100260_COVER_MS.indd 3
3/30/19 12:14 PM
100260_COVER_MS.indd 4
3/30/19 12:14 PM
100260_12 PAGE_PROMO_FINAL_MS 1
EVER-19-0354 PAGINAS INTERIORES 1
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 2
EVER-19-0354 PAGINAS INTERIORES 2
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 3
EVER-19-0354 PAGINAS INTERIORES 3
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 4
EVER-19-0354 PAGINAS INTERIORES 4
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 5
EVER-19-0354 PAGINAS INTERIORES 5
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 6
EVER-19-0354 PAGINAS INTERIORES 6
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 7
EVER-19-0354 PAGINAS INTERIORES 7
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 8
EVER-19-0354 PAGINAS INTERIORES 8
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 9
EVER-19-0354 PAGINAS INTERIORES 9
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 10
EVER-19-0354 PAGINAS INTERIORES 10
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 11
EVER-19-0354 PAGINAS INTERIORES 11
3/30/19 12:03 PM
3/30/19 11:57 AM
100260_12 PAGE_PROMO_FINAL_MS 12
EVER-19-0354 PAGINAS INTERIORES 12
3/30/19 12:03 PM
3/30/19 11:57 AM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission File Number 001-35872
EVERTEC, Inc.
(Exact name of registrant as specified in its charter)
Puerto Rico
(State or other jurisdiction of
incorporation or organization)
Cupey Center Building, Road 176, Kilometer 1.3,
San Juan, Puerto Rico
(Address of principal executive offices)
66-0783622
(I.R.S. employer
identification number)
00926
(Zip Code)
(787) 759-9999
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the common stock held by non-affiliates of EVERTEC, Inc. was approximately $1,088,117,961 based on the closing price of $21.85 as
of the close of business on June 29, 2018.
As of February 15, 2019, there were 72,378,710 outstanding shares of common stock of EVERTEC, Inc.
Documents Incorporated by Reference:
Part III incorporates certain information by reference to the Proxy Statement for the 2019 Annual Meeting of Shareholders
[This page intentionally left blank(cid:17)]
EVERTEC, Inc.
2018 Annual Report on Form 10-K
TABLE OF CONTENTS
Part I
Item 1—Business
Item 1A—Risk Factors
Item 1B—Unresolved Staff Comments
Item 2—Properties
Item 3—Legal Proceedings
Item 4—Mine Safety Disclosures
Part II
Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Item 6—Selected Financial Data
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A—Quantitative and Qualitative Disclosures About Market Risks
Item 8—Financial Statements and Supplementary Data
Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A—Controls and Procedures
Item 9B—Other Information
Part III
Item 10—Directors, Executive Officers and Corporate Governance
Item 11—Executive Compensation
Item 12—Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13—Certain Relationships and Related Transactions and Director Independence
Item 14—Principal Accounting Fees and Services
Part IV
Signatures
Page
4
17
34
34
35
35
36
39
41
61
63
63
63
64
64
64
65
65
65
66
[This page intentionally left blank(cid:17)]
Forward-Looking Statements
This Annual Report on Form 10-K, or Report, contains “forward-looking statements” within the meaning of, and
subject to the protection of, the Private Securities Litigation Reform Act of 1995. Such statements can be identified
by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,”
“plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of
future performance and may involve significant risks and uncertainties, and that actual results may vary materially
from those in the forward-looking statements as a result of various factors. Among the factors that significantly
impact our business and could impact our business in the future are:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our reliance on our relationship with Popular, Inc. (“Popular”) for a significant portion of our
revenues pursuant to our master services agreement with them and to grow our merchant acquiring
business;
as a regulated institution, the likelihood we will be required to obtain regulatory approval before
engaging in certain new activities or businesses, whether organically or by acquisition, and our
potential inability to obtain such approval on a timely basis or at all, which may make transactions
more expensive or impossible to complete, or make us less attractive to potential sellers;
our ability to renew our client contracts on terms favorable to us, including our contract with
Popular, and any significant concessions we may have to grant to Popular with respect to pricing
or other key terms in anticipation of the negotiation of the extension of the MSA, both in respect
of the current term and any extension of the MSA;
our dependence on our processing systems, technology infrastructure, security systems and
fraudulent payment detection systems, as well as on our personnel and certain third parties with
whom we do business, and the risks to our business if our systems are hacked or otherwise
compromised;
our ability to develop, install and adopt new software, technology and computing systems;
a decreased client base due to consolidations and failures in the financial services industry;
the credit risk of our merchant clients, for which we may also be liable;
the continuing market position of the ATH network;
a reduction in consumer confidence, whether as a result of a global economic downturn or
otherwise, which leads to a decrease in consumer spending;
our dependence on credit card associations, including any adverse changes in credit card
association or network rules or fees;
changes in the regulatory environment and changes in international, legal, tax, political,
administrative or economic conditions;
the geographical concentration of our business in Puerto Rico, including our business with the
government of Puerto Rico and its instrumentalities, which are facing severe fiscal challenges;
additional adverse changes in the general economic conditions in Puerto Rico, whether as a result
of the government’s debt crisis or otherwise, including the continued migration of Puerto Ricans to
the U.S. mainland, which could negatively affect our customer base, general consumer spending,
our cost of operations and our ability to hire and retain qualified employees;
a protracted federal government shutdown may affect our financial performance;
operating an international business in Latin America and the Caribbean, in jurisdictions with
potential political and economic instability;
our ability to execute our geographic expansion and acquisition strategies, including challenges in
successfully acquiring new businesses and integrating and growing acquired businesses;
our ability to protect our intellectual property rights against infringement and to defend ourselves
against claims of infringement brought by third parties;
our ability to recruit and retain the qualified personnel necessary to operate our business;
our ability to comply with U.S. federal, state, local and foreign regulatory requirements;
1
•
•
•
•
•
•
•
•
•
•
•
•
evolving industry standards and adverse changes in global economic, political and other
conditions;
our high level of indebtedness and restrictions contained in our debt agreements, including the
senior secured credit facilities, as well as debt that could be incurred in the future;
our ability to prevent a cybersecurity attack or breach in our information security;
our ability to generate sufficient cash to service our indebtedness and to generate future profits;
our ability to refinance our debt;
the possibility that we could lose our preferential tax rate in Puerto Rico;
the risk that the counterparty to our interest rate swap agreements fail to satisfy its obligations
under the agreement;
uncertainty of the pending debt restructuring process under Title III of the Puerto Rico Oversight,
Management and Economic Stability Act (“PROMESA”), as well as actions taken by the Puerto
Rico government or by the PROMESA Board to address the Puerto Rico fiscal crisis;
uncertainty related to Hurricanes Irma and Maria and their aftermaths’ impact on the economies of
Puerto Rico and the Caribbean;
the possibility of future catastrophic hurricanes affecting Puerto Rico and/or the Caribbean, as well
as other potential natural disasters;
the nature, timing and amount of any restatement; and
other risks and uncertainties detailed in Part I, Item IA “Risk Factors” in this Report.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to
differ materially from those suggested by the forward-looking statements. Forward-looking statements should,
therefore, be considered in light of various factors, including those set forth under “Item 1A. Risk Factors,” in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
elsewhere in this Report. These forward-looking statements speak only as of the date of this Report, and we do
not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
2
INDUSTRY AND MARKET DATA
This Form 10-K includes industry data that we obtained from periodic industry publications, including the
August 2018 Nilson Report and the 2018 World Payments Report. Industry publications generally state that the
information contained therein has been obtained from sources believed to be reliable. This Form 10-K also
includes market share and industry data that were prepared primarily based on management’s knowledge of the
industry and industry data. Unless otherwise noted, statements as to our market share and market position
relative to our competitors are approximated and based on management estimates using the above-mentioned
latest-available third-party data and our internal analysis and estimates. While we are not aware of any
misstatements regarding any industry data presented herein, our estimates, in particular as they relate to market
share and our general expectations, involve risks and uncertainties and are subject to change based on various
factors, including those discussed under “Risk Factors,” “Forward-Looking Statements” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.
3
Item 1. Business
Part I
Except as otherwise indicated or unless the context otherwise requires, (a) the terms “EVERTEC,” “we,” “us,”
“our,” “our Company” and “the Company” refer to EVERTEC, Inc. and its subsidiaries on a consolidated
basis, (b) the term “Holdings” refers to EVERTEC Intermediate Holdings, LLC, but not any of its subsidiaries
and (c) the term “EVERTEC Group” refers to EVERTEC Group, LLC and its predecessor entities and their
subsidiaries on a consolidated basis, including the operations of its predecessor entities prior to the Merger (as
defined below). EVERTEC Inc.’s subsidiaries include Holdings, EVERTEC Group, EVERTEC Dominicana,
SAS, Evertec Chile Holdings SpA (formerly known as Tecnopago SpA), Evertec Chile SpA (formerly known as
EFT Group SpA), Evertec Chile Global SpA (formerly known as EFT Global Services SpA), Evertec Chile
Servicios Profesionales SpA (formerly known as EFT Servicios Profesionales SpA), , EFT Group S.A.,
Tecnopago España SL, Paytrue S.A., Caleidon, S.A., Evertec Brasil Solutions Informática Ltda. (formerly
known as Paytrue Solutions Informática Ltda.), EVERTEC Panamá, S.A., EVERTEC Costa Rica, S.A.
(“EVERTEC CR”), EVERTEC Guatemala, S.A., Evertec Colombia, SAS (formerly known as Processa, SAS),
EVERTEC USA, LLC 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.
Company Overview
EVERTEC is a leading full-service transaction processing business in Latin America and the Caribbean,
providing a broad range of merchant acquiring, payment services and business process management services.
According to the August 2018 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 in the region from our base in Puerto Rico. We manage a system of
electronic payment networks that process more than two billion transactions annually, and offer a
comprehensive suite of services for core bank processing, cash processing and technology outsourcing. In
addition, we own and operate the ATH network, one of the leading personal identification number (“PIN”) debit
networks in Latin America. We serve a diversified customer base of leading financial institutions, merchants,
corporations and government agencies with “mission-critical” technology solutions that enable them to issue,
process and accept transactions securely. We believe our business is well-positioned to continue to expand
across the fast-growing Latin American region.
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 in 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).
4
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 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 for credit, debit, prepaid, automated teller
machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide
“mission-critical” technology solutions such as core bank processing, as well as IT outsourcing and cash
management services to financial institutions, corporations and governments. We provide these services through
scalable, end-to-end technology platforms that we manage and operate in-house and that generate significant
operating efficiencies that enable us to maximize profitability.
We sell and distribute our services primarily through a proprietary direct sales force with established customer
relationships. We continue to pursue joint ventures and merchant acquiring alliances. We benefit from an
attractive business model, the hallmarks of which are recurring revenue, scalability, significant operating
margins and moderate capital expenditure requirements. Our revenue is predominantly recurring in nature
because of the mission-critical and embedded nature of the services we provide. In addition, we generally
negotiate multi-year contracts with our customers. We believe our business model should enable us to continue
to grow our business organically in the primary markets we serve without significant incremental capital
expenditures.
Corporate Background
EVERTEC, Inc. ("EVERTEC", formerly known as Carib Latam Holdings, Inc.) is a Puerto Rico corporation
organized in April 2012. Our main operating subsidiary, EVERTEC Group, LLC (formerly known as
EVERTEC, LLC and EVERTEC, Inc., hereinafter “EVERTEC Group”), was organized in Puerto Rico in 1988.
EVERTEC Group was formerly a wholly-owned subsidiary of Popular. On September 30, 2010, pursuant to an
Agreement and Plan of Merger (as amended, the “Merger Agreement”), AP Carib Holdings, Ltd. (“Apollo”), an
affiliate of Apollo Global Management LLC, acquired a 51% indirect ownership interest in EVERTEC Group as
part of a merger (the “Merger”) and EVERTEC Group became a wholly-owned subsidiary of Holdings.
On April 17, 2012, EVERTEC Group was converted from a Puerto Rico corporation to a Puerto Rico limited
liability company (the “Conversion”) for the purpose of improving its consolidated tax efficiency by taking
advantage of changes to the Puerto Rico Internal Revenue Code, as amended (the “PR Code”), that permit
limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax
purposes. Concurrent with the Conversion, Holdings, which is our direct subsidiary, was also converted from a
Puerto Rico corporation to a Puerto Rico limited liability company. Prior to these conversions, EVERTEC, Inc.
was formed in order to act as the new parent company of Holdings and its subsidiaries, including EVERTEC
Group. The transactions described above in this paragraph are collectively referred to as the “Reorganization.”
History
We have over a 25 year operating history in the transaction processing industry. Prior to the Merger, EVERTEC
Group was 100% owned by Popular, the largest financial institution in the Caribbean, and operated substantially
as an independent entity within Popular. As mentioned above, following the Merger, Apollo owned a 51%
interest in us and shortly thereafter, we began the transition to a separate, stand-alone entity. As a stand-alone
company, we have made substantial investments in our technology and infrastructure, recruited various senior
executives with significant transaction processing experience in Latin America, enhanced our profitability
through targeted productivity and cost savings actions and broadened our footprint beyond the markets
historically served.
5
We continue to benefit from our relationship with Popular. Popular is our largest customer, acts as one of our
largest merchant referral partners and sponsors us with the card associations (such as Visa or MasterCard),
enabling merchants to accept these card associations’ credit card transactions. Popular also provides merchant
sponsorship as one of the participants of the ATH network, enabling merchants to connect to the ATH network
and accept ATH debit card transactions. We provide a number of critical products and services to Popular, which
are governed by a 15-year Amended and Restated Master Services Agreement (the “Master Services
Agreement”) that runs through 2025.
On April 17, 2013, the Company completed its initial public offering of 28,789,943 shares of common stock at a
price to the public of $20.00 per share. On September 18, 2013 and December 13, 2013, the Company
completed public offerings of 23,000,000 and 15,233,273 shares, respectively, of the Company’s common stock
by Apollo, Popular, and current and former employees. Popular owned approximately 11.7 million shares of
EVERTEC’s common stock, or 16.1% as of December 31, 2018, and Apollo no longer owns any of the
Company’s common stock.
Principal Stockholder
Popular, Inc. (NASDAQ: BPOP), whose principal banking subsidiary’s history dates back to 1893, is the No. 1
bank holding company by both assets and deposits based in Puerto Rico, and, as of September 30, 2018, ranks
46 by assets among U.S. bank holding companies. As of December 31, 2018, Popular owned approximately
16.1% of our common stock.
Industry Trends
Shift to Electronic Payments
The ongoing migration from cash, check and other paper methods of payment to electronic payments continues
to benefit the transaction processing industry globally. This migration is driven by factors including customer
convenience, marketing efforts by financial institutions, card issuer rewards and the development of new forms
of payment. We believe that the penetration of electronic payments in the markets where we principally operate
is significantly lower relative to more mature U.S. and European markets and that this ongoing shift will
continue to generate important growth opportunities for our business. In addition, in an effort to better capture
taxes over generated revenue, legislation in Puerto Rico has required most licensed professionals to provide an
electronic payment option to their customers, and that all consumer businesses that generate revenues in excess
of $50,000 provide an electronic payment option, with the exception of certain businesses, further expanding
the need for an electronic payment network in Puerto Rico.
Fast Growing Latin American and Caribbean Financial Services and Payments Markets
Currently, the penetration of banking products, including electronic payments, in the Latin American and
Caribbean region is lower relative to the mature U.S. and European markets. As these markets continue to grow,
and financial inclusion increases, the emergence of a larger and more sophisticated consumer base will
influence and drive an increase in card (e.g., debit, credit, prepayment, and EBT) and electronic payments
usage. According to the 2018 World Payments Report, non-cash payment volumes in Latin America recorded an
accelerated growth rate of 16.5% in 2016, driven by financial inclusion efforts and the adoption of mobile
payments and are projected to grow 21.6% through 2021, fueled by a change in mindset of payment users from
cash-to-mobile payments. As economic conditions in Latin America improve, revised positive GDP forecasts
may drive growth in non-cash transactions. With increasing awareness and penetration of smartphones, digital
payments in Latin America might directly leapfrog into e-wallets instead of following the traditional route of
increased card transactions. In North America, non-cash payments grew by 5.7% in 2016, are projected to grow
5.6% through 2021 and North America is expected to cede the position as the region with the largest number of
non-cash transactions to emerging Asia by 2021. We continue to believe that the attractive characteristics of our
6
markets and our position across multiple services and sectors will continue to drive growth and profitability in
our businesses.
Ongoing Technology Outsourcing Trends
Financial institutions globally are facing significant challenges including the entrance of non-traditional
competitors, the compression of margins on traditional products, significant channel proliferation and increasing
regulation that could potentially curb profitability. Many of these institutions have traditionally fulfilled their IT
needs through legacy computer systems, operated by the institution itself. Legacy systems are generally highly
proprietary, inflexible and costly to operate and maintain and we believe the trend to outsource in-house
technology systems and processes by financial institutions will continue.
Industry Innovation
The electronic payments industry experiences ongoing technology innovation. Emerging payment technologies
such as prepaid cards, contactless payments, payroll cards, mobile commerce, mobile “wallets” and innovative
POS devices continue to drive the shift away from cash, check and other paper methods of payment. The
increasing demand for new and flexible payment options catering to a wider range of consumer segments is
driving growth in the electronic payment processing sector.
Our Competitive Strengths
Market Leadership in Latin America and the Caribbean
We believe we have an inherent competitive advantage relative to U.S. competitors based on our first-hand
knowledge of the Latin American and Caribbean markets and technological needs, language and culture. We
have built leadership positions across the transaction processing value chain in the key geographic markets that
we serve, which we believe will enable us to continue to penetrate our core markets and provide advantages to
enter new markets. According to the August 2018 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 own and operate the ATH network, one of the leading ATM and PIN debit
networks in Latin America. EVERTEC processed approximately two billion transactions in 2018, which,
according to management's estimates, makes ATH branded products the most frequently used electronic method
of payment in Puerto Rico. We offer compelling value to our merchants, as noted in the most recent report
published by the Federal Reserve Board regarding debit network fees, which ranked the ATH network as one of
the most economical networks for merchants. Given our scale and customer base of top tier financial
institutions and government entities, we believe we are the leading card issuer and core bank processor in the
Caribbean and the only non-bank provider of cash processing services to the U.S. Federal Reserve in the
Caribbean. We believe our competitive position and brand recognition increases card acceptance, driving usage
of our proprietary network, and presents opportunities for future strategic relationships.
Broad and Deep Customer Relationships and Recurring Revenue Business Model
We have built a strong and long-standing portfolio of financial institution, merchant, corporate and government
customers across Latin America and the Caribbean, which provides us with a reliable, recurring revenue base
and powerful references that have helped us expand into new channels and geographic markets. Our Payment
Services - Puerto Rico & Caribbean, Payment Services - Latin America and Merchant Acquiring segments, as
well as certain business lines representing the majority of our business solutions segment, generate recurring
revenues that collectively accounted for approximately 95% of our total revenues in 2018. We receive recurring
revenues from services based on our customers’ on-going daily commercial activity such as processing loans,
hosting accounts and information on our servers, and processing everyday payments at grocery stores, gas
stations and similar establishments. We generally provide these services under one to five year contracts, often
7
with automatic renewals. We also provide a few project-based services that generate non-recurring revenues in
our business solutions segment such as IT consulting for a specific project or integration. Additionally, we
entered into a 15-year Master Services Agreement with Popular on September 30, 2010. We provide a number
of critical payment services and business solutions products and services to Popular and benefit from the bank’s
distribution network and continued support. Through our long-standing and diverse customer relationships, we
are able to gain valuable insight into trends in the marketplace that allows us to identify new market
opportunities. In addition, we believe the recurring nature of our business model provides us with revenue and
earnings stability.
Highly Scalable, End-to-End Technology Platform
Our diversified business model is supported by our scalable, end-to-end technology platforms that allow us to
provide a broad range of transaction processing services and develop and deploy technology solutions to our
customers at low incremental costs and increasing operating efficiencies. We have spent over $185 million over
the last five years on technology investments, including POS, to continue to build the capacity and functionality
of our platforms and we have been able to achieve attractive economies of scale with flexible product
development capabilities. We believe that our platforms will allow us to provide differentiated services to our
customers and facilitate further expansion into new sales channels and geographic markets.
Experienced Management Team with a Strong Track Record of Execution
We have grown our revenue organically by introducing new products and services and expanding our
geographic footprint throughout Latin America. We have a proven track record of creating value from
operational and technology improvements and capitalizing on cross-selling opportunities. We have combined
new leadership at EVERTEC, bringing many years of industry experience, with long-standing leadership at the
operating business level. Collectively, our management team benefits from an average of over 20 years of
industry experience and we believe they are well positioned to continue to drive growth across business lines
and regions.
Our Growth Strategy
We intend to grow our business by continuing to execute on the following business strategies:
Continue Cross-Sales to Existing Customers
We seek to grow revenue by continuing to sell additional products and services to our existing merchant,
financial institution, corporate and government customers. We intend to broaden and deepen our customer
relationships by leveraging our full suite of end-to-end technology solutions. For example, we believe that there
is significant opportunity to cross-sell our network services, ATM point-of-sale processing and card issuer
processing services as well as our risk management products to our over 180 existing financial institution
customers, particularly in markets outside of Puerto Rico. We will also seek to continue to cross-sell value
added services into our existing merchant base.
Leverage Our Franchise to Attract New Customers in the Markets We Currently Serve
We intend to attract new customers by leveraging our comprehensive product and services offering, the strength
of our brand and our leading end-to-end technology platform. Furthermore, we believe we are well positioned to
develop new products and services to take advantage of our access to and position in markets we currently
serve. For example, in markets we serve outside of Puerto Rico, we believe there is a significant opportunity to
penetrate small to medium financial institutions with our products and services.
8
Expand in the Latin American Region
We believe there is substantial opportunity to expand our businesses in the Latin American region. We believe
that we have a competitive advantage relative to U.S. competitors based on our first-hand knowledge of the
Latin American and Caribbean markets and their technological needs, language and culture. We believe
significant growth opportunities exist in a number of large markets such as Colombia, México, and Chile,
among others. We also believe that there is an opportunity to provide our services to existing financial
institution customers in other regions where they operate. Additionally, we continually evaluate our strategic
plans for geographic expansion, which can be achieved through joint ventures, partnerships, alliances or
strategic acquisitions. For a description of risks associated with obtaining regulatory approvals and other risks
associated with strategic transactions, see “Item 1A. Risk Factors—Risks Related to Our Business—Our
expansion and selective acquisition strategy exposes us to risks, including the risk that we may not be able to
successfully integrate acquired businesses.”
Develop New Products and Services
Our experience with our customers provides us with insight into their needs and enables us to continuously
develop new transaction processing services. We plan to continue growing our merchant, financial institution,
corporate and government customer base by developing and offering additional value-added products and
services to cross-sell along with our core offerings. We intend to continue to focus on these and other new
product opportunities in order to take advantage of our leadership position in the transaction processing industry
in the Latin American and Caribbean region.
Our Business
We offer our customers end-to-end products and solutions across the transaction processing value chain from a
single source across numerous channels and geographic markets, as further described below.
Merchant Acquiring
According to the August 2018 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. Our merchant acquiring business provides services to merchants that allow them to accept
electronic methods of payment such as debit, credit, prepaid and EBT cards carrying the ATH, Visa,
MasterCard, Discover and American Express brands. Our full suite of merchant acquiring services includes, but
is not limited to, the underwriting of each merchant’s contract, the deployment and rental of POS devices and
other equipment necessary to capture merchant transactions, the processing of transactions at the point-of-sale,
the settlement of funds with the participating financial institution, detailed sales reports and customer support.
In 2018, our merchant acquiring business processed over 400 million transactions.
Payment Services
We believe we are the largest card processor and card network service provider in the Caribbean. We provide a
diversified suite of payment processing products and services to blue chip regional and global corporate
customers, government agencies, and financial institutions across Latin America and the Caribbean. These
services provide the infrastructure technology necessary to facilitate the processing and routing of payments
across the transaction processing value chain.
At the point-of-sale, we sell transaction processing technology solutions, similar to the services in our merchant
acquiring business, to other merchant acquirers to enable them to service their own merchant customers. We
also offer terminal driving solutions to merchants, merchant acquirers (including our merchant acquiring
business) and financial institutions, which provide the technology to securely operate, manage and monitor POS
9
terminals and ATMs. We also rent POS devices to financial institution customers who seek to deploy them
across their own businesses.
To connect the POS terminals to card issuers, we own and operate the ATH network, one of the leading ATM
and PIN debit networks in Latin America. The ATH network connects the merchant or merchant acquirer to the
card issuer and enables transactions to be routed or “switched” across the transaction processing value chain.
The ATH network offers the technology, communications standards, rules and procedures, security and
encryption, funds settlement and common branding that allow consumers, merchants, merchant acquirers,
ATMs, card issuer processors and card issuers to conduct commerce seamlessly, across a variety of channels,
similar to the services provided by Visa and MasterCard. The ATH network and processing businesses
processed approximately two billion transactions in 2018.
To enable financial institutions, governments and other businesses to issue and operate a range of payment
products and services, we offer an array of card processing and other payment technology services, such as
internet and mobile banking software services, bill payment systems and EBT solutions. Financial institutions
and certain retailers outsource to us certain card processing services such as card issuance, processing card
applications, cardholder account maintenance, transaction authorization and posting, high volume payment
processing fraud and risk management services, and settlement. Our payment products include electronic check
processing, automated clearing house (“ACH”), lockbox, online, interactive voice response and web-based
payments through personalized websites, among others.
We have been the main provider of EBT services to the Puerto Rican government since 1998. Our EBT
application allows certain agencies to deliver government benefits to participants through a magnetic card
system and serves approximately 800,000 active participants.
Business Solutions
We provide our financial institutions, corporate and government customers with a wide suite of business process
management solutions including specifically core bank processing, network hosting and management, IT
consulting, business process outsourcing, item and cash processing, and fulfillment. In addition, we believe we
are the only non-bank provider of cash processing services to the U.S. Federal Reserve in the Caribbean.
Competition
Competitive factors impacting the success of our services include the quality of the technology-based
application or service, application features and functions, ease of delivery and integration, ability of the provider
to maintain, enhance and support the applications or services, and price. We believe that we compete well in
each of these categories. In addition, we believe that our relationship with Popular, scale and expertise, and
financial institution industry expertise, combined with our ability to offer multiple applications, services and
integrated solutions to individual customers, enhances our competitiveness against companies with more limited
offerings and helps us compete with large global competitors with similar assets to ours.
In merchant acquiring, we compete with several other service providers and financial institutions, including
Worldpay, Inc., First Data Corporation, Global Payments, Inc., Elavon, Inc., EVO Payments, Inc., independent
sales organizations and some local banks. Also, the card associations and payment networks are increasingly
offering products and services that compete with ours. The main competitive factors are price, brand awareness,
strength of the relationship with financial institutions, system functionality, integration service capabilities and
innovation. Our business is also impacted by the expansion of new payments methods and devices, card
association business model expansion, and bank consolidation.
In payment services, we compete with several other third party card processors and debit networks, including
First Data Corporation, Tecnocom Telecomunicaciones y Energía, S.A., Fidelity National Information Services,
10
Inc., Fiserv, Inc., Total System Services, Inc., Worldpay, Inc., MasterCard, Visa, American Express, Discover
and Global Payments, Inc. Also, card associations and payment networks are increasingly offering products and
services that compete with our products and services. The main competitive factors are price, system
performance and reliability, system functionality, security, service capabilities and disaster recovery and
business continuity capabilities.
In business solutions, our main competition includes internal technology departments within financial
institutions, retailers, data processing or software development departments of large companies and/or large
technology and consulting companies, such as Fidelity National Information Services, Inc. and Fiserv, Inc. The
main competitive factors are price, system performance and reliability, system functionality, security, service
capabilities, and disaster recovery and business continuity capabilities.
Intellectual Property
We own numerous registrations for several trademarks in different jurisdictions and own or have licenses to use
certain software and technology, which are critical to our business and future success. For example, we own the
ATH and EVERTEC trademarks in several jurisdictions, which are associated by the public, financial
institutions and merchants with high quality and reliable electronic commerce, payments, and debit network
solutions and services. Such goodwill allows us to be competitive, retain our customers and expand our
business. Further, we also use a combination of (i) proprietary software, and (ii) duly licensed third party
software to operate our business and deliver secure and reliable products and services to our customers. The
licensed software is subject to terms and conditions that we considered within the industry standards. Most are
perpetual licenses and the rest are term licenses with renewable terms. In addition, we monitor these license
agreements and maintain close contact with our suppliers to ensure their continuity of service.
We seek to protect our intellectual property rights by securing appropriate statutory intellectual property
protection in the relevant jurisdictions. We also protect proprietary know-how and trade secrets through
company confidentiality policies, licenses, programs and contractual agreements.
Employees
As of December 31, 2018, we had approximately 2,100 employees across 11 countries in the United States,
Latin America and the Caribbean. In Brazil, we have one unionized employee covered by the terms of industry-
specific collective agreements. None of our other employees are otherwise represented by any labor
organization. We consider our relationships with our employees to be good. We have not experienced any work
stoppages in connection with employee matters.
Government Regulation and Payment Network Rules
Federal Reserve Regulations
Popular is a bank holding company that has elected to be treated as a financial holding company under the
provisions of the Gramm-Leach-Bliley Act of 1999. To the extent that we are deemed to be a “subsidiary” of
Popular for purposes of the Bank Holding Company (“BHC”) Act, we will be subject to regulation and
oversight by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and our
activities will be subject to several related significant restrictions, the more significant of which are discussed
below.
Transactions with Affiliates
To the extent that we are deemed to be an affiliate of Popular for purpose of the affiliate transaction rules found
in Section 23A and 23B of the Federal Reserve Act and Regulation W of the Federal Reserve Board, we will be
11
subject to various restrictions on our ability to borrow from, and engage in certain other transactions with
Popular’s bank subsidiaries, Banco Popular and Banco Popular North America (“BPNA”). In general these rules
require that any “covered transaction” that we enter into with Banco Popular or BPNA (or any of their
respective operating subsidiaries), as the case may be, must be secured by designated amounts of specified
collateral and must be limited to 10% of Banco Popular’s or BPNA’s, as the case may be, capital stock and
surplus. In addition, all “covered transactions” between Banco Popular or BPNA, on the one hand, and Popular
and all of its subsidiaries and affiliates on the other hand, must be limited to 20% of Banco Popular’s or
BPNA’s, as the case may be, capital stock and surplus. “Covered transactions” are defined by statute to include
a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets
(unless otherwise exempted by the Federal Reserve Board) from the affiliate, the acceptance of securities issued
by the affiliate as collateral for a loan and the issuance of a guarantee, acceptance or letter of credit on behalf of
an affiliate.
In addition, Section 23B and Regulation W require that to the extent that we are deemed an affiliate of Banco
Popular or BPNA, all transactions between us and either Banco Popular or BPNA be on terms and conditions,
including credit standards, that are substantially the same or at least as favorable to Banco Popular or BPNA, as
the case may be, as those prevailing at the time for comparable transactions involving other non-affiliated
companies or, in the absence of comparable transactions, on terms and conditions, including credit standards,
that in good faith would be offered by Banco Popular or BPNA to, or would apply to, non-affiliated companies.
Permissible Activities
To the extent that we are deemed to be controlled by Popular for bank regulatory purposes, we may conduct
only those activities that are authorized for a bank holding company or a financial holding company under the
BHC Act, the Federal Reserve Board’s Regulation K and other relevant U.S. federal banking laws. These
activities generally include activities that are related to banking, financial in nature or incidental to financial
activities. In addition, restrictions placed on Popular as a result of supervisory or enforcement actions may
restrict us or our activities in certain circumstances, even if these actions are unrelated to our conduct or
business. To the extent that we are deemed to be a foreign subsidiary of a bank holding company under the
Federal Reserve Board’s regulations, we will rely on the authority granted under the Federal Reserve Board’s
Regulation K to conduct our data processing, management consulting and related activities outside the United
States. The Federal Reserve Board’s Regulation K generally limits activities of a bank holding company outside
the United States that are not banking or financial in nature, specifically permitted under Regulation K to
foreign subsidiaries or necessary to carry on such activities that are not otherwise permissible for a foreign
subsidiary under the banking regulations. We continue to engage in certain activities outside the scope of such
permissible activities pursuant to authority under the Federal Reserve Board’s Regulation K, which allows a
bank holding company to retain, in the context of an acquisition of a going concern, such otherwise
impermissible activities if they account for not more than 5% of either the consolidated assets or consolidated
revenues of the acquired organization.
New lines of business, other new activities, divestitures or acquisitions that we may wish to commence in the
future may not be permissible for us under the BHC Act, the Federal Reserve Board’s Regulation K or other
applicable U.S. federal banking laws. Further, as a result of being subject to regulation and supervision by the
Federal Reserve Board, we may be required to obtain the approval of the Federal Reserve Board before
engaging in certain new activities or businesses, whether organically or by acquisition, unless such activities are
considered financial in nature. If we are unable to obtain any such approval on a timely basis, are delayed in
receiving approval, are approved subject to regulatory conditions or do not receive approval, this may make
transactions more expensive or may make us less attractive to potential sellers.
