Evertec(EVTC) - 2019 Q1 - Quarterly Report

Company Information & Filing Details Filing Information EVERTEC, Inc. submitted its 10-Q quarterly report for the period ended March 31, 2019, registered in Puerto Rico as a large accelerated filer, having submitted all required SEC reports and interactive data files - EVERTEC, Inc. filed its 10-Q quarterly report for the period ended March 31, 2019[1] - The company is incorporated in Puerto Rico and designated as a large accelerated filer[1][3] - All required SEC reports and interactive data files have been submitted in the past 12 months[2] Common Stock Information As of April 26, 2019, EVERTEC, Inc. had 72,226,415 shares of common stock outstanding, listed on the New York Stock Exchange under the ticker EVTC Common Stock Outstanding | Indicator | Quantity | | :--- | :--- | | Shares outstanding as of April 26, 2019 | 72,226,415 | | Ticker Symbol | EVTC | | Listed Exchange | New York Stock Exchange | Forward-Looking Statements Disclaimer and Risk Factors Overview This report contains forward-looking statements protected by the Private Securities Litigation Reform Act of 1995, which are not guarantees of future performance and involve significant risks and uncertainties - Forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties[10] - Major risk factors include: * Dependence on Popular, Inc., including for revenue and merchant acquiring business growth * Uncertainty in obtaining regulatory approvals for new business or acquisitions as a regulated entity * Potentially unfavorable terms for renewing client contracts, including with Popular * Reliance on processing systems, technology infrastructure, security systems, and third-party business partners, along with the risk of system breaches * Ability to develop, install, and adopt new software, technology, and computing systems * Reduced customer base due to financial services industry consolidation and failures * Credit risk of merchant customers * Continued market position of the ATH network * Decreased consumer spending due to declining consumer confidence * Reliance on credit card associations and changes in fees * Changes in regulatory, international, legal, tax, political, and economic conditions * Geographic concentration of business in Puerto Rico, including business with the Puerto Rico government, which faces severe fiscal challenges * Additional adverse changes in Puerto Rico's economic conditions, including the debt crisis and population migration * Potential impact of a prolonged federal government shutdown on financial results * Operating international businesses in jurisdictions with economic instability in Latin America and the Caribbean * Ability to execute geographic expansion and acquisition strategies, including challenges in new businesses and integrating acquired operations * Ability to protect intellectual property and defend against third-party infringement claims * Ability to recruit and retain qualified personnel * Ability to comply with U.S. federal, state, local, and foreign regulatory requirements * Changing industry standards and adverse changes in global economic, political, and other conditions * High levels of debt and restrictions in debt agreements * Ability to prevent cybersecurity attacks or information security breaches * Ability to generate sufficient cash to repay debt and generate future profits * Ability to refinance debt * Potential loss of preferential tax rates in Puerto Rico * Risk of counterparty failure to perform obligations under interest rate swap agreements * Uncertainty regarding the ongoing debt restructuring process under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) * Impact of Hurricanes Irma and Maria and their aftermath on the economies of Puerto Rico and the Caribbean * Future catastrophic hurricanes and other potential natural disasters that may affect Puerto Rico and/or the Caribbean * Nature, timing, and amount of any restatement[10][11] Part I. Financial Information Item 1. Financial Statements This section provides EVERTEC, Inc.'s unaudited consolidated condensed balance sheets, statements of income, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes on accounting policies and financial items Unaudited Consolidated Condensed Balance Sheets The unaudited consolidated condensed balance sheets present the company's financial position as of March 31, 2019, and December 31, 2018 Balance Sheet Key Data (as of March 31, 2019 vs December 31, 2018, in thousands USD) | Indicator (thousands USD) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 73,183 | 69,973 | | Restricted cash | 13,318 | 16,773 | | Accounts receivable, net | 96,307 | 100,323 | | Prepaid expenses and other assets | 34,451 | 29,124 | | Total current assets | 217,259 | 216,193 | | Investment in equity method investee | 12,337 | 12,149 | | Property and equipment, net | 45,778 | 36,763 | | Operating lease right-of-use assets | 34,743 | — | | Goodwill | 395,723 | 394,644 | | Other intangible assets, net | 252,592 | 259,269 | | Deferred tax assets | 2,167 | 1,917 | | Net investment in leases | 982 | 1,060 | | Other long-term assets | 7,195 | 5,297 | | Total assets | 968,776 | 927,292 | | Liabilities and Stockholders' Equity | | | | Current liabilities | | | | Accrued liabilities | 44,353 | 57,006 | | Accounts payable | 45,995 | 47,272 | | Unearned revenue | 12,156 | 11,527 | | Income taxes payable | 6,841 | 6,650 | | Current portion of long-term debt | 14,250 | 14,250 | | Short-term borrowings | 15,000 | — | | Current portion of operating lease liabilities | 9,458 | — | | Total current liabilities | 148,053 | 136,705 | | Long-term debt | 520,771 | 524,056 | | Deferred tax liabilities | 9,041 | 9,950 | | Unearned revenue - long-term | 30,199 | 26,075 | | Operating lease liabilities | 25,475 | — | | Other long-term liabilities | 18,739 | 14,900 | | Total liabilities | 752,278 | 711,686 | | Stockholders' Equity | | | | Equity attributable to EVERTEC, Inc. common stockholders | 216,498 | 215,606 | | Total liabilities and stockholders' equity | 968,776 | 927,292 | - As of March 31, 2019, total assets increased to $968.8 million, up from $927.3 million as of December 31, 2018, primarily due to increases in net property and equipment and operating lease right-of-use assets[13] - Total