EVERTEC, INC.
The following Management's Discussion and Analysis ("MD&A") covers: (i) the
results of operations for the three and nine months ended September 30, 2021 and
2020 and (ii) the financial condition as of September 30, 2021 . You should read
the following discussion and analysis in conjunction with the audited
consolidated financial statements (the "Audited Consolidated Financial
Statements") and related notes for the fiscal year ended December 31, 2020 ,
included in the Company's Annual Report on Form 10-K and with the unaudited
condensed consolidated financial statements (the "Unaudited Condensed
Consolidated Financial Statements") and related notes appearing elsewhere
herein. This MD&A contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ from those indicated in the
forward-looking statements. See "Forward-Looking Statements" for a discussion of
the risks, uncertainties and assumptions associated with these statements.
Except as otherwise indicated or unless the context otherwise requires, (a) the
terms "EVERTEC ," "we," "us," "our," "our Company" and "the Company" refer to
EVERTEC, Inc. and its subsidiaries on a consolidated basis, (b) the term
"Holdings" refers to EVERTEC Intermediate Holdings, LLC , but not any of its
subsidiaries and (c) the term "EVERTEC Group" refers to EVERTEC Group, LLC and
its predecessor entities and their subsidiaries on a consolidated basis. EVERTEC
Inc.'s subsidiaries include Holdings, EVERTEC Group , EVERTEC Dominicana, SAS,
Evertec Chile Holdings SpA (formerly known as Tecnopago SpA), Evertec Chile SpA
(formerly known as EFT Group SpA), Evertec Chile Global SpA (formerly known as
EFT Global Services SpA), Evertec Chile Servicios Profesionales SpA (formerly
known as EFT Servicios Profesionales SpA), EFT Group S.A. , Tecnopago España SL,
Paytrue S.A. , Caleidon, S.A. , Evertec Brasil Solutions Informática Ltda.
(formerly known as Paytrue Solutions Informática Ltda.), EVERTEC Panamá, S.A.,
EVERTEC Costa Rica, S.A. ("EVERTEC CR"), EVERTEC Guatemala, S.A. , Evertec
Colombia , SAS (formerly known as Processa, SAS), EVERTEC USA, LLC , Evertec
Placetopay, S.A.S. (formerly known as EGM Ingeniería sin Fronteras, S.A.S.)
("Place to Pay") and EVERTEC México Servicios de Procesamiento, S.A. de C.V.
Neither EVERTEC nor Holdings conducts any operations other than with respect to
its indirect or direct ownership of EVERTEC Group .
Executive Summary
EVERTEC is a leading full-service transaction-processing business in Puerto
Rico , the Caribbean and Latin America , providing a broad range of merchant
acquiring, payment services and business process management services. According
to the August 2020 Nilson Report , we are one of the largest merchant acquirers
in Latin America based on total number of transactions and we believe we are the
largest merchant acquirer in the Caribbean and Central America . We serve 26
countries out of 11 offices, including our headquarters in Puerto Rico . We own
and operate the ATH network, one of the leading personal identification number
("PIN") debit networks in Latin America . We manage a system of electronic
payment networks and offer a comprehensive suite of services for core banking,
cash processing, and fulfillment in Puerto Rico , that process approximately
three billion transactions annually. Additionally we offer technology
outsourcing in all the regions we serve. We serve a diversified customer base of
leading financial institutions, merchants, corporations and government agencies
with "mission-critical" technology solutions that enable them to issue, process
and accept transactions securely. We believe our business is well-positioned to
continue to expand across the fast-growing Latin American region.
We are differentiated, in part, by our diversified business model, which enables
us to provide our varied customer base with a broad range of
transaction-processing services from a single source across numerous channels
and geographic markets. We believe this capability provides several competitive
advantages that will enable us to continue to penetrate our existing customer
base with complementary new services, win new customers, develop new sales
channels and enter new markets. We believe these competitive advantages include:
•Our ability to provide competitive products;
•Our ability to provide in one package a range of services that traditionally
had to be sourced from different vendors;
•Our ability to serve customers with disparate operations across several
geographies with technology solutions that enable them to manage their business
as one enterprise; and
•Our ability to capture and analyze data across the transaction-processing value
chain and use that data to provide value-added services that are differentiated
from those offered by pure-play vendors that serve only one portion of the
transaction-processing value chain (such as only merchant acquiring or payment
services).