12
Examinations
As a technology service provider to financial institutions, we are also subject to regulatory oversight and
examination by the Federal Financial Institutions Examination Council (the “FFIEC”), an interagency body of
federal financial regulators that includes the Federal Reserve Board. The office of the Commissioner of
Financial Institutions of Puerto Rico also participates in such examinations by the FFIEC. In addition,
independent auditors annually review several of our operations to provide reports on internal controls for our
clients’ auditors and regulators.
Regulatory Reform and Other Legislative Initiatives
The payment card industry has come under increased scrutiny from lawmakers and regulators. The Dodd-Frank
Wall Street Reform and Protection Act (the “Dodd-Frank Act”) set forth significant structural and other changes
to the regulation of the financial services industry, including the establishment of the Consumer Financial
Protection Bureau (the “CFPB”). The CFPB has broad supervisory, enforcement and rulemaking authority over
consumer financial products and services (including many offered by us and by our clients) and certain bank
and non-bank providers of such products and services. In addition, Section 1075 of the Dodd-Frank Act
(commonly referred to as the “Durbin Amendment”) imposed new restrictions on card networks and debit card
issuers. More specifically, the Durbin Amendment provides that the interchange transaction fees that a card
issuer or payment network may receive or charge for an electronic debit transaction must be “reasonable and
proportional” to the cost incurred by the card issuer in authorizing, clearing and settling the transaction.
The Federal Reserve’s regulations (a) limit debit transaction interchange fees to $.21 + (5 bps times the value of
the transactions) + $.01 (as a fraud adjustment for issuers that have in place policies and measures to address
fraud); (b) require that issuers enable at least two unaffiliated payment card networks on their debit cards
without regard to authentication method; and (c) prohibit card issuers and payment card networks from entering
into exclusivity arrangements for debit card processing and restrict card issuers and payment networks from
inhibiting the ability of merchants to direct the routing of debit card transactions over networks of their choice.
The Dodd-Frank Act also allows merchants to set minimum dollar amounts (currently, not to exceed $10) for
the acceptance of a credit card and provide discounts or incentives to entice consumers to pay with various
payment methods, such as cash, checks, debit cards or credit cards, as the merchant prefers.
The CFPB is responsible for many of the regulatory functions with respect to consumer financial products and
services. In addition to rulemaking authority over several enumerated federal consumer financial protection
laws, the CFPB is authorized to issue rules prohibiting unfair, deceptive or abusive acts or practices in
connection with the offering of a consumer financial product or service or any transaction with a consumer for
such product or service. The CFPB also has authority to examine supervised entities for compliance with, and to
enforce violations of, consumer financial protection laws.
To the extent that we are deemed an affiliate of Banco Popular-an insured depository institution with greater
than $10 billion in total consolidated assets-and as a service provider to other insured depository institutions
with $10 billion or more in total consolidated assets, as well as larger participants in markets for consumer
financial products and services, as determined by the CFPB, we are subject to the supervision, enforcement and
rulemaking authority of the CFPB. CFPB rules, examinations and enforcement actions may require us to adjust
our activities and may increase our compliance costs.
In 2017, the former Director of the CFPB resigned and was replaced by a Director. This change in leadership,
although the subject of ongoing litigation, may result in certain changes to CFPB policies and supervision,
enforcement and rulemaking priorities. In addition, various legislative proposals to restructure or limit the
authority of the CFPB, or to modify certain consumer financial protection laws or CFPB regulations, have been
considered by Congress. It is unclear whether or to what extent any such change would affect the manner in
which we engage in consumer product and service activities.
13
From time to time, various legislative initiatives are introduced in Congress and state legislatures, and changes
in regulations or agency policies, or in the interpretation of such regulations and policies, are proposed by
regulatory agencies. Such initiatives may include proposals to modify the powers of bank holding companies
and their affiliates. Such legislation or changes in regulation could affect our operating environment in
substantial and unpredictable ways. If adopted, such legislation or changes in regulation could increase the cost
of doing business or limit permissible activities. We cannot predict whether any such legislation will be enacted,
and, if enacted, the effect that it, or any implementing regulations or related policies and guidance, would have
on our financial condition or results of operations.
Other Government Regulations
Our services are also subject to a broad range of complex federal, state, Puerto Rico and foreign regulation,
including privacy laws, international trade regulations, the Bank Secrecy Act and other anti-money laundering
laws, anti-trust and competition laws, the U.S. Internal Revenue Code, the PR Code, the Employee Retirement
Income Security Act, the Health Insurance Portability and Accountability Act and other Puerto Rico laws and
regulations. Failure of our services to comply with applicable laws and regulations could result in restrictions on
our ability to provide such services, as well as the imposition of civil fines and/or criminal penalties. The
principal areas of regulation (in addition to oversight by the Federal Reserve Board) that impact our business
are described below.
Privacy
We and our financial institution clients are required to comply with various U.S. state, federal and foreign
privacy laws and regulations, including those imposed under the Gramm-Leach-Bliley Act of 1999 which
applies directly to a broad range of financial institutions and to companies that provide services to financial
institutions. These laws and regulations place restrictions on the collection, processing, storage, use and
disclosure of certain personal information, require disclosure to individuals of detailed privacy practices and
provide them with certain rights to prevent the use and disclosure of protected information. The regulations,
however, permit financial institutions to share information with non-affiliated parties who perform services for
the financial institutions. These laws also impose requirements for safeguarding personal information through
the issuance of data security standards or guidelines. Certain state laws impose similar privacy obligations, as
well as, in certain circumstances, obligations to provide notification to affected individuals, states officers and
consumer reporting agencies, as well as businesses and governmental agencies that own data, of security
breaches of computer databases that contain personal information. In addition, U.S. state and federal
government agencies have been contemplating or developing new initiatives to safeguard privacy and enhance
data security. Some foreign privacy laws are stricter than those applicable under U.S. federal, state or Puerto
Rican law. As a provider of services to financial institutions, we are required to comply with the privacy
regulations and are bound by the same limitations on disclosure of the information received from our customers
as apply to the financial institutions themselves. See “Item 1A. Risk Factors-Risks Related to Our Business-
Security breaches or our own failure to comply with privacy regulations and industry security requirements
imposed on providers of services to financial institutions and card processing services could harm our business
by disrupting our delivery of services and damaging our reputation.”
Anti-Money Laundering and Office of Foreign Assets Control Regulation
Since we provide data processing services to both foreign and domestic financial institutions, we are required to
comply with certain anti-money laundering and terrorist financing laws and economic sanctions imposed on
designated foreign countries, nationals and others. Specifically, we must adhere to the requirements of the Bank
Secrecy Act, as amended by the USA PATRIOT Act of 2001 (collectively, the “BSA”) regarding processing and
facilitation of financial transactions, as well as other state, local and foreign laws relating to money laundering.
Furthermore, as a data processing company that provides services to foreign parties and facilitates financial
14
transactions between foreign parties, we are obligated to screen transactions for compliance with the sanctions
programs administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”).
These regulations prohibit us from entering into or facilitating a transaction to or from or dealings with
specified countries, their governments and, in certain circumstances, their nationals and others, such as narcotics
traffickers and terrorists or terrorist organizations designated by the U.S. Government under one or more
sanctions regimes.
A major focus of governmental policy in recent years has been aimed at combating money laundering and
terrorist financing. Preventing and detecting money laundering and other related suspicious activities at their
earliest stages warrants careful monitoring. The BSA, along with a number of other anti-money laundering
laws, imposes various reporting and record-keeping requirements concerning currency and other types of
monetary instruments. Similar anti-money laundering, counter-terrorist financing and proceeds of crime laws
apply to movements of currency and payments through electronic transactions and to dealings with persons
specified on lists maintained by organizations similar to OFAC in several other countries and which may
impose specific data retention obligations or prohibitions on intermediaries in the payment process. These laws
and regulations impose obligations to maintain appropriate policies, procedures and controls to detect, prevent
and report money laundering and terrorist financing and to verify the identity of their customers. Failure to
maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply
with all of the relevant laws or regulations, could have serious legal and reputational consequences for us.
Federal Trade Commission Act and Other Laws Impacting our Customers' Business
All persons engaged in commerce, including, but not limited to, us and our merchant and financial institution
customers are subject to Section 5 of the Federal Trade Commission Act prohibiting Unfair or Deceptive Acts or
Practices (“UDAP”). In addition, there are other laws, rules and/or regulations, including the Telemarketing
Sales Act, that may directly impact the activities of our merchant customers and in some cases may subject us,
as the merchant's payment processor, to investigations, fees, fines and disgorgement of funds in the event we are
deemed to have aided and abetted or otherwise provided the means and instrumentalities to facilitate the illegal
activities of the merchant through our payment processing services. Federal and state regulatory enforcement
agencies including the Federal Trade Commission, or FTC, and the states' attorneys general have authority to
take action against nonbanks that engage in UDAP or violate other laws, rules and regulations. To the extent we
process payments for a merchant that may be in violation of these laws, rules and regulations, we may be
subject to enforcement actions and as a result may incur losses and liabilities that may impact our business.
Anti-trust and Competition Laws
We are required to comply with various federal, local and foreign competition and anti-trust laws, including the
Sherman Act, Clayton Act, Hart-Scott-Rodino Antitrust Improvements Act, Robinson-Patman Act, Federal
Trade Commission Act and Puerto Rico Anti-Monopoly Act. In general, competition laws are designed to
protect businesses and consumers from anti-competitive behavior. Competition and anti-trust law investigations
can be lengthy and violations are subject to civil and/or criminal fines and other sanctions for both corporations
and individuals that participate in the prohibited conduct. Class action civil anti-trust lawsuits can result in
significant judgments, including in some cases, payment of treble damages and/or attorneys' fees to the
successful plaintiff. See “Item 1A. Risk Factors-Risks Related to Our Business-Failure to comply with U.S.
state and federal antitrust requirements, or the Puerto Rico Anti-Monopoly Act, and government investigations
into our compliance, could adversely affect our business.”
Foreign Corrupt Practices Act (“FCPA”), Export Administration and Other
As a data processing company that services both foreign and domestic clients, our business activities in foreign
countries, and in particular our transactions with foreign governmental entities, subject us to the anti-bribery
provisions of the FCPA, as well as the laws and regulations of the foreign jurisdiction where we operate.
15
Pursuant to applicable anti-bribery laws, our transactions with foreign government officials and political
candidates are subject to certain limitations. Finally, in the course of business with foreign clients and
subsidiaries, we export certain software and hardware that is regulated by the Export Administration
Regulations from the United States to the foreign parties. Together, these regulations place restrictions on who
we can transact with, what transactions may be facilitated, how we may operate in foreign jurisdictions and
what we may export to foreign countries.
The preceding list of laws and regulations is not exhaustive, and the regulatory framework governing our
operations changes continuously. The enactment of new laws and regulations may increasingly affect directly
and indirectly the operation of our business, which could result in substantial regulatory compliance costs,
litigation expense, loss of revenue, decreased profitability and/or adverse publicity.
Association and Network Rules
Several of our subsidiaries are registered with or certified by card associations and payment networks, including
the ATH network, MasterCard, Visa, American Express, Discover and numerous debit and EBT networks as
members or as service providers for member institutions in connection with the services we provide to our
customers. As such, we are subject to applicable card association and network rules, which could subject us to a
variety of fines or penalties that may be levied by the card associations or networks for certain acts and/or
omissions by us, our acquirer customers, processing customers and/or merchants. For example, “EMV” is a
credit and debit card authentication methodology that the card associations are mandating to processors, issuers
and acquirers in the payment industry. Compliance deadlines for EMV mandates vary by country and by
payment network. We have invested significant resources and man-hours to develop and implement this
methodology in all our payment related platforms. However, we are not certain if or when our financial
institution customers will use or accept the methodology and the time it will take for this technology to be
rolled-out to all customer ATM and POS devices connected to our platforms or adopted by our card issuing
clients. Non-compliance with EMV mandates could result in lost business or financial losses from fraud or fines
from network operators. We are also subject to network operating rules promulgated by the National Automated
Clearing House Association relating to payment transactions processed by us using the Automated Clearing
House Network and to various government laws regarding such operations, including laws pertaining to EBT.
Geographic Concentration
Our revenue composition by geographical area is based in Latin America and the Caribbean. Latin America includes,
among others, Costa Rica, México, Guatemala, Colombia, Chile, Uruguay, Brazil and Panamá. The Caribbean
primarily represents Puerto Rico, the Dominican Republic and the Virgin Islands. See Note 23 of Audited
Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional
information related to geographic areas.
Seasonality
Our payment businesses generally experience increased activity during the traditional holiday shopping periods
and around other nationally recognized holidays.
Available Information
EVERTEC’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K
and amendments to such reports (if applicable) filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) are available free of charge, through our website, http://
www.evertecinc.com, as soon as reasonably practicable after such material is electronically filed with or furnished
to the SEC. In addition, we make available on our website under the heading of “Corporate Information” our:
(i) Code of Ethics; (ii) Code of Ethics for Service Providers; (iii) Corporate Governance Guidelines; (iv) the charters
16
of the Audit, Compensation and Nominating and Corporate Governance committees, and also we intend to disclose
any amendments to the Code of Ethics. The aforementioned reports and materials can also be obtained free of
charge upon written request or telephoning to the following address or telephone number:
EVERTEC, Inc.
Cupey Center Building
Road, 176, Kilometer 1.3
San Juan, Puerto Rico 00926
(787) 759-9999
Our filings with the SEC are also available to the public from commercial document retrieval services and at the
web site maintained by the SEC at http://www.sec.gov.
Item 1A. Risk Factors
Readers should carefully consider, in connection with other information disclosed in this Annual Report on
Form 10-K, the risks and uncertainties described below. The following discussion sets forth risks that we
believe are material to our stockholders and prospective stockholders. The occurrence of any of the following
risks might cause our stockholders to lose all or a part of their investment in our Company. We cannot assure
you that the risk factors described below or elsewhere in this document are a complete set of all potential risks
we may face; additional risks and uncertainties not presently known to us or not believed by us to be material
may also affect our business results, financial condition, results of operations, cash flows, and the trading price
of our common stock. Some statements in this report, including statements in the following risk factors section,
constitute forward-looking statements. Please also refer to the section titled “Forward Looking Statements” at
the beginning of this Annual Report on Form 10-K.
Risks Related to Our Business
We expect to continue to derive a significant portion of our revenue from Popular.
Our services to Popular account for a significant portion of our revenues, and we expect that our services to
Popular will continue to represent a significant portion of our revenues for the foreseeable future. In 2018,
products and services billed to Popular accounted for approximately 41% of our total revenues. The majority of
Popular’s business is presented in the Business Solutions segment. If Popular were to terminate, fail to perform
under (in whole or in part), or fail to renew the Master Services Agreement (“MSA”), which currently expires in
2025, or our other material agreements with Popular, our revenues could be materially reduced and our
profitability and cash flows could also be materially reduced, all of which would have a material adverse impact
on our financial condition and results of operations.
We depend, in part, on our merchant relationships and our alliance with Banco Popular, a wholly-owned
subsidiary of Popular, to grow our merchant acquiring business. If we are unable to maintain these
relationships and this alliance, our business may be adversely affected.
Growth in our merchant acquiring business is derived primarily from acquiring new merchant relationships,
new and enhanced product and service offerings, cross selling products and services into existing relationships,
the shift of consumer spending to increased usage of electronic forms of payment, and the strength of our
relationship with Banco Popular. A substantial portion of our business is generated from our Independent Sales
Organization Sponsorship and Services Agreement (the “ISO Agreement”) with Banco Popular, which expires
in 2025.
Banco Popular acts as a merchant referral source and provides sponsorship into the ATH, Visa, Discover and
MasterCard networks for merchants, as well as card association sponsorship, clearing and settlement services.
17
We provide transaction processing and related functions. Both we and Popular as alliance partners may provide
management, sales, marketing, and other administrative services to merchants. We rely on the continuing
growth of our merchant relationships, which in turn is dependent upon our alliance with Banco Popular and
other distribution channels. There can be no guarantee that this growth will continue and the loss or
deterioration of these relationships, whether due to the termination of the ISO Agreement or otherwise, could
negatively impact our business and result in a reduction of our revenue and income.
Our MSA with Popular, our ISO Agreement with Banco Popular and our ATH Network Participation
Agreement and ATH Support Agreement with Banco Popular (the “BPPR ATH Agreements”) have initial
terms ending in 2025. If Popular or Banco Popular decide not to renew one or more of these agreements, or
if we are unable to negotiate extensions, or if we must provide significant concessions to Popular or Banco
Popular to secure extensions or otherwise, our results of operations, financial condition and trading price of
our common stock may be materially adversely affected, and it could also potentially limit our ability to
renegotiate our debt.
Our MSA with Popular has an initial term that ends in 2025. For 2018, we derived approximately 41% of our
revenue from such contract, which makes the MSA our most significant client contract. We expect that we will
enter into a negotiation with Popular prior to the expiration of the initial term of the MSA. We cannot be certain
that we will be able to negotiate an extension to the MSA. In addition, even if we are able to negotiate an
extension of the MSA, any new master services agreement may be materially different from the existing MSA.
Further, the anticipated negotiation of the MSA extension may result in Popular obtaining significant
concessions from us with respect to pricing and other key terms, both in respect of the current term and any
extension of the MSA, particularly as we approach 2025. Any such events may materially negatively impact our
financial condition, results of operations and trading price of our common stock, as well as potentially limit our
ability to renegotiate our debt.
Pursuant to our ISO Agreement with Banco Popular, Banco Popular sponsors us as an independent sales
organization with respect to certain credit card associations and is required to exclusively refer to us any
merchant that inquires about, requests or otherwise evidences interest in merchant and other services. If the ISO
Agreement is not renewed, we will have to seek other card association sponsors, we will not benefit from Banco
Popular referral of merchants and we may experience the loss of some merchants if Banco Popular itself enters
the merchant acquiring business or agrees to sponsor another independent sales organization. Any of these may
negatively impact our financial condition and results of operations.
Similarly, the BPPR ATH Agreements have initial terms ending in 2025. Under such agreements, among other
things, we provide Banco Popular certain ATM and POS services in connection with our ATH network; we
grant a license to use the ATH logo, word mark and associated trademarks; and Banco Popular agrees to
support, promote and market the ATH network and brand and to issue debit cards bearing the symbol of the
ATH network. If one or both of the BPPR ATH Agreements are not extended, our ATH brand and network could
be negatively impacted and our financial conditions and results of operations adversely affected.
A protracted government shutdown could negatively affect our financial condition.
During any protracted federal government shutdown, the federal government may reduce or cut funding for
certain welfare and disaster relief programs. Beneficiaries of certain federal programs, such as the Supplemental
Nutrition Assistance Program (SNAP), obtain their benefits through electronic benefits transfer (EBT) accounts.
A temporary or permanent reduction in federal welfare and relief programs could lead to a decrease in
electronic benefit card volume. The effect of a protracted government shutdown now or in the future may affect
our revenues, profitability and cash flows.
18
If we are unable to renew client contracts on favorable terms or at all, our results of operations and financial
condition may be adversely affected.
Failure to achieve favorable renewals of client contracts could negatively impact our business. Our contracts
with private clients generally run for a period of one to five years, except for our Master Services Agreement
with Popular. Our government contracts generally run for one year and do not include automatic renewal
periods due to government procurement rules and related fiscal funding requirements. Our standard merchant
contract has an initial term of up to three years, with automatic one-year renewal periods. At the end of the
contract term, clients can renew or renegotiate their contracts with us, but may also consider whether to engage
one of our competitors to provide products and services. If we are not successful in achieving high renewal rates
and/or contract terms that are favorable to us, our results of operations and financial condition may be adversely
affected.
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations,
limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the
extent of our variable rate debt and prevent us from meeting our obligations under our notes and senior
secured credit facilities.
We are highly leveraged. As of December 31, 2018, the total principal amount of our indebtedness was
approximately $545.3 million. Our high degree of leverage could have a significant impact on us, including:
•
•
•
increasing our vulnerability to adverse economic, industry or competitive developments;
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal
and interest on our indebtedness, therefore reducing our ability to use our cash flow for other purposes,
including for our operations, capital expenditures and future business opportunities;
exposing us to the risk of increases in interest rates because our borrowings are predominantly at
variable rates of interest;
• making it difficult for us to satisfy our obligations with respect to our indebtedness generally, including
•
•
•
complying with restrictive covenants and borrowing conditions, our noncompliance with which could
result in an event of default under the agreements setting forth the terms such of other indebtedness;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional debt or equity financing for working capital, capital
expenditures, business development, debt service requirements, acquisitions and general corporate or
other purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and
placing us at a competitive disadvantage compared to competitors who may be less highly leveraged
and who therefore, may be able to take advantage of opportunities that our leverage prevents us from
exploiting.
We rely on our systems, employees and certain counterparties, and certain failures could materially adversely
affect our operations.
Many of our services are based on sophisticated software, technology and computing systems, and we may
encounter delays when developing new technology solutions and services. Further, the technology solutions
underlying our services have occasionally contained, and may in the future contain, undetected errors or defects
when first introduced or when new versions are released. In addition, we may experience difficulties in
installing or integrating our technologies on platforms used by our customers.
Our businesses are dependent on our ability to reliably process, record and monitor a large number of
transactions. For example, we settle funds on behalf of financial institutions, other businesses and consumers
and process funds transactions from clients, card issuers, payment networks and consumers on a daily basis for
a variety of transaction types. Transactions facilitated by us include debit card, credit card, electronic bill
payment transactions, ACH payments, electronic benefits transfer transactions and check clearing that supports
19
consumers, financial institutions and other businesses. These payment activities rely upon the technology
infrastructure that facilitates the verification of activity with counterparties, the facilitation of the payment and,
in some cases, the detection or prevention of fraudulent payments. If any of our financial, accounting, or other
data processing systems or applications fail or experience other significant shortcomings or limitations, our
ability to serve our clients and accordingly our results of operations could be materially adversely affected. Such
failures or shortcomings could be the result of events that are wholly or partially beyond our control, which may
include, for example, computer viruses, fires, electrical or telecommunications outages, natural disasters,
disease pandemics, terrorist acts or other unanticipated damage to property or physical assets. Any such failure
or shortcoming could also damage our reputation, require us to expend significant resources to correct the
defect, and may result in liability to third parties, especially since some of our contractual agreements with
financial institutions require the crediting of certain fees if our systems do not meet certain specified service
levels.
Although we have taken steps to protect against data loss and system failures, there is still risk that we may lose
critical data or experience system failures. We perform the vast majority of disaster recovery operations
ourselves, though we utilize select third parties for some aspects of recovery. To the extent we outsource our
disaster recovery, we are at risk of the vendor’s unresponsiveness in the event of breakdowns in our systems.
Furthermore, our property and business interruption insurance may not be adequate to compensate us for all
losses or failures that may occur.
We are similarly dependent on our employees. Our operations could be materially adversely affected if one of
one or more employees causes a significant operational breakdown or failure, either intentionally or as a result
of human error. Third parties with which we do business could also be sources of operational risk to us,
including relating to breakdowns or failures of such parties’ own systems or employees. Any of these
occurrences could diminish our ability to operate one or more of our businesses, or result in potential liability to
clients, reputational damage and regulatory intervention or fines, any of which could materially adversely affect
our financial condition or results of operations.
If our amortizable intangible assets or goodwill become impaired, it may adversely affect our financial
condition and operating results.
If our amortizable intangible assets or goodwill were to become impaired, we may be required to record a
significant charge to earnings. Under U.S. generally accepted accounting principles (“GAAP”), definitive useful
life intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that
the carrying amount may not be recoverable.
Goodwill is tested for impairment at least annually. The goodwill impairment evaluation process requires us to
make estimates and assumptions with regards to the fair value of our reporting units. Actual values may differ
significantly from these estimates. Such differences could result in future impairment of goodwill that would, in
turn, negatively impact our results of operations and the reporting unit where the goodwill is recorded.
Our risk management procedures may not be fully effective in identifying or helping us mitigate our risk
exposure against all types of risks.
We operate in a rapidly changing industry, and we have experienced significant change in the past ten years,
including our separation from Popular following the Merger, our initial public offering in April 2013 and our
listing on the New York Stock Exchange (“NYSE”). Accordingly, we may not be fully effective in identifying,
monitoring and managing our risks. In some cases, the information we use to perform our risk assessments may
not be accurate, complete or up-to-date. In other cases, our risk assessments may depend upon information that
we may not have or cannot obtain. If we are not fully effective or we are not always successful in identifying all
risks to which we are or may be exposed, we could be subject to losses, penalties, litigation or regulatory
20
actions that could harm our reputation or have a material adverse effect on our business, financial conditions
and results of operations.
We are subject to security breaches or other confidential data theft from our systems, which can adversely
affect our reputation and business.
As part of our business, we electronically receive, process, store and transmit a wide range of confidential
information, including sensitive customer information and personal consumer data, such as names and
addresses, social security numbers, driver’s license numbers, cardholder data and payment history records. We
also operate payment, cash access and electronic card systems. Attacks on information technology systems
continue to grow in frequency, complexity and sophistication, a trend we expect will continue. The objectives of
these attacks include, among other things, gaining unauthorized access to systems to facilitate financial fraud,
disrupt operations, cause denial of service events, corrupt data, and steal non-public information. Such attacks
have become a point of focus for individuals, businesses and governmental entities.
Despite the safeguards we have in place, unauthorized access to our computer systems or databases could result
in the theft or publication of confidential information, the deletion or modification of records or could otherwise
cause interruptions in the successful operations of our businesses. These risks are increased when we transmit
information over the Internet as our visibility in the global payments industry may attract hackers to conduct
attacks on our systems. Our security measures may also be breached due to the mishandling or misuse of
information; for example, if such information were erroneously provided to parties who are not permitted to
have the information, either by employees acting contrary to our policies or as a result of a fault in our systems.
Actual or perceived vulnerabilities or data breaches may lead to claims against us, which may require us to
spend significant additional resources to remediate by addressing problems caused by breaches remediate and
further protect against security or privacy breaches. Additionally, while we maintain insurance policies
specifically for cyber-attacks, our current insurance policies may not be adequate to reimburse us for losses
caused by security breaches, and we may not be able to collect fully, if at all, under these insurance policies. A
significant security breach, such as loss of credit card numbers and related information, could have a material
adverse effect on our reputation and could result in a loss of customers. We cannot assure you that our security
measures will prevent security breaches or that failure to prevent them will not have a material adverse effect on
our business, results of operations and financial condition.
The ability to adopt technology to changing industry and customer needs or trends may affect our
competitiveness or demand for our products, which may adversely affect our operating results.
Changes in technology may limit the competitiveness of and demand for our services. Our businesses operate in
industries that are subject to technological advancements, developing industry standards and changing customer
needs and preferences. Also, our customers continue to adopt new technology for business and personal uses.
We must anticipate and respond to these industry and customer changes in order to remain competitive within
our relative markets. Our inability to respond to new competitors and technological advancements could impact
all of our businesses. For example, the ability to adopt technological advancements surrounding POS
technology available to merchants could have an impact on our merchant acquiring business.
Consolidations in the banking and financial services industry could adversely affect our revenues by
eliminating existing or potential clients and making us more dependent on a more limited number of clients.
In recent years, there have been a number of mergers and consolidations in the banking and financial services
industry. Mergers and consolidations of financial institutions reduce the number of our clients and potential
clients, which could adversely affect our revenues. Further, if our clients fail or merge with or are acquired by
other entities that are not our clients, or that use fewer of our services, they may discontinue or reduce their use
of our services. It is also possible that the larger banks or financial institutions resulting from mergers or
21
consolidations would have greater leverage to negotiate terms less favorable to us or could decide to perform in-
house some or all of the services which we currently provide or could provide. Any of these developments
could have a material adverse effect on our business, financial condition and results of operations.
We are subject to the credit risk that our merchants will be unable to satisfy obligations for which we may
also be liable.
We are subject to the credit risk of our merchants being unable to satisfy obligations for which we also may be
liable. For example, as the merchant acquirer, we are contingently liable for transactions originally acquired by
us that are disputed by the cardholder and charged back to the merchants. For certain merchants, if we are
unable to collect amounts paid to cardholders in the form of refunds or chargebacks from the merchant, we bear
the loss for those amounts. Notwithstanding our adherence to industry standards with regards to the acceptance
of new merchants and certain steps to screen for merchant credit risk, a default on payment obligations by one
or more of our merchants could have a material adverse effect on our business.
We depend on our payment processing clients to comply with their contractual obligations, as well as any
applicable laws, regulatory requirements and credit card associations rules or standards.
Our contracts with our payment processing clients generally require that they comply with all applicable laws
and regulatory requirements, as well as any applicable credit card associations rules or standards. A client’s
failure to comply with any such laws or requirements could force us to declare a breach of contract and
terminate the client relationship. The termination of such contracts or relationships, as well as any inability to
collect any damages caused, could have a material adverse effect on our business, financial condition and
results of operations. Additionally, any such failure by clients to comply could also result in fines, penalties or
obligations imputed to EVERTEC, which could also have a material adverse effect on our business.
Increased competition could adversely affect our business.
A decline in the market for our services as a result of increased competition could have a material adverse effect
on our business. We may face increased competition in the future as new companies enter the market and
existing competitors expand their services. Some of these competitors could have greater overall financial,
technical and marketing resources than us, which could enhance their ability to finance acquisitions, fund
internal growth and respond more quickly to professional and technological changes. Some competitors could
have or may develop a lower cost structure. New competitors or alliances among competitors could emerge,
resulting in a loss of business for us and a corresponding decline in revenues and profit margin.
22
Changes in consumer spending or payment preferences could adversely affect our business.
A decline in the market for our services, either as a result of continued migration of Puerto Ricans to the U.S.
mainland, a further deterioration in the Puerto Rico economy, a decrease in consumer spending or a shift in
consumer payment preferences, could have a material adverse effect on our business. If consumer confidence
decreases in a way that adversely affects consumer spending, whether in conjunction with a global economic
downturn or otherwise, we could experience a reduction in the volume of transactions we process. In addition, if
we fail to respond to changes in technology or consumer payment preferences, we could lose business.
Changes in credit card association or other network rules or standards could adversely affect our business.
In order to provide our transaction processing services, several of our subsidiaries are registered with or
certified by Visa, Discover and MasterCard and other networks as members or as service providers for member
institutions. As such, we and many of our customers are subject to card association and network rules that could
subject us or our customers to a variety of fines or penalties that may be levied by the card associations or
networks for certain acts or omissions by us, acquirer customers, processing customers and merchants. Visa,
Discover, MasterCard and other networks, some of which are our competitors, set the standards with which we
must comply. The termination of Banco Popular’s or our subsidiaries’ member registration or our subsidiaries’
status as a certified service provider, or any changes in card association or other network rules or standards,
including interpretation and implementation of the rules or standards, that increase the cost of doing business or
limit our ability to provide transaction processing services to or through our customers, could have an adverse
effect on our business, operating results and financial condition.
Changes in interchange fees or other fees charged by card associations and debit networks could increase
our costs or otherwise adversely affect our business.
From time to time, card associations and debit networks change interchange, processing and other fees, which
could impact our merchant acquiring and payment services businesses. Competitive pressures could result in
our merchant acquiring and payment services businesses absorbing a portion of such increases in the future,
which would increase our operating costs, reduce our profit margin and adversely affect our business, operating
results and financial condition.
For purposes of the Bank Holding Company Act of 1956 (the “BHC Act”), to the extent that we are deemed
to be controlled by Popular, we will be subject to regulation, supervision and examination by the U.S.
Federal Reserve Board, and our activities will be limited to those permissible under the BHC Act and related
regulations. We may be required to obtain regulatory approval before engaging in certain new activities or
businesses, whether organically or by acquisition.
To the extent that we are deemed to be controlled by Popular pursuant to regulation and guidance under the
BHC Act, we will be subject to regulation, supervision and examination by the Federal Reserve Board. The
BHC Act defines “control” differently than GAAP, and “control” can be found based on a variety of facts and
circumstances.
New lines of business, other new activities and acquisitions that we may wish to commence or undertake in the
future, including the manner in which we conduct our business or may undertake such activities or acquisitions,
may not be permissible for us under the BHC Act, the Federal Reserve Board’s Regulation K or other applicable
U.S. federal banking laws or may require the approval of the Federal Reserve Board or another applicable U.S.
federal banking regulator. In addition, potential acquisitions may take longer, be more costly, or make us less
attractive as a buyer. There can be no assurance that any required regulatory approvals will be obtained, or that
they will be obtained without regulatory conditions. Additional regulatory requirements may be imposed on our
activities or acquisitions to the extent we are controlled by Popular and Popular is subject to any supervisory or
enforcement action, even if the supervisory actions are unrelated to us or to our business.
23
Furthermore, as a technology service provider to regulated financial institutions, we are subject to additional
regulatory oversight and examination.
In general, financial institution regulators require their supervised institutions to cause their service providers to
agree to certain terms and to agree to supervision and oversight by applicable financial regulators, primarily to
protect the safety and soundness of the financial institution. We have agreed to such terms and provisions in
many of our service agreements with financial institutions. In particular, we are subject to regulatory oversight
and examination by applicable U.S. federal regulators as a technology service provider to regulated U.S.
financial institutions, including Banco Popular.
Changes in laws, regulations and enforcement activities may adversely affect the products and services we
provide and markets in which we operate.