liabilities increased to $752.3 million, mainly driven by increases in short-term borrowings and operating lease liabilities[13] Unaudited Consolidated Condensed Statements of Income and Comprehensive Income The unaudited consolidated condensed statements of income and comprehensive income detail the company's financial performance for the three months ended March 31, 2019, and 2018 Income Statement Key Data (for the three months ended March 31, 2019 vs March 31, 2018, in thousands USD) | Indicator (thousands USD) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Revenue | 118,836 | 110,274 | | Cost of revenues and expenses | 81,431 | 76,719 | | Operating income | 37,405 | 33,555 | | Non-operating income (expenses) | (6,862) | (6,506) | | Income before income tax expense | 30,543 | 27,049 | | Income tax expense | 3,809 | 3,935 | | Net income | 26,734 | 23,114 | | Net income attributable to EVERTEC, Inc. common stockholders | 26,644 | 23,022 | | Total comprehensive income attributable to EVERTEC, Inc. common stockholders | 24,554 | 26,932 | | Basic net income per common share | 0.37 | 0.32 | | Diluted net income per common share | 0.36 | 0.31 | - First quarter 2019 revenue increased by 8% to $118.8 million year-over-year, with operating income growing 11% to $37.4 million[17] - Net income attributable to EVERTEC, Inc. common stockholders increased from $23.0 million to $26.6 million, and diluted net income per common share rose from $0.31 to $0.36[17] Unaudited Consolidated Condensed Statements of Changes in Stockholders' Equity The unaudited consolidated condensed statements of changes in stockholders' equity illustrate the movements in equity for the three months ended March 31, 2019 Stockholders' Equity Changes (for the three months ended March 31, 2019, in thousands USD) | Indicator (thousands USD) | Balance as of December 31, 2018 | Balance as of March 31, 2019 | | :--- | :--- | :--- | | Common stock shares | 72,378,710 | 72,267,445 | | Common stock | 723 | 722 | | Additional paid-in capital | 5,783 | — | | Accumulated earnings | 228,742 | 237,418 | | Accumulated other comprehensive loss | (23,789) | (25,879) | | Non-controlling interests | 4,147 | 4,237 | | Total stockholders' equity | 215,606 | 216,498 | | Key Changes | | | | Share-based compensation recognized | 3,279 | | | Repurchase of common stock | (17,486) | | | Restricted stock units delivered (net of cash settlement) | (5,928) | | | Net income | 26,734 | | | Cash dividends declared | (3,617) | | | Other comprehensive loss | (2,090) | | - As of March 31, 2019, total stockholders' equity increased to $216.5 million, primarily driven by a $26.7 million increase in net income, partially offset by $17.5 million in common stock repurchases and $3.6 million in cash dividends[19] Unaudited Consolidated Condensed Statements of Cash Flows The unaudited consolidated condensed statements of cash flows provide an overview of cash movements from operating, investing, and financing activities for the three months ended March 31, 2019, and 2018 Cash Flow Key Data (for the three months ended March 31, 2019 vs March 31, 2018, in thousands USD) | Indicator (thousands USD) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash from operating activities | 29,339 | 30,368 | | Net cash used in investing activities | (13,956) | (9,365) | | Net cash used in financing activities | (15,628) | (17,359) | | Net (decrease) increase in cash, cash equivalents, and restricted cash | (245) | 3,644 | | Cash, cash equivalents, and restricted cash at end of period | 86,501 | 64,011 | - Net cash from operating activities for Q1 2019 was $29.3 million, a slight decrease from the prior year[21] - Net cash used in investing activities increased to $14.0 million, primarily due to higher capital expenditures[21] - Net cash used in financing activities decreased to $15.6 million, benefiting from a $15.0 million draw on the revolving credit facility, partially offset by $3.6 million in dividend payments and $17.5 million in common stock repurchases[21] Notes to Unaudited Consolidated Condensed Financial Statements Note 1 – The Company and Basis of Presentation EVERTEC, Inc. is a leading full-service transaction processing company in Latin America and the Caribbean, providing merchant acquiring, payment processing, and business process management services - EVERTEC, Inc. is a leading full-service transaction processing company in Latin America and the Caribbean, offering merchant acquiring, payment processing, and business process management services across 26 countries[25] - The company owns and operates the ATH network and provides core banking processing, cash processing, and technology outsourcing services to financial institutions, merchants, businesses, and government agencies[25] - The unaudited consolidated condensed financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and should be read in conjunction with the company's audited consolidated financial statements in its 2018 Form 10-K annual report[26][27] Note 2 - Recent Accounting Pronouncements The company adopted new SEC disclosure updates, FASB leasing (Topic 842), and non-employee share-based payment guidance in Q1 2019, while evaluating other upcoming standards - Adopted Accounting Pronouncements: * SEC Disclosure Updates and Simplification (effective December 2018): Expanded disclosure requirements for equity analysis in interim financial statements, adopted by the company in Q1 2019[28] * FASB Leases Guidance (Topic 842, effective January 1, 2019): Requires recognition of right-of-use (ROU) assets and lease liabilities on the balance sheet; the company adopted a modified retrospective transition method, recognizing $36.2 million in lease liabilities and corresponding ROU assets[29][31] * FASB Non-Employee Share-Based Payment Guidance (issued June 2018): Requires applying Topic 718 requirements to non-employee awards; adopted by the company in Q1 2019 with no material impact on financial statements[33] - Accounting Pronouncements Not Yet Adopted: * Measurement of Credit Losses on Financial Instruments (issued June 2016, effective after December 15, 2019): Replaces the incurred loss impairment method, requiring reflection of expected credit losses; the company is evaluating the impact[35] * Disclosure Framework for