Our broad suite of services spans the entire transaction-processing value chain
and includes a range of front-end customer-facing solutions such as the
electronic capture and authorization of transactions at the point-of-sale, as
well as back-end support services such as the clearing and settlement of
transactions and account reconciliation for card issuers. These include: (i)
merchant acquiring services, which enable point of sales ("POS") and e-commerce
merchants to accept and process electronic
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methods of payment such as debit, credit, prepaid and electronic benefit
transfer ("EBT") cards; (ii) payment processing services, which enable financial
institutions and other issuers to manage, support and facilitate the processing
of credit, debit, prepaid, automated teller machines ("ATM") and EBT card
programs; and (iii) business process management solutions, which provide
"mission-critical" technology solutions such as core bank processing, as well as
IT outsourcing and cash management services to financial institutions,
corporations and governments. We provide these services through scalable,
end-to-end technology platforms that we manage and operate in-house and that
generate significant operating efficiencies that enable us to maximize
profitability.
We sell and distribute our services primarily through a proprietary direct sales
force with established customer relationships. We continue to pursue joint
ventures and merchant acquiring alliances. We benefit from an attractive
business model, the hallmarks of which are recurring revenue, scalability,
significant operating margins and moderate capital expenditure requirements. Our
revenue is predominantly recurring in nature because of the mission-critical and
embedded nature of the services we provide. In addition, we generally negotiate
multi-year contracts with our customers. We believe our business model should
enable us to continue to grow our business organically in the primary markets we
serve without significant incremental capital expenditures.
Relationship with Popular
OnSeptember 30, 2010 ,EVERTEC Group entered into a 15-year Master Services Agreement ("MSA"), and several related agreements with Popular. Under the terms of the MSA, Popular agreed to useEVERTEC services on an ongoing exclusive basis for the duration of the agreement. Additionally, Popular granted us a right of first refusal on the development of certain new financial technology products and services for the duration of the MSA.
Factors and Trends Affecting the Results of Our Operations
The ongoing migration from cash and paper methods of payment to electronic payments continues to benefit the transaction-processing industry globally. We believe that the penetration of electronic payments in the markets in which we operate is significantly lower relative to the U.S. market, and that this ongoing shift will continue to generate substantial growth opportunities for our business. For example, the adoption of banking products, including electronic payments, in the Latin American andCaribbean regions is lower relative to the matureU.S. and European markets. We believe that the unbanked and underbanked population in our markets will continue to shrink, and therefore drive incremental penetration and growth of electronic payments inPuerto Rico and other Latin American regions. We also benefit from the trend of financial institutions and government agencies outsourcing technology systems and processes. Many medium- and small-size institutions in the Latin American markets in which we operate have outdated computer systems and updating these IT legacy systems is financially and logistically challenging, which presents a business opportunity for us.
Finally, our financial condition and results of operations are, in part, dependent on the economic and general conditions of the geographies in which we operate.
Results of Operations
Comparison of the three months ended
Three months ended September 30,
In thousands 2021 2020 Variance
Revenues $ 145,883 $ 136,507 $ 9,376 7 %
Operating costs and expenses
Cost of revenues, exclusive of depreciation
and amortization 62,995 57,854 5,141 9 %
Selling, general and administrative
expenses 17,126 16,682 444 3 %
Depreciation and amortization 18,745 18,127 618 3 %
Total operating costs and expenses 98,866 92,663 6,203 7 %
Income from operations $ 47,017 $ 43,844 $ 3,173 7 %
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Revenues
Total revenues for the three months endedSeptember 30, 2021 increased by$9.4 million or 7% to$145.9 million when compared to the prior year quarter, primarily driven by transactional revenue growth inPuerto Rico as we continue to benefit from federal stimulus, and increased revenue from ATH Movil and ATH Movil Business. Revenue growth inLatin America is driven mainly by client implementations in the beginning of the current year, organic growth from existing customers and the continued expansion of Place to Pay. Prior year revenue includes$4.4 million recognized in connection with one-time services provided to thePuerto Rico Department of Education .
Cost of Revenues
Cost of revenues for the three months endedSeptember 30, 2021 amounted to$63.0 million , an increase of$5.1 million or 9% when compared to the same period in the prior year. The increase during the three months was primarily driven by an increase in personnel costs, higher professional fees, and an increase in technology services.
Selling, General and Administrative
Selling, general and administrative expenses for the three months endedSeptember 30, 2021 increased by$0.4 million or 3% when compared to the same period in the prior year. The increase is primarily driven by an increase in personnel costs, partially offset by a decrease on professional services.
