Evertec(EVTC) - 2019 Q3 - Quarterly Report

FORM 10-Q General Information Company Information This section provides basic registrant details for EVERTEC, Inc., including its trading symbol, exchange listing, filer status, and the number of outstanding common shares as of a recent date - Registrant Name: EVERTEC, Inc[2] - Trading Symbol: EVTC on the New York Stock Exchange[2] - Filer Status: Large accelerated filer[5] - Shares Outstanding (as of October 25, 2019): 71,925,843 shares of common stock[6] Table of Contents Forward-Looking Statements Nature of Forward-Looking Statements This section clarifies that the report contains forward-looking statements, identifiable by specific terminology, and warns readers that actual results may differ materially due to various risks and uncertainties - Forward-looking statements are identified by terms such as 'believes,' 'expects,' 'may,' 'estimates,' 'will,' 'should,' 'plans,' or 'anticipates'[10] - Readers are cautioned that actual results may vary materially from those in forward-looking statements due to significant risks and uncertainties[10] Key Risk Factors Key risks include reliance on Popular, Inc. for a significant portion of revenue, the need for regulatory approval for new activities, the ability to renew client contracts, dependence on processing systems and technology, and the potential impact of the Puerto Rico fiscal crisis and natural disasters - Reliance on the relationship with Popular, Inc. for a significant portion of revenues and to grow the merchant acquiring business[10] - The likelihood of being required to obtain regulatory approval for new activities or businesses, which may make transactions more expensive or impossible to complete[10] - Dependence on processing systems, technology infrastructure, security systems, and personnel, with risks if systems are hacked or compromised[10] - Uncertainty of the pending debt restructuring process under Title III of PROMESA and actions by the Puerto Rico government or PROMESA Board[11] - The aftermath of Hurricanes Irma and Maria and their continued impact on the economies of Puerto Rico and the Caribbean, as well as the possibility of future catastrophic hurricanes[11] Part I. Financial Information Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, statements of changes in stockholders' equity, and cash flow statements, along with their accompanying notes, for the periods ended September 30, 2019 and December 31, 2018 (for balance sheet) or September 30, 2019 and 2018 (for income, equity, and cash flow) Unaudited Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :----- | :------- | | Total Assets | $980,066 | $927,292 | $52,774 | 5.69% | | Total Liabilities | $730,810 | $711,686 | $19,124 | 2.69% | | Total Equity | $249,256 | $215,606 | $33,650 | 15.61% | | Cash and cash equivalents | $102,535 | $69,973 | $32,562 | 46.54% | | Accounts receivable, net | $92,195 | $100,323 | $(8,128) | -8.10% | | Total current assets | $244,534 | $216,193 | $28,341 | 13.11% | | Total current liabilities | $128,337 | $136,705 | $(8,368) | -6.12% | Unaudited Condensed Consolidated Statements of Income and Comprehensive Income Condensed Consolidated Statements of Income Highlights (in thousands, except per share) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | Change | % Change | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | Change | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :----- | :------- | :-------------------------- | :-------------------------- | :----- | :------- | | Revenues | $118,804 | $112,017 | $6,787 | 6.06% | $360,188 | $335,638 | $24,550 | 7.31% | | Total operating costs and expenses | $84,002 | $79,656 | $4,346 | 5.46% | $250,293 | $239,082 | $11,211 | 4.69% | | Income from operations | $34,802 | $32,361 | $2,441 | 7.54% | $109,895 | $96,556 | $13,339 | 13.81% | | Net income attributable to EVERTEC, Inc.'s common stockholders | $24,754 | $22,997 | $1,757 | 7.64% | $78,456 | $66,071 | $12,385 | 18.74% | | Net income per common share - basic | $0.34 | $0.32 | $0.02 | 6.25% | $1.09 | $0.91 | $0.18 | 19.78% | | Net income per common share - diluted | $0.34 | $0.31 | $0.03 | 9.68% | $1.07 | $0.89 | $0.18 | 20.22% | Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (in thousands) | Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Balance at Dec 31, 2018 (2017) | $215,606 | $147,976 | | Net income | $78,657 | $66,322 | | Repurchase of common stock | $(28,449) | $0 | | Cash dividends declared | $(10,824) | $(3,636) | | Balance at Sep 30, 2019 (2018) | $249,256 | $214,952 | Unaudited Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | Change | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :----- | :------- | | Net cash provided by operating activities | $136,167 | $128,443 | $7,724 | 6.01% | | Net cash used in investing