 129,903 $ 124,304 Schedule I December 31, (In thousands) 2019 2018 Assets Current assets: Cash $ 1,678 $ 1,678 Accounts receivable, net 1,290 2,068 Prepaid expenses and other assets 9 41 Total current assets 2,977 3,787 Investment in subsidiaries, at equity 273,759 221,515 Other Intangible Asset 9 $ — Total assets $ 276,745 $ 225,302 Liabilities and stockholders’ equity Current liabilities: Accrued liabilities $ 260 $ 226 Income tax payable 1,757 1,660 Total current liabilities 2,017 1,886 Deferred tax liability, net 485 5,665 Other long-term liabilities 7,056 6,292 Total liabilities 9,558 13,843 Stockholders’ equity: Common stock 720 723 Additional paid-in capital — 5,783 Accumulated earnings 296,476 228,742 Accumulated other comprehensive loss, net of tax (30,009 ) (23,789 ) Total stockholders’ equity 267,187 211,459 Total liabilities and stockholders’ equity $ 276,745 $ 225,302 Years ended December 31, (Dollar amounts in thousands) 2016 2015 2014 $ 75,373 $ 81,161 $ 74,081 244 232 227 (1,351 ) (1,686 ) (1,994 ) 74,266 79,707 72,314 (770 ) (5,670 ) 6,157 75,036 85,377 66,157 (3,360 ) (545 ) (6,948 ) (1,449 ) (515 ) — $ 70,227 $ 84,317 $ 59,209 Years ended December 31, (In thousands) 2019 2018 2017 Non-operating income (expenses) Equity in earnings of subsidiaries $ 101,078 $ 84,866 $ 49,162 Interest income 367 380 301 Other expenses (1,595 ) (1,396 ) (1,428 ) Income before income taxes 99,850 83,850 48,035 Income tax benefit (3,619 ) (2,420 ) (7,019 ) Net income 103,469 86,270 55,054 Other comprehensive income (loss), net of tax Foreign currency translation adjustments 4,754 (10,564 ) (635 ) (Loss) gain on cash flow hedges (10,974 ) (2,377 ) 2,178 Total comprehensive income $ 97,249 $ 73,329 $ 56,597 Schedule I Years ended December 31, (Dollar amounts in thousands) 2016 2015 2014 $ 71,795 $ 86,237 $ 57,276 (29,696 ) (30,921 ) (31,359 ) (39,946 ) (54,949 ) (26,197 ) (548 ) (306 ) (2,001 ) — — 3,669 — — 543 — — (1,604 ) (70,190 ) (86,176 ) (56,949 ) 1,605 61 327 1,673 1,612 1,285 $ 3,278 $ 1,673 $ 1,612 F-46 Years ended December 31, (In thousands) 2019 2018 2017 Cash flows from operating activities $ 55,092 $ 19,431 $ 29,422 Cash flows from financing activities Dividends paid (14,420 ) (7,273 ) (21,762 ) Repurchase of common stock (31,822 ) (10,000 ) (7,671 ) Withholding taxes paid on share-based compensation (8,849 ) (2,159 ) (1,588 ) Net cash used in financing activities (55,091 ) (19,432 ) (31,021 ) Net (decrease) increase in cash 1 (1 ) (1,599 ) Cash at beginning of the period 1,678 1,679 3,278 Cash at end of the period $ 1,679 $ 1,678 $ 1,679