Depreciation and Amortization
Depreciation and amortization expense for the three months endedSeptember 30, 2021 amounted to$18.7 million , an increase of$0.6 million or 3% when compared to the same period in the prior year. Increased expense during the three months is driven by software amortization due to key projects that went into production as well as increased capital expenditures. Non-Operating Expenses Three months ended September 30, In thousands 2021 2020 Variance Interest income $ 504$ 429 $ 75 17 % Interest expense (5,684) (5,867) 183 3 % Earnings of equity method investment 411 202 209 103 % Other income, net 146 2,486 (2,340) (94) % Total non-operating expenses $ (4,623)$ (2,750) $ (1,873) (68) % Non-operating expenses for the three months endedSeptember 30, 2021 increased by$1.9 million to$4.6 million when compared to the same period in the prior year. The increase is related to a$2.3 million decrease in other income as the prior year includes the favorable impact of foreign currency exchange on remeasurement of assets and liabilities denominated in US dollars. Income Tax Expense Three months ended September 30, In thousands 2021 2020 Variance Income tax expense $ 7,134$ 6,513 $ 621 10 % Income tax expense for the three months endedSeptember 30, 2021 amounted to$7.1 million , an increase of$0.6 million when compared to the same period in the prior year. The effective tax rate for the period was 16.8%, compared with 15.8% in the 2020 period. The increase in the effective tax rate primarily reflects the impact of certain discrete items in the Company'sLatin America operations. 24
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Comparison of the nine months ended
Nine months ended September 30,
In thousands 2021 2020 Variance
Revenues $ 434,559 $ 376,386 $ 58,173 15 %
Operating costs and expenses
Cost of revenues, exclusive of depreciation
and amortization 182,180 168,900 13,280 8 %
Selling, general and administrative
expenses 49,980 51,528 (1,548) (3) %
Depreciation and amortization 56,091 53,761 2,330 4 %
Total operating costs and expenses 288,251 274,189 14,062 5 %
Income from operations $ 146,308 $ 102,197 $ 44,111 43 %
Revenues
Total revenues for the nine months ended September 30, 2021 increased by $58.2
million or 15% to $434.6 million when compared to the same period in the prior
year. Revenue increased across all of the Company's segments. The increase in
Puerto Rico was primarily driven by transactional revenue growth which was
positively impacted by incremental federal stimulus, increased consumer demand
and the continuous adoption of the Company's digital solutions, mainly ATH Movil
and ATH Movil Business. Latin America revenue growth was mainly driven from new
business and projects that went into production, and organic growth from
existing clients and the expansion of our payment gateway Place to Pay. Revenue
in the prior year period was impacted by COVID-19 stay-at-home orders in all of
the regions in which the Company operates.
Cost of Revenues
Cost of revenues for the nine months endedSeptember 30, 2021 amounted to$182.2 million , an increase of$13.3 million or 8% when compared to the same period in the prior year. The increase is primarily driven by an increase in personnel costs, increases in technology services, higher professional services and an increase in costs of sales.
Selling, General and Administrative
Selling, general and administrative expenses for the nine months endedSeptember 30, 2021 decreased by$1.5 million or 3% when compared to the same period in the prior year. The decrease is almost entirely related to a decrease in professional services as prior year includes expenses for corporate transactions, partially offset by an increase in personnel costs.
Depreciation and Amortization
Depreciation and amortization expense for the nine months endedSeptember 30, 2021 amounted to$56.1 million , an increase of$2.3 million or 4% when compared to the same period in the prior year. Increased expense during the period is driven by the same factors explained above for the quarter. 25 --------------------------------------------------------------------------------
Non-Operating Expenses
Nine months ended September 30,
In thousands 2021 2020 Variance
Interest income $ 1,343 $ 1,165 $ 178 15 %
Interest expense (17,248) (18,829) 1,581 8 %
Earnings of equity method investment 1,307 733 574 78 %
Other income, net 2,719 2,766 (47) (2) %
Total non-operating expenses $ (11,879) $ (14,165) $ 2,286 16 %
Non-operating expenses for the nine months ended September 30, 2021 decreased by
$2.3 million to $11.9 million when compared to the same period in the prior
year, primarily due to a $1.6 million decrease in interest expense as a result
of lower interest rates and a lower outstanding balance as a result of debt
repayments completed in the prior year and in the first half of 2021.