activities | $(49,862) | $(24,990) | $(24,872) | 99.53% | | Net cash used in financing activities | $(57,117) | $(59,824) | $2,707 | -4.52% | | Net increase in cash, cash equivalents and restricted cash | $29,188 | $43,629 | $(14,441) | -33.10% | | Cash, cash equivalents and restricted cash at end of period | $115,934 | $103,996 | $11,938 | 11.48% | Notes to Unaudited Condensed Consolidated Financial Statements Note 1 – The Company and Basis of Presentation EVERTEC, Inc. is a leading full-service transaction processing business in Latin America and the Caribbean, based in Puerto Rico, operating across 26 countries and owning the ATH network. The financial statements are unaudited, prepared in accordance with GAAP, and should be read with the 2018 Annual Report on Form 10-K - EVERTEC is a leading full-service transaction processing business in Latin America and the Caribbean, providing services across 26 countries[30] - The company owns and operates the ATH network, one of the leading debit networks in Latin America[30] - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and should be read in conjunction with the Audited Consolidated Financial Statements for the year ended December 31, 2018, included in the Company's Annual Report on Form 10-K[31][32] Note 2 - Recent Accounting Pronouncements The company is preparing to adopt several new accounting standards effective January 1, 2020, including updates on credit losses (ASC 326), fair value measurements (Topic 820), cloud computing arrangement costs, and related party guidance for variable interest entities. Most are not expected to have a material impact on consolidated financial statements, except for potential impact on trade receivables for credit losses - The company will adopt updated guidance for credit losses (ASC 326) effective January 1, 2020, using a modified retrospective approach, expecting an impact on trade receivables but not a material effect on consolidated financial statements[33] - Updated disclosure framework for fair value measurements (Topic 820) will be effective after December 15, 2019, but is not expected to impact disclosures as the company currently has no Level 3 assets or liabilities[34][37] - Updated guidance for cloud computing arrangement costs will be adopted effective January 1, 2020, and applied prospectively[38] - Updated guidance for related party variable interest entities will be adopted effective January 1, 2020, with no expected impact on consolidated financial statements[39] Note 3 - Property and Equipment, Net Net property and equipment increased to $43.2 million at September 30, 2019, from $36.8 million at December 31, 2018. Depreciation and amortization expense for property and equipment increased for both the three and nine months ended September 30, 2019, compared to the prior year Property and Equipment, Net (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | Change | % Change | | :-------------------------- | :----------- | :----------- | :----- | :------- | | Property and equipment, net | $43,179 | $36,763 | $6,416 | 17.45% | Depreciation and Amortization Expense (Property and Equipment, in millions) | Period | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Three months ended Sep 30 | $4.1 | $3.7 | $0.4 | 10.81% | | Nine months ended Sep 30 | $12.4 | $10.9 | $1.5 | 13.76% | Note 4 – Goodwill and Other Intangible Assets Goodwill increased slightly to $395.8 million at September 30, 2019, primarily due to foreign currency translation adjustments in Latin America, with no impairment losses recognized. Other intangible assets, net, decreased to $244.7 million, with amortization expense increasing for both the three and nine months ended September 30, 2019 Goodwill by Segment (in thousands) | Segment | Dec 31, 2018 | Sep 30, 2019 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :----- | :------- | | Payment Services - Puerto Rico & Caribbean | $160,972 | $160,972 | $0 | 0.00% | | Payment Services - Latin America | $49,728 | $50,932 | $1,204 | 2.42% | | Merchant Acquiring, net | $138,121 | $138,121 | $0 | 0.00% | | Business Solutions | $45,823 | $45,823 | $0 | 0.00% | | Total Goodwill | $394,644 | $395,848 | $1,204 | 0.31% | - No goodwill impairment losses were recognized as of September 30, 2019[44] Other Intangible Assets, Net (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | Change | % Change | | :-------------------------- | :----------- | :----------- | :----- | :------- | | Other intangible assets, net | $244,672 | $259,269 | $(14,597) | -5.63% | Amortization Expense (Other Intangibles, in millions) | Period | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Three months ended Sep 30 | $12.9 | $11.9 | $1.0 | 8.40% | | Nine months ended Sep 30 | $38.0 | $36.4 | $1.6 | 4.40% | Note 5 – Debt and Short-Term Borrowings Total debt decreased