We and our customers are subject to U.S. federal, Puerto Rico and other countries’ laws, rules and regulations
that affect the electronic payments industry. Our customers are subject to numerous laws, rules and regulations
applicable to banks, financial institutions, processors and card issuers in the United States and abroad. We are
subject to regulation because of our activities in the countries where we carry them out and because of our
relationship with Popular, and at times we are also affected by the laws, rules and regulations to which our
customers are subject. Failure to comply with any of these laws, rules and regulations may result in the
suspension or revocation of licenses or registrations, the limitation, suspension or termination of one or more of
the services we provide, and/or the imposition of civil and criminal penalties, including fines, all of which could
have an adverse effect on our financial condition. In addition, even an inadvertent failure by us to comply with
laws, rules and regulations, as well as rapidly evolving social expectations of corporate fairness, could damage
our reputation or brands.
Regulation of the electronic payment card industry, including regulations applicable to us and our customers,
has increased significantly in recent years. There is also continued scrutiny by the U.S. Congress of the manner
in which payment card networks and card issuers set various fees, from which some of our customers derive
significant revenue. Further, banking regulators have been strengthening their examination guidelines with
respect to relationships between banks and their third-party service providers, such as us. Any such heightened
supervision of our relationship with Popular could have an effect on our contractual relationship with Popular as
well as on the standards applied in the evaluation of our services. See “Item 1. Business-Government
Regulation and Payment Network Rules-Regulatory Reform and Other Legislative Initiatives.”
Further changes to laws, rules and regulations, or interpretation or enforcement thereof, could have a negative
financial effect on us.
The Government of Puerto Rico’s fiscal crisis continues. The expiration of the automatic stay on litigation to
collect claims against the Government on May 1, 2017, the initiation of creditor litigation promptly thereafter
and the Government’s filing for bankruptcy protection on May 3, 2017, are all expected to further slow the
Puerto Rico economy, increase emigration from Puerto Rico, increase the risk of non-payment of
Government obligations and negatively affect the economy and consumer spending, which could have a
material adverse effect on our business and the trading price of our common stock.
For the years ended December 31, 2018 and 2017, approximately 79% and 81%, respectively, of our total
revenues were generated from our operations in Puerto Rico. In addition, some revenues that are generated from
our operations outside Puerto Rico are dependent upon our operations in Puerto Rico. As a result, our financial
condition and results of operations are highly dependent on the economic and political conditions in Puerto
Rico, and could be significantly adversely impacted by adverse economic or political developments in Puerto
Rico. Puerto Rico has been in economic recession since 2006. In August 2015, Puerto Rico defaulted for the
first time on the Public Finance Corporation bonds. In April 2016, the Puerto Rico governor signed a debt
24
moratorium law that gave the governor emergency powers to deal with the fiscal crisis, including the ability to
declare a moratorium on any debt payment. On June 30, 2016, the U.S. President signed into law the Puerto
Rico Oversight, Management and Economic Stability Act (PROMESA). PROMESA establishes a fiscal
oversight and management board (the “Oversight Board”) comprised of seven voting members appointed by the
President. PROMESA also imposed an automatic stay on all litigation against Puerto Rico and its
instrumentalities, as well as any other judicial or administrative actions or proceedings to enforce or collect
claims against the Puerto Rico government.
On May 1, 2017, the automatic stay expired and creditors of the Puerto Rico government filed various lawsuits
involving defaults on more than $70 billion of bonds issued by Puerto Rico. On May 3, 2017, Puerto Rico filed
for bankruptcy-like protection under Title III of PROMESA.
While the Title III filing does not foreclose negotiations between creditors and the Puerto Rico government
toward a consensual restructuring agreement, there can be no assurance that meaningful negotiations will occur
or that any consensual agreement will be reached or by what date. Importantly, there also can be no assurance as
to the financial outcome or timing of the completion of the Title III processes. There also can be no assurance as
to any favorable intervention by the U.S. Congress or the U.S. President.
The invocation of Title III is expected to potentially deepen Puerto Rico’s economic recession, and to further
curtail the ability of the Commonwealth and its instrumentalities, subject to the oversight of the Oversight
Board (collectively, the “Government”), to access capital markets to place new debt or roll future
maturities. Additionally, potential Government actions such as further reductions in spending or the imposition
of new taxes may further deepen the current economic crisis, lead to an increase in unemployment rates, and
result in a continued decline in population and in the economy.
Consequently, such recent events could potentially adversely impact the trading price of our common stock,
adversely impact our customer base, depress general consumer spending and delay the Government’s payments
thus increasing our Government accounts receivables, and potentially impair the collectability of those accounts
receivable, all of which, individually or in the aggregate, could potentially have a material adverse effect on our
business, financial condition and results of operations. As of December 31, 2018, we had net receivables of $9.4
million from Puerto Rico and certain public corporations.
Hurricanes Irma and Maria and their aftermaths and any similar natural disasters in the future could have
a prolonged negative impact on the countries in which we operate and a material adverse effect on our
business and results of operations.
Puerto Rico’s location in the Caribbean exposes the island to increased risk of hurricanes and other severe
tropical weather conditions and natural disasters. Hurricanes Irma and Maria and their aftermaths, including the
widespread power outage in Puerto Rico, the damage to infrastructure and communications networks, and the
temporary cessation and slow pace of reestablishment of regular day-to-day commerce, have severely impacted
the economies of Puerto Rico and the Caribbean. It is unknown how long it will take for the business
communities, resident populations and the economies to recover. Puerto Rico’s current situation following
Hurricane Maria could further accelerate the ongoing emigration trend of Puerto Rico residents to the United
States. A prolonged delay in the repairs to the islands’ infrastructures, decline in business volume and any other
economic declines due to Hurricanes Irma and Maria and their aftermaths may impact demand for our services
and could have a material adverse effect on our business and results of operations.
Our presence in international markets includes operations in several Latin American and Caribbean countries.
Although we have contingency plans in effect for natural disasters or other catastrophic events, the occurrence
of a natural disaster such as, but not limited to, earthquakes, landslides, hurricanes, tornadoes, tsunamis,
volcanic activity, droughts and floods, could still disrupt our operations outside the United States and Puerto
Rico. For example, we conduct business in Chile, a country that is particularly susceptible to earthquakes. Any
25
natural disaster or catastrophic event in the countries in which we do business could adversely affect our
business, results of operations and financial condition.
We are exposed to risks associated with our presence in international markets, including political or
economic instability.
Our financial performance may be significantly affected by general economic, political and social conditions in
the emerging markets where we operate. Many countries in Latin America have suffered significant economic,
political and social crises in the past, and these events may occur again in the future. Instability in Latin
America has been caused by many different factors, including:
exposure to foreign exchange variation
significant governmental influence over local economies;
substantial fluctuations in economic growth;
high levels of inflation;
exchange controls or restrictions on expatriation of earnings;
high domestic interest rates;
•
•
•
•
•
•
• wage and price controls;
•
•
•
changes in governmental economic or tax policies;
imposition of trade barriers;
unexpected changes in regulation which may restrict the movement of funds or result in the
deprivation of contract rights or the taking of property without fair compensation
• Terrorist attacks and other acts of violence or war; and
overall political, social and economic instability.
•
Adverse economic, political and social conditions in the Latin America markets where we operate may create
uncertainty regarding our operating environment, which could have a material adverse effect on our results of
operations.
Our business in countries outside the United States and transactions with foreign governments increase our
compliance risks and exposes us to business risks.
Our operations outside the United States could expose us to trade and economic sanctions or other restrictions
imposed by the United States or other local governments or organizations. In foreign countries in which we
have operations, a risk exists that our associates, contractors or agents could, in contravention of our policies,
engage in business practices prohibited by U.S. laws and regulations applicable to us, such as the Foreign
Corrupt Practices Act ("FCPA"). We have existing safeguards in place designed to ensure compliance with these
laws and regulations. Nevertheless, we remain subject to the risk that one or more of our associates, contractors
or agents, including those based in or from countries where practices that violate such U.S. laws and regulations
or the laws and regulations of other countries may be customary, will engage in business practices that are
prohibited by our policies and, by doing so, violate such laws and regulations. Any such violations, even if
prohibited by our internal policies, could adversely affect our business, operating results, financial condition and
reputation and result in severe criminal or civil sanctions. In addition, we are also subject to compliance with
local government regulations.
We are also subject to the Export Administration Regulations (“EAR”), which regulates the export, re-export
and re-transfer abroad of covered items made or originating in the United States as well as the transfer of
covered U.S.-origin technology abroad. We have adopted a compliance program to make sure our goods and
technologies are exported in compliance with the requirements of the EAR. However, there can be no assurance
that we have not violated the EAR in past transactions or that our new policies and procedures will prevent us
from violating the EAR in every transaction in which we engage. Any such violations of the EAR could result
26
in fines, penalties or other sanctions being imposed on us, which could negatively affect our business, operating
results and financial condition.
Moreover, some financial institutions refuse, even in the absence of a regulatory requirement, to provide
services to companies operating in certain countries or engaging in certain practices because of concerns that
the compliance efforts perceived to be necessary may outweigh the usefulness of the service relationship. Our
operations outside the United States make it more likely that financial institutions may refuse to conduct
business with us for this type of reason. Any such refusal could negatively affect our business, operating results
and financial condition.
We and our subsidiaries conduct business with financial institutions and/or card payment networks
operating in countries whose nationals, including some of our customers’ customers, engage in transactions
in countries that are the targets of U.S. economic sanctions and embargoes. If we are found to have failed to
comply with applicable U.S. sanctions laws and regulations in these instances, we and our subsidiaries could
be exposed to fines, sanctions and other penalties or other governmental investigations.
We and our subsidiaries conduct business with financial institutions and/or card payment networks operating in
countries whose nationals, including some of our customers’ customers, engage in transactions in countries that
are the target of U.S. economic sanctions and embargoes, including Cuba. As a U.S.-based entity, we and our
subsidiaries are obligated to comply with the economic sanctions regulations administered by OFAC. These
regulations prohibit U.S.-based entities from entering into or facilitating unlicensed transactions with, for the
benefit of, or in some cases involving the property and property interests of, persons, governments, or countries
designated by the U.S. government under one or more sanctions regimes. Failure to comply with these sanctions
and embargoes may result in material fines, sanctions or other penalties being imposed on us or other
governmental investigations. In addition, various state and municipal governments, universities and other
investors maintain prohibitions or restrictions on investments in companies that do business involving
sanctioned countries or entities.
For these reasons, we have established risk-based policies and procedures designed to assist us and our
personnel in complying with applicable U.S. laws and regulations and have in the past voluntarily submitted
disclosures to OFAC in compliance with those policies and procedures when we have identified a potential
violation. Our policies and procedures include the use of software to screen transactions we process for
evidence of sanctioned-country and persons involvement. Consistent with a risk-based approach and the
difficulties of identifying all transactions of our customers’ customers that may involve a sanctioned country,
there can be no assurance that our policies and procedures will prevent us from violating applicable U.S. laws
and regulations in every transaction in which we engage, and such violations could adversely affect our
reputation, business, financial condition and results of operations.
Because we process transactions on behalf of the aforementioned financial institutions through the
aforementioned payment networks, we have processed a limited number of transactions potentially involving
sanctioned countries and there can be no assurances that, in the future, we will not inadvertently process such
transactions. Due to a variety of factors, including technical failures and limitations of our transaction screening
process, conflicts between U.S. and local laws, political or other concerns in certain countries in which we and
our subsidiaries operate, and/or failures in our ability effectively to control employees operating in certain non-
U.S. subsidiaries, we have not rejected every transaction originating from or otherwise involving sanctioned
countries, or persons and there can be no assurances that, in the future, we will not inadvertently fail to reject
such transactions.
27
Our expansion and selective acquisition strategy exposes us to risks, including the risk that we may not be
able to successfully integrate acquired businesses.
As part of our growth strategy, we evaluate opportunities for acquiring complementary businesses that may
supplement our internal growth. However, there can be no assurance that we will be able to identify and
purchase suitable operations. To the extent that we are deemed to be controlled by Popular for purposes of the
BHC Act, we may conduct only activities authorized under the BHC Act and the Federal Reserve Board’s
Regulation K and other related regulations for a bank holding company or a financial holding company. These
restrictions may limit our ability to acquire other businesses or enter into other strategic transactions. In
addition, in connection with any acquisitions, we must comply with U.S. federal and other antitrust and/or
competition law requirements.
Further, the success of any acquisition depends in part on our ability to integrate the acquired company, which
may involve unforeseen difficulties and may require a disproportionate amount of our management’s attention
and our financial and other resources. Although we conduct due diligence investigations prior to each
acquisition, there can be no assurance that we will discover all operational deficiencies or material liabilities of
an acquired business for which we may be responsible as a successor owner or operator. The failure to
successfully integrate these acquired businesses or to discover such liabilities could adversely affect our
operating results.
Failure to protect our intellectual property rights and defend ourselves from potential intellectual property
infringement claims may diminish our competitive advantages or restrict us from delivering our services.
Our trademarks, proprietary software, and other intellectual property, including technology/software licenses,
are important to our future success. Limitations or restrictions on our ability to use such marks or a diminution
in the perceived quality associated therewith could have an adverse impact on the growth of our businesses. We
also rely on proprietary software and technology, including third party software that is used under licenses. It is
possible that others will independently develop the same or similar software or technology, which would permit
them to compete with us more efficiently. Furthermore, if any of the third party software or technology licenses
are terminated or otherwise determined to be unenforceable, then we would have to obtain a comparable
license, which may involve increased license fees and other costs.
Despite our efforts to protect our proprietary or confidential business know-how and other intellectual property
rights, unauthorized parties may attempt to copy or misappropriate certain aspects of our services, infringe upon
our rights, or to obtain and use information that we regard as proprietary. Policing such unauthorized use of our
proprietary rights is often very difficult, and therefore, we are unable to guarantee that the steps we have taken
will prevent misappropriation of our proprietary software/technology or that the agreements entered into for that
purpose will be effective or enforceable in all instances. Misappropriation of our intellectual property or
potential litigation concerning such matters could have a material adverse effect on our results of operations or
financial condition. Our registrations and/or applications for trademarks, copyrights, and patents could be
challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us
with maximum protection or meaningful advantage. Managing any such challenges, even if they lack merit,
could: (i) be expensive and time-consuming to defend; (ii) cause us to cease making, licensing or using software
or applications that incorporate the challenged intellectual property; (iii) require us to redesign our software or
applications, if feasible; (iv) divert management’s attention and resources; and (v) require us to enter into
royalty or licensing agreements in order to obtain the right to use necessary technologies. Furthermore, the laws
of certain foreign countries in which we do business or contemplate doing business in the future may not protect
intellectual property rights to the same extent as do the laws of the United States or Puerto Rico. Adverse
determinations in judicial or administrative proceedings related to intellectual property or licenses could prevent
us from selling our services and products, or prevent us from preventing others from selling competing services,
impose liability costs on us, or result in a non-favorable settlement, all of which could result in a material
adverse effect on our business, financial condition and results of operations.
28
The ability to recruit, retain and develop qualified personnel is critical to our success and growth.
All of our businesses function at the intersection of rapidly changing technological, social, economic and
regulatory developments that require a wide ranging set of expertise and intellectual capital. For us to
successfully compete and grow, we must retain, recruit and develop the necessary personnel who can provide
the needed expertise across the entire spectrum of our intellectual capital needs. In addition, we must develop
our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable
unpredictability of human capital. However, the market for qualified personnel is competitive and we may not
succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with
qualified or effective successors. Recruiting and retaining qualified personnel in Puerto Rico is particularly
challenging, given the poor state of the Puerto Rican economy and the increased emigration of Puerto Ricans
following Hurricanes Irma and Maria. Our effort to retain and develop personnel may also result in significant
additional expenses, which could adversely affect our profitability. We cannot assure you that key personnel,
including executive officers, will continue to be employed or that we will be able to attract and retain qualified
personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on us.
Failure to comply with U.S. state and federal antitrust requirements, or the Puerto Rico Anti-Monopoly Act,
and government investigations into our compliance, could adversely affect our business.
Due to our ownership of the ATH network and our merchant acquiring and payment services business in Puerto
Rico, we are involved in a significant percentage of the debit and credit card transactions conducted in Puerto
Rico each day. We have in the past been subject to regulatory investigations and any future regulatory scrutiny
of, or regulatory enforcement action in connection with, compliance with U.S. state and federal antitrust
requirements could potentially have a material adverse effect on our reputation and business.
Our subsidiary, EVERTEC Group, benefits from a preferential tax exemption grant from the Puerto Rico
Government under the Tax Incentive Act No. 73 of 2008 that imposes certain commitments, conditions and
representations on EVERTEC Group. If EVERTEC Group does not comply with the terms of the grant,
EVERTEC Group may be subject to reduction of the benefits of the grant, tax penalties, other payment
obligations or full revocation of the grant, which could have a material adverse effect on our financial
condition, results of operations and our stock price.
EVERTEC Group has a tax exemption grant under the Tax Incentive Act No. 73 of 2008 from the Government
of Puerto Rico. Under this grant, EVERTEC Group will benefit from a preferential income tax rate of 4% on
industrial development income, as well as from tax exemptions with respect to its municipal and property tax
obligations for certain activities derived from its data processing operations in Puerto Rico. The grant has a term
of 15 years effective as of January 1, 2012 with respect to income tax obligations and July 1, 2013 and
January 1, 2013 with respect to municipal and property tax obligations, respectively.
The grant contains customary commitments, conditions and representations that EVERTEC Group is required to
comply with in order to maintain the grant. The more significant commitments include: (i) maintaining at least
750 employees in EVERTEC Group’s Puerto Rico data processing operations during 2012 and at least 700
employees for the remaining years of the grant, (ii) investing at least $200.0 million in building, machinery,
equipment or computer programs to be used in Puerto Rico during the effective term of the grant (to be made
over four year capital investment cycles in $50.0 million increments), (iii) an additional best efforts capital
investments requirement of $75.0 million by December 31, 2026 (to be made over four year capital investment
cycles in $20.0 million the first three increments and $15.0 million the last increment); and (iv) 80% of
EVERTEC Group employees must be residents of Puerto Rico. Failure to meet the requirements could result,
among other things, in reductions in the benefits of the grant, tax penalties, other payment obligations or
revocation of the grant in its entirety, which could have a material adverse effect on our financial condition and
results of operations.
29
Risks Related to Our Structure, Governance and Stock Exchange Listing
We are a holding company and rely on dividends and other payments, advances and transfers of funds from
our subsidiaries to meet our obligations and pay any dividends.
We have no direct operations or significant assets other than the ownership of 100% of the membership interest
of Holdings, which in turn has no significant assets other than ownership of 100% of the membership interest of
EVERTEC Group. Because we conduct our operations through our subsidiaries, we depend on those entities for
dividends and other payments to generate the funds necessary to meet our financial obligations, and to pay any
dividends with respect to our common stock. Legal and contractual restrictions in our existing senior secured
credit facilities and other agreements which may govern future indebtedness of our subsidiaries, as well as the
financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our
subsidiaries. We are prohibited from paying any cash dividend on our common stock unless we satisfy certain
conditions. The senior secured credit facilities also include limitations on the ability of our subsidiaries to pay
dividends to us. The earnings from, or other available assets of, our subsidiaries may not be sufficient to pay
dividends or make distributions or loans or enable us to pay any dividends on our common stock or other
obligations.
As a publicly traded company, we are exposed to risks relating to evaluations of controls required by Section
404 of the Sarbanes-Oxley Act.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), the Dodd-Frank Act, and related regulations implemented
by the SEC, have substantially increased legal and financial compliance costs. We expect that our ongoing
compliance with applicable laws and regulations, including the Exchange Act, the Dodd-Frank Act, and the
Sarbanes-Oxley Act, will involve significant and potentially increasing costs. In particular, we must annually
evaluate our internal controls systems to allow management to report on our internal controls. We must perform
the system and process evaluation and testing (and any necessary remediation) required to comply with the
management certification and, when applicable, auditor attestation requirements of Section 404 of the Sarbanes-
Oxley Act. We intend to invest resources to comply with evolving laws, regulations and standards, and this
investment may result in increased general and administrative expenses and a diversion of management’s time
and attention from revenue-generating activities to compliance activities. If we are not able to continue to
satisfy the requirements of the Exchange Act, the Dodd-Frank Act, and the Sarbanes-Oxley Act, we may default
on our credit facility and be subject to sanctions or investigation by regulatory authorities, including the SEC.
Any action of this type could adversely affect our financial condition, results of operations, and investors’
confidence in our company, and could cause our stock price to decline.
The price of our common stock may fluctuate significantly and you could lose all or part of your investment.
Volatility in the market price of our common stock may prevent you from being able to sell your common stock
at or above the price you paid for your common stock. The market price for our common stock could fluctuate
significantly for various reasons, including:
•
•
our operating and financial performance and prospects;
changes in earnings estimates or recommendations by securities analysts who track our common stock
or industry;
• market perception of our success, or lack thereof, in pursuing our growth strategy;
• market perception of the challenges of operating a company in Puerto Rico; and
•
sales of common stock by us, our stockholders, Popular or members of our management team.
30
In addition, the stock market has experienced significant price and volume fluctuations historically and
particularly in late 2018 and early 2019. This volatility has had a significant impact on the market price of
securities issued by many companies, including companies in our industries. The changes frequently appear to
occur without regard to the operating performance of the affected companies. Hence, the price of our common
stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could
materially reduce our share price.
Future sales or the possibility of future sales of a substantial amount of our common stock may depress the
price of shares of our common stock.
We may sell additional shares of common stock in subsequent public offerings or otherwise, including financing
acquisitions. Our amended and restated certificate of incorporation authorizes us to issue 206,000,000 shares of
common stock, of which 72,378,710 are outstanding as of December 31, 2018. All of these shares, other than
the 11,654,803 shares held by Popular and the shares held by our officers and directors, are freely transferable
without restriction or further registration under the Securities Act.
In addition, we have filed a Form S-8 under the Securities Act covering 12,089,382 shares of our common stock
reserved for issuance under our Carib Holdings, Inc. 2010 Equity Incentive Plan (the "2010 Plan"), and our
EVERTEC, Inc. 2013 Equity Incentive plan (the "2013 Plan") and certain options and restricted stock granted
outside of these plans (which we refer to as the Equity Plans), but subject to the terms and conditions of the
2010 Plan. Accordingly, shares of our common stock registered under such registration statement may become
available for sale in the open market upon grants under the Equity Incentive Plans, subject to vesting restrictions
and Rule 144 limitations applicable to our affiliates.
We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances
and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts
of our common stock (including any shares issued in connection with an acquisition), or the perception that
such sales could occur, may adversely affect prevailing market prices for our common stock.
If securities analysts stop publishing research or reports about our company, or if they issue unfavorable
commentary about us or our industry or downgrade our common stock, the price of our common stock could
decline.
The trading market for our common stock will depend in part on the research and reports that third party
securities analysts publish about our company and our industry. One or more analysts could downgrade our
common stock or issue other negative commentary about our company or our industry. In addition, we may be
unable or slow to attract research coverage. Alternatively, if one or more of these analysts cease coverage of our
company, we could lose visibility in the market. As a result of one or more of these factors, the trading price of
our common stock could decline.
The interests of Popular may conflict with or differ from your interests as a stockholder.
Popular has the right to nominate two members of our Board and, therefore, may be able to influence our
decisions. The interests of Popular could conflict with your interests as a holder of our common stock. For
example, the concentration of ownership held by Popular, the terms of the Stockholder Agreement and our
organizational documents (including Popular’s quorum rights and consent rights over amendments to our
bylaws) and Popular’s right to terminate certain of its agreements with us in certain situations upon a change of
control of EVERTEC Group, could delay, defer or prevent certain significant corporate actions that you as a
stockholder may otherwise view favorably, including a change of control of us (whether by merger, takeover or
other business combination). See “Certain Relationships and Related Party Transactions” in EVERTEC’s proxy
statement for a description of the circumstances under which Popular may terminate certain of its agreements
with us. A sale of a substantial number of shares of stock in the future by Popular could cause our stock price to
decline.
31
Our organizational documents and Stockholder Agreement may impede or discourage a takeover, which
could deprive our investors of the opportunity to receive a premium for their shares.
Provisions of our amended and restated certificate of incorporation, amended and restated bylaws and the
Stockholder Agreement may make it more difficult for, or prevent a third party from, acquiring control of us
without the approval of our Board and/or Popular. These provisions include:
•
•
•
•
•
•
a voting agreement pursuant to which Popular agreed to vote its shares in favor of the Popular director
nominees (which, constitute the right to appoint two of our nine directors), directors nominated by a
committee of our Board in accordance with the Stockholder Agreement and the management director
and to remove and replace any such directors in accordance with the terms of the Stockholder
Agreement and applicable law and an agreement by us to take all actions within our control necessary
and desirable to cause the election, removal and replacement of such directors in accordance with the
Stockholder Agreement and applicable law;
requiring that a quorum for the transaction of business at any meeting of the Board (other than a
reconvened meeting with the same agenda as the originally adjourned meeting) consist of (1) a
majority of the total number of directors then serving on the Board and (2) at least one director
nominated by Popular, for so long as it owns, together with its affiliates, 5% or more of our
outstanding common stock;
prohibiting cumulative voting in the election of directors;
authorizing the issuance of “blank check” preferred stock without any need for action by stockholders
other than Popular (as further described below);
prohibiting stockholders from acting by written consent unless the action is taken by unanimous
written consent;
establishing advance notice requirements for nominations for election to our Board or for proposing
matters that can be acted on by stockholders at stockholder meetings, which advance notice
requirements are not applicable to any directors nominated in accordance with the terms of the
Stockholder Agreement.
Our issuance of shares of preferred stock could delay or prevent a change in control of us. Our Board has
authority to issue shares of preferred stock, subject to the approval of at least one director nominated by Popular
for so long as Popular, together with its respective affiliates, owns at least 10% of our outstanding common
stock. Our Board may issue preferred stock in one or more series, designate the number of shares constituting
any series, and fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting
rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. In
addition, Popular, under and subject to the Stockholder Agreement and our organizational documents, will
retain significant influence over matters requiring board or stockholder approval, including the election of
directors. Together, our amended and restated certificate of incorporation, bylaws and Stockholder Agreement
could make the removal of management more difficult and may discourage transactions that otherwise could
involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence
of the foregoing provisions, as well as the significant common stock owned by Popular and its individual right
to nominate a specified number of directors in certain circumstances, could limit the price that investors might
be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of us,
thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
Risks Related to Our Indebtedness
Despite our high indebtedness level, we and our subsidiaries still may be able to incur significant additional
amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future, some of which
may be secured. Although the agreement setting forth the terms of our senior secured credit facilities contain
32
restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant
qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be
incurred in compliance with these restrictions could be substantial. In addition to the $97.9 million which was
available for borrowing under our revolving credit facility as of December 31, 2018, the terms of the senior
secured credit facilities enable us to increase the amount available under the term loan and/or revolving credit
facilities if we are able to obtain loan commitments from banks and satisfy certain other conditions. If new debt
is added to our and our subsidiaries’ existing debt levels, the related risks that we face would increase.
If we are unable to comply with covenants in our debt instruments that limit our flexibility in operating our
business, or obligate us to take action such as deliver financial reports, we may default under our debt
instruments and our indebtedness may become due.
The agreement setting forth the terms of the senior secured credit facilities contain, and any future indebtedness
we incur may contain, various covenants that limit our ability to engage in specified types of transactions. These
covenants limit our and our restricted subsidiaries’ ability to, among other things:
•
•
incur additional indebtedness or issue certain preferred shares;
pay dividends on, repurchase or make distributions in respect of our capital stock or make other
restricted payments;
• make certain investments;
•
•
•
•
•
sell certain assets;
grant liens;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates; and
designate our subsidiaries as unrestricted subsidiaries.
As a result of these covenants, we are limited in the manner in which we conduct our business and we may be
unable to engage in favorable business activities or finance future operations or capital needs. In addition, the
covenants in the senior secured credit facilities require us to maintain a maximum total secured net leverage
ratio and also limit our capital expenditures. A breach of any of these covenants could result in a default under
one or more of these agreements, including as a result of cross default provisions and, in the case of our
revolving credit facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of
default under the senior secured credit facilities, the lenders could elect to declare all amounts outstanding under
the senior secured credit facilities to be immediately due and payable and terminate all commitments to extend
further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were
unable to repay those amounts, the lenders under our senior secured credit facilities could proceed against the
collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as
collateral under the senior secured credit facilities. If the lenders under the senior secured credit facilities
accelerate the repayment of borrowings, the proceeds from the sale or foreclosure upon such assets will first be
used to repay debt under our senior secured credit facilities and we may not have sufficient assets to repay our
unsecured indebtedness thereafter. As a result, our common stock could become worthless.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take
other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial
condition and operating performance, which is subject to prevailing economic and competitive conditions and
to certain financial, business and other factors beyond our control. We may not be able to maintain a level of
cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on
our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to
reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or
33
refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the
capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest
rates and may require us to comply with more onerous covenants, which could further restrict our business
operations. The terms of existing or future debt instruments may restrict us from adopting some of these
alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness
on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur
additional indebtedness. These alternative measures may not be successful and may not permit us to meet our
scheduled debt service obligations.
The risks referenced above are not the only risks facing us. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially adversely affect our business,
financial condition or results of operations.
Discontinuation, reform or replacement of LIBOR and other benchmark rates, or uncertainty related to the
potential for any of the foregoing, may adversely affect our business.
The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR by the end of
2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The
discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable
impact on contractual mechanics in the credit markets or cause disruption to the broader financial markets.
Uncertainty as to the nature of such potential discontinuation, reform or replacement may negatively impact the
volatility of LIBOR rates, liquidity, our access to funding required to operate our business, our ability to hedge
our interest rate risk, or the trading market for our existing senior secured credit facilities.
At December 31, 2018, we had $545.0 million of borrowings under our senior secured credit facilities that bore
interest at LIBOR plus an applicable margin. Together with the administrative agent for those facilities, we may
replace LIBOR with a comparable or successor rate in a manner that gives due consideration to any evolving or
then existing convention for similar U.S. dollar denominated syndicated credit facilities. The replacement of
LIBOR with a comparable or successor rate could cause the amount of interest payable on our senior secured
credit facilities to be materially different than expected. We may choose in the future to pursue amendments to
our senior secured credit facilities to provide for a comparable or successor rate, but we can give no assurance
that we will be able to reach agreement with our lenders on any such amendments.
At December 31, 2018, we also had two interest rate swap agreements which are designed to protect us from
changes in interest rates. If LIBOR becomes unavailable and market quotations for specified inter-bank lending
are not available, it is unclear how payments under such agreements would be calculated, which could cause
these agreements to no longer offer us the protection we expect. Relevant industry groups are seeking to create a
standard protocol addressing the expected discontinuation of LIBOR, to which parties to then-existing swaps
will be able to adhere. There can be no assurance that such a protocol will be developed or that our swap
counterparties will adhere to it. It is uncertain whether amending our then-existing swap agreements may
provide us with effective protection from changes in the then-applicable interest rate on our senior secured
credit facility indebtedness or other indebtedness. Similarly, while industry groups have announced that they
anticipate amending standard documentation to facilitate a market in swaps on one or more successor rates to
LIBOR, it is uncertain whether and to what extent a market for interest rate swaps on the successor rate selected
for our senior secured credit facility indebtedness or other indebtedness will develop, which may affect our
ability to effectively hedge our interest rate exposure.
Item 1B. Unresolved Staff Comments
None.
34
Item 2. Properties
Our principal operations are conducted in Puerto Rico. Our principal executive offices are leased and located at
Cupey Center Building, Road 176, Kilometer 1.3, San Juan, Puerto Rico 00926.
We own one property in Costa Rica, in the province of San Jose, which is used by our Costa Rican subsidiary
for its payment services business. We also lease space in 12 other locations across Latin America and the
Caribbean, including various data centers and office facilities to meet our sales and operating needs. We believe
that our properties are in good operating condition and adequately serve our current business operations. We
also anticipate that suitable additional or alternative space, including those under lease options, will be available
at commercially reasonable terms for future expansion.
Item 3. Legal Proceedings
We are defendants in various lawsuits or arbitration proceedings arising in the ordinary course of business.
Management believes, based on the opinion of legal counsel and other factors, that the aggregated liabilities, if
any, arising from such actions will not have a material adverse effect on the financial condition, results of
operations and the cash flows of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
35
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock trades on the NYSE under the symbol "EVTC".
Dividends
On July 26, 2018, the Company’s Board of Directors ("Board") voted to reinstate a quarterly dividend on the
Company's common stock, which had been suspended since November of 2017. Any declaration and payment
of future dividends to holders of our common stock will be at the discretion of our Board and will depend on
many factors, including our financial condition, earnings, available cash, business opportunities, legal
requirements, restrictions in our debt agreements and other contracts, capital requirements, level of indebtedness
and other factors that our Board deems relevant. The covenants of our senior secured credit facilities may limit
our ability to pay dividends on our common stock and limit the ability of our subsidiaries to pay dividends to us
if we do not meet required performance metrics contained in our debt agreements. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Financial Obligations.”
We are a holding company and have no direct operations. We will only be able to pay dividends from our
available cash on hand and funds received from our subsidiaries, Holdings and EVERTEC Group, whose ability
to make any payments to us will depend upon many factors, including their operating results and cash flows. In
addition, the senior secured credit facilities limit EVERTEC Group’s ability to pay distributions on its equity
interests. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Financial Obligations.”