Income Tax Expense
Nine months ended September 30,
In thousands 2021 2020 Variance
Income tax expense 14,474 15,551 $ (1,077) (7) %
Income tax expense for the nine months ended September 30, 2021 amounted to
$14.5 million , a decrease of $1.1 million when compared to the same period in
the prior year. The effective tax rate for the period was 10.8% compared with
17.7% in the 2020 period. The decrease in the effective tax rate primarily
reflects the impact from the reversal of a liability for uncertain tax positions
as a result of the expiration of the statute of limitation in the current year,
while the prior year was impacted by the revenue mix towards higher taxed
businesses.
Segment Results of Operations
The Company operates in four business segments: Payment Services -
The Payment Services -Puerto Rico &Caribbean segment revenues are comprised of revenues related to providing access to the ATH debit network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and point of sale ("POS") transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions), ATH Movil (person-to-person and person-to-merchant digital transactions) and EBT (which principally consist of services to the government ofPuerto Rico for the delivery of benefits to participants). For ATH debit network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed and other processing services. For EBT services, revenues are primarily derived from the number of beneficiaries on file. The Payment Services -Latin America segment revenues consist of revenues related to providing access to the ATH network of ATMs and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POS transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions), as well as licensed software solutions for risk and fraud management and card 26 -------------------------------------------------------------------------------- payment processing. For network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed, and other processing services. The Merchant Acquiring segment consists of revenues from services that allow merchants to accept electronic methods of payment. In the Merchant Acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees and rental fees from POS devices and other equipment, net of credit card interchange and assessment fees charged by credit cards associations (such asVISA or MasterCard) or payment networks. The discount fee is generally a percentage of the transaction value.EVERTEC also charges merchants for other services that are unrelated to the number of transactions or the transaction value. The Business Solutions segment consists of revenues from a full suite of business process management solutions in various product areas such as core bank processing, network hosting and management, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived in part from a recurrent fixed fee and from fees based on the number of accounts on file (i.e. savings or checking accounts, loans, etc.) or computer resources utilized. Revenues from other processing services within the Business Solutions segment are generally volume-based and depend on factors such as the number of accounts processed. In addition,EVERTEC is a reseller of hardware and software products and these resale transactions are generally non-recurring. In addition to the four operating segments described above, management identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These areas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these areas are aggregated and presented within the "Corporate and Other" category in the financial statements alongside the operating segments. The Corporate and Other category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:
•marketing,
•corporate finance and accounting,
•human resources,
•legal,
•risk management functions,
•internal audit,
•corporate debt related costs,
•non-operating depreciation and amortization expenses generated as a result of
merger and acquisition activity,
•intersegment revenues and expenses, and
•other non-recurring fees and expenses that are not considered when management
evaluates financial performance at a segment level
The Chief Operating Decision Maker ("CODM") reviews the operating segments
separate financial information to assess performance and to allocate resources.
Management evaluates the operating results of each of its operating segments
based upon revenues and Adjusted EBITDA. Adjusted EBITDA is defined as EBITDA
further adjusted to exclude unusual items and other adjustments. Adjusted
EBITDA, as it relates to operating segments, is presented in conformity with ASC
Topic 280, Segment Reporting, given that it is reported to the CODM for purposes
of allocating resources. Segment asset disclosure is not used by the CODM as a
measure of segment performance since the segment evaluation is driven by
revenues and Adjusted EBITDA. As such, segment assets are not disclosed in the
notes to the accompanying unaudited condensed consolidated financial statements.
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--------------------------------------------------------------------------------The following tables set forth information about the Company's operations by its four business segments for the periods indicated below.
Comparison of the three months ended
Payment Services -
Three months ended September 30,
In thousands 2021 2020
Revenues $38,773 $33,284
Adjusted EBITDA 21,805 18,473
Adjusted EBITDA Margin 56.2 % 55.5 %
Payment Services - Puerto Rico & Caribbean segment revenues for the three months
ended September 30, 2021 increased by $5.5 million to $38.8 million when
compared to the same period in the prior year, driven by increased transactional
revenue from POS transactions, an incremental $0.9 million in revenue from ATH
Movil and ATH Movil Business as consumer preference continues to shift towards
digital payment products and an increase in transaction processing and
monitoring revenue recognized for services provided to the Payment Services -
Latin America Segment. Adjusted EBITDA increased by $3.3 million to $21.8
million driven by the increase in revenues, partially offset by higher operating
expenses mainly higher technology services.