slightly to $531.2 million at September 30, 2019, from $538.6 million at December 31, 2018. The company has secured credit facilities (2023 Term A, 2024 Term B, and a revolving credit facility) and notes payable. Interest rate swap agreements are in place to convert a portion of variable interest rate debt to fixed Total Debt (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | Change | % Change | | :-------------------------- | :----------- | :----------- | :----- | :------- | | Total debt | $531,174 | $538,606 | $(7,432) | -1.38% | - Unpaid principal balance of the 2023 Term A Loan was $211.8 million and the 2024 Term B Loan was $322.6 million at September 30, 2019[50] - Additional borrowing capacity for the Revolving Facility was $116.9 million at September 30, 2019[50] - The company has two interest rate swap agreements (2015 Swap for $200 million, 2018 Swap for $250 million) to convert a portion of the 2024 Term B Loan from variable to fixed interest rates[53] Note 6 – Financial Instruments and Fair Value Measurements The company uses a fair value hierarchy (Level 1, 2, 3) for financial instruments, maximizing observable inputs. Interest rate swaps are classified as Level 2 liabilities at September 30, 2019, with a carrying and fair value of $16.7 million. Secured term loans are categorized as Level 3 - Fair value measurement provisions establish a hierarchy (Level 1, 2, 3) requiring maximization of observable inputs[57] Fair Value of Financial Instruments (in thousands) | Metric | Sep 30, 2019 (Fair Value) | Dec 31, 2018 (Fair Value) | | :-------------------------- | :------------------------ | :------------------------ | | Interest rate swap (liability) | $16,687 | $4,059 | | Interest rate swap (asset) | $0 | $1,683 | | 2023 Term A | $209,103 | $218,625 | | 2024 Term B | $324,579 | $319,517 | - Secured term loans, not measured at fair value in the balance sheets, would be categorized as Level 3 in the fair value hierarchy[62] Note 7 – Equity Accumulated other comprehensive loss increased to $(33.1) million at September 30, 2019, from $(23.8) million at December 31, 2018, primarily due to foreign currency translation adjustments and cash flow hedges Accumulated Other Comprehensive Loss (in thousands) | Metric | Dec 31, 2018 | Sep 30, 2019 | Change | % Change | | :------------------------------------ | :----------- | :----------- | :----- | :------- | | Balance, net of tax | $(23,789) | $(33,094) | $(9,305) | 39.12% | - The increase in accumulated other comprehensive loss was driven by foreign currency translation adjustments and (loss) gain on cash flow hedges[63] Note 8 – Share-based Compensation The company grants restricted stock units (RSUs) under Long-term Incentive Plans (LTIPs) with service, market, and/or performance conditions. Share-based compensation expense increased to $3.5 million for the three months and $10.2 million for the nine months ended September 30, 2019, compared to the prior year periods. Unrecognized cost for RSUs was $16.7 million as of September 30, 2019, expected to be recognized over 1.7 years - RSUs are granted under LTIPs with vesting dependent upon service, market, and/or performance conditions, including Adjusted EBITDA and a Total Shareholder Return (TSR) modifier[64][65][66][68] Share-based Compensation Expense (in millions) | Period | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Three months ended Sep 30 | $3.5 | $2.4 | $1.1 | 45.83% | | Nine months ended Sep 30 | $10.2 | $9.7 | $0.5 | 5.15% | - As of September 30, 2019, the maximum unrecognized cost for restricted stock and RSUs was $16.7 million, expected to be recognized over a weighted average period of 1.7 years[71] Note 9 - Revenues The company recognizes revenue following ASC 606, measuring it based on consideration specified in contracts and allocating transaction price to performance obligations. Revenue is disaggregated by geographical markets, product/service nature, and timing of transfer. Most revenue is recognized over time. Contract assets and liabilities (unearned income) are also reported - Revenue recognition policy follows ASC 606, measuring revenue on consideration specified in contracts and allocating transaction price to performance obligations[72][73] - Revenue is disaggregated by primary geographical markets, nature of products and services, and timing of transfer of goods and services[75] Revenue Disaggregation by Timing of Recognition (in thousands) | Timing of Recognition | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Products and services transferred at a point in time | $3,210 | $1,781 | $9,844 | $4,612 | | Products and services transferred over time | $115,594 | $110,236 | $350,344 | $331,026 | | Total Revenues | $118,804 | $112,017 | $360,188 | $335,638 | - Unearned income (contract liabilities) amounted to $14.6 million (current) and $29.7 million (long-term) at September 30, 2019, mainly related to upfront fees for implementation or set up activities[82] - The estimated aggregate transaction price allocated to unsatisfied or partially satisfied performance obligations at September 30, 2019, is $261.7 million, primarily for professional service fees recognized over 2 to 5 years[83] Note 10 - Income Tax Income tax expense for the three months ended September 30, 2019, was $3.7 million (effective rate 13.0%), and for the nine months, it was $10.0 million (effective rate 11.3%). The changes are influenced by foreign taxes, shifts in Puerto Rico taxable operations, and discrete items in LATAM. The company intends to indefinitely reinvest unremitted foreign earnings Income Tax Expense (in thousands) | Period | 2019 | 2018 | Change | % Change | | :-------------------------- | :----- | :----- | :----- | :------- | | Three months ended Sep 30 | $3,720 | $3,302 | $418 | 12.66% | | Nine months ended Sep 30 | $10,018 | $10,349 | $(331) | -3.20% | Effective Tax Rate | Period | 2019 | 2018 | | :-------------------------- | :----- | :----- | | Three months ended Sep 30 | 13.0% | 12.5% | | Nine months ended Sep 30 | 11.3% | 13.5% | - The company has $58.5 million of unremitted earnings from foreign subsidiaries, which are intended to be indefinitely reinvested, thus no deferred tax liability is recognized on them[86] Note 11 - Net Income per Common Share Basic net income per common share was $0.34 for the three months and $1.09 for the nine months ended September 30, 2019. Diluted net income per common share was $0.34 and $1.07 for the same periods, respectively. The Board declared a quarterly cash dividend of $0.05 per share for the first three quarters of 2019 Net Income Per Common Share (GAAP) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income per common share - basic | $0.34 | $0.32 | $1.09 | $0.91 | | Net income per common share - diluted | $0.34 | $0.31 | $1.07 | $0.89 | - The Board declared a quarterly cash dividend of $0.05 per share of common stock on February 15, April 25, and July 25, 2019[90] Note 12 - Commitments and Contingencies The company is involved in various legal proceedings, but management believes the final disposition will not have a material adverse effect. The company adopted ASC 842 for leases, recognizing operating lease ROU assets and liabilities. Total lease cost for the nine months ended September 30, 2019, was $8.2 million - Management believes that the final disposition of legal proceedings will not have a material adverse effect on the business, results of operations, financial condition, or cash flows[91] - The company's leases accounting policy follows ASC 842, recognizing operating lease right-of-use (ROU) assets and liabilities[92][93] Total Lease Cost (in thousands) | Period | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Operating lease cost | $1,907 | $5,833 | | Finance lease cost (amortization of ROU assets + interest) | $68 | $216 | | Variable lease cost | $700 | $2,117 | | Total lease cost | $2,675 | $8,166 | - Weighted average remaining lease term for operating leases is 6.0 years and for finance leases is 1.0 year. Weighted average discount rates are 4.5% for operating leases and 4.2% for finance leases[100] Note 13 – Related Party Transactions Transactions with related parties, primarily Popular, Inc., remain significant. Total revenues from related parties were $52.7 million for the three months and $154.0 million for the nine months ended September 30, 2019, representing 44% and 43% of total revenues, respectively. Key balances include cash deposits, accounts receivable, and unearned income with affiliates Related Party Transactions (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $52,702 | $47,216 | $154,022 | $139,954 | | Cost of revenues | $1,719 | $840 | $3,580 | $2,192 | | Operating lease cost and other fees | $1,959 | $2,016 | $6,177 | $5,984 | | Interest income | $43 | $37 | $98 | $101 | - Popular revenues as a percentage of total revenues were 44% for the three months ended September 30, 2019, and 43% for the nine months ended September 30, 2019[103] Related Party Balances (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :------------------------------------------ | :----------- | :----------- | | Cash and restricted cash deposits in affiliated bank | $47,442 | $29,136 | | Accounts receivable | $35,054 | $25,714 | | Unearned income | $32,177 | $25,401 | Note 14 – Segment Information The company operates in four segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America, Merchant Acquiring, and Business Solutions. Performance is assessed based on revenues and Adjusted EBITDA. Corporate and Other includes overhead and intersegment eliminations - The company operates in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America, Merchant