Issuer Purchases of Equity Securities
Total number of
shares
Average price paid
purchased
per share
Total number of shares
purchased as part of a publicly
announced program (1)
Approximate dollar
value of
shares that may yet be
purchased
under the program
89,439
277,964
367,403
$
$
26.833
27.341
27.217
89,439
277,964
367,403
$
62,345,700
Period
11/1/2018-11/30/2018
12/1/2018-12/31/2018
Total
(1) On February 17, 2016, the Company announced that its Board approved an increase and extension to the
current stock repurchase program, authorizing the purchase of up to $120 million of the Company’s
common stock and extended the expiration to December 31, 2017. On November 2, 2017, the
Company's Board approved an extension to the expiration date of the current stock repurchase program
to December 31, 2020.
Securities Authorized for Issuance under Equity Compensation Plans
On September 30, 2010, the board of directors of Holdings adopted the 2010 Plan. Holdings reserved
5,843,208 shares of its Class B Non-Voting Common Stock for issuance upon exercise and grants of stock
options, restricted stock and other equity awards under the Plan. On April 17, 2012, in connection with the
Reorganization, the Company assumed the 2010 Plan and all of the outstanding equity awards issued thereunder
or subject thereto. As a result, each of the then outstanding stock options to purchase shares of Holdings’ Class
B Non-Voting Common Stock became a stock option to purchase the same number and class of shares of the
Company’s Class B Non-Voting Common Stock, in each case on the same terms (including exercise price) as
the original stock option. In connection with our initial public offering in April 2013, all of the outstanding
36
shares of the Company’s Class B Non-Voting Common Stock and stock options to purchase shares of the
Company’s Class B Non-Voting Common Stock were converted into and deemed exercisable for, respectively,
shares of our common stock on a one-to-one basis. Similarly, each of the then outstanding shares of restricted
stock of Holdings was converted into the same number of shares of restricted stock of the Company.
In connection with our initial public offering, we adopted the 2013 Plan and reserved 5,956,882 shares of our
Common Stock for issuance upon exercise and grants of stock options, restricted stock and other equity awards.
We have filed a Form S-8 under the Securities Act covering 12,089,382 shares of our common stock reserved
for issuance under the Equity Plans and certain options and restricted stock granted outside of the Equity Plans
but subject to the terms and conditions of the 2010 Plan.
The following table summarizes equity compensation plans approved by security holders and equity
compensation plans that were not approved by security holders as of December 31, 2018:
Plan Category
Equity compensation plans
approved by security holders (1)
Equity compensation plans not
approved by security holders
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(A)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(B)
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected
in column (A))
(C)
2,036,163
N/A
$0.00
N/A
5,904,356
N/A
(1)
The Company's equity plans were approved by the two sole stockholder's prior to the Company's initial
public offering, Apollo and Popular.
Stock Performance Graph
The following Performance Graph shall not be deemed incorporated by reference and shall not constitute
soliciting material or otherwise considered filed under the Securities Act of 1933 or the Exchange Act.
The following graph shows a comparison from April 12, 2013 (the date our common stock commenced trading
on the NYSE) through December 31, 2018 of the cumulative total return for our common stock, the S&P 500
Index and the S&P Technology Index. The graph assumes that $100 was invested on April 12, 2013 in our
common stock and each index and that all dividends were reinvested.
Note that historical stock price performance is not necessarily indicative of future stock price performance.
37
Comparison of sixty-nine months cumulative total return of EVERTEC Inc.
38
Item 6. Selected Financial Data
The following table sets forth our selected historical consolidated financial data as of the dates and for the
periods indicated. The selected consolidated financial data as of and for the years ended December 31, 2018,
2017, 2016, 2015 and 2014 have been derived from the audited consolidated financial statements of EVERTEC,
included in our Annual Reports on Form 10-K.
The results of operations for any period are not necessarily indicative of the results to be expected for any future
period. The selected historical consolidated financial data set forth below should be read in conjunction with,
and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and the consolidated financial statements and related notes thereto appearing elsewhere in this
Annual Report on Form 10-K.
(Dollar amounts in thousands, except per
share data)
Statements of Income Data:
Revenues
Operating costs and expenses
Cost of revenues, exclusive of
depreciation and amortization shown
below
Selling, general and administrative
expenses
Depreciation and amortization
Total operating costs and expenses
Income from operations
Interest income
Interest expense
Earnings (losses) of equity method
investment
Other income, net
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to
non-controlling interest
Net income attributable to
EVERTEC, Inc.’s common
stockholders
Net income per common share—
basic
Net income per common share—
diluted
Cash dividends declared per
common share
Year ended December 31,
2018
2017
2016
2015
2014
$
453,869
$
407,144
$
389,507
$
373,528
$
361,788
196,957
200,650
175,809
167,916
157,537
68,717
63,067
328,741
125,128
787
(30,044)
692
2,602
99,165
12,596
86,569
56,161
64,250
321,061
86,083
716
(29,861)
604
2,657
60,199
4,780
55,419
46,986
59,567
282,362
107,145
377
(24,617)
(52)
544
83,397
8,271
75,126
37,278
64,974
270,168
103,360
495
(24,266)
147
2,306
82,042
(3,335)
85,377
41,276
65,988
264,801
96,987
328
(25,772)
1,140
2,375
75,058
8,901
66,157
299
365
90
—
—
55,054
0.76
0.76
0.30
$
$
$
$
75,036
1.01
1.01
0.40
$
$
$
$
85,377
1.11
1.11
0.40
$
$
$
$
66,157
0.84
0.84
0.40
$
$
$
$
86,270
1.19
1.16
0.10
$
$
$
$
39
Balance Sheet Data:
Cash and cash equivalents
Total assets
Total long-term liabilities
Total debt
Total equity
2018
2017
2016
2015
2014
December 31,
$69,973
927,292
574,981
538,606
215,606
$50,423
902,788
607,596
616,740
147,976
$51,920
885,662
648,324
650,759
108,175
$28,747
863,654
662,939
662,699
98,214
$32,114
885,321
691,085
681,240
94,840
40
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) covers: (i) the results of operations for the years ended December 31, 2018, 2017 and 2016 and
(ii) the financial condition as of December 31, 2018 and 2017. See Note 1 of the Notes to Audited Consolidated
Financial Statements for additional information about the Company and the basis of presentation of our
financial statements. You should read the following discussion and analysis in conjunction with the financial
statements and related notes appearing elsewhere herein. This MD&A contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ from those indicated in the forward-looking
statements. See “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions
associated with these statements.
Overview
EVERTEC is a leading full-service transaction processing business in Latin America and the Caribbean,
providing a broad range of merchant acquiring, payment services and business process management services.
According to the August 2018 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 in the region from our base in Puerto Rico. We manage a system of
electronic payment networks that process more than two billion transactions annually, and offer a
comprehensive suite of services for core bank processing, cash processing and technology outsourcing. In
addition, we own and operate the ATH network, one of the leading personal identification number (“PIN”) debit
networks in Latin America. We serve a diversified customer base of leading financial institutions, merchants,
corporations and government agencies with “mission-critical” technology solutions that enable them to issue,
process and accept transactions securely. We believe our business is well-positioned to continue to expand
across the fast-growing Latin American region.
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 competitve 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 in 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 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 for credit, debit, prepaid, automated teller
machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide
41
“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 generates 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.
Separation from and Key Relationship with Popular
Prior to the Merger on September 30, 2010, EVERTEC Group was 100% owned by Popular, the largest
financial institution in the Caribbean, and operated substantially as an independent entity within Popular. After
the consummation of the Merger, Popular retained an approximately 49% indirect ownership interest in
EVERTEC Group and is our largest customer. In connection with, and upon consummation of, the Merger,
EVERTEC Group entered into a 15-year Master Services Agreement, and several related agreements with
Popular. Under the terms of the Master Services Agreement, Popular agreed to continue to use EVERTEC
services on an ongoing exclusive basis, for the duration of the agreement, on commercial terms consistent with
those of our historical relationship. 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 Master Services Agreement. As
of December 31, 2018, Popular retained a 16.1% interest in EVERTEC.
Our MSA with Popular has an initial term that ends in 2025. For 2018, we derived approximately 41% of our
revenue from such contract, which makes the MSA our most significant client contract. We anticipate that we
will enter into a negotiation with Popular prior to the expiration of the initial term of the MSA. We cannot be
certain that we will be able to negotiate an extension to the MSA. In addition, even if we are able to negotiate an
extension of the MSA, any new master services agreement may be materially different from the existing MSA.
Further, the anticipated negotiation of the MSA extension may result in Popular obtaining significant
concessions from us with respect to pricing and other key terms, both in respect of the current term and any
extension of the MSA, particularly as we approach 2025. See “Item 1A. Risk Factors—Risks Related to Our
Business—We expect to continue to derive a significant portion of our revenue from Popular."
2018 Developments
On July 26, 2018, the Company’s Board of Directors ("Board") voted to reinstate a quarterly dividend on the
Company's common stock, which had been suspended since November of 2017, and declared a regular
quarterly cash dividend of $0.05 per share on the Company’s outstanding shares of common stock. The Board
also declared a dividend on October 25, 2018. The Board anticipates declaring this dividend in future quarters
on a regular basis; however future declarations of dividends are subject to the Board’s approval and may be
adjusted as business needs or market conditions change.
On November 27, 2018, EVERTEC and EVERTEC Group, entered into a credit agreement setting forth the
terms of the senior secured credit facilities, consisting of a $220.0 million term loan A facility that matures on
November 27, 2023, a $325.0 million term loan B facility that matures on November 27, 2024 and a $125.0
million revolving credit facility that matures on November 27, 2023, with a syndicate of lenders and Bank of
America, N.A., as administrative agent, collateral agent, swingline lender and line of credit issuer. The net
42
proceeds received from this transaction, together with other cash available to EVERTEC Group, were used,
among other things, to refinance EVERTEC Group’s previous senior secured credit facilities, which consisted
of a $191.4 million term A loan facility and a $379.0 million term B loan facility.
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 growth opportunities for our business. For example, currently the adoption of banking products,
including electronic payments, in the Latin American and Caribbean region is lower relative to the mature U.S.
and European markets. We believe that the unbanked and underbanked population in our markets will continue
to shrink, and therefore drive incremental penetration and growth of electronic payments in Puerto Rico and
other Latin American regions. We also benefit from the trend for financial institutions and government agencies
to outsource technology systems and processes. Many medium- and small-size institutions in the Latin
American markets in which we operate have outdated computer systems and updating these IT legacy systems
is financially and logistically challenging, which presents a business opportunity for us.
Finally, our financial condition and results of operations are, in part, dependent on the economic and general
conditions of the geographies in which we operate.
On June 30, 2016, the U.S. President signed into law PROMESA. PROMESA establishes a fiscal oversight and
the Oversight Board comprised of seven voting members appointed by the President. The Oversight Board has
broad budgetary and financial powers over Puerto Rico’s budget, laws, financial plans and regulations,
including the power to approve restructuring agreements with creditors, file petitions for restructuring and
reform the electronic system for the tax collection. The Oversight Board has ultimate authority in preparing the
Puerto Rico government’s budget and any issuance of future debt by the government and its instrumentalities.
In addition, PROMESA imposes an automatic stay on all litigation against Puerto Rico and its instrumentalities,
as well as any other judicial or administrative actions or proceedings to enforce or collect claims against the
Puerto Rico government. On May 1, 2017, the automatic stay expired. Promptly after the expiration of the stay,
creditors of the Puerto Rico government filed various lawsuits involving defaults on more than $70 billion of
bonds issued by Puerto Rico, having failed to reach a negotiated settlement on such defaults with the Puerto
Rico government during the period of the automatic stay. On May 3, 2017, the Oversight Board filed a
voluntary petition of relief on behalf of the Commonwealth pursuant to Title III of PROMESA for the
restructuring of the Commonwealth’s debt. Subsequently, the Oversight Board filed voluntary petitions of relief
pursuant to Title III of PROMESA on behalf certain public corporations and instrumentalities. Title III is an in-
court debt restructuring proceeding similar to protections afforded debtors under Chapter 11 of the United States
Code (the “Bankruptcy Code”); the Bankruptcy Code is not available to the Commonwealth or its
instrumentalities.
As the solution to the Puerto Rican government’s debt crisis remains unclear, we continue to carefully monitor
our receivables with the government as well as monitor general economic trends to understand the impact the
crisis has on the economy of Puerto Rico and our card payment volumes. To date our receivables with the
Puerto Rican government and overall payment transaction volumes have not been significantly affected by the
debt crisis; however; we remain cautious.
In the aftermath of the 2017 hurricanes, economic activity and consumer spending in Puerto Rico and the Virgin
Islands has been erratic. For the year ended December 31, 2018, we experienced elevated sales volumes as
consumers and businesses spent on hurricane recovery and rebuilding activities. This spending increased our
merchant acquiring revenues and we believe our elevated sales volume was in large part driven by a stimulus of
relief funding and private insurance proceeds received by consumers and businesses. We believe that this
43
pattern will likely continue through 2019 as incremental insurance and relief funds are projected to be received
by consumers and businesses.
In addition to the macroeconomic trends described above, management currently estimates that we will
continue to experience a revenue attrition in Latin America of approximately $3 million to $5 million for
previously disclosed migrations anticipated in 2019. Clients’ decision to migrate, which were made prior to
2015, were driven by a variety of historical factors, including primarily a desire to enhance customer service
experience. Management believes that these customer decisions are unlikely to change; however, the timing of
the migration is subject to change based on each customer’s conversion schedule.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the
preparation of our financial statements, we are required to make estimates and assumptions about future events,
and apply judgments that affect the reported amounts of certain assets and liabilities, and in some instances, the
reported amounts of revenues and expenses during the period.
We base our assumptions, estimates, and judgments on historical experience, current events and other factors
that management believes to be relevant at the time our consolidated financial statements are prepared.
However, because future events are inherently uncertain and their effects cannot be determined with certainty,
actual results could differ from our assumptions and estimates, and such differences could be material. A
summary of significant accounting policies is included in Note 1 of the Notes to Audited Consolidated Financial
Statements appearing elsewhere in this Annual Report on Form 10-K. We believe that the following accounting
estimates are the most critical; require the most difficult, subjective or complex judgments; and thus result in
estimates that are inherently uncertain.
Revenue recognition
The Company’s revenue recognition policy follows the guidance from Accounting Standards Codification
("ASC') 606, Revenue from Contracts with Customers, which provide guidance on the recognition, presentation,
and disclosure of revenue from contracts with customers in consolidated financial statements.
The Company recognizes revenue when (or as) control of goods or services are transferred to a customer. The
transfer of control occurs when the customer can direct the use of and receive substantially all the benefits from
the transferred good or service. Therefore, revenue is recognized over time (typically for services) or at a point
in time (typically for goods).
The assessment of revenue recognition is performed by the Company based on the five-step model established
in Topic 606, as follows: Step 1: Identify the contract with customer; Step 2: Identify the performance
obligations in the contract; Step 3: Determine the transaction price; Step 4: Allocate the transaction price to the
performance obligations in the contract; and Step 5: Recognize revenue when or as the entity satisfies a
performance obligation.
At contract inception, the Company evaluates whether the contract (i) is legally enforceable; (ii) approved by
both parties; (iii) properly defines rights and obligations of the parties, including payment terms; (iv) has
commercial substance; and (v) collection of substantially all consideration entitled is probable, before
proceeding with the assessment of revenue recognition. If any of these requirements is not met, the contract
does not exist for purposes of the model and any consideration received is recorded as a liability. A
reassessment may be performed in a later date upon change in facts and circumstances. The Company also
evaluates within this step if contracts issued within a period of 6 months with the same customer should be
accounted for as a single contract. The Company’s contracts with customers may be modified through
44
amendments, change requests and waivers. Upon receipt, modifications of contracts with customers are
evaluated to determine if must be accounted for: (i) as a separate contract, (ii) a cumulative catch-up, or (iii) as a
termination and creation of a new contract. Contract modifications must also comply with the requirements to
determine if a contract with a customer exists for accounting purposes.
To identify performance obligations within contracts with customers, the Company first identifies all the
promises in the contract (i.e., explicit and implicit). This includes the customer’s options to acquire
additional goods or services for free or at a discount in exchange for an upfront payment. Then, the
Company proceeds to exclude the immaterial promises from the assessment of identifying performance
obligations; and to evaluate if customer’s options to acquire additional goods or services represent a material
right based on corporate’s defined thresholds (i.e., equal or lower than 20%), to determine if they must be
included in the assessment. The Company may exclude as immaterial promises, the promises with a
transaction price equal or lower than 10 percent of the total contract value.
After excluding immaterial promises and options not considered a material right, the Company assesses if
each material good or service (or bundle of goods or services) is distinct in nature (i.e., the customer can
benefit from the good or service on its own or together with other readily available resources), and is capable
of being distinct in the context of the contract (i.e., the promise to transfer the good or service is separately
identifiable from other promises in the contract). A distinct good or service (or bundle of goods or services)
constitutes a performance obligation.
The Company also applies the series guidance to distinct goods or services (either with a specified quantity
of goods or services or a stand-ready service), with an over time revenue recognition, to determine whether
they should be accounted for as a single performance obligation. These distinct goods or services are
recognized as a single performance obligation when their nature and timely increments are substantially the
same and have the same pattern of transfer to the customer (i.e., the distinct goods or services within the
series use the same method to measure progress towards complete satisfaction). To determine if a
performance obligation should be recognized over time, one or more of the following criteria must be met:
(1) the customer simultaneously receives and consumes the benefits as the Company performs (i.e., routine
or recurring services); (2) the customer controls the asset as the entity creates or enhances it (i.e., asset on
customer’s site); or (3) the Company’s performance does not create an asset for which the Company has an
alternative use and there is a right to payment for performance to date (i.e., asset built to order). Performance
obligations that do not meet the over time criteria are recognized at a point in time.
In addition, in Step 2 of the model, the Company evaluates whether the practical expedient of right-to-
invoice applies. If this practical expedient is applicable, steps 3, 4 and 5 are waived. For this practical
expedient to apply, the right to consideration must correspond directly with the value received by the
customer for the Company’s performance to date, no significant up-front payments or retroactive
adjustments must exist, and specified minimums must be deemed non-substantive at the contract level. If the
contract with the customer has multiple performance obligations and the practical expedient of right-to-
invoice does not apply, the Company proceeds to determine the transaction price and allocate it on a stand-
alone selling price basis among the different performance obligations identified in the Step 2.
The Company generally applies the expected cost-plus margin approach to determine the stand-alone selling
price at the performance obligation level. In addition, for performance obligations that are satisfied over time
and the right to invoice practical expedient is not available, the Company determines a method to measure
progress (i.e., input or output method) based on current facts and circumstances. When these performance
obligations have variable consideration within its transaction price and are part of a series, the Company
allocates the variable consideration to each time increment.
As part of the revenue recognition analysis, when another party is involved in providing goods or services to a
customer, the Company evaluates, for each performance obligation, whether is providing the goods or services
itself (i.e., as principal), or if it is only arranging on behalf of the other party. The Company acts as principal if it
45
controls the specified good or service before that good or service is transferred to a customer. To determine if
the Company acts as an agent, the Company considers indicators, such as: (i) the responsibility to fulfill a
promise; (ii) the inventory risk; and (iii) the price determination.
Goodwill and other intangible assets
Goodwill represents the excess of the purchase price and related costs over the value assigned to net assets
acquired. Goodwill is not amortized, but is tested for impairment at least annually, or more often if events or
circumstances indicate there may be impairment.
The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative
impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify
goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). The
Company may assess qualitative factors to determine whether it is more likely than not, that is, a likelihood of
more than 50 percent that the fair value of the reporting unit is less than its carrying amount, including
goodwill. The Company has an unconditional option to bypass the qualitative assessment for any reporting unit
in any period and proceed directly to performing the quantitative goodwill impairment test. The Company may
resume performing the qualitative assessment in any subsequent period. With the early adoption in December
2017 of the accounting standards update that simplifies the goodwill impairment test, the quantitative goodwill
impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares
the fair value of a reporting unit with its carrying amount, including goodwill. If the Company determines to
perform a quantitative impairment test, a third-party valuator may be engaged to prepare an independent
valuation of each reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an
impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill
allocated to that reporting unit. Additionally, the Company shall consider the income tax effect from any tax-
deductible goodwill on the carrying amount of the reporting unit, if applicable, when measuring the goodwill
impairment loss. For the years ended December 31, 2018, 2017 and 2016, no impairment losses associated with
goodwill were recognized.
Other identifiable intangible assets with definitive useful lives are amortized using the straight-line method or
accelerated methods. These intangibles are evaluated periodically for impairment when events or changes in
circumstances indicate that the carrying amounts may not be recoverable.
Other identifiable intangible assets with definitive useful lives include customer relationships, trademarks,
software packages and a non-compete agreement. Customer relationships were valued using the excess earnings
method under the income approach. Trademark assets were valued using the relief-from-royalty method under
the income approach. Internally developed software packages, which include capitalized software development
costs, are recorded at cost, while software packages acquired as part of a business combination were valued
using the relief-from-royalty method under the income approach. The non-compete agreement was valued based
on the estimated impact that theoretical competition would have on revenues and expenses.
Income Tax
Income taxes are accounted for under the asset and liability method. A temporary difference refers to a
difference between the tax basis of an asset or liability, determined based on recognition and measurement
requirements for tax positions, and its reported amount in the financial statements that will result in taxable or
deductible amounts in future years when the reported amount of the asset or liability is recovered or settled,
respectively. Deferred tax assets and liabilities represent the future effects on income taxes that result from
temporary differences and carryforwards that exist at the end of a period. Deferred tax assets and liabilities are
measured using enacted tax rates and provisions of the enacted tax law and are not discounted to reflect the
time-value of money. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
46
consolidated statements of income and comprehensive income in the period that includes the enactment date. A
deferred tax valuation allowance is established if it is considered more likely than not that all or a portion of the
deferred tax asset will not be realized.
The Company recognizes the benefit of uncertain tax positions only if it is more likely than not that the tax
position will be sustained on examination by taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement or disposition
of the underlying issue with the taxing authority. Accordingly, the amount of benefit recognized in the
consolidated financial statements may differ from the amount taken or expected to be taken in the tax return
resulting in unrecognized tax benefits (“UTBs”). The Company recognizes the interest and penalties associated
with UTBs as part of the provision for income taxes on its consolidated statements of income and
comprehensive income. Accrued interest and penalties are included on the related tax liability line in the
consolidated balance sheets.
All companies within EVERTEC are legal entities which file separate income tax returns.
Recent Accounting Pronouncements
For a description of recent accounting standards, see Note 2 of the Notes to Audited Consolidated Financial
Statements included in this Annual Report on Form 10-K.
Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, as presented in
this Annual Report on Form 10-K, are supplemental measures of our performance that are not required by, or
presented in accordance with GAAP. They are not measurements of our financial performance under GAAP and
should not be considered as alternatives to total revenues, net income or any other performance measures
derived in accordance with GAAP or as alternatives to cash flows from operating activities as measures of our
liquidity. Adjusted EBITDA at the segment level is reported to the chief operating decision maker for purposes
of making decisions about allocating resources to the segments and assessing their performance. For this reason
Adjusted EBITDA, as it relates to our segments, is presented in conformity with Accounting Standards
Codification 280, Segment Reporting, and is excluded from the definition of non-GAAP financial measures
under the Securities and Exchange Commission's Regulation G and Item 10(e) of Regulation S-K.
For more information regarding EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per
common share, including a quantitative reconciliation of EBITDA, Adjusted EBITDA, Adjusted Net Income
and Adjusted Earnings per common share to the most directly comparable GAAP financial performance
measure, which is net income, see “—Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net
Income and Adjusted Earnings per common share” and “—Covenant Compliance” below.
47
Results of Operations
Year ended December 31,
(In thousands)
2018
2017
2016
Variance 2018 vs. 2017 Variance 2017 vs. 2016
Revenues
$453,869
$407,144
$389,507
$
46,725
11 % $
17,637
5 %
Operating costs and
expenses
Cost of revenues,
exclusive of depreciation
and amortization shown
below
Selling, general and
administrative expenses
Depreciation and
amortization
Total operating costs and
expenses
196,957
200,650
175,809
(3,693)
(2)%
24,841
14 %
68,717
56,161
46,986
12,556
22 %
9,175
20 %
63,067
64,250
59,567
(1,183)
(2)%
4,683
8 %
328,741
321,061
282,362
7,680
Income from operations
$125,128
$ 86,083
$107,145
$
39,045
Revenues
2 %
38,699
45 % $ (21,062)
14 %
(20)%
Total revenues in 2018 increased by $46.7 million or 11% when compared with the prior year. The increase in
revenues is attributable, in part, to the negative impact of the two hurricanes on 2017 results. The increase was
driven by increases in ATH debit network transaction volumes and card processing volumes, a full year of
revenue generated from the acquisition in the third quarter of 2017 of a business in Latin America, formerly
known as PayGroup, increased volumes in our merchant acquiring business and an increase in network revenue.
Total revenues in 2017 increased by $17.6 million or 5% when compared with the prior year. The increase in
revenues was driven by increases in ATH debit network transaction volumes and card processing volumes,
revenue generated from the PayGroup acquisition, increased revenue from the acquisition of a printing business
in the fourth quarter of 2016 and an increase in core banking revenue. Revenues in 2017 were negatively
impacted by the two hurricanes that made landfall in Puerto Rico and the Caribbean in September of 2017.
Cost of revenues
Cost of revenues in 2018 decreased $3.7 million or 2% when compared with the prior year. The decrease in cost
of revenue is primarily related to the impact in the prior year of charges taken for the exit activity and the
impairment loss, described below. These decreases were partially offset by an increase salaries and benefits
mainly related to increased headcount in connection with the acquisition of the business formerly known as
PayGroup and an increase in cost of sales.
Cost of revenues in 2017 increased $24.8 million or 14% when compared with the prior year. The increase in
cost of revenue is primarily related to $12.8 million in charges taken in connection with an exit activity for a
third party software solution that was no longer commercially viable and a $5.0 million impairment loss related
to a software asset under development. The remaining increase was primarily attributable to the acquisition of
the business formerly known as PayGroup.
48
Selling, general and administrative
Selling, general and administrative expenses in 2018 increased $12.6 million or 22% when compared with
2017. The increase is mainly driven by an increase in share based compensation expense, added salaries from
the acquisition of the business formerly known as PayGroup, $3.5 million in expenses incurred in connection
with the Company's refinancing of outstanding long-term debt and an increase in professional fees.
Selling, general and administrative expenses in 2017 increased $9.2 million when compared with 2016. The
increase is primarily related to an increase in share based compensation, expenses related to the PayGroup
acquisition and an increase in payroll and other taxes in our Latin America operations.
Depreciation and amortization
Depreciation and amortization expense decreased by $1.2 million in 2018 compared to 2017 primarily driven by
lower amortization from software packages related to software that became fully amortized during the year.
Depreciation and amortization expense increased by $4.7 million in 2017 compared to 2016 mainly related to
an increase in amortization expense related to intangible assets acquired as part of business combinations
completed in the prior and current year.
Non-operating income (expenses)
Year ended December 31,
(In thousands)
2018
2017
2016
Variance 2018 vs. 2017 Variance 2017 vs. 2016
Interest income
$
787
$
716
$
377
$
71
10 % $
339
90 %
Interest expense
(30,044)
(29,861)
(24,617)
(183)
1 %
(5,244)
21 %
Earnings (losses) of equity
method investment
Other income, net
Total non-operating
expenses
692
2,602
604
2,657
(52)
544
$(25,963) $(25,884) $(23,748)
88
(55)
(79)
15 %
(2)%
656
(1,262)%
2,113
388 %
— %
(2,136)
9 %
Total non-operating expenses in 2018 remained relatively flat at $26.0 million when compared to 2017 . Other
income, net is comprised of $2.7 million in foreign currency transaction gains, $1.8 million from federal relief
funds received in connection with wages paid in the aftermath of hurricane Maria, partially offset by a $2.6
million loss on extinguishment of debt.
Total non-operating expenses in 2017 increased $2.1 million or 9% when compared to 2016 . Interest expense
increased by $5.2 million primarily as a result of an amendment to the Company's outstanding credit agreement
in 2017 which was completed in the fourth quarter of 2016 coupled with an increased LIBOR and increased
interest expense from the commencement of the fixed interest rate swap. This increase was partially offset by an
increase in foreign exchange gains and an increase in earnings from our equity method investment.
49
Income tax expense
Year ended December 31,
(In thousands)
Income tax expense $ 12,596
2018
2017
2016
Variance 2018 vs. 2017 Variance 2017 vs. 2016
$
4,780
$
8,271
7,816
164%
(3,491)
(42)%
Income tax expense in 2018 increased by $7.8 million to $12.6 million. The effective tax rate in 2018 was
approximately 13%. The increase in income tax expense was mainly due to the impact on the prior year of the
reversal of a tax liability related to an uncertain tax position for which the statute of limitations expired and an
increase in taxable income from our Latin America operations, including the impact of a full year of taxable
income from the acquisition of the business formerly known as PayGroup.
Income tax expense in 2017 decreased by $3.5 million to $4.8 million. The effective tax rate in 2017 was
approximately 8%. The decrease in income tax expense was mainly due to the reversal of a tax liability related
to an uncertain tax position for which the statute of limitations expired during the third quarter of 2017.
Segment Results of Operations
The Company operates in four business segments: Payment Services - Puerto Rico & Caribbean, Payment
Services - Latin America (collectively "Payment Services segments"), Merchant Acquiring, and Business
Solutions.
The Payment Services - Puerto Rico & Caribbean segment revenues are comprised of revenues related to
providing access to the ATH debit network and other card networks to financial institutions, including related
services such as authorization, processing, management and recording of ATM and POS transactions, and ATM
management and monitoring. The segment revenues also include revenues from card processing services (such
as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or
credit issuers), payment processing services (such as payment and billing products for merchants, businesses
and financial institutions) and EBT (which principally consist of services to the government of Puerto Rico for
the delivery of benefits to participants). For ATH debit network and processing services, revenues are primarily
driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction
switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are
primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed,
the number of cards embossed and other processing services. For EBT services, revenues are primarily derived
from the number of beneficiaries on file.
The Payment Services - Latin America segment revenues consist of revenues related to providing access to the
ATH network and other card networks to financial institutions, including related services such as authorization,
processing, management and recording of ATM and POS transactions, and ATM management and monitoring.
The segment revenues also include revenues from card processing services (such as credit and debit card
processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment
processing services (such as payment and billing products for merchants, businesses and financial institutions),
as well as, licensed software solutions for risk and fraud management and card payment processing. For 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.
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
50
card interchange and assessment fees charged by credit cards associations (such as VISA or MasterCard) or
payment networks. The discount fee is generally a percentage of the transaction value. EVERTEC also charges
merchants for other services that are unrelated to the number of transactions or the transaction value.
The Business Solutions segment consists of revenues from a full suite of business process management
solutions in various product areas such as core bank processing, network hosting and management, IT
professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core
bank processing and network services revenues are derived in part from a recurrent fixed fee and from fees
based on the number of accounts on file (i.e. savings or checking accounts, loans, etc.) or computer resources
utilized. Revenues from other processing services within the Business Solutions segment are 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 as “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 the Merger,
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 Earnings before Interest, Taxes, Depreciation and
Amortization ("Adjusted EBITDA"). Adjusted EBITDA is defined as EBITDA further adjusted to exclude
unusual items and other adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in
conformity with Accounting Standards Codification Topic 280, "Segment Reporting" given that it is reported to
the CODM for 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
performance. As such, segment assets are not disclosed in the notes to the accompanying consolidated financial
statements.
See Note 23 of the Audited Consolidated Financial Statements appearing elsewhere in this Annual Report on
Form 10-K for the reconciliation of EBITDA to consolidated net income.
51
The following tables set forth information about the Company’s operations by its four business segments for the
periods indicated below.
Payment Services - Puerto Rico & Caribbean
(In thousands)
Revenues
Adjusted EBITDA
Year ended December 31,
2018
2017
$114,119
$101,687
75,104
58,534
2016
$99,680
63,086
Payment Services - Puerto Rico & Caribbean revenues in 2018 increased $12.4 million when compared with
2017. The increase in revenues primarily reflects revenue growth over the hurricane impacted results in the
prior year, driven mainly by increased volumes. Adjusted EBITDA increased $16.6 million, primarily as a result
of the higher revenue, as well as the impact in the prior year of an impairment charge of a software asset under
development.
Payment Services - Puerto Rico & Caribbean revenues in 2017 increased $2.0 million when compared with
2016. Revenue growth reflected increases in ATH debit network transaction volumes and card processing
volumes. Adjusted EBITDA decreased $4.6 million, mainly a result of the impairment charge taken related to a
software asset under development and reduced revenues related to the hurricanes.
Payment Services - Latin America
(In thousands)
Revenues
Adjusted EBITDA
Year ended December 31,
2018
$80,899
27,727
2017
$62,702
17,558
2016
$47,162
15,354
Payment Services - Latin America revenues increased $18.2 million in 2018 driven by a full year of revenues
from the acquisition of the business formerly known as PayGroup coupled with increased revenues from card
products. Revenues from this segment also includes intercompany software sale and developments from
Payment Services- Latin America to Payment Services- Puerto Rico & Caribbean. Adjusted EBITDA increased
$10.2 million mainly driven by revenue contribution from the acquisition of the business formerly known as
PayGroup at a lower margin, as well as, the previously mentioned intercompany software sales and
developments.