Payment Services -
Three months ended September 30,
In thousands 2021 2020
Revenues $26,792 $21,241
Adjusted EBITDA 9,991 9,538
Adjusted EBITDA Margin 37.3 % 44.9 %
Payment Services - Latin America segment revenues for the three months ended
September 30, 2021 increased by $5.6 million to $26.8 million driven mainly by
revenues generated by new client implementations that went into production in
early 2021, expansion of services with existing clients and the continued
expansion of Place to Pay, partially offset by anticipated client attrition.
Adjusted EBITDA increased by $0.5 million when compared to the same period in
the prior year primarily due to the increase in revenues, partially offset by
lower non-operating income as the prior year included the favorable impact of
the remeasurement of assets and liabilities denominated in US dollar and an
increase in other operating taxes.
Merchant Acquiring
Three months ended September 30,
In thousands 2021 2020
Revenues $37,606 $30,646
Adjusted EBITDA 19,230 15,885
Adjusted EBITDA Margin 51.1 % 51.8 %
Merchant Acquiring segment revenues for the three months ended September 30,
2021 increased by $7.0 million to $37.6 million primarily driven by an increase
in transactional revenue due to higher sales volume, as we continue to benefit
from the impact of COVID related federal stimulus, and revenue generated from
the expanded relationship with FirstBank . Adjusted EBITDA increased by $3.3
million driven by the increase in revenues, partially offset by an increase in
operating expenses driven by the increased transaction volume and higher
personnel costs.
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Business Solutions
Three months ended September 30,
In thousands 2021 2020
Revenues $58,134 $63,018
Adjusted EBITDA 26,034 32,991
Adjusted EBITDA Margin 44.8 % 52.4 %
Business Solutions segment revenues for the three months ended September 30,
2021 decreased by $4.9 million to $58.1 million mainly as a result of the
favorable impact in the prior year of a one-time contract with the Puerto Rico
Department of Education that amounted to $4.4 million . Adjusted EBITDA decreased
by $7.0 million to $26.0 million as a result of the impact of the aforementioned
contract recorded net of expenses, and higher operating expenses.
Comparison of the nine months ended
Payment Services -
Nine months ended September 30,
In thousands 2021 2020
Revenues $113,626 $90,632
Adjusted EBITDA 66,228 47,823
Adjusted EBITDA Margin 58.3 % 52.8 %
Payment Services - Puerto Rico & Caribbean segment revenues for the nine months
ended September 30, 2021 increased by $23.0 million to $113.6 million , due to an
increase in transactions when compared to the same period in the prior year
which was impacted by a decline in transaction volumes due to the impact of
COVID-19, while the current year is benefiting from incremental federal stimulus
and increased consumer demand. Revenue during the year has also benefited from
an incremental $5.1 million recognized from ATH Movil and ATH Movil Business, as
well as an increase in transaction processing and monitoring revenue recognized
for services provided to the Payment Services - Latin America Segment. Adjusted
EBITDA increased by $18.4 million to $66.2 million driven by the increase in
revenues, partially offset by higher operating expenses driven by higher
equipment expenses.
Payment Services -
Nine months ended September 30,
In thousands 2021 2020
Revenues $77,641 $62,678
Adjusted EBITDA 30,985 23,864
Adjusted EBITDA Margin 39.9 % 38.1 %
Payment Services - Latin America segment revenues for the nine months ended
September 30, 2021 increased by $15.0 million to $77.6 million driven mainly by
revenues generated by new client implementations as well as expanded existing
relationships and increased volume from Place to Pay, partially offset by client
attrition. Adjusted EBITDA increased by $7.1 million when compared to the same
period in the prior year primarily due to the increase in revenues, partially
offset by an increase in fees for transaction processing and monitoring services
from the Payment Services - Puerto Rico & Caribbean segment.
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Merchant Acquiring
Nine months ended September 30,
In thousands 2021 2020
Revenues $106,808 $80,531
Adjusted EBITDA $55,293 40,551
Adjusted EBITDA Margin 51.8 % 50.4 %
Merchant Acquiring segment revenues for the nine months ended September 30, 2021
increased by $26.3 million to $106.8 million as a result of an increase in
transaction volumes that benefited from the impact of federal stimulus, while
the prior year period was impacted by lower sales volume as a result of the
beginning of the COVID-19 pandemic. Adjusted EBITDA increased by $14.7 million
driven by the increase in revenues, partially offset by an increase in operating
expenses driven by the increased transaction volume.