Acquiring, and Business Solutions[106] - Management evaluates the operating results of each segment based upon revenues and Adjusted EBITDA[113] Segment Revenues and Adjusted EBITDA (3 Months Ended Sep 30, 2019 vs 2018, in thousands) | Segment | 2019 Revenues | 2018 Revenues | Revenue Change | Revenue % Change | 2019 Adj. EBITDA | 2018 Adj. EBITDA | Adj. EBITDA Change | Adj. EBITDA % Change | | :------------------------------------ | :------------ | :------------ | :------------- | :--------------- | :--------------- | :--------------- | :----------------- | :------------------- | | Payment Services - Puerto Rico & Caribbean | $30,411 | $28,951 | $1,460 | 5.04% | $18,377 | $19,244 | $(867) | -4.51% | | Payment Services - Latin America | $20,596 | $18,907 | $1,689 | 8.93% | $7,588 | $6,551 | $1,037 | 15.83% | | Merchant Acquiring | $26,436 | $24,486 | $1,950 | 7.96% | $11,208 | $10,948 | $260 | 2.37% | | Business Solutions | $52,945 | $48,831 | $4,114 | 8.42% | $25,082 | $21,744 | $3,338 | 15.35% | Segment Revenues and Adjusted EBITDA (9 Months Ended Sep 30, 2019 vs 2018, in thousands) | Segment | 2019 Revenues | 2018 Revenues | Revenue Change | Revenue % Change | 2019 Adj. EBITDA | 2018 Adj. EBITDA | Adj. EBITDA Change | Adj. EBITDA % Change | | :------------------------------------ | :------------ | :------------ | :------------- | :--------------- | :--------------- | :--------------- | :----------------- | :------------------- | | Payment Services - Puerto Rico & Caribbean | $92,910 | $84,162 | $8,748 | 10.39% | $59,959 | $54,912 | $5,047 | 9.19% | | Payment Services - Latin America | $62,533 | $58,534 | $3,999 | 6.83% | $23,617 | $18,340 | $5,277 | 28.77% | | Merchant Acquiring | $79,203 | $73,829 | $5,374 | 7.28% | $35,424 | $34,438 | $986 | 2.86% | | Business Solutions | $159,492 | $145,985 | $13,507 | 9.25% | $72,396 | $68,061 | $4,335 | 6.37% | Note 15 – Subsequent Events On October 23, 2019, the Board declared a regular quarterly cash dividend of $0.05 per share, payable on December 6, 2019. Future dividend declarations are subject to Board approval and various factors - On October 23, 2019, the Board declared a regular quarterly cash dividend of $0.05 per share on outstanding common stock, payable on December 6, 2019[121] - Future dividend declarations are at the Board's discretion and depend on factors including financial condition, earnings, available cash, business opportunities, legal requirements, and debt agreements[189] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's discussion and analysis of the company's financial condition and results of operations for the three and nine months ended September 30, 2019 and 2018, highlighting key trends, segment performance, liquidity, and capital resources Executive Summary EVERTEC is a leading full-service transaction processing business in Latin America and the Caribbean, offering merchant acquiring, payment services, and business process management. Its diversified model, scalable technology, and recurring revenue base provide competitive advantages for growth - EVERTEC is a leading full-service transaction processing business in Latin America and the Caribbean, serving 26 countries from its base in Puerto Rico[125] - The company manages electronic payment networks processing over two billion transactions annually and owns and operates the ATH network[125] - EVERTEC's diversified business model provides competitive advantages, including offering a range of services from a single source, serving customers across geographies, and using data to provide value-added services[126] - The business model is characterized by recurring revenue, scalability, significant operating margins, and moderate capital expenditure requirements, enabling organic growth[130] Corporate Background and Key Relationships EVERTEC, Inc. was formed in 2012 as the parent company of EVERTEC Group, which was formerly a wholly-owned subsidiary of Popular, Inc. Popular remains EVERTEC's largest customer under a 15-year Master Services Agreement (MSA), which includes exclusivity and a right of first refusal for new financial technology products - EVERTEC Group was formerly a wholly-owned subsidiary of Popular, Inc., which retained an indirect ownership interest and is now EVERTEC's largest customer[131][133] - A 15-year Master Services Agreement (MSA) with Popular ensures ongoing and exclusive use of EVERTEC's services[133] - Popular granted EVERTEC a right of first refusal on the development of certain new financial technology products and services for the duration of the MSA[133] Factors and Trends Affecting the Results of Our Operations The company benefits from the global shift to electronic payments and the outsourcing of technology systems by financial institutions in Latin America and the