Fair Value Measurement (issued August 2018, effective after December 15, 2019): Removes, modifies, and adds disclosure requirements for fair value measurements; the company is evaluating the impact[36] * Implementation Costs for Cloud Service Contracts (issued August 2018, effective after December 15, 2019): Standardizes capitalization requirements for cloud service contract implementation costs; the company is evaluating the impact[37] * Variable Interest Entities Related Parties Guidance (issued October 2018, effective after December 15, 2019): Requires proportional consideration of indirect interests held through common control related parties; the company expects no material impact[39][40] Note 3 - Property and Equipment, Net As of March 31, 2019, the company's net property and equipment increased to $45.78 million from $36.76 million as of December 31, 2018, primarily due to additions in data processing equipment and land, with higher depreciation expenses Property and Equipment, Net (in thousands USD) | Item | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Buildings | 1,436 | 1,440 | | Data processing equipment | 123,802 | 110,673 | | Furniture and fixtures | 7,667 | 7,761 | | Leasehold improvements | 2,638 | 2,625 | | Accumulated depreciation and amortization | (91,036) | (86,990) | | Net depreciable assets | 44,507 | 35,509 | | Land | 1,271 | 1,254 | | Property and equipment, net | 45,778 | 36,763 | - Depreciation and amortization expense for Q1 2019 was $4.0 million, compared to $3.6 million in the prior year period[41] Note 4 - Goodwill and Other Intangible Assets Goodwill increased slightly to $395.7 million due to foreign currency translation, while other intangible assets decreased to $252.6 million primarily from amortization of customer relationships and trademarks Goodwill Changes (in thousands USD) | Operating Segment | Balance as of December 31, 2018 | Foreign Currency Translation Adjustment | Balance as of March 31, 2019 | | :--- | :--- | :--- | :--- | | Payment Services - Puerto Rico & Caribbean | 160,972 | — | 160,972 | | Payment Services - Latin America | 49,728 | 1,079 | 50,807 | | Merchant Acquiring, net | 138,121 | — | 138,121 | | Business Solutions | 45,823 | — | 45,823 | | Total | 394,644 | 1,079 | 395,723 | Other Intangible Assets, Net (in thousands USD) | Item | Net Carrying Amount as of March 31, 2019 | Net Carrying Amount as of December 31, 2018 | | :--- | :--- | :--- | | Customer relationships | 141,853 | 148,168 | | Trademarks | 11,714 | 12,469 | | Software packages | 74,526 | 73,189 | | Non-compete agreements | 24,499 | 25,443 | | Other intangible assets, net | 252,592 | 259,269 | - Amortization expense for other intangible assets was $12.2 million for both Q1 2019 and Q1 2018[45] Note 5 - Debt and Short-Term Borrowings Total debt increased to $556.7 million as of March 31, 2019, primarily due to increased short-term borrowings, with a debt structure including term loans and a revolving credit facility Total Debt (in thousands USD) | Debt Type | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Secured Credit Facility (Term A due 2023) | 215,157 | 217,791 | | Senior Secured Credit Facility (Term B due 2024) | 319,864 | 320,515 | | Senior Secured Revolving Credit Facility | 15,000 | — | | Notes Payable (due April 30, 2021) | 269 | 300 | | Notes Payable (due December 28, 2019) | 6,434 | — | | Total Debt | 556,724 | 538,606 | - As of March 31, 2019, the outstanding principal balances for the Term A and Term B loans were $217.3 million and $324.2 million, respectively, with $82.9 million of additional borrowing capacity available under the revolving credit facility[49] Interest Rate Swap Agreements | Swap Agreement | Effective Date | Maturity Date | Notional Amount | Floating 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% | Note 6 - Financial Instruments and Fair Value Measurements The company categorizes financial instruments into three fair value hierarchy levels, with interest rate swaps and term loans measured at fair value - Fair Value Hierarchy: * Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities * Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly * Level 3: Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date[56] Financial Instrument Fair Value Measurements (in thousands USD) | Item | Fair Value as of March 31, 2019 | Fair Value as of December 31, 2018 | | :--- | :--- | :--- | | Interest rate swap assets | 1,032 | 1,683 | | Interest rate swap liabilities | 7,851 | 4,059 | | Term A Loan due 2023 | 214,806 | 218,625 | | Term B Loan due 2024 | 323,377 | 319,517 | - The secured term loans are not measured at fair value on the balance sheet but are classified as Level 3 within the fair value hierarchy[60] Note 7 – Equity This note details changes in accumulated other comprehensive loss for the three months ended March 31, 2019, which increased to a net loss of $25.88 million due to foreign currency translation and cash flow hedge losses Accumulated Other Comprehensive Loss Changes (in thousands USD) | Item | Foreign Currency Translation Adjustment | Cash Flow Hedges | Total | | :--- | :--- | :--- | :--- | | Balance as of December 31, 2018 (net of tax) | (21,626) | (2,163) | (23,789) | | Other comprehensive income (loss) before reclassifications (net of tax) | 1,965 | (3,773) | (1,808) | | Effective portion reclassified to net income | — | (282) | (282) | | Balance as of March 31, 2019 (net of tax) | (19,661) | (6,218) | (25,879) | Note 8 – Share-based Compensation The company grants restricted stock units (RSUs) under long-term incentive plans, recognizing $3.3 million in share-based compensation expense in Q1 2019, with up to $23.2 million in unrecognized costs - The company grants Restricted Stock Units (RSUs) through its 2017, 2018, and 2019 Long-Term Incentive Plans (LTIPs), with vesting contingent on service, market, and/or performance conditions[61][62][63] Unvested Restricted Stock and RSU Activity (for the three months ended March 31, 2019) | Item | Number of Shares | Weighted-Average Grant Date Fair Value | | :--- | :--- | :--- | | Unvested as of December 31, 2018 | 2,036,163 | 15.09 | | Vested | (715,251) | 28.50 | | Granted | 432,216 | 18.16 | | Unvested as of March 31, 2019 | 1,753,128 | 18.18 | - Share-based compensation expense