Business Solutions
Nine months ended September 30,
In thousands 2021 2020
Revenues $179,438 $174,455
Adjusted EBITDA 86,287 84,459
Adjusted EBITDA Margin 48.1 % 48.4 %
Business Solutions segment revenues for the nine months ended September 30, 2021
increased by $5.0 million to $179.4 million as a result of an increase in core
banking revenues and an increase in IT consulting services revenue, as the
Company continues to benefit from the shift to digital, partially offset by the
impact in the prior year of the aforementioned one-time Department of Education
contract. Adjusted EBITDA increased by $1.8 million to $86.3 million as a result
of the increase in revenue, partially offset by an increase in costs of sales.
Liquidity and Capital Resources
Our principal source of liquidity is cash generated from operations, and our primary liquidity requirements are the funding of working capital needs, capital expenditures, and acquisitions. We also have a$125.0 million Revolving Facility, of which$119.1 million was available for borrowing as ofSeptember 30, 2021 . The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn. As ofSeptember 30, 2021 , we had cash and cash equivalents of$244.1 million , of which$87.8 million resides in our subsidiaries located outside ofPuerto Rico for purposes of (i) funding the respective subsidiary's current business operations and (ii) funding potential future investment outside ofPuerto Rico . We intend to indefinitely reinvest these funds outside ofPuerto Rico , and based on our liquidity forecast, we will not need to repatriate this cash to fund thePuerto Rico operations or to meet debt-service obligations. However, if in the future we determine that we no longer need to maintain cash balances within our foreign subsidiaries, we may elect to distribute such cash to the Company inPuerto Rico . Distributions from the foreign subsidiaries toPuerto Rico may be subject to tax withholding and other tax consequences. Additionally, our credit agreement imposes certain restrictions on the distribution of dividends from subsidiaries.
Our primary use of cash is for operating expenses, working capital requirements, capital expenditures, debt service, acquisitions, dividend payments, share repurchases, and other transactions as opportunities present themselves.
Based on our current level of operations, we believe our cash flows from
operations and the available secured Revolving Facility will be adequate to meet
our liquidity needs for the next twelve months. However, our ability to fund
future operating expenses, dividend payments, capital expenditures, mergers and
acquisitions, and our ability to make scheduled payments of interest, to pay
principal on or refinance our indebtedness and to satisfy any other of our
present or future debt obligations will depend on our future operating
performance, which may be affected by general economic, financial and other
factors beyond our control.
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Nine months ended September 30,
(In thousands) 2021 2020
Cash provided by operating activities $ 175,855 $ 121,159
Cash used in investing activities (60,305) (36,920)
Cash used in financing activities (74,077) (50,780)
Effect of foreign exchange rate on cash, cash equivalents and restricted cash
215 (2,384)
Increase in cash, cash equivalents and restricted cash $
41,688
Net cash provided by operating activities for the nine months endedSeptember 30, 2021 was$175.9 million compared to$121.2 million for the same period in the prior year. The$54.7 million increase in cash provided by operating activities is primarily driven by the increase in net income, an increase in collections for accounts receivable and a decrease in cash used to pay down accounts payable and accrued liabilities. Net cash used in investing activities for the nine months endedSeptember 30, 2021 was$60.3 million compared to$36.9 million for the same period in the prior year. The$23.4 million increase is primarily attributable to the acquisition of a$14.8 million customer relationship, an increase in additions to software of$7.5 million , and the purchase of$3.0 million in available-for-sale debt securities during the period. Net cash used in financing activities for the nine months endedSeptember 30, 2021 was$74.1 million compared to$50.8 million for the same period in the prior year. The$23.3 million increase was mainly attributed to an increase in cash used to repurchase common stock of$17.1 million and a$5.3 million increase in withholding taxes paid on share-based compensation.