Caribbean. However, operations are affected by economic conditions, the Puerto Rico debt crisis (PROMESA), anticipated client attrition in Latin America, and ongoing pricing negotiations with Popular - The ongoing migration from cash and paper methods to electronic payments, coupled with lower penetration in Latin America and the Caribbean, presents substantial growth opportunities[134] - The company benefits from the trend of financial institutions and government agencies outsourcing technology systems and processes, especially for outdated IT legacy systems in Latin American markets[134] - Financial condition and results are dependent on economic conditions in operating geographies, including the impact of PROMESA and the Puerto Rico debt crisis[137][138][139] - Management estimates a revenue attrition of approximately $2 million to $3 million in Latin America for previously disclosed client migrations anticipated in 2019[140] - The company is currently negotiating with Popular regarding a disagreement on certain pricing terms under the Master Services Agreement (MSA)[141] Results of Operations Overall revenues increased by 6% for the three months and 7% for the nine months ended September 30, 2019, driven by value-added solutions, new managed services, pricing actions, and project completions. Operating costs and expenses also increased, leading to an 8% increase in income from operations for the quarter and 14% for the nine months. Non-operating expenses increased due to foreign exchange losses, while income tax expense saw minor fluctuations Key Financial Performance (3 Months Ended Sep 30, 2019 vs 2018, in thousands) | Metric | 2019 | 2018 | Variance | % Change | | :------------------------------------------ | :----- | :----- | :------- | :------- | | Revenues | $118,804 | $112,017 | $6,787 | 6% | | Cost of revenues | $51,878 | $49,464 | $2,414 | 5% | | Selling, general and administrative expenses | $15,152 | $14,404 | $748 | 5% | | Depreciation and amortization | $16,972 | $15,788 | $1,184 | 7% | | Total operating costs and expenses | $84,002 | $79,656 | $4,346 | 5% | | Income from operations | $34,802 | $32,361 | $2,441 | 8% | | Total non-operating expenses | $(6,296) | $(5,984) | $(312) | 5% | | Income tax expense | $3,720 | $3,302 | $418 | 13% | Key Financial Performance (9 Months Ended Sep 30, 2019 vs 2018, in thousands) | Metric | 2019 | 2018 | Variance | % Change | | :------------------------------------------ | :----- | :----- | :------- | :------- | | Revenues | $360,188 | $335,638 | $24,550 | 7% | | Cost of revenues | $154,498 | $146,015 | $8,483 | 6% | | Selling, general and administrative expenses | $45,355 | $45,684 | $(329) | -1% | | Depreciation and amortization | $50,440 | $47,383 | $3,057 | 6% | | Total operating costs and expenses | $250,293 | $239,082 | $11,211 | 5% | | Income from operations | $109,895 | $96,556 | $13,339 | 14% | | Total non-operating expenses | $(21,220) | $(19,885) | $(1,335) | 7% | | Income tax expense | $10,018 | $10,349 | $(331) | -3% | - Revenue increase in Q3 2019 was driven by value-added solutions, new managed services, pricing actions, and project completions[143] - Revenue growth for the nine months ended September 30, 2019, was impacted by higher net spread from pricing actions, elevated sales volumes in Puerto Rico, higher core banking transactions, new managed services projects, and one-time revenues from an electronic benefits contract and hardware sales[153] Segment Results of Operations This section details the performance of EVERTEC's four business segments for the three and nine months ended September 30, 2019, compared to 2018. All segments generally experienced revenue growth, with varying impacts on Adjusted EBITDA due to changes in operating expenses, transaction volumes, and foreign exchange - Payment Services - Puerto Rico & Caribbean: Q3 revenue increased by $1.5 million (5.04%) due to higher POS/ATM transaction volumes and new fees, but Adjusted EBITDA decreased by $0.9 million (-4.51%) due to increased operating expenses. 9M revenue increased by $8.7 million (10.39%) including a one-time electronic benefits contract, leading to a $5.0 million (9.19%) increase in Adjusted EBITDA[170][175] - Payment Services - Latin America: Q3 revenue increased by $1.7 million (8.93%) mainly from intercompany software sales, with Adjusted EBITDA up $1.0 million (15.83%). 9M revenue increased by $4.0 million (6.83%) from intercompany sales, partially offset by client attrition, resulting in a $5.3 million (28.77%) increase in Adjusted EBITDA due to higher revenue and lower operating expenses[172][177] - Merchant Acquiring: Q3 revenue increased by $2.0 million (7.96%) due to pricing actions, with Adjusted EBITDA up $0.3 million (2.37%). 