recognized in Q1 2019 was $3.3 million, compared to $3.6 million in the prior year period[68] - As of March 31, 2019, the maximum unrecognized cost for restricted stock and RSUs was $23.2 million, expected to be recognized over a weighted-average period of 2.1 years[69] Note 9 - Revenues Revenue recognition follows ASC 606, with total revenue of $118.8 million in Q1 2019, primarily from services transferred over time, and an estimated $267.6 million in transaction price for unfulfilled obligations - The company's revenue recognition policy follows ASC 606, recognizing revenue when performance obligations are satisfied and disaggregating revenue by major geographic markets, nature of products and services, and timing of goods and services transfer[70][71][73] Revenue Disaggregated by Timing of Revenue Recognition (in thousands USD) | Timing of Revenue Recognition | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Products and services transferred at a point in time | 3,624 | 1,491 | | Products and services transferred over time | 115,212 | 108,783 | | Total | 118,836 | 110,274 | - As of March 31, 2019, the total transaction price allocated to unsatisfied or partially satisfied performance obligations was estimated at $267.6 million, primarily for professional services related to hosting and maintenance services, typically recognized over the contract term[81] Note 10 - Income Tax Income tax expense for Q1 2019 was $3.81 million, with an effective tax rate of 12.5%, lower than the prior year due to a mix of taxable and exempt income in Puerto Rico and a reduced tax rate for fully taxable operations Income Tax Expense Components (in thousands USD) | Item | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Current tax provision | 4,691 | 5,087 | | Deferred tax benefit | (882) | (1,152) | | Income tax expense | 3,809 | 3,935 | - The effective tax rate for Q1 2019 was 12.5%, down from 14.5% in the prior year period, primarily due to the mix of taxable and exempt income in Puerto Rico and a lower income tax rate for fully taxable operations effective January 1, 2019[144] - As of March 31, 2019, the company had $51.1 million in unremitted foreign subsidiary earnings, which it intends to reinvest indefinitely[85] Note 11 - Net Income per Common Share Basic net income per common share was $0.37 and diluted net income per common share was $0.36 for Q1 2019, both higher than the prior year, with a quarterly cash dividend of $0.05 per share declared Net Income per Common Share (in thousands USD, except per share data) | Indicator | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net income attributable to EVERTEC, Inc. common stockholders | 26,644 | 23,022 | | Less: Non-forfeitable dividends on restricted stock | 6 | 14 | | Net income attributable to EVERTEC, Inc. common stockholders | 26,638 | 23,008 | | Weighted-average common shares outstanding | 72,378,532 | 72,409,462 | | Weighted-average potential dilutive common shares | 1,391,534 | 963,373 | | Weighted-average common shares outstanding - assuming dilution | 73,770,066 | 73,372,835 | | Basic net income per common share | 0.37 | 0.32 | | Diluted net income per common share | 0.36 | 0.31 | - The Board of Directors declared a quarterly cash dividend of $0.05 per share on February 15, 2019, which was paid on March 22, 2019[88] Note 12 - Commitments and Contingencies The company is involved in legal proceedings, but management does not expect a material adverse impact, and has adopted ASC 842 for operating leases, recognizing right-of-use assets and lease liabilities - Management believes that the ultimate disposition of existing legal proceedings will not have a material adverse effect on the company's business, results of operations, financial condition, or cash flows[89][90] - The company adopted ASC 842, Leases, recognizing right-of-use assets and lease liabilities for operating leases on its consolidated condensed balance sheets[91][92] Lease-Related Information (for the three months ended March 31, 2019, in thousands USD) | Indicator | Amount | | :--- | :--- | | Operating lease cost | 1,923 | | Finance lease cost (amortization) | 67 | | Finance lease cost (interest) | 8 | | Variable lease cost | 714 | | Total lease cost | 2,712 | | Weighted-average remaining operating lease term (years) | 7 | | Weighted-average remaining finance lease term (years) | 2 | | Weighted-average operating lease discount rate | 4.8% | | Weighted-average finance lease discount rate | 4.3% | Note 13 - Related Party Transactions Total revenue from related parties, primarily Popular, Inc., was $49.03 million in Q1 2019, representing 41% of total revenue, with significant related party balances in cash, receivables, and unearned revenue Related Party Transactions (in thousands USD) | Item | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Total revenue | 49,030 | 45,535 | | Cost of revenues | 523 | 384 | | Operating lease costs and other expenses | 2,128 | 1,963 | | Interest income from related parties | 28 | 32 | - Revenue from Popular, Inc. accounted for 41% of total revenue[100] Related Party Balances (in thousands USD) | Item | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and restricted cash deposits at related party banks | 27,447 | 29,136 | | Accounts receivable | 30,984 | 25,714 | | Prepaid expenses and other assets | 4,019 | 2,796 | | Operating lease right-of-use assets | 24,105 | — | | Other long-term assets | 130 | 166 | | Accounts payable | 6,353 | 6,344 | | Unearned revenue | 30,915 | 25,401 | | Operating lease liabilities | 24,182 | — | Note 14 - Segment Information The company operates four business segments—Payment Services (Puerto Rico & Caribbean, Latin America), Merchant Acquiring, and Business Solutions—all showing revenue growth in Q1 2019 - Four Business Segments: * Payment Services - Puerto Rico & Caribbean: Provides ATH debit network and other card network access, card processing, payment processing, and EBT services[103] * Payment Services - Latin America: Offers ATH network and other card network access, card processing, payment processing, and licensed software solutions[104] * Merchant Acquiring: Provides services for merchants to accept electronic payment methods, including discount fees, membership fees, and POS equipment rental fees[105] * Business