Capital Resources
Our principal capital expenditures are for hardware and computer software (purchased and internally developed) and additions to property and equipment. We invested approximately$43.4 million and$36.9 million , during the nine months endedSeptember 30, 2021 and 2020, respectively. In addition, in 2021, the Company acquired a$14.8 million customer relationship as well as$3.0 million in available-for-sale debt securities. Generally, we fund capital expenditures with cash flow generated from operations and, if necessary, borrowings under our Revolving Facility. Dividend Payments OnFebruary 18, 2021 ,April 22, 2021 andJuly 22, 2021 , respectively the Board declared quarterly cash dividends of$0.05 per share of common stock, which were paid onMarch 26, 2021 ,June 4, 2021 andSeptember 3, 2021 , respectively, to stockholders of record as of the close of business onMarch 1, 2021 ,May 3, 2021 andAugust 2, 2021 , respectively. OnOctober 21, 2021 , our Board declared a regular quarterly cash dividend of$0.05 per share on the Company's outstanding shares of common stock. The dividend will be paid onDecember 3, 2021 to stockholders of record as of the close of business onNovember 1, 2021 . The Board anticipates declaring this dividend in future quarters on a regular basis; however future declarations of dividends are subject to the Board's approval and may be adjusted as business needs or market conditions change.
Financial Obligations
Secured Credit Facilities
OnNovember 27, 2018 ,EVERTEC andEVERTEC Group, LLC ("EVERTEC Group ") (collectively, the "Borrower") entered into a credit agreement providing for the secured credit facilities, consisting of a$220.0 million term loan A facility that matures onNovember 27, 2023 (the "2023 Term A Loan"), a$325.0 million term loan B facility that matures onNovember 27, 2024 (the "2024 Term B Loan"), and a$125.0 million revolving credit facility (the "Revolving Facility") that matures onNovember 27, 2023 , with a syndicate of lenders andBank of America, N.A . ("Bank of America "), as administrative agent, collateral agent, swingline lender and line of credit issuer (collectively the "2018 Credit Agreement"). 31 -------------------------------------------------------------------------------- The 2018 Credit Agreement requires mandatory repayment of outstanding principal balances based on a percentage of excess cash flow, provided that no such payment shall be due if the resulting amount of the excess cash flow multiplied by the applicable percentage is less than$10 million . OnMarch 8, 2021 andMarch 5, 2020 , in connection with this mandatory repayment clause, the Company repaid$17.8 million and$17.0 million , respectively, as a result of excess cash flow calculation performed for the years endedDecember 31, 2020 and 2019, respectively. The unpaid principal balance atSeptember 30, 2021 of the 2023 Term A Loan and the 2024 Term B Loan was$174.4 million and$296.7 million , respectively. The additional borrowing capacity under our Revolving Facility atSeptember 30, 2021 was$119.1 million . The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
Notes Payable
InDecember 2019 ,EVERTEC Group entered into two non-interest bearing financing agreements amounting to$2.4 million to purchase software and maintenance. As ofSeptember 30, 2021 andDecember 31, 2020 , the outstanding principal balance of the notes payable was$0.8 million and$1.5 million , respectively. These notes are included in accounts payable in the Company's unaudited condensed consolidated balance sheets.
Interest Rate Swaps
As of
Swap Agreement Effective date Maturity Date Notional Amount Variable Rate Fixed Rate
2018 Swap April 2020 November 2024 $250 million 1-month LIBOR 2.89%
The Company has accounted for this agreement as a cash flow hedge.
As ofSeptember 30, 2021 andDecember 31, 2020 , the carrying amount of the derivative included on the Company's unaudited condensed consolidated balance sheets was$18.1 million and$25.6 million , respectively. The fair value of this derivative is estimated using Level 2 inputs in the fair value hierarchy on a recurring basis. Refer to Note 8 for disclosure of losses recorded on cash flow hedging activities.
During the three and nine months ended
The cash flow hedge is considered highly effective.
Covenant Compliance
As of
Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share (Non-GAAP Measures)
We define "EBITDA" as earnings before interest, taxes, depreciation and amortization. We define "Adjusted EBITDA" as EBITDA further adjusted to exclude unusual items and other adjustments described below. Adjusted EBITDA by segment is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in conformity with ASC Topic 280, Segment Reporting, and is excluded from the definition of non-GAAP financial measures under theSecurities and Exchange Commission's Regulation G and Item 10(e) of Regulation S-K. We define "Adjusted Net Income" as net income adjusted to exclude unusual items and other adjustments described below. We define "Adjusted Earnings per common share" as Adjusted Net Income divided by diluted shares outstanding. 32 -------------------------------------------------------------------------------- We present EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of ourselves and other companies in our industry. In addition, our presentation of Adjusted EBITDA is substantially consistent with the equivalent measurements that are contained in the senior secured credit facilities in testingEVERTEC Group's compliance with covenants therein such as the secured leverage ratio. We use Adjusted Net Income to measure our overall profitability because we believe better reflects our comparable operating performance by excluding the impact of the non-cash amortization and depreciation that was created as a result of the Merger. In addition, in evaluating EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, you should be aware that in the future we may incur expenses such as those excluded in calculating them. Further, our presentation of these measures should not be construed as an inference that our future operating results will not be affected by unusual or nonrecurring items.