9M revenue increased by $5.4 million (7.28%) from pricing actions and electronic benefit disaster relief funding, leading to a $1.0 million (2.86%) increase in Adjusted EBITDA[173][178] - Business Solutions: Q3 revenue increased by $4.1 million (8.42%) from new services for Popular and the Government of Puerto Rico, with Adjusted EBITDA up $3.3 million (15.35%). 9M revenue increased by $13.5 million (9.25%) from new services and incremental managed services, resulting in a $4.3 million (6.37%) increase in Adjusted EBITDA, partially offset by higher costs of sales and maintenance expenses[174][179] Liquidity and Capital Resources The company's primary liquidity sources are cash from operations and a $125.0 million Revolving Facility ($116.9 million available). Cash and cash equivalents were $102.5 million at September 30, 2019, with $55.9 million held by foreign subsidiaries for indefinite reinvestment. Operating cash flow increased, while investing activities saw a significant increase in cash usage due to capital expenditures. Financing activities saw a decrease in cash usage, influenced by debt repayments, dividends, and share repurchases - Primary liquidity sources are cash generated from operations and a $125.0 million Revolving Facility, of which $116.9 million was available at September 30, 2019[179] - At September 30, 2019, cash and cash equivalents were $102.5 million, with $55.9 million residing in foreign subsidiaries for indefinite reinvestment[180] - Net cash provided by operating activities increased by $7.7 million (6.01%) to $136.2 million for the nine months ended September 30, 2019[184] - Net cash used in investing activities increased by $24.9 million (99.53%) to $49.9 million for the nine months ended September 30, 2019, primarily due to increases in capital expenditures[185] - Net cash used in financing activities decreased by $2.7 million (-4.52%) to $57.1 million for the nine months ended September 30, 2019, influenced by debt repayments, $10.8 million in dividends paid, and $28.4 million in common stock repurchases[186] - Capital expenditures are expected to be in a range of $50 million to $55 million in 2019[187] Financial Obligations The company's financial obligations include secured credit facilities (2023 Term A, 2024 Term B, and a revolving credit facility) and notes payable. Interest rate swaps are used to hedge variable interest rate exposure. The secured leverage ratio was 2.12 to 1.00 as of September 30, 2019, with no events of default - Secured credit facilities consist of a $220.0 million 2023 Term A facility, a $325.0 million 2024 Term B facility, and a $125.0 million revolving credit facility[191] - Unpaid principal balances at September 30, 2019, were $211.8 million for the 2023 Term A Loan and $322.6 million for the 2024 Term B Loan[192] - Interest rate swap agreements are in place to convert a portion of the interest rate payments on the 2024 Term B Loan from variable to fixed[195] - As of September 30, 2019, the secured leverage ratio was 2.12 to 1.00, and no event of default or default had occurred[199] Net Income Reconciliation to Non-GAAP Measures This section defines and reconciles non-GAAP financial measures such as EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per common share, which are used to evaluate performance and compliance with debt covenants. It also highlights the limitations of these non-GAAP measures - EBITDA is defined as earnings before interest, taxes, depreciation, and amortization; Adjusted EBITDA further excludes unusual items and other adjustments[199] - Adjusted EBITDA by segment is reported to the chief operating decision maker for resource allocation and performance assessment[199] - Adjusted Net Income and Adjusted Earnings per common share are used to better reflect comparable operating performance by excluding non-cash amortization and depreciation from the Merger[200] - Limitations of non-GAAP measures include not reflecting cash outlays for capital expenditures, working capital changes, or cash requirements for debt service and income taxes[201] Reconciliation of Net Income to Non-GAAP Measures (in thousands, except per share) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $24,786 | $23,075 | $78,657 | $66,322 | | EBITDA | $52,397 | $49,517 | $160,442 | $146,429 | | Adjusted EBITDA | $55,480 | $52,100 | $170,873 | $159,836 | | Adjusted net income | $34,591 | $33,583 | $108,842 | $102,654 | | Adjusted Earnings per common share (Diluted) | $0.47 | $0.45 | $1.48 | $1.38 | Off Balance Sheet Arrangements As of September 30, 2019, the company had no off-balance sheet arrangements, except for letters of credit issued against the Revolving Facility, which reduce borrowing capacity - As of September 30, 2019, the company did not have any off-balance sheet items, with the exception of letters of credit issued against the Revolving Facility[205] Seasonality