Solutions: Delivers a full suite of business process management solutions such as core bank processing, network hosting, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment services[106][107] Revenue and Adjusted EBITDA by Segment (for the three months ended March 31, 2019, in thousands USD) | Segment | Revenue | Adjusted EBITDA | | :--- | :--- | :--- | | Payment Services - Puerto Rico & Caribbean | 32,017 | 21,263 | | Payment Services - Latin America | 20,831 | 8,256 | | Merchant Acquiring | 25,974 | 11,965 | | Business Solutions | 51,364 | 23,048 | | Corporate and Other | (11,350) | (6,936) | | Total | 118,836 | 57,596 | - In Q1 2019, the Payment Services - Puerto Rico & Caribbean segment's revenue grew by $4.8 million, Merchant Acquiring segment revenue increased by $2.6 million, and Business Solutions segment revenue grew by $3.4 million[155][157][158] Note 15 - Subsequent Events The Board declared a quarterly cash dividend of $0.05 per share on April 25, 2019, payable on June 7, 2019, with future dividends subject to board discretion and various financial factors - The Board of Directors declared a quarterly cash dividend of $0.05 per share on April 25, 2019, payable on June 7, 2019, to shareholders of record as of the close of business on May 6, 2019[115] - Future dividend declarations will be at the discretion of the Board and depend on various factors, including financial condition, earnings, available cash, business opportunities, legal requirements, and debt agreement restrictions[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses EVERTEC's Q1 2019 operating results and financial condition, highlighting revenue and cost changes across segments, liquidity, capital resources, debt obligations, and non-GAAP financial metrics Executive Summary EVERTEC is a leading full-service transaction processing company in Latin America and the Caribbean, leveraging a diversified business model and electronic payment network for competitive advantage - EVERTEC is a leading full-service transaction processing company in Latin America and the Caribbean, providing merchant acquiring, payment services, and business process management services across 26 countries[119] - The company manages an electronic payment network that processes over 2 billion transactions annually and owns and operates the ATH network[119] - The company offers a broad range of transaction processing services through a diversified business model, providing competitive advantages such as competitive products, one-stop-shop services, cross-geographic technology solutions, and value-added data analytics[120] Corporate Background EVERTEC, Inc. was incorporated in Puerto Rico in 2012, with its main operating subsidiary established in 1988, and a significant ownership stake acquired by Apollo Global Management in 2010 - EVERTEC, Inc. was incorporated in Puerto Rico in April 2012, with its primary operating subsidiary, EVERTEC Group, LLC, established in 1988[125] - On September 30, 2010, AP Carib Holdings, Ltd., an affiliate of Apollo Global Management LLC, acquired a 51% indirect ownership interest in EVERTEC Group[125] - In April 2012, EVERTEC Group and Holdings converted to Puerto Rico limited liability companies to enhance consolidated tax efficiency[126] Separation from and Key Relationship with Popular Prior to 2010, EVERTEC Group was a wholly-owned subsidiary of Popular, which remains EVERTEC's largest customer and has a 15-year Master Services Agreement for exclusive service use - Prior to the September 30, 2010, merger, EVERTEC Group was a wholly-owned subsidiary of Popular, the largest financial institution in the Caribbean[127] - Post-merger, Popular retained an indirect ownership interest in EVERTEC Group and became EVERTEC's largest customer[127] - EVERTEC Group entered into a 15-year Master Services Agreement (MSA) with Popular, ensuring Popular's continued exclusive use of EVERTEC's services and granting EVERTEC a right of first refusal for certain new financial technology products and services development[127] Factors and Trends Affecting the Results of Our Operations The company benefits from the shift to electronic payments and financial institution outsourcing, but faces risks from regional economic conditions like Puerto Rico's debt crisis and client migration - The ongoing migration from cash and paper-based payment methods to electronic payments, coupled with relatively low electronic payment penetration in Latin America and the Caribbean, presents significant growth opportunities for the company[128] - The trend of financial and government institutions outsourcing technology systems and processes also provides business opportunities, particularly in the Latin American market where many small and medium-sized institutions have outdated IT legacy systems[128] - The company's financial condition and operating results are partly dependent on the economic and general conditions in the regions where it operates, such as Puerto Rico's debt crisis and hurricane impacts[129][133][134] - Management anticipates continued revenue attrition in Latin America of approximately $3 million to $4 million in 2019 due to client migration[135] Results of Operations (Comparison of Q1 2019 vs Q1 2018) Overall operating results for Q1 2019 show an 8% revenue increase and an 11% operating income increase compared to Q1 2018 Operating Results Overview (in thousands USD) | Indicator | 2019 | 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | 118,836 | 110,274 | 8,562 | 8% | | Cost of revenues and expenses | 81,431 | 76,719 | 4,712 | 6% | | Operating income | 37,405 | 33,555 | 3,850 | 11% | Revenues Total revenue increased by $8.6 million (8%) to $118.8 million in Q1 2019, driven by increased sales volume, core banking transactions, and a one-time electronic benefits contract - Total revenue for Q1 2019 increased by $8.6 million (8%) to $118.8 million[137] - Revenue growth was primarily driven by increased sales volume in Puerto Rico, higher core banking transaction volumes (partially due to recovery from last year's hurricanes), increased network services related to new hosting service projects, and approximately $2.7 million in one-time revenue from an electronic benefits contract[137] Cost of revenues Cost of revenues increased by $2.6 million (5%) to $50 million in Q1 2019, primarily due to higher sales costs and equipment maintenance expenses - Cost of revenues was $50.0 million, an increase of $2.6 million (5%) compared to the prior year period[140] - The increase was primarily associated with higher cost of sales and increased equipment maintenance expenses[140] Selling, general and administrative Selling, general and administrative expenses increased by $1.7 million (13%) in Q1 2019, mainly due to higher payroll and professional fees for specific initiatives - Selling, general and administrative expenses increased by $1.7 million (13%) in Q1 2019[141] - The increase was primarily due to higher payroll expenses and increased legal, consulting, and other professional fees related to specific initiatives[141] Depreciation and amortization Depreciation and amortization expenses increased by $0.4 million (3%) to $16.3 million, primarily due to higher capital expenditures and the impact of development projects going into production - Depreciation and amortization expense was $16.3 million, an increase of $0.4 million (3%)[142] - The increase was primarily due to higher capital expenditures in the prior year and the impact of development projects going into production[142] Non-operating income (expenses) Total non-operating expenses increased by $0.4 million to $6.9 million, mainly due to a $0.6 million decrease in other net income from lower foreign exchange gains Non-Operating Income (Expenses) Overview (in thousands USD) | Indicator | 2019 | 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Interest income | 259 | 157 | 102 | 65% | | Interest expense | (7,551) | (7,679) | 128 | (2)% | | Equity method investment income | 222 | 199 | 23 | 12% | | Other income, net | 208 | 817 | (609) | (75)% | | Total non-operating expenses | (6,862) | (6,506) | (356) | 5% | - Non-operating expenses increased by $0.4 million to $6.9 million, primarily due to a $0.6 million decrease in other net income, resulting from lower foreign exchange gains compared to the prior year period[143] Income tax expense Income tax expense remained stable at $3.8 million, with an effective tax rate of 12.5% in Q1 2019, down from 14.5% in the prior year due to changes in Puerto Rico's tax landscape Income Tax Expense (in thousands USD) | Indicator | 2019 | 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Income tax expense | 3,809 | 3,935 | (126) | (3)% | - Income tax expense was $3.8 million, largely consistent with the prior year period, with an effective tax rate of 12.5% for the quarter, down from 14.5% in Q1 2018, primarily due to the mix of taxable and exempt income in Puerto Rico and a lower income tax rate for fully taxable operations effective January 1, 2019[144] Segment Results of Operations All four business segments demonstrated revenue growth in Q1 2019, with varying impacts on Adjusted EBITDA Payment Services - Puerto Rico & Caribbean This segment's revenue increased by $4.8 million to $32 million, driven by higher ATM and POS transaction volumes, new transaction fees, and a one-time electronic benefits contract Payment Services - Puerto Rico & Caribbean Segment Performance (in thousands USD) | Indicator | 2019 | 2018 | | :--- | :--- | :--- | | Revenue | 32,017 | 27,168 | | Adjusted EBITDA | 21,263 | 17,310 | - Segment revenue increased by $4.8 million to $32.0 million, driven by higher ATM network and POS transaction volumes, new transaction fees, and approximately $2.7 million in one-time revenue from an electronic benefits contract[155] - Adjusted EBITDA increased by $4.0 million to $21.3 million, primarily benefiting from higher revenue associated with the electronic benefits contract[155] Payment Services - Latin America This segment's revenue increased by $0.4 million to $20.8 million, primarily from increased internal software and development revenue, partially offset by prior year one-time sales and client attrition Payment Services - Latin America Segment Performance (in thousands USD) | Indicator | 2019 | 2018 | | :--- | :--- | :--- | | Revenue | 20,831 | 20,391 | | Adjusted EBITDA | 8,256 | 6,993 | - Segment revenue increased by $0.4 million to $20.8 million, primarily driven by increased internal software and development revenue sold to the Payment Services - Puerto Rico & Caribbean segment, partially offset by the non-recurrence of prior year one-time sales and completed implementation projects, as well as client attrition[156] - Adjusted EBITDA increased by $1.3 million, mainly due to higher internal services and license revenue sold to the Payment Services - Puerto Rico & Caribbean segment[156] Merchant Acquiring This segment's revenue increased by $2.6 million to $26 million, driven by higher sales volume and contributions from electronic benefits disaster recovery funds Merchant Acquiring Segment Performance (in thousands USD) | Indicator | 2019 | 2018 | | :--- | :--- | :--- | | Revenue | 25,974 | 23,379 | | Adjusted EBITDA | 11,965 | 10,852 | - Segment revenue increased by $2.6 million to $26.0 million, primarily due to higher sales volume (impacted by hurricanes in the prior year) and contributions from electronic benefits disaster recovery funds[157] - Adjusted EBITDA increased by $1.1 million, mainly due to higher sales volume and increased transaction and non-transaction fees, partially offset by higher transaction processing fees and a decrease in average ticket size[157] Business Solutions This segment's revenue increased by $3.4 million (7%) to $51.4 million, primarily from new services for Popular and incremental hosting services for the Puerto Rico government Business Solutions Segment Performance (in thousands USD) | Indicator | 2019 | 2018 | | :--- | :--- | :--- | | Revenue | 51,364 | 47,921 | | Adjusted EBITDA | 23,048 | 23,165 | - Segment revenue increased by $3.4 million (7%), primarily driven by new services provided to Popular and incremental hosting services for the Puerto Rico government[158] - Adjusted EBITDA decreased by $0.1 million to $23.0 million, mainly due to increased costs to support and maintain Business Solutions applications and higher expenses to support the Business Solutions segment's infrastructure[159][160] Liquidity and Capital Resources The company's primary liquidity source is cash from