Payment Services - Latin America revenues in 2017 increased $15.5 million driven mainly by added revenues
from the PayGroup acquisition. Adjusted EBITDA increased $2.2 million mainly driven by increased
transaction growth as well as contribution from our PayGroup acquisition at a lower margin, both of which were
partially offset by customer attrition.
Merchant Acquiring
(In thousands)
Revenues
Adjusted EBITDA
Year ended December 31,
2018
$99,655
46,516
2017
$85,778
37,497
2016
$91,248
41,629
Merchant acquiring segment revenue increased $13.9 million to $99.7 million in 2018. The primary growth
drivers in 2018 were increased volumes favorably impacted by higher spending related to post-hurricane
52
recovery activities. Adjusted EBITDA increased by $9.0 million mainly due to the factors above described for
revenues coupled with a favorable revenue mix that improved margins.
Merchant acquiring segment revenue in 2017 decreased $5.5 million. Merchant sales volume and revenue were
negatively impacted by Hurricanes Irma and Maria in September 2017. The decrease was also impacted by the
shift of revenue from Merchant Acquiring related to a client contract change in the second quarter of 2016.
Adjusted EBITDA decreased by $4.1 million mainly due to the factors above described for revenues coupled
with a less favorable merchant mix and a lower average ticket, both of which reduced margins.
Business Solutions
(In thousands)
Revenues
Adjusted EBITDA
Year ended December 31,
2018
2017
2016
$197,602
$189,077
$184,276
87,813
86,790
89,239
Business solutions revenue was $197.6 million in 2018, an increase of $8.5 million when compared with the
prior year, mainly driven by higher revenues from Popular coupled with increased hardware sales and increased
revenues from our printing business. Adjusted EBITDA increased by $1.0 million mainly due to increases in
lower margin revenue.
Business solutions revenue in 2017 increased to $189.1 million primarily reflecting increased revenue from our
Accuprint printing business acquisition and an increase in core banking revenue. Adjusted EBITDA decreased
to $86.8 million mainly as a result of higher internal charges related to higher support and maintenance hours
for Business Solution applications, primarily for Banco Popular coupled with higher expenses related to
infrastructure supporting the Business Solutions segment as we replaced obsolete assets.
Liquidity and Capital Resources
Liquidity
Our principal source of liquidity is cash generated from operations, and our primary liquidity requirements are
the funding of capital expenditures and working capital needs. We also have a $125.0 million revolving credit
facility, of which $97.9 million was available as of December 31, 2018. The Company issues letters of credit
against our revolving credit facility which reduce our availability of funds to be drawn.
At December 31, 2018, we had cash and cash equivalents of $70.0 million, of which $50.3 million resides in
our subsidiaries located outside of Puerto Rico for purposes of (i) funding the respective subsidiary’s current
business operations and (ii) funding potential future investment outside of Puerto Rico. We intend to
indefinitely reinvest these funds outside of Puerto Rico and, based on our liquidity forecast, we will not need to
repatriate this cash to fund the Puerto Rico operations or to meet debt-service obligations. However, if in the
future we determine that we no longer need to maintain cash balances within our foreign subsidiaries, we may
elect to distribute such cash to the Company in Puerto Rico. Distributions from the foreign subsidiaries to
Puerto Rico may be subject to tax withholding and other tax consequences. Additionally, our credit agreement
imposes certain restrictions on the distribution of dividends from subsidiaries, refer to "Financial Obligations"
section for further details.
Our primary use of cash is for operating expenses, working capital requirements, capital expenditures, dividend
payments, share repurchases, debt service, acquisitions and other transactions as opportunities present
themselves.
53
Based on our current level of operations, we believe our cash flows from operations and the available senior
secured Revolving Credit 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 will be affected by general economic, financial and other factors beyond our
control.
Comparison of the years ended December 31, 2018 and 2017
The following table presents our cash flows from operations for the years ended December 31, 2018 and 2017:
(In thousands)
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Increase in cash, cash equivalents and restricted cash
Years ended December 31,
2018
2017
$
$
172,734
(41,300)
(105,055)
26,379
$
$
145,786
(76,268)
(69,183)
335
Net cash provided by operating activities for the year ended December 31, 2018 was $172.7 million, an increase
of $26.9 million compared with 2017. The increase in cash provided by operating activities was primarily
driven by the increase in net income.
Net cash used in investing activities decreased by $35.0 million to $41.3 million. The decrease was mainly
attributable to the completion in the prior year of the purchase of the business formerly known as PayGroup.
Capital expenditures in 2018 amounted to $41.3 million compared with $33.5 million in 2017.
Net cash used in financing activities for the year ended December 31, 2018 amounted to $105.1 million, an
increase of $35.9 million when compared with the prior year. The increase is mainly a result of the repayment of
long-term debt concurrent with the issuance of new debt under the 2018 Credit Agreement, which was partially
offset by lower dividends paid.
Comparison of the years ended December 31, 2017 and 2016
The following table presents our cash flows from operations for the years ended December 31, 2017 and 2016:
(In thousands)
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Increase in cash, cash equivalents and restricted cash
Years ended December 31,
2017
2016
$
$
145,786
(76,268)
(69,183)
335
$
$
168,054
(57,788)
(90,798)
19,468
Net cash provided by operating activities for the year ended December 31, 2017 was $145.8 million, a decrease
of $22.3 million compared with 2016. The decrease in cash provided by operating activities was primarily
driven by a decrease in net income.
Net cash used in investing activities increased by $18.5 million to $76.3 million. The increase was mainly
attributable to the completion of the purchase of PayGroup during the third quarter of 2017.
54
Net cash used in financing activities for the year ended December 31, 2017 amounted to $69.2 million, a
decrease of $21.6 million when compared with the prior year. The decrease is driven by less cash used for stock
repurchases and dividend payments.
Capital Resources
Our principal capital expenditures are for hardware and computer software (purchased and internally
developed), additions to property and equipment and acquisitions. We invested approximately $41.3 million,
$33.5 million, and $42.3 million on capital expenditures for hardware and computer software and property and
equipment for the years ended December 31, 2018, 2017 and 2016, respectively. In terms of acquisitions, in
2017, we completed the purchase of PayGroup for $42.8 million, while in 2016, we completed the purchase of
Processa for $5.9 million and Accuprint for $9.7 million. Capital expenditures are expected to be funded by
cash flow from operations and, if necessary, borrowings under our revolving credit facility.
Dividend Payments
On July 26, 2018, the Company’s Board voted to reinstate a quarterly dividend on the Company's common
stock, which had been suspended since November of 2017. Any declaration and payment of future dividends to
holders of our common stock will be at the discretion of our Board and will depend on many factors, including
our financial condition, earnings, available cash, business opportunities, legal requirements, restrictions in our
debt agreements and other contracts, capital requirements, level of indebtedness and other factors that our Board
deems relevant. Refer to the table below for details regarding our dividends in 2018 and 2017:
Declaration Date
February 17, 2017
April 27, 2017
July 25, 2017
July 26, 2018
October 25, 2018
Stock Repurchase
Record Date
March 1, 2017
May 8, 2017
August 7, 2017
August 6, 2018
November 5, 2018
Payment Date
March 20, 2017
June 9, 2017
September 8, 2017
September 7, 2018
December 7, 2018
Dividend per share
0.10
0.10
0.10
0.05
0.05
During 2018, the Company repurchased 367,403 shares of the Company’s common stock at a cost of $10.0
million. The Company funded such repurchase with cash on hand and borrowings under the existing revolving
credit facility.
During 2017, the Company repurchased 465,240 shares of the Company’s common stock at a cost of $7.7
million. The Company funded such repurchase with cash on hand and borrowings under the existing revolving
credit facility.
During 2016, the Company repurchased 2,504,427 shares of the Company’s common stock at a cost of $39.9
million. The Company funded the repurchase with cash on hand and borrowings under the existing revolving
credit facility.
Repurchases may be accomplished through open market transactions, privately negotiated transactions,
accelerated share repurchase programs and other means.
55
Financial Obligations
2018 Senior Secured Credit Facilities
On November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement setting
forth the terms of the senior secured credit facilities, consisting of a $220.0 million term loan A facility that matures
on November 27, 2023 ("2023 Term A"), a $325.0 million term loan B facility that matures on November 27, 2024
("2024 Term B") and a $125.0 million revolving credit facility (the "Revolving Credit Facility") that matures on
November 27, 2023, with a syndicate of lenders and Bank of America, N.A. (“Bank of America”), as administrative
agent, collateral agent, swingline lender and line of credit issuer (collectively the “2018 Credit Agreement”). The
material terms and conditions of the senior secured credit facilities are summarized below.
Scheduled Amortization Payments
The 2023 Term A provides for amortization in the amount of 1.25% of the original principal amount of the 2023
Term A during each of the first twelve quarters starting from the quarter ending March 31, 2019, 1.875% during
each of the four subsequent quarters and 2.50% during each of the final three quarters, with the balance payable
on the final maturity date.
The 2024 Term B provides for quarterly amortization payments totaling 1.00% per annum of the original principal
amount of the 2024 Term B, with the balance payable on the final maturity date.
Voluntary Prepayments and Reduction and Termination of Commitments
The terms of the 2018 senior secured credit facilities allow EVERTEC Group to prepay loans and permanently
reduce the loan commitments under the senior secured credit facilities at any time, subject to the payment of
customary LIBOR breakage costs, if any, provided that, in connection with certain refinancing or repricing of the
2024 Term B on or prior to the date which is six months after the closing date of the 2018 Credit Agreement, a
prepayment premium of 1.00% will be required.
Additionally, the terms of the facilities require mandatory repayment of outstanding principal balances based on
a percentage of excess cash flow provided that no such prepayment shall be due if the resulting amount of the
excess cash flow times the applicable percentage is less than $10 million.
Interest
The interest rates under the 2023 Term A and revolving credit facility are based on, at EVERTEC Group’s option,
(a) adjusted LIBOR plus an interest margin of 2.25% or (b) the greater of (i) Bank of America’s “prime rate,” (ii)
the Federal Funds Effective Rate plus 0.5% and (iii) adjusted LIBOR plus 1.0% (“ABR”) plus an interest margin
of 1.25%. The interest rates under the 2024 Term B are based on, at EVERTEC Group’s option, (a) adjusted LIBOR
plus an interest margin of 3.50% or (b) ABR plus an interest margin of 2.50%. The interest margins under the
2023 Term A and Revolving Facility are subject to reduction based on achievement of specified total secured net
leverage ratio.
Guarantees and Collateral
EVERTEC Group’s obligations under the senior secured credit facilities and under any cash management, interest
rate protection or other hedging arrangements entered into with a lender or any affiliate thereof are guaranteed by
EVERTEC and each of EVERTEC’s existing wholly-owned subsidiaries (other than EVERTEC Group) and
subsequently acquired or organized subsidiaries, subject to certain exceptions.
56
Subject to certain exceptions, the senior secured credit facilities are secured to the extent legally permissible by
substantially all of the assets of (1) EVERTEC, including a perfected pledge of all of the limited liability company
interests of EVERTEC Intermediate Holdings, LLC (“Holdings”), (2) Holdings, including a perfected pledge of
all of the limited liability company interests of EVERTEC Group and (3) EVERTEC Group and the subsidiary
guarantors, including but not limited to: (a) a pledge of substantially all capital stock held by EVERTEC Group
or any guarantor and (b) a perfected security interest in substantially all tangible and intangible assets of EVERTEC
Group and each guarantor.
Covenants
The senior secured credit facilities contain affirmative and negative covenants that the Company believes are usual
and customary for a senior secured credit agreement. The negative covenants in the senior secured credit facilities
include, among other things, limitations (subject to exceptions) on the ability of EVERTEC and its restricted
subsidiaries to:
declare dividends and make other distributions;
redeem or repurchase capital stock;
grant liens;
•
•
•
• make loans or investments (including acquisitions);
• merge or enter into acquisitions;
•
•
•
•
• modify the terms of certain debt;
•
•
•
sell assets;
enter into any sale or lease-back transactions;
incur additional indebtedness;
prepay, redeem or repurchase certain indebtedness;
restrict dividends from subsidiaries;
change the business of EVERTEC or its subsidiaries; and
enter into transactions with their affiliates.
In addition, the 2023 Term A and the Revolving Credit Facility require EVERTEC to maintain a maximum total
secured net leverage ratio of 4.25 to 1.00 for any quarter ending on or prior to September 30, 2020 and for fiscal
quarters ending thereafter, 4.00 to 1.00.
Concurrently with the execution of the 2018 Credit Agreement, the Company terminated the 2013 Credit
Agreement. The net proceeds received by EVERTEC Group from the senior secured credit facilities under the
2018 Credit Agreement, together with other cash available to EVERTEC Group, were used, among other things,
to refinance EVERTEC Group’s previous senior secured credit facilities, which consisted of a $191.4 million 2020
Term A and a $379.0 million Term B, under the credit agreement, dated as of April 17, 2013 and as subsequently
amended, among EVERTEC Intermediate Holdings, LLC, EVERTEC Group, JPMorgan Chase Bank, N.A., as
administrative agent, collateral agent, swingline lender and line of credit issuer, and the lenders party thereto. In
connection with this transaction the Company recognized a loss on extinguishment of $2.6 million.
The unpaid principal balance at December 31, 2018 of the 2023 Term A Loan and the 2024 Term B Loan was
$220.0 million, and $325.0 million, respectively. The additional borrowing capacity for the Revolving Facility
loan at December 31, 2018 was $97.9 million. The Company issues letters of credit against the revolving credit
facility which reduce the additional borrowing capacity of the revolving credit facility.
Events of Default
The events of default under the senior secured credit facilities include, without limitation, nonpayment, material
misrepresentation, breach of covenants, insolvency, bankruptcy, certain judgments, change of control (as defined
in the 2018 Credit Agreement) and cross-events of default on material indebtedness.
57
Notes payable
In May 2016, EVERTEC Group entered into a non-interest bearing financing agreement amounting to $0.7
million and in October 2016 entered into an interest bearing agreement of $1.1 million, to purchase software. As
of December 31, 2018 and 2017, the outstanding principal balance of the notes payable is $0.3 million and $1.0
million, respectively. The current portion of these notes is recorded as part of accounts payable and the long-
term portion is included in other long-term liabilities.
Interest Rate Swaps
At December 31, 2018, the Company had two interest rate swap agreements, entered into in December 2015
and December 2018, which convert a portion of the interest rate payments on the Company's 2023 Term B Loan
from variable to fixed:
Swap Agreement
2015 Swap
2018 Swap
Effective date
Maturity Date
January 2017 April 2020
April 2020
Notional Amount
$200 million
November 2024 $250 million
Variable Rate
Fixed Rate
1-month LIBOR 1.9225%
1-month LIBOR 2.89%
The Company has accounted for these transactions as cash flow hedges.
At December 31, 2018 and 2017, the carrying amount of the derivatives on the Company’s balance sheets is as
follows:
(In thousands)
Other long-term assets
Other long-term liabilities
December 31, 2018
December 31, 2017
$
1,683
$
4,059
214
—
As of December 31, 2018, the Company recognized gains related to hedging activities on the Statement of
Income and Comprehensive Income that offset the Company's interest expense as follows:
(In thousands)
Interest expense
December 31, 2018
$
104
During the year ended December 31, 2018, the Company reclassified gains of $0.1 million from accumulated
other comprehensive loss into income through interest expense. Based on current LIBOR rates, the Company
expects to reclassify $1.0 million from accumulated other comprehensive loss into income through interest
expense over the next 12 months. Refer to Note 13 for tabular disclosure of the fair value of the derivative and
to Note 15 for tabular disclosure of gains (losses) recorded on cash flow hedging activities.
The cash flow hedges are considered highly effective.
Covenant Compliance
As of December 31, 2018, the total secured net leverage ratio was 2.30 to 1.00. As of the date of filing of this
Form 10-K, no event has occurred that constitutes an Event of Default or Default.
In this Annual Report on Form 10-K, we refer to the term “Adjusted EBITDA” to mean EBITDA as so defined
and calculated for purposes of determining compliance with the total secured net leverage ratio based on the
financial information for the last twelve months at the end of each quarter.
58
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 Accounting Standards Codification 280,
Segment Reporting, and is excluded from the definition of non-GAAP financial measures under the Securities
and Exchange Commission's Regulation G and Item 10(e) of Regulation S-K. We define “Adjusted Net
Income” as net income adjusted to exclude unusual items and other adjustments described below. We define
“Adjusted Earnings per common share” as Adjusted Net Income divided by diluted shares outstanding.
We present EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our
performance and believe they are frequently used by securities analysts, investors and other interested parties in
the evaluation of ourselves and other companies in our industry. In addition, our presentation of Adjusted
EBITDA is substantially consistent with the equivalent measurements that are contained in the senior secured
credit facilities in testing EVERTEC Group’s compliance with covenants therein such as the total secured net
leverage ratio. We use Adjusted Net Income to measure our overall profitability because we believe it better
reflects our comparable operating performance by excluding the impact of the non-cash amortization and
depreciation that was created as a result of the Merger. In addition, in evaluating EBITDA, Adjusted EBITDA,
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:
59
(Dollar amounts in thousands)
Net income
Income tax expense
Interest expense, net
Depreciation and amortization
EBITDA
Equity income (1)
Compensation and benefits (2)
Transaction, refinancing and other fees (3)
Adjusted EBITDA
Operating depreciation and amortization (4)
Cash interest expense, net (5)
Income tax expense (6)
Non-controlling interest (7)
Adjusted net income
Net income per common share (GAAP):
Diluted
Adjusted Earnings per common share (Non-GAAP):
Diluted
Shares used in computing adjusted earnings per common share:
Year Ended December 31, 2018
$
$
$
$
86,569
12,596
29,257
63,067
191,489
(259)
13,659
7,570
212,459
(29,208)
(26,103)
(19,514)
(472)
137,162
1.16
1.84
Diluted
74,420,110
1) Represents the elimination of non-cash equity earnings from our 19.99% equity investment in
Dominican Republic, Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”), net of dividends
received.
2) Primarily represents share-based compensation and other compensation expense.
3) Primarily represents fees and expenses associated with corporate transactions as defined in the 2018
Credit Agreement, recorded as part of selling, general and administrative expense and cost of revenues,
as well as relief contributions related to the 2017 hurricanes.
4) Represents operating depreciation and amortization expense, which excludes amounts generated as a
result of the Merger and other from purchase accounting intangibles generated from acquisitions.
5) Represents interest expense, less interest income, as they appear on our consolidated statements of
income and comprehensive income, adjusted to exclude non-cash amortization of the debt issue costs,
premium and accretion of discount.
6) Represents income tax expense calculated on adjusted pre-tax income using the applicable GAAP tax
rate, adjusted for certain discreet items.
7) Represents the 35% non-controlling equity interest in Evertec Colombia (formerly referred to as
Processa), net of amortization for intangibles created as part of the purchase.
60
Contractual Obligations
The Company’s contractual obligations as of December 31, 2018 are as follows:
Payment due by periods
Less than
1 year
1-3 years
3-5 years
After 5 years
(In thousands)
Long-term debt (1)
Operating leases (2)
Other long-term liabilities
Total
$
$
Total
546,499
8,463
317
$
14,550
$
49,171
$
482,778
$
6,924
136
1,539
181
—
—
555,279
$
21,610
$
50,891
$
482,778
$
—
—
—
—
(1) Long-term debt includes principal balance of $546.0 million and the payments of cash interest (based on
interest rates as of December 31, 2018 for variable rate debt) of the senior secured term loan facilities, as
well as commitments fees related to the unused portion of our senior secured revolving credit facility, as
required under the terms of the long-term debt agreements.
(2) Includes certain facilities and equipment under operating leases. See Note 22 of the Notes to Audited
Consolidated Financial Statements for additional information regarding operating lease obligations.
Off Balance Sheet Arrangements
In the ordinary course of business the Company may enter into commercial commitments. As of December 31,
2018, the Company did not have any off balance sheet items.
Seasonality
Our payment businesses generally experience moderate increased activity during the traditional holiday
shopping periods and around other nationally recognized holidays, which follow consumer spending patterns.
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 impact on our
operating results during the last three years as overall inflation has been partially offset by increased margins on
incremental revenue and cost reduction actions. We cannot assure you, however, that we will not be affected by
general inflation in the future.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks arising from our normal business activities. These market risks principally
involve the possibility of change in interest rates that will adversely affect the value of our financial assets and
liabilities or future cash flows and earnings, and foreign exchange risk that may result in unfavorable foreign
currency translation adjustments. Market risk is the potential loss arising from adverse changes in market rates
and prices.
Interest rate risks
We issued floating-rate debt which is subject to fluctuations in interest rates. Our senior secured credit facilities
accrue interest at variable rates and only the Term B Loan is subject to floors or minimum rates. A 100 basis
61
point increase in interest rates over our floor(s) on our debt balances outstanding as of December 31, 2018,
under the senior secured credit facilities would increase our annual interest expense by approximately $3.5
million. The impact on future interest expense as a result of future changes in interest rates will depend largely
on the gross amount of our borrowings at that time.
In December 2015 and December 2018, we entered into interest rate swap agreements which convert a portion
of our outstanding variable rate debt to fixed.
The interest rate swap exposes us to credit risk in the event that the counterparty to the swap agreement does not
or cannot meet its obligations. The notional amount is used to measure interest to be paid or received and does
not represent the amount of exposure to credit loss. The loss would be limited to the amount that would have
been received, if any, over the remaining life of the swap. The counterparty to the swap is a major US based
financial institution and we expect the counterparty to be able to perform its obligations under the swap. We use
derivative financial instruments for hedging purposes only and not for trading or speculative purposes
See Note 12 of the Notes to Audited Consolidated Financial Statements appearing elsewhere in this Annual
Report on Form 10-K for additional information related to the senior secured credit facilities.
Foreign currency exchange risk
We conduct business in certain countries in Latin America. Some of this business is conducted in the countries’
local currencies. The resulting foreign currency translation adjustments, from operations for which the
functional currency is other than the U.S. dollar, are reported in accumulated other comprehensive loss in the
audited consolidated balance sheet, except for highly inflationary environments in which the effects would be
included in other operating income in the consolidated statements of income and comprehensive income. At
December 31, 2018, the Company had $21.6 million in an unfavorable foreign currency translation adjustment
as part of accumulated other comprehensive loss compared to an unfavorable foreign currency translation
adjustment of $11.1 million at December 31, 2017.
62
Item 8. Financial Statements and Supplementary Data
The Audited Consolidated Financial Statements, together with EVERTEC’s independent registered public
accounting firms reports, are included herein beginning on page F-1 of this Annual Report on Form 10-K.
89,659
28,572
(6,078)
22,494
2,247
20,247
20,199
0.27
0.27
Selected Quarterly Financial Data
(Dollar amounts in thousands, except per
share data)
Revenues
Operating costs and expenses
Income from operations
Non-operating expenses
Income before income taxes
Income tax expense
Net income
Quarters ended,
March 31, 2018
110,274
$
June 30, 2018
$
113,347
September 30, 2018
112,017
$
December 31, 2018
118,231
$
76,719
33,555
(6,506)
27,049
3,935
82,707
30,640
(7,395)
23,245
3,112
79,656
32,361
(5,984)
26,377
3,302
$
23,114
$
20,133
$
23,075
$
Net income attributable to
EVERTEC, Inc.’s common
stockholders
$
Net income per common share - basic $
Net income per common share -
diluted
$
23,022
0.32
0.31
$
$
$
20,052
0.28
0.27
$
$
$
22,997
0.32
0.31
$
$
$
Quarters ended,
(Dollar amounts in thousands, except per
share data)
Revenues
Operating costs and expenses
Income from operations
Non-operating expenses
Income before income taxes
Income tax expense (benefit)
$
Net income
Net income attributable to
EVERTEC, Inc.’s common
stockholders
$
Net income per common share - basic $
Net income per common share -
diluted
$
March 31, 2017
101,280
$
June 30, 2017
$
103,511
September 30, 2017
102,725
$
December 31, 2017
99,628
$
70,688
30,592
(5,434)
25,158
2,020
73,517
29,994
(5,712)
24,282
4,068
23,138
$
20,214
$
23,029
0.32
0.31
$
$
$
20,089
0.28
0.27
$
$
$
93,917
8,808
(7,506)
1,302
(4,840)
6,142
6,102
0.08
0.08
$
$
$
$
82,939
16,689
(7,232)
9,457
3,532
5,925
5,834
0.08
0.08
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
63
The Company, under the direction of the Chief Executive Officer and the Chief Financial Officer, has
established disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that as of December 31, 2018, the Company’s disclosure controls and
procedures are effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31,
2018 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process
designed by, or under the supervision of our Chief Executive Officer and Chief Financial Officer and effected
by the Company’s board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management and the directors of the firm; and provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the firm’s assets that could have a material effect on our financial statements.
The Company’s management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2018. In making this assessment, management used the criteria established in the Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the “COSO criteria”). Based on this assessment, management has determined that the Company’s
internal control over financial reporting as of December 31, 2018 was effective.
Deloitte & Touche, LLP, an independent registered public accounting firm, has audited the consolidated
financial statements as of and for the year ended December 31, 2018, included in this Form 10-K and, as part of
the audit, has issued a report, included as part of Item 8 of this Form 10-K, on the effectiveness of our internal
control over financial reporting as of December 31, 2018.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
Part III
The information required by Item 10 will be included in EVERTEC's proxy statement, to be filed pursuant to
Regulation 14 A within 120 days after the end of the 2018 fiscal year, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 will be included in EVERTEC's proxy statement, to be filed pursuant to
Regulation 14 A within 120 days after the end of the 2018 fiscal year, and is incorporated herein by reference.
64
Table of Contents
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by Item 12 will be included in EVERTEC's proxy statement, to be filed pursuant to
Regulation 14 A within 120 days after the end of the 2018 fiscal year, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Party Transactions and Director Independence
The information required by Item 13 will be included in EVERTEC's proxy statement, to be filed pursuant to
Regulation 14 A within 120 days after the end of the 2018 fiscal year, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 will be included in EVERTEC's proxy statement, to be filed pursuant to
Regulation 14 A within 120 days after the end of the 2018 fiscal year, and is incorporated herein by reference.
65
Part IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized,
EVERTEC, Inc.
Date: February 26, 2019
By:
/s/ Morgan M. Schuessler, Jr.
Morgan M. Schuessler, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
66
Table of Contents
Signature
Title
Date
/s/ Morgan M. Schuessler, Jr.
Chief Executive Officer (Principal Executive
February 26, 2019
Morgan M. Schuessler, Jr.
Officer)
/s/ Joaquin A. Castrillo-Salgado
Chief Financial Officer (Principal Financial and
February 26, 2019
Joaquin A. Castrillo-Salgado
Accounting Officer)
/s/ Frank G. D’Angelo
Frank G. D’Angelo
/s/ Teresita Loubriel
Teresita Loubriel
Chairman of the Board
February 26, 2019
Director
February 26, 2019
/s/ Alan H. Schumacher
Director
February 26, 2019
Alan H. Schumacher
/s/ Thomas W. Swidarski
Director
February 26, 2019
Thomas W. Swidarski
/s/ Jorge A. Junquera
Jorge A. Junquera
/s/ Nestor O. Rivera
Nestor O. Rivera
/s/ Olga M. Botero
Olga M. Botero
/s/ Brian J. Smith
Brian J. Smith
Director
Director
Director
Director
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
67
F - 1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income and Comprehensive Income for the years ended December 31,
2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31,
2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Audited Consolidated Financial Statements
Schedule I
F - 2
F - 4
F - 6
F - 7
F - 9
F - 11
F - 47
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of EVERTEC, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of EVERTEC, Inc. and subsidiaries (the "Company") as of
December 31, 2018 and 2017, the related consolidated statements of income and comprehensive income, shareholders'
equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes and the
schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 26, 2019, expressed an unqualified opinion on the Company's
internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.
/s/ Deloitte & Touche LLP
San Juan, Puerto Rico
February 26, 2019
Stamp No. E360667
affixed to original
We have served as the Company’s auditor since 2015.
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of EVERTEC, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of EVERTEC, Inc. and subsidiaries (the “Company”) as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company
and our report dated February 26, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
San Juan, Puerto Rico
February 26, 2019
Stamp No. E360668
affixed to original
F - 3
EVERTEC, Inc. Consolidated Balance Sheets
(Dollar amounts in thousands, except share data)
Assets
Current Assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Prepaid expenses and other assets
Total current assets
Investment in equity investee
Property and equipment, net
Goodwill
Other intangible assets, net
Deferred tax asset
Other long-term assets
Total assets
Liabilities and stockholders’ equity
Current Liabilities:
Accrued liabilities
Accounts payable
Unearned income
Income tax payable
Current portion of long-term debt
Short-term borrowings
Total current liabilities
Long-term debt
Deferred tax liability
Unearned income—long-term
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 22)
Stockholders’ equity
December 31,
2018
December 31,
2017
$
69,973
$
$
$
16,773
100,323
29,124
216,193
12,149
36,763
394,644
259,269
1,917
6,357
927,292
$
57,006
$
47,272
11,527
6,650
14,250
—
136,705
524,056
9,950
26,075
14,900
711,686
50,423
9,944
83,328
25,011
168,706
13,073
37,924
398,575
279,961
988
3,561
902,788
38,451
41,135
7,737
1,406
46,487
12,000
147,216
557,251
13,820
23,486
13,039
754,812
Preferred stock, par value $0.01; 2,000,000 shares authorized; none
issued
Common stock, par value $0.01; 206,000,000 shares authorized;
72,378,710 shares issued and outstanding at December 31, 2018
(December 31, 2017 - 72,393,933)
Additional paid-in capital
Accumulated earnings
Accumulated other comprehensive loss, net of tax
—
—
723
5,783
228,742
(23,789)
723
5,350
148,887
(10,848)
F - 4
Total EVERTEC, Inc. stockholders’ equity
Non-controlling interest
Total equity
Total liabilities and equity
211,459
4,147
215,606
$
927,292
$
144,112
3,864
147,976
902,788
The accompanying notes are an integral part of these audited consolidated financial statements.
F - 5
EVERTEC, Inc. Consolidated Statements of Income and Comprehensive Income
(Dollar amounts in thousands, except per share data)
Years ended December 31,
2018
2017
2016
Revenues (affiliates Note 21)
$
453,869
$
407,144
$
389,507
Operating costs and expenses
Cost of revenues, exclusive of depreciation and
amortization shown below
Selling, general and administrative expenses
Depreciation and amortization
Total operating costs and expenses
Income from operations
Non-operating income (expenses)
Interest income
Interest expense
Earnings (losses) of equity method investment
Other income, net
Total non-operating expenses
Income before income taxes
Income tax expense
Net income
Less: Net income attributable to non-controlling
interest
Net income attributable to EVERTEC, Inc.’s
common stockholders
Other comprehensive (loss) income, net of tax of $345,
$122 and $176
Foreign currency translation adjustments
(Loss) gain on cash flow hedges
Total comprehensive income attributable to
EVERTEC, Inc.’s common stockholders
Net income per common share - basic attributable
to EVERTEC, Inc.’s common stockholders
Net income per common share - diluted attributable
to EVERTEC, Inc.’s common stockholders
Cash dividends declared per share
$
$
$
$
196,957
68,717
63,067
328,741
125,128
787
(30,044)
692
2,602
(25,963)
99,165
12,596
86,569
299
86,270
(10,564)
(2,377)
73,329
1.19
1.16
0.10
200,650
56,161
64,250
321,061
86,083
716
(29,861)
604
2,657
(25,884)
60,199
4,780
55,419
365
55,054
(635)
2,178
56,597
0.76
0.76
0.30
$
$
$
$
$
$
$
$
175,809
46,986
59,567
282,362
107,145
377
(24,617)
(52)
544
(23,748)
83,397
8,271
75,126
90
75,036
(3,360)
(1,449)
70,227
1.01
1.01
0.40
The accompanying notes are an integral part of these audited consolidated financial statements.