The company's payment businesses generally experience moderately increased activity during traditional holiday shopping periods and around other nationally recognized holidays, reflecting consumer spending patterns - The company's payment businesses generally experience moderate increased activity during traditional holiday shopping periods and around other nationally recognized holidays, following consumer spending patterns[206] Effect of Inflation Inflation has had a minimal net effect on operating results over the last three years, as increases in input costs were offset by higher selling prices and cost reduction actions - Inflation has had a minimal net effect on operating results during the last three years, as overall inflation has been offset by increased selling prices and cost reduction actions[208] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from changes in interest rates affecting its floating-rate debt and foreign exchange risk from operations in local currencies in Latin America. Interest rate swaps are used to hedge variable rate debt - The company is exposed to market risks from fluctuations in interest rates on its floating-rate debt; a 100 basis point increase would increase annual interest expense by approximately $3.3 million[209][210] - Interest rate swap agreements are used to convert a portion of outstanding variable rate debt to fixed, hedging interest rate risk[211][212] - The company conducts business in local currencies in certain Latin American countries, exposing it to foreign exchange risk, with translation adjustments reported in accumulated other comprehensive loss[213] Item 4. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019. There have been no material changes in internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[215] - There have been no material changes in the company's internal control over financial reporting during the fiscal quarter ended September 30, 2019[216] Part II. Other Information Item 1. Legal Proceedings The company is a defendant in various lawsuits in the ordinary course of business, but management believes any resulting liabilities will not have a material adverse effect on its financial condition, results of operations, or cash flows - Management believes that aggregated liabilities from various lawsuits and arbitration proceedings will not have a material adverse effect on the company's financial condition, results of operations, and cash flows[219] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018. Additional unknown or immaterial risks may also adversely affect the business - There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018[220] - Additional risks and uncertainties not currently known or deemed immaterial may also materially adversely affect the business, financial condition, or results of operations[221] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 8,120 shares of common stock during the three months ended September 30, 2019, at an average price of $30.920 per share, as part of its stock repurchase program. Approximately $33.9 million remains authorized under the program, which was extended to December 31, 2020 Common Stock Repurchases (3 Months Ended Sep 30, 2019) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Purchased Under Program | Approximate Dollar Value Remaining Under Program | | :-------------------- | :--------------------- | :--------------------------- | :---------------------------- | :----------------------------------------------- | | 7/1/2019-7/31/2019 | 8,020 | $30.920 | 8,020 | | | 9/1/2019-9/30/2019 | 100 | $30.970 | 100 | | | Total | 8,120 | $30.920 | 8,120 | $33,898,048 | - The stock repurchase program, authorizing up to $120 million, was extended to December 31, 2020, with approximately $33.9 million remaining for purchase[222] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities - No defaults upon senior securities were reported[223] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[224] Item 5. Other Information No other information is reported under this item - No other information was reported under this item[225] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including indemnification agreements, CEO/CFO certifications (Sarbanes-Oxley Act), and XBRL-related documents - Exhibits include indemnification agreements, CEO and CFO certifications (pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002), and various XBRL documents[227] Signatures The report is duly signed by EVERTEC, Inc. through its Chief Executive Officer, Morgan Schuessler, and Chief Financial Officer, Joaquin A. Castrillo-Salgado, on October 31, 2019 - The report was signed by Morgan Schuessler, Chief Executive Officer, and Joaquin A. Castrillo-Salgado, Chief Financial Officer, on behalf of EVERTEC, Inc. on October 31, 2019[233][234]