operations, used for capital expenditures, working capital, and acquisitions, with $73.2 million in cash and cash equivalents as of March 31, 2019 - The company's primary source of liquidity is cash generated from operating activities, which is primarily used for capital expenditures, working capital needs, and acquisitions[161] - As of March 31, 2019, the company had $73.2 million in cash and cash equivalents, with $48.4 million held by subsidiaries outside of Puerto Rico, intended to fund local business operations and potential future investments[162] Cash Flow Overview (in thousands USD) | Indicator | 2019 | 2018 | | :--- | :--- | :--- | | Cash provided by operating activities | 29,339 | 30,368 | | Cash used in investing activities | (13,956) | (9,365) | | Cash used in financing activities | (15,628) | (17,359) | | Net (decrease) increase in cash, cash equivalents, and restricted cash | (245) | 3,644 | - Net cash provided by operating activities in Q1 2019 was $29.3 million, a $1.0 million decrease from the prior year period, primarily due to increased cash payments for accounts payable, accrued liabilities, and income taxes, partially offset by higher accounts receivable collections[166] - Net cash used in investing activities increased by $4.6 million to $14.0 million, mainly due to higher capital expenditures[167] - Net cash used in financing activities decreased by $1.7 million to $15.6 million, primarily due to a $15.0 million draw on the revolving credit facility, partially offset by $3.6 million in dividend payments and $17.5 million in common stock repurchases[168] Capital Resources Capital expenditures primarily fund hardware, software, and property and equipment, with Q1 2019 capex at $14 million and a full-year projection of $40-45 million - The company's capital expenditures are primarily for additions to hardware and computer software (purchased and internally developed) and property and equipment[170] - Capital expenditures for Q1 2019 were approximately $14.0 million, with full-year 2019 capital expenditures projected to be between $40.0 million and $45.0 million[170] Dividend Payments The Board declared a quarterly cash dividend of $0.05 per share on April 25, 2019, payable on June 7, 2019, with future declarations subject to various financial and operational factors - The Board of Directors declared a quarterly cash dividend of $0.05 per share on April 25, 2019, payable on June 7, 2019[171] - Future dividend declarations will be at the discretion of the Board and depend on various factors, including financial condition, earnings, available cash, business opportunities, legal requirements, and debt agreement restrictions[171] Financial Obligations The company's financial obligations include a senior secured credit agreement with term loans and a revolving credit facility, totaling $556.7 million in debt as of March 31, 2019, with interest rate swaps hedging floating rate risk - The company entered into a Senior Secured Credit Agreement on November 27, 2018, comprising a $220.0 million Term A Loan (due 2023), a $325.0 million Term B Loan (due 2024), and a $125.0 million Revolving Credit Facility (due 2023)[172] - As of March 31, 2019, the outstanding principal balances for the Term A and Term B loans were $217.3 million and $324.2 million, respectively, with $82.9 million of additional borrowing capacity available under the revolving credit facility[173] - The company holds two interest rate swap agreements to convert a portion of the Term B Loan's floating interest rate to a fixed rate, hedging against interest rate risk[176] Covenant Compliance As of March 31, 2019, the company's secured leverage ratio was 2.31 to 1.00, with no events of default or defaults occurring - As of March 31, 2019, the secured leverage ratio was 2.31 to 1.00[180] - No events of default or defaults have occurred as of the date of this 10-Q report filing[180] Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share (Non-GAAP Measures) The company uses non-GAAP metrics like EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted EPS to provide a clearer view of comparable operating performance, despite their inherent limitations - The company uses EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per common share as supplemental performance measures to better reflect comparable operating performance and for evaluating the company and others in its industry[181] Non-GAAP Metrics Reconciliation Table (in thousands USD, except per share data) | Indicator | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net income | 26,734 | 23,114 | | Income tax expense | 3,809 | 3,935 | | Net interest expense | 7,292 | 7,522 | | Depreciation and amortization | 16,273 | 15,867 | | EBITDA | 54,108 | 50,438 | | Equity earnings | (222) | (199) | | Compensation and benefits | 3,439 | 3,829 | | Transaction, refinancing, and other expenses | 271 | (100) | | Adjusted EBITDA | 57,596 | 53,968 | | Operating depreciation and amortization | (7,965) | (7,321) | | Cash interest expense, net | (7,132) | (6,368) | | Income tax expense | (5,300) | (5,567) | | Non-controlling interests | (112) | (138) | | Adjusted Net Income | 37,087 | 34,574 | | Adjusted Diluted Earnings per Common Share | 0.50 | 0.47 | - Limitations of Non-GAAP Measures: * Do not reflect cash expenditures for capital expenditures or future contractual commitments * Do not reflect changes in working capital or cash requirements * Do not reflect cash requirements for asset replacements * Do not reflect interest expense or cash requirements for principal and interest payments on debt * Do not reflect income tax expense or cash requirements for income tax payments * Comparability with other companies, including those in the same industry, may be limited due to differences in calculation methods[182] Off Balance Sheet Arrangements As of March 31, 2019, the company had no off-balance sheet arrangements - As of March 31, 2019, the company had no off-balance sheet items[187] Seasonality The company's payment business experiences moderate increases in activity during traditional holiday shopping seasons and national holidays, consistent with consumer spending patterns - The company's payment business typically experiences a moderate increase in activity during traditional holiday