F - 6
EVERTEC, Inc. Consolidated Statements of Changes in Stockholders’ Equity
(Dollar amounts in thousands, except share data)
Number of
Shares of
Common Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Earnings
Accumulated
Other
Comprehensive
Loss
Non-
Controlling
Interest
Total
Stockholders’
Equity
74,988,210
$
750
$
9,718
$
95,328
$
(7,582) $
— $
98,214
Balance at
December 31,
2015
Share-based
compensation
recognized
Repurchase of
common stock
Stock options
exercised, net
of cashless
exercise
Restricted
stock grants
and units
delivered, net
of cashless
exercise
Net income
Non-
controlling
interest on
acquisition
Cash dividends
declared on
common stock
Dividend
reversal for
forfeited
options
Other
comprehensive
loss
Balance at
December 31,
2016
Cumulative
adjustment
from the
implementation
of ASU
2016-09
Share-based
compensation
recognized
—
—
6,408
—
(2,504,427)
(25)
(15,594)
(24,327)
8,393
—
(79)
—
142,856
1
(471)
—
—
—
—
—
—
—
—
—
—
—
72,635,032
726
—
—
75,036
—
—
(29,696)
—
—
18
—
—
—
—
—
—
—
—
—
—
—
—
—
90
6,408
(39,946)
(79)
(470)
75,126
3,409
3,409
—
(29,696)
—
18
(4,809)
(4,809)
116,341
(12,391)
3,499
108,175
4,203
4,203
—
—
9,642
—
—
—
9,642
F - 7
—
1,543
—
1,543
72,393,933
723
5,350
148,887
(10,848)
3,864
147,976
—
—
858
(465,240)
(5)
(2,702)
(4,964)
8,798
—
(91)
215,343
2
(1,499)
—
—
—
—
—
—
—
—
—
—
—
12,592
(367,403)
(4)
(9,996)
352,180
—
—
4
—
—
—
—
(2,163)
—
—
—
—
—
55,054
(21,747)
—
—
—
86,270
(7,273)
Repurchase of
common stock
Stock options
exercised, net
of cashless
exercise
Restricted
stock grants
and units
delivered, net
of cashless
exercise
Net income
Cash dividends
declared on
common stock
Other
comprehensive
income
Balance at
December 31,
2017
Cumulative
adjustment
from
implementation
of ASC 606
Share-based
compensation
recognized
Repurchase of
common stock
Restricted
stock units
delivered, net
of cashless
Net income
Cash dividends
declared on
common stock
Other
comprehensive
loss
Balance at
December 31,
2018
—
—
—
—
—
—
—
(7,671)
(91)
—
(1,497)
365
55,419
—
(21,747)
—
—
—
—
—
—
(16)
842
—
—
—
12,592
(10,000)
(2,159)
299
86,569
—
(7,273)
—
(12,941)
—
(12,941)
72,378,710
$
723
$
5,783
$
228,742
$
(23,789) $
4,147
$
215,606
The accompanying notes are an integral part of these audited consolidated financial statements.
F - 8
EVERTEC, Inc. Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Amortization of debt issue costs and accretion of discount
Loss on extinguishment of debt
Provision for doubtful accounts and sundry losses
Deferred tax benefit
Share-based compensation
Loss on impairment of software
Loss on disposition of property and equipment and other
intangibles
(Earnings) losses of equity method investment
Dividend received from equity method investment
(Increase) decrease in assets:
Accounts receivable
Prepaid expenses and other assets
Other long-term assets
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities
Income tax payable
Unearned income
Other long-term liabilities
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities
Additions to software
Acquisitions, net of cash acquired
Property and equipment acquired
Proceeds from sales of property and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of long-term debt
Debt issuance costs
Net decrease in short-term borrowings
Repayments of borrowings for purchase of equipment and software
Dividends paid
Withholding taxes paid on share-based compensation
Repurchase of common stock
Repayment of long-term debt
Credit amendment fees
Net cash used in financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of the
period
Cash, cash equivalents and restricted cash at end of the period
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents
Restricted cash
Cash, cash equivalents and restricted cash
Supplemental disclosure of cash flow information:
$
$
$
F - 9
Years ended December 31,
2018
2017
2016
$
86,569
$
55,419
$
75,126
63,067
4,316
2,645
2,112
(4,611)
12,592
—
109
(692)
390
(18,181)
(3,911)
(4,432)
16,057
5,245
7,021
4,438
86,165
172,734
(27,386)
—
(13,933)
19
(41,300)
545,000
(4,418)
(12,000)
(720)
(7,273)
(2,159)
(10,000)
(613,485)
—
(105,055)
26,379
64,250
5,128
—
843
(4,306)
9,642
11,441
430
(604)
—
(2,099)
(4,048)
1,654
(870)
(349)
8,444
811
90,367
145,786
(22,174)
(42,836)
(11,290)
32
(76,268)
—
—
(16,000)
(2,373)
(21,762)
(1,588)
(7,671)
(19,789)
—
(69,183)
335
60,367
86,746
69,973
16,773
86,746
$
$
$
60,032
60,367
50,423
9,944
60,367
$
$
$
59,567
4,334
1,476
1,990
(4,594)
6,408
2,277
453
52
—
(2,583)
(1,426)
(1,790)
14,594
405
8,018
3,747
92,928
168,054
(23,819)
(15,600)
(18,450)
81
(57,788)
75,763
(4,830)
11,000
(2,213)
(29,696)
(548)
(39,946)
(96,741)
(3,587)
(90,798)
19,468
40,564
60,032
51,920
8,112
60,032
Cash paid for interest
Cash paid for income taxes
Supplemental disclosure of non-cash activities:
Payable due to vendor related to property and equipment and
software acquired
26,891
9,750
25,379
9,930
22,535
8,697
317
1,037
3,302
The accompanying notes are an integral part of these audited consolidated financial statements.
F - 10
Notes to Audited Consolidated Financial Statements
Note 1 – The Company and Summary of Significant Accounting Policies
Note 2 – Recent Accounting Pronouncements
Note 3 – Revenues
Note 4 – Cash and cash equivalents
Note 5 – Accounts Receivable, net
Note 6 – Prepaid Expenses and Other Assets
Note 7 – Investment in Equity Investee
Note 8 – Property and Equipment, net
Note 9 – Goodwill
Note 10 – Other Intangible Assets, net
Note 11 – Other Long-Term Assets
Note 12 – Debt and Short-Term Borrowings
Note 13 – Financial Instruments and Fair Value Measurements
Note 14 – Other Long-Term Liabilities
Note 15 – Equity
Note 16 – Share-based Compensation
Note 17 – Employee Benefit Plan
Note 18 – Total Other Income, net
Note 19 – Income Tax
Note 20 – Net Income Per Common Share
Note 21 – Related Party Transactions
Note 22 – Commitments and Contingencies
Note 23 – Segment Information
Note 24 – Subsequent Events
F - 12
F - 17
F - 21
F - 24
F - 24
F - 25
F - 25
F - 26
F - 26
F - 27
F - 27
F - 29
F - 32
F - 34
F - 34
F - 35
F - 36
F - 36
F - 37
F - 41
F - 41
F - 42
F - 43
F - 46
F - 11
Note 1—The Company and Summary of Significant Accounting Policies
The Company
EVERTEC, Inc. (formerly known as Carib Latam Holdings, Inc.) and its subsidiaries (collectively the “Company,” or
“EVERTEC”) is a leading full-service transaction processing business in Latin America and the Caribbean. The Company
is based in Puerto Rico and provides a broad range of merchant acquiring, payment services and business process
management services across 26 countries in the region. EVERTEC owns and operates the ATH network, one of the leading
automated teller machine (“ATM”) and personal identification number (“PIN”) debit networks in Latin America. In
addition, EVERTEC provides a comprehensive suite of services for core bank processing, cash processing and technology
outsourcing in the regions the Company serves. EVERTEC serves a broad and diversified customer base of leading
financial institutions, merchants, corporations and government agencies with solutions that are essential to their operations,
enabling them to issue, process and accept transactions securely.
Initial Public Offering and Other Public Offerings
On April 17, 2013, the Company completed its initial public offering of 28,789,943 shares of common stock at a price to
the public of $20.00 per share. On September 18, 2013 and December 13, 2013, the Company completed public offerings
of 23,000,000 and 15,233,273 shares, respectively, of the Company’s common stock by Apollo Global Management, LLC
("Apollo") and Popular, Inc. ("Popular"), and current and former employees. As of December 31, 2018, Popular owned
approximately 11.7 million shares of EVERTEC's common stock, or 16.1% and Apollo no longer owns any of the
Company’s common stock.
Basis of Presentation
The consolidated financial statements of EVERTEC have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”). In the opinion of management, the accompanying consolidated
financial statements, prepared in accordance with GAAP, contain all adjustments, all of which are normal and recurring in
nature, necessary for a fair presentation.
A summary of the most significant accounting policies used in preparing the accompanying consolidated financial
statements is as follows:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and operations of the Company, which are
presented in accordance with GAAP. The Company consolidates all entities that are controlled by ownership of a majority
voting interest. Intercompany accounts and transactions are eliminated in the consolidated financial statements.
Use of Estimates
The preparation of the accompanying consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period.
Revenue Recognition
The Company’s revenue recognition policy follows the guidance from Accounting Standards Codification ("ASC") 606,
Revenue from Contracts with Customers, which provides guidance on the recognition, presentation, and disclosure of
revenue from contracts with customers in consolidated financial statements.
The Company recognizes revenue when (or as) control of goods or services are transferred to a customer. The transfer of
control occurs when the customer can direct the use of and receive substantially all the benefits from the transferred good
or service. Therefore, revenue is recognized over time (typically for services) or at a point in time (typically for goods).
F - 12
The assessment of revenue recognition is performed by the Company based on the five-step model established in Topic
606, as follows: Step 1: Identify the contract with customer; Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price; Step 4: Allocate the transaction price to the performance obligations in the
contract; and Step 5: Recognize revenue when or as the entity satisfies a performance obligation.
At contract inception, the Company evaluates whether the contract (i) is legally enforceable; (ii) approved by both parties;
(iii) properly defines rights and obligations of the parties, including payment terms; (iv) has commercial substance; and (v)
collection of substantially all consideration entitled is probable, before proceeding with the assessment of revenue
recognition. If any of these requirements is not met, the contract does not exist for purposes of the model and any
consideration received is recorded as a liability. A reassessment may be performed in a later date upon change in facts and
circumstances. The Company also evaluates within this step if contracts issued within a period of 6 months with the same
customer should be accounted for as a single contract. The Company’s contracts with customers may be modified through
amendments, change requests and waivers. Upon receipt, modifications of contracts with customers are evaluated to
determine if must be accounted for: (i) as a separate contract, (ii) a cumulative catch-up, or (iii) as a termination and
creation of a new contract. Contract modifications must also comply with the requirements to determine if a contract with a
customer exists for accounting purposes.
To identify performance obligations within contracts with customers, the Company first identifies all the promises in the
contract (i.e., explicit and implicit). This includes the customer’s options to acquire additional goods or services for free
or at a discount in exchange for an upfront payment. Then, the Company proceeds to exclude the immaterial promises
from the assessment of identifying performance obligations; and to evaluate if customer’s options to acquire additional
goods or services represent a material right based on corporate’s defined thresholds (i.e., equal or lower than 20% of
contract value), to determine if they must be included in the assessment. The Company may exclude as immaterial
promises, the promises with a transaction price equal or lower than 10 percent of the total contract value.
After excluding immaterial promises and options not considered a material right, the Company assesses if each material
good or service (or bundle of goods or services) is distinct in nature (i.e., the customer can benefit from the good or
service on its own or together with other readily available resources), and is capable of being distinct in the context of
the contract (i.e., the promise to transfer the good or service is separately identifiable from other promises in the
contract). A distinct good or service (or bundle of goods or services) constitutes a performance obligation.
The Company also applies the series guidance to distinct goods or services (either with a specified quantity of goods or
services or a stand-ready service), with an over time revenue recognition, to determine whether they should be
accounted for as a single performance obligation. These distinct goods or services are recognized as a single
performance obligation when their nature and timely increments are substantially the same and have the same pattern of
transfer to the customer (i.e., the distinct goods or services within the series use the same method to measure progress
towards complete satisfaction). To determine if a performance obligation should be recognized over time, one or more
of the following criteria must be met: (1) the customer simultaneously receives and consumes the benefits as the
Company performs (i.e., routine or recurring services); (2) the customer controls the asset as the entity creates or
enhances it (i.e., asset on customer’s site); or (3) the Company’s performance does not create an asset for which the
Company has an alternative use and there is a right to payment for performance to date (i.e., asset built to order).
Performance obligations that do not meet the over time criteria are recognized at a point in time.
In addition, in Step 2 of the model, the Company evaluates whether the practical expedient of right-to-invoice applies.
If this practical expedient is applicable, steps 3, 4 and 5 are waived. For this practical expedient to apply, the right to
consideration must correspond directly with the value received by the customer for the Company’s performance to date,
no significant up-front payments or retroactive adjustments must exist, and specified minimums must be deemed non-
substantive at the contract level. If the contract with the customer has multiple performance obligations and the practical
expedient of right-to-invoice does not apply, the Company proceeds to determine the transaction price and allocate it on
a stand-alone selling price basis among the different performance obligations identified in the Step 2.
The Company generally applies the expected cost-plus margin approach to determine the stand-alone selling price at the
performance obligation level. In addition, for performance obligations that are satisfied over time and the right to invoice
practical expedient is not available, the Company determines a method to measure progress (i.e., input or output method)
based on current facts and circumstances. When these performance obligations have variable consideration within its
transaction price and are part of a series, the Company allocates the variable consideration to each time increment.
F - 13
As part of the revenue recognition analysis, when another party is involved in providing goods or services to a customer,
the Company evaluates, for each performance obligation, whether is providing the goods or services itself (i.e., as
principal), or if it is only arranging on behalf of the other party. The Company acts as principal if it controls the specified
good or service before that good or service is transferred to a customer. To determine if the Company acts as an agent, the
Company considers indicators, such as: (i) the responsibility to fulfill a promise; (ii) the inventory risk; and (iii) the price
determination.
Investment in Equity Investee
The Company accounts for investments using the equity method of accounting if the investment provides the Company the
ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist
if the Company has an ownership interest in the voting stock of an investor of between 20 percent and 50 percent, although
other factors are considered in determining whether the equity method of accounting is appropriate. Under this method, the
investment, originally recorded at cost, is adjusted to recognize the Company’s share of net income or losses as they occur.
The Company’s share of investee earnings or losses is recorded, net of taxes, within earnings (losses) of equity method
investment caption in the consolidated statements of income and comprehensive income. The Company’s consolidated
revenues include fees for services provided to an investee accounted for under the equity method. Additionally, the
Company’s interest in the net assets of its equity method investee is reflected in the consolidated balance sheets. On the
acquisition of the investment any difference between the cost of the investment and the amount of the underlying equity in
net assets of an investee is required to be accounted as if the investee were a consolidated subsidiary. If the difference is
assigned to depreciable or amortizable assets or liabilities, then the difference should be amortized or accreted in
connection with the equity earnings based on the Company’s proportionate share of the investee’s net income or loss. If the
investor is unable to relate the difference to specific accounts of the investee, the difference should be considered goodwill.
The Company considers whether the fair value of its equity method investment has declined below its carrying value
whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the
Company considered any such decline to be other than temporary (based on various factors, including historical financial
results, product development activities and the overall health of the investee’s industry), then the Company would record a
write-down to estimated fair value.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation of property and
equipment is computed using the straight-line method and expensed over their estimated useful lives. Amortization of
leasehold improvements is computed over the terms of the respective leases, including renewal options considered by
management to be reasonably assured of being exercised, or the estimated useful lives of the improvements, whichever is
shorter. Costs of maintenance and repairs which do not improve or extend the life of the respective assets are expensed as
incurred.
Impairment of Long-lived Assets
Long-lived assets to be held and used, and long-lived assets to be disposed of, are evaluated for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Capitalization of Software
The Company develops software that is used in providing processing services to customers. Capitalized software includes
purchased software and internally-developed software and is recognized as software packages within the other intangible
assets line item in the consolidated balance sheets. Capitalization of internally developed software occurs only after the
preliminary project stage is complete and technological feasibility has been achieved, and management’s estimation that
the likelihood of successful development and implementation reaches a provable level. Tasks that are generally capitalized
are as follows: (a) system design of a chosen path including software configuration and software interfaces; (b) employee
costs directly associated with the internal-use computer software project; (c) software development (coding) and software
and system testing and verification; (d) system installation; and (e) enhancements that add function and are considered
permanent. These tasks are capitalized and amortized using the straight line method over its estimated useful life, which
F - 14
range from three to ten years and is included in depreciation and amortization in the consolidated statements of income and
comprehensive income.
The Company capitalizes interest costs incurred in the development of software. The amount of interest capitalized is an
allocation of the interest cost incurred during the period required to substantially complete the asset. The interest rate for
capitalization purposes is based on a weighted average rate on the Company’s outstanding borrowing. For the years ended
December 31, 2018, 2017 and 2016, interest cost capitalized amounted to approximately $1.1 million, $0.8 million and
$0.4 million, respectively.
Software and Maintenance Contracts
Software and maintenance contracts are recorded at cost. Amortization of software and maintenance contracts is computed
using the straight-line method and expensed over their estimated useful lives which range from one to five years and are
recognized in cost of revenues in the consolidated statements of income and comprehensive income.
Software and maintenance contracts are recognized as prepaid expenses and other assets or within other long-term assets
depending on their remaining useful lives.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price and related costs over the value assigned to net assets acquired.
Goodwill is not amortized, but is tested for impairment at least annually, or more often if events or circumstances indicate
there may be impairment.
The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative impairment
test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and
measure the amount of a goodwill impairment loss to be recognized (if any). The Company may assess qualitative factors
to determine whether it is more likely than not, that is, a likelihood of more than 50 percent that the fair value of the
reporting unit is less than its carrying amount, including goodwill. The Company has an unconditional option to bypass the
qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill
impairment test. The Company may resume performing the qualitative assessment in any subsequent period. The
quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment
loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the Company determines to
perform a quantitative impairment test, a third-party valuator may be engaged to prepare an independent valuation of each
reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered
not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an
amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Additionally, the
Company shall consider the income tax effect from any tax-deductible goodwill on the carrying amount of the reporting
unit, if applicable, when measuring the goodwill impairment loss. For the years ended December 31, 2018, 2017 and 2016,
no impairment losses associated with goodwill were recognized.
Other identifiable intangible assets with definitive useful lives are amortized using the straight-line method or accelerated
methods. These intangibles are evaluated periodically for impairment when events or changes in circumstances indicate
that the carrying amounts may not be recoverable.
Other identifiable intangible assets with definitive useful lives include customer relationships, trademarks, software
packages and a non-compete agreement. Customer relationships were valued using the excess earnings method under the
income approach. Trademark assets were valued using the relief-from-royalty method under the income approach.
Internally developed software packages, which include capitalized software development costs, are recorded at cost, while
software packages acquired as part of a business combination were valued using the relief-from-royalty method under the
income approach. The non-compete agreement was valued based on the estimated impact that theoretical competition
would have on revenues and expenses.
F - 15
Derivative Instruments and Hedging Activities
The Company uses derivative financial instruments to enhance its ability to manage its exposure to certain financial and
market risks. On the date the derivative instrument contract is entered into, the Company may designate the derivative as
(1) a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value” hedge), (2)
a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or
liability (“cash flow” hedge), or (3) as a “standalone” derivative instrument, including economic hedges that the Company
has not formally documented as a fair value or cash flow hedge. Changes in the fair value of a derivative that qualifies for
cash flow hedge accounting are recognized in Other Comprehensive Income (Loss). Amounts accumulated in other
comprehensive income (loss) are reclassified to earnings when the related cash outflow affects earnings. Changes in the
fair value of a derivative instrument that is highly effective and that is designated and qualifies as a fair value hedge, along
with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including gains or
losses on firm commitments), are recorded in current-period earnings. Similarly, the changes in the fair value of stand-
alone derivative instruments or derivatives not qualifying or designated for hedge accounting are reported in current-period
earnings. The Company recognizes all derivative financial instruments in the Consolidated Balance Sheets as assets or
liabilities at fair value. The Company presents derivative assets and derivative liabilities separately in the Consolidated
Balance Sheets. The Company does not enter into derivative financial instruments for speculative purposes.
Income Tax
Income taxes are accounted for under the asset and liability method. A temporary difference refers to a difference between
the tax basis of an asset or liability, determined based on recognition and measurement requirements for tax positions, and
its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the
reported amount of the asset or liability is recovered or settled, respectively. Deferred tax assets and liabilities represent the
future effects on income taxes that result from temporary differences and carryforwards that exist at the end of a period.
Deferred tax assets and liabilities are measured using enacted tax rates and provisions of the enacted tax law and are not
discounted to reflect the time-value of money. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the consolidated statements of income and comprehensive income in the period that includes the enactment
date. A deferred tax valuation allowance is established if it is considered more likely than not that all or a portion of the
deferred tax asset will not be realized.
The Company recognizes the benefit of uncertain tax positions only if it is more likely than not that the tax position will be
sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement or disposition of the underlying issue with the taxing authority.
Accordingly, the amount of benefit recognized in the consolidated financial statements may differ from the amount taken
or expected to be taken in the tax return resulting in unrecognized tax benefits (“UTBs”). The Company recognizes the
interest and penalties associated with UTBs as part of the provision for income taxes on its consolidated statements of
income and comprehensive income. Accrued interest and penalties are included on the related tax liability line in the
consolidated balance sheets.
All companies within EVERTEC are legal entities which file separate income tax returns.
Cash and cash equivalents
Cash includes cash on hand and in banks and certificates of deposits with original maturities of three months or less.
Restricted Cash
Restricted cash represents cash received on deposits from participating institutions of the ATH network that has been
segregated for the development of the ATH brand and cash maintained as collateral for a credit facility with Popular. Also,
restricted cash includes certain cash collected from the Ticketpop business and a reserve account for payment and
transaction processing services to merchants. The restrictions of these accounts are based on contractual provisions entered
into with third parties. This cash is maintained in separate accounts at a financial institution in Puerto Rico.
F - 16
Allowance for Doubtful Accounts
An allowance for doubtful accounts is provided for based on the estimated uncollectible amounts of the related receivables.
The estimate is primarily based on a review of the current status of specific accounts receivable. Receivables are
considered past due if full payment is not received by the contractual date. Past due accounts are generally written off
against the allowance for doubtful accounts only after all collection attempts have been exhausted.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange at
the end of the period. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The
resulting foreign currency translation adjustment from operations for which the functional currency is other than the U.S.
dollar is reported in accumulated other comprehensive loss. Gains and losses on transactions denominated in currencies
other than the functional currencies are included in determining net income for the period in which exchange rates change.
Share-based Compensation
The Company estimates the fair value of stock-based awards, on a contemporaneous basis, at the date they are granted
using the Monte Carlo simulation analysis for market based restricted stock units (“RSUs”) using the following
assumptions: (1) stock price; (2) risk-free rate; (3) expected volatility; (4) expected annual dividend yield and (5) expected
term. The risk-free rate is based on the U.S. Constant Maturities Treasury Interest Rate as of the grant date or the yield of a
2-year or 3-year Treasury bond, as applicable. The expected volatility is based on a combination of historical volatility and
implied volatility from publicly traded companies in the Company’s industry. The expected annual dividend yield is based
on management’s expectations of future dividends as of the grant date and, in certain cases, assumes that those dividends
will be reinvested over the performance period. Performance and time based RSUs and restricted stock are valued based on
the market price of the Company’s stock at the grant date.
Upon restricted stock or RSUs release, participants may elect to “net share settle”. Rather than requiring the participant to
deliver cash to satisfy the tax withholdings, the Company withholds a sufficient number of shares to cover these amounts
and delivers the net shares to the participant.
Net Income Per Common Share
Basic net income per common share is determined by dividing net income by the weighted-average number of common
shares outstanding during the period.
Diluted net income per common share assumes the issuance of all potentially dilutive share equivalents using the treasury
stock method. For stock options and RSUs it is assumed that the proceeds will be used to buy back shares. For stock
options, such proceeds equal the average unrecognized compensation plus exercise price. For unvested restricted share
units, the proceeds equal the average unrecognized compensation.
Note 2—Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance for accounting for employee
share based payments. The areas for simplification in this Update involve several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. The Company has adopted this guidance in the first quarter of 2017 with the
following effects on its Consolidated Financial Statements:
- All excess tax benefits and tax deficiencies should be recognized as income tax expense. This guidance was
adopted on a modified retrospective basis with a $4.2 million cumulative impact on retained earnings and will be
applied prospectively to all excess tax benefits and tax deficiencies resulting from settlements after the date of
adoption. Additionally, for purposes of the diluted share count calculation for the Company's earnings per share,
which is performed under the treasury stock method, the Company is no longer including excess tax benefits.
F - 17
- Excess tax benefits should be classified along with other income tax cash flows as an operating activity. This
guidance was adopted with no impact on the Consolidated Statement of Cash Flows and will be applied
prospectively to all excess tax benefits resulting from settlements after the date of adoption.
- An entity can make an entity-wide accounting policy election to either estimate the number of awards that are
expected to vest (current GAAP) or account for forfeitures when they occur. The Company has elected to account
for forfeitures when they occur.
- The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in
the applicable jurisdictions. The Company has adopted this guidance with no impact on its Consolidated Financial
Statements given that withholdings are calculated using actual statutory withholding tables.
- Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as
a financing activity. The Company adopted this guidance with no impact on its Consolidated Statement of Cash
Flows as the Company currently classifies statutory withholding taxes paid on share-based compensation as a
financing activity.
During 2014, the FASB issued new guidance for revenue from contracts with customers, which requires an entity to
recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the Company expects to be entitled for the transfer of those goods or services; and also includes
changes in the accounting for customer contract acquisition costs and fulfillment costs. During 2016, the FASB issued
several additional updates that amended the proposed guidance. These new standards replaced most existing revenue
recognition guidance in GAAP, and were effective for public business entities for interim and annual periods that began
after December 15, 2017.
Management adopted the standards effective January 1, 2018, using the modified retrospective transition method, applied
to only those contracts that were not completed as of January 1, 2018. The adoption using this transition method requires us
to recognize the cumulative effect of initially applying the guidance at the date of initial application. Management
recognized the cumulative effect of initially applying the new revenue standard with an adjustment increasing opening
retained earnings by $0.9 million as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are
presented under the new guidance provided by ASC Topic 606, while prior period amounts are not adjusted and continue to
be reported in accordance with the Company's historic accounting under ASC Topic 605. The Company's accounting policy
under ASC Topic 605 is included in the Company's 2017 Form 10-K.
The standards had the most significant impact in the following areas:
- Where the Company charges upfront fees for implementation or set-up activities, including fees charged in
preproduction periods, the period over which these fees are recognized may in some cases be shorter than the
Company's previous practice.
- The Company has certain contracts with an implicit price concession. The Company may enter into such implicit
price concessions subsequent to the contract inception with the expectation of accepting less than the contractual
amount of consideration in exchange for goods or services. Price concessions reduce the transaction price to
reflect the consideration that the Company expects to be entitled to after the concession is provided.
- Revenue for certain professional services that are recognized upon completion of the services were evaluated under
the new standards and determined that the revenue should be recognized over time during the development period
or once in production through the term of the contract based on the transfer of control to the customer.
- Required enhancements to current disclosures around revenue recognition.
Refer to Note 3 - Revenues for discussions of the impact of adopting ASC Topic 606 on the Company's consolidated
financial statements.
In August 2016, the FASB issued updated guidance for the classification of certain cash receipts and cash payments on the
statement of cash flows. The amendments in this update provide specific guidance for the classification of eight issues:
debt prepayment or extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with
coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent
consideration payments made after a business combination; proceeds from the settlement of an insurance claim; proceeds
from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions
F - 18
received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash
flows and applications of the predominance principle. The Company adopted this guidance in the first quarter of 2018 with
no impact on the financial statements.
In October 2016, the FASB issued updated guidance for tax treatment of intra-entity transfers of assets other than
inventory. Current GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer
until the asset has been sold to an outside party. The Board decided that an entity should recognize the income tax
consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the
amendments eliminate the exception for an intra-entity transfer of an asset other than inventory. The Company adopted this
guidance in the first quarter of 2018 with no impact on the financial statements. Any future intra-entity transfers of assets
will be analyzed under this updated guidance.
In November 2016, the FASB issued guidance regarding the classification of transactions involving restricted cash on the
statement of cash flows. The amendments in this update require that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. The Company adopted this guidance retrospectively to all periods presented within the financial
statements and has included and reconciled restricted cash within cash and cash equivalents in the Consolidated Statements
of Cash Flows.
In February 2017, the FASB issued updated guidance clarifying the scope of asset derecognition guidance and accounting
for partial sales of nonfinancial assets. The amendments in this update clarify the scope of the FASB’s recently established
guidance on nonfinancial asset derecognition (ASC 610-20) as well as the accounting for partial sales of nonfinancial
assets. This update conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new
revenue standard. The Company adopted this guidance in the first quarter of 2018 with no impact on the financial
statements.
In May 2017, the FASB issued updated guidance to clarify the scope of modifications under share-based compensation
accounting. The amendments in this update provide guidance about which changes to the terms or conditions of a share-
based payment award require an entity to apply modification accounting. The amendments in this update should be applied
prospectively to an award modified on or after the adoption date. The Company adopted this guidance in the first quarter of
2018 and will apply this guidance to future changes in terms and conditions of share-based payment awards.
In August 2017 and October 2018, the FASB issued updated guidance to improve accounting for hedging activities. The
amendments in the August 2017 update better align an entity’s risk management activities and financial reporting for
hedging relationships through changes to both the designation and measurement guidance for qualifying hedging
relationships and the presentation of hedge results. The amendments in the October 2018 update permit use of the
Overnight Index Swap rate based on Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge
accounting purposes, in addition to other permissible U.S. benchmark rates. The Company adopted this guidance in the
fourth quarter of 2018. With the adoption of this guidance as long as the Company's assessment for hedge effectiveness
continues to indicate that a hedging relationship is highly effective, all changes in the fair value of a hedging instrument
will be recorded through other comprehensive income as the updated literature eliminates accounting for hedge
ineffectiveness for cash flow hedges. The adoption of this guidance did not have an impact on the Company's classification
or accounting for its cash flow hedges. Additional disclosures required by the adoption of this guidance are in Note 12 -
Debt and Short-term Borrowings.
Recently issued accounting pronouncements
The FASB has issued the following accounting pronouncements and guidance relevant to the Company’s operations:
In June 2018, the FASB issued updated guidance for accounting for non-employee share-based payments. The update was
issued as part of the FASB simplification initiative and requires an entity to apply the requirements of Topic 718 to
nonemployee awards, with certain exceptions, which were previously accounted under Topic 505. The amendments in this
update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim
F - 19
periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The
Company will evaluate any future grants to non-employees under the updated guidance once effective.
In July 2018, the FASB issued codification improvements for various standards. The amendments represent changes to
clarify, correct errors in, or make minor improvements to the codification. Certain amendments included in the update were
effective upon issuance of the guidance and the Company adopted without a material impact on the consolidated condensed
financial statements. The remaining guidance improvements are effective for public business entities for fiscal years
beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently evaluating
the impact of the adoption of this guidance on its consolidated financial statements.
In August 2018, the FASB issued an updated disclosure framework for fair value measurements. The amendments in the
issued update remove, modify and add disclosure requirements on fair value measurements in Topic 820 Fair Value
Measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. Certain amendments in the update should be applied prospectively for
only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should
be applied retrospectively to all periods presented. Early adoption is permitted upon issuance of this update. An entity is
permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the
additional disclosures until their effective date. The Company is currently evaluating the impact of the adoption of this
update on the notes to the consolidated financial statements.
In August 2018, the FASB issued updated guidance for customer's accounting for implementation costs incurred in a cloud
computing arrangement that is a service contract. The amendments in this update align the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software. The amendments in this update are effective for
public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.
The amendments in this update should be applied either retrospectively or prospectively to all implementation costs
incurred after the date of adoption. The Company is currently evaluating the impact of the adoption of this update to the
consolidated financial statements.
In October 2018, the FASB issued updated guidance to improve related party guidance for variable interest entities. The
updated guidance requires entities to consider indirect interests held through related parties under common control on a
proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-
making fee is a variable interest. The amendments in this update are effective for public business entities for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. These
amendments should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of
the earliest period presented. The Company does not expect the adoption of this guidance to have an impact on the
consolidated financial statements.
In November 2018, the FASB issued updated guidance to clarify the interaction between the guidance for collaborative
arrangements and the updated revenue recognition guidance. The amendments in this update, among other things, provide
guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic
606. The amendments in this update are effective for public business entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating
the impact of the adoption of this guidance on its consolidated financial statements.
Accounting pronouncements issued prior to 2018 and not yet adopted
During 2016, the FASB issued a new standard related to Accounting Standards Codification ("ASC") Topic 842 Leases to
increase transparency and comparability among organizations by recognizing Right of Use ("ROU") assets and lease
liabilities on the balance sheet for all leases, other than leases that meet the definition of a short term lease, notwithstanding
the lease classification. Under the standard, organizations are required to provide disclosures with the objective of enabling
users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. For lessors,
this amended guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. In
July 2018, the FASB issued Accounting Standards Update ("ASU") 2018-10 and ASU 2018-11, to amend narrow aspects
of the standard, to add a new and optional transition method for the adoption of the new standard and provide lessors with a
practical expedient, among others. The Company has elected the transition method provided by the new standard whereby
it will apply the requirements of Topic 842 on a prospective basis as of the adoption date of January 1, 2019, without
F - 20
restating prior periods. The Company elected to apply all the practical expedients available for transition, except for the
practical expedient pertaining to land easement, since it is not applicable to the Company. Accordingly, upon transition, the
Company will account for its existing leases without reassessing (a) whether the contract contains a lease under ASC Topic
842, (b) whether the lease classification should be different in accordance with ASC Topic 842, and (c) whether initial
direct costs before transition would have met the definition of the new leasing standard. Also, the Company will consider
all facts and circumstances from lease contract inception up to the effective date of ASC Topic 842 to determine lease
terms. For financing leases, the Company will change the characterization of the asset (to an ROU asset) and the obligation
(to a lease liability). On adoption, the Company expects to recognize additional operating lease liabilities of approximately
$36.8 million, with corresponding ROU assets of the same amount based on the present value of the remaining lease
payments under current leasing standards for existing operating leases. The new standard also provides practical expedients
for an entity's ongoing accounting. The Company elected to apply the short-term lease recognition exception for all leases
that qualify. This means that, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities.