Some of the limitations of EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted earnings per common share are as follows:
•they do not reflect cash outlays for capital expenditures or future contractual commitments; •they do not reflect changes in, or cash requirements for, working capital; •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; •in the case of EBITDA and Adjusted EBITDA, they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness; •in the case of EBITDA and Adjusted EBITDA, they do not reflect income tax expense or the cash necessary to pay income taxes; and •other companies, including other companies in our industry, may not use EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per common share or may calculate EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share differently than as presented in this Report, limiting their usefulness as a comparative measure. EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share are not measurements of liquidity or financial performance under GAAP. You should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share as alternatives to cash flows from operating activities or any other performance measures determined in accordance with GAAP, as an indicator of cash flows, as a measure of liquidity or as an alternative to operating or net income determined in accordance with GAAP.
A reconciliation of net income to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share is provided below:
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Twelve months
Three months ended September 30, Nine months ended September 30, ended
(In thousands, except per share September 30,
information) 2021 2020 2021 2020 2021
Net income $ 35,260 $ 34,581 $ 119,955 $ 72,481 $ 152,325
Income tax expense 7,134 6,513 14,474 15,551 17,925
Interest expense, net 5,180 5,438 15,905 17,664 21,813
Depreciation and amortization 18,745 18,127 56,091 53,761 73,848
EBITDA 66,319 64,659 206,425 159,457 265,911
Equity income (1) (411) (202) 10 (733) (393)
Compensation and benefits (2) 3,493 3,669 11,280 10,920 14,743
Transaction, refinancing and other
fees (3) 369 1,907 1,205 6,880 2,602
Adjusted EBITDA 69,770 70,033 218,920 176,524 282,863
Operating depreciation and
amortization (4) (10,779) (9,888) (32,385) (28,943) (42,526)
Cash interest expense, net (5) (4,926) (5,301) (14,946) (16,917)
(20,314)
Income tax expense (6) (9,125) (7,472) (24,416) (21,729)
(29,879)
Non-controlling interest (7) 17 (155) (55) (412) (189) Adjusted net income $ 44,957 $
47,217
$ 0.48 $ 0.47 $ 1.65 $ 0.99
Adjusted Earnings per common share
(Non-GAAP):
Diluted $ 0.62 $ 0.65 $ 2.02 $ 1.49
Shares used in computing adjusted
earnings per common share:
Diluted 72,876,253 73,001,780 72,817,707 73,049,817
1)Represents the elimination of non-cash equity earnings from the Company's
19.99% equity investment in Dominican Republic , Consorcio de Tarjetas
Dominicanas S.A. ("CONTADO"), net of cash dividends received.
2)Primarily represents share-based compensation and severance payments.
3)Represents fees and expenses associated with corporate transactions as defined
in the 2018 Credit Agreement, recorded as part of selling, general and
administrative expenses, a software impairment charge and a gain from sale of
assets.
4)Represents operating depreciation and amortization expense, which excludes
amounts generated as a result of merger and acquisition activity.
5)Represents interest expense, less interest income, as they appear on our
condensed consolidated statements of income and comprehensive income, adjusted
to exclude non-cash amortization of the debt issue costs, premium and accretion
of discount.
6)Represents income tax expense calculated on adjusted pre-tax income using the
applicable GAAP tax rate, adjusted for certain discrete items.
7)Represents the 35% non-controlling equity interest in Evertec Colombia, net of
amortization for intangibles created as part of the purchase.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company may enter into commercial
commitments. With the exception of the letters of credit issued against the
Revolving Facility which reduce the additional borrowing capacity of the
Revolving Facility, as of
Seasonality
Our payment businesses generally experience moderate increased activity during
the traditional holiday shopping periods and around other nationally recognized
holidays, which follow consumer spending patterns.
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--------------------------------------------------------------------------------Effect of Inflation
While inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have an impact on our operating results, inflation has had minimal net effect on our operating results during the last three years as overall inflation has been offset by increased selling process and cost reduction actions. We cannot assure you, however, that we will not be affected by general inflation in the future.
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