shopping seasons and other national holidays, consistent with consumer spending patterns[188] Effect of Inflation While inflation in certain input costs impacts operating results, the net effect on operating performance has been minimal over the past three years due to increased sales processes and cost-cutting measures - Although inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, impact operating results, the net effect of inflation on operating performance has been minimal over the past three years, as overall inflation has been offset by increased sales processes and cost-cutting measures[189] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks primarily from interest rate fluctuations and foreign exchange, managing interest rate risk through swaps and monitoring foreign currency translation adjustments Interest rate risks The company is exposed to interest rate fluctuations on its floating-rate debt, with a 100 basis point increase potentially raising annual interest expense by $3.4 million, mitigated by interest rate swaps - The company has issued floating-rate debt, exposing it to interest rate fluctuations; as of March 31, 2019, a 100 basis point increase in interest rates above the floor would increase annual interest expense by approximately $3.4 million[191] - The company uses interest rate swap agreements to convert a portion of its floating-rate debt to a fixed rate, thereby hedging against interest rate risk[192] - Interest rate swap agreements expose the company to counterparty credit risk, but the company expects its counterparties to fulfill their obligations[193] Foreign exchange risk Operating in local currencies in Latin America exposes the company to foreign currency translation adjustments, which are recorded in accumulated other comprehensive loss - The company conducts business in local currencies in certain Latin American countries, resulting in foreign currency translation adjustments that are recorded in accumulated other comprehensive loss[194] - As of March 31, 2019, the company's accumulated other comprehensive loss included $19.7 million in unfavorable foreign currency translation adjustments, compared to $21.6 million as of December 31, 2018[194] Item 4. Controls and Procedures The CEO and CFO assessed the company's disclosure controls and procedures as effective as of March 31, 2019, with no material changes to internal controls over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures The company's CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2019 - As of March 31, 2019, the company's Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[196] Changes in Internal Control Over Financial Reporting No material changes occurred in internal control over financial reporting during the quarter, and controls were implemented to assess the new leasing accounting standard's impact - No material changes in the company's internal control over financial reporting occurred during the fiscal quarter ended March 31, 2019[197] - The company implemented internal controls to ensure the adequate assessment and proper accounting for the impact of the new leasing accounting standard, and its adoption did not result in a material change to internal control over financial reporting[197] Part II. Other Information Item 1. Legal Proceedings The company is a defendant in various legal proceedings, but management believes the total liabilities will not materially adversely affect its financial condition, operating results, or cash flows - The company is a defendant in various legal proceedings or arbitration proceedings arising in the normal course of business[200] - Management believes that the aggregate liabilities, if any, resulting from these proceedings will not have a material adverse effect on the company's financial condition, results of operations, and cash flows[200] Item 1A. Risk Factors Risk factors disclosed in this quarterly report are consistent with the 2018 Form 10-K, and investors are reminded of potential unknown or currently immaterial risks that could adversely affect the business - The risk factors disclosed in this quarterly report are not materially different from those disclosed in the company's annual report on Form 10-K for the year ended December 31, 2018[201] - The company reminds investors that other unknown or currently immaterial risks may exist that could also materially adversely affect its business, financial condition, or results of operations[202] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 618,573 shares of common stock at an average price of $28.269 per share during Q1 2019 under its publicly announced stock repurchase program, with approximately $44.86 million remaining for repurchase Common Stock Repurchase Summary (for the three months ended March 31, 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans | | :--- | :--- | :--- | :--- | :--- | | February 1, 2019 - February 28, 2019 | 103,480 | 28.874 | 103,480 | | | March 1, 2019 - March 31, 2019 | 515,093 | 28.147 | 515,093 | | | Total | 618,573 | 28.269 | 618,573 | 44,859,539 | - The company announced a stock repurchase program on February 17, 2016, extended on November 2, 2017, authorizing the repurchase of up to $120.0 million of its common stock, extended to expire on December 31, 2020[203] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities during the reporting period[204] Item 4. Mine Safety Disclosures Not applicable - Not applicable[205] Item 5. Other Information No other information is disclosed in this reporting period - No other information is disclosed in this reporting period[206] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q report, including restricted stock unit award agreements, CEO and CFO certifications, and XBRL documents - Main exhibits include: * Restricted Stock Unit Award Agreements (for executive officers) * CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906 * XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase[208] SIGNATURES This report was officially signed by EVERTEC, Inc.'s CEO, Morgan Schuessler, and CFO, Joaquin A. Castrillo-Salgado, on May 3, 2019 - This report was signed by Morgan Schuessler, Chief Executive Officer, and Joaquin A. Castrillo-Salgado, Chief Financial Officer of EVERTEC, Inc., on May 3, 2019[214][215]