Currently, the Company does not have short-term leases. In addition, the Company elected the practical expedient of not
separating lease and non-lease components for all leases. During the fourth quarter of 2018, the Company initiated the
implementation of a third-party supported lease accounting information system solution to track and account for its leases,
which was implemented into production in January 2019. Currently, the Company is implementing new lease accounting
processes and related internal controls. As a lessor, the Company does not expect a material effect in its financial
statements, business processes, systems and controls.
During 2016, the FASB issued updated guidance for the measurement of credit losses on financial instruments, which
require an entity to recognize impairment based on an expected losses basis rather than on incurred losses, that might result
in more timely recognition of credit losses. This guidance is further clarified and amended by an update issued in
November 2018. The amendments in this update require a financial asset (or a group of financial assets) measured at
amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a
valuation account that is deducted from the amortized cost basis of the financial asset or assets to present the net carrying
value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on
relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect
the collectibility of the reported amount. An entity must use judgment in determining the relevant information and
estimation methods that are appropriate in its circumstances. The Company expects to adopt this guidance in the fiscal
period required by this update and continues to evaluate if the adoption will have an impact on the consolidated financial
statements.
Note 3 – Revenues
Summary of Revenue Recognition Accounting Policy
The Company's revenue recognition policy follows Accounting Standards Codification ("ASC") 606, Revenue from
Contracts with Customers, which provides guidance on the recognition, presentation and disclosure of revenue from
contracts with customers in consolidated financial statements.
Revenue is measured based on the consideration specified in a contract with a customer. Once the Company determines a
contract's performance obligations and the transaction price, including an estimate of any variable consideration, the
Company allocates the transaction price to each performance obligation in the contract using a stand-alone selling price
("SSP"). The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product
or service to a customer. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted
to governmental authorities.
Nature of performance obligations
At contract inception, the Company assesses the goods and services promised in the contract with a customer and identifies
a performance obligation for each promise to transfer to the customer a good or service (or bundle of goods or services)
that is distinct. To identify the performance obligations, the Company considers all the goods or services promised in the
contract regardless of whether they are explicitly stated or implied. Payment for the Company’s contracts with customers
are typically due in full within 30 days of invoice date.
F - 21
The following is a description of the Company's principal revenue generating activities, including the separate performance
obligations by operating segment.
The Payment Services - Puerto Rico & Caribbean segment provides financial institutions, government entities and other
issuers services to process credit, debit and prepaid cards; automated teller machines and electronic benefit transfer
(“EBT”) card programs (which principally consist of services to the government of Puerto Rico for the delivery of benefits
to participants). Revenue is principally derived from fixed fees per transaction and time and material basis billing for
professional services provided to enhance the existing hosted platforms. Professional services in these contracts are
primarily considered non-distinct from the transactional services and accounted for as a single performance obligation.
Revenue for these contracts is recognized over time in the amount in which the Company has right to consideration.
The Payment Services - Latin America segment provides financial institutions, government entities and other issuers
services to process credit, debit and prepaid cards, for which revenue is recognized in the same manner as described above,
as well as licensed software solutions for risk and fraud management and card payment processing. Licensed software
solutions are provided mainly as Software as a Service ("SaaS") and on-premise perpetual licenses. Set-up fees related to
SaaS are considered non-distinct from the license and accounted for as a single performance obligation. SaaS revenues are
recognized over time while the customer benefits from the software. On-premises perpetual licenses require significant
customization and development. Professional services provided for significant customizations and development are non-
distinct from the license and accounted for as a single performance obligation, recognized over time during the
development of the license. Revenue is recognized based on the Company's efforts or inputs, measured in labor hours
expended, relative to the total expected inputs to satisfy the performance obligation. Maintenance or support services are
considered distinct and recognized over time in the amount in which the Company has right to consideration.
The Merchant Acquiring segment provides customers with the ability to accept and process debit and credit cards. Revenue
is derived from fixed or identifiable fees charged to individual merchants per transaction, set-up fees, monthly membership
fees and rental of POS terminals. Set-up fees are considered non-distinct from the transaction processing services and
accounted for as a single performance obligation. Revenue for these contracts is recognized over time in the amount in
which the Company has right to consideration.
The Business Solutions segment consists of revenues from a full suite of business process management solutions. Revenue
derived from core bank processing and other processing and transaction-based services are generally recognized over time
in the amount in which the Company has right to consideration. Hosting services generally represent a series of distinct
monthly increments that are substantially the same and has the same pattern of transfer. Professional services to enhance
EVERTEC's platforms are generally considered non-distinct from the hosting service and accounted for as a single
performance obligation. Hosting services are generally recognized over time once in production during the remaining term
of the contract. Maintenance or support services are usually considered distinct and recognized over time in the amount in
which the Company as right to consideration. Hardware and software sales are recognized at a point in time when the
control of the asset is transferred to the customer. Indicators of transfer of control include the Company's right to payment,
or as the customer has legal title or physical possession of the asset. The Company may also provide professional services
to enhance customer's platforms or as IT consulting services by arranging for other parties to transfer the services (i.e.,
acting as an agent). For these contracts, revenue is recognized on a net basis.
The Company’s service contracts may include service level arrangements (“SLA”) generally allowing the customer to
receive a credit for part of the service fee when the Company has not provided the agreed level of services. If triggered, the
SLA is deemed a consideration payable that may impact the transaction price of the contract, thus SLA performance is
monitored and assessed for compliance with arrangements on a monthly basis, including determination and accounting for
its economic impact, if any.
Refer to Note 23 - Segment Information for further information, including revenue by products and services the Company
provides and the geographic regions in which the Company operates.
Significant Judgments
Determining a measure of progress for performance obligations satisfied over time requires management to make
judgments that affect the timing of revenue to be recognized. The Company exercises judgment in identifying a suitable
method that depicts the entity’s performance in transferring control of these performance obligations, on a contract by
F - 22
contract basis. The principal criteria used for determining the measure of progress is the availability of reliable information
that can be obtained without incurring undue cost, which generally results in the application of an input method since, in
most cases, the outputs used to reasonably measure progress are not directly observable. Usually, the input method based
on labor hours incurred, with respect to total expected labor hours to satisfy the performance obligation is applied. For
performance obligations satisfied at a point in time, the Company determines that the customer is able to direct the use of,
and obtain substantially all of the benefits from, the products at the time the products are delivered, the customer has legal
title of the products or the Company’s has the right to payment.
The Company mainly uses the expected cost-plus margin approach to allocate the transaction price in contracts with
multiple performance obligations. To determine the stand-alone selling price, the Company periodically performs an
assessment to determine the margin of goods or services with the assistance of the different business areas. This assessment
is performed considering past transactions and/or reasonably available information, including market conditions, trends or
other company or customer specific factors, among others.
Impact of adoption of Topic 606
The total effect of the adjustments to the Consolidated Financial Statements for the year ended December 31, 2018 and
earnings per share is considered immaterial.
Disaggregation of revenue
The Company disaggregates revenue from contract with customers into the primary geographical markets, nature of
products and services, and timing of transfer of goods and services. The revenue disaggregated by segment, which
includes the nature of the products and services that the Company provides and the primary geographical markets in which
the Company operates is discussed in Note 23 - Segment Information. In the following table, revenue is disaggregated by
timing of revenue recognition.
December 31, 2018
Payment
Services -
Puerto Rico
& Caribbean
Payment
Services -
Latin
America
Merchant
Acquiring, net
Business
Solutions
Total
$
$
293
$
2,864
$
— $
7,329
$
10,486
77,744
75,706
99,655
190,278
443,383
78,037
$
78,570
$
99,655
$ 197,607
$ 453,869
(In thousands)
Timing of revenue recognition
Products and services transferred at a
point in time
Products and services transferred over
time
Contract balances
The following table provides information about contract assets from contracts with customers.
(In thousands)
Balance at beginning of period
Services transferred to customers
Transfers to accounts receivable
December 31, 2018
Contract Assets
$
$
1,903
1,187
(2,094)
996
Contract assets of the Company arise when the Company has a contract with a customer for which revenue has been
recognized (i.e., goods or services have been transferred), but the customer payment is subject to a future event (i.e.,
satisfaction of additional performance obligations). Contract assets are considered a receivable when the rights to
F - 23
consideration of the Company become unconditional (i.e., the Company has a present right to payment). The current
portion of these contract assets is recorded as part of prepaid expenses and other assets and the long-term portion is
included in other long-term assets.
Accounts receivable, net at December 31, 2018 amounted to $100.3 million. Unearned income and Unearned income -
Long term, which refer to contract liabilities, at December 31, 2018 amounted to $11.5 million and $26.1 million,
respectively, and generally arise when consideration is received or due in advance from customers prior to performance.
Unearned income is mainly related to upfront fees for implementation or set up activities, including fees charged in pre-
production periods in connection with hosting services. During the year ended December 31, 2018, the Company
recognized revenue of $8.1 million that was included in unearned income at December 31, 2017.
Transaction price allocated to the remaining performance obligations
Revenues from recurring transaction-based and processing services represent the majority of the Company's total revenue
as of December 31, 2018. The Company recognizes revenues from recurring transaction-based and processing services
over time at the amounts in which the Company has right to invoice, which corresponds directly to the value to the
customer of the Company’s performance completed to date. Therefore, the Company has elected to apply the practical
expedient in paragraph 606-10-50-14. Under this practical expedient, the Company is not required to disclose information
about remaining performance obligations if the performance obligation is part of a contract with an original expected
duration of one year or less or if the Company recognizes revenue at the amount to which it has a right to invoice.
The Company also applies the practical expedient in paragraph 606-10-50-14A and does not disclose the information about
remaining performance obligations for variable consideration when the variable consideration is allocated entirely to a
wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that
forms part of a single performance obligation in accordance with paragraph 606-10-25-14(b).
For contracts excluded from the application of the practical expedients noted above, the estimated aggregate amount of the
transaction price allocated to performance obligations that are unsatisfied or partially satisfied at December 31, 2018 is
$251.7 million. This amount primarily consists of professional service fees for implementation or set up activities related to
hosting services and maintenance services, typically recognized over the life of the contract which vary from 2 to 5 years.
It also includes professional service fees for customizations or development of on-premise licensing agreements, which are
recognized over time based on inputs relative to the total expected inputs to satisfy a performance obligation.
Note 4—Cash and cash equivalents
At December 31, 2018 and 2017, the Company’s cash and cash equivalents amounted to $70.0 million and $50.4 million,
respectively, which are deposited in deposit accounts within financial institutions. Of the total cash balance at
December 31, 2018 and 2017, $50.3 million and $30.0 million, respectively, resides in subsidiaries located outside of
Puerto Rico. Cash deposited in an affiliate financial institution amounted to $19.6 million as of both December 31, 2018
and 2017.
Note 5—Accounts Receivable, Net
Accounts receivable, net consisted of the following:
(In thousands)
Trade
Due from affiliates, net
Settlement assets
Other
Less: allowance for doubtful accounts
Accounts receivable, net
F - 24
December 31,
2018
2017
$
$
$
61,082
25,703
15,118
304
(1,884)
100,323
$
57,740
18,089
8,949
321
(1,771)
83,328
Table of Contents
EVERTEC, Inc. Notes to Consolidated Financial Statements
The Company records settlement assets that result from timing differences in the Company’s settlement processes with
merchants, financial institutions, and credit card associations related to merchant and card transaction processing. The
amounts are generally collected or paid the following business day.
Note 6—Prepaid Expenses and Other Assets
Prepaid expenses and other assets consisted of the following:
(In thousands)
Software licenses and maintenance contracts
Deferred project costs
$
Guarantee deposits
Insurance
Prepaid income taxes
Taxes other than income
Postage
Other
December 31,
2018
2017
$
9,961
4,283
4,611
1,229
1,646
1,710
2,150
3,534
7,008
3,223
4,870
1,244
1,875
1,551
3,068
2,172
Prepaid expenses and other assets
$
29,124
$
25,011
Note 7—Investment in Equity Investee
Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) is the largest merchant acquirer and ATM network in the
Dominican Republic. The Company uses the equity method of accounting to account for its equity interest in CONTADO.
As a result of the acquisition in 2011 of CONTADO’s 19.99% equity interest, the Company calculated an excess cost of the
investment in CONTADO over the amount of underlying equity in net assets of approximately $9.0 million, which was
mainly attributed to customer relationships, trademark and goodwill intangibles. The Company’s excess basis allocated to
amortizable assets is recognized on a straight-line basis over the lives of the appropriate intangibles. Amortization expense
for each of the years ended December 31, 2018, 2017 and 2016 amounted to approximately $0.3 million, $0.2 million and
$0.3 million, respectively, and was recorded within earnings (losses) of equity method investment in the consolidated
statements of income and comprehensive income. The Company recognized $0.7 million, $0.6 million and $(0.1) million
as equity in CONTADO’s net income, net of amortization, in the consolidated statements of income and comprehensive
income for the years ended December 31, 2018, 2017 and 2016, respectively. For the year ended December 31, 2018, the
Company received $0.4 million in dividends from CONTADO. No dividends were received during 2017 or 2016.
CONTADO fiscal year ends December 31 and is reported in the consolidated statements of income and comprehensive
income for the period subsequent to the acquisition date on a one month lag. No significant events occurred in
CONTADO’s operations subsequent to November 30, 2018 that would have materially affected the Company’s reported
results.
F - 25
Note 8—Property and Equipment, Net
Property and equipment, net consisted of the following:
(Dollar amounts in thousands)
Buildings
Data processing equipment
Furniture and equipment
Leasehold improvements
Less—accumulated depreciation and amortization
Depreciable assets, net
Land
Property and equipment, net
Useful life
in years
30
3 - 5
3 - 20
5 -10
December 31,
2018
2017
$
1,440
$
110,673
7,761
2,625
122,499
(86,990)
35,509
$
1,254
36,763
$
1,531
103,426
232
2,190
107,379
(70,793)
36,586
1,338
37,924
Depreciation and amortization expense related to property and equipment was $14.5 million, $14.7 million and $14.2
million for the years ended December 31, 2018, 2017 and 2016, respectively.
Note 9—Goodwill
The changes in the carrying amount of goodwill, allocated by operating segments, were as follows (See Note 23):
(In thousands)
Balance at December 31, 2016
Goodwill attributable to acquisition
Adjustment to goodwill from prior year
acquisition
Foreign currency translation adjustments
Balance at December 31, 2017
Foreign currency translation adjustments
Payment
Services -
Puerto Rico &
Caribbean
$
160,972
Payment
Services -
Latin America
25,716
$
Merchant
Acquiring, net
138,121
$
Business
Solutions
$
46,177
$
—
—
160,972
—
26,931
1,099
(87)
53,659
(3,931)
49,728
—
—
138,121
—
—
(354)
45,823
—
$
138,121
$
45,823
$
Total
370,986
26,931
1,099
(441)
398,575
(3,931)
394,644
Balance at December 31, 2018
$
160,972
$
Goodwill is tested for impairment on an annual basis as of August 31, or more often if events or changes in circumstances
indicate there may be impairment. The Company may test for goodwill impairment using a qualitative or a quantitative
analysis. In the quantitative analysis, the Company compares the estimated fair value of the reporting units to their carrying
values, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit
is not considered impaired. If the fair value does not exceed the carrying value, an impairment loss equaling the excess
amount is recorded, limited to the recorded balance of goodwill. The Company performed a quantitative analysis as of
August 31, 2018 that indicated that the estimated fair value exceeded the carrying value of each of the reporting units. No
impairment losses were recorded in 2018, 2017 or 2016.
F - 26
Note 10—Other Intangible Assets, Net
The carrying amount of other intangible assets consisted of the following:
(In thousands)
Customer relationships
Trademark
Software packages
Non-compete agreement
Other intangible assets, net
Useful life in years
8 - 14
2 - 15
3 -10
15
(In thousands)
Useful life in years
Customer relationships
Trademark
Software packages
Non-compete agreement
Other intangible assets, net
8 - 14
2 - 15
3 -10
15
December 31, 2018
Gross
amount
Accumulated
amortization
Net carrying
amount
342,738
$
41,357
224,855
56,539
665,489
$
(194,570) $
(28,888)
(151,666)
(31,096)
(406,220) $
148,168
12,469
73,189
25,443
259,269
December 31, 2017
Gross
amount
Accumulated
amortization
Net carrying
amount
344,175
$
41,594
195,262
56,539
637,570
$
(168,134) $
(25,241)
(136,907)
(27,327)
(357,609) $
176,041
16,353
58,355
29,212
279,961
$
$
$
$
Amortization expense related to intangibles, including software packages, was $48.6 million, $49.5 million and $45.4
million for the years ended December 31, 2018, 2017 and 2016, respectively. Amortization expense related to software
packages was $14.7 million, $15.9 million and $14.3 million for the years ended December 31, 2018, 2017 and 2016,
respectively. The estimated amortization expenses of balances outstanding at December 31, 2018 for the next five years are
as follows:
(In thousands)
2019
2020
2021
2022
2023
$
47,081
41,588
36,638
33,243
31,619
During the third quarter of 2017, the Company recognized an impairment charge of $6.5 million through cost of revenues
for a third party software solution that is no longer commercially viable. In connection with this exit activity, the Company
accrued $5.3 million for ongoing contractual fees, also through cost of revenues and recognized maintenance expense of
$1.0 million. Both the liability and the impairment charge affected the Company's Merchant Acquiring segment and
Payment Services segments. In the fourth quarter of 2017, the Company recognized an impairment loss related to a multi-
year software development project that was impacted by delays caused by the hurricane and projected increased costs with
a third party vendor, amounting to $5.0 million through cost of revenues and is in the Company's Payment Services -
Puerto Rico & Caribbean segment. The fair value of the impaired assets was determined using discounted cash flow
models.
Note 11—Other Long-Term Assets
As of December 31, 2018, other long-term assets included $1.8 million related to deferred debt-issuance costs related to the
revolving credit facility, $1.8 million related to the long-term portion of certain software and maintenance contracts, $1.1
million relating to the long-term portion of certain lease receivables and a derivative asset $1.7 million.
F - 27
Table of Contents
EVERTEC, Inc. Notes to Consolidated Financial Statements
As of December 31, 2017, other long-term assets included $1.0 million related to deferred debt-issuance costs related to the
revolving credit facility, $1.6 million related to the long-term portion of certain software and maintenance contracts, $0.7
million relating to the long-term portion of certain lease receivables and a derivative asset of $0.2 million.
F - 28
Note 12—Debt and Short-Term Borrowings
Total debt was as follows:
(In thousands)
December 31,
2018
2017
Senior Secured Credit Facility (2018 Term A) due on April 17, 2018 paying
interest at a variable interest rate (London InterBank Offered Rate (“LIBOR”)
plus applicable margin(1)(3))
$
— $
26,690
Senior Secured Credit Facility (2020 Term A) due on January 17, 2020 paying
interest at a variable interest rate (LIBOR plus applicable margin(3)(4)(9))
Senior Secured Credit Facility (Term B) due on April 17, 2020 paying interest
at a variable interest rate (LIBOR plus applicable margin(2)(3)(9))
Senior Secured Credit Facility (2023 Term A) due on November 27, 2023
paying interest at a variable interest rate (LIBOR plus applicable margin(3)(7))
Senior Secured Credit Facility (2024 Term B) due on November 27, 2024
paying interest at a variable interest rate (LIBOR plus applicable margin(3)(8))
Senior Secured Revolving Credit Facility(6)
Note Payable due on August 31, 2019(5)
Note Payable due on April 30, 2021(3)
—
—
217,791
320,515
—
—
300
200,653
376,395
—
—
12,000
584
418
Total debt
$
538,606
$
616,740
(1) Applicable margin of 2.25% at December 31, 2017.
(2) Subject to a minimum rate (“LIBOR floor”) of 0.75% plus applicable margin of 2.50% at December 31, 2017.
(3) Net of unaccreted discount and unamortized debt issue costs, as applicable.
(4) Applicable margin of 2.50% at December 31, 2017.
(5) Fixed interest rate of 7.50%. The Company prepaid the outstanding principal balance of this note during the second
quarter of 2018 without penalties.
(6) Applicable margin of 2.25% and 2.50% at December 31, 2018 and December 31, 2017, respectively.
(7) Applicable margin of 2.25% at December 31, 2018.
(8) Subject to a minimum rate (“LIBOR floor”) of 0.0% plus applicable margin of 3.50% at December 31, 2018.
(9) Prepaid on November 27, 2018 in connection with the execution of the 2018 Credit Agreement.
The following table presents contractual principal payments for the next five years:
(In thousands)
2019
2020
2021
2022
2023
$
14,386
14,386
14,295
19,750
173,750
2018 Senior Secured Credit Facilities
On November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement governing the senior
secured credit facilities, consisting of a $220.0 million term loan A facility that matures on November 27, 2023 ("2023 Term
A"), a $325.0 million term loan B facility that matures on November 27, 2024 ("2024 Term B") and a $125.0 million revolving
credit facility (the "Revolving Facility") that matures on November 27, 2023, with a syndicate of lenders and Bank of America,
N.A. (“Bank of America”), as administrative agent, collateral agent, swingline lender and line of credit issuer (collectively
the “2018 Credit Agreement”). The material terms and conditions of the senior secured credit facilities are summarized below.
Scheduled Amortization Payments
F - 29
The 2023 Term A provides for amortization in the amount of 1.25% of the original principal amount of the 2023 Term A during
each of the first twelve quarters starting from the quarter ending March 31, 2019, 1.875% during each of the four subsequent
quarters and 2.50% during each of the final three quarters, with the balance payable on the final maturity date.
The 2024 Term B provides for quarterly amortization payments totaling 1.00% per annum of the original principal amount
of the 2024 Term B, with the balance payable on the final maturity date.
Voluntary Prepayments and Reduction and Termination of Commitments
The terms of the 2018 senior secured credit facilities allow EVERTEC Group to prepay loans and permanently reduce the
loan commitments under the senior secured credit facilities at any time, subject to the payment of customary LIBOR breakage
costs, if any, provided that, in connection with certain refinancing or repricing of the 2024 Term B on or prior to the date
which is six months after the closing date of the 2018 Credit Agreement, a prepayment premium of 1.00% will be required.
Additionally, the terms of the facilities require mandatory repayment of outstanding principal balances based on a
percentage of excess cash flow provided that no such prepayment shall be due if the resulting amount of the excess cash
flow times the applicable percentage is less than $10 million.
Interest
The interest rates under the 2023 Term A and revolving credit facility are based on, at EVERTEC Group’s option, (a) adjusted
LIBOR plus an interest margin of 2.25% or (b) the greater of (i) Bank of America’s “prime rate,” (ii) the Federal Funds
Effective Rate plus 0.5% and (iii) adjusted LIBOR plus 1.0% (“ABR”) plus an interest margin of 1.25%. The interest rates
under the 2024 Term B are based on, at EVERTEC Group’s option, (a) adjusted LIBOR plus an interest margin of 3.50% or
(b) ABR plus an interest margin of 2.50%. The interest margins under the 2023 Term A and Revolving Facility are subject
to reduction based on achievement of specified total secured net leverage ratio.
Guarantees and Collateral
EVERTEC Group’s obligations under the senior secured credit facilities and under any cash management, interest rate
protection or other hedging arrangements entered into with a lender or any affiliate thereof are guaranteed by EVERTEC and
each of EVERTEC’s existing wholly-owned subsidiaries (other than EVERTEC Group) and subsequently acquired or organized
subsidiaries, subject to certain exceptions.
Subject to certain exceptions, the senior secured credit facilities are secured to the extent legally permissible by substantially
all of the assets of (1) EVERTEC, including a perfected pledge of all of the limited liability company interests of EVERTEC
Intermediate Holdings, LLC (“Holdings”), (2) Holdings, including a perfected pledge of all of the limited liability company
interests of EVERTEC Group and (3) EVERTEC Group and the subsidiary guarantors, including but not limited to: (a) a
pledge of substantially all capital stock held by EVERTEC Group or any guarantor and (b) a perfected security interest in
substantially all tangible and intangible assets of EVERTEC Group and each guarantor.
Covenants
The senior secured credit facilities contain affirmative and negative covenants that the Company believes are usual and
customary for a senior secured credit agreement. The negative covenants in the senior secured credit facilities include, among
other things, limitations (subject to exceptions) on the ability of EVERTEC and its restricted subsidiaries to:
declare dividends and make other distributions;
redeem or repurchase capital stock;
grant liens;
•
•
•
• make loans or investments (including acquisitions);
• merge or enter into acquisitions;
•
•
•
•
sell assets;
enter into any sale or lease-back transactions;
incur additional indebtedness;
prepay, redeem or repurchase certain indebtedness;
F - 30
• modify the terms of certain debt;
•
•
•
restrict dividends from subsidiaries;
change the business of EVERTEC or its subsidiaries; and
enter into transactions with their affiliates.
In addition, the 2023 Term A and the Revolving Facility require EVERTEC to maintain a maximum total secured net leverage
ratio of 4.25 to 1.00 for any quarter ending on or prior to September 30, 2020 and for fiscal quarters ending thereafter, 4.00
to 1.00.
Concurrently with the execution of the 2018 Credit Agreement, the Company terminated the existing senior secured credit
facilities. The net proceeds received by EVERTEC Group from the senior secured credit facilities under the 2018 Credit
Agreement, together with other cash available to EVERTEC Group, were used, among other things, to refinance EVERTEC
Group’s previous senior secured credit facilities, which consisted of a $191.4 million 2020 Term A and a $379.0 million Term
B, under the credit agreement, dated as of April 17, 2013 and as subsequently amended, among EVERTEC Intermediate
Holdings, LLC, EVERTEC Group, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent, swingline lender
and L/C issuer, and the lenders party thereto. In connection with this transaction the Company recognized a loss on
extinguishment of $2.6 million.
The unpaid principal balance at December 31, 2018 of the 2023 Term A Loan and the 2024 Term B Loan was $220.0
million, and $325.0 million, respectively. The additional borrowing capacity for the Revolving Facility loan at
December 31, 2018 was $97.9 million. The Company issues letters of credit against the revolving credit facility which
reduce the additional borrowing capacity of the revolving credit facility.
Events of Default
The events of default under the senior secured credit facilities include, without limitation, nonpayment, material
misrepresentation, breach of covenants, insolvency, bankruptcy, certain judgments, change of control (as defined in the 2018
Credit Agreement) and cross-events of default on material indebtedness.
2013 Senior Secured Credit Facilities
On April 17, 2013, EVERTEC Group entered into a credit agreement (the “2013 Credit Agreement”) governing the senior
secured credit facilities, consisting of a $300.0 million term loan A facility (the “Term A Loan”), a $400.0 million term loan
B facility (the “Term B Loan”, together with the Term A Loan, the “Senior Secured term loans”) and a $100.0 million
revolving credit facility. During 2016, the Company entered into two separate amendments to the 2013 Credit Agreement.
In the second quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiaries of the
Company, entered into a second amendment and waiver to the outstanding 2013 Credit Agreement (the “Second
Amendment”). In the fourth quarter of 2016, EVERTEC Group, together with certain other direct and indirect subsidiaries
of the Company, entered into a third amendment (the “Third Amendment”) to the 2013 Credit Agreement. The Third
Amendment extended the maturity of (a) approximately $219 million of EVERTEC Group’s existing approximately $250
million of Term A loan facility to January 17, 2020 (the “2020 Term A Loan”) and (b) $65 million of EVERTEC Group’s
existing $100 million of Revolving Facility to January 17, 2020. The remaining approximately $30 million of Term A loan
(the “2018 Term A Loan”) and the $35 million of Revolving Facility were not extended and matured as originally
scheduled on April 17, 2018.
Notes payable
In May 2016, EVERTEC Group entered into a non-interest bearing financing agreement amounting to $0.7 million and in
October 2016 entered into an interest bearing agreement of $1.1 million, to purchase software. As of December 31, 2018
and 2017, the outstanding principal balance of the notes payable is $0.3 million and $1.0 million, respectively. The current
portion of these notes is recorded as part of accounts payable and the long-term portion is included in other long-term
liabilities.
Interest Rate Swaps
F - 31
At December 31, 2018, the Company had two interest rate swap agreements, entered into in December 2015 and December
2018, which convert a portion of the interest rate payments on the Company's 2023 Term B Loan from variable to fixed:
Swap Agreement
2015 Swap
2018 Swap
Effective date
January 2017
April 2020
Notional Amount
Maturity Date
$200 million
April 2020
November 2024 $250 million
Variable Rate
1-month LIBOR
1-month LIBOR
Fixed Rate
1.9225%
2.89%
The Company has accounted for these transactions as cash flow hedges.
At December 31, 2018 and 2017, the carrying amount of the derivatives on the Company’s balance sheets is as follows:
(In thousands)
Other long-term assets
Other long-term liabilities
December 31, 2018
December 31, 2017
$
1,683
$
4,059
214
—
For the year ended December 31, 2018, the Company recognized gains related to hedging activities on the Statement of
Income and Comprehensive Income that offset the Company's interest expense as follows:
(In thousands)
Interest expense
December 31, 2018
$
104
During the year ended December 31, 2018, the Company reclassified gains of $0.1 million from accumulated other
comprehensive loss into income through interest expense. Based on current LIBOR rates, the Company expects to
reclassify $1.0 million from accumulated other comprehensive loss into income through interest expense over the next 12
months. Refer to Note 13 for tabular disclosure of the fair value of the derivative and to Note 15 for tabular disclosure of
gains (losses) recorded on cash flow hedging activities.
The cash flow hedges are considered highly effective.
Note 13—Financial Instruments and Fair Value Measurements
Recurring Fair Value Measurements
Fair value measurement provisions establish a fair value hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. These provisions describe three levels of
input that may be used to measure fair value:
Level 1: Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Inputs, other than quoted prices included in Level 1, which are observable for the asset or liability through
corroboration with market data at the measurement date.
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.
The Company uses observable inputs when available. Fair value is based upon quoted market prices when available. If
market prices are not available, the Company may employ models that mostly use market-based inputs including yield
curves, interest rates, volatilities, and credit curves, among others. The Company limits valuation adjustments to those
deemed necessary to ensure that the financial instrument’s fair value adequately represents the price that would be received
or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit quality and liquidity as
well as other criteria. The estimated fair value amounts are subjective in nature and may involve uncertainties and matters
of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair
value could affect the results. The fair value measurement levels are not indicative of risk of investment.
The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value estimates are made at a specific point
F - 32
in time based on the type of financial instrument and relevant market information. Many of these estimates involve various
assumptions and may vary significantly from amounts that could be realized in actual transactions.
The following table summarizes fair value measurements by level at December 31, 2018 and 2017, for assets and liabilities
measured at fair value on a recurring basis:
(Dollar amounts in thousands)
December 31, 2018
Financial asset:
Interest rate swap
Financial liability:
Interest rate swap
December 31, 2017
Financial asset:
Interest rate swap
Derivative Instruments
Level 1
Level 2
Level 3
Total
$
— $
1,683
$
— $
1,683
—
—
4,059
214
—
—
4,059
214
The fair value of the Company’s derivative instrument is determined using a standard valuation model. The significant
inputs used in these models are readily available in public markets, or can be derived from observable market transactions,
and therefore have been classified as Level 2. Inputs used in these standard valuation models for derivative instruments
include the applicable forward rates and discount rates. The discount rates are based on the historical LIBOR Swap rates.
The following table presents the carrying value, as applicable, and estimated fair values for financial instruments at
December 31, 2018 and 2017:
(Dollar amounts in thousands)
Financial asset:
Interest rate swap
Financial liabilities:
Interest rate swap
Senior Secured Term B Loan
2018 Term A Loan
2020 Term A Loan
2023 Term A
2024 Term B
December 31,
2018
2017
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
1,683
$
1,683
$
214
$
4,059
4,059
—
—
—
—
—
—
217,791
320,515
218,625
319,517
—
376,395
26,690
200,653
—
—
214
—
370,540
26,027
196,584
—
—
The fair value of the senior secured term loans at December 31, 2018 and 2017 was obtained using the prices provided by
third party service providers. Their pricing is based on various inputs such as: market quotes, recent trading activity in a
non-active market or imputed prices. Also, the pricing may include the use of an algorithm that could take into account
movement in the general high yield market, among other variants.
The senior secured term loans, which are not measured at fair value in the balance sheets, if measured, would be
categorized as Level 3 in the fair value hierarchy.
There were no transfers in or out of Level 3 during the years ended December 31, 2018, 2017 and 2016.
F - 33
Note 14—Other Long Term Liabilities
As of December 31, 2018, other long-term liabilities mainly consist of unrecognized tax benefit liabilities and the long-
term portion of notes payables of $10.5 million and a derivative liability of $4.1 million.
As of December 31, 2017, other long-term liabilities mainly consist of unrecognized tax benefit liabilities and the long-
term portion of notes payables of $13.0 million.
Note 15—Equity
The Company is authorized to issue up to 206,000,000 shares of common stock of $0.01 par value. At December 31, 2018
and 2017, the Company had 72,378,710 and 72,393,933 shares outstanding, respectively. The Company is also authorized
to issue 2,000,000 shares of $0.01 par value preferred stock. As of December 31, 2018, no shares of preferred stock have
been issued.
Stock Repurchase
In 2018, 2017 and 2016, the Company repurchased a total of 0.4 million, 0.5 million, and 2.5 million shares, respectively,
at a cost of $10.0 million, $7.7 million, and $39.9 million. The Company funded such repurchases with cash on hand and
borrowings to the existing revolving credit facility. As of December 31, 2018, 2017 and 2016, the repurchased shares were
permanently retired.
Dividends
Historically, the Company has paid a regular quarterly dividend on the Company’s common stock, subject to the
declaration thereof each quarter by the Company’s Board of Directors (the "Board"). On November 2, 2017, the Board
voted to temporarily suspend the quarterly dividend on the Company's common stock due to the difficult operating
environment in Puerto Rico. On July 26, 2018, the Board voted to reinstate a quarterly dividend on the Company's
common stock and declared a regular quarterly cash dividend of $0.05 per share on the Company’s outstanding shares of
common stock. The Board anticipates declaring this dividend in future quarters on a regular basis; however future
declarations of dividends are subject to Board of Directors’ approval and may be adjusted as business needs or market
conditions change.
The Company’s dividend activity in 2018 and 2017 was as follows:
Declaration Date
February 17, 2017
April 27, 2017
July 25, 2017
July 26, 2018
October 25, 2018
Record Date
Payment Date
Dividend per share
March 1, 2017
May 8, 2017
August 7, 2017
August 6, 2018
March 20, 2017
June 9, 2017
September 8, 2017
September 7, 2018
November 5, 2018
December 7, 2018
$
0.10
0.10
0.10
0.05
0.05
F - 34
Accumulated Other Comprehensive loss
The following table provides a summary of the changes in the balances comprising accumulated other comprehensive loss
for the years ended December 31, 2018 and 2017:
Foreign Currency
Translation
Adjustments
Cash Flow Hedge
Total
(10,427) $
(1,964) $
(12,391)
(635)
—
(11,062)
(10,564)
—
(21,626) $
580
1,598
214
(2,273)
(104)
(2,163) $
(55)
1,598
(10,848)
(12,837)
(104)
(23,789)
Balance - December 31, 2016, net of tax
Other comprehensive (loss) income before
reclassifications
Amount reclassified to Net Income
Balance - December 31, 2017, net of tax
Other comprehensive loss before reclassifications
Amount reclassified to Net Income
Balance - December 31, 2018, net of tax
$
$
Note 16—Share-based Compensation
Long-term Incentive Plan ("LTIP")
In the first quarter of 2016, 2017 and 2018, the Compensation Committee of the Board of Directors approved grants of
restricted stock units (“RSUs”) to executives and certain employees pursuant to the 2016 LTIP, 2017 LTIP and 2018 LTIP,
respectively, all under the terms of our 2013 Equity Incentive Plan. Additionally, in the fourth quarter of 2017, a special
retention grant to certain executives and employees of the Company was approved. Under the LTIPs, the Company granted
restricted stock units to eligible participants as time-based awards and/or performance-based awards.
The vesting of the RSUs is dependent upon service, market, and/or performance conditions as defined in the grants.
Employees that received time-based awards with service conditions are entitled to receive a specific number of shares of
the Company’s common stock on the vesting date if the employee is providing services to the Company on the vesting
date. Time-based awards granted in the first quarter of each year vest over a period of three years in substantially equal
installments commencing on the grant date and ending on February 19 of each year for the 2016 LTIP, on February 24 of
each year for the 2017 LTIP and on February 28 of each year for the 2018 LTIP. The award granted in the fourth quarter of
2017 vests 40% in the second year and 60% in the third year.
Employees that received awards with market conditions under the 2016 LTIP are entitled to receive a specific number of
shares of the Company’s common stock on the vesting date if the Company’s total shareholder return (“TSR”) target
relative to a specified group of industry peer companies is achieved. Employees that received awards with performance
conditions are entitled to receive a specific number of shares of the Company’s common stock on the vesting date if the
Cumulative Annual Growth Rate (“CAGR”) of Diluted EPS target over one year is achieved for the 2016 LTIP. The shares
earned according to the plan are further subject to a two-year service vesting period. For the performance-based awards
under the 2017 LTIP and 2018 LTIP, the Compensation Committee established adjusted earnings before income taxes,
depreciation and amortization ("Adjusted EBITDA") as the primary performance measure while maintaining focus on total
shareholder return through the use of a market-based TSR performance modifier. The TSR modifier adjusts the shares
earned based on the core Adjusted EBITDA performance upwards or downwards (+/- 25%) based on the Company’s
relative TSR at the end of the three-year performance period as compared to the companies in the Russell 2000 Index. The
Adjusted EBITDA performance measure will be calculated for the one-year period commencing on January 1 of the year of
the grant and ending on December 31 of the same year, relative to the goals set by the Compensation Committee for this
same period. The shares earned will be subject to a further two-year service vesting period.
Performance and market-based awards vest at the end of the performance period that commenced on February 19, 2016 for
the 2016 LTIP, February 24, 2017 for the 2017 LTIP and February 28, 2018 for the 2018 LTIP. The periods end on February
19, 2019 for the 2016 LTIP, February 24, 2020 for the 2017 LTIP and February 28, 2021 for the 2018 LTIP. Awards are
forfeited if the employee voluntarily ceases to be employed by the Company prior to vesting.
F - 35
The following table summarizes the nonvested restricted shares and RSUs activity for the years ended December 31, 2018,
2017 and 2016:
Nonvested restricted shares and RSUs
Nonvested at December 31, 2015
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2018
Shares
491,726
907,320
(154,820)
(31,862)
1,212,364
1,584,241
(315,953)
(139,760)
2,340,892
636,322
(468,064)
(472,987)
2,036,163
$
Weighted-average
grant date fair value
22.32
$
12.02
20.97
18.61
14.88
15.37
15.30
16.06
15.08
17.07
18.41
16.55
15.09
Share-based compensation recognized was as follows:
(Dollar amounts in thousands)
Share-based compensation recognized, net
Stock options
Restricted shares and RSUs
Years ended December 31,
2018
2017
2016
$
— $
12,592
6
$
9,636
60
6,355
The maximum unrecognized cost for restricted stock units was $15.8 million as of December 31, 2018. The cost is
expected to be recognized over a weighted average period of 1.76 years.
Note 17—Employee Benefit Plan
EVERTEC, Inc. Puerto Rico Savings and Investment plan (“the EVERTEC Savings Plan”) was established in 2010, as a
defined contribution savings plan qualified under section 1165(e) of the Puerto Rico Internal Revenue Code. Investments in
the plan are participant directed, and employer matching contributions are determined based on specific provisions of the
EVERTEC Savings Plan. Employees are fully vested in the employer’s contributions after five years of service. For the
years ended December 31, 2018, 2017 and 2016, the costs incurred under the plan amounted to approximately $0.8 million,
$0.7 million and $0.7 million, respectively.
Note 18—Total Other Income, net
For the year ended December 31, 2018, other income, net is primarily comprised of $2.7 million in foreign currency
transaction gains, $1.8 million from federal relief funds received in connection with wages paid in the aftermath of
hurricane Maria, and a $2.6 million loss on extinguishment of debt.
For the year ended December 31, 2017, other income, net is primarily comprised of $2.6 million in foreign currency
transaction gains.
For the year ended December 31, 2016, other income, net is primarily comprised of $1.9 million in foreign currency
transaction gains and a $1.5 million loss on extinguishment of debt.
F - 36
Note 19—Income Tax
On April 17, 2012, EVERTEC Group and Holdings were converted from a Puerto Rico corporation into Puerto Rico
limited liability companies to benefit from changes to the Puerto Rico Income Tax Code allowing limited liability
companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. As a result of these
conversions and subsequent elections to be treated as partnerships, EVERTEC Group’s and Holding’s taxable income flows
through to EVERTEC, Inc.
EVERTEC Group, Holdings and EVERTEC, Inc. entered into a Tax Payment Agreement pursuant to which EVERTEC
Group is obligated to make certain payments to Holdings or EVERTEC, Inc. for taxable periods or portions thereof
occurring on or after April 17, 2012 (the “Effective Date”). Under the Tax Payment Agreement, EVERTEC Group will
make payments with respect to any and all taxes (including estimated taxes) imposed under the laws of Puerto Rico, the
United States of America and any other jurisdiction or any political (including municipal) subdivision or authority or
agency in Puerto Rico, the United States of America or such other jurisdiction, that would have been imposed on
EVERTEC Group if EVERTEC Group had been a corporation for tax purposes of that jurisdiction, together with all
interest and penalties with respect thereto (“Taxes”), reduced by taking into account any applicable net operating losses or
other tax attributes of Holdings or EVERTEC, Inc. that reduce Holdings’ or EVERTEC, Inc.’s taxes in such period. The
Tax Payment Agreement provides that the payments thereunder shall not exceed the net amount of Taxes that Holdings and
EVERTEC, Inc. actually owe to the appropriate taxing authority for a taxable period. Further, the Tax Payment Agreement
provides that if Holdings or EVERTEC, Inc. receives a tax refund attributable to any taxable period or portion thereof
occurring on or after the Effective Date, EVERTEC, Inc. shall be required to recalculate the payment for such period
required to be made by EVERTEC Group to Holdings or EVERTEC, Inc. If the payment, as recalculated, is less than the
amount of the payment EVERTEC Group already made to Holdings or EVERTEC, Inc. in respect of such period, Holdings
or EVERTEC, Inc. shall promptly make a payment to EVERTEC Group in the amount of such difference.
The components of income tax expense (benefit) consisted of the following:
(In thousands)
Current tax provision
Deferred tax benefit
Income tax expense
Years ended December 31,
2018
2017
2016
$
$
17,207
(4,611)
12,596
$
$
9,086
(4,306)
4,780
$
$
12,865
(4,594)
8,271
F - 37
The Company conducts operations in Puerto Rico and certain countries throughout the Caribbean and Latin America. As a
result, the income tax expense (benefit) includes the effect of taxes paid to the Puerto Rico government as well as foreign
jurisdictions. The following table presents the segregation of income tax expense (benefit) based on location of operations:
(In thousands)
Income before income tax provision
Puerto Rico
United States
Foreign countries
Total income before income tax provision
Current tax provision
Puerto Rico
United States
Foreign countries
Total current tax provision
Deferred tax benefit
Puerto Rico
United States
Foreign countries
Total deferred tax benefit
Years ended December 31,
2018
2017
2016
77,176
3,199
18,790
99,165
6,841
599
9,767
17,207
$
$
$
$
(2,904) $
(584)
(1,123)
(4,611) $
47,347
3,089
9,763
60,199
1,892
292
6,902
9,086
$
$
$
$
(3,176) $
(184)
(946)
(4,306) $
70,899
2,670
9,828
83,397
7,072
567
5,226
12,865
(2,874)
(259)
(1,461)
(4,594)
$
$
$
$
$
$
Taxes payable to foreign countries by EVERTEC’s subsidiaries will be paid by such subsidiary and the corresponding
liability and expense will be presented in EVERTEC’s consolidated financial statements.
On December 10, 2018, the Governor of Puerto Rico signed in to law Act 257, which decreased the maximum corporate
tax rate from 39% to 37.5%, effective January 1, 2019. This rate decrease is only applicable to the fully taxable operations
of EVERTEC in Puerto Rico. As a result of this tax rate decrease, the deferred taxes were reevaluated as of December 31,
2018, the impact of this reevaluation was considered immaterial.
As of December 31, 2018, the Company has $47.8 million of unremitted earnings from foreign subsidiaries. The Company
has not recognized a deferred tax liability on undistributed earnings for the Company’s foreign subsidiaries because these
earnings are intended to be indefinitely reinvested. The amount of the unrecognized deferred tax liability depends on
judgment required to analyze the withholding tax due, the applicable tax law and factual circumstances in effect at the time
of any such distributions. EVERTEC believes it is not practicable at this time to reliably determine the amount of
unrecognized deferred tax liability related to the Company’s undistributed earnings. If circumstances change and it
becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted, and income taxes have not
been recognized by the parent entity, the parent entity shall accrue as an expense of the current period income taxes
attributable to that remittance.
On October 19, 2012, EVERTEC Group was granted a tax exemption under the Tax Incentive Act No. 73 of 2008. Under
this grant, EVERTEC Group will benefit from a preferential income tax rate on industrial development income, as well as
from tax exemptions with respect to its municipal and property tax obligations for certain activities derived from its data
processing operations in Puerto Rico. The grant has a term of 15 years effective as of January 1, 2012 with respect to
income tax obligations and January 1, 2013 with respect to municipal and property tax obligations. Industrial development
income under this grant is subject to a preferential rate of 4%.
The grant contains customary commitments, conditions and representations that EVERTEC Group will be required to
comply with in order to maintain the grant. The more significant commitments include: (i) maintaining at least 700
employees in EVERTEC Group's Puerto Rico data processing operations, (ii) investing at least $200.0 million in building,
machinery, equipment or computer programs to be used in Puerto Rico during the effective term of the grant (to be made
over four year capital investment cycles in $50.0 million increments); and (iii) 80% of EVERTEC Group employees must
be residents of Puerto Rico. Failure to meet the requirements could result, among other things, in reductions of the benefits
F - 38
of the grant or revocation of the grant in its entirety, which could result in EVERTEC, Inc. paying additional taxes or other
payments relative to what would be required to pay to other municipal agencies if the full benefits of the grant are not
available.
On October 11, 2011, Evertec Group was granted a tax exemption under Tax Incentive Law No. 73 of 2008, retroactively
to December 1, 2009. Under this grant, activities derived from consulting and data processing services provided outside
Puerto Rico are subject to a preferred rate that declines gradually from 7% to 4% by December 1, 2013. After this date, the
rate remains at 4% until its expiration in November 1, 2024.
In addition, in August 2018, the Puerto Rico Industrial Development Company approved the requested extension of a grant
under Tax Incentive Law No. 135 of 1997 for EVERTEC Group. Under this grant, activities derived from certain
development and installation service in excess of a determined income are subject to a fixed tax rate of 10% for a 10-year
period from January 1, 2018.
The following table presents the components of the Company’s deferred tax assets and liabilities:
(In thousands)
Deferred tax assets (“DTA”)
Allowance for doubtful accounts
Unearned income
Investment in equity subsidiary
Alternative minimum tax
Share-based compensation
Debt issuance costs
Accrued liabilities
Derivative liability
Accrual of contract maintenance cost
Impairment of asset
Other
Total gross deferred tax assets
Deferred tax liabilities (“DTL”)
Capitalized salaries
Derivative asset
Difference between the assigned values and the tax basis of assets and liabilities
recognized in a business combination
Other
Total gross deferred tax liabilities
Deferred tax liability, net
December 31,
2018
2017
$
170
$
4,394
220
—
1,684
309
1,257
351
157
289
1,976
10,807
1,756
185
16,240
659
18,840
195
3,136
447
51
1,208
69
505
—
472
425
1,754
8,262
1,617
—
19,124
353
21,094
$
(8,033) $
(12,832)
Pursuant to the provision of the PR Code, net operating losses (“NOL”) can be carried forward for a period of seven, ten or
twelve taxable years, depending on the taxable year generated. Act 72 of May 29, 2015, limited the amount of NOLs
deduction to 80% for regular tax and 70% for alternative minimum tax (“AMT”) for taxable years commencing after
December 31, 2014. However, Act 257 of 2018 limits the deduction of NOLs to 90% for regular tax for tax years
commencing after December 31, 2018. At December 31, 2018, the Company has $0.1 million in NOL carryforwards
related to Puerto Rico industrial development income, available to offset future eligible income, which will expire in 2028.
The Company recognizes the benefit of uncertain tax positions ("UTPs") only if it is more likely than not that the tax
position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate settlement.
F - 39
The following is a tabular reconciliation of the total amounts of UTPs:
(In thousands)
Balance, beginning of year
Gross increases—tax positions in prior period
Gross decreases—tax positions in prior period
Lapse of statute of limitations
Balance, end of year
Years ended December 31,
2018
2017
2016
9,148
$
12,219
$
12,847
578
(488)
—
—
—
(3,071)
—
(345)
(283)
9,238
$
9,148
$
12,219
$
$
As of December 31, 2018, 2017 and 2016, approximately $9.2 million, $9.1 million and $12.2 million, respectively, would
affect the Company’s effective income tax rate, if recognized.
The Company recognizes interest and penalties related to UTB as part of income tax expense. During the years ended
December 31, 2018, 2017 and 2016, the Company recognized an income tax expense of $0.4 million, an income tax benefit
of $0.8 million and an income tax expense of $0.7 million, respectively, related to interest and penalties. The amount
accrued for interest and penalties at December 31, 2018 and 2017 was $1.6 million, and $1.2 million, respectively. The
Company anticipates changes to the UTBs within the next 12 months to be primarily related to interest. The Company
believes it has sufficient accruals for contingent tax liabilities.
In connection with tax return examinations, contingencies can arise that generally result from different interpretations of
tax laws and regulations as they pertain to the amount, timing or inclusion of revenues and expenses in taxable income, or
the ability to utilize tax credits to reduce income taxes payable. While it is probable, based on the potential outcome of the
Company’s Puerto Rico and foreign tax examinations or the expiration of the statute of limitations for specific
jurisdictions, that the liability for UTBs may increase or decrease within the next twelve months, the Company does not
expect any such change would have a material effect on our financial condition, results of operations or cash flow.
The Company and its subsidiaries are subject to Puerto Rico income tax as well as income tax of multiple foreign
jurisdictions. A significant majority of the income tax is from Puerto Rico with a statute of limitations of four years after
filing the income tax returns; therefore, the income tax returns for 2014, 2015, 2016, and 2017 are currently open for
examination.
The income tax expense differs from the amount computed by applying the Puerto Rico statutory income tax rate to the
income before income taxes as a result of the following:
(In thousands)
Computed income tax at statutory rates
Benefit of net tax-exempt interest income
Differences in tax rates due to multiple jurisdictions
Tax expense (benefit) due to a change in estimate
Effect of income subject to tax-exemption grant
Unrecognized tax expense (benefit)
Other
Income tax expense
Years ended December 31,
2018
2017
2016
$
$
38,674
(50)
(678)
467
(26,260)
443
—
$
23,477
(56)
2,353
(334)
(16,832)
(3,828)
—
$
12,596
$
4,780
$
32,525
(52)
32
258
(24,866)
373
1
8,271
F - 40
Note 20—Net Income Per Common Share
The reconciliation of the numerator and the denominator of the earnings per common share is as follows:
(Dollar amounts in thousands, except share and per share data)
Net income attributable to EVERTEC, Inc.’s common
stockholders
Less: non-forfeitable dividends on restricted stock
Net income available to common shareholders
Weighted average common shares outstanding
Weighted average potential dilutive common shares (1)
Weighted average common shares outstanding—assuming
dilution
Net income per common share—basic
Net income per common share—diluted
$
$
$
$
Years ended December 31,
2018
2017
2016
86,270
4
86,266
$
$
55,054
10
55,044
$
$
72,607,321
1,812,789
72,479,807
392,381
75,036
12
75,024
74,132,863
340,506
74,420,110
72,872,188
74,473,369
1.19
1.16
$
$
0.76
0.76
$
$
1.01
1.01
(1)
Potential common shares consist of common stock issuable under the assumed exercise of stock options and RSUs
awards using the treasury stock method.
Refer to Note 15 for a detail of dividends declared and paid during 2018 and 2017.
Note 21—Related Party Transactions
The following table presents the Company’s transactions with related parties for each of the periods presented below:
(Dollar amounts in thousands)
Total revenues (1)(2)
Cost of revenues
Rent and other fees
Interest earned from an affiliate
Interest income
Years ended December 31,
2018
2017
2016
$
$
$
$
188,060
3,422
8,046
147
$
$
$
$
177,213
2,929
7,803
154
$
$
$
$
176,473
2,180
8,110
211
(1)
(2)
Total revenues from Popular as a percentage of revenues were 41%, 43% and 45% for each of the periods presented
above.
Includes revenues generated from investee accounted for under the equity method of $1.3 million, $1.8 million and
$2.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.
F - 41
At December 31, 2018 and 2017, the Company had the following balances arising from transactions with related parties:
(In thousands)
Cash and restricted cash deposits in affiliated bank
Other due to/from affiliate
Accounts receivable
Prepaid expenses and other assets
Other long-term assets
Accounts payable
Unearned income
December 31,
2018
2017
$
$
$
$
$
$
29,136
25,714
2,796
166
6,344
25,401
$
$
$
$
$
$
23,227
18,073
1,216
288
5,827
19,768
The balance of cash and restricted cash deposits in an affiliated bank was included within the cash and cash equivalents and
restricted cash line items in the accompanying consolidated balance sheets. Due from affiliates mainly included the
amounts outstanding related to processing and information technology services billed to Popular subsidiaries according to
the terms of the Master Services Agreement (“MSA”) under which EVERTEC Group has a contract to provide such
services for at least 15 years on an exclusive basis for the duration of the agreement on commercial terms consistent with
historical pricing practices among the parties. This amount was included in the accounts receivable, net in the consolidated
balance sheets.
Note 22—Commitments and Contingencies
The Company leases certain facilities and equipment under operating leases. Most leases contain renewal options for
varying periods. Future minimum rental payments on such operating leases at December 31, 2018 are as follows:
(Dollar amounts in thousands)
2019
2020
2021
2022
2023
Unrelated
parties
Related
party
Total minimum future
rentals
395
$
36
—
—
—
6,529
$
1,503
—
—
—
6,924
1,539
—
—
—
431
$
8,032
$
8,463
$
$
Certain lease agreements contain provisions for future rent increases. The total amount of rental payments due over the
lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference between
rent expense recorded and the amount paid is recorded as a deferred rent obligation.
Rent expense of office facilities and real estate for the years ended December 31, 2018, 2017 and 2016 amounted to $9.2
million, $8.3 million and $8.2 million, respectively. Also, rent expense for telecommunications and other equipment for the
years ended December 31, 2018, 2017 and 2016 amounted to $6.6 million, $6.0 million and $6.2 million, respectively.
EVERTEC is a defendant in a number of legal proceedings arising in the ordinary course of business. Based on the opinion
of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on
the business, results of operations or financial condition of the Company. The Company has identified certain claims in
which a loss may be incurred, but in the aggregate the loss would be minimal. For other claims, where the proceedings are
in an initial phase, the Company is unable to estimate the range of possible loss for such legal proceedings. However, the
Company at this time believes that any loss related to these latter claims will not be material.
F - 42
Note 23—Segment Information
The Company operates in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin
America (collectively "Payment Services segments"), Merchant Acquiring, and Business Solutions.
The Payment Services - Puerto Rico & Caribbean segment revenues are comprised of revenues related to providing access
to the ATH debit network and other card networks to financial institutions, including related services such as authorization,
processing, management and recording of ATM and POS transactions, and ATM management and monitoring. The segment
revenues also include revenues from card processing services (such as credit and debit card processing, authorization and
settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and
billing products for merchants, businesses and financial institutions) and EBT (which principally consist of services to the
government of Puerto Rico for the delivery of benefits to participants). For ATH debit network and processing services,
revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees,
transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are
primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number
of cards embossed and other processing services. For EBT services, revenues are primarily derived from the number of
beneficiaries on file.
The Payment Services - Latin America segment revenues consist of revenues related to providing access to the ATH
network and other card networks to financial institutions, including related services such as authorization, processing,
management and recording of ATM and POS transactions, and ATM management and monitoring. The segment revenues
also include revenues from card processing services (such as credit and debit card processing, authorization and settlement
and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing
products for merchants, businesses and financial institutions), as well as, licensed software solutions for risk and fraud
management and card payment processing. For 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.
The Merchant Acquiring segment consists of revenues from services that allow merchants to accept electronic methods of
payment. In the Merchant Acquiring segment, revenues include a discount fee and membership fees charged to merchants,
debit network fees and rental fees from POS devices and other equipment, net of credit card interchange and assessment
fees charged by credit cards associations (such as VISA or MasterCard) or payment networks. The discount fee is generally
a percentage of the transaction value. EVERTEC also charges merchants for other services that are unrelated to the number
of transactions or the transaction value.
The Business Solutions segment consists of revenues from a full suite of business process management solutions in various
product areas such as core bank processing, network hosting and management, IT professional services, business process
outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are
derived in part from a recurrent fixed fee and from fees based on the number of accounts on file (i.e. savings or checking
accounts, loans, etc.) or computer resources utilized. Revenues from other processing services within the Business
Solutions segment are 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 as “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,
F - 43
•
•
•
•
•
•
•
•
•
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 the Merger,
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 Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA").
Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted
EBITDA, as it relates to operating segments, is presented in conformity with Accounting Standards Codification Topic 280,
"Segment Reporting" given that it is reported to the CODM for 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 performance. As such, segment assets are not disclosed in the notes to the accompanying consolidated
financial statements.
The following tables set forth information about the Company’s operations by its four business segments for the periods
indicated below. Historical information has been conformed to the updated presentation.
December 31, 2018
Payment
Services -
Puerto Rico &
Caribbean
Payment
Services -
Latin America
Merchant
Acquiring, net
Business
Solutions
Corporate and
Other (1)
Total
(In thousands)
Revenues
$
114,119
$
80,899
$
99,655
$ 197,602
$
Operating costs and expenses
Depreciation and amortization
Non-operating income (expenses)
EBITDA
Compensation and benefits (2)
Transaction, refinancing, and
other fees (3)
52,006
9,734
2,420
74,267
1,087
75,240
9,284
11,750
26,693
1,034
55,778
126,232
1,698
13,878
3
45,578
938
477
85,725
2,088
(250)
—
—
—
Adjusted EBITDA
$
75,104
$
27,727
$
46,516
$ 87,813
$
(38,406) $ 453,869
328,741
19,485
28,473
(11,356)
(40,774)
8,512
63,067
3,294
191,489
13,659
7,561
7,311
(24,701) $ 212,459
(1)
(2)
(3)
Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and
intersegment eliminations. Intersegment eliminations predominantly reflect the $36.1 million processing fee from
Payments Services - Puerto Rico and Caribbean to Merchant Acquiring, intercompany software sale and
developments of $2.3 million from Payment Services- Latin America to Payment Services- Puerto Rico &
Caribbean and cost transfer fees from Corporate and Other to Payment Services Latin America for leveraged
services and management fees.
Primarily represents share-based compensation and other compensation expense and severance payments.
Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit
Agreement, relief contributions related to the 2017 hurricanes and the elimination of non-cash equity earnings from
our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received.
F - 44
December 31, 2017
Payment
Services -
Puerto Rico &
Caribbean
Payment
Services -
Latin America
Merchant
Acquiring, net
Business
Solutions
Corporate and
Other (1)
Total
(In thousands)
Revenues
$
101,687
$
62,702
$
85,778
$ 189,077
$
Operating costs and expenses
Depreciation and amortization
Non-operating income (expenses)
EBITDA
Compensation and benefits (2)
Transaction, refinancing, exit
activity and other fees (3)
57,463
8,993
2,229
55,446
589
66,786
8,880
8,726
13,522
816
57,574
119,761
2,254
15,774
1
30,459
573
13
85,103
1,687
2,499
3,220
6,465
—
Adjusted EBITDA
$
58,534
$
17,558
$
37,497
$ 86,790
$
(32,100) $ 407,144
321,061
19,477
28,349
(7,708)
(30,936)
6,090
64,250
3,261
153,594
9,755
2,495
14,679
(22,351) $ 178,028
(1)
(2)
(3)
Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and
intersegment eliminations. Intersegment eliminations predominantly reflect the $32.1 million processing fee from
Payments Services - Puerto Rico and Caribbean to Merchant Acquiring and cost transfer fees from Corporate and
Other to Payment Services Latin America for leveraged services and management fees.
Primarily represents share-based compensation and other compensation expense and severance payments.
Primarily represents fees and expenses associated with corporate transactions as defined in the 2013 Credit
Agreement, an impairment charge and contractual fee accrual for a third party software solution that was
determined to be commercially unviable and the elimination of non-cash equity earnings from our 19.99% equity
investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received.
December 31, 2016
Payment
Services -
Puerto Rico &
Caribbean
Payment
Services -
Latin America
Merchant
Acquiring, net
Business
Solutions
Corporate and
Other (1)
Total
(In thousands)
Revenues
$
99,680
$
47,162
$
91,248
$ 184,276
$
Operating costs and expenses
Depreciation and amortization
Non-operating income (expenses)
EBITDA
Compensation and benefits (2)
Transaction, refinancing, and
other fees (3)
49,128
7,597
2,238
60,387
637
2,062
45,304
7,285
5,584
14,727
627
52,771
2,672
—
41,149
480
113,082
13,783
24
85,001
1,961
—
—
2,277
Adjusted EBITDA
$
63,086
$
15,354
$
41,629
$ 89,239
$
(32,859) $ 389,507
282,362
22,077
28,230
59,567
(7,354)
(34,060)
6,777
167,204
10,482
492
5,650
9,989
(21,633) $ 187,675
(1)
(2)
Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and
intersegment eliminations. Intersegment eliminations predominantly reflect the $32.9 million processing fee from
Payments Services - Puerto Rico and Caribbean to Merchant Acquiring and cost transfer fees from Corporate and
Other to Payment Services Latin America for leveraged services and management fees.
Primarily represents share-based compensation and other compensation expense and severance payments.
F - 45
(3)
Primarily represents fees and expenses associated with corporate transactions as defined in the 2013 Credit
Agreement and consulting, audit and legal expenses incurred as part of the prior year restatement of financial
results, certain fees paid to resolve a software maintenance contract matter, a software impairment charge and the
elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas
S.A., net of cash dividends received.
The reconciliation of EBITDA to consolidated net income is as follows:
(In thousands)
Total EBITDA
Less:
Income tax expense
Interest expense, net
Depreciation and amortization
Net Income
Years ended December 31,
2018
2017
2016
$
191,489
$
153,594
$
167,204
12,596
29,257
63,067
4,780
29,145
64,250
$
86,569
$
55,419
$
8,271
24,240
59,567
75,126
The geographic segment information below is classified based on the geographic location of the Company’s subsidiaries:
(Dollar amounts in thousands)
Revenues (1)
Puerto Rico
Caribbean
Latin America
Total revenues
Years ended December 31,
2018
2017
2016
$
$
358,436
$
329,533
$
15,672
79,761
14,909
62,702
453,869
$
407,144
$
326,073
16,272
47,162
389,507
(1)
Revenues are based on subsidiaries’ country of domicile.
Major customers
For the years ended December 31, 2018, 2017 and 2016, the Company had one major customer which accounted for
approximately $186.8 million or 41%, $175.4 million or 43%, and $174.4 million or 45%, respectively, of total revenues.
See Note 21.
The Company’s next largest customer, the Government of Puerto Rico, consolidating all individual agencies and public
corporations, represented 7% of the Company’s total revenues for each the years ended December 31, 2018, 2017 and
2016.
Note 24—Subsequent Events
On February 14, 2019, the Board declared a regular quarterly cash dividend of $0.05 per share on the Company’s
outstanding shares of common stock. The dividend will be paid on March 22, 2019 to stockholders of record as of the close
of business on February 26, 2019. The Board anticipates declaring this dividend in future quarters on a regular basis;
however future declarations of dividends are subject to Board of Directors’ approval and may be adjusted as business needs
or market conditions change.
F - 46
Schedule I
EVERTEC, Inc. Condensed Financial Statements
Parent Company Only
Condensed Balance Sheets
(In thousands)
Assets
Current assets:
Cash
Accounts receivable, net
Prepaid expenses and other assets
Prepaid income tax
Total current assets
Investment in subsidiaries, at equity
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accrued liabilities
Accounts payable
Income tax payable
Total current liabilities
Deferred tax liability, net
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock
Additional paid-in capital
Accumulated earnings
Accumulated other comprehensive loss, net of tax
Total stockholders’ equity
$
$
$
Total liabilities and stockholders’ equity
$
Condensed Statements of Income and Comprehensive Income
December 31,
2018
2017
1,678
2,068
41
—
3,787
221,515
225,302
226
—
1,660
1,886
5,665
6,292
13,843
723
5,783
228,742
(23,789)
211,459
225,302
$
$
$
$
1,679
—
24
1,594
3,297
155,666
158,963
224
359
—
583
8,660
5,608
14,851
723
5,350
148,887
(10,848)
144,112
158,963
(In thousands)
Non-operating income (expenses)
Equity in earnings of subsidiaries
Interest income
Other expenses
Income before income taxes
Income tax benefit
Net income
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments
(Loss) gain on cash flow hedges
Total comprehensive income
Years ended December 31,
2018
2017
2016
$
$
$
84,866
380
(1,396)
83,850
(2,420)
86,270
(10,564)
(2,377)
73,329
$
$
49,162
301
(1,428)
48,035
(7,019)
55,054
(635)
2,178
56,597
$
75,373
244
(1,351)
74,266
(770)
75,036
(3,360)
(1,449)
70,227
F - 47
Schedule I
Condensed Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Cash flows from financing activities
Dividends paid
Repurchase of common stock
Withholding taxes paid on share-based compensation
Net cash used in financing activities
Net (decrease) increase in cash
Cash at beginning of the period
Cash at end of the period
2018
Years ended December 31,
2017
2016
$
19,431
$
29,422
$
71,795
(7,273)
(10,000)
(2,159)
(19,432)
(1)
1,679
1,678
$
(21,762)
(7,671)
(1,588)
(31,021)
(1,599)
3,278
1,679
$
(29,696)
(39,946)
(548)
(70,190)
1,605
1,673
3,278
$
F - 48
100260_COVER_MS.indd 6
3/30/19 12:14 PM
100260_COVER_MS.indd 1
3/30/19 12:14 PM